Campden Hill Ltd v Chakrani & Ors

A completed transaction is not rendered unenforceable merely because an executory land-related agreement did not comply with section 2 of the Law Reform (Miscellaneous Provisions) Act 1989, where the relevant land obligation has been performed. In assessing whether a credit bargain is extortionate, the court must assess the statutory criteria on the assumed facts of a genuine transaction, including the debtor’s circumstances, the creditor’s risk and the commercial context. Tracing into a mixed client account requires identification of the claimant’s money. The first-in first-out rule may prevent tracing where the claimant’s money has been exhausted before the impugned payment. A recipient cannot defeat tracing by relying on a change of position where the expenditure secured an asset and was knowingly continued after discovery of the fraud.

The claimant advanced £500,000 after receiving documents apparently authorising a legal charge over property owned by the first defendant. The documents were forged by the defendant’s solicitor, who disbursed much of the money to the first defendant and others.

The claimant alleged deceit, breach of warranty of authority and breach of undertaking against the solicitor and her principals. It also sought recovery and tracing remedies against recipients of the money. The principal issues were whether the facility fee was unenforceable under section 2 of the Law Reform (Miscellaneous Provisions) Act 1989, whether the bargain was extortionate under the Consumer Credit Act 1974, and whether the claimant could trace its money through the solicitors’ mixed client account.

1. Forgery and liability. The first defendant did not authorise the loan or charge. His signature was forged by the solicitor. The solicitor and her principals were liable for deceit, breach of undertaking and breach of warranty of authority. The claimant was entitled to recover the £500,000 with interest under section 35A of the Supreme Court Act 1981.
2. Section 2. The relevant provision in the loan agreement concerned execution of the legal charge, which was a precondition to the advance. Once the charge had been executed, the relevant obligation had been completed. Following Tootal Clothing Ltd v Guinea Properties Management Ltd [1992] 2 EGLR 80, section 2 did not invalidate enforcement of the completed transaction. The parties could also agree that the facility fee was payable on repayment rather than in advance.
3. Extortionate credit bargain. The court had to assess the statutory criteria as if the transaction had been genuine and the first defendant had been the borrower. A 40 per cent fee for a six-month secured loan would ordinarily be grossly exorbitant. Its character depended on the commercial opportunity, the borrower’s circumstances, the lender’s risk, the availability of legal advice and the likely exercise of the statutory discretion. The chance of successful reopening was assessed at about 20 per cent, so the facility-fee element of damages was discounted accordingly.
4. Tracing. The restitutionary principle in Bannatyne v D&C McIver [1906] 1 KB 103 did not dispense with tracing. Applying the first-in first-out rule in Clayton’s Case [I Mer 572], the claimant could trace into some payments made from the client account but not into the £68,000 paid to Mr Iqbal, because the claimant’s money had already been exhausted. The principles in Roscoe (Bolton) Ltd v Winder [1915] 1 Ch 62 and Bishopsgate Management Ltd v Homan [1995] 1 AER 347 applied.
5. Equitable remedies. A fiduciary relationship existed because the money had been paid to a solicitor to be held against production of genuine documents. The claimant could trace £229,271 into the first defendant’s assets and obtain a personal remedy for £10,000 applied in reduction of his debt. The payment to the Pakistani land transaction was not barred by change of position. The first defendant’s later knowing use of the money could not defeat tracing.