Annulment Funding Company Ltd v Cowey & Anor

Undue influence is a question of fact. It may be proved by direct evidence of pressure or by evidence from which the court properly infers it; a rebuttable evidential presumption is only a forensic device and does not create a separate cause of action. After a full trial, the judge must assess the totality of the evidence. A finding of actual undue influence is open where the pleaded facts and evidence support it. The principles governing a lender’s inquiry and the steps needed to avoid constructive notice apply equally to misrepresentation. Where both the loan and its security were affected, the court cannot sever the security and leave the loan unaffected.

A bankrupt borrower and his partner obtained bridging finance to fund annulment of the bankruptcy, secured by a second charge over their home. They expected short-term funding pending a conventional remortgage, but refinancing failed. The lender claimed possession and repayment. The partner defended on undue influence and misrepresentation. The Lambeth County Court found actual undue influence, held that the lender had constructive notice, set aside the charge as against her, and held that she was not liable as a joint debtor on the unsecured loan. The lender appealed the findings of actual and presumed undue influence and the refusal to sever the loan from the security.

The appeal was dismissed. Mr Justice Morgan gave the leading judgment, with Lord Justice Jackson and Lady Justice Arden agreeing.

1. Actual undue influence. The defence pleaded facts from which undue influence could be inferred, but that did not confine the judge to a presumptive route. Undue influence remained a question of fact, to be determined from the evidence. Following the approach described in Royal Bank of Scotland plc v Etridge (No. 2) [2002] 2 AC 773, the judge was required to assess the totality of the evidence after the full trial. The lender had itself invited findings based on the actual evidence, so it could not complain that the judge made a positive finding of actual undue influence.
2. Evidence and appellate review. The judge had distinguished the general pressure arising from the parties’ financial circumstances from the specific pressure applied by Mr Cowey. The findings that he persuaded and misled Ms Cowlam were supported by the evidence and were not challenged as primary factual findings. On those findings, the transaction was at least an instance of unwitting misrepresentation. The principles governing when a lender is put on inquiry, and the reasonable steps required to avoid constructive notice, applied equally to misrepresentation and other forms of undue influence: Barclays Bank plc v O’Brien [1994] 1 AC 180. The finding of constructive notice was unchallenged.
3. Presumed undue influence. The grounds concerning trust and confidence, a transaction calling for explanation, and rebuttal of the presumption did not arise because the finding of actual undue influence disposed of the appeal. It was not inconsistent, however, for the judge to explain an alternative presumptive analysis where he had not found that there was no undue influence. That alternative discussion was strictly unnecessary.
4. Severance. The findings established that both the loan and the charge were affected by the undue influence or misrepresentation. There was therefore no unaffected part of the transaction to sever. Barclays Bank plc v Caplan [1998] 1 FLR 532, concerning separable affected and unaffected parts, did not alter that conclusion.

The appeal was accordingly dismissed.

• Court of Appeal (Civil Division) — The appeal was dismissed: [2010] EWCA Civ 711.
• Lambeth County Court — His Honour Judge Welchman found actual undue influence, set aside the charge as against Ms Cowlam, and held that she was not liable as a joint debtor on the unsecured loan.