Vickers v Jackson

A purported charge is a sham where the parties did not intend it to create legal relations and used it only to give creditors the appearance of an enforceable security. The court may examine subsequent events when determining the transaction’s reality. A charge requires genuine indebtedness, whether actual, prospective or contingent; without an obligation there is no charge. A claimant seeking to assert ownership and remove a sham charge is not barred by illegality merely because the transaction was intended to deceive creditors. The court will not enforce the sham or require payment of fictitious indebtedness to obtain its removal.

The claimant sought declarations that a memorandum of charge over vineyard land was void or should be set aside as a sham, together with removal of the related land-charge entries. The defendant denied the claim and counterclaimed for possession and payment of sums allegedly secured by the charge.

The court examined the parties’ agreements, invoices, subsequent correspondence and evidence concerning the alleged indebtedness. The central issues were whether the charge and invoices were genuine, whether any indebtedness existed, and whether the claimant was barred by illegality from obtaining relief.

1. Claim and counterclaim. The claim succeeded. The memorandum of charge and underlying invoices were shams, had no legal effect and secured no genuine indebtedness. The counterclaim was dismissed.
2. Sham. Applying the approach in National Westminster Bank v Jones [2001] 1BLC 98, the court recognised the heavy burden on a party alleging sham. The inquiry was factual rather than one of construction. It was permissible to consider events occurring after the agreement. The evidence showed that the charge and invoices were created to ring-fence the land from creditors, although neither party intended them to be enforced.
3. Indebtedness and security. The only genuine payment arrangement concerned a percentage of debt savings. The defendant’s wider work was undertaken in connection with companies in which he had a shareholding interest, and no personal hourly-rate agreement was proved. A charge is security for an obligation. It can exist only where there is genuine actual, prospective or contingent indebtedness. Since there was no such obligation, the charge was void and of no effect: compare Hitch v Stone [2001] STC 214.
4. Illegality. The claimant was asserting his rights as legal and beneficial owner, not seeking to enforce the illegal purpose. Illegality therefore did not bar relief. The defendant could not obtain enforcement of a sham charge by relying on its apparent terms. The sham finding was a complete answer to the counterclaim, so it was unnecessary to decide whether the counterclaim was independently barred by illegality. The court nevertheless held that no illegality prevented the claimant’s relief.
5. The claimant was entitled to orders declaring the charge void and ineffective and vacating the relevant land-charge and caution entries. Costs were awarded to the claimant. Permission to appeal and a stay were refused.

This was a first-instance decision. Permission to appeal and a stay were refused by the High Court judge; any further application was left to the Court of Appeal.