Islam & Anor v Al-Sami & Anor

An instrument described as a loan agreement and charge must be construed according to its terms and the factual matrix objectively established by the parties’ circumstances. A charge securing a single contemporaneous loan cannot be recharacterised as an all-monies security for existing and future liabilities without a proper contractual and factual basis. Liabilities owed to a company or another person are not liabilities to the lender merely because the lender provided the services or later asserted an assignment. Where the alleged indebtedness and the asserted factual matrix are not proved, the charge has no operative content. A document created to present a non-existent loan as security against a potential creditor is not a bona fide transaction.

The claimants held charging orders over the second defendant’s leasehold flat. The first defendant asserted priority under a handwritten loan agreement dated 3 April 2002, said to record a £200,000 loan to the second defendant and an equitable charge over the flat. He later relied on alleged rent, service fees and personal loans, some said to have been assigned to him.

The deputy High Court judge found that the alleged indebtedness was not established, that key assignment documents were false, that the agreement could not bear the wider construction advanced, and that it was a sham or delusive transaction. The first defendant appealed, challenging the findings of fact, construction and credibility assessment.

1. Appeal dismissed. The first defendant failed to establish any liability owed by the second defendant to him and secured by the charge. That conclusion alone entitled the claimants to judgment.
2. The deputy judge adopted the correct approach by testing whether the factual matrix relied on for construction existed. The findings that the purported assignment of the restaurant business’s assets was inauthentic, and that the purported assignment of service debts was also not genuine, were amply supported by the evidence. Any rent was owed to Proofasset Limited, and the service invoices were rendered by Al-Hinsa & Co Limited. The appellant therefore could not establish liabilities to himself.
3. The evidence concerning alleged personal borrowings was properly treated as unsatisfactory. The appellant had not established that those sums existed, and in any event they could not support the assertion that a £200,000 loan had been made.
4. In the absence of actual or contemplated liabilities, the agreement could only mean what it expressly stated: a contemporaneous loan of £200,000 secured on the property. The appellant’s construction required the agreement to be rewritten as an all-monies charge for present and future indebtedness up to £200,000. The wording, including the provision for interest, did not support that construction.
5. The finding that the agreement was “delusive” was also upheld. The document was created to support a charge for a non-existent loan and was properly characterised as a lie addressed to a potential creditor. The conclusion followed from the absence of indebtedness, the dishonest creation of supporting documents, the lack of any actual or contemplated £200,000 loan, and the appellant’s role in assisting the second defendant in the underlying litigation.

Mr Justice David Richards gave the judgment of the court. Lord Justice Elias and Lady Justice Arden agreed.

• Court of Appeal (Civil Division): Appeal from the order of Mr David Donaldson QC, sitting as a deputy High Court judge in the Chancery Division, dismissed. Permission to appeal had been granted by Mummery LJ.
• High Court of Justice, Chancery Division: Held that the purported loan agreement and charge were ineffective, that the second defendant was not indebted to the first defendant, and gave judgment for the claimants.