Clydesdale Bank Plc v John Workman & Ors

The Court of Appeal allowed the appeal against a finding that two solicitors (Mr Murphy and Mr Denslow) were guilty of dishonest assistance in a breach of trust arising from a mortgage fraud. The underlying legal issues concerned the effect of registration under the Land Registration Act 2002 (notably sections 27, 29 and 48), priority between registered charges and the significance of a third party’s state of mind when alleging dishonest assistance. The court held that the trial judge failed to address a critical defence: that the solicitors honestly believed the registered Hayward charge secured more than the sale proceeds and therefore lawfully entitled the registered chargee to the proceeds. Because the judge did not make an explicit finding that he disbelieved that defence, the finding of dishonesty was insufficiently secure and could not stand.

Background and parties:

• The dispute arose from the sale of three development plots owned by a company, Beechwood, which had negotiated borrowings from Yorkshire Bank. The bank's legal mortgage had not been registered at HM Land Registry and therefore operated only in equity.
• A separate charge in favour of Mr Hayward was registered at HM Land Registry. Sales of plots 2, 3 and 4 followed; the proceeds were paid to Hayward's solicitors. The Bank alleged that solicitors acting for the seller (later at Shoosmiths: Mr Murphy and Mr Denslow) had dishonestly assisted in defeating the bank's equitable interest.

Procedural history:

• The trial judge (HHJ Pelling QC) found the solicitors dishonest in relation to the sales of plots 3 and 4; see [2013] EWHC B38 (Ch), [2014] PNLR 18. The solicitors appealed to the Court of Appeal, which heard the matter on 26–27 January 2016 and delivered judgment on 4 February 2016.

Issues framed:

1. Whether the solicitors were guilty of dishonest assistance in a breach of trust (the mortgage fraud) given their knowledge and conduct.
2. The legal effect of registration at HM Land Registry under the Land Registration Act 2002 and the priority of registered charges vis-à-vis an unregistered equitable charge.
3. Whether recklessness or mere failure to make enquiries suffices for dishonest assistance, and the standard for appellate review of findings about a party’s state of mind.

Court’s reasoning and outcome:

• The Court of Appeal accepted the trial findings of fact in part but emphasised that a critical factual issue was left unresolved: the solicitors asserted that they genuinely believed the Hayward registered charge secured more than the aggregate sale proceeds and therefore had priority. If that belief were true, payment to the registered chargee would have been lawful and not dishonest.
• The appellate court held that the trial judge had not confronted that defence and had not said he disbelieved it. Because the finding of dishonesty depended on a missing or unaddressed factual building block, the finding was not sufficiently secure to stand on appeal.
• The court addressed the distinction between recklessness and dishonesty, citing Royal Brunei Airlines v Tan, and observed that recklessness can be indicative of dishonesty but is not equivalent to it. The judge had not found motive or self-interest, a factor relevant under that authority.
• For these reasons the Court of Appeal allowed the appeal. A cross-appeal on the date for interest was rendered academic by allowance of the appeal.

Appeal allowed. The Court of Appeal concluded that the trial judge had failed to address a critical defence — namely the solicitors' asserted honest belief that the registered Hayward charge secured more than the sale proceeds and therefore entitled the registered chargee to those proceeds — and had not expressly disbelieved that defence. Because that unresolved factual issue was essential to the finding of dishonest assistance, the finding of dishonesty was insufficiently secure and the appeal succeeded.

First instance: High Court of Justice, Chancery Division (His Honour Judge Pelling QC) — judgment reported at [2013] EWHC B38 (Ch), [2014] PNLR 18. Appeal to the Court of Appeal (Civil Division) — neutral citation [2016] EWCA Civ 73 (appeal allowed).