Sean Richard Ormsby Lindsay v Jared Michael O’Loughnane & Ors

Equitable charges created before a later charging order may take priority, even where the security documents contain drafting errors. The court construes such documents objectively, considering their wording, context and commercial purpose. Loan agreements may be used to construe unregistered equitable charges. A charge may extend to the chargor’s actual interest in each property identified in its schedule and may secure liabilities already advanced.

A transaction entered into to fund legal costs is not necessarily within the ordinary course of business exception in a standard freezing order. The exception is construed narrowly. However, written consent or an estoppel arising from the claimant’s conduct may prevent reliance on the freezing order. A transaction under Insolvency Act 1986, section 423 requires an undervalue and a purpose of prejudicing a creditor; the claim failed because no undervalue was proved.

The claimant had obtained final charging orders over properties owned or beneficially owned by Jared O’Loughnane, securing a substantial judgment debt arising from fraudulent foreign-exchange investment representations.

French and Heaphy asserted earlier equitable charges securing loans made to Jared for legal costs and living expenses. The claimant sought payment of the sale proceeds to himself, challenging the charges on grounds including late execution, uncertainty, sham, lack of consideration, wrongful purpose, section 423 of the Insolvency Act 1986, release, limitation and breach of a worldwide freezing order.

The central issues were whether the charges were valid and had priority, whether they were transactions defrauding creditors, and whether they could be enforced despite the freezing order.

1. Validity and priority. The French and Heaphy loan agreements and charges were executed before the claimant’s interim charging orders. The charges therefore had priority, subject to the claimant’s substantive objections.
2. Contractual intention and sham. The family relationships did not create a presumption that the arrangements were gifts or lacked legal effect. The parties objectively intended legally enforceable loans and security. The documents were not shams because there was no common intention that they should create rights and obligations different from those appearing on their face.
3. Construction. The court construed the charges with the signed loan agreements, applying ordinary contractual principles. The charges were equitable rather than registered public charges, so the restrictive approach in Cherry Tree did not prevent consideration of the loan agreements. Obvious drafting errors, including incorrect dates and references to liabilities, could be corrected by construction where the intended meaning was clear.
4. The charges secured Jared’s obligations under the respective loan agreements, including sums already advanced. The schedules showed that the Properties, including properties registered solely in Jared’s name, and all of Jared’s interests in them, were charged. Penny’s interest in Beacon Hill was secondary security only.
5. Section 423. The claimant was a victim for the purposes of section 423, and Jared had a purpose of prejudicing creditors. Nevertheless, no transaction at an undervalue was proved. The interest rate, security and commercial context did not establish that the consideration received was significantly less than the value provided. The section 423 claim therefore failed.
6. Freezing order. Granting the charges was within the prohibition on dealing with or diminishing Jared’s assets, but it was not within the ordinary course of business exception. That exception requires a relevant business and is narrowly construed. The claimant’s solicitors’ letter of 23 December 2009 was, however, construed as written consent to legitimate transactions on reasonable commercial terms. Alternatively, the claimant was estopped from asserting breach because the respondents had relied on the shared understanding that no variation application was required.
7. If there had been a breach, the court would have refused enforcement under the principled illegality approach in Patel v Mirza, because enforcing charges knowingly granted in breach of a freezing order would undermine the integrity of the legal system.
8. The release of security over Beacon Hill released no rights in the Properties and did not waive interest. The net sums advanced by French and Heaphy, with simple interest at 4% above Coutts base rate from 25 July 2010, were ordered to be paid from the proceeds held in court. The claimant’s limitation amendment was refused.