Lloyds Tsb Bank Plc v Markandan & Uddin (a firm) [2012] EWCA Civ 65

by Commercial Blawg on February 17, 2012

  • SumoMe

Solicitor and partner Mr Anis Waiz of Mohindra Maini LLP continues his critical review of current case law, as first published on leading case law website CaseCheck. This important case arose from a mortgage fraud and facts which are all too familiar to lenders and solicitors.

There are a number of key issues as to completion and breach of trust in the judgment which are essential to grasp and of keen interest to conveyancers and Lenders .

Part of the claim against the defendant was that they were in breach of trust in paying away the advance. The defendant sought to rely on section 61 of the Trustee Act 1925 (“the 1925 Act”). Lord Justice Rimer noted

“The careful, conscientious and thorough solicitor, who conducts the transaction by the book and acts honestly and reasonably in relation to it in all respects but still does not discover the fraud, may still be held to have been in breach of trust for innocently parting with the loan money to a fraudster. He is, however, likely to be treated mercifully by the court on his section 61 application”


In 2007 Cheltenham & Gloucester PLC (C&G) now a wholly owned subsidiary of Lloyds instructed the defendant solicitors to act for it on a proposed mortgage loan of £742,500 to a purported borrower.

The loan was to buy a property. The repayment was to be secured by a first legal charge over certain property. In fact the genuine owners of the property had not agreed to sell it to the purported borrower or to anyone, and were ignorant of the fraud that was being carried on.

Upon what they claimed was the completion of the purchase and charge, the defendant remitted the loan money to (so they believed) a firm of solicitors acting for the vendors. The bogus firm had contacted M&U to inform them that they were acting for the owners of the property, on the proposed sale to the borrower.

However this was a fictitious branch office. One or more individuals pretended to be carrying on practice of a branch office for which they printed some bogus notepaper. The fraudsters duped the defendant into paying the loan money to them.

As a result C&G received no legal charge over the property . The only potential recovery was from the defendant.

The reader is referred to the Judgment for the full facts including a number of anomalies in the application for the mortgage and startling facts.

The defendants Retainer

C&G’s letter of instruction to the Defendant noted

‘C&G has adopted the CML [Council of Mortgage Lenders] Lenders’ Handbook for England and Wales (the “Handbook”) and we therefore require you to act in accordance with the instructions contained in it.”

There were some key provisions in the handbook which the court considered. Again the reader is referred to the judgment:

1 Clause 5.8 On completion, we require a fully enforceable first charge by way of legal mortgage over the property..

2 Clause 10.3.1 You are only authorised to release the loan when you hold sufficient funds to complete the purchase of the property and pay all stamp duty land tax and registration fees to perfect the security as a first legal mortgage or, if you do not have them, you accept responsibility to pay them yourself.

3 Clause 10.3.4 You must hold the loan on trust for us until completion. If completion is delayed, you must return it to us when and how we tell you (see part 2)….

As was standard the defendant signed a certificate of title for the property and sent it to C&G. The certificate was in the terms of the Appendix to Rule 6(3) of the Solicitors’ Practice Rules 1990.


Completion was to be by post. The then applicable Law Society’s code for completion by post applied. Under that code, the defendant should have received from the Vendor’ solicitors the signed part of the vendors’ contract, the executed transfer, the DS1 certificate of discharge in respect a prior charge and the charge certificate. In fact they received nothing.

From the Judgment the reader will note some unusual facts surrounding payment of the purchase price and the TR1

At a later date the defendants remitted from their client account £702,613.25 to another account of the supposed Vendors solicitors. No transfer was ever produced by the Purported vendors.

Matters then came to light. when the real owners of the property re mortgaged . The claimant had thus parted with the loan and had no security.

The Claims

C&G issued proceedings against the defendant under three alternative heads.

1 In parting with the loan money, they acted in breach of trust and were liable to reconstitute the trust fund (the loan money) and restore it to C&G.

2 They had parted with the money in breach of its undertakings to C&G.

3 They were liable in negligence and breach of contract.

The Issues

The defendants admitted in their Defence that they had held the loan money ‘on bare trust for C&G with C&G’s authority to pay it away in connection with the purchase of the property. Accordingly the court directed a trial of certain preliminary issues:

1 had there been a breach of trust by the defendant?

2 If ‘yes’, could the defendant rely on the 1925 Act to relieve them from liability?

3 was any loss or damage suffered by C&G caused or contributed to by C&G’s own fault?

Those issues were tried in 2010 before Mr Roger Wyand QC,. He held there had been a breach and the defendant could not rely on the 1925 Act. As to question 3 he entered judgment against the defendant for £742,500, with interest.

As to the 1925 Act , the court noted that section empowered the court to relieve a defendant wholly or partly from personal liability if they had ‘acted honestly and reasonably, and ought fairly to be excused for the breach of trust.

There was no question as to the defendant’s honesty. However there was a challenge to the reasonableness of their actions. In his judgment, the judge gave his reasons for concluding that their conduct had not been reasonable. There was no appeal on that point.

The defendant appeal was on the basis they had not committed a breach of trust and as a matter of causation even if there was a breach that had not caused any loss to C&G.

The Appeal

There was no dispute that upon C&G’s payment of the loan money to the defendant, the defendant , held it upon trust for C&G until ‘completion’. Clause 10.3.4 of the CML Handbook expressly provided for that.

Importantly the Court of Appeal noted even if this was not provided for the money would anyway have been held on such a trust. Money held by a solicitor on client account is trust money (see Target Holdings Ltd v. Redferns (a Firm) and Another [1996] 1 AC 421, at 436A to C, per Lord Browne-Wilkinson).

A number of issue arose on the Appeal:

1 Was there completion?

The instructions provided that the defendant were authorised to release the money for the purpose of completing the purchase (clause 10.3.1 of the Handbook); and upon such release, the trust would come to an end.

The key was the meaning of completion in clause 10.3.4 of the handbook. Lord Justice Rimer noting:

In my view, therefore, the judge was right to hold that ‘completion’ in clause 10.3.4 did not refer to the successive moments when the transfer and charge were respectively registered. It referred to the prior date when conventional completion occurred. M&U were authorised by C&G to release the loan money to enable such completion to take place. The trust was only destined to subsist until such time as it did.

The defendant sought to argue that completion had taken place. To enable it to take place, the defendant had remitted the required moneys to the vendors solicitors and expected those solicitors to honour their undertakings to send them by first class post the documents listed in paragraph 3.2 of replies to requisitions on title.

However there was no solicitors for the vendors. There were no vendors, in fact selling the property; they had no intention of paying any of the loan money in the redemption of a prior charge; and they had no genuine documents to send to the defendants.

The Court of Appeal agreed with the judge at first instance who held there was no completion. The defendant parted with the advance money without receiving either (i) ‘the requisite documents’ or (ii) a solicitor’s undertaking to provide such documents. A number of reasons were given.

1.1 The purported contract was a nullity, since the vendor had not agreed to sell their property, nor had they authorised anyone to sell it to him in their name;

1.2 The purported completion of that nullity by way of the exchange of purchase money for forged documents could not have amounted to completion.

1.3 Completion must mean the completion of a genuine contract by way of an exchange of real money in payment of the balance of the purchase price for real documents that will give the purchaser the means of registering the transfer of title to the property that he has agreed to buy and to charge.

1.4 An exchange of real money for worthless forgeries in purported performance of a purported contract was a nullity and not completion at all.

2 The trust point.

For the defendant it was argued that it was unfair that they were liable having become innocently mixed up in the fraud and be held accountable as trustees for parting with the loan money in the belief that they were doing so for the purposes of completing a genuine transaction.

However as noted by the Court of Appeal they failed to obtain relief under the 1925 Act , although they had acted honestly because they had not acted reasonably and so were not deserving of the merciful exercise by the court of its exculpatory discretion.

Their material failings were numerous and include failing to check the vendors solicitors which constituted a breach of clause A3.2 of Section 3 (Safeguards) of the Handbook; and to part for a second time with the money when they knew that the purported solicitors had breached their earlier undertakings.

The defendant Appealed was dismissed.


This may appear to be a harsh decision. However there were clear failings by the solicitors to conduct the transaction properly and in accordance with accepted practice and their professional duties.

A warning for lawyers and a useful reminder as to the courts exercise of discretion under the 1925 Act. The final word goes to Lord Justice Rimer

“Whilst it is impossible not to have sympathy for M&U in becoming enmeshed in the fraud, the judge’s conclusion was that, by these two shortcomings, they brought their misfortune upon themselves. If they had instead performed their role as solicitors with exemplary professional care and efficiency, but had still parted with the loan money in circumstances that were objectively reasonable, the decision on the section 61 application might have been different

Commercial Blawg

Commercial Blawg

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