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June 2010

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June 10 Update
Case name Annulment Funding Co Ltd v Cowey
Neutral citation [2010] EWCA Civ 711
Legal points Mortgages – undue influence – pleadings - evidence based approach
Facts Mr C and Ms C were the joint legal and beneficial owners of a house subject to a first charge to C & G Plc. Mr C was made bankrupt with total debts including fees of around £120,000. His beneficial interest vested in his trustee under s 306 Insolvency Act 1986. It had a net value of around £215,000. On the advice of his solicitor and accountant, Mr C proposed to obtain short-term bridging funding from AFC to raise sufficient funds to pay off his creditors and obtain an annulment of the bankruptcy. It was intended that he would then re-mortgage the loan with a High Street lender at a more conventional rate of interest. Mr C and Ms C accepted AFC’s offer of advance of £138,000 secured by way of second charge on the house, and funds were released to Mr C’s solicitor to enable him to obtain an annulment of the bankruptcy. Unfortunately, the brokers appointed were unable to obtain re-mortgage finance and following default in repayment, AFC called in the loan. They subsequently commenced proceedings for possession and a money judgment. Mr C and Ms C sought to defend the claim on various grounds, including a claim by Ms C of presumed undue influence by Mr C. They were jointly represented by a McKenzie friend. The judge held that Ms C had established undue influence and directed that the charge be set aside as against her. He found that the charge had been procured by actual undue influence or alternatively presumed undue influence. He subsequently held that Ms C was not liable as a joint debtor with Mr C, to repay the loan. AFC appealed on a number of grounds, but essentially arguing that it was not open to the judge to find that there was actual undue influence when the pleaded defence was one of presumed undue influence. They also challenged the judge’s findings of actual undue influence and presumed undue influence on the evidence and argued that it was wrong in law to make a finding of presumed undue influence in the alternative to actual undue influence.
Held The appeal would be dismissed. It was clear first of all that the judge had properly directed himself in accordance with Barclays Bank Plc v O’Brien [1994] AC 180 and Royal Bank of Scotland Plc v Etridge (No.2) [2002] 2 AC 773. In particular, an allegation of undue influence involves an issue of fact and the party asserting it can either call direct evidence to support a finding, or call other evidence to justify an inference that undue influence had been used. Either way the party is attempting to prove the fact of undue influence. The judge has to decide on the totality of the evidence whether undue influence has been proved. This is what the judge did. There was nothing procedurally unfair in the judge determining whether all of the evidence led him to find that actual undue influence had been established. There was sufficient evidence to enable the judge to make findings of undue influence. The judge distinguished between the general pressure on Mr C and Ms C which arose from the situation they were in, and the specific pressure which Mr C brought to bear on Ms C, which the judge found to be undue. Although in Etridge Lord Scott (para 219) said that ‘a finding of actual undue influence and a finding that there is a presumption of undue influence are not alternatives to one another’ what the judge was saying was that if the evidence did not support his positive finding of undue influence he would go on to consider whether it was proper to infer undue influence. It was not inconsistent for the judge to consider the matter in the alternative.
Comment Undue influence claims are on the increase yet despite the fact that O’Brien and Etridge have been around for some time, practitioners still struggle with some of the concepts involved in pleading and pursuing claims based on both actual and presumed undue influence. This case is a reminder that fundamentally a plea of undue influence involves an issue of fact upon which it is open to a trial judge to make findings of either actual undue influence or presumed undue influence, depending on the evidence. Although the Court of Appeal ultimately upheld the judge’s findings of actual undue influence notwithstanding that only presumed undue influence had been pleaded, this is not an invitation for sloppy pleading. Remember that undue influence is a species of fraud. Properly advised, a defendant should plead and particularise all facts and matters relied on in respect of allegations of both actual and presumed undue influence. On a separate point, the Court of Appeal refused to hear the McKenzie friend speak on behalf of both Mr C and Ms C on the appeal on the basis that there was an (obvious) conflict of interest between Mr C and Ms C.