Lloyds Tsb Bank Plc v Markandan & Uddin (a firm) [2012] EWCA Civ 65 (09 February 2012)

by BankingBlawg on February 16, 2012

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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




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