Earp (as trustee in bankruptcy) v Kurd and another

Legal charge – Illegality – Sham – Claimant applying for declaration that property vested in him as trustee in bankruptcy – Defendants stating property subject  to legal change – Claimant challenging legality of legal charge – Whether legal charge constituting sham – Whether sums being due under terms of legal charge – Application granted in part The claimant was the trustee in bankruptcy of the second defendant who had been declared bankrupt in October 2007 on the petition of the local authority for an unpaid debt of £13,581. The claimant applied for a declaration that a freehold property in London E1 which the second defendant had acquired in March 1997 had been vested in him as trustee free from any charge or, alternatively, for a declaration as to the amount secured by any such charge. The property was a four-storey building with a retail unit on the ground floor and basement and office/storage space on the upper floors. According to a valuation obtained by the claimant in July 2008, its market value was then £480,000, or £375,000 if subject to marketing constraints. The first defendant, who was the nephew of the second defendant, claimed that the property was subject to a legal charge in his favour, dated 11 December 1997, securing two cash loans totalling £75,000, £250,000 in respect of supplies for the second defendant’s business and mortgage payments totalling £88,000 paid on the property, ransom payments totalling £175,000 made to free the second defendant from kidnap and £22,000 spent on the property. In each case compound interest of 10% was claimed, amounting in aggregate to considerably more than the likely value of the property. The claimant’s case was that the legal charge was a sham or, alternatively, that none of the sums claimed were due pursuant to its terms. Held: The application was granted in part.A document was a sham if it was intended by the parties to give third parties or the court the appearance of creating between the parties legal rights and obligations which differed from those which the parties in fact intended to create. The court would be slow to find that an agreement was a sham and would not do so unless it was no more than a piece of paper which the parties had signed with no intention of it having any effect other than that of deceiving a third party and/or the court. The fact that a document was uncommercial, or even artificial, did not mean that it was a sham: Snook v London & West Riding Investments Ltd [1967] 2 QB 786 and Stone (Inspector of Taxes) v Hitch [2001] EWCA Civ 63 applied. The parties’ motive for executing a document, which was intended to give rise to the rights and obligations which it evidenced, was irrelevant. It was not undone merely because there was an ulterior purpose in doing it. As to the amount of an advance being shown as greater than the advance in fact made, there was no legal principle that parties could not agree to assume a certain state of affairs at the time the contact was concluded, or had been so in the past, even if that was not the case, so that the contract was made upon the basis that the present or past facts were as stated and agreed by the parties. A party was estopped from denying the truth of the factual statements or assumptions made in a contract or deed; whereas in equity, notwithstanding estoppels by contract or by deed, a party might seek to show that money was stated to have been paid had not in fact been paid, such a plea would fail, and a party would be bound by the deed or contract, where he know that what was stated in it to exist did not in fact exist: Miles v Bull [1969] 1 QB 258, Close Asset Finance Ltd v Taylor [2006] EWCA Civ 788; [2006] PLSCS 123, Springwell Navigation Corporation v JP Morgan Chase Bank [2010] EWCA Civ 1221 and Solcom Trading Ltd v Tatik Inc [2012] EWHC 3464 (Ch) applied. Applying those principle to the present case, the legal charge had not been a sham. It had been the intention of the parties that, in the event of a sale of the property, the first defendant would recover £75,000, plus any further advances in respect of the mortgage liabilities, or other agreed advances, if any, together with interest. The object of the exercise was to ensure that the second defendant had no beneficial interest in the property, but that did not make it a sham; nor did the fact that there was never any intention that the second defendant would have to pay the first defendant anything beyond the proceeds of sale of the property. The arrangement was intended to operate as a legal charge and there was no intention to deceive the court or any third party. The second defendant had simply trusted his brothers not to seek to enforce his liability beyond the amount realised for the property: Vickers v Jackson [2011] EWCA Civ 725; [2011] PLSCS 195; [2011] 3 EGLR 65 distinguished. Accordingly, the initial advance of £75,000 and other payments to the bank were amounts due under the legal charge. However, on the balance of probabilities, the sums claimed in respect of the leather skins, the ransom payments and the building work did not represent debts due under the legal charge. Hugo Groves (instructed by Blake Lapthorn) appeared for the claimant; Clifford Darton (instructed by Whitmore Law LLP) appeared for the first defendant; The second defendant did not appear and was not represented. Eileen O’Grady, barrister