Circumstances when the security of a bank may be challenged

A contract can be set aside on a number of grounds;

1.            Undue Influence
2.            Misrepresentation
3.            Illegality
4.            Duress

The Application of these principles to Banking i.e. what a banker should safeguard against when taking security to avoid being liable.

CIBC Mortgages PLC V. Pitts & Another (1993) Vol. 4 All E.R. 433

This is an illustration as to how a problem can arise when securities are being taken.

A debenture is a floating security tied on assets of a company that will crystallise after certain effects.

The facts in this case were that a husband and wife jointly owned a matrimonial home which was valued at £275,000 in 1986.  There was an encumbrance on that property in favour of a building society for £16700.  In 1986 the husband told the wife that he would like to borrow money on the security of the home and to use the loan to buy shares in the stock market.  The wife was most reluctant but as a result of pressure, brought upon to bear on her by the husband, she eventually agreed.  Both the husband and wife signed an application for a loan from the plaintiff in the amount of a £150,000 for a period of twenty years.  And the purpose of the loan was expressed in the application to be for the purpose of paying off the existing mortgage with the building society and for the Purchasing of a Holiday Home.  The Plaintiff agreed to advance the £150,000 for 19 years and the husband and wife signed the Mortgage offer and the legal charge prepared by the Plaintiff’s solicitors.  The wife did not read those documents before signing them neither did she receive separate advice about the transaction and nobody suggested that she should in fact seek advice.  She did not know the amount that was being borrowed, the bank then proceeded to disburse the loan, the existing mortgage with the building society was paid off and the balance of the amount of the loan was paid into a joint account in the names of the husband and wife.  The husband then utilised that money to speculate on the stock market and was in fact at some stage at least in the books able to convert himself into a Millionaire through his stock dealings.  The stock market then crashed in October of 1987 and the husband was then unable to keep up the Mortgage repayments and the Plaintiff then applied for an order for possession of the matrimonial home. 

The wife contested the application for possession of the matrimonial home on the ground that she had been induced to sign the mortgage by misrepresentation, duress and undue influence on the part of the husband.  The judge held that the husband had exercised actual undue influence on the wife to procure her agreement and that the transaction was manifestly disadvantageous to her.  But since the husband had not acted as an agent of the Plaintiff and the fact that there had been a joint advance to both the husband and the wife, the wife’s claim failed.  She appealed to the court of appeal and the appeal was dismissed on the grounds that the transaction was not manifestly disadvantageous and therefore the wife could not succeed on undue influence.  And furthermore the Plaintiff had neither actual or constructive notice of any irregularity.

She then appealed to the House of Lords which held that a claimant who proved actual undue influence was not under the further burden of proving that the transaction induced by undue influence was manifestly disadvantageous but was entitled as of right to have it set aside as against the person exercising the undue influence since actual undue influence was a species of fraud and a person who had been induced by undue influence to carry out a transaction which he did not freely and knowingly enter into was entitled to have that transaction set aside as of right.  However the House of Lords went to hold, although the wife had established actual undue influence by the husband, the Plaintiff was not affected by it because the husband had not in a real sense acted as its agent in procuring her agreement and that the Plaintiff had no actual or constructive notice of the undue influence.  So far as the Plaintiff was concerned there was a joint application by both husband and wife, the loan was advanced to both husband and wife and there was nothing to indicate that this was anything other than a normal advance to a husband and wife for their joint benefit and for that reason the appeal was dismissed.

Look at the Judgement of Wilkinson J. and his discussion of the law in that case.

Under our statutes the requirements is that the signatures of the chargees must be witnessed by an advocate and he must say that he has agreed.

The circumstances when the security of a bank may be challenged



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