The Supreme Court recently handed down judgment in the case of AIB Group (UK) v Mark Redler Solicitors  UKSC 68. AIB appealed the judgment of the Court of Appeal in their claim for breach of trust against Mark Redler Solicitors. The Supreme Court unanimously dismissed AIB’s appeal.
AIB agreed to lend the sum of £3.3 million to its borrowers, Mr and Mrs Sondhi. The loan was to be secured against the borrowers’ home, which had been valued at £4.25 million. Barclays had a charge registered against the property which secured their lending in the sum of £1.5 million across two mortgage accounts.
AIB provided the mortgage advance to Mark Redler Solicitors (MRC). MRC called Barclays to seek a redemption figure for their charge. However, there was a misunderstanding and MRC were only provided with the redemption figure for one of the mortgage accounts. The redemption figure obtained by MRC was £1.2 million. MRC provided the sum of £1.2 million to Barclays and paid the balance of the AIB loan, £2.1 million to Mr and Mrs Sondhi.
Barclays would not remove their charge and the borrowers failed to repay the additional monies needed to fully redeem the Barclays charge of £300,000.
The AIB charge was registered as a second charge.
The borrowers subsequently defaulted and the property was sold by Barclays for £1.2 million. The amount recovered by AIB was £867,697.
The Court of Appeal proceedings
The parties agreed that MRC had acted negligently. AIB argued that they had paid the loan monies to MRC to be held on trust and that MRC had acted in breach of trust by paying away the monies without obtaining a first legal charge. AIB argued that MRC was liable to reconstitute the trust monies less any monies received from the sale. MRC argued that if they were held to be in breach of trust, the correct measure of equitable compensation was to place AIB in the position it would have been in if they had performed their obligations correctly i.e. with a loss of £300,00 being the sum needed to redeem the Barclays charge.
As a result of the significant loss suffered on the sale of the property, AIB would have been in a significantly less advantageous position had they obtained a first legal charge than if MRC was held liable to reconstitute the trust fund.
The Court of Appeal agreed with MRC and held that they were liable to compensate AIB only to the extent of the losses caused by its breach in not obtaining a first legal charge. Damages were therefore limited to the £300,000 owed to Barclays and interest.
AIB appealed to the Supreme Court regarding the issue of the correct measure of loss.
The Supreme Court dismissed the appeal. MRC were liable to pay damages to AIB in respect of the £300,000 sum that should have been paid originally to Barclays, plus interest.
Lord Toulson, giving the lead judgment, commented on the reasoning of Lord Browne-Wilkinson in Target Holdings Ltd v Redferns  AC 421 including the meaning of completion in the context of a commercial transaction which appears at odds with the judgment of the Court of Appeal in Lloyds TSB Bank plc v Markandan & Uddin  EWCA Civ 65. Lord Toulson commented that a loan was “completed” when the loan monies were released to the borrowers and a lender/borrower relationship had been created. In Lloyds v Markandan, the transaction was “completed” only once the solicitors had the means necessary to obtain a registered first legal charge. The reasoning of Lord Toulson on “completion” meant that the remedy of reconstituting the trust fund was not available.
The facts of the case made it particularly unappealing to allow AIB’s appeal as this would have resulted in a significantly higher award to AIB than if the original transaction had proceeded as planned.
It is important to remember that AIB did obtain partial security and although this decision is not helpful to lenders, it is arguable that is should be distinguished from cases where no measure of security is obtained at all, including fraud type cases. In these types of cases, lenders (and their advisers) will continue to argue that the underlying commercial transaction cannot be considered completed and solicitors are liable to reconstitute the trust fund.