Ikbal v Sterling Law is yet another case concerning a phenomenon which is becoming increasingly and depressingly familiar to both lenders and the courts: that of a vendor, or vendor’s solicitor, who proves to be not what he seemed. Whilst the claim here was brought by a cash purchaser rather than a lender, the relevant legal principles are essentially identical. Permission to appeal having been granted, Ikbal is set to become the latest in a fast growing line of authorities in this area.

The salient facts are simple. This was a case of identity fraud. The purchaser’s solicitors (“S”) transferred the balance of the purchase money to the purported vendor’s solicitors (“F”) in the absence of any express agreement for the use of the Code for Completion by Post. No TR1 was ever received. Accordingly, S were never in a position to discharge their obligations as trustees by the delivery to their client of a duly executed transfer. Nor, as an alternative, did they ever restore the purchase money to him. A little over a month after the purported completion date, the SRA intervened in F’s practice. Of the purchase money, there was no trace.

It will come as no surprise to those familiar with Target v Redferns that these facts gave rise to a breach of trust claim against S. In this type of case, there will not necessarily be merely a single breach of trust. There may be different breaches of different duties. Here, for example, there was a breach of the duty not to make unauthorised payments (the use of the Postal Code not having been agreed). But even if there had been authority to transfer the balance of the purchase money, there could (and would) still have been a subsequent breach, a consequence of non-completion. For causation purposes (remembering always that the principles applicable to a breach of trust claim differ from those at common law), it is important correctly to identify both the relevant breaches and the relevant duties.

It might be thought (erroneously) that, if a lender’s or purchaser’s solicitor has authority to transfer the balance of the purchase money and does so, he is at that point in some way discharged from his obligations as a trustee with the vendor’s solicitor stepping into his shoes (and thus assuming sole responsibility to the lender or purchaser for any defalcations). This cannot be right, if for no other reason than that the vendor’s solicitor’s obligation on non-completion is to return the entirety of the purchase money not to the intended purchaser himself but to his solicitors.

In Ikbal, not surprisingly, Mr Nicholas Davidson Q.C. (sitting as a Deputy Judge of the Chancery Division) held that, subject to an application for relief under section 61 of the Trustee Act 1925, S were liable to pay their erstwhile client the amount of the balance of the purchase money plus interest. There were two breaches of trust: first, “at the time of the funds being sent to (F)” and, secondly, “when the monies were appropriated by (F)”.

Section 61 of the Trustee Act 1925 empowers the court to relieve a trustee from personal liability. The material parts read as follows:

“If it appears to the court that a trustee …  is or may be personally liable for any breach of trust … but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust … then the court may relieve him either wholly or partly from personal liability for the same.”

The two tests (“honestly and reasonably” and “ought fairly to be excused”) are plainly fact sensitive. However, as a general proposition, it can be said that section 61 provides the mechanism which protects the conscientious solicitor acting for a lender or purchaser from the consequences of the fraud of third parties pending completion once the mortgage or purchase money has passed from his direct control.

In Ikbal, as to the first test (“honestly and reasonably”), the judge considered there to be two relevant periods, those before and after the transfer of the balance of the purchase money. He considered that S’s conduct during the first period, whilst honest, was not reasonable and found their conduct during the second period to have been “very unreasonable indeed”. As to the second test (“ought fairly to be excused”), he said that, were it not for what he referred to as “the causation point”, he would have refused relief: “The claimant was ill served by the defendant”.

S’s application for relief thus turned on “the causation point”, this being analysed as forming part of the first test. The judge found that, as a matter of law:

“It is … necessary to consider whether the unreasonable conduct is “connected with the loss for which relief is sought”…”

The judge’s application of the law to the facts is to be found at paragraphs [235] and [236]. In relation to the first period, he said this:

“The unreasonable conduct in failing to agree the use of the Postal Code, and the loss, are part of the same history: it was the use of the Postal Code and the remittance of the funds by bank transfer that enabled the fraudsters to access the funds. But that would have happened in any event: if the defendant had expressly agreed the use of the Postal Code the outcome would have been the same. So although the events are part of the same history, there is not the connection between them which I understand to be envisaged by Nationwide v Davisons.”

In relation to the second period, he said this:

“The unreasonable conduct on or after 30 July was not connected with the loss, which in my judgment had already occurred.”

Accordingly, the judge relieved S from liability for their breaches of trust. He did, though, grant permission to appeal, such permission being limited to the issue of relief.