Facts

This case demonstrated a 'split property fraud'. The fraudulent scheme involved two owners of a property and a corrupt conveyancer defrauding banks in connection with charges granted over a bungalow. In each case the innocent lender believed that it was taking a charge over the whole of the bungalow. In fact, the charges were taken over small strips of land and garages at the bungalow as opposed to the main property itself.

By a series of transactions, the fraudsters were able to obtain a number of charges over the same property. Cheltenham & Gloucester Plc (C&G), Halifax Plc (Halifax), a third party and Bank of Scotland Plc (BOS) all believed that they had taken charges over the bungalow during the course of the fraud. When the fraud was discovered, the charge to C&G had been discharged leaving the charges to the third party, Halifax and BOS remaining.

The charge taken by Halifax, which turned out to be over just a garage, was followed by the transfer of the bungalow by the fraudsters to one of them alone (in the guise of an alias). The fraudsters then fraudulently obtained finance from BOS. BOS took its charge, although again this transpired to be over one of the other garages, and not the bungalow itself.

BOS obtained a money judgment against one of the fraudsters and then obtained a charging order over the bungalow. The charging order required BOS to discharge any other securities over the bungalow that had priority to its charge. The bungalow was sold by BOS and BOS discharged the charge to the third party. The court had to make a decision as to how the remaining proceeds of sale should be divided between Halifax and BOS. Although by that stage the two institutions had merged to form HBOS, the proceeds of sale were insufficient to discharge their total combined indebtedness. The aim of the proceedings was therefore to determine which firm of solicitors (Halifax's or BOS') was liable for the loss.

The parties agreed that Halifax had the benefit of a proprietary estoppel as it had been led to believe (by the fraudsters) that it would have a charge over the bungalow. The basic rule is that the priority of competing equitable interests is determined by the order in which they were created. This would give priority to Halifax. However, Section 29 of the Land Registration Act 2002 (LRA 2002) provides for a registered estate to be wiped clear of equities which have not been protected on a transfer for valuable consideration. BOS argued that the effect of the transfer by the fraudsters was that its interest ranked ahead of the interest of Halifax.

Decision

The court decided that Halifax's interest under the proprietary estoppel had priority over the interest of BOS.

The main issue between Halifax and BOS was whether the effect of s29 was such that the registration of the transfer of the bungalow into the sole name of one of the fraudsters resulted in Halifax's charge losing priority. This depended on whether the transfer to the fraudster was made for valuable consideration.

The court decided that, as there was no genuine transfer (as it was between the fraudsters and was a sham), there was no valuable consideration. Therefore, the interest of BOS had to rank behind that of Halifax.

Commentary

The court commented (obiter dicta - therefore not binding as precedent) that if there had been a transfer for valuable consideration s29 would have resulted in the interest of BOS taking priority to that of Halifax. The effect of s29 of the LRA 2002 would result in Halifax losing its interest in the land but the interest would still have been enforceable as a personal right. The benefit of this is questionable as it would have been a personal right against the fraudsters and it is assumed that there would not have been any funds to pursue. It is likely that Halifax would seek recourse from the firm of conveyancers for whom the corrupt conveyancer worked.

This case highlights the difficulties for lenders in protecting themselves against fraudulent transactions where a corrupt conveyancer is involved. It illustrates the need for lenders to ensure that their own identity check procedures are rigorous to try and establish where a fraud is taking place.

Halifax Plc (1) and Bank of Scotland Plc (2) v Curry Popeck (1) and Pulvers (2)