England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE No CHANF 97/0450/3

Royal Courts of Justice

Strand

London WC2

Thursday, 18th June 1998

B e f o r e:

LORD JUSTICE MILLETT

LORD JUSTICE MORRITT

LORD JUSTICE POTTER

DUNBAR BANK Plc

Plaintiff/Respondent

- v -

MAURICE NADEEM

First Defendant

ZUBAIDA NADEEM

Second Defendant/Appellant

(Computer Aided Transcript of the Palantype Notes of

Smith Bernal Reporting Limited, 180 Fleet Street,

London EC4A 2HD

Tel: 0171 831 3183

Official Shorthand Writers to the Court)

MR LEOLIN PRICE QC and MR B DEVLIN (Instructed by Messrs Rippon Patel & French of London) appeared on behalf of the Appellant

MR J CHERRYMAN QC and MR J HORAN (Instructed by Nicholson Graham Jones of London) appeared on behalf of the Respondent

J U D G M E N T

(As Approved by the Court )

(Crown Copyright)

LORD JUSTICE MILLETT: On 7th November 1996 Mr Robert Englehart QC, sitting as a Deputy High Court Judge of the Chancery Division, made an order that upon the Second Defendant Mrs Zubaida Nadeem paying the sum of £142,791.05 on or before 7th February 1997 to the solicitors to the Plaintiff Dunbar Bank Plc ("the Bank") the legal charge dated 9th May 1991 made between the Bank, Mrs Nadeem and her husband Mr Nadeem (who was the First Defendant) should be set aside as between the Bank and Mrs Nadeem, and the Bank's application for possession of the property 152 Pavilion Road, London SW1 ("the property") should be dismissed. The Deputy Judge also ordered that in default of such payment by the specified date

there should be an immediate order for possession of the property, such order not to be enforced before 7th April 1997. The Deputy Judge made no order for costs as between the Bank and Mrs Nadeem

but he directed that the Bank should not be entitled as between itself and Mrs Nadeem to add its costs to the security. This direction took effect when, as was foreseeable, Mrs Nadeem was unable to make the payment specified in the order.

Both parties are dissatisfied with the order and appeal to this Court. By her appeal Mrs Nadeem contends that the Judge should have made an order setting aside the Legal Charge as between herself and the Bank without imposing any conditions. By its cross-appeal the Bank contends that Mrs Nadeem has not established a case for having the Legal Charge set aside.

The facts, which are unusual, can be stated as follows. The property is Mr and Mrs Nadeem's matrimonial home. They have lived there since 1982. Mr Nadeem formerly occupied the property under a lease for a term of 13 3/4 years from 25th March 1983 granted by the Cadogan Estate. He was the sole beneficial owner of the lease; Mrs Nadeem had no beneficial interest in it. By 1990 the lease had only some 3 years unexpired, though Mr Nadeem may have enjoyed security of tenure under the Rent Acts.

Mr Nadeem was a solicitor in sole practice. He also carried on business as a property investor. By the end of 1989 he found himself in financial difficulties. The properties which he owned had been acquired with the assistance of bank borrowings, both from the Bank and other secured lenders, and the onset of the recession was causing the value of their security to diminish. By mid-1990 he was having difficulty in meeting payments of interest on his borrowings. He had four loan accounts with the Bank in respect of which the Bank held a number of various properties as security. The total indebtedness on these accounts at the end of 1990 was approximately £1.267m and interest was payable at a rate of some £50,000 a quarter. All the accounts were repayable on demand. Mr Nadeem had also borrowed heavily from other sources, and he was indebted to other banks including National Westminster Bank.

At the beginning of 1991 Mr Nadeem was in arrears to the Bank for approximately £32,000 in respect of the interest payable in September 1990 and was unable to pay the £52,000 interest which had fallen due in December 1990. In the meantime, however, he had been offered the opportunity to acquire a longer lease of the property in place of his existing lease for a sum of £210,000. The new lease was to be for a term of 33 years from September 1990. It was valued by independent valuers at £400,000. For the surrender of the remainder of his existing lease, therefore, Mr Nadeem was in a position to acquire an extended lease of his matrimonial home at a price which was roughly £190,000 less than its estimated value.

Mr Nadeem saw this as a means of helping to alleviate his financial difficulties. He approached the Bank to provide the finance for the acquisition of the new lease. The Bank was willing to agree in principle to advance £260,000 on the security of the new lease, of which £210,000 would be used to acquire the lease and £50,000 to "regularise" the four existing accounts. The Judge found that what was intended was bridging finance to help Mr Nadeem to make a profit by acquiring a valuable asset. Mr Nadeem had presented his proposition to the Bank as a means by which "his personal [debt] position will be greatly eased", and the Bank contemplated that the loan would be short-term and would swiftly be repaid by a re-mortgage or sale of the property. The short-term nature of the loan was confirmed in a subsequent letter of 3rd February 1992 from the Bank to Mr Nadeem in which the Bank stated:

"The purpose of the facility was to give you some time to have the property re-mortgaged."

All negotiations were conducted between Mr Nadeem and the Bank. At first Mrs Nadeem was not involved in the transaction at all. Before the end of 1991, however, Mr Nadeem informed the Bank that Mrs Nadeem was to acquire the new lease jointly with himself. The explanation which Mr Nadeem gave in evidence was that he thought that his wife should have an interest in the property as he himself was "getting on". This did not cause the Bank any concern, save that it required Mrs Nadeem's signature to the documentation. The negotiations continued to be conducted by Mr Nadeem alone.

The facility letter is dated 28th February 1991. It was addressed to Mr and Mrs Nadeem and was in the following terms:

"Dear Sir & Madam,

Loan Facility

Following discussions, we confirm that we are pleased to offer you a loan facility of £260,000 (Two Hundred & Sixty Thousand Pounds) or up to 65% of the valuation of the security specified in clause (4) below whichever is the smaller sum on the following terms and conditions:

(1) The purpose of the loan is to provide you with:

(a) £210,000 to enable you to purchase a 32 years lease over [the property] for £210,000. Your existing lease will be surrendered simultaneously on the date of completion.

(b) £50,000 to be used to pay outstanding interest payments on the account of Mr M Nadeem in our books."

The remaining terms of the facility letter made it clear that the outstanding balances of the loan were to be repayable forthwith on demand and that -

"The security for the loan will consist of a first legal charge over a [new] lease ..... over [the property]."

On 6th March 1991 Mr Nadeem returned the copy of the facility letter duly signed by himself and Mrs Nadeem. The Judge found:

"Although Mrs Nadeem did sign the letter, I have no doubt having heard and observed her giving evidence before me that she merely signed because her husband asked her to do so. She did not read the letter before signing and, if she had read it, she would not have understood it. She always signed all documents dealing with financial matters simply because her husband told her to sign. I doubt very much whether her husband gave her any explanation at all about the matter. At most, she would have understood that the document was something to do with the house."

Sometime before completion the Bank learned that National Westminster Plc was proposing to take a second charge over the new lease. The bank's consent was readily forthcoming to this, as the creation of a second charge ranking behind its own would not affect its security. It is unclear when the Bank first learned of the amount of Mr Nadeem's indebtedness to National Westminster Bank Plc. It was in fact some £560,000, but the Judge found that this may not have been known to the Bank until after the completion of its own security. The National Westminster Bank Plc took somewhat greater precautions before taking its security than did the Bank in the present case. It is not contended that Mrs Nadeem could successfully challenge the National Westminster's legal charge.

The transaction was completed on 9th May 1991 when the new lease was granted to Mr and Mrs Nadeem and charged by them to the Bank by an all moneys charge in the Bank's standard form. This purported to make each of the mortgagors jointly and severally liable for all moneys and liabilities owed by either of them on any account. On the face of it, therefore, Mrs Nadeem covenanted to be personally liable for and charged her interest with not only the £260,000 advanced to her and her husband to enable the property to be acquired and Mr Nadeem's accounts to be "regularised" but also Mr Nadeem's other liabilities to the Bank which were in excess of £1.267m.

The property market continued to decline. Mr Nadeem was unable to make interest payments when they fell due, or to re-mortgage the property, and on 22nd February 1994 the Bank made demand for repayment of the facility by letters addressed separately to Mr and Mrs Nadeem. The Bank demanded payment of the amount of the facility in the sum of £332,379.64, being the amount owed under the facility at the date of the letters. Mr and Mrs Nadeem defaulted. The Bank sought to enforce its legal charge, and Mrs Nadeem counterclaimed to have the legal charge set aside as against her for undue influence.

The Judge held:

(1) Mrs Nadeem had established a relationship of trust and confidence in her husband. She was happy to leave anything of a financial nature entirely to her husband, and relied implicitly in him and would unquestioningly do whatever he asked her.

(2) The evidence did not establish a case of actual undue influence.

(3) The transaction was manifestly disadvantageous to Mrs Nadeem; and she had established a case of presumed undue influence.

(4) The bank had constructive notice of the defect in the transaction and, accordingly, Mrs Nadeem was, prima facie, entitled to have the legal charge set aside as between her and the Bank.

(5) If the legal charge were set aside unconditionally Mrs Nadeem would be unjustly enriched, since she would have acquired with the use of the Bank's money a beneficial interest in the property without having to contribute to the cost of its acquisition. To avoid this injustice she must make restitutio in integrum by repaying to the Bank £105,00, being one half of the money advanced by the Bank for the acquisition of the property with simple interest at an ordinary commercial rate. The sum mentioned in the order represents the sum of £105,000 with interest added. In reaching this conclusion the Judge rejected submissions on behalf of the Bank that the capital sum in question ought to be £210,000.

Mrs Nadeem cross-appeals against the imposition of any condition, which she contends is wrong in principle and rendered her established right to have the legal charge set aside illusory. The Bank cross-appeals against the Judge's order setting the legal charge aside. In answer to Mrs Nadeem's cross-appeal, the Bank seeks to confirm the condition which the Judge imposed. It does not pursue its claim that the capital sum in question ought to have been £210,000 rather than £105,000. Logically the cross-appeal must be considered first.

The Judge found that the transaction was manifestly disadvantageous to Mrs Nadeem because of the presence of two features. The first is that £50,000 of the joint loan facility of £260,000 was to be applied by the Bank to meet Mr Nadeem's own indebtedness to the Bank. Mrs Nadeem obtained no benefit thereby. Secondly, the legal charge expressly made Mr Nadeem personally liable for and charged the property with the whole of Mr Nadeem's present and future indebtedness to the Bank amounting, at the date of the Legal Charge, to more than £1.2m. The bank submits that, even on this footing, the Judge was wrong to find that the transaction was manifestly disadvantageous to Mrs Nadeem. Even on up-dated valuations in June 1991, the bank had a margin of security of £250,000 without taking account of the furhter security provided by the property, and he failed to take this into account. The Bank submits that in the circumstances the Judge ought not to have held that the equity of redemption of the property, which apparently had a value of £140,000 and in which Mrs Nadeem was acquiring a joint beneficial interest, was illusory. The Bank concedes that the transaction was speculative and may have been imprudent, but it contends that it was not manifestly disadvantageous to Mrs Nadeem. It was not one which could not be explained by "other ordinary motives on which ordinary men act": see Allcard v Skinner (1887), 36 Ch D 145 at p185 per Lindley LJ.

In my judgment it is not necessary to reach a conclusion on this question, since I am satisfied that the Judge was wrong to take the Legal Charge at face value. In taking an all moneys charge the Bank took a charge in radically different terms from that contemplated by the terms of the facility letter, and if the difference was intentional one might have expected some explanation to be forthcoming either in the documentation or in the evidence.

But there is in fact convincing evidence that no such change was intended, the significance of which I think the Judge may understandably have overlooked since no particular reliance was placed upon it for this purpose. This lies in the fact that the transaction was intended, at least by the Bank, to be short-term bridging finance to be repaid by a sale or re-mortgage of the property in the near future. The Bank was at all times anxious to be repaid its £260,000 out of the proceeds of a sale or re-mortgage of the property and evinced a willingness to discharge its security upon having repayment of that sum with interest. It was always

prepared to accept repayment out of the proceeds of a re-mortgage, and it must have been prepared to accept the discharge of its own security to allow a re-mortgage (not, it should be noted, namely a second mortgage) to be effected. Such an attitude is consistent with the terms of the facility letter, but inconsistent with the terms of the Legal Charge, which if enforced according to their terms, would make a re-mortgage impossible. The inference is irresistible that the Bank mistakenly used an inappropriate standard form to effect the security. In my judgment it could never have enforced the Legal Charge according to its terms against either Mr or Mrs Nadeem and, to be fair, it has never sought to do so.

On this footing the transaction was not manifestly disadvantageous, or, in my opinion, at all disadvantageous to Mrs Nadeem. She was obtaining for the first time a beneficial joint interest in an equity of redemption in the property having an estimated value of £140,000. The fact that £50,000 of the advance for which she was making herself jointly liable was to be used for her husband's sole benefit does not affect this conclusion; I have already taken this into account in reducing the value of the benefit to her from £190,000 to £140,000.

In the course of argument before us, Mrs Nadeem challenged the need to establish manifest disadvantage. On the law as it stands at present, a person who can prove the exercise of actual undue influence by another in respect to a transaction is entitled to have the transaction set aside without proof of manifest disadvantage: see CICB Mortgage v Pitt [1994] AC 200. But such proof is required where the exercise of undue influence is only presumed: see BCCI v Aboody [1992] 4 All E R 433. This raises a nice question whether the Judge merely found a relationship of trust and confidence from which the exercise of undue influence could be presumed; or whether he went further and found or inferred a case of actual exercise of undue influence. The Judge himself dealt with this question in the course of his judgment. He said:

"The case was opened to me, without demur from Mr Price, as one in which presumed, not actual, undue influence was alleged. However, in his closing submission Mr Price did at one point faintly suggest that actual undue influence could also be for me to consider. Mr Cherryman objected that no such case was pleaded. I have to say that, although the Defence does not in terms differentiate between actual and presumed undue influence, I read it in the same way as Mr Cherryman. In any event I do not consider that the evidence establishes any case of actual undue influence. There was no coercion, pressure or deliberate concealment by Mr Nadeem in relation to his wife. They each proceeded merely on the footing that he knew best what was to be done in relation to financial and legal matters. I do not think that Mr Nadeem deliberately set out to take unfair advantage of his wife."

I have, for my part, some difficulty with this passage, since neither coercion, nor pressure, nor deliberate concealment is a necessary element in a case of actual undue influence. Moreover, the Judge did to my mind find more than a relationship in which Mrs Nadeem was content to leave it to Mr Nadeem to make decisions in financial matters because she trusted him. He expressly found that she did not read the facility letter and could not have understood it if she had read it. She simply signed the documents because her husband told her to sign, probably without any explanation at all.

In my view, the Judge's description of the parties' relationship is closely similar to that which has been described in a number of the cases - for example, Tufton v Sperni [1952] 2 TLR 516 - what Jenkins LJ called "actual domination ..... over the mind and will" and what Morris LJ has called "complete domination by the defendant over the plaintiff - so that the mind of the latter became a mere channel through which the wishes of the former flowed". Lord Donaldson of Lymington MR in Re T [1992] 2 FLR 458 said:

"The real question in each case is, ´Does the patient really mean what he says or is he merely saying it for a quiet life to satisfy someon else or because the advice and persuasion to which he has been subjected is such that he can no longer think and decide for himself?' In other words, ´Is it a decision expressed in form only, not in reality?'"

Such a situation has been described in many different ways. Before us Mr Price, to my mind, aptly described it as a case where although the pen may have been the pen of Mrs Nadeem, the mind was the mind of Mr Nadeem.

But I need not decide this question because of the Judge's clear finding that Mr Nadeem did not take unfair advantage of his position. Seen through his eyes, the transaction was obviously beneficial to his wife and was intended by him to be for her benefit. She was obtaining a beneficial interest in the matrimonial home for the first time. Far from seeking to exploit the trust which she reposed in him for his own benefit, he was seeking to give her an interest in the matrimonial home "because he was getting on". He may well also have thought it expedient to give her some protection in case his precarious financial position disintegrated further, because if he did not take the opportunity to acquire the new lease, at least in part for his wife, it would be available in its entirety for his creditors, leaving her without a roof over her head. It is true that he did not give evidence to this effect. If he did not do so, it may be that he was not

certain that his conduct was lawful. In my judgment, his own

evidence, coupled with the situation in which he found himself, and, to my mind, objective criteria, he was not exploiting the trust reposed in him for his own benefit but seeking to turn an opportunity of his own, at least in part, to his wife's advantage

The court of equity is a court of conscience. It sets aside transactions obtained by the exercise of undue influence because

such conduct is unconscionable. But however the present case is

analysed, whether as a case of actual or presumed influence, the

influence was not undue. It is impossible, in my judgment, to

criticise Mr Nadeem's conduct as unconscionable.

Accordingly, in my view, the cross-appeal succeeds. The Judge's order must be set aside and an order substituting an order for possession must be substituted.

This makes it unnecessary to deal with the appeal, but it has been fully argued and in the hope that it may be of assistance in other cases I shall make some brief observations in relation to the matter.

1. Mrs Nadeem submits that the imposition of terms is wrong in principle and contrary to the decision of this Court in TSB v Camfield [1995] 1 WLR 430. In that case the wife was persuaded by her husband to charge her beneficial interest in the matrimonial home as security for loan facilities to her husband for his business purposes and not (as the statement of facts erroneously states) to secure the parties' joint indebtedness to the bank. The husband falsely represented to his wife that the maximum liability to be secured by the charge was £15,000. She was willing to execute the charge on that basis. The bank had constructive notice of the husband's misrepresentation and the wife was held to be entitled to have the charge set aside as against her. The bank invited the Court to substitute a charge for £15,000 on the ground this would sufficiently meet the equity of the case since the wife

had been willing to execute the charge to that extent. The Court

refused to do so, either by setting the charge aside in part, or by imposing terms on the relief sought.

Whether that case was rightly decided or not, it was a very diferent case. There the wife obtained no benefit for himself from the transaction. As Nourse LJ said at page 434H:

"Mr Cherryman says that there can be no question of the equity being subjected to terms, such terms only being appropriate where they are necessary to procure restitutio in integrum, a doctrine which has no application here because there is nothing for the wife to give back and no cause for her to provide compensation."

In that passage Nourse LJ was summarising counsel's submissions, but it is plain from that the Court accepted them.

2. The remedy of rescission is an equitable remedy. It is well established that it is a condition of relief that the party obtaining rescission should make restitutio in integrum or, in modern terminology, counter restitution to the other party. If counter restitution cannot be made the claim to rescission fails: see Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218. I reject Mr Price's submission that, had the cross-appeal not succeeded, Mrs Nadeem would have had an unqualified, unconditional right to rescission. She never had any such right. Her right to rescission was conditional on her making a counter restitution.

3. The condition which the Judge imposed was, however, wrong in principle. It is necessary to analyse the transaction which is sought to be set aside in some detail. In many cases the transaction can be analysed either as a transaction between the husband and wife, which is set aside as against the husband and through him as against the bank, or as a transaction between the wife and the bank which can be set aside directly as against the bank. In the present case it is inescapable that there must have been two agreements. By the first agreement made between Mr and Mrs Nadeem, Mr Nadeem agreed that he would purchase for Mrs Nadeem a half interest in the property on terms that she join with him in charging the property with repayment of the money advanced to make the purchase possible. In those circumstances what Mr Nadeem was offering to obtain for his wife was an interest in the equity of redemption and not in the property free from the charge.

Secondly, there was the agreement between Mr and Mrs Nadeem and the Bank on terms of the facility letter. By the first agreement Mrs Nadeem obtained a half interest in the equity of redemption subject to the Bank's legal charge, and by the second she obtained jointly

with her husband an advance of £260,000 on the terms that £210,000 would be used to buy the property which she and pp her husband should jointly charge in favour of the Bank to secure repayment of the advance. By the second agreement she did not obtain a freestanding loan, whether of £210,000 or £105,000, which she was free to use as she thought fit. There was no possibility of her applying the advance except for the purpose of acquiring the property so that she could join in giving security to the Bank for the money advanced with which to acquire it.

Accordingly, in my judgment, the extent of Mr Nadeem's enrichment, should the Legal Charge be set aside, is not the money which was

advanced to her and her husband jointly, but the interest in the equity of redemption which she obtained by the use of the Bank's money. That is the extent of her enrichment. And it is that, in my opinion, of which she must make counter restitution.

4. In my judgment, however, there was no need to impose conditions on the setting aside of the Legal Charge in order to achieve counter restitution. On the unusual facts of the present case it

would have been automatic. Mrs Nadeem cannot retain her beneficial interest in the property in priority to the Bank's charge and at the same time reject liability to repay the advance by which the property was obtained. Once the Legal Charge is set aside, the source of her beneficial interest in the property must be her husband. The answer has to be her husband. He had nothing to give her except an interest in the equity of redemption subject to the Bank's security. She had no need to make counter restitution because, having set aside the Legal Charge, she cannot assert a

beneficial interest in the property in priority to the Bank's legal charge to secure repayment of the money with which the property was acquired.

5. In my judgment, therefore, the Legal Charge would be to eliminate any personal liability on the part of Mrs Nadeem. Even if the Legal Charge were set aside, she would be unable to assert any beneficial interest in the property in priority to the Bank's Legal Charge. It follows that the position of the National Westminster Bank, which has a second Legal Charge on the property, is unaffected. I do not understand how it can be prejudiced in any way, nor how its second charge can prevent the setting aside of the first Legal Charge as between the Bank and Mrs Nadeem. It holds a second Legal Charge ranking behind the Bank's Legal Charge. That is a charge on the legal estate executed by both legal owners. The disappearance of Mrs Nadeem's beneficial interest or its postponement to the interest of the Bank does not advance the National Westminster's security, but neither, in my judgment, does it prejudice it. If it were the case that Mrs Nadeem were required to assign her beneficial interest in the property to her husband, the existence of such a subsequent charge on that beneficial interest might make counter-restitution impossible. But those are not the facts of this case.

6. Accordingly, I would not have been persuaded by the existence of the second legal charge in favour of the National Westminster Bank to hold that counter-restitutiion was impossible.

For the reasons I have given the Bank's appeal succeeds. I would set aside the Judge's order and substitute an order dismissing the counterclaim and giving an order for possession to the Bank.

LORD JUSTICE MORRITT: The case for Mrs Nadeem ("the Wife") was treated in the court below as resting on presumed undue influence of the type referred to as class 2 in the categorisation of such cases made by Lord Browne-Wilkinson in Barclays Bank Plc v O'Brien [1994] AC 180, 189. There is no suggestion in either notice of appeal that it should be regarded as a case of express undue

influence coming within class 1 of the categorisation. As a class

2 case, and it is not disputed, it is necessary for the Wife to demonstrate that the impugned transaction was to her manifest disadvantage. See National Bank Plc v Morgan [1985] AC 686. For the reasons given by Millett LJ, I agree with him that such a case was not made out by the Wife. The consequence is that the legal charge is not liable to be set aside as against her and she has no defence to the claim for possession made by the Bank. For that reason I agree that the appeal by the Bank should be allowed.

The appeal by the Wife does not therefore arise. However, the matter was fully argued and as it gives rise to problems likely to arise in other cases it may assist if I indicate what appear to me to be the appropriate principles to apply.

The applicant for an order for a transaction to be set aside on the ground of undue influence or for any other invalidating tendency, as they were described by Lord Browne-wilkinson in Barclays Bank Plc v O'Brien (ibid) 190, must as a condition for relief give back all he obtained from the transaction. See Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 at pp 1278-1279. The matter was put clearly by Bowen LJ in Newbigging v Adam (1886) 34 Ch D 582 at pp 592 where he said:

" .... when you come to consider what is the exact relief to which a person is entitled in a case of misrepresentation it seems to me to be this, and nothing more, that he is entitled to have the contract rescinded, and is entitled accordingly to all the incidents and consequences of such rescission. It is said that the injured party is entitled to be replaced in statu quo. It seems to me that when you are dealing with innocent misrepresentation you must understand that proposition that he is to be replaced in statu quo with this limitation - that he is not to be replaced in exactly the same position in all respects, otherwise he would be entitled to recover damages, but is to be replaced in his position so far as regards the rights and obligations which have been created by the contract into which he has been induced to enter. That seems to me to be the true doctrine, and I think it is put in the neatest way in Redgrave v Hurd ."

In the later passage to which I referred, Bowen LJ added:

"There ought, as it appears to me, to be a giving back and a taking back on both sides, including the giving back and taking back of the obligations which the contract has created, as well as the giving back and the taking back of the advantages."

Thus it is necessary to analyse the transaction to be set aside with some care, a point which was emphasised by Sir Donald Nicholls when Vice-Chancellor in Cheese v Thomas [1994] 1 AER 35, 41. In this case the Wife seeks only that the legal charge be set aside against her for that is the practical result she desires. In my view it would be to take too narrow a view to regard that as the only transaction she seeks to have set aside.

In a case such as the present there were two relevant transactions. First, there was the agreement or arrangement between the Husband

and the Wife that he would procure for her a half interest in the new lease to be granted by the landlord in respect of the matrimonial home if she would join with the Husband in borrowing

from the Bank the sum needed for that and other purposes and charging the new lease to the bank to secure it. Second, and pursuant to the first agreement or arrangement, there was the agreement for the loan and the security made between the Husband and Wife on the one hand and the Bank on the other contained in the facility letter and the legal charge. On the footing, as found by the Judge, that the Bank had notice of the relevant undue influence, such influence had been exercised to procure both transactions, not just the legal charge, so that each of them was

liable to be set aside as against both the Husband and the Bank.

In these circumstances it seems to me that the right or advantage acquired by the Wife which she was bound to restore as a condition of rescission was the beneficial interest in the lease granted by the landlord and not a proportion of the debt secured by the legal charge. It was no part of the bargain made by any of the three parties involved that there should be a several loan to the Wife of any proportion of the joint loan of £260,000. Further, the Wife did not receive any part of that loan otherwise than pursuant to the obligation to apply it for the purposes set out in the facility letter. I accept the submissions for the Wife that the judge erred in imposing a condition on the order to set aside the legal charge that she should repay that part of it which might be attributable to the acquisition of her beneficial interest. So to do was to impose a condition not warranted by the obligation to make restitution and, therefore, contrary to the decision of this court in TSB Bank Plc v Camfield [1995] 1 WLR 430.

It seems to me to follow from this analysis that the obligation of the Wife to make restitution as a condition for the setting aside of the legal charge is to restore to the Husband, if she can, the beneficial interest in the lease she acquired in consequence of the transactions as a whole. It is, in my view, plain that the Wife cannot retain the beneficial interest in the lease if she is to escape from liability under the facility letter and legal charge. Her obligation to restore the beneficial interest in the lease cannot be regarded as an obligation to restore it to the Bank for the Bank did not provide it and no one ever intended the Bank to be anything other than a legal chargee of it. In my view with regard to the Wife the Husband was the source of the beneficial interest in the lease now vested in his Wife subject to the legal charge. If the beneficial interest were restored to him then it would come within his charge to the Bank which is not impugned. The result would be that the Bank would then enjoy a legal charge over the whole of the beneficial interest in the lease as security for the whole of the liability. In my view this would produce a just result. The Wife's personal liability would be extinguished in exchange for the removal of her beneficial interest, being the two consequences to her of the two transactions I referred to earlier. But the further consequence would be that the Wife could have no defence to the claim of the Bank made against her for possession of the property comprised in the lease and charged to the Bank.

In this case there is the additional complication of the subsequent charge granted by both Husband and Wife to the National Westminster Bank Plc. The Bank is not party to these proceedings. The Wife does not contend that that charge is also liable to be set aside against her. National Westminster Bank Plc contracted for a second charge. It would, in my view, be unjust if it should now obtain priority over Dunbar Bank in respect of the Wife's interest in the lease.

In my judgment, it does not obtain such priority. One consequence of the charge on the Wife's beneficial interest being voidable, as

opposed to void, is that the subsequent charge, when made, was

effective in respect of her beneficial interest. In my view it follows that the Wife is not now in a position to restore to the Husband the unencumbered interest which she obtained from him. She is, therefore, unable to restore the benefit derived by her from the transactions she seeks to have set aside. The consequence is that the remedy of rescission is not now available to her. Therefore, on the facts of this case, if, contrary to the view I have already expressed, the legal charge had been procured by the

undue influence of the Husband I would have concluded that it could not now be set aside. In this event also the Wife would have no defence to the claim for possession.

I would allow the appeal of the Bank but dismiss the appeal of the Wife.

LORD JUSTICE POTTER: I agree that the cross-appeal of the Bank should be allowed in this case on the basis that the plaintiff could not establish her plea of undue influence by demonstrating manifest disadvantage as required in National Bank v Morgan . I

also agree with the analysis by Lord Justice Morritt of what, in reality, constituted the transaction to be set aside in this action for the purposes of deciding what right or advantage the Wife was bound to restore as a condition of setting aside the charge. However I prefer to express no view on the position of the National Westminster Bank or any priority it might enjoy had it been appropriate to grant the Wife the remedy sought against Dunbar Bank.

Order: Cross appeal allowed. Appeal dismissed. Order set aside. Order for possession within 56 days. Counterclaim dismissed. Leave to appeal refused. Legal aid taxation