England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM LIVERPOOL DISTRICT REGISTRY
MR ANTHONY ELLERAY QC
(Sitting as Judge of the High Court)

		Royal Courts of Justice Strand London, WC2
		9 July 2003

1. MR JUSTICE LIGHTMAN: This is an appeal by the claimant Mr Shreeve ("the claimant") from the order of Mr Recorder Anthony Elleray QC ("the judge") sitting as a judge of the High Court at Liverpool made on 17 January 2003.

HISTORY

2. In 1989 the claimant purchased a property know as "Rays Brow", Church Road, Northwich, Cheshire ("the property"), a property ripe for residential development, from Messrs F and P J Cobley ("the Cobleys"). The claimant was registered as proprietor subject to two registered charges, the first in favour of the Provincial Bank ("the Provincial charge") (presumably in respect of the advance of part of the purchase price) and the second in favour of the Cobleys ("the Cobleys charge") (presumably in respect of an unpaid portion of the purchase price). In April/June 1991 the claimant and the first defendant Mr Taylor ("the first defendant"), who was a chartered architect, agreed to enter into a joint venture in respect of the development of the property, and building work commenced in August 1991.
3. On 12 September 1991 Provincial in consideration of the payment of £60,544.26 transferred the Provincial charge to the first defendant and his wife the second defendant (whom I shall refer to together as "the defendants"). In November 1991 the building work ceased. On 20 August 1992 the claimant was declared bankrupt. In June 1993 correspondence proceeded between the defendants and the Cobleys regarding their respective entitlements under the Provincial and Cobley charges. This resulted in an agreement that the defendants as mortgagees under the Provincial charge should sell the property for £132,000 and that the proceeds should be applied as follows: £2,326.50 should be paid in respect of agents' charges, £7,619.79 should be applied in payment of legal fees, £81,779.45 should be paid to the defendants, and £40,274.26 should be paid to the Cobleys.
4. On 24 September 1993 in pursuance of this agreement the defendants sold the property to Rays Brow Development Ltd (a company of which they were directors and majority shareholders) for £132,000 and applied the proceeds in making the four payments.
5. On 11 June 1998 the claimant's trustee in bankruptcy ("the trustee") assigned to the claimant the cause of action against the defendants for damages for breach of their duties as mortgagees in selling the property at an undervalue. On 9 July 1998 the claimant issued a specially endorsed writ against the defendants. In the writ the claimant pleaded: (1) the grant of the Provincial charge to secure the sum of £100,000 and interest; (2) the grant of the Cobley charge to secure approximately £80,000; (3) the transfer to the defendants of the Provincial charge in consideration of the payment by the defendants to Provincial of £60,544.26; (4) that the market value of the property at the date of sale was £290,000; (5) the sale of the property for £132,000 and the application of the proceeds as I have just set out.
6. The limitation period for such a claim - whether by the claimant or anyone else interested in the equity of redemption - expired on 24 September 1999.
7. The defendants put in their defence dated 8 October 1998. By the defence the defendants made no admission as to the Provincial or Cobleys charges or the sums secured thereby, but admitted the transfer by Provincial of the Provincial charge to the defendants in consideration of payment of £60,544.26, the sale for £132,000 and the application of the proceeds. The thrust of the defence was to the effect that £132,000 was a reasonable sale price in all the circumstances.
8. It is to be noted that both the claimant in paragraph 12 (e) of his statement of claim and the defendants in paragraph 4 (e) of the defence averred that the price obtained of £132,000 was just sufficient to discharge the two charges and costs.
9. At the trial the judge held that the defendants had failed to exercise due care to obtain the best price reasonably obtainable which was not £290,000 as claimed by the claimant, but £143,000, and accordingly the sale was at an undervalue of £11,000 and that this breach of duty was actionable at the suit of any person interested in the equity of redemption and prejudiced thereby. The judge would have ordered payment of the £11,000 to the claimant right away but he was concerned that no consideration had been given to the position and entitlement of the Cobleys, who were not parties to the proceedings and who were interested as chargees under the Cobleys charge, and no consideration was given to the effect of such entitlement on the parties. Accordingly by his order dated 18 May 2001 giving effect to his judgment, he provided as follows:

"1 It is declared that the sale of the property known as 'Rays Brow', Church Road, Barnton, Northwich, Cheshire by the defendants to Rays Brow Development Limited on 24 September 1993 at a price of £132,000 was a sale at an undervalue and actionable at the suit of any person interested in the equity of redemption and prejudiced thereby.

2 And it is declared that the true value of the above-mentioned property on 24 September 1993 was £143,000.

3 And it is ordered that the solicitors for the claimant and for the defendants do jointly write to Messrs F & P J Cobley (or the persons upon whom their rights under their charge of the said property may have devolved) inquiring whether:

(a) they can put forward any evidence that the arrangements reached between themselves and the defendants in 1993 in relation to the redemption or overreaching of their second charge included a term releasing the claimant's trustee in bankruptcy from liability under the personal covenant for payment in their second charge;

(b) they wish to claim that the claimant holds the sum of £11,000 (together with interest) upon trust for themselves as being persons prejudiced by the above-mentioned sale at an undervalue and who have not (by whatever means) lost their right to complain about the said sale.

4 And it is ordered in the event that no reply is received from Messrs F & P J Cobley (or the persons upon whom their rights under their charge of the said property may have devolved) within 28 days of the dispatch of the letters mentioned in paragraph 3 or that a negative reply is received to both questions, the claimant shall have judgment against the defendants for £11,000 together with interest thereon from 24 September 1995 until the date of judgment at 8% per annum.

5 And it is ordered that in the event that a positive reply to either question is received from Messrs F & P J Cobley (or the persons upon whom their rights under their charge of the said property may have devolved) within the above-mentioned period of 28 days and the parties cannot agree, the parties shall have liberty to apply for directions for the determination by the court of the issues raised by a positive reply."

There followed orders as to costs.

10. In accordance with that order the claimant and the defendants, by their solicitors, wrote to the Cobleys to ascertain whether the deal struck between the Cobleys and the defendants to share the proceeds of sale in any way released the trustee from liability under the personal covenant in the Cobleys charge and whether the Cobleys wished to argue that the sum of £11,000 was held by the claimant upon trust for them. The Cobleys responded making a claim for the £11,000. They said that the Cobleys charge had secured the sum of £80,000; that there never was any agreement that the claimant's personal covenant should be released; that after giving credit for the share of the proceeds of sale received from the defendants, there remained £43,000 odd due from the claimant's bankrupt estate; and that had the Cobleys known that the sale was at an undervalue to the tune of £11,000, the £11,000 would have been divided between the defendants and the Cobleys in the same proportions as the proceeds of sale, namely two-thirds to the defendants and one-third to the Cobleys.
11. In the light of the fact that the Cobleys denied the existence of any agreement to release any liability on the part of the trustee and the claim by the Cobleys to the £11,000, the parties applied to the judge for directions and both parties prepared skeleton arguments in advance of the further hearing.
12. The defendants in their skeleton argument stated: (1) that at the date of the sale they had a legal charge (in fact dated 12 March 1992) securing the payment of £160,000 plus interest dated from March 1992 and an assignment of the Provincial charge which had been "redeemed" by the defendants in the sum of £60,500 odd; (2) that the Cobleys had at the date of sale the benefit of the Cobleys charge securing £80,000 of which £43,000 remained due dating from 1990: (3) that as at the date of the sale the property was charged in excess of its market value (i.e. £143,000) to the tune of £103,000. In a word, the defendants contended that to obtain any entitlement to any damages awarded for sale at an undervalue the claimant needed to establish a market value of £245,000 plus, and by reason of the failure to do so the claimant was entitled to no relief and his claim should be dismissed.
13. The claimant, in his skeleton argument in answer, submitted: (1) that the entitlement of the Cobleys was irrelevant and should be ignored for two reasons, namely that they could have no complaint in respect of a sale at an undervalue because they had agreed to the sale at that price and because any claim by the Cobleys in respect of the sale was statute barred; and (2) that it was not open to the defendants to contend that at the date of the sale more than £81,779.45 was secured by that charge, for in the defence it was expressly pleaded that the price received of £132,000 was just sufficient to discharge the two charges and costs. It was not open to the defendants to amend these pleadings after judgment, let alone to make a claim to the existence of a fact (i.e. that more than £81,779.45 was secured) which was in issue.
14. On 16 January 2003, the Cobleys wrote to the court that they now recognised that their claim to the £11,000 was probably statute barred and they accordingly no longer maintained any claim to it.
15. On 17 January 2003 the judge heard argument from both parties and gave judgment. In his judgment the judge held that the claimant and his equity of redemption were in no way prejudiced by the sale at the undervalue by reason of the existence of the charges held by the defendants and the Cobleys, and that the only entitlement on the part of the claimant was to a reduction in the sum of £11,000 in the proofs of one or other in the bankruptcy of the defendants and the Cobleys. The reduction was not by way of set off, but by reason of a notional increase in the price paid and received by one or other of the mortgagees in reduction of their secured indebtedness, which (to the extent that it was undischarged and unsecured) was the subject of proofs in the bankruptcy.
16. Pursuant to this judgment the judge made a further order in the following terms:

"And upon the defendants through their counsel undertaking to procure within a period of 56 days a reduction in the amount for which a proof of debt has been lodged in the sum of £11,000 (whether by one or either of them or both and whether by some other person or persons and whether jointly with some other person or persons) in the bankruptcy of the claimant.

It is ordered:

that there be no further order on the application save that there shall be permission to apply in the event that the defendants shall be unable to procure such a reduction as aforesaid and in such eventuality the matter shall be listed for hearing before Mr Anthony Elleray QC (if convenient and reasonably practicable)

There be no order as to costs of the claim and of this application."

17. The judge refused permission to appeal. The reason which he gave was that the bankruptcy regime would not prevent the defendants making good the £11,000 shortfall on their sale as first mortgagees by proving that they or the Cobleys as mortgagees reduced any claim for what had been secured debt which was now made in the bankruptcy by some £11,000.
18. The claimant thereupon applied to the Court of Appeal for permission to appeal. On 21 January Lord Justice Chadwick gave permission to appeal on one specific ground.
19. The Taylors thereupon applied for permission to cross appeal and they were given permission to cross appeal.
20. At the commencement of this hearing the claimant made an application for permission to appeal on a further ground, namely that it was not open to the defendants at the further hearing before the judge to seek an order, nor was it open to the judge to make the order which he did, relying on any secured indebtedness on the part of the claimant to the defendants or to the Cobleys beyond that which was discharged out of the proceeds of sale of the property on the sale by the defendants. We gave such permission.

LEGAL POSITION

21. It is clear, as held by the judge, that the sale by the defendants of the property at an undervalue gave rise to a claim by all or any person or persons interested in the equity of redemption prejudiced thereby. It was always open to the defendants and the Cobleys to make good the loss in this case by agreeing to treat the shortfall in the purchase price obtained as part of the purchase price received and applied in reduction of the secured debt. If they had done so, the sale at an undervalue could not have prejudiced the trustee or the claimant. The value of the claimant's equity of redemption and the amount of his debt would have remained the same as if the full price of £143,000 had been obtained and applied in reduction of his secured indebtedness.
22. In this case, it was accordingly open to the defendants in their defence in this action to have pleaded the full secured indebtedness of the claimant under the Provincial (or other) charge held by the defendants and under the Cobleys charge and thereby shown that the (alleged and subsequently established) sale at an undervalue could not have occasioned any loss to the claimant unless the market value of the property was shown to exceed the price obtained by a sum exceeding the secured indebtedness by a sum of some £103,000. If the defendants had so pleaded, the claimant's advisers would have had to investigate the position and are likely to have realised that the action ought not to proceed further, and legal aid would (or should) have been withdrawn. This must surely have been the case (if not before) after the expert valuer had valued the property at £160,000. But both parties in their pleadings expressly agreed that the purchase price obtained equalled the sum secured, i.e, that the secured indebtedness was fully discharged out of the price of £132,000 paid and that accordingly, if there was a sale at an undervalue, the only prejudice was to the claimant's equity of redemption and that the claimant was accordingly entitled to any damages recovered. Both parties clearly proceeded on this basis until after judgment, and the judge proceeded on this basis when he gave judgment.
23. After judgment, the judge expressed concern that the Cobleys (who had not been parties to the action) might have been prejudiced by the sale at the undervalue and accordingly might be entitled to the £11,000 damages. This was an entirely reasonable concern: the agreement in the pleadings that the two charges had been fully discharged out of the proceeds of sale of th property could not bind the Cobleys. The Cobleys thereafter made a claim for the £11,000, but subsequently thought better of it and withdrew it. In the circumstances any entitlement of the Cobleys to the £11,000 under the Cobleys charge is to be ignored: see Adamson v Halifax Plc [2003] 1 WLR 60.
24. The defendants however raised before the judge for the first time the existence of the sum secured by charges granted by the claimant over the property to the defendants and contended that the action ought to be dismissed because the outstanding indebtedness to the defendants far exceeded the £11,000, and that if the £11,000 is treated (as it should be) as part repayment of the secured indebtedness there would be no prejudice or loss to the claimant.
25. In my judgment, this argument would have had force and indeed should have proved successful if pleaded in the defence and argued at the trial. But it was not open to the judge in justice to the claimant to allow the defendants (who have had legal representation throughout) to raise this issue at this very late stage.
26. When the judge gave judgment on 15 May 2001, the action had been fought throughout on the basis that the claimant was fully entitled to any damages recovered if he established that the sale was at an undervalue, and he established that the sale was indeed at an undervalue. The judge, when formulating the order designed to give effect to his judgment, raised a query whether the intended order might prejudice the Cobleys and have legal consequences by reasons of their entitlement; that query was resolved in favour of the claimant before the further hearing on 17 January 2003 when the Cobleys abandoned any claim. At a further hearing the judge was faced with the new argument that the claimant's claim was misconceived from the beginning because of (unpleaded) secured indebtedness to the defendants and he acceded to it.
27. With the greatest respect to the judge, he does not appear to have addressed the question whether the defendants could in justice be allowed to raise for the first time such a critical matter which had been expressly conceded until that date. In my judgment, the defendants have good grounds for complaint that their legal advisers did not raise what would plainly (if established) have been a total defence to the action, but it remains the case that, in default of raising it earlier, the defendants cannot in justice raise it after judgment as they sought to do before the judge. The judge was, in my judgment, in error in accepting and attempting to give effect to that argument by making the order which he did. The only course properly open to him was to order the defendants to pay the £11,000 to the claimant.
28. I would accordingly allow the claimant's appeal and substitute for the order made by the judge an order for payment by the defendants to the claimant of £11,000 and interest.
29. LORD JUSTICE JONATHAN PARKER: I agree. The action was fought throughout on the basis (as admitted and indeed averred by the defendants in paragraph 4 (E) of their Defence) that £132,000, the sale price, was "just sufficient to discharge the first and second legal mortgages and costs".
30. A reserved judgment was delivered on that basis on 18 May 2001. At that stage, the judge having found a sale at an undervalue, the only outstanding matter, which was quite properly raised by the judge, was as to the position of the Cobleys since it had become apparent in the course of the hearing that the £132,000 was not sufficient to pay off the full amount of the Cobleys' secured indebtedness and that a balance of that indebtedness remained outstanding. Hence the mechanism which the judge devised in his Order dated 18 May 2001 to ensure that the Cobleys were not prejudiced by an order for payment of the £11,000 damages to the claimant.
31. At the restored hearing it was contended for the first time on behalf by the defendants by Mr Stephen Pritchett, who had not appeared at the trial, that not only was there an outstanding balance of the secured indebtedness under the Cobleys charge but also that there was a substantial balance of outstanding indebtedness under the defendants' charge, far greater than the amount of the undervalue.
32. Mr Oughton for the claimant, he having appeared for him at the trial, submitted to the judge, first, that the Cobleys were effectively out of the picture since they had made no claim based on a sale at an undervalue and since any such claim would, in any event, have been statute-barred.
33. As to the contention that there was an outstanding balance owed to the defendants under their charge, Mr Oughton pointed out to the judge that this contention was contrary to the averment made in the Defence, to which I referred earlier, and that it was not open to the defendants to amend their pleadings after judgment. He further made it clear to the judge that the contention that there was an outstanding balance of secured indebtedness owing to the defendants was disputed.
34. In his judgment, given at the conclusion of the restored hearing, the judge did not specifically address this latter point beyond saying that the defendants did not protect themselves in advance of the trial against a finding of undervalue. The protection he is there referring to, as I understand it, is a waiver of the secured indebtedness sufficient to cover any shortfall on the sale at an undervalue.
35. I agree with my Lord for the reasons he has given that the Cobleys have fallen out of the picture.
36. As to the contention raised by the defendants, once again I agree with my Lord that it would be thoroughly unjust for the defendants in effect to be allowed - after trial and after judgment - to run a case which had not been run before the judge, particularly in circumstances where the new case would require an amendment to their Defence by striking out a positive averment directly contrary to the new case which is now sought to be pleaded.
37. Accordingly for the reasons my Lord has given I, too, would allow this appeal.
Appeal allowed. A minute of the order to be lodged with court.