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Cite as: [2001] EWHC Ch 21

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National Westminster Bank Plc v. Breeds [2001] EWHC Ch 21 (1st February, 2001)

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

ON APPEAL FROM THE EPSOM COUNTY COURT

CH 2000 APP 00266

Royal Courts of Justice

Strand

London WC2A 2LL

1 February, 2001

Before

THE HON MR JUSTICE LAWRENCE COLLINS

Between	NATIONAL WESTMINSTER BANK PLC	Claimant/Respondent
	and
	(1) GLEN TERENCE BREEDS (2) PETA KAY BREEDS	First Defendant Appellant/Second Defendant

JUDGMENT

Approved by the Court for handing down

Mr Hashim Reza (instructed by Atkins Wilson & Bell) appeared on behalf of the Appellant Mrs Peta Breeds.

Mr David Pope (instructed by Denton Wilde Sapte) appeared on behalf of the Respondent National Westminster Bank plc.

Hearing: 12, 13 and 14 December 2000

Mr Justice Lawrence Collins

I. Introduction

1. This is an appeal from the decision of His Honour Judge Hull QC on March 9, 2000, in which he ordered possession in favour of National Westminster Bank plc ("the bank") of a house at Hinchley Wood, Esher, Surrey, owned by Mr and Mrs Breeds. Mrs Breeds had executed a second mortgage as a result of misrepresentations and improper pressure by her husband. Mrs Breeds appeals from the decision on the ground (inter alia) that the judge wrongly decided that the bank had taken such steps as were effective to avoid its being fixed with constructive notice of Mrs Breeds' right to set aside the transaction.

2. What the court has to decide is whether, in the light of the facts known to the bank, including the availability of legal advice to the wife, any risk of the wife having an equity reasonably appeared to the bank to have been dispelled: Royal Bank of Scotland v. Etridge (No.2) [1998] 3 All ER 705, 720 (C.A.). In this case the principal question is whether the bank was entitled to rely on a statement by a solicitor that he had explained the transaction to Mrs Breeds, when the solicitor was not only the solicitor to her husband and to the borrower company, but was also the company secretary and an active participant in its quest for finance and banking facilities, and a person whose role went further than "would normally be expected of a solicitor in private practice retained by a company and charged with the responsibilities of a company secretary." The answer to that question depends upon the limits of the principles established by the Court of Appeal in a series of decision culminating in Royal Bank of Scotland plc v. Etridge (No.2) [1998] 3 All ER 705, the effect of which is that normally a bank is not concerned with the independence of the solicitor or any conflict of interest he may have and that these are matters for the solicitor to resolve.

II. The background

3. In 1979 Glen Breeds ("Mr Breeds") formed a partnership with Mr Melvin Saunders ("Mr Saunders") to supply various design packaging and agency services for book publishers. Each of them had been involved in the book publishing business for some time before. They had first met when they were at school together, and in 1975 they began to work together as graphic designers. Their partnership traded under the name Mushroom Productions. From 1983 the business was carried on by a limited company called Mushroom Books Ltd ("the company"). Mr Breeds and Mr Saunders were the sole directors and shareholders.

4. The business was conducted initially from offices in Soho, but later from 9 Newburgh Street, London, W1. In 1981 Mr Breeds and Mr Saunders purchased for Ł11,000 (with the assistance of Mr Breeds' father) premises in Twickenham for the business.

5. The company specialised in children's books, and packaged the work of creative writers and designers in a form which was attractive to publishers. According to the documents in the case, the children's imprint of Pan Books published four titles in the Magic Road series, and the same books were launched in the United States by the children's books imprint of Putnams. By 1986 the company was publishing books itself.

III. Mr and Mrs Breeds

6. Mr and Mrs Breeds were married in December 1981. Mrs Breeds sold the property she owned in Tunbridge Wells and moved into Mr Breeds' home in Surbiton. In the following year they purchased, in joint names, 71 Couchmore Avenue, Hinchley Wood, Esher, Surrey for Ł46,750. Mr Breeds contributed Ł11,000, Mrs Breeds contributed Ł19,000 and Ł20,000 was borrowed from the Nationwide Building Society against a first mortgage. At that time Mrs Breeds had a daughter from a prior relationship, who was treated as a daughter of the family. In 1983 Mrs Breeds had twin daughters, who were subsequently diagnosed to have severe learning and behavioural problems, including speech, language and visual deficiencies. In December 1984 she gave birth to a fourth daughter. Mrs Breeds had an account with the National Westminster Bank at its Hinchley Wood branch. She had no part in the management of her husband's business and she did not own any shares in the company.

IV. Relations with the bank

7. The company's bankers were originally Williams and Glyn's. In July 1984 the company's accountant, Mr Nicholls, was in touch with the Mincing Lane branch of the National Westminster Bank ("the bank") to say that the company was considering changing its bankers. The bank's record notes show that Mr Andrew, the manager of the Mincing Lane branch, was told (misleadingly, as the judge found) that the company had a turnover of Ł500,000 per annum. He was told that the reason why the company wished to change bankers was that the quality of service given by Williams and Glyn's was not good, and that, despite their having balances of almost Ł70,000, Williams and Glyn's required cash cover for a letter of credit for Ł5,000. Mr Andrew visited the premises of the company on July 13, 1984, when he was told that the company was thinking of moving directly into publishing, and would require banking facilities. Mr Andrew asked the company to prepare, with the assistance of Mr Nicholls, cash flow forecasts and balance sheets. Mr Andrew, who was about to leave the bank, passed the matter to the branch at 208 Piccadilly, London, W1, where it was dealt with at the Piccadilly branch by Mr Rothwell. Mr Rothwell has been employed by the bank since 1958, and at the relevant time was the deputy manager at the Piccadilly branch, which was one of the larger branches of the bank. Subsequently he became senior manager at the Oxford Street branch and then chief manager at the Kensington Business Centre, and he is now group head of retail credit. The judge found that Mr Rothwell was an outstanding bank officer, whose dealings with Mr Breeds and Mr Saunders were recorded with great thoroughness in the bank's interview notes.

1984

8. Later that year the company secured an overdraft facility of Ł35,000 from the bank, against the personal guarantees of Mr Breeds and Mr Saunders for that sum, a second charge over Mr Saunders' house, and a charge over the property they jointly owned in Twickenham. A charge over the Breeds' house was not required because, it seems, Mr Rothwell was told that they were changing house (which the judge found to be untrue).

9. At a meeting with Mr Breeds, Mr Saunders and Mr Nicholls on September 18, 1984 Mr Rothwell had been shown forecasts to July 1985, showing a projected turnover of Ł323,000 and indicating that the bank balance would be in credit from March 1985, and would be in credit by about Ł95,000 in June and Ł87,000 in July 1985. Mr Rothwell's notes recorded that he had been impressed with Mr Breeds and Mr Saunders, although the company's figures were in a bit of a mess, and there was no track record or supporting financial information on which to assess the request for facilities.

10. When Mr Rothwell confirmed the overdraft facility in a letter that day he said that the overdraft was to be made available in accordance with the cash flow estimate which had been provided by the company. The facility was made available for six months on about November 7, 1984 following the bank's receipt of the guarantees, although the charges were not executed until some time later.

1985

11. In 1985 the company secured an increase in the overdraft facility to Ł60,000, against unlimited guarantees from Mr Breeds and Mr Saunders, and the promise of a second charge over the Breeds' house.

12. In the course of 1985 there were a number of meetings with Mr Rothwell to discuss the continuation and increase of the facility, and the provision of further capital. Mr Breeds and Mr Saunders gave Mr Rothwell optimistic forecasts. On February 7, 1985 they told him that the Frankfurt Book Fair had been a success for the company and that there were potential orders for 1.5 million books, and prior to the meeting Mr Breeds had provided some notes indicating that the company had plans which might result in a total potential revenue of Ł750,00 (over what period was not stated). On November 27, Mr Rothwell was told that there were contracts in the pipeline which would produce Ł270,000 over the next six months.

13. The six month facility granted in November 1984 was due to expire on June 6, 1985, and Mr Breeds and Mr Saunders saw Mr Rothwell on June 5, 1985, when they handed him draft accounts to July 31, 1984, indicating a turnover of Ł172,000 and a retained profit of Ł20,000. The judge found that these accounts, and subsequent accounts shown to the bank, were misleading in that they did not show that Mr Breeds and Mr Saunders had paid themselves Ł30,000 in salaries: the figure was, it seems, hidden in other charges to the profit and loss account. Mr Rothwell was not given the audited accounts until November 7. They indicated that the profit was Ł9,800 (and not Ł20,512) and the net current assets were Ł9,681 (as against Ł20,393 in the draft accounts). On December 13, 1985 Mr Breeds sent Mr Rothwell draft accounts of the company for the year to July 31, 1985. These showed a turnover of Ł166,000, and a profit of Ł5,916 after taxation.

14. The facility was renewed in June, no doubt because, as Mr Rothwell noted, the account had worked well within the Ł35,000 facility.

15. In the course of various meetings in November 1985 the company requested an increase in the facility from Ł35,000 to Ł60,000. Mr Rothwell told Mr Breeds and Mr Saunders that the bank would need additional security to go up to Ł60,000 and his note records that "Glen Breeds readily agreed to give me a second charge over his house," with a market value of Ł80,000 on which the mortgage outstanding was Ł20,000. Mr Rothwell also suggested that the existing guarantee limited to Ł35,000 from Mr Breeds and Mr Saunders should be replaced by an unlimited guarantee, to which they agreed. On November 27, 1985 Mr Rothwell wrote to Mr Breeds and Mr Saunders to confirm that the facilities were to be increased to Ł60,000 for two months.

16. On about December 17, 1985 the bank put the Ł60,000 facility in place since (as Mr Rothwell said in his letter of that date) Mr Breeds and Mr Saunders had already signed the unlimited guarantee and, according to Mr Rothwell's note, the securities department of the bank was in the course of perfecting the second mortgage over Mr Breeds' matrimonial home.

1986

17. In the first half of 1986 the bank obtained a charge over the Breeds' house. The overdraft limit was exceeded, there were unfulfilled promises of cash being credited, there were further optimistic cash flow forecasts, and the overdraft was increased on conditions which were not fulfilled.

18. The circumstances in which the mortgage was executed will be dealt with in the next section. Mr Rothwell began to press for it at the end of February 1986, and he said at a meeting on March 17 that he would only continue the facilities if the mortgage were executed by the end of the week.

19. It seems that the bank operated a system of allowing the overdraft to go above the Ł60,000 by a further Ł10,000 without dishonouring cheques, but it naturally became concerned when the Ł60,000 limit was exceeded. By January 10, 1986 the company was overdrawn by Ł64,834 against the facility of Ł60,000, and Mr Rothwell telephoned the company's office to ask whether any monies were due to be paid in, and was told that Ł50,000 was expected into the account in the next two to three weeks, much of it from abroad, and that all outstanding debtors were being chased. On January 22, 1986 Mr Breeds wrote to Mr Rothwell to say that the company had contracts for the publishing of books providing a gross income of Ł385,000 to February/March 1987, and that they were awaiting monies on signature of contract totalling Ł73,000. By January 28, 1986 the account was overdrawn in excess of Ł65,000 and an account for Mushroom Productions was overdrawn by about Ł4,300), and Mr Rothwell was again told that Ł72,000 was due from abroad, and Mr Rothwell wrote to Mr Breeds asking whether there were any other sources of payment from which the overdraft could be reduced. Mr Breeds replied that they were expecting a turnover on existing contracts of approximately Ł600,000 and that his aim was to "break" the Ł1m mark in the year to the end of 1986.

20. On March 17, 1986 there was a meeting at the bank between Mr Rothwell, Mr Breeds, Mr Saunders and Mr Tony Pierre of Howard Tilley (the accountant who had replaced Mr Nicholls). The projected accounts for the fifteen months to May 1987 were produced to the bank, showing anticipated sales of Ł554,000 and a net profit of Ł20,000. Cash flow projections were also produced showing the overdraft peaking at Ł92,000 in the following two months, and then going down to Ł60,000, and eventually to Ł5,000 in October. Mr Rothwell noted that once the security over the Breeds' house was executed he would write to confirm facilities of Ł70,000 with an excess of Ł22,000 until the end of April, following which the facilities would revert to Ł70,000 for six months when the position would be discussed again.

21. The mortgage was executed on April 1, 1986 and Mr Rothwell confirmed the increased facility on April 7. But none of the forecasts was met. By the end of April 1986 the overdraft was Ł108,000, although it was due to be Ł70,000. By August 1986 the bank required meetings because the cash flow forecasts had not been met, and on September 25, 1986 Mr Rothwell noted that the drawing was well in excess of the limit and completely contrary to the cash flow forecast. In December 1986 draft accounts for the year ended July 31, 1986 were provided indicating a gross turnover of Ł203,000 and a loss of Ł41,000, and an increase in creditors to Ł262,000 with a deficiency of assets of Ł25,000. These, according to the bank "made fairly disastrous reading". By March 1987 it was plain that the bank realised that the company was in serious difficulties. On November 3, 1987 it ceased trading. The bank took steps to realise the security over the Twickenham property and over the Saunders' house, and commenced these possession proceedings in 1993. I have not been given any adequate explanation about why they took so long to come to court.

V. The second charge on the matrimonial home and Mr Boundy's advice

22. As indicated above, Mr Rothwell required security over Mr Breeds' matrimonial home as a condition of increasing the overdraft from Ł35,000 to Ł60,000.

23. On November 27, 1985 he asked the securities department of the bank to write to Mr Breeds at his home address with the necessary initial documentation for the bank to take the second charge. He asked for the charge form to be drawn up and that it be ensured that the correct form was used bearing in mind that the bank was taking the security in joint names. He noted that Mr Breeds would sign at the bank but that "Mrs Breeds will sign in the presence of her solicitor who is Mr Charles Boundy of Walters Fladgate." Mr Boundy had acted for both of them on the purchase of the house, but had never met her.

24. Mrs Breeds first learned about the proposed mortgage in December 1985 when her signature was required for the authority to the bank to inspect the register. Mr Breeds misled Mrs Breeds. The judge put it this way:

"Mr Breeds told her, she said, that the business was going to be pooled with Mr and Mrs Saunders, and told her that, 'They [that is Mr and Mrs Saunders] are going to sign.' This, of course, was another falsehood. Mr and Mrs Saunders had mortgaged their house to the bank a year before. Mr Breeds sought to reassure her. He said, 'Things are fine - we might need to borrow some money from the bank.' This from a man who had already borrowed extensively and proposed to borrow much more - desperate for money. He went on, 'It is not detrimental, it doesn't matter, just sign it.' She resisted his attempts to persuade her. He told her that he would not put the home at risk, that it was only short-term borrowing. He told her that there was 'no risk', but eventually he resorted to a different tone and he said, 'If you don't sign there will be no business, no money, no marriage.' This to a lady with four young children.

I also heard evidence from Mr Breeds, about whom I formed, as I have indicated, a very unfavourable view. He was obliged to admit making a number of misleading statements. For what it is worth, he admitted deceiving Mrs Breeds throughout. He had not told her that the company had lost all its capital, that it had debts of about Ł200,000, that it depended on the bank for its continued existence or that its projected figures had never been achieved. She would have been horrified if he had told her. Mr Reza asked Mr Breeds if he were not tricking his wife quite deliberately, and Mr Breeds replied, 'I was keeping her in ignorance to prevent her unduly worrying."

25. As noted above, the bank permitted the overdraft facility of Ł60,000 to be put in place on December 16, 1985, since they had obtained the unlimited guarantees from Mr Breeds and Mr Saunders.

26. On February 26, 1986 Mr Rothwell recorded that he had spoken to Mr Breeds and emphasised that the facility had been agreed by the bank "strictly against the improved security base, in particular his second charge over the matrimonial home", and pointed out that Mrs Breeds had not replied to the earlier enquiry by the bank (of which there is no evidence in the papers) and that Mr Breeds had assured Mr Rothwell that he would take this forward.

27. On March 14, 1986 Mr Breeds wrote to Mr Tubb at the bank to say that it would be better for Mrs Breeds to sign the mortgage at her local branch in Hinchley Wood, as they had four children all attending different schools and it could prove to be a little difficult should she have to travel to London.

28. It seems that Mr Breeds told the bank that Mr Boundy had advised Mrs Breeds, since on March 14, 1986 Mr Tubb wrote to Mr Boundy as follows:-

"We refer to our proposed Second Mortgage over the above property and have been informed that you provided legal advice to Mrs Breeds in this respect.

We would therefore be grateful for your confirmation of this fact and that Mrs Breeds fully understands the nature and import of the liability she will enter into."

29. There was a meeting on March 17, 1986 at the bank, when Mr Rothwell saw Mr Breeds, Mr Saunders and Mr Pierre (the accountant). The manuscript briefing note prior to the meeting indicates that the charge form and a copy were enclosed with the brief for the signature of Mr Breeds and "Mrs Breeds will have to sign the document at her solicitors or alternatively at a local branch if separate Legal Advice has already been given by her solicitor which Mr Breeds seems to think is the case."

30. At the meeting on March 17 it became apparent to Mr Rothwell that Mrs Breeds had not executed the mortgage, and that she had not by then been advised by a solicitor. His note states:

"We are independently secured here by charges over both Breeds and Saunders houses. Breeds property which has the greater equity is in the process of completion. I have said I wish this charge to be executed before the end of this week following which I will confirm facilities but not before. ... Once Breeds security is executed and his wife has obtained separate advice, I will write to confirm facilities ... On this basis we are fully secured and talking about a company which is making satisfactory progress and worthy of our support. MC2 [the Securities Department] please note the above and refer to me as soon as the Bank's charge form is returned to us executed by Mrs Breeds under separate advice when we can write to the company along the lines of the above."

The note adds in handwriting "Mrs Breeds is calling on Thursday 20^th to execute chge form in presence of Charles Boundy - solicitor."

31. The judge found that no valid criticism could be made of Mr Rothwell for insisting that the charge should be completed by the end of the week in March 1986 because he had shown very considerable forbearance in not insisting on his original demand for a charge on the house in 1984 and then in tolerating the procrastination of Mr Breeds from November 1985 onwards. His wish for prompt execution of the mortgage was no more than any competent manager would have expressed in the circumstances.

32. On March 18, 1986 Mr Boundy sent Mr Breeds a copy of the bank's letter of March 14, and said "I recall you mentioning to me that [Mrs Breeds] was a little unclear on the issue, but I cannot recall actually advising her." On March 18, 1986 the Piccadilly branch wrote to Mr Boundy enclosing the bank's standard charge and stating it was the requirement of the bank that Mrs Breeds should receive separate legal advice before signing the document. Mr Boundy was asked to witness the document and ensure that it was dated, and to return the mortgage document to the Piccadilly branch. But that letter was only received on March 20 after Mrs Breeds had been to see Mr Boundy.

33. At some time between March 17 and March 19, 1986 Mr Breeds asked Mrs Breeds if she would accompany him to the offices of Mr Boundy in Basingstoke. There was a meeting on March 20, 1986 between Mr Boundy and Mrs Breeds, at which Mr Breeds was also present. Three children then aged 3 years and 15 months were present throughout. The judge's account of the meeting was as follows:-

"Mrs Breeds duly arrived on 20th March. She and Mr Breeds had driven from Hinchley Wood to Basingstoke with three of their very young children. They were late for the appointment and had to wait. When they saw Mr Boundy, who was, of course, meeting Mrs Breeds for the first time, the children were bored and fretful: 'Crawling all over their parents.' Mr Boundy had not, as I say, received the claimants' letter with the mortgage. He made what on the face of it was the intelligent suggestion that the children might go into another room while he advised Mrs Breeds. However, this suggestion did not commend itself and the parents, who knew their children, of course, thought it would be better on the whole if they stated with them. Mr Breeds was present throughout. Mr Boundy, who did not, as I say, have the actual mortgage charge waiting to be signed, had a copy of what he believed and understood to be the claimants' standard form of charge and, having armed himself with this, set about explaining its nature and contents to Mrs Breeds, who sat politely listening to him, while the children made matters difficult."

34. On March 25, 1986 Mr Boundy wrote to the Piccadilly branch of the bank:-

"As explained to you over the telephone, we are familiar with the bank's form of legal mortgage, and Mr Boundy of this firm did discuss with and explained to Mrs Breeds the nature and contents of the mortgage and the obligations into which she was entering, which she appeared to understand."

35. He also wrote to the Hinchley Wood branch enclosing the mortgage and confirmed that:-

"although we were not able to witness the signature of Mrs Breeds to this document, we have explained to her the nature and contents of the mortgage and the implications of the commitment into which she enters by signing it. We also confirm that Mrs Breeds appeared to understand the points made."

36. Mr Boundy also wrote on the same day to Mrs Breeds to say that he was glad to meet her in the previous week "although the circumstances were not exactly ideal!" He sent her the proposed mortgage. He pointed out that the charge effectively turned Mrs Breeds into a joint guarantor of the liabilities of Mr Breeds to the bank to the extent to the total of her interest in the equity in the house. It was totally up to the bank as to how they dealt with the borrowing arrangements and she was effectively in the position of guarantor without any control over the borrowing, although hopefully with some control over the borrower.

37. The charge itself was dated April 1, 1986 and secured all present, future, actual or contingent liabilities of Mr Breeds to the bank.

38. The judge said of Mr Boundy's advice:-

"I am quite satisfied from the evidence that this meeting, which lasted perhaps half an hour, was inadequate to explain the mortgage to Mrs Breeds and that she did not receive the advice to which she was entitled. The conflict of interest, or potential conflict of interest was obvious. Mr Boundy was the company secretary, he knew of its financial straits, he had been involved in the search for finance, had acted regularly for Mr Breeds and was advising in the presence of Mr Breeds, one of the company's two prime movers."

39. The judge recorded that Mr Boundy had said in evidence that he had not been asked to give independent, impartial advice, to Mrs Breeds, whom the bank thought was his client. He could not be independent, he told the judge, of his relationship with the company. If that were required, he could not have held the meeting. In evidence Mr Boundy said that he gained the impression that Mrs Breeds had sufficient familiarity with the financial situation of the company. She had said that she was aware that if she did not sign the mortgage it would be the end of the company and, he thought, she said of her house. He said that he advised about the viability of the transaction in the sense of advising about the risk but not the details of the transaction. He had not discussed with Mrs Breeds what would follow if she refused to execute the mortgage. The judge said that he was not impressed by Mr Boundy's account of the interview. Even accepting his evidence as accurate, which the judge said he should not be prepared to do, he overlooked the most important parts of his duty. His advice was wholly inadequate to remove the influence, the extreme pressure and fraud which had been exerted to persuade Mrs Breeds to execute the mortgage. The judge said: "I would emphasise that, in my judgment, Mr Boundy was guilty of a serious breach of duty to her". He found that the advice given by Mr Boundy was wholly inadequate and, on his own account of the matter, he should not have accepted his instructions. On the basis of the judge's findings, and subject to questions of limitation and causation, Mrs Breeds would plainly have a remedy against Mr Boundy, as would the bank (also subject to any question of limitation) in respect of the misleading confirmation which he gave to the bank and on which it relied.

VI. The judge's conclusion

40. The judge found that during 1985 and 1986 Mr Breeds' statements to the bank were becoming less and less reliable, including the statements in the cash flow forecast. But he found that Mr Rothwell acted throughout with good faith and conscientiousness. He was gravely misled by Mr Breeds. The absence of proper accounts and the shortage of funds were in his experience typical of a new business being developed by young and inexperienced business men. The bank's rules on principles of lending required managers to consider any proposed lending in relation to (i) the purpose of the advance; (ii) the integrity and business ability of the borrower; (iii) the source of repayment; (iv) the duration of the advance; (v) the safety of the advance and the security offered; and (vi) profitability. The judge found that Mr Rothwell's failure to comply to the letter with the bank's internal rules was the conduct of a manager who relied on his own very extensive experience and expertise and thought he could tell when to trust a borrower and when to take a commercial risk.

41. Mr Rothwell had accepted that he was only prepared to lend against the security of the house, but all this meant was that he would not lend without that security, not that he was lending against security, i.e. acting like a pawnbroker. His evidence was that in 41 years he had never lent money purely and simply because he knew he could get it back by realising security, and he categorically denied that he was lending against security. The judge found that the charge made on behalf of Mrs Breeds that Mr Rothwell was lending against security (i.e. that the bank was looking to the house as the sole source of repayment) was improbable, and basing himself on his clear view of his integrity and skill, the judge rejected it, and found that Mr Rothwell acted with perfect propriety.

42. The judge's impression of Mrs Breeds was that she was a fairly intelligent and thoughtful person. She always left financial decisions to Mr Breeds and trusted him with all such matters, not enquiring about them. She understood that his partnership with Mr Saunders and in due course the business of the company were going well. She disliked the idea of borrowing and until the end of 1985 had no idea that the company was borrowing heavily at the bank or that Mr Breeds had personally guaranteed the overdraft. She learned about the proposed mortgage in December 1985 when her signature was required for the search of the register.

43. The essence of the judge's conclusion was as follows: (a) Mrs Breeds was led to execute the mortgage as a result of undue influence and dishonest representations by Mr Breeds; (b) Mr Boundy had a conflict of interest and he did not adequately advise Mrs Breeds, and the advice he gave was wholly inadequate to remove the influence, extreme pressure and fraud which had been exerted to persuade Mrs Breeds to execute the mortgage; (c) Mrs Breeds therefore had an equitable right to have the transaction set aside; (d) but the bank did not know, nor should it have known, that this was a transaction into which Mrs Breeds could not have been advised to enter, nor that she was being bounced into executing the mortgage under the pressure of emergency; (e) Mr Boundy's position as solicitor to the company and to Mr Breeds, and his position as company secretary, did not make it obvious to the bank that he should not advise Mrs Breeds, and it was for Mr Boundy and not for the bank to judge whether he had a conflict of interest which would make it improper or impossible for him to advise her; (f) although there were grounds for anxiety about the lending, the bank believed that Mr Boundy had discharged his duty and therefore did not have notice of the undue influence exerted on Mrs Breeds; (g) that conclusion was not affected by the fact that Mr Boundy's letter to the bank merely confirmed that he had discussed with and explained the mortgage to Mrs Breeds and the obligations into which she was entering, which she appeared to understand; (h) consequently although Mrs Breeds had been the victim of undue influence and indeed fraud she was not entitled as against the bank to have the mortgage set aside; (i) nor was she entitled to have it set aside for failure by the bank to disclose the change in the facilities being provided in March 1986 as compared with those provided in November 1985: the differences were not material, and they were a matter on which Mr Boundy could be expected to advise; nor for failure to disclose to her that there were no audited or reliable accounts on which the facility could be justified, since Mr Rothwell had himself been seriously misled; there was no duty on a bank to disclose to a surety that the security was required as a condition for continuing banking facilities or that the borrower had exceeded its overdraft limit or had not been punctual in its dealings or regarding the nature and extent of the liabilities of the borrower.

VII. The grounds of appeal and the bank's position

44. Mrs Breeds' position is that (a) the bank was put on enquiry as to Mrs Breeds' equity; and (b) it did not take sufficient or reasonable steps to satisfy itself that she entered into the transaction freely and with knowledge of the true facts because (i) the bank did not comply with its internal procedures which were intended to protect the customer from improper pressure and undue influence, and (ii) the bank knew that Mr Boundy was the company secretary and an officer of the company and was personally involved in the company's affairs and its attempts to obtain finance. Further, the bank was under a duty to disclose, and failed to disclose, that the November 27, 1985 facility had been provided, been exceeded, and had not been repaid and that by March 17, 1986 there was no audited or reliable financial information supplied by the company on which any further facility could be justified in accordance with the bank's usual lending policy and the bank was in effect only prepared to lend and did lend against Mrs Breeds' security.

45. The following were the main criticisms of the judgment. First, the judge was wrong to find that after March 17, 1986 Mr Rothwell was not "lending against security." Second, the judge did not give sufficient weight to the insolvency of the company, the lack of business integrity and business ability of the company's management, the absence of any identified source to repay advances, the lack of reliable financial information and cash flow and income forecasts and the facts that the company's indebtedness had increased, it had exceeded its facility and its finances had deteriorated in the four months after November 27, 1985. Third, the judge did not give sufficient weight to the facts that Mrs Breeds was not a director or shareholder of the company and had no managerial or financial interest in it; that the bank knew Mrs Breeds was a customer of the bank and that it learned that Mr Breeds' assurances that Mrs Breeds had been legally advised were untrue; and that the security was unlimited in amount. Fourth, the bank failed to observe its internal instruction to insist that Mrs Breeds obtain legal advice as to the viability of the underlying proposition. Fifth, the judge failed to make a clear finding that its officials knew that Mr Boundy was company secretary and an officer of the company, and failed to attribute sufficient weight to that knowledge. In particular, he was personally interested in the transaction and was incapable of giving independent advice without compromising his duties to act in the best interests of the company; in effect Mrs Breeds was being advised by the company; the bank would have known that Mr Boundy would have acquired knowledge of the company's desperate need for finance and of the fact that the facility had been exceeded and had expired. Consequently the bank knew or should have known that Mr Boundy could not competently and impartially have advised Mrs Breeds about the transaction, particularly in the light of its ultimatum; the bank would or should have known that a competent and impartial adviser would have told Mrs Breeds not to grant the mortgage because by then the facility for which the security was required had already been given, been exceeded, and had expired; the company's financial position had deteriorated, and there was no reliable financial information about the company, and any borrowings would in effect be made against her security.

46. The bank has not appealed against the judge's finding that Mrs Breeds was entitled to set aside the transaction as against Mr Breeds and that the advice provided by Mr Boundy was insufficient to ensure that she was free from undue influence.

47. But it argues that it was not put on enquiry because, as the judge found, Mr Rothwell had been seriously misled by Mr Breeds, Mr Rothwell believed Mr Breeds to be a talented entrepreneur engaged in a rapid expansion of his business, and Mr Rothwell had no reason to believe that Mrs Breeds was hearing about the mortgage for the first time when she met Mr Boundy on March 20, 1986. In addition, the bank relies on the fact that Mr Rothwell received and reviewed draft accounts and forecasts, and argues that failure to execute the mortgage would have had adverse consequences not only for the company, but also for Mrs Breeds.

VIII. Applicable principles

48. I was referred to several decisions of the Court of Appeal in recent years applying Barclays Bank plc v. O'Brien, and to avoid unnecessary repetition I shall set out what I understand from Royal Bank of Scotland plc v. Etridge (No.2) [1998] 4 All ER 705; Bank of Scotland v. Bennett [1999] 1 FLR 1115; and Barclays Bank plc v. Coleman [2000] 1 All ER 385 to be the principles currently applied (and subject to any revision which the House of Lords may make following the appeal to be heard shortly in the Etridge case):

(1) The correct approach is to look at the transaction through the eyes of the lender and to ask whether, in the light of all the facts which the lender knows, it is put on enquiry that there is a real risk that the wife's apparent consent to the transaction may have been obtained by some improper conduct on the part of the husband: Bank of Scotland v. Bennett, at 1138

(2) A transaction by which a wife provides security for the debts of a business from which the family derives its income cannot be said to be extravagantly or even necessarily improvident: Royal Bank of Scotland v. Etridge (No.2) at 719; Bank of Scotland v. Bennett at 1138-9.

(3) But if all the lender knows is that the business is one in which the husband (but not the wife) has a direct financial interest then condition (a) in Barclays Bank v. O'Brien will be satisfied, namely that the transaction is not on its face to the financial advantage of the wife: Bank of Scotland v. Bennett at 1140. Cf. Barclays Bank plc v. Boulter [1999] 1 WLR 1919, 1925.

(4) In that case the transaction will appear improvident on its face, but the question whether the wife's participation in the transaction should have appeared improvident to a lender, acting reasonably, should be answered in the light of all the facts known to the lender: Bank of Scotland v. Bennett at 1140.

(5) It is not necessary for a wife to show that the transaction is manifestly disadvantageous in order for her to succeed on actual undue influence, but the role of manifest disadvantage is controversial in cases of presumed undue influence: Barclays Bank plc v. Coleman at 397-400. The fact that a transaction is manifestly disadvantageous (a) assists the wife in establishing her claim against the husband in the case of presumed undue influence; and (b) is relevant to the way in which the transaction appears to the bank and thus assists the wife in establishing that the third party had constructive knowledge of the impropriety: Royal Bank of Scotland v. Etridge (No.2) at 714.

(6) Ultimately the question is whether the lender is put on enquiry, by the facts it does know, that there is a real risk that the wife's apparent consent to the transaction may have been obtained by some improper conduct: this is to be determined in the light of all the information in the bank's possession, including its state of knowledge of the account, the relationship of the parties, and the availability of legal advice for the wife: Bank of Scotland v. Bennett at 1140; Royal Bank of Scotland v. Etridge (No.2) at 722.

(7) The risk must be sufficiently real and substantial to justify the conclusion that the lender ought reasonably to have made further enquiries to satisfy itself that the wife's consent was not obtained by improper conduct: Bank of Scotland v. Bennett at 1140.

(8) If the bank has made reasonable enquiry and the results of the enquiry are such as to reasonably allay suspicion, then the bank is not fixed with constructive notice: Royal Bank of Scotland v. Etridge (No.2) at 719.

(9) It is normally sufficient if the bank has urged the wife to obtain independent legal advice before entering into the transaction: Royal Bank of Scotland v. Etridge (No.2) at 721.

IX. Independent legal advice

49. The bank's then current written instructions (1986 version) to managers stated:-

"UNDUE INFLUENCE - SEPARATE ADVICE ...

The background always requires careful thought and precautions should be taken when dealing with any third party ... when pressure can be exerted by the person whose liabilities are being guaranteed or secured.

Care is also necessary where the guarantor or chargor is a customer of the Bank with a view to ensuring that he is not being influenced by his relationship with the Bank and is fully aware of the nature of the liability. In such cases, where any doubts exist the Bank has a duty to insist that independent legal advice is given, not only regarding the nature of the guarantee or charge but also as to the viability of the underlying proposition. In this latter regard it is sufficient to advise the guarantor or chargor to obtain full details from the principal debtor whose consent is required before disclosures as to the underlying transaction can be made to the guarantor or chargor or the legal adviser.

Thus, where there is any suspicion of undue influence, the Manager must see that the guarantor or third-party chargor is advised by a solicitor (nominated by the third party) who should witness the document ... ... Branch Managers have discretion to waive the formality for separate advice only where the surrounding circumstances are undoubted ..."

50. The duties of the solicitor to the wife have been considered in several decisions of the Court of Appeal in recent years, culminating in the extensive treatment in Royal Bank of Scotland plc v Etridge (No.2) [1998] 4 All ER 705. It has been emphasised that the solicitor must give advice which is independent both of the bank and of the borrower or husband: Barclays Bank plc v. Thomson [1997] 4 All ER 816, 829, per Morritt LJ. When Nourse LJ referred in Barclays Bank v. Coleman [2000] 1 All ER 385, 402 to independent legal advice meaning independent of the mortgagee he was not, in my judgment, intending to do more than give an illustration. The case involved the question whether advice given by a legal executive, working for a sole practitioner, should be regarded as independent legal advice. It was held that it should be so regarded, and the question of independence from the bank or the husband did not arise: the solicitor had been chosen to give the advice because his office was near the matrimonial home.

51. Royal Bank of Scotland v. Etridge (No.2), at 715-717, re-stated the duties of the solicitor called upon to give independent advice to the complainant:-

(1) A solicitor who is instructed to advise a person who may be subject to the undue influence of another must bear in mind that it is not sufficient that she understands the nature and effect of the transaction if she is so affected by the influence of the others that she cannot make an independent decision of her own.

(2) It is not sufficient to explain the documentation and ensure that she understands the nature of the transaction and wishes to carry it out.

(3) His duty is to satisfy himself that his client is free from improper influence, and the first step must be to ascertain whether it is one into which she could sensibly be advised to enter if free from such influence.

(4) If he is not so satisfied it is his duty to advise her not to enter into it, and to refuse to act further for her in the implementation of the transaction if she persists.

(5) Where the bank is asking for a continuing all moneys unlimited charge, the solicitor does not discharge his duty to the wife by telling her that the liability is "unlimited". That will not dispel the effect of what she has been told. He must bring home to her that she is being asked to undertake liability for the existing indebtedness (even though this was previously unsecured by her) as well as for future indebtedness to an unlimited extent, and not merely liability for the amount of the contemplated increase in the overdraft.

(6) He should inform her of the alternatives which are open to her, which include giving a limited guarantee or charge, and if necessary he should offer to negotiate with the bank on her behalf. He should not assume that the bank's request is on a "take it or leave it" basis, or that it has an impregnable negotiating position. In fact its position vis-à-vis the wife is relatively weak, since (i) she is not obliged to give security, (ii) any security is better than none and (iii) the bank cannot afford the risk of taking a security which it knows the wife's solicitor has advised her she should not give.

(7) Where there is a real conflict of interest, and certainly where there is a possibility that he may be called on to advise the wife not to enter into the proposed transaction, a solicitor should decline to act if he is also acting (otherwise than in a purely ministerial capacity) for another party to the transaction.

(8) If the marriage is secure and the indebtedness has been incurred by the business which provides the husband's livelihood and on which the prosperity of his wife and family depends, there may be no real conflict between the interests of the husband and the wife.

(9) It is a matter for the solicitor's professional judgment whether he should himself advise the wife on the wisdom of the transaction, or invite her to obtain other advice, for example from the accountant to the business. In order to enable him to exercise his judgment, however, it will usually be necessary for the solicitor to inform himself of the circumstances of the proposed transaction, the amount of the existing indebtedness and of the new advance, and of the reasons for the new advance or the bank's request for additional security.

(10) He may also need to probe the stability of the marriage. This would need to be done with sensitivity; but the wife should at least be warned that by entering into the transaction she could be putting at risk the one substantial asset on which she could rely should the marriage come to grief.

(11) Even though the transaction may be one into which the wife can properly be advised to enter, and in which there is no real conflict of interest between her and her husband, the task of advising the wife carries a heavy responsibility. She is being asked to put at risk her largest, probably her only substantial, asset.

X. The bank and the solicitor

52. It has been held that the bank is not put on enquiry by the fact that the solicitor merely confirms that he has explained the transaction to the wife and ensured that she understands it, nor if he omits to confirm that she appeared to understand the transaction: Royal Bank of Scotland v. Etridge (No.2) at 721-722.

53. If the bank is in possession of material information which is not available to the solicitor, or if the transaction is one into which no competent solicitor could properly advise, the availability of legal advice is insufficient to avoid the bank being fixed with constructive notice: Royal Bank of Scotland v. Etridge (No.2) at 722.

54. It has also been held that it is not for the bank to form a view on whether the solicitor has a conflict of interest such that it would not be appropriate for him to advise the wife. Thus in Bank of Baroda v. Rayarel [1995] 2 FCR 631, 641-642 Hoffmann LJ said:-

"If a prospective surety deals with a bank through a solicitor, the bank is entitled to assume that the solicitor has given her appropriate advice. If there is a possibility of a conflict of interest between the surety and the other parties whom the solicitor is also advising, the bank is entitled to assume that the solicitor will have told her that she was entitled to take independent advice."

55. That was the third of a trilogy of decisions of the Court of Appeal (the others being Massey v. Midland Bank plc [1995] 1 All ER 929; Banco Exterior International v. Mann [1995] 1 All ER 936) which, said Simon Brown LJ in Barclays Bank plc v Thomson [1997] 4 All ER 816, 821, "clearly establishes a bank's entitlement to rely upon a solicitor's certificate that proper advice has been given to the signatory of a relevant instrument even though that solicitor acts principally for the very person against whose undue influence the signatory must be guarded".

56. In Royal Bank of Scotland v. Etridge (No.2), at 721, the Court of Appeal said that the bank is entitled to rely on the fact that the solicitor undertook the task of explaining the transaction to the wife as showing that he considered himself to be sufficiently independent for this purpose. See also Bank of Scotland v. Bennett [1999] 1 FLR at 1141-1142.

57. The rationale for this approach appears to be that the reported cases reflect situations which are abnormal. In many cases, where the marriage is secure, and the business is sound and provides the family income, there may be no conflict of interest between husband and wife, and a competent and honest solicitor will have no difficulty in deciding whether it is appropriate for him to advise. But Sir Peter Millett, as he then was, has criticised the practice of allowing the bank to assume that the wife has received adequate legal advice, "an assumption which the bank almost always knows to be false": (1998) 114 LQR 214, at 220.

XI. Mr Boundy's role and the bank's knowledge

58. Mr Boundy originally practised as Charles Boundy & Co and he had acted for Mr Breeds from 1979. On November 1, 1985 the practices of Charles Boundy & Co and Walters Fladgate merged. The combined firm was known as Walters Fladgate, and Mr Boundy became the senior partner. Mr Boundy had advised Mr Breeds and Mr Saunders in connection with the establishment of the company, and he was appointed company secretary in November 1983. In 1984 the registered office of the company was changed to a Westminster address which was where his firm practised. The judge noted that his role went further than "would normally be expected of a solicitor in private practice retained by a company and charged with the responsibilities of a company secretary." Mr Boundy acted for the company in various contractual matters and advised the company on methods of raising finance, and he conducted correspondence with at least one potential investor in the company. There are also examples in the papers of Mr Boundy writing as secretary of the company to publishers requiring them to proceed with distribution and questioning their rights to terminate contracts with the company..

59. Mr Boundy was paid a retainer of Ł500 per month and sent additional bills if his instructions warranted them. He was secretary to about twenty private companies. There was no evidence that he took any part in the day to day management of the company, but he met Mr Breeds very frequently and introduced a new accountant when one was required

60. Mr Boundy was also a creditor of the company (in his capacity as solicitor). In early 1986 his firm was owed about Ł2500, but I do not regard this as significant.

61. Mr Boundy was present at two meetings at the bank when the company sought increases in its facility. He attended the meeting at the bank on February 7, 1985. Mr Rothwell's note states that Mr Breeds and Mr Saunders called and introduced Mr Rothwell to Mr Charles Boundy "their solicitor." Mr Boundy was also at the meeting at the bank on November 7, 1985. Mr Boundy's evidence was that he was introduced to the bank at this meeting as the solicitor and company secretary. Mr Rothwell accepted in evidence that he knew Mr Boundy attended the meetings to try and get facilities on behalf of the company.

62. It is likely that at some time between October 1985 and January 1986 the bank received a copy of the 1986 publishing programme for the company. That says:-

"Charles Boundy, company secretary for the group, is involved at every level of contract and corporate planning. His long-standing relationship with Glen Breeds and Mel Saunders, which goes back over seven years, has placed him in a unique position, so that in deed if not in fact he is considered as one of the mainstays of the group, and with his recent merger with Walters Floodgate [sic] brings a new strength and range of expertise to Mushroom."

The judge took the view that, although the paragraph in the publishing programme was to be discounted because Mr Breeds was inclined to go into rather grandiloquent language, it represented basically the truth. The judge, when quoting this document in his judgment (page 6), omitted the reference to Mr Boundy being the company secretary.

63. The judge made inconsistent findings about the bank's knowledge of Mr Boundy's position. At one point the judge said that it was not clear to him from Mr Rothwell's evidence whether Mr Rothwell actually knew that Mr Boundy was the company secretary. But at another point he said that Mr Rothwell very likely, or at any rate very possibly, knew that Mr Boundy was the company secretary. The judge found, as was indeed clear, that Mr Rothwell certainly knew that Mr Boundy acted for the company and for Mr Breeds and Mr Saunders.

64. In view of these inconsistent findings the parties have agreed that I should determine the question of whether the bank knew that Mr Boundy was the company secretary on the basis of the documents, the transcripts, and the inherent probabilities of the matter. I have no hesitation in forming the view that the bank must have done. Although (surprisingly) there is no evidence that the bank had effected a companies search, which would have shown him as secretary, Mr Boundy's evidence was that Mr Breeds and Mr Saunders would have introduced him not only as their solicitor but as company secretary: there is no reason why they should not have done so and every reason why they should. The evidence of Mr Rothwell was that he did not know Mr Boundy was company secretary, although he did accept that if he had seen the signature of Mr Boundy on the accounts as company secretary he would have known he was company secretary. The 1984 accounts which were received by the bank on November 7, 1985 were signed by Mr Boundy as secretary. But there must be a serious question as to whether Mr Rothwell could have recognised the signature. The signature was wholly illegible and it was not established that Mr Rothwell would have recognised it. It is likely that the bank at the material time had the 1986 publishing programme, which noted that Mr Boundy was company secretary (although the judge, as I have said, when quoting this document, left out the words to this effect). The document was certainly in the possession of the bank and there is no reason to think that it was not given it in late 1985 or early 1986. It is true that the bank's documents refer to Mr Boundy as the solicitor rather than as company secretary. It may be that Mr Rothwell did not attach much importance to Mr Boundy's role as company secretary and therefore had forgotten about it, but in my judgment it is very probable that the bank knew that Mr Boundy was company secretary.

65. The bank, therefore, knew not only that Mr Boundy was the borrower's solicitor, but it also knew that he was the company secretary, that he had been taking an active role in the company's quest for facilities at a time when it had critical cash flow problems, and it had been supplied with a document which described Mr Boundy as one of the mainstays of the group.

XII. Conclusions

66. The judge held that Mr Rothwell's knowledge that Mr Boundy was company secretary did not make it obvious that Mr Boundy should not, as Mrs Breeds' solicitor, advise her. It was for Mr Boundy, not for Mr Rothwell, to say whether Mr Boundy's interest as company secretary, creditor of the company (to a fairly modest extent) and solicitor to the company and to Mr Breeds made it improper or impossible for him to advise Mrs Breeds. Mr Rothwell had himself been seriously misled by Mr Breeds and, although he had discovered that Mr Breeds was unreliable in the matter of financial forecasts and the production of accounts, had attributed all that to the enthusiasm and inexperience of a young and talented entrepreneur engaged in the rapid expansion of his business.

67. The judge relied on the fact that Mr Rothwell had been misled by the suggestion that Mr Boundy was Mrs Breeds' solicitor and that Mr Boundy had probably already advised her. In the circumstances, he did not think that it should have been obvious to Mr Rothwell that this was a transaction into which Mrs Breeds could not be advised to enter. Nor should he have envisaged that Mrs Breeds was hearing about what was required of her for the first time, and that she was in effect, being bounced into executing the mortgage under the pressure of an emergency. He was not to understand that Mr Breeds was dishonest and devious or that he had been dishonest with Mrs Breeds as well as with Mr Rothwell. Although there were certainly grounds for anxiety about this lending as time went past, the judge did not consider that the bank, acting in the belief that Mr Boundy had discharged his duty in advising Mrs Breeds, had notice of the undue influence practised on her.

68. In this case the bank knew that Mrs Breeds had no direct financial or managerial interest in the company. The fact that Mrs Breeds provided security for the debts of the company was not necessarily improvident, but the present state of the authorities (including Barclays Bank plc v. O'Brien itself) indicates that if all the bank knows is that the business is one in which the husband, but not the wife, has a direct financial interest, then the first O'Brien condition will be satisfied and the bank will be put on enquiry.

69. Here the bank knew rather more which might have alerted the bank to the danger that Mrs Breeds' apparent consent might have been obtained by some improper conduct. Despite the judge's findings about the expertise of Mr Rothwell, there can be no doubt that in March/April 1986 the bank knew that Mr Breeds (and Mr Saunders) had very considerably exaggerated the actual turnover of the company when they first approached the bank in 1984. Mr Andrew, of the Mincing Lane branch, had been told that the turnover was Ł500,000, and his record note of that false statement was in the bank's file, even if Mr Rothwell did not appreciate its significance. But Mr Rothwell certainly knew that Mr Breeds' forecasts of turnover to July 1985 had been twice the figure actually attained (Ł323,000 forecast against Ł166,000 actual); that the cash flow forecasts had never been achieved; and that the bank was being given assurances about the payment of the overdraft which were not being fulfilled. In short, the bank had knowledge of circumstances which should have alerted it to the facts that Mr Breeds and Mr Saunders were not reliable and that the company was desperate for cash. This case comes very close to the example put by Chadwick LJ in Bank of Scotland v. Bennett [1999] 1 FLR at 1141, which, adapted to the facts of this case, is of a bank faced with a company which required funding to support barely profitable trading, and where the bank was not providing new money against security in connection with a venture which must have been seen to have real prospects of success.

70. It is against that background that it is necessary to assess whether the bank, in the light of Mr Boundy's statement that he had explained to Mrs Breeds the nature and contents of the mortgage and the obligations into which she was entering and that she appeared to understand, reasonably considered that any risk of Mrs Breeds had been dispelled. In fact, as is apparent, Mr Boundy, of course, utterly failed to consider whether he could properly advise, and also failed to give any adequate advice.

71. From the bank's perspective, Mr Rothwell knew by March 17, 1986 that (contrary to what the bank appears to have been told earlier) Mr Boundy had not advised Mrs Breeds. Mr Rothwell's note of the meeting makes it clear that he required confirmation that she had received independent advice.

72. The bank's internal instructions require or recommend that the independent legal advice be as to the viability of the underlying proposition, and they are entirely consistent with the case-law. I do not accept the bank's argument that this requirement or recommendation is designed purely to ensure that the wife is not being influenced by her relationship with the bank; but all it means is, as the cases confirm, that the advice should not be limited to the nature of the charge. Here Mr Boundy's confirmation was in a form on which, in the normal case, the bank could rely. Royal Bank of Scotland v. Etridge (No.2) makes it clear that the form of the certificate is not crucial. In this case Mr Boundy confirmed (contrary to the fact) that Mrs Breeds understood the implications of the commitment into which she was entering.

73. A solicitor should not act for two clients where there is a real risk of a conflict of interest between them. Independence includes the ability to advise, without fear, that the wife should not enter into the transaction, or that she should not accept the bank's terms without a fight. But Etridge (No.2) and the decisions which it restates are binding authority for the principle that (at least in the normal case) questions of conflict of interest are for the solicitor to resolve with his client, and are not the concern of the bank. But in all of the modern cases the conflict of interest arose from the fact that the solicitor acted also for the bank, or for the borrower company, or for the husband. An extreme example of a conflict of interest which negatived a bank's reliance on its customer's legal advice was Bank of Montreal v. Stuart [1911] AC 120 (P.C.), where the solicitor for the wife was the bank's solicitor, the husband's solicitor, a director and secretary of the company concerned, and a shareholder. The facts, and the principles applied, are rather different from the modern cases, and the decision depended on the fact that the solicitor had a strong personal interest in procuring the wife to give the guarantee; it left everything to him and was therefore "answerable for what he did" (at p.138). The solicitor "was in a position in which it would have been almost impossible for any man to act fairly"(at p.137).

74. I do not disturb the findings of primary fact made by the judge, but in the circumstances of this case I do not consider that to rely on Mr Boundy as Mrs Breeds' independent legal adviser can reasonably be regarded as sufficient to dispel the real risk that Mrs Breeds was subject to undue influence. This is not a case like Credit Lyonnais v. Burch [1997] 1 All ER 144 where if legal advice had been taken (which it was not) it would not have protected the bank because no competent solicitor could have advised Miss Burch to have entered into the extraordinary transaction. But this case comes as close as any case which it is possible to envisage to Millett LJ's example (at 156) of a bank not being entitled to assume that the solicitor has discharged his duty if it knows or ought to know that its assumption is false.

75. Here the bank knew that the company was desperate for cash; that its turnover forecasts and cash flow forecasts were unreliable; that the word of Mr Breeds (and Mr Saunders) could not in important respects be relied on. Further, not only did the bank know that Mr Boundy was the company's solicitor, but it also knew (as I have held) that Mr Boundy was company secretary (an officer and agent of the company with extensive duties and responsibilities: Panorama Developments v. Fidelis Fabrics [1971] 2 QB 711, 716, per Lord Denning MR), and that he played a major role in the company's quest for finance, and was a "mainstay" of the group. If there was any doubt at all whether Mrs Breeds should execute the mortgage, he could not possibly give independent advice given his role (and duties as solicitor to, and an officer of, the company) in seeking finance for the company. The bank was demanding as a condition of continuing the facilities that an all monies mortgage must be executed within a few days, and, objectively, it is plain that there must have been a very real prospect that the mortgage would have to be enforced. In my judgment this combination of circumstances takes the case out of the ordinary case where the solicitor, so far as the bank is concerned, may or may not have a conflict of interest which is for the solicitor to resolve. In this case the circumstances pointed to the strong probability of a real conflict of interest.

XIII. Non-disclosure

76. I accept that a bank has a duty to disclose to a surety a special arrangement between the bank and the customer which the surety would not expect. In Credit Lyonnais v ECGD [1996] 1 Lloyd's Rep. 200, 226-7 (affd. on other grounds [2000] 1 AC 486) Longmore J followed Mr Michael Burton QC, sitting as a deputy High Court Judge, in Levett v. Barclays Bank plc [1995] 1 WLR 1260, 1275, in applying the guidance of Chief Justice Gibbs in the High Court of Australia in Commercial Bank of Australia Ltd v. Amadio (1982-3) 151 CLR 447, 457:-

"It would be commercially unreal to suggest that a bank has a duty to reveal to a surety all the facts within its knowledge which relate to the transactions and financial position of a customer in any case where those transactions are out of the ordinary. The obligation is to reveal anything in the transaction between the banker and the customer which has the effect that the position of the customer is different from that which the surety would naturally expect, particularly if it affects the nature or degree of the surety's responsibility."

77. What is said here on behalf of Mrs Breeds is that the bank should have disclosed that by March 1986 the facility for which the mortgage had originally been required had been granted and had expired, and had not been repaid; that it was proposing to provide different facilities in March 1986 to the temporary one agreed in November 1985; and that by March 1986 there was no audited or reliable financial information on which any further facility could be justified in accordance with the bank's usual lending policy and that the bank was in effect only prepared to lend against the security of the home.

78. I have already dealt with the charge that the bank was only prepared to lend against security, but I do not consider that, even if made out, it would have been a matter for disclosure. I agree with the judge that the other matters were not matters for disclosure. What was happening in March 1986 was that Mrs Breeds was being asked to give an unlimited mortgage to secure all the debts of a company to a bank which was being asked to continue a limited overdraft facility. There were no unusual features of the transaction, for the purposes of the principles relating to disclosure, which would have put Mrs Breeds in a position different from what a surety would (properly advised - which she was not) naturally expect.

79. I will therefore allow the appeal.

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