England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BIRMINGHAM DISTRICT REGISTRY

		Judgment handed down: 26th September 2008

JUDGE PURLE QC:

1. The Applicant Administrator seeks directions as to the status of the Respondent Bank as a creditor in the Administration of FG Collier & Son Ltd. ("the Company"). In essence, the Administrator wishes to know whether he should treat the Bank as a secured or unsecured creditor.
2. The Applicant was appointed Administrator of the Company on 1^st August 2003.
3. At that date the Company was indebted to the Bank on its own account. It was also contingently liable under a guarantee which it gave in April 1999 in respect of a connected company, UK Marble Ltd. ("UK Marble"). A Mr. Brian Key had also given a personal guarantee of UK Marble's indebtedness.
4. Under a mortgage dated 20^th July 1994, the Bank had an all-monies charge over a property owned by the Company known as Edgar House, 2 Church Street, Westbury, Wiltshire ("the Property").
5. The indebtedness of UK Marble to the Bank was paid off in late 2003 or early 2004. UK marble in consequence requested from the Bank the withdrawal of the guarantees (the Company's and Mr. Key's).
6. The Bank duly confirmed that the guarantees were cancelled and also executed a Deed of Release dated 5^th April 2004 releasing the mortgage over the Property. The Administrator knew nothing of this until he came to take steps to sell the Property, and asked the Bank for the release of the Deeds.
7. The Bank employees responsible for this transaction have explained that they did not know the Company was indebted to the Bank on its own account. Indeed, they did not even know that the Company was a customer of the Bank. Clearly, had they known of the Company's continuing indebtedness, the Deed of Release would not have been executed. What the Bank through its employees thought it was doing was giving effect to the discharge of the Company's liabilities when unbeknown to them a substantial liability remained. The Bank did not intend to make a gift of its interest in the Property as mortgagee. It proceeded on the basis that it no longer had any interest, because nothing remained due following the discharge of the UK Marble indebtedness. In this, the relevant Bank employees were mistaken.
8. The Administrator now proposes to sell the Property and wishes to know whether he is to treat the Bank as a secured or unsecured creditor. The Bank contends that it is entitled to be relieved from the consequences of its mistake and that the Deed of Release is liable to be rescinded. That being so, the Administrator upon completion of the sale should account to the Bank as mortgagee.
9. It is well settled that equity will set aside transactions for mistake in appropriate circumstances. Thus, in Lady Hood of Avalon v Mackinnon [1909] 1 Ch 476, Lady Hood made an appointment in favour of her elder daughter to put her in the same position as her younger daughter. In so doing, she overlooked an earlier large appointment she had made some years before in her elder daughter's favour. The later appointment was rescinded, as Lady Avalon mistakenly believed that she was bringing about equality when she was not.
10. The Bank also relies upon the more recent decision of AMP (UK) Ltd. v Barker [2001] OPLR 197. That case concerned the claimant company's pension scheme, which the scheme trustees with the consent of the claimant company had amended in favour of persons leaving through incapacity, overlooking the fact that other benefits were automatically increased, a consequence they did not intend. Lawrence Collins J. allowed a claim for rectification (which does not arise in the present case) and also expressed the view that he would if necessary have set the claimant company's consent aside on the grounds of mistake. He referred to the "long pedigree" of cases setting aside unilateral transactions on grounds of mistake, and concluded that there was no reason why the jurisdiction to set aside for mistake should be limited to settlements in the strict sense.
11. In reaching this conclusion, Lawrence Collins J. referred to the earlier decision of Gibbon v Mitchell [1990] 1 WLR 1304, where Millett J. emphasised the width of the equitable jurisdiction to relieve from the consequences of mistake. The case itself concerned a purported surrender of a protected life interest in favour of the 2 children of the protected life tenant, Mr Gibbon. The effect in law of his executing the surrender deed was to bring into operation the discretionary trusts under section 33 of the Trustee Act 1925. Millett J. was satisfied that the result was the opposite of what Mr. Gibbon intended and that, whilst rectification was not a suitable remedy, the transaction could be set aside, thus enabling an application to be made under the Variation of Trusts Act 1958 (to which he acceded) deleting the protective nature of the life interest.
12. At the time of that decision, recovery of payments made under a mistake were thought to be limited to payments made under a mistake of fact. Millett J. was concerned to emphasise that the equitable jurisdiction was not so limited, but nevertheless recognised that there must be some limit to the court's jurisdiction. After reviewing the authorities, he commented at p. 1309 E-F as follows:-

"In my judgment, these cases show that, wherever there is a voluntary transaction by which one party intends to confer a bounty on another, the deed will be set aside if the court is satisfied that the disponor did not intend the transaction to have the effect which it did. It will be set aside for mistake whether the mistake is a mistake of law or of fact, so long as the mistake is as to the effect of the transaction itself and not merely as to its consequences or the advantages to be gained by entering into it. The proposition that equity will never relieve against mistakes of law is clearly too widely stated…"

13. Millett J. went on to conclude at p. 1310 A–B:

"Mr. Gibbon did not merely execute the deed under a mistake of law as to the legal consequences of his doing so. He executed it under a mistake as to its legal effect … Since its effect was not that which he intended, he is entitled to have it set aside."

14. Mr. Najib for the Administrator contends that there is no relevant mistake here. Founding on the words of Millett J., he says that the Bank intended to release the Property from the Mortgage. That is what the Deed of Release achieved. There was therefore no mistake as to the effect of the transaction.
15. Mr. Tamlyn for the Bank says that Gibbon v Mitchell has to be read in the context of a mistake of law, and is not authority for any general proposition that, so long as the legal effect of the document is correctly understood, the Court's power to relieve from the consequences of a mistake is not engaged. That must be right. There was, for example, no misunderstanding of the legal effect of the appointment in the Lady Hood of Avalon case.
16. In the AMP (UK) Plc decision, Lawrence Collins J. at para [70] said this about the distinction between "effect" and "consequences":

"If anything, it is simply a formula designed to ensure that the policy involved in equitable relief is effectuated to keep it within reasonable bounds and to ensure that it is not used simply when parties are mistaken about the commercial effects of their transactions or have second thoughts about them."

17. It is clear that the equitable jurisdiction is not being invoked in this case because the bank now repents of an unwise commercial decision or because of second thoughts. The Bank seeks equitable relief because it executed the Deed of Release believing that it was giving effect to the fact that the secured indebtedness had all been discharged. On that assumption, that was not an unwise commercial decision. The Bank was bound to release the mortgage, or face a redemption action. As things turned out, the bank was releasing its rights as secured creditor in respect of the Company's outstanding indebtedness, but did not know this. On that basis, it seems to me that I could if necessary bring the case within the "effect" straitjacket. Turning the Bank from a secured creditor into an unsecured creditor was an unintended effect, the underlying (and mistaken) belief being that the Bank was not a creditor at all.
18. Mr. Tamlyn makes a more radical submission for the Bank. He points out that recovery of monies paid under a mistake is now recoverable in all cases, whether the mistake is one of fact or law. This is the result of the House of Lord's decision in Kleinwort Benson Ltd. v Lincoln City Council [1999] 2 AC 349. As is pointed out in Chitty on Contracts, 29^th ed., Vol 1, at para 29-029 at p. 1648, the approach now is to look at the effect of the mistake, and allow recovery whenever the mistake causes the payment.
19. Subsequently, at para 29-033, the editors of Chitty repeat the causative approach, observing by reference to the Kleinwort Benson case that the function of mistake is to show that the benefit which has been received is an unintended benefit. Mr Tamlyn also referred me to the House of Lords' approval of the causation approach in Deutsche Morgan Grenfell Group plc v IRC & Another [2007] 1 AC 558, in particular at paras 59, 60 and 143.
20. The same approach, Mr. Tamlyn says, should be applied here. The mistake caused the Deed of Release to be executed, and it was never intended to turn the Bank from a secured into an unsecured creditor.
21. I am minded to adopt Mr. Tamlyn's approach if it is open to me to do so. The position before the Kleinwort Benson decision was that equity had a wide jurisdiction to relieve from the consequences of mistake, free of the constraints thought to apply in a common law claim for restitution. It would be very strange if the approach of equity were now to be more circumscribed than the approach at law.
22. A number of Judges have commented upon the difficulty of applying the "effect" and "consequences" distinction. Nevertheless, the relevant passage from the judgment of Millett J. in Gibbon v Mitchell (to which I have referred) was cited with apparent approval by the Court of Appeal in Re Strain (deceased); Allnutt and Another v Wilding and others [2007] EWCA Civ 412; 9 ITELR 806. That case was, however, about rectification and Mummery LJ at para [21] of the leading judgment expressly stated that he was expressing no opinion on whether the case would have been one where the settlement could be set aside for mistake.
23. I have also considered the important recent decision of Lewison J. in Re Griffiths (deceased); Ogden and another v Trustees of the RHS Griffiths 2003 Settlement and others [2008] EWHC 118 (Ch); [2008] 2 All ER 654; [2008] STC 776. In that case, a life-time transfer which had been made under a mistake as to the donor's chances of surviving long enough for the transfer to be exempt from Inheritance Tax was set aside. Unbeknown to the donor, he had lung cancer at the time. Lewison J. commented:

"It is plain in my judgment that a mistake of fact is capable of bringing the equitable jurisdiction into play. All that is required is a mistake of a sufficiently serious nature. In my judgment a mistake about an existing or pre-existing fact if sufficiently serious is enough to bring the jurisdiction into play. If and to the extent that Millett J intended to restrict the scope of the equitable jurisdiction to a mistake about the effect of a transaction, I respectfully disagree."

24. His reference to Millett J. was a reference to the passage in Gibbon v Mitchell to which I have referred. It does not appear that Lewison J. was referred to the Court of Appeal's decision in Strain. However, I do not think it would have made any difference to his decision had he been referred to it, as that case was not, as I have already said, about the scope of the equitable jurisdiction to set aside for mistake.
25. Lewison J. went on to hold that for relief to be available, what had to be shown was that the person affected by the mistake would not have acted as he had done if he had been aware of the true facts. This is in line with the modern approach for recovery of monies paid under a mistake of fact and with the approach urged on me by Mr. Tamlyn. This is in my judgment the correct approach and (although I have expressed a view on the matter in paragraph 17) it is strictly unnecessary for me to consider the distinction between "effect" and "consequences". I shall therefore direct the Administrator to recognise the Bank as a secured creditor, as if the Deed of Release had never been executed.
26. It was argued in the alternative by Mr. Tamlyn that the rule in Ex parte James (1874) 9 Ch App 609 requires the Administrator to give up the benefit of the Deed of Release, even if the equitable jurisdiction to relieve against mistake cannot be invoked. In the light of my ruling on the mistake issue, it is not necessary for me to rule on the Ex parte James point, and I do not do so.