England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
ON APPEAL FROM THE CENTRAL LONDON COUNTY COURT
IN BANKRUPTCY

		Appellant Respondent
		10 February 2012

Miss Geraldine Andrews Q.C:

1. This is an appeal, brought by permission of Norris J., against the Order of Deputy District Judge Atkin made on 1 August 2011 adjudging the Appellant ("Mrs Hurley") bankrupt on a bankruptcy petition presented by the Respondent ("Darjan").
2. Darjan is the freehold owner of licensed premises at 1 Burford Street, Hoddesdon, known as the Bell Public House ("the Bell"). Mrs Hurley and her husband, Michael Patrick Hurley, were joint signatories to a lease dated 19 January 2009 in respect of the Bell ("the Lease"), for a term of 21 years. The Lease expressly identifies Mr and Mrs Hurley as the Tenants and Darjan as the Landlord. By Clauses 6 and 8.3 of the Lease, the Hurleys agreed to pay Darjan an annual rent of £50,000 plus VAT, which was payable in quarterly instalments in advance.
3. The alleged debt upon which the bankruptcy petition was based is £49,369.89 due in respect of rent arrears. The last quarterly rental that was paid in respect of the Lease of the Bell was in December 2008. When over a year's worth of arrears had accumulated, and its written demands for the unpaid rent were not met, Darjan forfeited the Lease and retook possession of the Bell on 1 June 2010.
4. Darjan served statutory demands on Mr and Mrs Hurley on 22 December 2010. Neither made an application to set aside the statutory demands, and in due course Darjan filed two bankruptcy petitions, number 1440 of 2011 against Mrs Hurley and number 1441 of 2011 against her husband. The petitions were initially heard together.
5. It was common ground before me that Mrs Hurley's failure to apply to set aside the statutory demand did not affect her right to raise a dispute in due course at the hearing of the bankruptcy petition: Barnes v Whitehead [2004] BPIR 693.
6. There was also no dispute between the parties as to the approach to be taken and the legal tests to be applied by the court when considering whether or not to make a bankruptcy order against Mrs Hurley. By virtue of s.267 of the Insolvency Act 1986, the debt founding the application for a bankruptcy order must be "for a liquidated sum payable to the petitioning creditor ... either immediately or at some certain, future time". In McGuinness v Norwich & Peterborough Building Society [2011] EWCA Civ 1286 the Court of Appeal considered what was meant by "a debt for a liquidated sum" and concluded that it must be a pre-ascertained liability under the agreement which gives rise to it. This can include a contractual liability where the amount due is to be ascertained in accordance with a contractual formula or contractual machinery which, when operated, will produce a figure, but it excludes claims for monetary compensation in a sum equivalent to the claimant's loss. On that test, unpaid rent would plainly fall within the definition of "a debt for a liquidated sum".
7. A statutory demand may be set aside under rule 6.54(b) of the Insolvency Rules if the debt is disputed on grounds which appear to the court to be substantial. It follows that if the debt is disputed on substantial grounds, the Court will not make a bankruptcy order either. In Williamson v Governor of the Bank of Scotland [2006] EWHC 1289 (Ch) Mr George Bompas Q.C., sitting as a Judge of the Chancery Division of the High Court, helpfully observed at [19] that for a Statutory Demand to be set aside under rule 6.54(b) of the Insolvency Rules, the court must see that there is a dispute, that the grounds of dispute are genuine, and that they are substantial (that is, in contrast with grounds which are merely frivolous). He went on to say that there had to be an evidential basis for the dispute.
8. Mr Hurley advanced a number of grounds for disputing the debt on which his wife also relied. However those grounds were unsuccessful and he was adjudged bankrupt on 21 July 2011. To the extent that Mrs Hurley relied on the submissions advanced by Mr Hurley, those grounds for opposition fell away and she has not sought to appeal from the findings so far as they apply to her.
9. However, Mrs Hurley had a further and independent ground of opposition, and there was insufficient time on 21 July to complete the argument on that aspect of the case. Therefore the petition against Mrs Hurley was adjourned, and the hearing concluded on 1 August 2011. On that occasion, the Deputy District Judge decided that there was no dispute that was genuine and substantial. She therefore made the bankruptcy order against Mrs Hurley.
10. Mrs Hurley contends on appeal that the Judge was wrong to reach that conclusion, and that she has substantial grounds for contesting the debt, on the basis that her signature on the Lease was procured by undue influence exerted by Mr Hurley, and that Darjan had constructive notice of the undue influence so as to give rise to an equitable right to have the Lease set aside.
11. Mrs Hurley also raises a point in respect of the Lease itself, namely, that it was not validly executed as a Deed and thus it fails to comply with the requirements of section 1(3)(a)(i) of the Law of Property (Miscellaneous Provisions) Act 1989 (as amended). On Mrs Hurley's evidence, the Lease was not signed by her in the presence of a witness who attested the signature – the signature which appears below hers on the Lease was appended by an unidentified individual on some subsequent occasion. The only signatures that she saw on the Lease at the time when her husband asked her to sign it were those of two directors of Darjan (which appear in the upper part of the signature page in the space for the Landlord to sign), and there was nobody present to witness it. Indeed, that was a point that she made to her husband at the time, when expressing her disquiet about signing the document.
12. I observe that no-one appears to have witnessed Mr Hurley's signature on the Lease either. Although Darjan would not necessarily have known that the signature below Mrs Hurley's was not that of an attesting witness, the absence of a witness to Mr Hurley's signature appears to have been overlooked by everyone. On the face of the Lease, it does not appear to be possible to interpret the signature of the unidentified person as an attestation of the signatures of both the Hurleys. Thus the deficiency in the execution of the Lease as a Deed is manifest, and it does not comply with the requisite statutory requirements. It therefore takes effect only as an agreement to give a lease, which is susceptible of being perfected by an order for specific performance. Under the well-known doctrine in Walsh v Lonsdale, equity treats the parties as if the Lease has already been granted, so long as specific performance would be granted.
13. The ramifications of the deficiencies in execution of the Lease as a deed were the subject of submissions by both parties on this appeal. This point was not argued before the Deputy District Judge, but as all the relevant evidence is before the court, and the only issues arising in this regard are issues of law, Norris J. granted Mrs Hurley permission to raise it on appeal. Darjan has served a Respondents' Notice. I propose to consider this point first, because if, as Mr Young submitted, any liability of Mrs Hurley to Darjan does not sound in debt, and Darjan's claim for damages for non-performance of the agreement for a lease is not a "debt for a liquidated sum", this appeal must succeed regardless of whether there is any merit in the undue influence argument.

The effect of the deficiencies in execution of the lease

14. On the face of it, the proposition that the absence of the signature of a witness attesting the signature of any one of the joint tenants on a lease could have the effect of precluding the landlord from issuing a statutory demand in respect of accrued arrears of rent, even where there is otherwise no arguable defence to the claim, is both startling and unattractive. Whilst it is of course incumbent on the landlord to make sure that his lease is perfected, and he runs risks by leaving it to one of the prospective tenants to finalise the execution of the deed, instead of (for example) sending it to a solicitor, the alleged consequences are wholly disproportionate to any degree of fault. On proper analysis, however, it becomes clear that those are not the consequences.
15. Mr Young very fairly accepted that if Darjan could show that it would obtain an order for specific performance, the arrears of rent would be a debt contingently due upon the grant of such an order, and would therefore fall within the meaning of "liquidated sum" for the purposes of bringing bankruptcy proceedings. In my judgment, he was right to do so. He also accepted that, as Mann LJ said in AMEC Properties Ltd v Planning Research and Systems Plc [1992] BCLC 1149 at 1156, "a contract for the grant of an interest in land will normally be specifically enforced".
16. However, Mr Young contended that an order for specific performance would not be granted in the present case, because Darjan had chosen to forfeit the lease, and thus it could no longer be performed. A court of equity will not usually grant specific performance if such an order would be futile. Thus Darjan would be left to its alternative remedy in damages for breach of contract; and although the damages would be measured by reference to the quantum of the arrears of rent, they could not be ascertained or computed by any mechanism provided for within the four corners of the contract itself, because the computation would depend on an extraneous matter, namely, the forfeiture of the lease before its term expired.
17. This argument falls at the first hurdle because, in my judgment, the fact that the landlord foreclosed would not be an answer to a claim for specific performance in the circumstances of this case. At paragraph 4.110 of the current edition of Woodfall on Landlord and Tenant, it is stated that:

"Since equity does nothing in vain, an order for specific performance will not be made where it would be pointless to make it. Thus specific performance will not ordinarily be granted of an agreement for lease where the agreed term has already expired or will expire before a decree can be obtained, but this will not defeat a claim for rent in such a case."

The authority cited for the proposition that the expiry of the agreed term would not defeat a claim for rent is Gilbey v Cossey (1912) 106 LT 607.

18. The facts of Gilbey v Cossey are strikingly similar to the present case. The landlord agreed to let a cottage and farm to the tenant for a period of seven years, but it was not a good demise by reason of the fact that it was not made under seal. It was, as Darling J put it,

"simply an agreement under the hands of the parties, but it was capable of being turned into a good demise by reason of a doctrine of equity by which, it being in writing, but not under seal, a right would be founded upon it to get an order for the specific performance of the agreement – that is to say, that the parties should execute it and then it would be a good lease for seven years."

Counsel for the tenant argued that because the term of the lease had already expired by the time that the landlord's action for rent arrears came to court, specific performance would not be granted because it would be futile. The argument was rejected.

19. Darling J. observed that "the whole of this doctrine of specific performance is nothing less nowadays than a legal fiction" explaining what he meant in these terms:

"It was recognised that justice really demanded that a person should be held to have an interest in land, although the document under which he claimed it had only a signature upon a piece of paper, which made it an agreement for a lease instead of a piece of wax on parchment which would have made it a lease. I should have said boldly: "this is a lease" but the court of equity said "this is not a lease under seal, but it gives the right to have a lease under seal, and so we decree specific performance of it, and we look at it as if it had been given, and now you may maintain your action of law upon the agreement"."

20. He then referred to the observation of Jessel MR in Walsh v Lonsdale that "the tenant holds under the terms in equity as if a lease had been granted", and said that if the landlord was to be regarded here as if the lease had been granted, it was perfectly plain that he must have the same rights as if it had been, and the court must look at the case as if a lease had been actually granted.
21. Bucknill J, in his concurring judgment, said this:

"the justice of the case clearly demands that the defendant should be responsible under this agreement, and he would have been responsible if there had been a lease. In those circumstances the court of equity would have said that it was in its power to make good that which was imperfect under the agreement. Justice demanded that the defendant should be liable for the rent because the land had been occupied and three quarters rent was due. By the time judgment was given in the case, the term specified in the agreement had ended, and it may well be that in many cases similar to the present the court of equity would have refused a decree for specific performance because no real good could be done thereby. In this case it is everything that specific performance could have been granted, because by its means the plaintiff would be entitled to get what he could not get without it, for if it were not granted the result would be that the land would be occupied by his tenant without the landlord being able to recover the rent. We can get over that difficulty by holding that specific performance could have been granted to the plaintiff so as to enable him to sue upon this agreement" (emphasis added).

22. Thus Gilbey v Cossey is clear authority for the proposition that even if the term of the lease would have expired, a court can and will grant specific performance so as to enable the landlord to enforce the covenant to pay rent, in circumstances where it would be just and equitable to do so. If that is so, it can make no difference in principle to the question whether specific performance would be granted, whether the reason why the term of the lease has come to an end is effluxion of time, or termination by the landlord in accordance with the contractual right of forfeiture he would have had under a valid and effective lease.
23. I can see no sensible reason why exercising a right of forfeiture, which he would have had if the contract had been embodied in a deed, should deprive the landlord of the right to claim the rent as a liquidated sum and seek a bankruptcy order against the defaulting tenant. Indeed, that result would seem to me to run completely contrary to the principles underlying the doctrine in Walsh v Lonsdale. Nor does it matter for the purposes of this argument that Mrs Hurley's evidence is that she never entered into occupation of the Bell, although her husband did. If the Lease had been validly executed as a Deed, she would have been liable to pay the rent, whether or not she entered into occupation.
24. As this is a case in which specific performance would achieve a just result, and there would be a point in making an order perfecting the lease, despite the fact that the landlord had already forfeited the lease and retaken possession of the Bell, I am satisfied that an order for specific performance would be granted at the behest of Darjan. For that reason, there are no substantial grounds for disputing the debt arising from the deficiencies in the execution of the Lease. In the light of this conclusion I need not consider whether the landlord's potential alternative claim for damages for non-performance of the agreement to enter into a lease would fall within the definition of a "liquidated sum".
25. So far as the alternative arguments raised by Mr Cook are concerned, in the light of my conclusion that the agreement to give a lease would be enforced by the court, I will deal with these briefly. I am persuaded neither by his submission that a periodic tenancy was created, nor by his submission that, notwithstanding that the Lease would not be enforceable as a lease, it would still be enforceable as a contract under which Darjan maintained an entitlement to payment of rent in return for granting a right of occupation (presumably under some form of licence).
26. As to the first point, the commentary in Woodfall at 4-080 makes it clear that whilst the original position at common law was that if the deed was defective, entry into possession under an agreement for lease coupled with payment of rent would create a periodic tenancy, as a result of the fusion of law and equity, the equitable rule prevailed and continues to prevail. Thus Walsh v Lonsdale has overtaken the periodic tenancy approach, and I am very doubtful whether, in a case where specific performance of the agreement for a lease would not be granted, the landlord could successfully argue that it should be treated as an agreement for a periodic tenancy instead. In any event, there would be no basis for the creation of any periodic tenancy if Mrs Hurley did not enter into occupation or pay the rent, whatever Mr Hurley may have done.
27. As to the second point, I accept that as a general rule a contract which is not executed as a Deed may still be an enforceable agreement. However that begs the question of what the parties to that agreement have agreed to do. What they have agreed to do in this context is execute a lease on those terms. There is no immediately enforceable agreement for occupancy of the premises on the terms of the lease; if that were not the case, the landlord would not need to go to court to ask for specific performance. The point is put beyond doubt by Gilbert v Cossey, where Bucknill J made it plain in the passage that I have quoted in paragraph 20 above that the landlord could not get his rent under the lease without an action for specific performance.

Constructive notice of undue influence

28. I now turn to the substantive defence to the claim for the arrears of rent that was advanced before the judge, namely, the undue influence point. The principle of undue influence is an equitable doctrine which operates to free a party from a contract if he or she entered into it under the influence of another person in circumstances where he or she was prevented from exercising independent judgment. The principle is concerned with how that party's consent was procured, rather than with whether or not the victim of the undue influence acted into the transaction willingly. Undue influence has a connotation of impropriety. Statements or conduct by a husband which do not pass beyond the bounds of what may be expected of a reasonable husband in the circumstances should not, without more, be castigated as undue influence.
29. The principle most often applies in a situation where the person exerting the undue influence is the other party to the contract that the person subjected to the influence is seeking to set aside. In the present case, however, there is no suggestion that Darjan itself exerted any form of pressure or influence over Mrs Hurley. The influence is said to have been exerted by Mr Hurley. In such circumstances, the person subjected to the influence will have an equitable right to have the transaction set aside if the other contracting party knew that he or she was acting under undue influence and took no steps to redress the situation (in the same way as if that party knew he or she was labouring under a mistake, or that someone else had made a material misrepresentation to him or her, and failed to correct it).
30. In one special class of case, that of suretyship, that principle has been extended to a situation in which the other contracting party does not know of the undue influence but is put on notice of the risk that it has occurred. In Royal Bank of Scotland v Etridge (No. 2) [2002] 2 AC 773 the House of Lords clarified the principles upon which a lender would be fixed with constructive notice of undue influence by the borrower over the surety. It was confirmed that the relationship between husband and wife does not fall into a special category in which there is a legal presumption that one reposes trust and confidence in the other. The question whether a transaction could be set aside for undue influence will therefore depend on the facts of each specific case. A lender will be put on inquiry (i.e. is taken to be on notice of the risk of undue influence) in every case in which the relationship between the borrower and the surety is non-commercial. In all such cases, the creditor must take reasonable steps to bring home to the individual guarantor the risks he or she is running by standing as surety. If the creditor fails to do so, he runs the risk that the guarantee will be set aside if the surety is able to prove that his consent was procured by undue influence, misrepresentation or some other form of wrongdoing. By failing to take reasonable steps to procure that the surety gives free and informed consent (which normally means seeing to it that he or she takes independent legal advice before entry into the transaction) the creditor becomes fixed with constructive notice of the wrongdoing.
31. Lord Nicholls confirmed that whether a transaction was brought about by the exercise of undue influence is a question of fact; that he (or she) who asserts a wrong has been committed must prove it, and that the evidence required to discharge that burden depends on the nature of the alleged undue influence, the personality of the parties, their relationship, and all the circumstances of the case. Proof that the complainant placed trust and confidence in the other party in relation to the management of the complainant's financial affairs, coupled with a transaction which calls for explanation, will normally be enough to constitute prima facie evidence that the dominant party abused the influence he or she acquired in the parties' relationship.
32. At [48], Lord Nicholls drew a distinction between a case where the wife becomes surety for the debts of her husband, in which the bank is put on inquiry, and a case such as CIBC Mortgages v Pitt [1994] 1 AC 200, in which money is being advanced, or has been advanced, to the husband and wife jointly. In such a case, the bank is not put on inquiry, unless it is aware that the loan is being made for the husband's purposes, as distinct from their joint purposes. The proviso caters for the situation in which a lender seeks to get around the principle in Etridge, for example, by structuring the transaction in a way that disguises its true nature, as well as for the situation in which the lender knows that in practice the "joint borrower" is going to be in a position akin to that of a surety.
33. The distinction between the two types of transaction falling on each side of the dividing line is an important one. A non-commercial surety stands to lose a great deal, but gains little or nothing from the transaction, and is therefore perceived to be particularly vulnerable, whereas from the perspective of the lender, a joint loan facility confers a benefit on both borrowers, and not just one of them. There is nothing in the latter type of case to put the lender on notice that there is a risk that one of the borrowers has been subjected to undue influence or some other wrongdoing, even if that borrower happens to be the spouse of the other borrower, and even if the lender has only had direct dealings with one of them.
34. The question I have to determine in this case is whether there is a substantial dispute on the basis that Darjan was fixed with notice of undue influence exerted by Mr Hurley over Mrs Hurley, which caused her to sign the Lease. I am unaware of any case in which the principle of constructive notice expounded in Etridge has been applied outside the context of suretyship, and counsel were unable to find any authority in which it had. Although I cannot rule out the possibility that the principle might be applied outside that context, it seems to me that a joint tenancy under a Lease is far more akin to the joint borrowing scenario in CIBC Mortgages v Pitt than it is to the suretyship scenario which was the focus of Etridge. In a standard contractual relationship, nothing less than actual knowledge of the wrongdoing affecting the consent of the complainant will suffice to deprive the innocent contracting party of his contractual rights. The rationale underlying the extension of those equitable principles in cases of suretyship is absent when, as here, the complainant derives a direct benefit under the contract in the form of an interest in land.
35. Was there anything about this case to suggest to Darjan that Mrs Hurley was taking on a position akin to a surety and thus susceptible to pressure from her husband? Darjan's policy was to require either two or more tenants, or one tenant and a guarantor. In this case they went down the former route. This is hardly surprising, given that Mr and Mrs Hurley were married. The prospective landlord would not expect Mr Hurley to be running the pub on his own and living apart from his wife, though on the evidence that is what happened in practice. On the face of it, there was nothing about this transaction to alert Darjan to the prospect that it may have been procured by wrongdoing of any kind on the part of Mr Hurley.
36. The fact that Mr Wogman, Darjan's representative, left it to Mr Hurley to get his wife's signature on the Lease and did not speak to Mrs Hurley directly is not enough to engage the principle in Etridge. I do not accept Mr Young's submission that it is "readily to be inferred" that Darjan investigated the means of Mr Hurley and found that his wife owned the matrimonial home – but even if Darjan did so, it does not follow that Darjan would expect the wife to have nothing to do with the business venture that her husband was undertaking, or to be a tenant of the Bell in name only. Nor do I accept Mr Young's submission that Mr Wogman's reference to the "elusive Mrs Hurley" in a light-hearted conversation with her some time after the Lease was signed, is evidence that Mr Wogman was aware from the start that Mrs Hurley was not going to take an active role in running the business. If anything, it points the other way, since Mr Wogman would hardly have stated to Mrs Hurley that he thought she did not exist and that Mr Hurley had made her up, if he had expected her to be absent.
37. In short, there is no evidence that from Darjan's perspective this was anything other than a standard lease of licensed premises to a husband and wife. This transaction was not one which called for an explanation. There was nothing about it to set any alarm bells ringing.
38. Thus the alleged defence to Darjan's claim for the rent based on Etridge principles is doomed to failure, regardless of the prospects of Mrs Hurley successfully establishing that she was acting under undue influence when she signed the document in the family kitchen. As to that, I share the view of the Deputy District Judge that Mrs Hurley would not have discharged the burden of proving undue influence at trial. I approach the matter by assuming in her favour that everything Mrs Hurley has said in her witness statement is true, and that Mr Hurley said in the course of their argument in the kitchen that he could not get another job at his age and that he would become a down-and-out. Mr Young characterised this as "emotional blackmail", but if it was, it was relatively mild – Mrs Hurley would have known as well as Mr Hurley did that the chances of his becoming a down-and-out were remote.
39. This was not a lady who was accustomed to entrusting her financial affairs to her husband. She had her own job, and a measure of financial independence. Indeed she had made it clear to Mr Hurley in the past that there was a limit to the amount of money she would lend him, and that she was not prepared to mortgage her own property further to support his business ventures. Mrs Hurley must have been well aware that her husband's outburst was just a facet of the heightened emotion generally displayed in the course of a domestic argument. She was standing in the way of his cherished dream, and he was making a fuss about it, in rather dramatic terms. Indeed it was his manifest unhappiness that, above all, appears to have made her decide to sign the document then and there. None of this suggests that her independent judgment as to whether or not she should sign the Lease was being overborne.
40. Mrs Hurley's doubts about the transaction appearing "iffy", as she put it, appear to have been centred upon the question whether the Lease would be valid and binding if she signed it somewhere other than at a solicitor's office, and without a witness being present, rather than doubts as to whether she should sign it at all. Her evidence is that she signed the Lease "in the heat of the moment in order to make him happy again." It does not follow from this that her consent to enter into the transaction was not free and informed consent. On the contrary it suggests that she took the decision of her own accord, in order to help her husband to realise his dream.
41. Prior to the decision in Etridge the leading case on constructive notice of wrongdoing by the principal debtor was the judgment of the House of Lords in Barclays Plc Bank v O'Brien [1994] 1 AC 180. That was a case in which the wife's signature of a mortgage over the family home for the husband's company's borrowings from the bank had been procured by the husband's misrepresentation. The wife had also run a case of undue influence, but that defence failed before the Court of Appeal [1993] QB 109, and was not pursued further. I have reminded myself of the facts of that case, (which are set out in the judgment of Scott LJ in the Court of Appeal on pages 113-117) and of the circumstances in which Mrs O'Brien signed the guarantee, (summarised at page 141). Mrs O'Brien, like Mrs Hurley, did not fit the outmoded picture of the subservient wife who was unable to understand financial matters or take practical business-like decisions. Mr O'Brien was extremely insistent that Mrs O'Brien should sign. He made an emotional scene on the day she signed, and told her that if she did not sign, the company would be bankrupt and her son John (who worked for the company) would lose his home. It was held that the influence brought to bear by Mr O'Brien was not, in the context of a normal husband and wife relationship, and bearing in mind Mrs O'Brien's character and capabilities, sufficiently undue. They were heavy family pressures but not particularly unusual, or sufficient to overset and bear down the will of Mrs O'Brien. As Scott LJ put it, "She signed because she was persuaded that it was the right thing to do, not because her husband's pressure deprived her consent of reality".
42. Whilst I am conscious that each case will depend on its own specific facts, if the pressure by the husband in the O'Brien case, which was not dissimilar, and possibly worse, was insufficient to engage the principle of undue influence, then the emotional pressure exerted by Mr Hurley in the present case plainly fell short of what is necessary. The emotional pressure exerted upon Mrs Hurley, bearing in mind her character and capabilities, was not particularly extraordinary in the context in which it arose, and it cannot have been enough to deprive her consent of reality. Deputy District Judge Atkin was not only entitled to reach the conclusion, on the evidence before her, that there was no substantial dispute on the undue influence point; it is a conclusion with which I wholeheartedly agree. There was no undue influence, and even if there had been, Darjan was not fixed with constructive notice.

Conclusion

43. For these reasons the bankruptcy order against Mrs Hurley was rightly granted, and this appeal must be dismissed.