Guernsey Law Reports 2005–06 GLR 104
HAMMERSCHMIDT and KELLS WORLDWIDE LIMITED v. BARCLAYS BANK PLC
ROYAL COURT (Hancox, Lieut. Bailiff): May 3rd, 2005
Security Interests—priority—bona fide purchaser for value without notice—holder of security interest who purchases legal interest in collateral has priority over competing equitable interest—if purchaser already has equitable interest without notice of competing equitable interest, entitled to perfect his equitable interest and acquire priority—acquiring actual notice or competing interest before obtaining legal interest then irrelevant
Security Interests—priority—competing equitable interests—normally, first in time prevails—interest under constructive trust in bank account used as collateral for security interest takes priority over equitable assignment of collateral, unless holder of security interest becomes bona fide purchaser for value of legal interest without notice of equitable interest, or other exceptional circumstances apply, e.g. rule in Dearle v. Hall
Security Interests—priority—person with interest in collateral—Security Interests (Guernsey) Law 1993, s.14(1)(d) gives no additional protection to person with interest in collateral if not debtor or holder of security interest, e.g. beneficiary under constructive trust over collateral—priority then to be decided “without regard to the Law”—s.4 only concerns “priority between security interests”
The plaintiffs brought an action to recover funds held in accounts at the defendant Bank.
In November and December 1997, H deposited a total of some DM5m. in Kells’s accounts at the Bank and from the date of the deposits acquired an equitable interest in the funds by way of a constructive trust. In January 1998, the Bank made a loan of DM4.5m. to Ivyside and a security agreement was made (to which the Bank, Kells and Ivyside were parties) under which the Bank purported to take an equitable assignment of funds in Kells’s accounts as collateral for the loan. In February 1998, H deposited a further DM9.4m. in Kells’s accounts, again retaining the beneficial interest under a constructive trust; in March 1998, the Bank made a further loan of DM9m. to Ivyside and in April 1998 a further security agreement was made between the same parties and on the same
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terms as collateral for the further loan. Kells again purported to make an equitable assignment of its funds to the Bank as security.
H did not give the Bank notice of his equitable interests in the funds and it had no knowledge of them when it made the security agreements and took its equitable assignments. It was informed of them for the first time in February 1999, after H had discovered that he had been defrauded by three directors of Ivyside (a fact again unknown to the Bank), and in April 1999, when Ivyside defaulted in repayment of the loans, the Bank sought to enforce its security interests and debited Kells’s accounts to secure repayment.
H and Kells commenced the present proceedings to recover the funds and it was ordered that the question of the priority between H’s equitable interests in the funds by virtue of the constructive trusts and the Bank’s interests in them under the security agreements/equitable assignments should be tried as a preliminary issue.
The plaintiffs submitted that (a) since priority between equitable interests had to be decided according to their date of creation, H’s interests took priority over those of the Bank; (b) alternatively, the Bank had acquired no equitable interest under the purported assignments from Kells, since Kells had none to assign when it entered into the security agreements (or at all), since it was H who was the beneficial owner of the funds; (c) the absence of an equitable interest thus prevented the Bank from perfecting its title to the legal interest, and becoming a bona fide purchaser for value, when it debited Kells’s accounts to secure repayment of the loans; (d) even if it did become the bona fide purchaser for value when it debited Kells’s accounts in April 1999, it had by then (in February 1999) been given actual notice of H’s equitable interest and was therefore bound by that interest; and (e) since the entire purpose of the Security Interests (Guernsey) Law 1993 was to protect those who had deposited money with a financial institution in good faith for the purpose of determining priorities, s.14(1)(d) of the Law required the court to disregard the security agreements and treat H, as a person with an existing interest in the collateral provided, as having priority.
The Bank submitted in reply that (a) it was entitled to rely on exceptions to the rule that equitable interests took priority according to the date of their creation—in particular the rule in Dearle v. Hall, under which equitable interests in the same property ranked according to the date on which notice of their creation was given to the holder of the legal interest, and the Bank had given formal notice of its interests to Kells before H had done so; (b) the rationale of the rule was that a beneficial owner should not be enabled to create a succession of conflicting interests in persons who could assume (because no notice was given) that no intervening interests had been created—just as here, H had allowed Kells to remain in possession of the funds and did not give the Bank notice of his interest in them; (c) alternatively, it had acquired its equitable interests when making the security agreements with Kells and Ivyside and, when it subsequently became the bona fide purchaser for value of the legal interest
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in Kells’s accounts, it consolidated the legal interest with its earlier equitable interests in the funds and effectively back-dated its legal interest to the time it acquired the equitable interests; (d) it was therefore a bona fide purchaser for value without notice of H’s existing interests, which it did not acquire until later; and (e) it was not the case that the protective policy of the 1993 Law required the court to ignore the plain meaning of ss. 4(1) and 14(1)(d), which provided no additional protection for someone in H’s position, since he was not the holder of a security interest under the Law.
Held, ruling in favour of the Bank’s priority:
(1) The Bank was a bona fide purchaser for value of the legal interest in the funds in Kells’s accounts, without notice of H’s pre-existing beneficial interest in the funds by virtue of the constructive trusts, and therefore had a superior claim to H. It had acquired beneficial interests under the security agreements and the related equitable assignments and by taking the legal interest in the funds when it debited Kells’s accounts to repay the loans, it perfected those beneficial interests and back-dated its legal interest to January and April 1998. It therefore took without notice of H’s equitable interest, of which it had not been informed until February 1999 (para. 116; para. 148; para. 151).
(2) Had the Bank not succeeded in this way, H would have been successful on the basis that his equitable interests in the funds took priority over the Bank’s interests because they were created earlier. The main temporal priority rule would have applied and the Bank would have been unable, on the facts, to rely on the exception created by the rule in Dearle v. Hall. That rule applied only when the holder of a beneficial interest had assigned his interest twice and the purchaser for value under the second assignment had been the first assignee to notify the holder of the legal interest of his assignment; in the present case, it could not apply, since there were not successive assignments to different persons but competing priorities in the same interest—and the authorities indicated that the rule was not to be extended beyond its original scope (paras. 89–93; para. 150).
(3) Similarly, H could not derive any assistance from either the policy or the terms of the Security Interests (Guernsey) Law 1993. While it was undoubtedly true that the purpose of the Law was to protect those who had made deposits with financial institutions in good faith, it did not provide additional protection for someone in H’s position, since he was not the holder of a security interest under the Law. Indeed, the terms of s.14(1)(d) expressly provided that “the rights of any person other than the debtor [Kells] who has any interest in any collateral at the time the debtor created the security interest in it [H] are to be determined without regard to this Law”—and in any event the only provision of the Law concerned with priorities was s.4(1) which applied exclusively to “priority between security interests” (paras. 149–150).
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Cases cited:
(1) Australian Mutual Prov. Socy. v. Gregory (1908), 5 C.L.R. 615; [1908] HCA 7, not followed.
(2) C.K. Consultants (Plastics) Ltd. v. Vines, Royal Ct., February 10th, 1982, unreported, referred to.
(3) Colonial Mutual Gen. Ins. Co. Ltd. v. ANZ Banking Group (New Zealand) Ltd., [1995] 1 W.L.R. 1140; [1995] 3 All E.R. 987; [1995] 2 Lloyd's Rep. 433; [1995] C.L.C. 1047, referred to.
(4) Compaq Computer Ltd. v. Abercorn Group Ltd., [1991] BCC 484; [1993] BCLC 603, followed.
(5) Dearle v. Hall (1828), 3 Russ. 1; 38 E.R. 475, distinguished.
(6) Dodds v. Hills (1865), 2 H. & M. 424; 71 E.R. 528, followed.
(7) Hill v. Peters, [1918] 2 Ch. 273, dicta of Eve, J. considered.
(8) Inland Rev. Commrs. v. Gribble, [1913] 3 K.B. 212, not followed.
(9) Lyle (B.S.) Ltd. v. Rosher, [1959] 1 W.L.R. 8; [1958] 3 All E.R. 597, followed.
(10) Macmillan Inc. v. Bishopsgate Inv. Trust Plc. (No. 3), [1995] 1 W.L.R. 978; [1995] 3 All E.R. 747, dicta of Millett, J. applied.
(11) Pfeiffer (E.) Weinkellerei-Weineinkauf G.m.b.H. & Co. v. Arbuthnot Factors Ltd., [1988] 1 W.L.R. 150; (1987), 3 BCC 608; [1987] BCLC 522, dicta of Phillips, J. applied.
(12) Redfearn v. Somervail (1813), 1 Dow 50; 3 E.R. 618, referred to.
(13) Ryall v. Rowles (1749), 1 Ves. Sen. 348; 27 E.R. 1074, referred to.
(14) Stuart-Hutcheson v. Spread Trustee Co. Ltd., [2002] W.T.L.R. 1213; (2002), 5 ITELR 140, dicta of Clarke, J.A. applied.
(15) Taylor v. Blakelock (1886), 32 Ch. D. 560, dicta of Bowen, L.J. applied.
(16) Thomson v. Clydesdale Bank Ltd., [1893] A.C. 282, followed.
(17) United Bank of Kuwait Plc. v. Sahib, [1997] Ch. 107; [1996] 3 W.L.R. 372; [1996] 3 All E.R. 215; [1996] 2 FLR 666; (1997), 73 P. & C.R. 177; [1997] Fam. Law 17, referred to.
(18) Ward v. Duncombe, [1893] A.C. 369, considered.
(19) Warner Bros. Records Inc. v. Rollgreen Ltd., [1976] Q.B. 430; [1975] 2 W.L.R. 816; [1975] 2 All E.R. 105, referred to.
Legislation construed:
Security Interests (Guernsey) Law 1993, s.1(8):
“Express notice in writing that collateral has been assigned must be given by or on behalf of the secured party to the person from whom the assignor would have been entitled to claim the collateral; and if a person to whom such notice is given is aware—
(a) that the assignment is disputed by the assignor or any person claiming under him; or
(b) of any other opposing or conflicting claims to or rights in the collateral,
he must give notice thereof to the assignee, and may institute proceedings against the secured party, and against the assignor or
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person having the claim or right as the case may be, in which the Court may make such order as it thinks fit.”
s.4(1): “Priority between security interests in the same collateral is determined by the order of creation of those security interests.”
s.14(1)(d): The relevant terms of this paragraph are set out at para. 5.
R.I.C.E. Harris for the plaintiffs;
C.H. Edwards for the defendant.
1 HANCOX, LIEUT. BAILIFF: On May 23rd, 2003, I dismissed the defendant’s application for discovery of documents prior to the defence being filed. This was lodged, together with a counterclaim for various declarations, on June 13th of that year, followed by the reply and defence to counterclaim on January 9th, 2004. Since then, the plaintiffs and the defendant (to which I referred as “Barclays” or “the Bank” in my previous judgment, and will continue to do so here) have filed several cross-applications for orders that the court should try a preliminary issue based on the facts pleaded in various paragraphs of their respective pleadings, accepting (for the present purpose only) that those facts are true.
2 The plaintiffs filed an amended application on May 10th, 2004 without objection, and this expressed the matters included in their application of April 14th rather differently. In particular, the question formulated in the earlier application, namely whether Barclays possessed valid security interests under the Security Interests (Guernsey) Law 1993, was put as an assumed fact and the other issues were partially re-cast. Then, on May 11th, 2004, I gave agreed directions that each party should submit memoranda within 14 days, specifying which questions in their opponents’ list should not be so determined by the court, and that the issues which the parties did wish to submit to the court should be narrowed down as far as possible.
3 Mr. Harris’s application of May 25th was accompanied by a memorandum explaining the reasons for this issue being determined at an early stage, and Mr. Shepherd, for his part, filed a skeleton argument on the same day. In the former, Mr. Harris referred to a separate Royal Court action between Kells and one James Turian, and submitted that his proposed preliminary issue would not impact on that case, but if, as is contended by Mr. Shepherd in his skeleton argument, this court orders the determination of preliminary issues as between Barclays and Kells, then it might be necessary to consolidate this action with the one between Kells and Mr. Turian, who, I note, is a signatory to the second, and possibly the first, security agreement.
4 It is appropriate to record at this stage that while Mr. Harris only incidentally mentions Kells in his earlier applications, inasmuch as the three sums in question, namely DM100,000, DM4.9m. and DM9.4m.,
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were paid into Kells’s account with Barclays in late 1997 and early 1998 (which is not substantially disputed except as to the trivial amount of approximately DM18), Mr. Shepherd maintained from the outset that there are two issues concerning Kells, to which I shall refer below.
5 When the case was listed in the interlocutory court on May 28th, the parties (Advocate Shepherd then appearing for the Bank) were still not entirely ad idem as to the issue to be submitted to the court for decision. Mr. Shepherd felt he needed further clarification, while Mr. Harris said he would be relying on s.14(1)(d) of the 1993 Law, to which he later referred in the course of his submissions on March 17th and 21st of this year. That provision is as follows:
“(1) The rights of —
. . .
(d) any person (other than the debtor) [meaning, in this instance, Kells] who was the owner of, or who had an interest in, any collateral at the time when a debtor purported to cause or permit a security interest to be created in it,
are to be determined without regard to this Law.”
6 However, by August 19th, 2004, the parties had reached substantial agreement, and, in particular, Mr. Shepherd omitted the two last clauses from his earlier application, namely whether Barclays acted in breach of its mandate with Kells, and, if so, whether Kells is precluded from bringing an action against Barclays, no doubt in the interests of having the main preliminary issue, namely which of Mr. Hammerschmidt’s and Barclays’s respective interests should take priority over the other, decided.
7 Consequently, on September 3rd, the court recorded this order:
“That the following preliminary issue be tried on the assumption (for the purposes of the trial of that preliminary issue only) [Emphasis in original] that the facts and matters pleaded in paras. 3 to 30, 33 and 35* of the cause, and in paras. 3.2, 6, 21, 24.1, 25, 28, 33.1, 34, 41.1 and 41.2 of the defence [which were the same as those referred to in both parties’ earlier applications] are true:
‘At the time Barclays enforced its security/ies under the first and/or second security agreements, did Mr. Hammerschmidt’s equitable interest in the subject-matter of the said security/ies as a beneficiary under a constructive trust take priority over Barclays’s interest in the same, pursuant to its security/ies (or vice versa)?’
*[With the exception, obviously, as far as the defendant is concerned, of the word ‘wrongfully’ at the commencement of para. 35 of the cause.]”
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8 In the result, it is unnecessary for me at this juncture to deal with the issues said to appertain only to Kells (the corporate entity which was allegedly used as the vehicle by which the fraudsters were enabled to milk Mr. Hammerschmidt’s funds for their enrichment), and I can now concentrate on the main issue of law which I have just set out, and which is by agreement to be decided before any of the others to which reference has been made.
9 I have ventured to recall the protracted and difficult negotiations which resulted in eventual consensus as to the preliminary issue of law to be decided as a tribute to the efforts of counsel, who did so in the ultimate interests of their clients and of saving the court time and considerable costs. It is, accordingly, well understood that while Mr. Harris and Mr. Shepherd, and his successor, Advocate Edwards, will use their best endeavours to maintain this position even after the determination of this preliminary issue, neither can irrevocably commit his client to doing so other than for this purpose.
10 It is plain from the foregoing that the issue as now agreed is a proper one to be submitted for determination within the foregoing principles, and I therefore turn to consider the submissions of Mr. Harris and of Mr. Edwards in the light thereof. Mr. Harris says that the first plaintiff’s case is that he retained equitable interests under constructive trusts in the funds deposited in Kells’s account, namely DM100,000 on November 25th, 1997, DM4.9m. on December 10th, 1997, and DM9.4m. on February 27th, 1998.
11 Advocate Edwards, who now appears for the Bank, accepts that proposal, of course without prejudice to his client’s future position. Accordingly, the all-important matter for the court now to determine is whether or not these beneficial interests, being created earlier in point of time, take priority over the Bank’s interests created by the assignment of January 20th, 1998 and the security agreement of April 9th, 1998, both of which are said to be statutorily sanctioned under the provisions of the 1993 Law.
12 Mr. Harris referred at the outset of his legal submissions to the Guernsey Court of Appeal case of Stuart-Hutcheson v. Spread Trustee Co. Ltd. (14), which I have found particularly helpful. In that case, Clarke, J.A. said ([2002] W.T.L.R. at 1222):
“[The fact] that prior to the [Trusts Law 1989] trusts had become part of the Guernsey law is not in dispute; what is in issue is the extent to which the general law of trusts in England has become part of the law of Guernsey.”
13 He then continued (ibid., at 1222–1223):
“In thus importing, as it were, the English concept of a trust and
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trustees [by the 1989 Law] those concerned must be regarded as having intended to introduce the trust concept with its usual incidents unless they were inconsistent with some provision of Guernsey [law] or otherwise inapposite or inapplicable.”
14 As regards the concept of constructive trusts, Clarke, J.A. cited with approval an earlier passage from the summing-up to the Jurats given by Frossard, Deputy Bailiff in C.K. Consultants (Plastics) Ltd. v. Vines (2), as follows: “I now turn to the more difficult question and that is, is the concept of constructive trusts part of our law. In my opinion, I answer, yes, because we recognise trusts.”
15 Clarke, J.A. continued (ibid.):
“In other words, the recognition and acceptance of trusts in Guernsey carried with it the need to seek guidance from jurisdictions which have a law of trusts, and recognition of the concept of constructive, as well as express, trusteeship as an integral part of the law of trusts.”
16 According to Mr. Harris, one of the usual incidents of the concept of the law of trusts under English jurisdiction is the rule as to priorities. This is enshrined in the maxim qui prior est tempore, potior est jure: he who is earlier in time is stronger in law. On the authority of the Stuart-Hutcheson case (14), Mr. Harris says that this rule should be applied in Guernsey in the instant case.
17 Mr. Harris continued, saying that in respect of each set of transactions in the instant case there are two competing equitable interests, but not—and this is of some importance to his case—two competing equitable assignments. It is common ground that Mr. Hammerschmidt paid DM100,000 on November 25th, 1997, and DM4.9m. on December 10th of that year, into Barclays in Guernsey. These two amounts were, as stated in the defence, in accordance with instructions acted on by Barclays, paid into Account No. 43713233, which, it is accepted, was an account maintained by Kells Worldwide Ltd., a company registered in the British Virgin Islands.
18 The aggregate of the two sums so paid in, which was just short of DM5m., was transferred by the Bank successively into accounts maintained in Kells’s name, namely Currency Deposit Account No. 6129918 and (on December 23rd, 1998) Account No. 6130514. Mr. Harris has maintained throughout that the first plaintiff acquired, from the moment when the two sums comprising that amount were deposited with the Bank, an equitable interest under a constructive trust in the DM499,865.88 specified in the schedule to the first security agreement.
19 On 8th January, 1998, Barclays provided a loan of DM4.75m. to the company known as Ivyside, and the rights conferred on Barclays by the first security agreement, which bears the date of January 20th, formed the
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security for the loan so provided. Barclays has consistently maintained that it did no more and no less than it was entitled to do under the terms and conditions of the loan and in accordance with normal and accepted banking practice.
20 Later in his address, Mr. Edwards referred to Inland Rev. Commrs. v. Gribble (8). He said that, in realizing its security interest pursuant to the security agreement of January 20th, 1998, Barclays fell into the third category propounded by Buckley, L.J. ([1913] 3 K.B. at 218) and thus became a bona fide purchaser for value. The consideration was the advance of the first tranche of moneys to Ivyside as instructed by the persons mandated to operate Kells’s account, namely two of the alleged fraudsters, Messrs. Rochelle and Brillaud (the arrest of the former in Luxembourg having alerted the plaintiff and caused him to consult German lawyers in early 1999) and Standard Mercator signatories—presumably a company connected with the Mercator Trust Co., which had initially introduced Kells as a customer, and which was the subject of the defendant’s discovery application of January 7th, 2003.
21 The defendant’s contention, accordingly, as stated in its first skeleton argument, is that it took an equitable assignment under and by virtue of the first security agreement of the balance of Account No. 6130514. Therein lies the kernel of one of the main areas of disagreement between Mr. Harris and Mr. Edwards, for Mr. Harris relies on the maxim (this in turn forms the basis for his submission in relation to s.14(1)(d) and (5) of the 1993 Law) nemo dat quod non habet: no one can give to or confer on someone else that which he, or, in this case, Kells, does not possess. It must, of course, be borne in mind throughout that Kells, and not the Bank, was the legal owner of the moneys held on deposit in the account prior to April 9th, 1999.
22 Consequently, Mr. Harris submits that since it has not been, and cannot be, advanced that Kells ever had a beneficial, that is to say, equitable, interest in the money resting in its name in an account at the Bank, it could not do that which it purported to do under the first security agreement, namely assign to the other party to that agreement, that is to say the Bank, the beneficial interest in the “moneys due or owing to the assignor,” as they are described in cl. 2. Consequently, the Bank did not have the right to sell or otherwise dispose of that which was purportedly, but inaccurately, stated to be assigned to it, namely the moneys described in the Schedule.
23 It follows from this, Mr. Harris continued, that the Bank could not perfect its title to, and thus acquire the legal ownership of, the moneys deposited with it by taking the necessary steps to notify the principal debtor (Ivyside) and the guarantor (meaning Kells) of the former’s default, and debiting Kells’s account in order to repay itself on April 9th, 1999
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(which it did according to para. 35(d) of the cause, and which is taken to be true for the purposes of the question of law which the parties have submitted to the court for decision).
24 The second set of transactions encompassed the paying-in on February 27th, 1998, of DM9.4m. by Mr. Hammerschmidt into Kells’s Account No. 43713233 with Barclays, following a meeting with the fraudsters in Luxembourg some three days earlier. The bulk of this sum was transferred into Currency Treasury Deposit Account No. 6130514 by deal reference No. 66164199 shortly afterwards. It was scheduled to mature on March 12th, 1999, which was later extended to March 26th, 1999.
25 On March 3rd, 1998, Barclays entered into another loan agreement with Ivyside, and, pursuant thereto, advanced DM9m. from Kells’s account to Ivyside. This was subject to the security said to be provided by the second loan agreement of April 9th, 1998, whereby Kells guaranteed the repayment of a sum not exceeding DM9.4m., and, as beneficial owner, granted to Barclays security over all sums standing to the credit of account No. 6130514 (into which the second tranche of moneys provided by Mr. Hammerschmidt had by then been transferred).
26 Similarly, as in the case of the first set of transactions, counsel are agreed that Mr. Hammerschmidt became the beneficiary under a constructive equitable trust in respect of the DM9.4m. he paid into Kells’s account with Barclays, and Barclays took an equitable assignment of the DM9.4m. under and by virtue of the second security agreement. Barclays contends that, in due course, after serving notices of default and realizing its security, it became a bona fide purchaser for value of the balance in Kells’s Account No. 6130514.
27 In regard to its acquisition of the two equitable assignments to which I have just referred, and to the Bank’s contention that, in respect of each set of transactions, it was a bona fide purchaser for value when the legal interests in these amounts became vested in it, it is important to be clear as to the case advanced by Mr. Edwards, epitomized in para. 41 of the defences, which I now reproduce:
“41. At the dates of execution of the first and second security agreements (namely January 20th, 1998 and April 9th, 1998, respectively), when Barclays’s security interests were created:
41.1. Mr. Hammerschmidt had not given notice to Barclays of his alleged equitable right or interest in respect of the credit balances in the Kells accounts;
41.2 Barclays had no knowledge of Mr. Hammerschmidt’s equitable right or interest in respect of the said credit balances, or of the alleged fraud perpetrated against Mr. Hammerschmidt;
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41.3 Barclays complied with the notice requirements of s.1(8) of the 1993 Law in relation to its security interests in respect of the said credit balance.”
28 The quotation in Mr. Harris’s first skeleton argument from Snell’s Equity, 30th ed., has now been replaced by the quotation in the 31st ed. (2005). Para. 4–03 states as follows:
“At law, as in equity, the basic rule is that estates and interests primarily rank in the order in which they are created. The precise explanation of this result differs between the two systems. At law, the result is generally expressed in terms of the disponor’s capacity to confer a good title on the disponee of an estate or interest . . . [N]o person can confer a better title than he himself has. The disponee therefore takes subject to prior interests affecting the estate or interest . . . In equity, the result is expressed more directly in terms of temporal priority. [Then the maxim to which I have referred is set out.] Accordingly, where there are two competing equitable interests, the general rule of equity is that the person whose equity attached to the property first will be entitled to priority over the other.”
29 The foregoing extract is the cornerstone of Mr. Harris’s argument. Mr. Edwards, however, has maintained that in the instant case, the Bank is entitled to rely on two of the modifications to the rule as to priorities, which, in his submission, form exceptions to it, and which appear in the text immediately before the passage just set out. These are (at para. 4–02)—
“(iii) [as a purchaser] for value of the legal interest in the property
. . .
(v) the rule in Dearle v. Hall under which the priority of certain dealings in property is determined by the order in which notice of the dealing has been received.”
I will now examine the authorities cited for and against these propositions.
30 I turn first to the early case of Dearle v. Hall (5), as it was at the forefront of both parties’ submissions, inasmuch as, in its defence, Barclays relies on it as authority for the proposition that priority is accorded to the party who first gave notice of his interest to the holder of the legal estate in Kells’s account, while the plaintiffs, in their réplique, deny (for the reasons upon which Mr. Harris expanded in his submissions) that Dearle v. Hall has any application to the instant case. In order properly to understand that decision, it is necessary to delve fully into the facts, the two judgments of the Master of the Rolls, and that of the Lord Chancellor, Lord Lyndhurst, affirming them.
31 Peter Brown, by his will dated September 11th, 1794, had directed his executrix and executors to invest the residue of his estate, some
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£4,600, in government or real securities and to pay the interest and produce to his son, Zachariah, for his life. This resulted in an annuity of £93. The legal title to the assets remained in the executors. During the ensuing years, Zachariah had purported to make successive assignments for value of equitable interests in the form of annuities to different individuals.
32 In 1808, Zachariah decided to sell to Dearle an annuity of £37 for the capital sum of £204. Persons other than the executors joined in an indenture of December 19th, 1808 with Zachariah and Dearle, and secured it by an assignment to Dearle and his executors of the £93 annuity. This provided that Zachariah should continue to receive the produce, interest and dividends of the original capital sum unless and until default should be made for more than 21 days in paying the £37 annuity, quarterly, to Dearle.
33 The following year, Zachariah sold a further annuity of £27 to one Caleb Sherring, in return for a capital payment of £150. In pursuance of this, Sherring and Zachariah joined in a further indenture of September 26th, 1809, which appears to have taken no notice of the earlier annuity but was expressed to be made on similar security. Both these annuities were paid until the middle of 1811 but then ceased, save that Dearle subsequently caused one of the sureties to be arrested, to enforce payment of 1¾ years’ instalments.
34 Notwithstanding the earlier equitable assignments, of which the executors of the will (that is to say the legal estate holders) had no notice, Zachariah in 1812 advertised his life interest in the original annuity of £93 as an unencumbered interest. This led to negotiations with one Hall, who, after due enquiries of the executors by his solicitor into the validity of the fund and of the title thereto, purchased the annuity for £711.3s.6d. on March 20th, 1812.
35 The prior assignments to Dearle and Sherring first came to the notice of the executors on October 17th, 1812, and they thenceforth refused to make further payments to any of the claimants until their rights should be ascertained. Dearle and Sherring then filed their bill against Hall for payment of their respective annuities, and sought to restrain the executors from paying any part of the original £93 annuity to any person other than the plaintiffs.
36 The plaintiffs relied on the priority in time of the execution of the indentures under which they had acquired their interests. The defendant argued that by giving the first notice of his interest to the executors, in whom the legal estate to the residue of Peter Brown’s estate (out of which the annuities were paid) was vested, he had done all he could to make his title to the interest he claimed complete, whereas, by omitting to give notice of their encumbrances, the plaintiffs had acquired an imperfect title
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and had thus enabled Zachariah to commit the fraud of which Hall complained.
37 It is important to ascertain, as far as possible from the two reports of the case which are available, whether the rule in Dearle v. Hall still survives, over a century and three-quarters later, and its precise nature, before considering whether it is truly applicable to the circumstances of the instant case. Mr. Harris submits in his skeleton and supplemental skeleton arguments that the rule does not apply because the circumstances here are different, as shown by the authorities he cited.
38 That the decision is still regarded by authoritative courts as giving rise to a rule is shown by the following extracts from relatively recent decisions. In B.S. Lyle Ltd. v. Rosher (9), Lord Morton of Henryton described it ([1959] 1 W.L.R. at 16) as “the well-known rule in Dearle v. Hall.” Fifteen years later, in Warner Bros. Records Inc. v. Rollgreen Ltd. (19), Lord Denning said ([1975] 2 All E.R. at 110): “We were also referred to Dearle v. Hall, which gave rise to the rule in Dearle v. Hall.” I do not, however, need to delve into the facts of that case, for Roskill, L.J. regarded Dearle v. Hall as “a long way indeed from the present.”
39 The third case is United Bank of Kuwait Plc. v. Sahib (17), in which Chadwick, J., after stating that to extend the rule to the facts of that case would be to lose sight of its purpose, continued ([1997] 1 Ch. at 119):
“The rule is based on the inequity of allowing an assignee, who has taken no steps (by giving notice to the trustees to whom inquiry might be made) to protect subsequent assignees against the possibility of fraud on the part of the assignor, from setting up his prior assignment against those who have been deceived.”
40 Fourthly, in Pfeiffer (E.) Weinkellerei-Weineinkauf G.m.b.H. & Co. v. Arbuthnot Factors Ltd. (11), Phillips, J., as he then was, who subsequently delivered a concurring judgment in the Sahib case, in which, curiously, no reference was made to Pfeiffer, to which both counsel referred, applied the rule in Dearle v. Hall in a situation involving the equitable assignment of debts due to it by its sub-purchasers by a bulk importer of wine. I will revert to this case later.
41 Fifthly, in Compaq Computer Ltd. v. Abercorn Group Ltd. (4), the last case on Mr. Harris’s list, from which he extensively quoted, and in which all the foregoing authorities (save the Kuwait Bank case (17) were cited, Mummery, J., as he then was, said ([1991] BCC at 498):
“I deal first with the arguments on the rule in Dearle v. Hall. It was accepted by Compaq that if the rule did apply, Kellock would enjoy priority. Two arguments were advanced on behalf of Compaq as to why the rule in Dearle v. Hall did not apply.”
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42 Regarding the true nature of the rule, this has exercised the courts on many occasions: as Lord Macnaghten said in Ward v. Duncombe (18) ([1893] A.C. at 391):
“The learned counsel for the appellants invited your Lordships to define exactly the principle on which the doctrine of notice as established by the rule in Dearle v. Hall depends. Speaking for myself, I think that would be a very hard task. I am not sure that the doctrine rests upon any very satisfactory principle.” [Emphasis supplied.]
Both this sentence and that to which Lord Denning referred as a criticism of the rule in Dearle v. Hall (5) were strongly relied on by Mr. Harris.
43 The facts in Ward v. Duncombe were that the settlor left leasehold property to his executors on trust for sale, and a portion of the surplus rents, which was to devolve upon his son and then his granddaughter, forming her marriage settlement. This share was assigned to Frederick Wyatt on certain trusts. One of the executors had notice of this assignment and the other did not. By two indentures, made 11 and 12 years later respectively, advances of £300 and £200 were obtained from an insurance company on the security of the granddaughter’s share. On an action for the administration of the estate of the original testator, questions arose as to the priority of the encumbrances on the granddaughter’s share thereunder.
44 At first instance, Stirling, J. allowed the claim of the trustees of the marriage settlement as against the directors of the insurance company, which held the mortgages over the security despite the fact that the company had received no notice of the prior assignment, in one instance because the executor had no knowledge of the assignment and the other had prevaricated when enquiries were made. This decision was upheld on appeal and on second appeal to the House of Lords.
45 As Mr. Edwards said, it is important to understand the underlying reasons as to why the rule came into existence. The Lord Chancellor and Lord Macnaghten were ad idem that where there are successive assignments of an equitable interest and the second or subsequent assignee has no notice of an earlier assignment, priority depends simply and solely on priority of notice. The reason for this was that if a prior (not primary) encumbrancer who had given no notice was preferred, it would facilitate fraud by the cestui que trust, and cause loss to those who might have used every precaution to ensure that the title they were taking was valid and had done everything they could to make that title secure.
46 In his speech, Lord Herschell, L.C. was impressed by the fact that, in Dearle v. Hall (5), Lord Lyndhurst had followed the principle of Ryall v. Rowles (13), which was a case in bankruptcy but which was expressly stated to be of general application ([1893] A.C. at 377): “[I]f you leave
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another in apparent possession of personal property, you enable him to gain false credit and must take the consequences.” He then cited the former Lord Chancellor, who had stated (3 Russ. at 57; 38 E.R at 494) that—
“Sir Thomas Plumer [M.R.] was of opinion, that the Plaintiffs had no right to the assistance of a court of equity to enforce their claim to the property as against the Defendant Hall, and that, having neglected to give the trustees notice of their assignments, and having enabled Z. Brown to commit this fraud, they could not come into this Court to avail themselves of the priority of their assignments in point of time, in order to defeat the right of a person who had acted as Hall had acted, and who, if the prior assignments were to prevail against him, would necessarily sustain a great loss. In that opinion I concur.” [Emphasis supplied.]
47 Lord Macnaghten concurred with this reasoning in similar language, and also approved another principle on which the Master of the Rolls had acted in Dearle v. Hall, namely ([1893] A.C. at 389) that—
. . . a party, till he gave notice to the trustees, had not done everything that was necessary to complete his title. I fully agree with this principle. In a case of this sort it is necessary that a party claiming advantage from a title should do everything that is requisite to complete that title before he sets up a claim in respect of it.”
48 The Lord Chancellor and Lord Macnaghten were also ad idem in concluding that Lord Lyndhurst had relied on the much earlier case of Ryall v. Rowles (13) in affirming the decision of the Master of the Rolls. Indeed, Lord Macnaghten said ([1893] A.C. at 392): “Much of the reasoning in Dearle v. Hall is founded upon Ryall v. Rowles.”
49 This is borne out by the following extract from Lord Lyndhurst in Dearle v. Hall (3 Russ. at 58; 38 E.R. at 494):
“Where personal property is assigned, delivery is necessary to complete the transaction, not as between the vendor and the vendee, but as to third persons, in order that they may not be deceived by apparent possession and ownership remaining in a person, who, in fact, is not the owner. This doctrine is not confined to chattels in possession, but extends to choses in action, bonds, &c.: in Ryall v. Rowles . . . it is expressly applied to bonds, simple contract-debts, and other choses in action. It is true that Ryall v. Rowles was a case in bankruptcy; but . . . [they] did not . . . confine themselves to the case of bankruptcy, but stated grounds of judgment which are of general application.”
50 While it is perfectly true that Lord Herschell stated ([1893] A.C. at 378) that “those opinions [of the judges in Ryall v. Rowles] do not appear,
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as the law is now settled, to be of such general application as was thought by Lord Lyndhurst,” he then continued that “. . . the importance attached to them throws light upon the considerations which led to the judgments in the cases before Sir T. Plumer and Lord Lyndhurst.”
51 It follows from the foregoing and from Mr. Edwards’s emphasis on the passage from Lord Herschell’s speech in Ward v. Duncombe (18) (ibid., at 377) that, despite its length and antiquity, it is necessary to analyse the decision in Ryall v. Rowles. In that case, a trader had taken a loan from two brothers of £1,500, against the security of a mortgage over his dwelling house, coppers and utensils. He then mortgaged the utensils, stock-in-trade, debts and profits for securing another loan from his partner, Stephens, and again to Sir James Reynel of a seventh part of his moiety. The trader then made another mortgage of the same to one Skip, and a fifth mortgage of the realty to Stephens in return for £2,000, which Stephens paid to Baugh, to whom it had been assigned by the original mortgage, one Stone.
52 The final disposition made by the trader was to effect a sixth mortgage of his moiety to his son, George, in consideration for a further loan. Notwithstanding all these several mortgages, which had taken place between 1732 and 1738, the trader, William Harvest, had remained in possession of the utensils and stock-in-trade as though his own, and had altered and received the debts due to the partnership without any control from the creditors until 1740, when he was declared bankrupt.
53 Ryall v. Rowles (13), therefore, involved a medley of mortgages, pledges and securities, and it is not entirely clear from the judgment as to which items were the subject of the successive mortgages. It is, however, clear, as is recognized by Lord Macnaghten in Ward v. Duncombe ([1893] A.C. at 384), that the very strong court which decided Ryall v. Rowles was primarily concerned with the construction of the relevant bankruptcy statute then in force—for instance, the Chief Justice refers to the use of the preamble in its construction, and the Solicitor General, who appeared for the assignees, refers to “the act now in construction.”
54 It is also, in my view, clear that the purpose of the action was to achieve equal distribution amongst creditors, and to prevent undue priority between them and the mortgagees. It was submitted that to allow a trader to remain in possession of his goods and chattels would allow him to gain false and delusive credit by the appearance of substance to mislead those who dealt with him. This aspect formed an important part of Mr. Edwards’s submission that to allow another person to remain in apparent possession of personal property is tantamount to an invitation to obtain false credit.
55 The question for the court to determine in Ryall v. Rowles was whether the phrase “goods and chattels” in the Act included choses in action. The Lord Chancellor said (1 Ves. Sen. at 372; 27 E.R. at 1088):
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“. . . [W]here the vendee or assignee leave such goods in possession of the bankrupt as owner, he confides as much in the general credit of the bankrupt as that creditor, who has only taken his bond or note . . . Traders instead of absolute sales would then make such mortgages; and there would be a great opportunity; for traders might mortgage over and over again, as this case is a pregnant instance.”
56 Consequently, he held (ibid., at 371; 1088) that—
“choses in action are properly within the description of goods and chattels within this clause; and I will only add one argument, for the sake of which I mention it, which is, that this construction is strongly warranted by the next preceding clause relating to bankrupts, who by fraud make themselves accountant to the king to defeat their private creditors; which plainly shews, that the words goods and chattels . . . take in choses in action.”
57 What, then, is a chose in action? According to Wharton’s Law Lexicon (14th ed. (1949)), a “chose in action, otherwise called chose in suspense, is a thing of which a man has not the possession or actual enjoyment, but has a right to demand by action or other proceeding . . .”
58 Mr. Edwards strongly relied on the passage to which I referred earlier of the speeches in Ward v. Duncombe (18), of which he sets out an extract in his skeleton argument. The rest of the passage in the speech of Lord Herschell, L.C. is as follows ([1893] A.C. at 378):
“. . . [T]he leading consideration which induced the Court [in Dearle v. Hall] to lay down the rule that he who gives notice has a better equitable right than a prior encumbrancer who has given no notice was this, that any other decision would facilitate fraud by the cestui que trust, and cause loss to those who might have used every precaution that was possible to ascertain, before parting with their money, that the title they were taking was a valid one, and who might have done everything they could to render that title secure . . . [T]he point upon which stress was laid was this, that the party giving notice had taken the property out of the apparent ownership and possession of the cestui que trust. This is indicated by the importance attached to the opinions of the judges in Ryall v. Rowles.” [Emphasis supplied.]
59 Mr. Edwards submitted—and this is an integral part of his submissions—that that is the very thing that happened in the instant case, i.e. by leaving Kells in possession of the money in its account and failing to give the Bank notice of his interest, Mr. Hammerschmidt enabled the fraudsters to do what they did. Mr. Harris, however, submitted that whereas in Dearle v. Hall (5) there were successive assignments of the same beneficial interest, this is not so in the instant case. He, equally
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strongly, relied on this passage in Ward v. Duncombe (18), in support of his contention that the rule is not to be extended beyond its original scope, as follows (ibid., at 394):
“. . . I have made these observations, not for the purpose of impugning the authority of the rule in Dearle v. Hall. The rule is settled law. But it seems to me that when your Lordships are asked to extend the rule to a case not already covered by authority, it is proper to inquire into the principles upon which the rule is said to be founded. For the reasons which I have already given, I do not think that those principles are so clear or so convincing that the rule ought to be extended to a new case.”
60 Moreover, said Mr. Harris, this was made crystal clear by Viscount Kilmuir, L.C. in B.S. Lyle Ltd. v. Rosher (9). The facts of that case were that in 1933 the bankrupt and his father had executed a deed of appointment and release in respect of resettlement funds, over which they had power of appointment, and had transferred to Lloyd’s certain investments. This was done in order to comply with the conditions of admission, so as to enable the bankrupt to be admitted as a member of Lloyd’s.
61 In 1953, the bankrupt borrowed a substantial sum from the plaintiffs/appellants and later created two charges over the funds deposited in Lloyd’s, to stave off proceedings. He was not entitled to use those funds himself or create any charge over them for his debts. Lloyd’s informed the appellants that they had no notice of any other charge over the funds, specifically the interests of the trustees, which had been preserved under the original deed of appointment. The bankrupt had no beneficial interest in the funds held by Lloyd’s. The question for decision was whether the charges created in favour of the appellants ranked in priority to the interests of the settlement trustees.
62 The appellants contended that the case was one of competing equitable interests in which priority was to be decided by an application of the rule in Dearle v. Hall (5). The Law Lords unanimously rejected this contention on the ground that the bankrupt had no beneficial interest in the Lloyd’s funds, Lord Cohen saying ([1959] 1 W.L.R. at 23) that this fact was, in his opinion, fatal to the appellants’ submission that the doctrine in Dearle v. Hall applied. Mr. Harris drew particular attention to the passage from Viscount Kilmuir: see para. 81.
63 In response to this line of argument, Mr. Edwards said that by no stretch of the imagination could B.S. Lyle Ltd. v. Rosher (9) be regarded as an authority on the applicability or non-applicability of the rule, because, as Lord Morton demonstrated, it was not a case of priorities at all. He said, and I emphasize the relevant portion of his speech ([1959] 1 W.L.R. at 16):
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“That rule applies where there is a debtor or fundholder, and an individual who, having a beneficial interest in the debt or fund, executes two or more successive equitable assignments of, or charges on, that interest in favour of different persons. In these circumstances questions of priority arise. But no question of priority can arise in the present case, where the bankrupt has merely executed two wholly ineffective charges, both in favour of the same party.”
64 The next case cited by both counsel was Hill v. Peters (7), which was extensively referred to in B.S. Lyle Ltd. v. Rosher (9). In that case, a firm of solicitors, who were trustees for a Mr. and Mrs. Peters of an equitable interest in personalty, namely the purchase price received by them in respect of the sale of the Peters’ property, in breach of trust and in fraud of their cestuis que trust, and for their own purposes, without disclosing the existence of the trust, had purported to assign the interest by way of mortgage to another client, Mrs. Gwyn, who had died in 1911. Afterwards, in further breach of trust, they handed over to Mrs. Gwynn’s executors the mortgage deed which had formed the security for an advance the solicitors had made to another client, a Mr. Gotto, in September 1897, on the security of his share in the residuary estate of his father.
65 In 1917, Mrs. Gwyn’s executors gave notice to the surviving trustee of the will of Mr. Gotto senior, and in 1918 they sought a declaration that the notice they had given regarding the £4,000 raised from Mrs. Gwyn entitled them to priority over the £2,000, which was still outstanding from the money advanced out of the purchase money due to Mr. and Mrs. Peters under the rule in Dearle v. Hall (5). They claimed that the Peters should have given notice of the declaration of trust which the solicitors had made in respect of the £4,000 originally advanced from the money due to Mr. and Mrs. Peters in 1907.
66 In addressing this aspect of the executors’ case, Eve, J. said ([1918] 2 Ch. at 279):
“In my opinion the declaration of trust [in respect of the Peters’ interest] was not an assignment or transfer, but the creation of the relationship of trustee and cestui que trust as between Mr. and Mrs. Peters and [the solicitors].”
Further on, he said:
“I cannot see any reason whatever for so extending the doctrine of Dearle v. Hall. I respectfully indorse the observations of Lord Macnaghten in Ward v. Duncombe as to the undesirability of doing anything to extend that doctrine to cases which are not already covered by it.”
67 In dealing with this case, Mr. Edwards pointed to the fact that, in B.S.
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Lyle Ltd. v. Rosher (9), Lord Morton, after considering the Scottish case of Redfearn v. Somervail (12), which he found “of no assistance at all,” said ([1959] 1 W.L.R. at 17):
“As the Court of Appeal correctly observed, the interests now claimed by the appellants were never in fact capable of being created by the bankrupt, ‘even in breach of trust.’ That fact, in my opinion, completely distinguishes the present case from Redfearn v. Somervail.”
Then, and Mr. Edwards laid particular emphasis on the next sentence: “For these reasons the appellants’ case fails in limine,” i.e. at the outset, or, to put it colloquially, the appellants’ case did not even get to first base. Why? Because, as Mr. Edwards in effect said, and as Lord Morton had earlier said, B.S. Lyle Ltd. v. Rosher was not a case of priorities at all.
68 Finally, as regards this case, Mr. Edwards drew attention to these words of Lord Cohen ([1959] 1 W.L.R. at 24):
“. . . [T]here was no room for the application of the rule in Dearle v. Hall. For this reason, while not dissenting from the observations of Eve J. [in Hill v. Peters], I prefer to base my opinion that the appeal should be dismissed solely on the ground I have already stated.”
69 Mr. Edwards said that this could hardly be treated as a ringing endorsement of Hill v. Peters (7), or, indeed, of the plaintiff’s submissions, inasmuch as at least two of the leading cases cited not only held that Dearle v. Hall (5) had no application, but that the issue of priorities had never arisen in either of them.
70 Mr. Edwards then demonstrated that the rule in Dearle v. Hall, notwithstanding that it involved the priority of equitable interests, had been applied in many common law jurisdictions. For instance, in Australian Mutual Prov. Socy. v. Gregory (1), the question at issue was whether the interest of the trustee in bankruptcy in the estate of a bankrupt which had been placed under sequestration in Natal took priority over successive assignments for valuable consideration by the bankrupt of his interest under the deceased’s will, which included land in Tasmania assigned to the appellants and others.
71 It seems to me that this case is of little assistance, for, although the applicability of the rule in Dearle v. Hall was only canvassed on the hypothetical basis that the trustee’s interest by virtue of the sequestration fell into the category of a movable and not an immovable, the court, consisting of Griffiths, C.J., Barton and Isaacs, JJ., took the view that the interest which the trustee had acquired was in immovable property in Tasmania, and was therefore an immovable. The result of that conclusion is succinctly stated by Barton, J. (5 C.L.R. at 633):
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“For these reasons I am of opinion that G.W. Gregory’s Tasmanian interest was at the time of the Natal adjudication an immoveable, and, therefore, the Natal adjudication and the appointment of Mr. Green as trustee did not operate to vest the interest in that respondent.”
72 He then states why the court went on to consider the rule in Dearle v. Hall (ibid., at 633):
“But in view of possible further proceedings it is perhaps desirable that we should give an opinion on the second question debated at the bar, which can be dealt with only on the assumption that G.W. Gregory’s interest is a moveable.” [Emphasis supplied.]
73 It was accepted that the Tasmanian assignees gave notice of their separate interests to the trustees of the deceased’s will on February 17th and October 16th, 1905 respectively, but the trustee in bankruptcy did not do so until November 6th. Under private international law, the assignment of a bankrupt’s property to the trustee, as the representative of his creditors, operated as an assignment of his moveables wherever situated, but not of his immovables. Thus, the interest being in immovable property, there was no assignment.
74 Consequently, Barton, J. stated in the paragraph of his judgment to which Mr. Edwards referred: “. . . [T]he reasoning of the Master of the Rolls in Dearle v. Hall applies as fully and as forcibly to an assignee in bankruptcy (or in insolvency) as to an assignee for valuable consideration.” In the result (ibid., at 635), he said:
“. . . I am of opinion that, on the assumption stated, the claim of the trustee in the Natal insolvency is postponed to those of the several assignees, for valuable consideration and without notice of the insolvency, who anticipated him by giving prior notice to the trustees under the will of James Gregory.”
75 Isaacs, J. concluded his judgment by saying (ibid., at 646):
“On the ground also that the principle of Dearle v. Hall would apply . . . if the bankrupt’s interest were a moveable, notwithstanding a Natal assignment in bankruptcy, I am of the opinion the appeal should be allowed.”
76 While, therefore, the rule in Dearle v. Hall would have applied in the case of Australian Mutual Prov. Socy. v. Gregory (1), because of the priority of the notice by the assignees, and since the requirement of successive assignees of the same, or similar, interest was satisfied, in my view those parts of the judgments of the court which dealt with the rule are obiter dicta.
77 Mr. Edwards’s next case is the appeal to the Privy Council in
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Colonial Mutual Gen. Ins. Co. Ltd. v. ANZ Bank (New Zealand) Ltd. (3). This concerned the priority of equitable interests in the proceeds of an insurance policy between the parties, the bank being the second mortgagee of a house which was destroyed by fire on February 25th, 1988. The first mortgagees had exercised their power of sale and had recovered their debt from the proceeds. The policy had been effected by the appellants in the name of the mortgagor, who was, wrongly, paid out by the insurers. The bank claimed the proceeds of the policy from the insurers, as it had notified them of its interest prior to the fire. The Board applied the rule in Dearle v. Hall and held that the bank’s equitable interest took priority over that of the appellants.
78 In the Compaq (4) case, the plaintiffs sold computers to Abercorn under a dealership agreement which included a Romalpa clause. This said that the title to and/or the property in the goods and materials supplied would not pass to Abercorn until the price and any other sums owing had been paid to Compaq. Abercorn sold Compaq products to purchasers under agreements which also included a Romalpa clause. It then made a discount agreement with Kellock, the terms of which included, inter alia, the assignment of invoices which it had raised to Kellock, subject to notice to its debtors, and later assigned to Kellock, for value, debts owing to it for Compaq products. Finally, Abercorn executed two debentures in favour of Kellock, conferring on Kellock charges on its book and other debts, and also over its undertaking, property and assets.
79 A number of facts were agreed between the parties for the purposes of the trial on five points of law, three of which related to priorities between Kellock and Compaq. Leaving aside for the moment the issues relating to s.395 of the Companies Act 1985 and ss. 136(1) and 137(1) of the Law of Property Act 1925 which arose in the course of the judgment, Mummery, J. followed Phillips, J. in the Pfeiffer (11) case and held that Kellock’s interests took priority over those of Compaq, notwithstanding that Compaq had effectively retained legal and beneficial title in unsold Compaq products.
80 Mr. Harris submitted that the Compaq (4) case was additional, and, indeed, was a recent authority in support of his contention that the rule in Dearle v. Hall (5) applied only in the case of successive equitable assignments in favour of different persons, and not where there were competing assignments of two or more equitable interests in one fund. This is evident from the passage from Lord Morton’s speech in B.S. Lyle Ltd. v. Rosher (9), which I cited at para. 63, and which Mummery, J. cited in Compaq ([1991] BCC at 499).
81 Neither, Mr. Harris continued, could it apply where the assignor (here Kells) never had any beneficial interest in the fund which he purported to assign or charge. Again, a passage from the speech of Viscount Kilmuir,
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L.C. in B.S. Lyle Ltd. v. Rosher is referred to by Mummery, J. ([1959] 1 W.L.R. at 14): “I do not know of a case where the doctrine has been applied without there being someone who had at one time a beneficial interest . . . I am certainly not disposed to extend the doctrine.”
82 The one consistent thread that runs through the decisions cited in argument is that the rule cannot be extended to cover other situations. In Warner Bros Records Inc. v. Rollgreen Ltd. (19), Sir John Pennycuick said ([1975] 2 All E.R. at 113):
“The court [in Dearle v. Hall] was there concerned with a trust fund where trustees were directly accountable to all persons having an interest in the trust fund, whether original or derivative. The question at issue was the priority as between various assignees of original interests . . . [T]he judgment in that case contains valuable statements of principle which have been cited by Lord Denning M.R.”
83 Lord Denning referred (ibid., at 110) to the criticism of the rule by Lord Macnaghten in Ward v. Duncombe (18) ([1893] A.C. at 393), which reads as follows:
“But the rule in Dearle v. Hall, founded in great measure on the bankruptcy law as it existed sixty years ago, remains unaltered, and it is beyond the power of any Court to alter it.
I am inclined to think that the rule in Dearle v. Hall has on the whole produced at least as much injustice as it has prevented.”
84 Although the facts in Pfeiffer (11) bear little resemblance to the instant case, the judgment of Phillips, J. as to the priority of equitable interests is of considerable assistance, and, as I have noted above, it was followed by Mummery, J. in Compaq (4). In Pfeiffer, an English bulk importer of German wine which in turn sold wine on to sub-purchasers, assigned to the defendant company debts owed to it by the sub-purchasers, who duly paid them to the defendant.
85 An essential feature of the case was that notice of the assignment of the debts which were sold to the defendant was given to the debtors, i.e. the sub-purchasers, by the importers and by the defendant. As there was a title reservation clause in favour of the German plaintiff company, it claimed that the defendant’s title to those debts was subordinate to its claims as beneficial owner of the proceeds of sale due from the English importer to the German plaintiff.
86 Mr. Harris says, of course, that, given the clear judicial authority which is discernible in all the cases which have been cited on the point, the rule in Dearle v. Hall (5) should not be extended. Pfeiffer (11) can have no application here because it did not involve two or more successive assignments of an equitable interest. In other words, the Dearle v. Hall
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exception to the first-in-time rule only applies to successive assignments and not to competing priorities of an interest, e.g. under a trust, and a subsequent assignment of that interest.
87 In the Pfeiffer case, two preliminary issues of law were submitted to the court for decision, of which only the second ([1988] 1 W.L.R. at 155), namely “whether or not the defendant [had] priority over the alleged rights of the plaintiff by virtue of the factoring agreement made between the defendant and Springfield Wine Importers Ltd. and any assignments made pursuant thereto,” is relevant here. After considering s.136(1) of the Law of Property Act 1925, Phillips, J. held that that section enabled the assignee of a debt or chose in action to acquire a legal title to it that had all the advantages of a legal title, but, so far as priorities are concerned, his position was no better than if the assignment had been made prior to the Act.
88 No similar statutory provision in Guernsey has been brought to my attention, and therefore, in my view, the consequence is the same as that stated by Phillips, J. (ibid., at 162), namely “. . . that, even if the assignment is effected for value without notice of a prior equity, priorities fall to be determined as if the assignment had been effected in equity, not in law.” He continued (ibid., at 163): “Under the rule priority depends upon the order in which notice of the interest created by the dealing is given to the person affected by it, i.e., in the case of assignments of a debt, the debtor.”
89 I accept for the purposes of this case Mr. Edwards’s submission that the rule in Dearle v. Hall (5) would apply in Guernsey in the same way as it does in England, provided that the conditions judicially laid down for its application are satisfied. Those conditions are, as formulated by Lord Kilmuir, L.C. in B.S. Lyle Ltd. v. Rosher (9) ([1958] 3 All E.R. at 602), the most authoritative decision on this question in the last century: “For the application of that doctrine there are at least four requirements, namely: a fundholder, someone who has, or has had, a beneficial interest, assignee No. 1 and assignee No. 2.”
90 Accordingly, in the oft-cited words of Lord Macnaghten in Ward v. Duncombe (18) ([1893] A.C. at 391), “priority in such a case [would depend] simply and solely on priority of notice.” This was reiterated by Phillips, J. in Pfeiffer (11), as I have just demonstrated, and followed by Mummery, J. in Compaq (4), for he said that no bare trust of the proceeds of sale was created in favour of Compaq ([1991] BCC at 500), but that there was an equitable assignment by Abercorn to Compaq of the proceeds of the sales of Compaq’s products to Abercorn’s customers (ibid., at 485).
91 At the beginning of that passage, Mummery, J. “assumes” that there is a distinction between the creation of a trust and an equitable assignment. In my judgment, there is such a distinction. It is common ground in
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the instant case that Mr. Hammerschmidt is the beneficiary under constructive trusts of the moneys he admittedly deposited in the Kells account with Barclays in late 1997 and early 1998. It follows, again in my judgment, and in accordance with the decisions I have reviewed herein, that those transactions are not assignments but trusts, in which Mr. Hammerschmidt had acquired equitable interests.
92 In Mr. Shepherd’s skeleton argument (which reflects, although it is not identical to the defence in this respect), it is expressly stated that Barclays took equitable assignments of the balances of the respective currency deposit accounts into which the money initially deposited by Mr. Hammerschmidt had been transferred by it. These moneys then formed the basis for the guarantees provided by Kells as security for the loans to Ivyside under the security agreements.
93 In the present case, there were not successive assignments of the equitable interests, but two instances of the creation of a trust, followed in each case by an equitable assignment of the moneys standing to the credit of Kells in the relevant bank account. Accordingly, the test formulated by Viscount Kilmuir for the application of the doctrine is not satisfied, for there was no Assignee No. 1. It follows from the authorities, in my judgment, that the rule in Dearle v. Hall (5) does not apply here.
94 Mr. Harris has submitted that there is a second reason why, according to the authorities, the rule does not apply. It is accepted in the defence that the two amounts that Mr. Hammerschmidt initially deposited with the Bank were placed in Account No. 43713233. I have already traced the passage of the sums invested from and into the various accounts maintained by Kells in the Bank (see paras. 10, 17–19 and 23–26). In view of the conclusion expressed in the preceding paragraph, it is not essential to reach a decision on this sub-issue (if I may so refer to it). However, in order to see this part of the argument in its proper perspective, I find it convenient to recapitulate the basic facts as they have been agreed.
95 As has been seen, on January 8th, 1998, Barclays and Ivyside concluded a loan agreement, pursuant to which the Bank advanced DM4.75m to Ivyside on January 15th, 1998. On January 20th, following the loan agreement, Barclays, Ivyside and Kells entered into the first security agreement, whereby, inter alia, Kells assigned to the Bank the amount of DM4,999,865.88, as specified in the schedule. This exceeded the sum advanced to Ivyside in accordance with the letter of January 8th, 1998.
96 Mr. Harris advances the same submissions in respect of the deposit of DM9,399,981.94 into Account No. 43713233, in which Mr. Hammerschmidt had a beneficial interest under a constructive trust, and of which Barclays took an equitable assignment pursuant to the second security agreement of April 9th, 1998. The sequence of events was that, following
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the deposit of DM9.4m on February 27th, the Bank transferred DM9,399,981.92 into Kells’s Currency Deposit Account No. 6130514, where it remained until March 26th, 1999, earning interest.
97 Barclays then provided a second loan to Ivyside under the loan agreement of March 3rd. On April 9th, 1998, the same parties executed the second security agreement, whereby Kells granted to the Bank a security interest, in its favour, over all sums of money standing to the credit of Account No. 6130514. No point has been taken by either side as to the differing form of the second security agreement from the first such agreement. I am satisfied that in substance they were the same, and that Kells thereby effected an equitable assignment to the Bank of the balance in that account.
98 The defence having accepted, for the purposes of this preliminary point, that pursuant to the first security agreement, the Bank took an equitable assignment of the balance in Currency Treasury Deposit Account No. 6130514 (into which the balance in Account No. 6129918 had been transferred), who, then, was the assignor? Mr. Harris submits that this has to be Kells, since it is so described in the agreement of January 20th, which is itself called “this assignment.” He then poses the question: did the assignor have a beneficial interest in Account No. 6129918, or in No. 6130514?
99 In cl. 2 of the agreement, the assignor is loosely described as beneficial owner, but Mr. Harris submits that is not the reality, for it is stated in the cause that the three amounts paid by the plaintiff into Kells’s Account No. 43713233 were, from the moment they were paid in, held by Kells on constructive trust for Mr. Hammerschmidt as beneficial owner of the same. The defence have not sought to get away from this position, since, for the present purposes, the truth of para. 30 of the cause is assumed.
100 In Mr. Harris’s submission, Kells had no beneficial interest in the funds in Accounts Nos. 6129918 or 6130514, either when the Bank took its equitable assignments or at any other time. In addition to the passage I have cited from Viscount Kilmuir on this point, he drew attention to the following extracts from the speech of Lord Keith of Avonholm in B.S. Lyle Ltd. v. Rosher (9) ([1959] 1 W.L.R. at 25):
“I understand that the others of your Lordships take the view that Dearle v. Hall has never been applied to a case where the assignor never had a beneficial interest in the thing assigned, and that the rule in Dearle v. Hall should not be extended to cover such a case.”
101 He also drew attention to the speech of Lord Cohen (ibid., at 23):
“Now, I know of no case where the rule in Dearle v. Hall has been applied where the creator of the encumbrances never had any
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beneficial interest in the fund. Nor were counsel able to direct our attention to any such case.
102 How, therefore, Mr. Harris says, could Kells create, in favour of Barclays, an equitable or beneficial interest that it did not have? Although Kells held the legal title and was the assignor, it did not have a beneficial interest in the money in the account. However, as I have just indicated, in view of my decision that one of the essential ingredients for the application of the rule in Dearle v. Hall (5), namely the requirement of successive assignments, is not present in this case, it is unnecessary for me to decide this point.
103 I therefore turn to address the second, and equally important, issue of whether the Bank, when it acquired its legal interest in the funds concerned, was in each instance a bona fide purchaser for value without notice of Mr. Hammerschmidt’s prior interest. As regards the issue of priority between an equitable and a legal interest, I am content to adopt a passage from Millett, J.’s judgment in Macmillan Inc. v. Bishopsgate Inv. Trust Plc. (No. 3) (10). The passage in question is as follows ([1995] 1 W.L.R. at 1000):
“Where both interests are equitable—or both legal, for that matter—the basic rule is that the two interests rank in the order of their creation. In the case of equitable interests the order of priority may be reversed in special circumstances, but ‘where the equities are equal, the first in time prevails’ [subject, as appears in this judgment, to the rule in Dearle v. Hall if it is applicable] . . . Where, however, the first is equitable and the second is legal the position is different. A bona fide purchaser for value who obtains the legal estate at the time of his purchase without notice actual or constructive of a prior equitable right is entitled to priority in equity as well as at law: see Pilcher v. Rawlins (1872), L.R. 7 Ch. App. 259. But he must have obtained the legal estate, and the question of notice is normally tested at the time when he obtained it.”
104 The next issue to determine is: was Barclays a purchaser for value when it acquired its interest in the sum standing to the credit of Kells’s respective accounts? The Bank’s case is that when it made the two advances to Ivyside, they represented value in each case, inasmuch as they formed valuable consideration for the assignments which it took from Kells under the two security agreements.
105 Mr. Edwards referred to his main skeleton argument, in which a passage from the judgment of Buckley, L.J. in Inland Rev. Commrs. v. Gribble (8) is set out in extenso. Mr. Edwards did not emphasize that that was a dissenting judgment, and that the majority of the Court of Appeal adopted a different meaning of the word “purchaser.” They upheld
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Horridge, J. at first instance, who had stated the problem thus ([1913] 3 K.B. at 224):
“On behalf of the Crown it was contended that the word ‘purchased’ in this section meant purchased in a popular sense and either in the sense of being bought for money or at any rate for money’s worth; whilst on the other hand it was contended on behalf of the respondents that purchase had a well-known meaning in English law and meant acquisition of any property otherwise than by descent, or at least that it included any acquisition of property for valuable consideration.”
106 The facts of Inland Rev. Commrs. v. Gribble were that the Commissioners, under the provisions of s.13 of the Finance Act 1910, had raised an assessment to reversion duty on the benefit accruing to trustees’ lease of a house, which had expired in 1910. They claimed exemption under s.14(1), the relevant part of which provided:
“Where, in the case of a reversion to a lease purchased before [30th April 1909] the lease on which the reversion is expectant determines within forty years of the date of the purchase, no reversion duty shall be charged . . . on the determination of the lease . . .”
107 Kennedy, L.J. said ([1913] 3 K.B. at 220): “. . . [I]t is our duty . . . to say that ‘purchased’ in the first line of this sub-section and ‘purchase’ in the fourth line mean that which . . . everybody to-day means by the words ‘purchased’ and ‘purchase’ in the ordinary language of life. ‘Purchase’ means ‘buy’.” And (ibid., at 221), he said: “But I think ‘purchase’ in the ordinary sense in the absence of any context to qualify it does mean ‘buy’.”
108 Had it not been for two earlier cases which Mr. Edwards cited on this question, I think he might have had difficulty in overcoming this very definite, authoritative and restrictive interpretation of “purchase” (which term would obviously include “purchaser”). It will be seen that that construction was of a word used in a statute dealing especially with tax and revenue. There are two authorities which, in my view, demonstrate the criteria by which the courts will decide the frequently used phrase “purchaser for value” (other than in a specialized statute), namely Taylor v. Blakelock (15) and Thomson v. Clydesdale Bank Ltd. (16).
109 As to the first, I am content to adopt very largely the summary of the facts as set out in the defendant’s skeleton argument. The fraudulent trustee had invested £5,000 from money in the estate of one Gyhon, deceased, in Metropolitan 3.5% stock in his own name. He then embezzled money from the Pearson marriage settlement, of which he was a co-trustee with the Rev. Blakelock, and later paid for Caledonian Railway stock from part of the proceeds of sale of the Metropolitan stock. He
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placed the Caledonian stock in his firm’s name, and later transferred it into his and Blakelock’s joint names.
110 That trustee having died insolvent seven years later, Blakelock, as surviving trustee of the Pearson settlement, had the Caledonian stock registered in his own name, whereupon Taylor, the surviving trustee of the Gyhon estate, sued for a declaration that it belonged to that estate. A very strong factor which weighed with Bacon, V.-C. and, later, Cotton and Bowen, L.JJ., was that not only did Blakelock have no notice of the fraud, but the correspondence and other evidence showed that he was entirely innocent. As in that case, this case is, in the words of Bacon, V.-C. (32 Ch. D. at 564), to which Mr. Edwards drew attention—“. . . one of those painful cases in which, as between two innocent persons, a loss having been sustained, the Court is to decide upon whom that loss should fall.”
111 The Court of Appeal held that Blakelock was a purchaser for value without notice of the fraud. The following passage from the judgment of Bowen, L.J. (ibid., at 569), which Mr. Edwards cited, epitomizes the meaning of the phrase “purchaser for value”:
“No doubt if [Blakelock] had notice, then his legal title would disappear, would be invalidated. If he was a volunteer he could not stand in a better position than the person who conveyed to him; but if he is not a volunteer, upon what principle can you take away his property?
That really reduces it to the simple question of what is the meaning of the term ‘a purchaser for value’ in such cases. ‘A purchaser for value’ is a well-known expression to the law. By the common law of this country the payment of an existing debt is a payment for valuable consideration.”
112 Cotton, L.J. demonstrated (ibid., at 568) that, by accepting the Caledonian stock in his own name, Blakelock had parted with the right to sue Carter (the fraudulent trustee). In doing so, he had given valuable consideration for having the stock vested in his sole name, and was thus a purchaser of it for value. The action was accordingly dismissed.
113 Thomson v. Clydesdale Bank Ltd. (16) was possibly closer to the present case. There, a stockbroker employed by the appellants as trustees of one Thomas Dunlop, deceased, to sell 50 shares in the Commercial Bank of Scotland received a cheque for the money but dishonestly paid it into his own current account with the respondent bank, which was substantially overdrawn. He then absconded. The trustees claimed they were entitled to follow the proceeds of the cheque and to be repaid by the respondent bank, whilst the bank claimed that it was entitled to retain those proceeds in discharge of the debt due to it on the overdraft. Lord Watson said ([1893] A.C. at 290):
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“[The broker’s conduct] was an undoubted fraud upon the appellants; but, in my opinion, the broker’s fraud is of no relevancy in this case, unless it is coupled with bad faith on the part of the respondents. The onus of proving that they acted in malâ [sic] fide rests with the appellants.”
114 As a result of considering these two 19th century cases, I have arrived at the conclusion that it would be wrong to apply the narrow and restricted meaning to the word “purchaser” which the majority of the Court of Appeal did in Inland Rev. Commrs. v. Gribble (8). That decision depended on the particular wording of the Finance (1909–1910) Act 1910 and on whether an exemption granted in a taxing statute to a specified set of circumstances applied to the case in question.
115 I do not consider there to be any warrant for extending the construction of a specialized phrase in a revenue statute to the much wider circumstances obtaining in the commercial world of Guernsey. The purpose of that Act, as stated in the preamble, was—
“. . . to grant certain duties of Customs and Inland Revenue [including Excise], to alter other duties, and to amend the Law relating to Customs and Inland Revenue [including Excise] . . . and to make other [financial] provisions.”
In my opinion, it affords further support for this conclusion.
116 It follows that, in my judgment, the words of Bowen, L.J. which I have set out in para. 111 govern the transactions carried out by the Bank in this case. I therefore hold that when the Bank made the advances and took its equitable assignments of the amounts standing to Kells’s credit in the relevant currency treasury accounts, it was a purchaser of those interests for valuable consideration, and therefore for value.
117 This leaves for determination the issue of notice, for, as Bowen, L.J. observed, if the respondent had notice, then his legal title would disappear—would be invalidated. At the conclusion of its main skeleton argument, the Bank emphasizes that it had no notice of Mr. Hammerschmidt’s equitable interests under the constructive trusts when it entered into the respective security agreements.
118 I should record at this stage that, while I have noted (at para. 21) that it is admitted in the defence that at least two of the payments in to the accounts were either made by Mr. Hammerschmidt or on his behalf, I do not think, in deciding the preliminary issue, that I can legitimately take these admissions into account. As I understand the position, my task is to decide the issues of priorities within the four corners of the second paragraph of the consent order of September 3rd, 2004.
119 Further on the issue of notice, the defendant says that when it
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purchased the (equitable) interests, it did not have notice of those of the plaintiff. The skeleton argument says: “The fact that at the time it enforced its securities [the Bank] had acquired notice is of no relevance. By that time, the equities had already been determined.”
120 Any other conclusion, so the argument goes, would result in serious implications for the lending industry, and, in graphic language, would lay lenders open to the risk of a lurking third party being able to trump the lender’s security. These submissions are reiterated and amplified in the defendant’s replying submissions, which introduce the doctrine of tabula in naufragio. I will consider this aspect shortly.
121 Mr. Harris, however, strongly submits that April 9th, 1999 is the relevant date for determining the issue of notice, which was when Barclays acquired the legal estate in the sums in Kells’s account. Accordingly, the letter from the German lawyers, Boesebeck Droste, of February 9th, 1999, having stated Mr. Hammerschmidt’s prior interests with crystal clarity, provided ample notice thereof. It followed, he said, that the only possible conclusion was that when Barclays acquired its legal interests on April 9th, 1999, it could not be regarded as a purchaser for value without notice, as claimed by Mr. Edwards.
122 In response to this line of argument, Mr. Edwards submitted that the court had to look at the dates when the Bank’s equitable interests were created, namely January 20th and April 9th, 1998, under the two security agreements, when, as he maintained, the Bank had no notice of Mr. Hammerschmidt’s beneficial interests. For this proposition he relied on the early authority of Dodds v. Hills (6), with which I will now deal.
123 The facts of Dodds v. Hills can be shortly stated. Hills was the sole trustee of certain shares settled on Mrs. Dodds. He obtained a series of advances, beginning in 1857, from one Smith, the secretary of a local club (from whose funds the advances predominantly came), and, as security, dishonestly executed a transfer of those shares to Smith. On June 7th, 1863, Hills absconded and was declared bankrupt on June 30th. On June 14th, Mr. and Mrs. Dodds informed Smith of the trust. On June 19th, Smith sent the share certificate to the company secretary for registration.
124 Mr. Edwards laid strong emphasis on this passage from the judgment of Page Wood, V.-C. (2 H. & M. at 427; 71 E.R. at 529):
“When this arrangement was made [in 1857] Smith had no notice of the trust; and after having received notice, he registered the transfer. At the time of the transfer he acquired the power to register himself as the owner of the shares. Hills could not displace the equity thus acquired, nor was anything further necessary to be done on his part to complete the transaction. Although it is true that, as between him and the company, Smith did not become the owner until after
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registration, nothing but his own act was necessary to make him complete master of the shares.”
125 As in Taylor v. Blakelock (15), a factor which carried some weight with Page Wood, V.-C. was that, when he acquired the equitable interest, Smith was entirely innocent, for he continued (ibid., at 428; 529):
“Some suggestion was made that the Defendant was guilty of negligence, such as to fix him from the outset with notice of the trust. But there is no evidence of any negligence . . . There was nothing to raise a legitimate suspicion in anyone’s mind.”
126 Mr. Edwards stressed that as recently as 1995, in Macmillan Inc. v. Bishopsgate Inv. Trust Plc. (No. 3) (10), Dodds v. Hills (6) was still regarded as good law. It followed that the critical moment for notice was when the equitable interest was obtained, or, here, assigned. This, said Mr. Edwards, is clearly shown by this extract from Millett, J. ([1995] 1 W.L.R. at 1004):
“As between the transferee on the one hand and the transferor and those claiming under him on the other, this rather than the time when the transferee actually obtains the legal title is to my mind the appropriate time for the question of notice to be tested . . . As the facts of the present case show, modern commercial lending often involves frequent substitution of security, and this makes registration inconvenient and commercially unattractive.”
127 Mr. Edwards particularly drew to my attention the concluding words on that page: that to expose the creditor (the Bank in this case), in addition to the other risks, “to the further risk of being bound by an adverse claim of which he had no notice when he advanced his money, and from which he would have been free if he had obtained registration, is in my judgment commercially unacceptable.”
128 To this argument Mr. Harris responded that, as the policy letter of August 28th, 1992, shows, the Security Interests (Guernsey) Law 1993 was specifically designed to protect people like Mr. Hammerschmidt, who, in good faith, deposited his money in a reputable and internationally known bank. It was of equal, if not greater, importance, Mr. Harris submitted, that investors should have confidence in the integrity of such institutions, and, in particular, should know that, if it became aware of a fraud, the Bank would take steps to protect the beneficial owners of funds and intangible property. It would be far more unacceptable if they did not do so.
129 What was Mr. Hammerschmidt to do to protect his interests if that integrity did not exist? It was impossible to give notice to the world at large, but immediately he knew of the arrest of two of Ivyside’s directors, he caused Boesebeck Droste to write to the Bank in terms which included
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the following: “The purpose of this letter is to put you on notice and strongly urge you to refrain from disposing of any money presently standing to the credit of the above named [meaning Kells’s] account.”
130 What, on the other hand, did Barclays do? At most, it had acquired an equitable interest in each case when it took its assignments under the first and second security agreements of January 20th and April 9th, 1998. Mr. Harris urged that, at those dates, the Bank took subject to Mr. Hammerschmidt’s rights, as is pleaded in the cause. The order of events was of huge importance in this case. He said that when it acquired the legal title, Barclays were on notice—Boesebeck Droste’s letter of February 9th, seeking, inter alia, full repayment of the funds invested by their client, insofar as they are still in possession in Barclays Bank Plc., made all the difference.
131 It is, of course, undisputed that the funds were, at that moment in time, still in the possession of Barclays Plc.—inasmuch as they represented the balance in the accounts in Kells’s name which were maintained at the Bank. Did the Bank, either then or at any antecedent or subsequent time, check the source of the funds, inasmuch as it must have been aware of the 1993 Law, since that was the statute enabling it to take the securities in the first place, and especially s.14(1)(d) thereof, and thus of the policy behind its enactment, as set out in the policy letter of August 1992? That policy was to protect investors by preventing bodies, especially banks, from assigning, or giving a valid security over, or from causing the assignment or the giving of a security over, something which did not belong to the assignor.
132 The answer, said Mr. Harris, was emphatically in the negative, by a series of self-serving measures, which were, as alleged in the cause, not only unconscionable but entirely inconsistent with its obligations towards depositors. When the respective loans were due for renewal in March, 1999, Barclays took the steps which are described in the defence. It issued formal demands for repayment of the moneys due under the security agreements, from the principal debtor and the guarantor respectively, in the two letters of March 26th.
133 Barclays then, on April 9th, 1999, debited Kells’s Call Account No. 88183777 (into which the sums in Account No. 6130514 had been transferred) with DM5,006,540.70 and DM9,413,046.70, being the principal sum and interest due under the respective loan agreements, and then transferred these amounts to itself, thus acquiring the legal title to those balances.
134 Mr. Harris challenged the correctness of the final paragraph of the defendants’ first skeleton argument, of which I have set out an extract at para. 119. How could the acquisition of the legal interest in the currency deposit accounts by the Bank, when admittedly it had, by then, two
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months’ notice (at least) of Mr. Hammerschmidt’s equitable interest, relate back, as it were, in one instance a year, and in the other well over a year, to its acquisition of the equitable assignments, when, for the purposes of this preliminary point, it had had no notice?
135 There were two essential distinctions, Mr. Harris submitted, between Dodds v. Hills (6) and Macmillan Inc. v. Bishopsgate Inv. Trust Plc. (No. 3) (10), on the one hand, and the Bank’s conduct in this case on the other. Mr. Edwards had made much of the fact that, in the former case, Smith took the legal title to the shares some five days after notice had been given to the plaintiff. But there, said Mr. Harris, no act other than Smith’s act in registering himself had been necessary for him to acquire the legal title in Dodds v. Hills. As Millett, J. said, the ratio of that case was that Smith had been able to obtain the legal interest of the shares (and Millett, J. emphasized this phrase ([1995] 1 W.L.R. at 1003)) “without recourse to the legal owner.”
136 Here, there was all the difference, as several acts other than by the security holder had occurred: for instance, the defaults by Ivyside, and the non-compliance with the Bank’s letters of March 26th, 1999, by Kells as guarantor; and, unlike the Dodds case, the Bank had had to have recourse to the legal owner of the moneys, meaning Kells. It could not become the legal owner of the moneys from day one, as had happened in respect of Smith, let alone the fact that five days’ lapse from the giving of the notice to the acquisition was hardly comparable to the periods just stated in para. 123.
137 Turning to Macmillan Inc. v. Bishopsgate Inv. Trust Plc. (No. 3) (10), Mr. Harris argued that, given that his client was the cestui que trust under a constructive trust, Kells, having committed breaches of trust by entering into the two security agreements and effecting the equitable assignments to Barclays, then committed further breaches of trust by its activities in March and April of 1999. Thus their conduct was directly contrary to this passage from Millett, J. (ibid., at 1003): “. . . [T]he doctrine has never been applied where the owner of a later equitable interest acquires the legal estate from a person who commits a breach of trust by conveying it to him.”
138 Moreover, it is stated in Underhill & Hayton, Law Relating to Trusts & Trustees, 16th ed. (2003), at 1002:
“The bona fide purchaser of an equitable interest, without notice of an express trust, cannot defend his position by subsequently, and after notice, getting in an outstanding legal estate from the trustee; for by so doing he would be guilty of taking part in a new breach of trust.”
139 My principal reservation regarding the aforementioned portion of Millett, J.’s judgment is that he was dealing with the doctrine of tabula in
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naufragio, a species of tacking, the historical passage of which he had traced on the preceding page ([1995] 1 W.L.R. at 1002), and to which Page Wood, V.-C. had referred in Dobbs v. Hills (6). This doctrine was introduced into the scales of the written submissions by the defendant’s skeleton argument of December 1st, 2004, and Mr. Harris devoted an entire section of his supplemental skeleton argument of December 22nd in reply. Moreover, the principle stated in Underhill is in relation to an express trust, whereas the beneficial interest here was by virtue of an implied constructive trust.
140 Tabula in naufragio is the process by which a mortgagee may, by taking a further mortgage for a further advance on the same property, defeat the equitable claims of a mesne encumbrancer, i.e. a person who has lent money on the property after the first but before the further mortgage. The tacking mortgagee gains this right by virtue of his title under the first mortgage and by the operation of the rule that where the equities are equal the law shall prevail.
141 The limitations of this doctrine, and its abolition in relation to mort- gages by the Law of Property Act 1925, were explained by Millett, J. ([1995] 1 W.L.R. at 1002). Mr. Harris has set out in some detail the reasons why he considers that the doctrine cannot be applied in the instant case, and concentrates on the fact that it does not apply where the encumbrancer who gets in the legal estate as a result of a breach of trust in conveying it to him becomes the trustee, i.e. Kells, in this case.
142 However, without disrespect to counsel, who have both devoted much care to this question, there is a more fundamental reason why tabula in naufragio is inappropriate here. The essence, as I understand it, of the doctrine was that it required the existence of an intervening equitable encumbrancer (i.e. one who intervened between the first and the third mortgages) who could, as it were, be huffed by a later legal encumbrancer, provided that the latter did not acquire his interest as a result of a breach of trust by the trustee. In those circumstances, in the words of Millett, J. (ibid., at 1002), “the doctrine was a harsh one,” the result of which (in the example there given) “might be to squeeze out B altogether.”
143 As I understand the definition, tabula in naufragio does not apply to a case where, as here, the person who later acquires the legal interest for value after having (as here) taken an equitable assignment can consolidate his two interests. Moreover, in Macmillan Inc. v. Bishopsgate Inv. Trust Plc. (No. 3) (10), Millett, J. says (ibid., at 1004): “It is true that Page Wood V.-C. based his decision on an imperfect analogy with the doctrine of tacking . . . and is best regarded as standing on an independent footing.”
144 It is important to remember that, in that portion of his judgment, Millett, J. was dealing specifically with priorities relating to the those defendants in the Macmillan case who had either become holders of
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shares in a New York company known as Berlitz, or who had security interests in such shares, of which 1.9m. were held by the second defendant, Shearson Lehman Bros. Holdings Plc. by way of the deposit of share certificates in London: it was thus an equitable interest. In due course, the security was perfected by deposit in the Depository Trust Co., which operated the central depository system.
145 The day after the death of the late Robert Maxwell, Lehman Bros., prior to the plaintiff’s notification of its claim to the shares, were sold to Shearson Lehman, though not transferred to them until afterwards. Thus, in both Dodds v. Hills (6) and the relevant part of the Macmillan case, the court was dealing with an equitable interest in shares in which the holder subsequently acquired the legal estate, and no notice of any third party’s interest intervened between the two events.
146 It seems to me that, although a deposit of shares is not involved in this case, unlike the imperfect analogy referred to by Millett, J., the Bank here was perfecting the security it had previously taken (in each of the two sets of transactions) by getting in the legal estate. True, Ivyside and Kells were necessary participants in the process of getting in the legal estate, inasmuch as the appropriate letters of demand had to be sent to them, and default made, but they were purely passive participants.
147 As Millett, J. said in relation to the case before him, this is a case of substitution of the security by the Bank. True again, Mr. Hammerschmidt is an innocent party who suffered by the activities of the fraudsters, but it was he, and not the Bank, that allowed the fraudsters to retain control of Kells. I find myself in agreement with Mr. Edwards that the Bank acted perfectly lawfully in following the instructions of the persons who were mandated to give, and to sign, those instructions.
148 I would therefore hold, subject to considering the effect of the Security Interests (Guernsey) Law 1993, that the Bank, in acquiring the legal estate to these accounts, was a purchaser for value of them without notice of the plaintiff’s prior equitable interest, because it had no such notice when executing the respective security agreements and taking the equitable assignments thereunder. How, then, does the 1993 Law impact on this situation?
149 Mr. Harris argues that for the limited purpose of establishing priority, the Law requires the court to disregard whatever security interest Barclays acquired and thus to treat his client’s interest as having priority. I regret that I do not read s.4(1), which is the provision dealing with priority between security in the same collateral, in this way. The collateral, under the definition of that term, means, in each case, the relevant treasury currency account in Kells’s name. The debtor in each case was Kells. Under s.14(1)(d), the rights of any person (other than Kells), which would clearly also include Mr. Hammerschmidt, who had an interest in the
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collateral at the time when Kells permitted the security interests to be created in that collateral, are to be determined without regard to the Law, meaning without regard to the order of priority stated in s.4(1).
150 While I have taken into account Mr. Harris’s submissions regarding the policy letter, I do not think it can control that which is, in my opinion, the plain meaning of s.14(1). It follows that, in answering the question posed by the preliminary issue, I accept the plaintiffs’ submissions that the rule in Dearle v. Hall (5) does not apply in this case, and that, consequently, the equitable rule as to the first in time as regards the equitable interests would apply, were it not for my conclusion on the second head of the submissions before the court.
151 However, for the reasons herein appearing, I propose to follow the reasoning of Millett, J. in Macmillan Inc. v. Bishopsgate Inv. Trust Plc. (No. 3) (10) ([1995] 1 W.L.R. at 1004). Consequently, I hold that the critical time for the issue of notice to be tested is when the Bank took the equitable assignments, rather than at the later time when it acquired the legal estate. I reject the plaintiffs’ submissions to the contrary. Barclays was, in my judgment, a purchaser for value without notice in each instance.
152 In the result, to use the term employed for the final head of his judgment by Millett, J. in the Macmillan case, the outcome is that I answer the question in the preliminary issue thus:
“At the time Barclays enforced its securities under the first and second security agreements, Mr. Hammerschmidt’s equitable interest in the subject-matter of the said securities as a beneficiary under constructive trusts did not take priority over Barclays’ interest in the same pursuant to its securities.”
153 Subject to counsel’s views, I propose to reserve the question of the costs hereof.
Order accordingly.
2009
Law Report
None
Guernsey Law Reports 2005–06 GLR 104