Richard Sheldon QC (sitting as a Deputy Judge of the High Court):
Introduction
- In these proceedings, the Claimant, Swift 1st Limited ("Swift") applies under paragraph 7 of Schedule 8 of the Land Registration Act 2002 ("LRA 2002") for determination of whether Swift is entitled to an indemnity, and if so in what amount, from the Defendant, the Chief Land Registrar ("the Registrar") arising out of the cancellation of Swift's registered charge over 15 Elmstead Road, Ilford, Essex ("the Property").
- The question of whether Swift is entitled to an indemnity raises legal issues of some complexity. In this judgment I deal with this question first. By the time of the trial which took place before me, the background facts relevant to this question were no longer in dispute and, so far as relevant, are summarised below.
- If Swift is entitled to an indemnity, the amount which should be awarded raises separate questions of fact which I consider after I have dealt with the first question.
Is Swift entitled to an indemnity?
The facts
- On 13 September 1983, Bimla Rani Sunsoay ("Mrs Rani") was registered at the Land Registry as sole proprietor of the Property under title number EGL131757. She has resided at the Property at all relevant times.
- On 11 April 2006, a legal charge of the Property purporting to bear the signature of Mrs Rani was executed in favour of GE Money Home Lending Ltd ("GE Money") to secure a loan of £32,000. On the following day this charge was registered in the charges register for the Property.
- In May 2006, Swift received a mortgage application form dated 22 May 2006 from Greenhill Finance, brokers, purportedly signed by Mrs Rani, for a loan of £64,500 said to be for the purpose of "home improvements" and stating that the house would be sold when the work was done.
- On 31 May 2006, a legal charge of the Property was purportedly executed in the name of Mrs Rani in favour of Swift ("the Charge"). Despite having reservations about the circumstances, the Registrar has accepted that the Charge was a fraud committed by persons unknown on both Swift and Mrs Rani.
- Also on 31 May 2006, Swift advanced funds totalling £66,750 of which £34,403 was paid to GE Money to redeem its prior registered charge and £30,057 paid by cheque, initially in the name of Mrs Sunsoay, but shortly thereafter reissued at the request of Greenhill Finance in the name of Mrs Rani. Mrs Rani has claimed, and it is now accepted by the Registrar, that she never received those funds.
- On 2 June 2006, Swift's charge was registered in the charges register for the Property and the entry in favour of GE Money removed.
- From late June 2006 onwards there were defaults in repayment of Swift's loan. In about May 2007, Swift issued proceedings for possession in the Ilford County Court (later transferred to the Central London County Court). These were defended by Mrs Rani on the grounds that the Charge and the earlier charge in favour of GE Money had been forged. By her counterclaim she sought an order that the Charge be "set aside" and that the register be amended accordingly,
- The trial of the possession proceedings was due to take place on 20 January 2009. In the light of the evidence, including evidence from a handwriting expert, Swift accepted that Mrs Rani had been the victim of a fraud. By an order of HH Judge Hazel Marshall QC made by consent on that date, upon Swift discontinuing the claim, it was ordered that the Charge be "set aside" and that "HM Land Registry shall amend the title to [the Property] by deleting any and all interest of [Swift] therein."
- On about 7 August 2009 the entry for the Charge on the register for the Property was cancelled.
- Swift wrote to the Registrar claiming an indemnity. The Registrar pointed out that the court's order "setting aside" the Charge disclosed no basis for treating the register as having been "rectified" as opposed to bringing the register "up to date". To meet this point, on 6 September 2011, the order was amended by consent so as to read that the Charge "be agreed to be void".
Schedule 8 of LRA 2002
- Schedule 8 of the LRA 2002, which is given effect by s 103, provides, so far as is central to the first question, as follows:
1(1) A person is entitled to be indemnified by the registrar if he suffers loss by reason of-
(a) rectification of the register....
(2) For the purposes of sub-paragraph (1)(a)-
(b) the proprietor of a registered estate or charge claiming in good faith under a forged disposition is, where the register is rectified, to be regarded as having suffered loss by reason of such rectification as if the disposition had not been forged....
11....
(2) In this Schedule, references to rectification of the register are to alteration of the register which-
(a) involves the correction of a mistake, and
(b) prejudicially affects the title of a registered proprietor.
The arguments: summary
- Swift's argument, in summary, is that it is entitled to an indemnity under Schedule 8 because:
a. Swift was the proprietor of a registered charge claiming in good faith under a forged disposition;
b. The register was rectified by cancellation of that forged disposition pursuant to the consent order of the Central London County Court;
c. Such rectification was a rectification under paragraphs 1(1)(a), and 11(2), of Schedule 8, which need to be read together. For the purposes of paragraph11(2), there has been an alteration of the register which involved the correction of a mistake and which prejudicially affected Swift's title. As regards the question of whether Swift's title has been prejudicially affected by the alteration of the register, it is necessary to consider whether there has been a "rectification" under paragraph 1(1)(a). For the purpose of paragraph 1(1)(a), Swift is to be regarded as having suffered loss by reason of such rectification "as if the disposition had not been forged", under paragraph 1(2)(b). That phrase is a statutory deeming provision which requires a hypothetical exercise of assuming that the charge had actually been executed by the purported disponor. On that assumption, for the purpose of Paragraph 1(1)(a), Mrs Rani is to be regarded as have been bound by Swift's charge. She would not have been able to set up any overriding interest against Swift because this this is ruled out by the statutory deeming provision in paragraph 1(2)(b).
- The Registrar's argument, in summary, is that paragraph 1(2) of Schedule 8 is only engaged for limited purposes under paragraph 1(1)(a) and has no independent or wider effect. It is a pre-condition to the application of these provisions that there has been a "rectification" within the meaning of paragraph 11(2). In the present case, whilst there has been an alteration of the register which involves the correction of a mistake, it did not "prejudicially" affect Swift's title. Swift's title was affected but not prejudicially so, because it was always subject to Mrs Rani's overriding interest, an interest having priority under s section 29 of the LRA 2002. That interest, it was argued, arose because (a) as victim of the fraud she had the absolute right to the unencumbered freehold interest in the Property as Swift's Charge as against her was a nullity; (b) she was at all material times in actual occupation of the Property; (c) her rights were capable of taking priority over those of Swift as overriding interests under Schedule 3 paragraph 2, the right to rectification itself being capable of being an overriding interest, and none of the exceptions in paragraph 2 applied on the facts of the present case.
- This summary does not do justice to the way Mr Morshead developed his argument but I hope that it will become apparent later in this judgment how the materials upon which he relied underscored the various steps summarised above.
- Mr Morshead candidly recognised that difficulties in construing the indemnity provisions arose from the Court of Appeal's decision in Malory Enterprises Ltd v. Cheshire Homes (UK) Ltd [2002] EWCA Civ 151; [2002] Ch 216, a decision reached in the context of the Land Registration Act 1925, but held by Mr Justice Newey to apply also to the LRA 2002 in Fitzwilliam v. Richall Holdings Services Ltd [2013] EWHC 86 (Ch); [2013] 1 P&CR 19 (itself followed by the same judge in Park Associated Developments Ltd v. Kinnear [2013] EWHC 3617 (Ch)). I consider these later in this judgment after I have considered the legislative history of the indemnity provisions which was relied upon by Mr Morshead in support of his argument.
The legislative history
- Section 83 of the Land Registration Act 1925 ("LRA 1925"), as originally enacted, provided:
83(1) Subject to the provisions of this Act to the contrary, any person suffering loss by reason of any rectification of the register under this Act shall be entitled to be indemnified.
83(2) Where an error or omission has occurred in the register, but the register is not rectified , any person suffering loss by reason of such error or omission, shall, subject to the provisions of this Act, be entitled to be indemnified....
83(4) Subject as hereinafter provided, a proprietor of any registered land or charge claiming in good faith under a forged instrument shall, where the register is rectified, be deemed to have suffered loss by reason of such rectification and shall be entitled to be indemnified under this Act.
So far as material these provisions remained unchanged until replaced by the provisions now found in Schedule 8 of the 2002 LRA.
- The changes brought into effect by the 2002 LRA were preceded by a Consultative Document published by the Law Commission and HM Land Registry dated 2 September 1998 ("Land Registration for the Twenty-First Century"), followed by proposals for a draft Bill and commentary published on 9 July 2001 (Law Com No 271) ("the Proposals"). The provisions in the draft Bill attached to the Proposals were, so far as is material to the present case, enacted by the LRA 2002.
- Part X of the Proposals contains an explanation of the provisions of the draft Bill which governed the alteration of the register and payment of indemnity. In the Introduction to Part X, the Proposals draw a distinction between changes made to the register under the statutory grounds for rectification and changes made for some other reason. At paragraph 10.2 it is said that: "Although this distinction between rectification of the register and its alteration is implicit in the Land Registration Act 1925, it is not spelt out explicitly."
Indemnity is, in some senses, the correlative of rectification. It is payable where a person suffers loss as a result of an error or omission in the register, whether or not the register is rectified, and in certain other circumstances. The availability of indemnity is of great importance to the system of land registration. It is the basis of the so-called "State guarantee of title" which registration confers. (Paragraph 10.3)
- In the section of the Proposals headed "The Effect of the Bill: Alteration", the following is stated:
10.6 The provisions of the Bill which govern the alteration of the register of title bear no resemblance to their equivalents in the Land Registration Act 1925. In accordance with the recommendations in the Consultative Document, they have been recast to reflect the present practice in relation to rectification and amendment of the register. The basic concept that the Bill employs is that of alteration of the register and the circumstances in which such an alteration can be made are explained below. The Bill makes it clear that rectification is just one particular form of alteration, and it is defined as one which -
(1) involves the correction of a mistake; and
(2) prejudicially affects the title of a registered proprietor.
The latter requirement is directly linked to the circumstances in which an indemnity is payable. This is explained below. As a result of this latter requirement, the concept of "rectification" as it is used in the Bill is narrower than it is under the Land Registration Act 1925.
10.7 The principal differences may be summarised as follows -
(1) Rectification is confined to cases where a mistake is to be corrected...
(2) Not every correction of a mistake will constitute rectification. The correction must be one which prejudicially affects the title of a registered proprietor. Under the 1925 Act, if, in order to correct a mistake, the register is altered to give effect to an overriding interest, that is regarded as rectification. However, no indemnity will be payable because the proprietor will suffer no loss in consequence. He or she had taken the land subject to any overriding interests. Rectification in such a case therefore does no more than update the title and the registered proprietor is in no worse position than he or she was before. In other words, there can be rectification under the present law even where an alteration to the register does not prejudicially affect the title of the registered proprietor. That will cease to be so under the Bill. The circumstances in which the register is rectified and those in which the proprietor will be entitled to an indemnity will coincide.
In the last cited passage, reference is made to the decision in Re Chowood's Registered Land [1933] Ch 574 In that case, Clauson J held that when Chowood was registered as proprietor, the land was subject to Lyall's then existing overriding interest in certain strips of land, namely title by possession. Rectification of the register for the purpose of giving effect to those overriding rights put Chowood in no worse position than they were before such rectification with the result that it had suffered no loss and was not entitled to be indemnified.
- At paragraph 10.16 of the Proposals, it is again pointed out that under the Bill if the register is altered to give effect to an overriding interest it will never amount to "rectification" because the alteration does not "prejudicially affect" the title of the registered proprietor who already holds the land subject to the overriding interest and the alteration merely updates the register to record the true position.
- In the section of the Proposals headed "The Effect of the Bill: Indemnity", the following is stated:
Loss by reason of rectification
10.31 There is an entitlement to indemnity where a person suffers loss by reason of rectification of the register. This replicates the effect of section 83(l)(a) of the Land Registration Act 1925 and it is a common reason for the payment of indemnity. In two specific cases, both of which are carried forward from the Land Registration Act 1925, a person is treated as if he or she has suffered loss by reason of rectification, even though, but for the provision this might not have been so
(2) The second case is where the register is rectified in relation to a proprietor of a registered estate or charge claiming in good faith under a forged disposition. That proprietor is treated as having suffered loss by reason of that rectification as if the disposition had not been forged. The reason for this provision is to reverse one effect of a case decided under the Land Transfer Acts 1875 and 1897, Re Odell ( [1906] 2 Ch 47 ). The Court of Appeal there held that an innocent purchaser of a registered charge who was registered as proprietor of it on the basis of a transfer that turned out to be forgery, was not entitled to any indemnity. Because the transfer was a forgery and therefore of no effect, he was not regarded as suffering any loss, even though he had been registered.
- It is to be noted that the wording of paragraph 1(2)(b) of Schedule 8 to the LRA 2002 is in different terms to those found in section 83(4) of the 1925 Act: under the latter a proprietor of registered land or charge claiming in good faith under a forged disposition is, where the register is rectified, "deemed to have suffered loss by reason of such rectification and shall be entitled to the indemnified under this Act" whereas under paragraph 1(2)(b) the proprietor in like circumstances is "to be regarded as having suffered loss by reason of such rectification as if the disposition had not been forged' (emphasis added). Counsel's researches have been unable to provide an explanation for this change in the wording, which does not appear from the Proposals.
- In paragraph 10.29, the Proposals explain that the provisions governing the payment of an indemnity in section 83 of the 1925 Act had been amended in 1997 and the Consultative Document had anticipated there might be "minor amendments" to the law to reflect more clearly "the current practice in relation to the payment of indemnity". In the event the provisions had been completely recast in accordance with the style of the Bill but "the substance of them has not, however, been altered in any significant way".
Malory
- In Malory, the claimant, a British Virgin Islands company called Malory Enterprises Ltd ("Malory BVI") had been the registered proprietor of certain land. A company of the same name was incorporated in the United Kingdom ("Malory UK") and dishonestly obtained from the Land Registry a new land certificate in its own name. Malory UK then purported to sell the land to the defendant, Cheshire Homes (UK) Ltd ("Cheshire"), which became registered as the proprietor. Malory BVI sought rectification of the register and damages against Cheshire for trespass. Malory BVI claimed, and the judge at first instance found, that it remained in possession of the land which amounted to "actual occupation" so as to have an overriding interest which prevailed against the registered title of Cheshire. Cheshire accepted that rectification of the register should be ordered but it was concerned to establish who had the better right to possession between the date of registration and the date of rectification so as to avoid any liability for trespass. It also sought to safeguard its position to claim an indemnity from the Land Registry.
- The decision in Malory was governed by the LRA 1925. The Court of Appeal delivered its judgment on 22 February 2002 (which I note was after the Proposals were published). Of particular significance to the present case, as will appear from the later discussion, are the following passages in the judgments of the Court of Appeal:
a. The beneficial ownership point. The Court of Appeal held that Malory BVI had standing to bring a claim for trespass against Cheshire during the period that the latter was the registered proprietor. The reasons appear from paragraphs 64 and 65 of the judgment of Arden LJ, where, having cited sections 5, 20 and 69 of the LRA 1925, she stated:
64. Although Malory UK had no title to convey to Cheshire, the position of Cheshire once it is registered as proprietor is governed by section 69 of the LRA. Accordingly, when it became the registered proprietor of the rear land, Cheshire was deemed to have vested in it "the legal estate in fee simple in possession".
65. However, section 69 deals only with the legal estate. Unlike section 5, which deals with first registration, that registered estate is not vested in Cheshire "together with all rights, privileges and appurtenances...." Moreover, since the transfer to Cheshire could not in law be of any effect in itself, in my judgment it cannot constitute a "disposition" of the rear land and accordingly section 20 cannot apply. In those circumstances, Cheshire's status as registered proprietor is subject to the rights of Malory BVI as beneficial owner. On this point I accept the submissions of Mr Dagnall and reject those of Mr Martin. It follows that I accept that Malory BVI has sufficient standing to sue for trespass even without seeking rectification of the register because it is the true owner and has a better right to possession. (See Chowood v Lyall(No.2) [1930] 2 Ch. 156,163-164, C.A.).
At paragraph 85, Clarke LJ agreed with Arden LJ, and in particular "that Cheshire's status as registered proprietor was subject to the rights of Malory BVI as beneficial owner because section 69 of the Land Registration Act 1925 only has the effect of vesting in Cheshire "the legal estate in fee simple in possession"".
b. The overriding interest/rectification point. Before the judge at first instance Cheshire had conceded that the right which Malory BVI had to seek rectification was a right which of itself was capable of being an overriding interest (see paragraph 24 of the judgment of Arden LJ). Counsel for the appellant was allowed to withdraw the concession and argue the point but his argument was rejected, albeit on an obiter basis as it did not need to be determined in view of the findings on the beneficial interest point (see paragraphs 66 - 68). Arden LJ continued thus:
69. Nor do I accept the argument that the right to seek rectification comes into existence only after Cheshire is registered. The registration of Cheshire gives rise to the right to seek rectification at the same time as, and as part of, the same transaction. I do not consider that the registration can be treated as predating the right to seek rectification in this way.
70. Mr Martin also submits that the reference in s.82(3) to overriding interests is inconsistent with the notion that a claim to rectification is itself an overriding interest. The answer to this point is, as I see it, that the right to claim rectification must be coupled with actual occupation for the saving in section 82(3) to apply.
Clarke LJ agreed that "Malory BVI has an overriding interest by virtue of its right to claim rectification" (paragraph 85).
c. The indemnity point. The issue of whether Cheshire was entitled to an indemnity was raised in argument, but was not resolved, as appears from the following passages in the judgment of Arden LJ:
19. Mr John Martin QC for the appellant submits that the effect of the decision that the first respondent had an overriding interest under section 70(1)(g) of the LRA may have been to deprive the appellant of a right to an indemnity. He accepts that section 83(4) of the LRA may apply but submits that there is a risk that the appellant will be held to have suffered no loss "by reason of the rectification" as required by section 83 of the LRA. This was the view taken by Clauson J in Re Chowood's Registered Land [1933] 1 Ch. 574 at 582 where the purchaser had bought land from a person who had no title...
83. Finally, some submissions were directed to the rights of the parties to claim an indemnity from the Chief Land Registrar. However, there are clearly matters for argument on the application of the statutory provisions, and while I have taken into account that the right of either party to a full indemnity is not assured, I express no view on the submissions that have been made as to the effect of the statutory provisions in that regard. Nor do I consider it would be right for the court to tailor the form of order simply to improve the position of a party seeking an indemnity.
LJJ Clarke and Schiemann also declined to resolve any issue of compensation.
Discussion
- The decision in Malory on the beneficial ownership point has been the subject of some controversy, which was alluded to in the judgment of Newey J in Fitzwilliam. In that case, the argument that Malory was a decision under the 1925 LRA (and in particular ss 69 and 20) and should not be followed in the context of the equivalent provisions of the LRA 2002 (ss 58 and 29) was rejected by Newey J who held that there was no significant difference in the latter provisions. Accordingly, following Malory, he held that, in circumstances where there had been a forged transfer of land, the original owner remained as beneficial owner and was entitled to rectification, the transferee who became the registered proprietor acquiring no more than the legal estate. Fitzwilliam was followed by the same judge in Park Associated Developments Ltd.
- I now turn to consider the effect of these decisions relating to the beneficial ownership point on the indemnity provisions in Schedule 8 of LRA 2002. The Registrar's argument is that entitlement to an indemnity only arises if there has been a "rectification" within the meaning of Schedule 8 paragraph 11, namely an alteration which involves the correction of a mistake "and prejudicially affects the title of a registered proprietor". If Malory and Fitzwilliam were to apply, in the case of a forged disposition, the original registered proprietor retains beneficial ownership and the new registered proprietor only acquires the legal estate but without acquiring any beneficial ownership. It would follow that alteration of the register by removal of the entry will "affect" the title of the new registered proprietor, but not "prejudicially" so as it merely makes the register correspond with the underlying legal position (cf Re Chowood's Registered Land [1933] Ch 574 and paragraph 10.7(2) of the Proposals referred to above). As Mr Morshead frankly accepted, that would make Schedule 8 paragraph 1(2)(b) a dead letter because the innocent person claiming through a forged disposition and registered as proprietor could never claim an indemnity as there would never be a "rectification" as defined in paragraph 11. It is clear that this was not intended: see paragraph 10.31 of the Proposals. If correct, the position would revert to that found by the Court of Appeal in Re Odell ... [1906] 2 Ch 47 which was specifically reversed by statute and clearly no further change was intended.
- Mr Morshead sought to meet this point by suggesting that the decision in Malory on the beneficial ownership point, whilst it might work when set against the indemnity provisions under the LRA 1925 (ie s 83), could not work viewed against Schedule 8 of the LRA 2002. He submitted that the LRA 2002 assumes that registration pursuant to a void disposition carries with it not merely the bare legal estate but also any beneficial interest in the estate which had not previously been separated from it. He invited me not to follow Newey J's decision in Fitzwilliam on the basis that the LRA 2002 is materially different from the 1925 Act when Schedule 8 is considered and that no argument was addressed to Newey J on Schedule 8.
- I have no hesitation in declining to accede to the invitation to depart from the decision of Newey J in Fitzwilliam (and the later case in which he followed this decision). It is clear from his judgment that the area is a potential legal minefield with wide ramifications. He is an experienced judge with considerable expertise in this area of the law. The decision is carefully reasoned and, far from being obviously wrong, seems to me to have been dictated by the Court of Appeal decision in Malory. Whilst it is true that specific argument does not seem to have been addressed to Newey J on the potential effect of his decision on the indemnity provisions in Schedule 8, I am far from satisfied that the decision would have been different if it had. In this respect, it is not without significance that argument on the indemnity provisions in the 1925 LRA was addressed to the Court of Appeal in Malory, but the Court of Appeal chose not to deal with these in reaching its decision - see "the Indemnity Point" under Malory above.
- Swift's argument, which I have summarised earlier in this judgment, seeks to circumvent the potential difficulties caused by Malory and Fitzwilliam on the beneficial ownership point by relying on the deeming provision in paragraph 1(2)(b) (ie Swift is "to be regarded as having suffered loss by reason of such rectification as if the disposition had not been forged"). Swift argues that this statutory hypothesis applies for the purposes of paragraph 1(a) ("rectification of the register"), including the issue of whether there has been a "rectification" within paragraph 1(a) as amplified by paragraph 11(2). On the footing that Swift has "suffered loss by reason of such rectification as if the disposition had not been forged", the alteration to the register "prejudicially affects" Swift's title.
- However, Mr Morshead points to a number of factors which he suggests shows that Swift's argument is incorrect.
- The first is based on the wording of the relevant provisions in Schedule 8. Mr Morshead says that paragraph 1(2)(b) is directed to the question of loss, not the question of whether there has been an alteration to the register which "prejudicially affects" the title of a registered proprietor under paragraph 11(2)(b): the statutory hypothesis only applies to the former, not the latter. A person claiming to be indemnified under paragraph 1(1)(a) must first show that there has been a rectification under paragraph 11(2), and this is borne out by the phrase "where the register is rectified" which appears in paragraph 1(2)(b). These arguments have force. But if I were to accept them, in the light of my finding that I am bound to follow Malory and Fitzwilliam, it would mean that paragraph 1(2)(b) would be a dead letter which is plainly not what Parliament intended. Swift's argument has the merit of achieving one consequence, which was plainly intended when Schedule 8 was enacted, namely of continuing the reversal of the effect of the decision in Re Odell (see paragraph 10.31(2) of the Proposals cited above). I also consider that, whilst the relevant provisions could have been more clearly drafted, in the case of a registered proprietor claiming in good faith under a forged disposition, the concept of a "prejudicial" effect of an alteration to the register in paragraph 11(2)(b) cannot be separated from the issue of loss under paragraphs 1(1)(a) and paragraph 1(2)(b) in the manner suggested by the Registrar. In section 83 of the LRA 1925, such a person was "deemed to have suffered loss" (thereby reversing the decision in Re Odell) and in consequence his title could be said to have been prejudicially affected, subject to the overriding interest point which I consider next. As the Proposals make clear, paragraph 11(2) (and the corresponding provision in Schedule 4 paragraph 1) was principally introduced in order to deal with that point but not otherwise significantly to alter the existing law.
- The second factor to which Mr Morshead referred as suggesting Swift's argument must be wrong was that it would run counter to the general principle that registration is always subject to overriding interests at the date of the disposition, and that no indemnity is payable where the register is "altered" to give effect to an overriding interest (see Re Chowood's Registered Land [1933] Ch 574). Why, he asks, should there be an exception in the case of a forged disposition? In support of these arguments he relied heavily on the Proposals which I have cited earlier. I would also accept that there is force in this second factor. It seems clear from the Proposals that the existing law, namely that a person could not claim an indemnity when the register was rectified to give effect to an overriding interest, was not intended to be changed.
- Mr Morshead originally contended that Swift's position meant that a person claiming under a forged disposition can always claim an indemnity under Schedule 8 notwithstanding the existence of an overriding interest. Mr Morshead did accept during the hearing that this was putting Swift's position too high because on Swift's argument the statutory hypothesis would only rule out the overriding interests of the purported disponor under the forged disposition - the rights of others with overriding interests could still be set up to defeat or reduce a claim (eg third parties' interests acquired by possession). Accordingly, at least to the latter extent, Swift's position would give effect to what was intended by the Proposals.
- However, Swift's position would mean that, in the case of a registered proprietor claiming in good faith under a forged disposition, the overriding interests of the purported disponor could not be set up to defeat or reduce a claim for an indemnity. The Proposals make no exception for this in the passages dealing with overriding interests to which I have earlier referred.
- I nevertheless find, though with some doubt, that Swift's position is to be preferred. It is clear from the passages in the Proposals dealing with indemnity that an exception is made in a case where a registered proprietor is claiming in good faith under a forged disposition. Exception is therefore made, at least to some extent, for forged dispositions. It also seems to me that the change in the wording to which I have referred in paragraph 25 above may bear on this point. Under the 1925 LRA, s 83(4), a registered proprietor claiming in good faith under a forged disposition is deemed to have suffered loss by reason of rectification. That leaves open the question of what loss was suffered, and a claim for an indemnity could in such a case, it would appear, be defeated or reduced by an existing overriding interest (Re Chowood). The wording of paragraph 1(2)(b) of Schedule 8 of the 2002 adds to the phrase "is to be regarded as having suffered loss by reason of such rectification" the words "as if the disposition had not been forged". Giving effect to these added words, the loss suffered by a registered proprietor claiming in good faith under a forged disposition is now to be determined on the basis that the disposition had not been forged. On that basis, the overriding interests of the purported disponor could not be set up to reduce or defeat the claim.
- Mr Morshead's preferred position was that a person claiming under a forged disposition can claim an indemnity under Schedule 8 unless the rightful owner's rights are an overriding interest. The difficulty which he faces in getting to this position (which would give some life to paragraph 1(2)(b)) is that on his argument such a person could only claim an indemnity if more than the bare legal estate passed on registration and I could only accept that argument if I did not follow Malory and Fitzwilliam.
- On the facts of the present case, Mr Morshead argued that Mrs Rani, as a person in actual occupation of the Property, had an overriding interest by virtue of her right to apply for rectification. I entertained some doubts whether this could be so where such an application could only be made once the forged disposition had been effected. However, Mr Morshead drew my attention to the passages in Malory cited under "The Overriding Interest/Rectification Point" above which, though obiter, I consider I should follow. I have therefore assumed for the purposes of this judgment that Mrs Rani did have such an overriding interest. However, I continue to have doubts that the passages in the Proposals dealing with overriding interests which I have referred to earlier had this particular type of interest in mind.
- Mr Morshead also drew my attention to what he described as a further "wrinkle" which arose from the decision in Malory. In paragraph 65 of her judgment, Arden LJ held that, because the transfer under the forgery was of no effect, it did not constitute a "disposition" for the purposes of s 20 of the 1925 LRA (which equates to s 29 of the 2002 LRA). He suggested that unless the forged instrument is treated as disposition, there is no machinery under the 2002 LRA for giving priority to the newly registered proprietor over any other interest, whether or not the owner is in actual occupation. I do not consider that I have to address this argument, and the numerous complex issues it would raise, in order to determine the issues in the present case. Swift's charge was in fact registered and such rights as it acquired under Schedule 8 flow from that fact.
- In Malory, the indemnity point was not determined and nothing was said in the passages which I have cited which casts any light on the issues which I have to decide. It is to be noted in any event that the facts of Malory were not on all fours with the present case. In Malory, the forged transfer was from Malory BVI to Malory UK. The transfer from Malory UK to Cheshire was not forged. Cheshire, unlike Swift in the present case, was not therefore a registered proprietor claiming under a forged instrument. Accordingly, Cheshire's claim to an indemnity faced different obstacles.
- For these reasons, I accept Swift's arguments under the first question and I find that it is entitled to an indemnity. I make this finding with some reluctance but consider that I am bound by Malory and Fitzwilliam. In the light of those decisions, Swift's argument is the only way I can see to give meaningful effect to the relevant provisions in Schedule 8.
How much should be awarded?
- I now turn to consider how much should be awarded to Swift under its indemnity. The parties have agreed a figure for quantum of £90,658.99 as the amount of Swift's loss as at the date of rectification, subject to argument as to whether there should be a reduction under Schedule 8 paragraph 5, which provides:
5(1) No indemnity is payable under this Schedule on account of any loss suffered by a claimant-
(a) wholly or partly as a result of his own fraud, or
(b) wholly as a result of his own lack of proper care.
(2) Where any loss is suffered by a claimant partly as a result of his own lack of proper care, any indemnity payable to him is to be reduced to such extent as is fair having regard to his share in the responsibility for the loss.
- The Registrar relies on these provisions. A submission that Swift's lack of proper care wholly caused its loss was not pursued with any vigour at the trial. An alternative submission that Swift's lack of proper care makes it substantially responsible for the loss which occurred was fully argued.
- Swift submitted that any finding of lack of proper care should be clearly articulated and that no such finding should be made unless the alleged conduct has been clearly pleaded or otherwise drawn to the attention of the claimant and he has had a proper opportunity to respond: see Baxter v Mannion [2010] EWHC 573 (Ch), [2010] 1 WLR 1965, paragraph 62 (Henderson J). In Prestige Properties Ltd v Scottish Provident Institution [2002] EWHC 330 (Ch), [2003] Ch 1, Lightman J made a similar point at paragraph 36. He also there concluded that it was open to the registrar to challenge a claimant's entitlement to an indemnity on the grounds both that the claimant had failed to take proper care in preventing the occurrence of the loss and had failed to take proper care to mitigate and limit the loss.
- Mr Mark White, Swift's risk manager, was cross examined on the issue of lack of proper care. I considered that the evidence which he gave was reliable. I deal with that evidence when I consider the facts. I have already given an outline of the facts earlier in this judgment and will supplement them in order to deal with the arguments which were addressed to me. I should also record that Mrs Susan Papworth, an assistant land registrar, was briefly cross examined although her evidence was peripheral to the matters I have to decide.
- In May 2006, Swift received a mortgage application form dated 22 May 2006 from Greenhill Finance, brokers, purportedly signed by Mrs Rani, for a loan of £64,500 said to be for the purpose of "home improvements" and stating that the house would be sold when the work was done ("the Mortgage Application").
- The information provided to Swift by Greenhill Finance in support of the mortgage application included:
a. A letter to Greenhill Finance dated 10 March 2010 confirming that Mr Nirmal Singh, Mrs Rani's former husband, no longer resided at the Property.
b. A certified copy of an Alliance & Leicester Debit Card dated 13 March 2006, bearing her signature ("Mrs Rani's debit card")
c. An Official Copy of the Register for the Property dated 12 April 2006
d. A copy of an Experian consumer report search for Mrs Rani dated 28 April 2006
e. A bankruptcy search dated 12 May 2006
f. Certified copy payslips for Mrs Rani for each of the months January to April 2006
g. A "Realtime" valuation dated 23 May 2006 which was carried out on Greenhill Finance's instruction and indicated that the market value of the Property was approximately £230,000. Mr White explained that the valuation was obtained by comparing values of similar properties in the area which had been sold or valued and did not involve a physical inspection of the Property. He said that this was the common industry practice where there were comparables available for similar properties.
- Swift carried out an official search of the register for the Property. On review of the documentation it received in support of the mortgage application, Swift sought, and obtained through Greenhill Finance, a copy bank statement to support Mrs Rani's debit card as proof of name. Greenhill Finance also provided a copy of a building insurance policy with Mrs Rani named as policyholder.
- On 24 May 2006 Swift sent a mortgage offer to Mrs Rani, addressed to Mrs Rani at the Property which was purportedly signed by Mrs Rani on the following day
- On 30 May 2006, Mr Martin Evans, a Swift employee (whom Mr White described as an experienced underwriter), contacted by telephone a person he believed to be Mrs Rani to confirm details of the mortgage offer ("the Speakwith telephone conversation"). The number he called was a land line which had been disclosed on the Mortgage Application as being the telephone number of the Property. (The Mortgage Application also gave a work and a mobile number.) Mr Evans completed and signed a New Business Verification Form immediately after the conversation. That form shows that the person to whom Mr Evans spoke was asked a number of questions about the mortgage application and her responses were recorded. She confirmed, amongst other things, (i) Mrs Rani's date of birth (30th March 1940); (ii) the identity of the holder of the first mortgage which was to be redeemed (GE Money); (iii) that she had signed the loan documents in front of a witness who was not a member of her family; (iv) that she would be selling the Property soon and was aware that early redemption incurred interest and penalties and was happy to proceed on this basis. Mr White explained in evidence that the Speakwith telephone conversation was a standard procedure which followed an established protocol.
- As I have already mentioned, Swift executed the Legal Charge on 31 May 2006, and after payment of fees and redemption of the GE Money charge, sent a cheque for £30,057.39 which was encashed.
- Mr Morshead accepted that the procedure followed by Swift was in accordance with industry practice. But he submitted that industry practice was careless. In particular, he says the following steps could have been taken but were not taken: (i) there should have been a physical inspection of the Property: (ii) there should have been a face to face meeting with Mrs Rani (neither Greenhill Finance nor Swift met Mrs Rani); (iii) a copy of Mrs Rani's passport should have been obtained.
- Mr Morshead submitted that even if these steps were not taken as a matter of course, they should have been taken in view of the discrepancy between the signature appearing on Mrs Rani's debit card and that appearing on the Charge. The discrepancy referred to was the fact that the signature on the former was in capital letters (in the form of "B Rani") whereas the signature on the latter was in joined-up handwriting (in the same form). Mr Morshead submitted that the opportunity to investigate the discrepancy was squandered in the Speakwith telephone conversation.
- Mr Morshead also submitted that Swift had shown a lack of proper care in failing to check that the telephone number which was used for the Speakwith telephone conversation had anything to do with the Property. He also said (in the light of a speech analysis report produced in early 2009) that Mr Evans should have been alerted to the fact that the person to whom he spoke was much younger than someone of Mrs Rani's age.
- Mr Morshead also submitted that, after the loan was advanced, Swift should have made a thorough investigation into the matter after they were first alerted in a telephone conversation in August 2006 with Mr Dargen, Mrs Rani's brother, that she was unaware of the loan. He says that steps which were taken in late 2008/ early 2009 should have been taken much earlier: in particular the report from a handwriting expert and a speech analysis report of the Speakwith telephone conversation which showed respectively that the signature on the charge was forged and that the person to whom Mr Evans spoke was not Mrs Rani.
- In the light of these matters, Mr Morshead suggested that Swift was substantially responsible for the loss as a result of its lack of proper care and that there should accordingly be a reduction of 60%.
- In response, Ms Hayes submitted that a 60% reduction could not be justified on the basis that £34,402.61 of the total loan of £66,750 was used to discharge a prior charge existing on the Property. I accept that submission. As for the balance, Ms Hayes submitted that the main cause of the loss was the impostor's calculated fraud, including the obtaining of considerable personal details of Mrs Rani such as evidence of income, bank statements and other supporting documentation for the mortgage application. She says Swift were entitled to assume the documents were valid, particularly in view of the earlier loan by and charge in favour of GE Money and the involvement of the same reputable broker, Greenhill Finance, in both transactions. She points out that neither party to the transaction used solicitors and that it would be wrong to apply duties imposed on conveyancers.
- Dealing with Mr Morshead's points in turn, I find that the Registrar has not made out a case that industry practice was careless. I need to bear in mind that I am dealing with the position in May 2006. It would not be appropriate to apply hindsight. Swift's business is described as follows by Mr White in paragraph 3 of his witness statement:
Swift is a non-conforming lender - i.e. typically it lends to borrowers who would not be able to obtain loans from high street lenders. Swift receives all of its business from broker and mortgage intermediaries. Swift has no role in the selling of its loan products. It does not provide any advice in relation to its products and is under no duty to do so....
Mr White said that the procedure adopted by Swift in the present case was industry practice. As appears from my factual summary it involved a number of identity checks, including receipt of bank information, salary slips and the Speakwith telephone conversation. I take into account also the role of the brokers, Greenhill Finance, the trading style of the Loan Company (which certified copies of a number of the documents in question) who dealt with the documentation purportedly on behalf of Mrs Rani. In her witness statement, Mrs Papworth says that the Registrar has always relied on conveyancers taking appropriate care to check identities and refers to the Law Society's conveyancing handbook (published in 2006) which sets out identity checks when taking instructions. However, this would seem to apply to the conveyancer's client who would normally be the borrower rather than the lender and Swift did not require the services of a conveyancer to conduct its business. It is also to be noted that the Registrar did not introduce its own identity requirements until November 2008, well after the salient events in question in the present case. For all these reasons, I am not satisfied that industry practice was careless.
- Mr Morshead's arguments based on the discrepancy in the signatures has more force. Mr White reluctantly accepted that it was obvious that the signatures were different. However, he did not accept that this should have been investigated further. He said that signatures can be different and there was other information available which established Mrs Rani's identity and which confirmed that Mrs Rani had signed the mortgage offer and charge. In particular, he repeated in evidence what he had said in paragraph 17 of his witness statement that during the Speakwith telephone conversation the person confirmed that she had signed the loan documents in front of a witness who was not a member of her family. I find that, because the discrepancy in the signatures was obvious, Swift, in acting with proper care, should have specifically asked for an explanation during the Speakwith telephone conversation. However, I also find that such failure did not contribute to the loss which Swift suffered. Had Mr Evans asked for an explanation it seems clear to me that the person with whom he was speaking (who purported to be Mrs Rani) would have said that both signatures were hers. In view of the other lies told by that person, it is unrealistic to expect that any other answer could have been given. I also find that had this explanation been given, Mr Evans or Swift could not have been expected to be make further inquiry. The use of different signatures by the same person is not that uncommon and there was nothing else which should have alerted Swift to the possibility that they were dealing with someone other than Mrs Rani.
- In making that finding, I bear in mind the further points made by Mr Morshead about the Speakwith telephone conversation, namely the failure to check that the landline number was that of the Property and that the voice of the person with whom Mr Evans spoke appeared younger than someone of Mrs Rani's age. I reject the contention that Swift's loss was suffered as a result of its lack of proper care in these respects. As for checking the landline number, there was nothing to suggest that the number given in the mortgage application form was incorrect. Alternative work and mobile numbers were given in that form. And there is no evidence that the landline number was not in fact the number at the Property. As for the apparent age of the speaker, reliance was placed on the speech analysis report obtained in early 2009. However that report was directed to answering the question whether or not the speaker was Mrs Rani, a sample of Mrs Rani's speech having been obtained for the purpose. The report found that the speeches were not consistent for a number of reasons, of which the apparent age of the speaker was only one. I consider that there is insufficient evidence for me to conclude that Mr Evans failed to exercise proper care in not investigating further. Ascertaining the age of a speaker whom one does not know over the telephone is far from straightforward.
- I have finally to deal with Mr Morshead's submission that Swift failed to mitigate its loss (in the sense of avoiding interest accruing on the outstanding loan) in failing to investigate the matter more expeditiously after it was alerted to the possibility of a fraud in August 2006. Mr Morshead complains that it was only in early 2009 that Swift accepted there had been a fraud when it agreed to the consent order: the report of the handwriting expert and the speech analysis report which led to such acceptance should, he says, have been obtained much earlier. I reject these submissions. Swift sought to enforce its charge by bringing possession proceedings. These were defended by Mrs Rani on the ground that the charge was a forgery. Prima facie, Swift was not required to prove that this defence was correct and it was not in its interest to do so. Other circumstances pointed to the reasonableness of Swift's stance. Mr Dargen in the conversation in August 2006 had told Swift that the matter had been reported to the police. A report from the police in March 2008, which was sent to Swift, concluded that there was no evidence that Mrs Rani's former husband or a lady called Mrs Johal were involved in the fraud and that "all lines of enquiry led back to Mrs Rani." It was only after Mrs Rani, in January 2009, obtained the speech analysis report and served a witness statement that Swift accepted, taking into account also the court ordered report from the handwriting expert, that Mrs Rani had been the victim of a fraud. I do not consider that Swift acted unreasonably in failing to accept this earlier. Indeed, it is also significant that in the defence in the current proceedings, the Registrar did not admit that Mrs Rani had been the victim of a fraud and required Swift to prove this. It was only immediately prior to the hearing before me that the Registrar, with some reluctance, accepted that she had been the victim of a fraud.
- Accordingly, I find that no reduction should be made from the agreed figure of £90,658.99.
Interest
- The Land Registration Rules 2003, r 95, makes provision for the payment of interest on the amount of an indemnity. By r 195(1)(a), where paragraph 1(1)(a) of Schedule 8 applies (as I have found in the present case), interest is payable in accordance with r 195(4) (simple interest at the rates specified) from the date of rectification to the date of payment. By r 195(3), no interest is payable for any period or periods where the court is satisfied that the claimant has not taken reasonable steps to pursue with due diligence the claim for indemnity.
- Swift first made its claim for an indemnity by letter to the Registrar dated 4 August 2009, which enclosed a number of documents including the consent order dated 20 January 2009. In the response dated 21 August 2009, the Registrar pointed out that the consent order disclosed no basis for treating the register has having been "rectified" because the language of "setting aside" the charge implied that the transaction was voidable rather than void; if the former no "mistake" was made in entering the charge on the register and the alteration must instead be to bring the register "up to date". Further correspondence ensued culminating in a letter dated 23 October 2009 from the Registrar stating that if Swift continued to assert that the charge was void it would need to revert to the court and ask for an amendment to the order and lodge the amended order with the Registrar. The amended form of consent order was not obtained until 2 September 2011 and sent to the Registrar on 14 September 2011 with a repeated request for an indemnity. When asked for an explanation for the delay between 23 October 2009 and 2 September 2011, Ms Hayes said that it took that time to obtain Mrs Rani's agreement to the amendment to the consent order, as she was not fluent in English and did not have a solicitor. I do not consider that this explanation explains a delay of 23 months. Whilst I should make some allowance for taking this step, I am satisfied that in consequence of this delay Swift has not taken reasonable steps to pursue with due diligence the claim for an indemnity during the period of 2 January 2010 to 2 September 2011 and that no interest is payable for this period.
Conclusion
- Accordingly I find that Swift is entitled to an indemnity in the sum of £90,658.99, but that no interest is payable on such sum for the period 2 January 2010 to 2 September 2011.
