Bank of Baroda v Rayarel and Others

JurisdictionEngland & Wales
Judgment Date13 January 1995
Judgment citation (vLex)[1995] EWCA Civ J0113-1
CourtCourt of Appeal (Civil Division)
Docket NumberCCRTF 94/0497/E
Date13 January 1995
Bank of Baroda
Rayarel & Others

[1995] EWCA Civ J0113-1

(Mr. W George, Sitting as a Recorder)

Before: Lord Justice Glidewell Lord Justice Hirst Lord Justice Hoffmann

CCRTF 94/0497/E




MR. C BROWN (Instructed by Messrs Kumar, W5 5AW) appeared on behalf of the Appellant (3rd Defendant)

MR. J TERRY (Instructed by Messrs P Rickson, Manchester) appeared on behalf of the Respondent (Bank)


Friday 13 January 1995


This is an appeal by the third Defendant, Sudhalaxmi Rayarel, against the judgment and order of Mr. Recorder George made on 8 February 1994 in the Bolton Court sitting at Bury, whereby it was ordered that the third Defendant was liable under a legal charge signed by her in or about September 1986 charging by way of mortgage her interest in the dwelling house property known as 7 Bideford Drive, Breightmet, Bolton in the County of Greater Manchester, as security to guarantee all present and future debts owed to the Plaintiff bank, the Bank of Baroda, by the first and second Defendants' company, Anoopam Millers Ltd, and that by virtue of such liability she should surrender possession of the said property to the Plaintiffs on or before 22 March 1994. The first Defendant, Amratlal Rayarel, is her husband and the second Defendant, Neynesh Rayarel, is her son. The property in question, 7 Bideford Drive, was and still is the family home. The background is that this family home had been acquired by the three defendants in 1983 and registered in their three names with HM Land Registry in 1984. The Bank of Baroda, who are the Plaintiffs, were the bankers to the company Anoopam Millers Ltd, whose shares were held by the first and second Defendants (who were also the directors). The third Defendant was also named in the company forms as the Company Secretary, so that in essence this was a family company in which the first and second Defendants had a direct interest as shareholders and directors, and in which the third Defendant, though not in the same capacity, clearly had an interest because it was the source of livelihood for the family as a whole.


The evidence is that in December 1985 the company had substantial obligations to the Plaintiff bank and, as was shown in the evidence, had a considerable amount of money tied up in stock which led, as so often happens, to cash flow problems. This led to the company experiencing difficulties in paying suppliers because the money committed for the purchase of stock had not been realised by sales to customers. The bank had already advanced substantial sums to the company.


In January or early February 1986, an approach was made to the bank for an increase in the overdraft by an amount of some £10,000. There was then discussion between the bank and the first two defendants as to the possibility of additional money being made available by the bank by way of overdraft. It was made clear, and indeed recorded in a document at page 62 dated 20 February 1986 to which I will return in due course, that one of the requirements of the bank was that any monies advanced should be secured by the charge on the house which was eventually executed by all three Defendants in the form of a second legal charge dated 26 September 1986. It is on that legal charge that the present action is brought.


The bank was successful in their claim against the first and second Defendants as well as against the third Defendant. The judgment against the first two defendants is not the subject matter of appeal. Put in a nutshell, they alleged against the bank that they were the victims of misrepresentation. That allegation was rejected by the Recorder as not being substantiated on the evidence. However, so far as the third Defendant and present Appellant is concerned, the learned Recorder held that the presumption of undue influence arising by reason of the nature of the relationship between her husband (the first Defendant) and herself, had not been rebutted; he also held that the charge on her home which she had executed was to her manifest disadvantage; and that consequently she had an equity to set aside the transaction. I mention in parenthesis that both those findings are the subject-matter of a cross notice by the Respondents to which there is no need to refer further at the present juncture.


The third Defendant's case against the bank was that they had constructive notice of the facts giving rise to the wife's equity. It follows that the critical question at issue before the learned Recorder, and now before us, is whether the bank was put on enquiry that it had to take reasonable steps to satisfy itself that the wife's agreement to stand surety had been properly obtained, and if so, whether they in fact took reasonable steps to ensure that they did not have constructive notice of the wife's rights. That, of course, is laid down in the now very well-known authority in the House of Lords of Barclays Bank Limited v O'Brien, [1994] AC 180. The learned Recorder correctly directed himself in accordance with the principles laid down by Lord Browne-Wilkinson in the leading speech in that case. The question here is whether he was right in applying them to the present facts.


The principles laid down in Barclays Bank v O'Brien are to be found in Lord Browne-Wilkinson's judgment, where he said 196D:


"Therefore in my judgment a creditor is put on inquiry when a wife offers to stand surety for her husband's debts by the combination of two factors: (a) the transaction is on its face not to the financial advantage of the wife; and (b) there is a substantial risk in transactions of that kind that, in procuring the wife to act as surety, the husband has committed a legal or equitable wrong that entitles the wife to set aside the transaction.


It follows that unless the creditor who is put on inquiry takes reasonable steps to satisfy himself that the wife's agreement to stand surety has been properly obtained, the creditor will have constructive notice of the wife's rights.


What, then are the reasonable steps which the creditor should take to ensure that it does not have constructive notice of the wife's rights, if any? Normally the reasonable steps necessary to avoid being fixed with constructive notice consist of making inquiry of the person who may have the earlier right, (i.e. the wife) to see whether such right is asserted. It is plainly impossible to require of banks and other financial institutions that they should enquire of one spouse whether he or she has been unduly influenced or misled by the other. But in my judgment the creditor, in order to avoid being fixed with constructive notice, can reasonably be expected to take steps to bring home to the wife the risk she is running by standing as surety and to advise her to take independent advice. As to past transactions, it will depend on the facts of each case whether the steps taken by the creditor satisfy this test. However for the future in my judgment a creditor will have satisfied these requirements if it insists that the wife attend a private meeting (in the absence of the husband) with a representative of the creditor at which she is told of the extent of her liability as surety, warned of the risk she is running and urged to take independent legal advice. If these steps are taken in my judgment the creditor will have taken such reasonable steps as are necessary to preclude a subsequent claim that it had constructive notice of the wife's rights.I should make it clear that I have been considering the ordinary case where the creditor knows only that the wife is to stand surety for her husband's debts. I would not exclude exceptional cases where a creditor has knowledge of further facts which render the presence of undue influence not only possible but probable. In such cases, the creditor to be safe will have to insist that the wife is separately advised."


There is no suggestion here that the present case falls into the exceptional class mentioned in the last few sentences I have just quoted. However this was in fact a past transaction: as already noted it took place in 1986, whereas the House of Lords judgment in Barclays Bank was not handed down until 21 October 1993. As Lord Browne-Wilkinson said, with past transactions it will depend on the facts of each case whether the steps taken by the creditor satisfy this test, and his ruling specifically related, as he said, to the future. Nonetheless it seems to me that in the present case the right course is to apply the same principles as were laid down in Barclays Bank v O'Brien as if they stood at the time of the present transaction.


I now proceed to summarise the salient facts and the course of the transaction as found by the learned Recorder, and not in any way challenged by the Appellant here. There was a first charge on the property in favour of a Building Society, and critically, immediately after the initial discussions between the bank and the first and second Defendants, a solicitor, Mr. Bird, became involved on the Defendants' side. As the judge put it:


"Almost immediately thereafter,"


that is after the initial approaches,


"a solicitor, Mr. Bird, initially practising under his own name but subsequently as an assistant solicitor with Holt and Longworth, became involved and he contacted, in February 1986, the building society who had a first mortgage on the property and entered into correspondence with the solicitors instructed by the plaintiffs, initially a firm called Douglas A Haslam. In fact, as appears from the bundle of...

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30 cases
5 books & journal articles
    • Singapore
    • Singapore Academy of Law Journal No. 1998, December 1998
    • 1 Diciembre 1998
    ...All ER 929; Banco Exterior International v Mann[1995] 1 All ER 936; TSB Bank plc v Camfield[1995] 1 All ER 951; Bank of Baroda v Rayerel[1995] 2 FLR 376; and Banco Exterior International SA v Thomas[1997] 1 WLR 221. For local decisions, see eg, the Singapore Court of Appeal decision of Mala......
    • Singapore
    • Singapore Academy of Law Journal No. 1996, December 1996
    • 1 Diciembre 1996
    ...1 All ER 936; Bank of Baroda v Rayarel[1995] 4 Bank LJ 333; Midland Bank Plc v Serter[1995] 1 FLR 1034; Bank Melli Iran v Samadi-Rah[1995] 2 FLR 376; Kidwai, ibid. See further Hooley [1995] LMCLQ 346, Tjio [1996] JBL 266, Fehlberg (1996) 59 MLR 675. TSB Bank Plc v Cornfield[1995] 1 WLR 430 ......
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    • United Kingdom
    • Social & Legal Studies No. 11-2, June 2002
    • 1 Junio 2002
    ...(1994) 70 P & CR 592Pitt: CIBC Mortgages plc v. Pitt and another [1993] 4 All ER 433Rayarel: Bank of Baroda v. Rayarel and others [1995] 2 FLR 376Rivett: Barclays Bank v. Rivett [1999] 1 FLR 730Shah: Bank of Baroda v. Shah and another [1988] 3 All ER 24Slayford: Alliance & Leicester plc v. ......
  • Legal Profession
    • Singapore
    • Singapore Academy of Law Annual Review No. 2003, December 2003
    • 1 Diciembre 2003
    ...of solicitors acting for the bank and the wife. As we may recall, Hoffmann LJ (as he then was) had counselled in Bank of Baroda v Rayarel[1995] 2 FCR 631 at 641—642 that if a prospective surety dealt with a bank through a solicitor, the bank was entitled to assume that the solicitor had giv......
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