State Bank of India v Sood
| Jurisdiction | England & Wales |
| Judge | Peter Gibson L.J.,PILL LJ,HIRST L.J. |
| Judgment Date | 30 October 1996 |
| Judgment citation (vLex) | [1996] EWCA Civ J1030-6 |
| Date | 30 October 1996 |
| Court | Court of Appeal (Civil Division) |
[1996] EWCA Civ J1030-6
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CROYDON COUNTY COURT
His Honour Judge Willis
Royal Courts of Justice
Lord Justice Hirst
Lord Justice Peter Gibson
Lord Justice Pill
MR. G. CRAWFORD (instructed by Messrs Royds Treadwell, London, EC4) appeared on behalf of the Appellant/Plaintiff.
MR. A. WILLIAMS (instructed by Messrs Dickinson Parker Hill & Son, Ormskirk, Lancashire) appeared on behalf of the Sixth and Seventh Respondents/Defendants.
MR. P. HAVEY (instructed by Messrs Vijay Sharma, London, SW1) appeared on behalf of the Third, Fourth and Fifth Respondents/Defendants.
Peter Gibson L.J. This is an appeal, brought with the leave of Ward L.J., from the order of His Honour Judge Willis in the Croydon County Court. It raises a question of importance for conveyancers, for creditors the debts owed to whom are secured on property and for persons with only equitable interests in registered land. The question can be formulated in this way: where two trustees for sale hold registered land for themselves and other beneficiaries and mortgage the land as security for existing and future liabilities of themselves and other persons, are the equitable interests of the beneficiaries overreached, notwithstanding that no money was advanced by the mortgagee to or at the direction of the trustees contemporaneously with the mortgage? The Judge in effect answered that question in the negative.
The question arises in the following circumstances. On 23 February 1978 the freehold property, 19 Landseer Road, Sutton, Surrey, was transferred to the First and Second Defendants who were registered shortly thereafter as, and have remained, the proprietors of the property. On 13 December 1983 the First and Second Defendants executed a Deed of Legal Charge which was a second legal charge on the property. By that Deed they charged the property by way of legal mortgage as security to the Punjab National Bank for the discharge on demand of all present and future liabilities of them jointly and severally and of Sobel Textiles (UK ) Ltd. ("Sobel") on any account and all other present, future, actual and contingent liabilities of them jointly and severally and of Sobel to the Punjab National Bank, as well as costs, charges and expenses in relation to the charge, and interest. The statutory power of sale was to be exercisable at any time after demand. On 4 December 1989 the Punjab National Bank assigned the benefit of the Legal Charge to the Plaintiff, the State Bank of India. It claims in the Statement of Claim that it is owed over £1 million by the First and Second Defendants under the Legal Charge. This is made up of the liabilities of (1) Sobel, (2) the Second Defendant as a partner in a firm called SMC Video, (3) the First and Second Defendants as guarantors of the debts of Kohli and Sood Ltd. and (4) the Second Defendant as guarantor of the debts of Sood Properties Ltd. In April 1992 and January 1993 it demanded payment from the First and Second Defendants respectively and, when the demands were not satisfied, it commenced proceedings by originating summons under R.S.C. O.88 against those Defendants on 20 September 1993, seeking possession of the property.
A bankruptcy order had been made against the Second Defendant on 5 March 1992. The Official Receiver, in whom the property of the bankrupt vested, indicated that he did not oppose the relief sought by the Plaintiff. But the Third to Seventh Defendants were added as parties by orders of the Court in March and May 1994. The court ordered that the proceedings continue as though they commenced by writ and a Statement of Claim was served on 11 May 1994. On 7 June 1994 a single Defence was served by the First and the Third to Seventh Defendants. A number of grounds of defence were pleaded, including allegations that the Third to Seventh Defendants or some of them have beneficial interests in the property. Those interests are said to have arisen (1) by a written agreement or agreements dated 23 February 1978 and 20 June 1979 respectively, in which the First and Second Defendants declared that they held the property in trust for themselves and the Third and Sixth Defendants in equal share, (2) by resulting trust in favour of the Third to Seventh Defendants, or (3) by constructive trust in favour of the Fourth, Fifth and Seventh Defendants. It is further pleaded that the property was the main residence of all the Defendants between 1978 and 1989 and that in December 1983 all the Defendants were in actual possession of the property. By "possession" the pleader probably meant occupation, as it is claimed that the Third to Seventh Defendants' beneficial interests in respect of the property are overriding interests and that on that basis the Plaintiff is not entitled to possession of the property.
The action was transferred to the County Court where the Plaintiff on 10 August 1994 applied to strike out those parts of the Defence which related to the allegation that the Third to Seventh Defendants had beneficial interests in respect of the property. That application was made pursuant to O. 13 r.5 of the County Court Rules and under the inherent jurisdiction of the court on the grounds that those pleadings disclosed no reasonable defence to the Plaintiff's claim or were frivolous and vexatious or otherwise an abuse of the process of the court. The application was supported by an Affidavit which in effect verifies the Statement of Claim, shows that interest has accrued since September 1993 and exhibits the entries in the register relating to the property and the Legal Charge. Deputy District Judge Fink acceded to the application, but on appeal by those Defendants, the Judge allowed the appeal. The Plaintiff, represented by Mr. Crawford, now appeals. Since the hearing before the Judge the Fifth Defendant has died and the First Defendant as his personal representative has been substituted as a respondent to the Plaintiff's appeal. The First Defendant in that capacity and the Third and the Fourth Defendants appear by Mr. Havey. The Sixth Defendant does not appear but surprisingly the Seventh Defendant has separate Counsel, Mr. Williams, although it is hard to see any difference in interest from that of Mr. Havey's clients on this appeal.
It is not in dispute that on the facts assumed to be true the First and Second Defendants have at all material times been trustees of the legal estate in the property, holding it on trust for sale and the net proceeds of sale and the net rents and profits until sale for themselves and the Third to Seventh Defendants or some of them as tenants in common. The interests of the Third to Seventh Defendants have therefore always been limited as a matter of legal theory to rights not in the property itself but in the proceeds of sale and the rents and profits until sale, though until sale the entitlement to share in the rents and profits carries with it the right, together with the other tenants in common, to occupy the property. But that right is not independent of the entitlement to share in the rents and profits until sale. The register shows no restriction on the registered proprietors' powers of disposition nor is there any entry in the register relating to the Third to Seventh Defendants' claimed interests and no caution against dealing has been registered.
Before I turn to the statutory provisions, I would make a few general observations on overreaching. As is explained by Charles Harpum in his illuminating article, Overreaching, Trustees' Powers, etc. (1990) C.L.J. 277, overreaching is the process whereby existing interests are subordinated to a later interest or estate created pursuant to a trust or power. Mr. Harpum arrived at that statement of the true nature of overreaching by a consideration of the effect of the exercise of powers of disposition in a settlement, referring to Sugden on Powers 8th ed. (1861) pp. 482,3. He argued cogently that a transaction made by a person within the dispositive powers conferred upon him will overreach equitable interests in the property the subject of the disposition, but ultra vires dispositions will not, and the transferee with notice will take the property subject to those interests. Mr. Harpum expressed the view that the exercise intra vires of a power of disposition which does not give rise to any capital money, such as an exchange of land, overreaches just as much as a transaction which does. There is every reason to think that the draftsman of the 1925 property legislation fully appreciated the true nature of overreaching. A principal objective of the 1925 property legislation was to simplify conveyancing and the proof of title to land. To this end equitable interests were to be kept off the title to the legal estate and could be overreached on a conveyance to a purchaser who took free of them.
The statutory provision governing overreaching is s.2 Law of Property Act 1925:
"(1) A conveyance to a purchaser of a legal estate in land shall overreach any equitable interest or power affecting that estate, whether or not he has notice thereof, if—
(i) the conveyance is made under the powers conferred by the Settled Land Act, 1925, or any additional powers conferred by a settlement, and the equitable interest or power is capable of being overreached thereby, and the statutory requirements respecting the payment of capital money arising under the settlement are complied with;
(ii) the conveyance...
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