Outer House case in which Mrs Cooper sought reduction of a standard security (in so far as) granted by her in favour of the Bank of Scotland over her share of the home she shared with her husband. Mrs Cooper argued that her husband had procured her signature of the security by misrepresentation and that the bank had neither advised her of the consequences of signing the document nor advised her to take independent legal advice.

Background
The Coopers’ had granted a standard security over their house in favour of the Bank of Scotland in 2002 (securing the present and future debts of both/either of them). At about the same time Mr Cooper obtained an overdraft from the Bank of Scotland for his business and, when the business overdraft grew to £72k, granted a personal guarantee in favour of the Bank of Scotland in January 2006 (in effect securing the business debt over the house). At the end of 2006 the house was re-mortgaged in favour of the Halifax. Due to an oversight (there was still outstanding business debt), and despite an instruction to the contrary, the security in favour the Bank of Scotland was discharged. In March 2007 the Bank of Scotland wrote to the Coopers asking them to sign a fresh security in respect of the business debt. Mr Cooper had failed to tell Mrs Cooper about the overdraft and personal guarantee. When the fresh security arrived, he gave Mrs Cooper the second page only and asked her to sign it telling her only that it related to the mortgage and that the higher monthly payments would pay off the mortgage more quickly.

Arguments
Mrs Cooper based her case on the principles arising from Smith v. Bank of Scotland[1] in which it was found that a bank may owe a duty to warn a potential cautioner of the consequences of entering into a proposed obligation and advise him or her to take independent advice where:

“the circumstances of the case are such as to lead a reasonable man to believe that owing to the personal relationship between the debtor and the proposed cautioner the latter’s consent may not be fully informed or freely given…”

In order to have an obligation set aside, the cautioner must show[2] (1) that an actionable wrong has been perpetrated by the principal debtor (2) that the creditor was in bad faith and (3) that the obligation was undertaken gratuitously.

The Bank of Scotland argued that, because Mrs Cooper had been liable for Mr Cooper’s business debts before the discharge (in error) of the 2006 security, the Bank had no reason to believe that her consent to the 2007 security was not freely given. Further, they argued that reducing the security would give a windfall benefit to Mrs Cooper and put her in a better position than she would otherwise have been by allowing her to escape from the obligations previously incumbent upon her merely because of the erroneous discharge of the 2002 security.

Decision
Lord Tyre found had that Mrs Cooper was entitled to a reduction of the standard security. The grant of the standard security by the pursuer was gratuitous (i.e. there was no obligation on Mrs Cooper to grant it). Having accepted that Mr Cooper had misrepresented the purpose and effect of signing the security to Mrs Cooper, it was also found that Mr Cooper had committed an actionable wrong. The Bank of Scotland were also found not to have acted in good faith as there was no evidence that either they or their solicitors took any steps whatsoever to bring to the pursuer’s attention the consequences for her of signing the standard security. The letter sending the security for signature had been in bland terms and conveyed an impression that the execution of the security was something of a formality. There was also no mention of the need for Mrs Cooper to obtain independent legal advice.

The discharge of the 2002 security had not been gratuitous as it had been granted in consideration of repayment of the loan then outstanding. The bank did not attempt to argue that the discharge could have been reduced on the ground of a unilateral uninduced error on the part of the bank (or their solicitors). There was no obligation on Mrs Cooper to grant the 2007 security at the time she signed it. That was the time to have in mind when determining whether restoration of the position was possible. Consequently, Lord Tyre held that the reduction of the 2007 security should not be refused on the basis that it would fail to restore the parties to the position they had been in prior to the granting of the security.

The full judgement is available from Scottish Courts here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

Complicated case in which the Liquidator of the Letham Grange Development Company sought reduction of a security over the Letham Grange resort near Arbroath. The case involves a number of companies all controlled by a Mr Liu and his family.

The grounds for challenge

The Liquidator argued that the holder of the security (Foxworth) had (1) not acquired the rights under the security in good faith and for value and (2) the security was void as it was not in the correct form.

Good faith and value

Prior to this case the Liquidator had challenged a disposition by Letham Grange in favour of Nova Scotia Limited on the basis that it was a gratuitous alienation, an unfair preference (both in terms of the Insolvency Act 1976) and a fraudulent preference at common law.  The subjects which had been purchased by Letham Grange for £2,105,000 were sold to Nova Scotia for only £248,100. The Liquidator had previously obtained a decree reducing the disposition (effectively by default when Nova Scotia failed to appear at a proof).

However, in the present proceedings Mr Liu argued that the price contained in the disposition was not the full consideration for the subjects as the price had been reduced to take account of loans which Mr Liu and his family had made to Letham Grange in order to finance the purchase. Foxworth then assumed liability to repay the loans to the family and Nova Scotia granted the standard security over the property in favour of Foxworth.

After consideration of the evidence and an assessment of the credibility of the witnesses, Lord Glennie found that the sale had been for adequate consideration and there had not been a gratuitous alienation. There had been loans by the family in favour of Letham to finance the original purchase and, although Foxworth had imputed knowledge of the facts pertaining to the sale to Nova Scotia (through Mr Liu who was in control of both companies), it did not have knowledge of any fact rendering the grant of the standard security by Nova Scotia a breach of an obligation on it affecting the property.

Form of the Security

The Liquidator argued that the security, which had been drafted by Mr Liu himself, was not valid pointing to the fact that although the deed referred to a separate personal bond (per a Form B security under the Conveyancing and Feudal Reform (Scotland) Act 1970) it failed to specify the date of the personal bond and did not include anything allowing the personal bond to be identified. Also, although the deed contained the rate of interest to be applied (per a Form A security under the 1970 Act), the personal bond did not.

However, Lord Glennie agreed with the argument that it was acceptable to rely on extraneous evidence to identify the personal bond approving the arguments put on behalf of Mr Liu to the effect that, although a standard security must comply with one of the statutory forms contained in the 1970 Act, it is sufficient compliance that the deed complies “as closely as may be” and some latitude may be allowed.

Lord Glennie noted that in effect the security had been a hybrid between Form A and Form B but found there was no difficulty in a security granted in hybrid form.

The full judgement is available from Scottish Courts here.

(See Inner House decision here and appeal to the Supreme court here).

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.