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It concerned two properties: Property A, legally and beneficially joint-owned by a Mr Charles and Ms Munroe, Property B likewise, by Mr Charles and Ms Benjamin. When Mr Charles was made bankrupt, he succeeded in obtaining funds from a Mr Agrawal which annulled the bankruptcy and discharged existing charges on the properties, in exchange for companies controlled by Mr Agrawal – all bearing the name Victus Estates Ltd – apparently acquiring title. The companies borrowed money from Shawbrook Bank and Onesavings Bank, executing a charge over the properties in the banks’ respective favours. The women had not authorised the sales and their signatures on the TR1 forms were forged. The proprietorship of the properties and the banks’ charges on them were duly registered.
The trial judge found that Mr Agrawal knew that the signatures had been forged. He held that no right or interest in the properties passed to Victus Estates on the basis that the TR1s were a sham. In reaching that conclusion, the judge rejected the lenders’ defence under section 63 of the Law of Property Act 1925, that Mr Charles’ equitable interest in the properties nevertheless transferred to the Victus companies.
The lenders’ appeal was allowed by Morgan J. In holding that the conveyances were a sham, the judge had failed to apply the principles of Snook v London & West Riding Investments Ltd  2 QB 786 and had confused sham with fraudulence. It could not be said that Mr Charles and the Victus companies intended the TR1s to have no legal effect, particularly when the purported sale underpinned the annulment of Mr Charles’ bankruptcy. The lenders’ ground of appeal under section 63 therefore succeeded, namely that Mr Charles’ equitable half-share in the properties transferred to the Victus companies and were charged to the lenders.
The appeal court also considered the operation of the illegality doctrine. The odd result produced by the first instance decision was that, by reason of his fraud, Mr Charles nevertheless attained both annulment of his bankruptcy and his half-share in the properties. Meanwhile the innocent lenders acquired no rights under their charge despite valid consideration. Morgan J., balancing the consequences for Ms Munroe and Ms Benjamin, the lenders as well as any windfall to Mr Charles, applied the principles set out in Stoffel & Co v Grondona  UKSC 42. He held that the mere fact that the conveyances were tainted with illegality should not prevent the transfer of Mr Charles’ equitable half-shares in the properties to the Victus companies, applying the policy considerations of the integrity of the legal system, public morality and the purpose of the prohibition on fraud.
The case serves as a useful reminder of the importance of considering transactions as a whole and balancing the respective interests of the parties in reaching a decision.
Article written by Amy Stroud.