The Irish High Court recently found that a receiver appointed to a company within the Mansfield Group was not entitled to take possession of a property in which, unknown to the bank, the estranged wife of James Mansfield Jnr was living with their children: In re Jeffel (In Receivership) IEHC 279, (Unreported, High Court, Gilligan J, 3 February 2012).

Facts
The receiver of the company in question, Jeffel Ltd, applied to the High Court for directions as to the nature of the respective rights of the company and the estranged wife of James Mansfield Jnr in the property known as Saggart Lodge.

The property was purchased by the company in 2004 as part of a larger parcel of land.  When James Mansfield Jr, a director of the company, separated from his wife, Ms Cosgrave, in 2005, a verbal agreement was reached whereby Ms Cosgrave was to be permitted to reside in the property with the couple’s children. The agreement provided that:

(i) Ms Cosgrave was to receive the beneficial interest in the property for life, in return for which she agreed to compromise her rights under family law legislation

(ii) the company was to transfer the legal interest in the property to Mr Mansfield Jnr in return for the payment of €900,000

However, while the deed of transfer to Mr Mansfield Jr was executed in December 2007, the transfer was never formally effected as no stamp duty was ever discharged and nor was it registered in the Land Registry.

In March 2007, the company issued an all sums due debenture to Bank of Scotland for all past and future debts, secured on certain of its assets including the property in question, in return for a €35 million loan. The bank did not conduct a detailed investigation into the title of properties taken as security. The debenture was registered in the Land Registry as a burden on the relevant folio. It was pursuant to this debenture that a receiver was subsequently appointed by the bank in 2010.

High Court Decision
Gilligan J, in seeking to determine the respective legal interests (if any) of the parties in the property, noted that the bank’s interest, as claimed by the receiver, had been registered against the property. The bank therefore had a valid charge over the property which crystallised on the appointment of the receiver in 2010. Prior to registration of its charge, the bank had an unregistered interest in the property. 

The Court further noted that Ms Cosgrave moved into the property in 2006 before the purchase price had been paid to the company and before the deed of transfer was executed. The Court found that Ms Cosgrave had an equitable life interest in the property arising from the fact that the company had permitted her and her children to live in the house and also the fact that her rights against her estranged husband had since been prejudiced. This interest, the Court found, accrued from the date Ms Cosgrave took up residence in the property and, as it was in the nature of an equitable life interest, did not require registration under section 72(1)(j) of the Registration of Title Act 1964. Ms Cosgrave’s interest was therefore already in existence at the time the debenture was executed by the bank.

The Court then considered whether the bank could be held to have been a “bona fide purchaser for value without notice” of Ms Cosgrave’s interest in the property. The Court placed emphasis on the provisions of the Conveyancing Act 1882 which dictate that a reasonable purchaser is expected to make the “necessary inquiries and inspections”. Gilligan J held that had the bank made such enquiries, it would have had actual notice of the fact that Ms Cosgrave was residing in the property at the date of creation of the debenture. As it had not done so, it was deemed to be on constructive notice of, and subject to the priority of, Ms Cosgrave’s interest in the property.
Gilligan J stated that:

“It appears abundantly clear that the Bank in this case used… a “shortcut” in putting in place security over the Company’s property. At the time that decision was taken, the Bank ought to have known that such an approach involved an element of risk… It is… not for the court to “correct” what turns out to have been a poor choice, especially by a large organisation with the benefit of considerable legal advice and assistance…”

It therefore followed that any interest in the property over which Jeffel sought to grant security was necessarily subject to Ms Cosgrave’s interest in the first instance.

The Court also found that Ms Cosgrave was entitled to the protections granted by the Family Home Protection Act 1976. In circumstances where the company had not obtained her consent (or applied to the Court to dispense with her consent) to the purported conveyance to the bank, the transaction was void with the result that the bank had no legal interest in the property. Consequently, the receiver had no entitlement to take possession.

This decision serves as a reminder of the importance of conducting full due diligence when taking security over property. It is, however, currently under appeal to the Supreme Court.

Contributed by Delia McMahon