Case No: 1BM30094
Neutral Citation Number: [2012] EWHC 35 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BIRMINGHAM DISTRICT REGISTRY

Birmingham Civil Justice Centre
Bull Street, Birmingham B4 6DS

Date: 23/01/2012

Before :

HHJ DAVID COOKE
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Between :

	AIB Group (UK) Plc	Claimant	
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	Mark Redler & Co (a firm)	Defendant	

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Jeremy Cousins QC and John Brennan (instructed by Moran & Co) for the Claimant 
Graeme McPherson QC and Sian Mirchandani (instructed by Mills & Reeve LLP) 
for the Defendant 

Hearing dates: 1-2 November 2011
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Judgment
HHJ David Cooke: 
1.	This is the trial of certain preliminary issues in a claim by the claimant bank ("the Bank" or "AIB") against the defendant solicitors in respect of losses arising from a remortgage transaction. In the barest of outline, the solicitors acted in 2006 for the bank and its borrowers, Drs Sondhi, in connection with a remortgage advance of £3.3m on their home, a substantial property in Surrey valued at the time at £4.25m. Their instructions from the bank included a requirement that the existing mortgage in favour of Barclays Bank be discharged out of the advance. The Barclays charge secured borrowings of about £1.5m on two accounts. On the day of completion, the solicitors telephoned Barclays and were given a redemption figure (approximately £1.23m). They paid that amount to Barclays, and the remainder of the advance to the borrowers order. The solicitors failed to notice that the figure given related to only one of the two accounts and so was insufficient to redeem the Barclays mortgage. It is admitted that they were negligent in this respect. The bank's charge was not registered until almost two years later in April 2008, when it reached agreement with Barclays that it should be registered as a second charge. 
2.	The borrowers defaulted on the loan and in July 2010 the bank obtained judgment against them for the then balance of some £3.5m, and an order for possession. The property was sold in March 2011 for £1.2m, from which the bank as second chargee has received £867,697. The borrowers are now bankrupt.
3.	The bank's claim includes a claim that the solicitors acted in breach of trust by paying away the advance, which it is admitted was held as trust money, without obtaining a first charge, and that in consequence they are liable to reconstitute the trust fund of £3.3m with interest, credit being given only for the £867,697 actually recovered, ie a liability of about £2.4m before interest. The solicitors argue that payment was not a breach of trust, or that if it was, their liability is limited to the loss in the value of the bank's security caused by their failure to pay off the whole of Barclays' secured debt, being the amount of about £300,000 paid to Barclays from the sale proceeds.
4.	The preliminary issues that I ordered to be tried, at the invitation of the parties, are:
i)	Did the defendant act in breach of trust in releasing the Advance Monies in the circumstances pleaded in paragraph 22 of the Amended Particulars of Claim?
ii)	If so, to what remedy, if any, is the Claimant entitled?
5.	Para 22 of the Amended Particulars of Claim is in these terms:
“ The release of the Advance Monies in August 2006 was unauthorised.  The Defendant was authorised to release the Advance Monies only upon completion of the remortgage which in turn required that there be a first legal charge in favour of the Claimant.  The Defendant knew that a charge free from prior mortgages was required.  This was provided for in the Certificate.  ”
6.	The Certificate referred to is the certificate of title given by the defendant to the claimant on 31 July 2006, the day before completion (2/674). It is in a standard form reciting particulars of the transaction and concludes by giving "the Certificate of Title set out in the Appendix to Rule 6(3) of the Solicitors Practice Rules 1990 as if the same were set out in full, subject to the limitations contained in it". That in turn reads as follows:
“Except as otherwise disclosed to you in writing…we have investigated title to the property, we are not aware of any other financial charges secured on the property which will affect the property after completion of mortgage and, upon completion of the mortgage, but you and the mortgagor … will have a good and marketable title to the property … free from prior mortgages or charges …which title will be registered with absolute title.  ”
7.	The facts are largely agreed, and I set them out here mainly from the schedule of facts agreed between the parties:
i)	The borrowers, Dr Ravindra Sondhi and his wife Dr Salma Sondhi were medical practitioners who also owned, through limited companies, three residential care homes.  In 2006 they approached the corporate banking division of the claimant bank for the provision of finance of approximately £20 million to one of their companies with a view to refinancing the existing care homes and funding the acquisition of a further four care homes.
ii)	In conjunction with that, they applied to the bank's Solihull branch, which dealt with residential mortgages, for a remortgage of their home with a view to raising funds which they would contribute to the financing of their business.
iii)	The borrowers completed an application form dated 28 June 2006, seeking an advance of £3.3 million (bundle reference: 2/563) and stating that the value of the property was £4.5 million with outstanding mortgage of £1.5 million.  They named the defendant as the solicitors acting for them in the transaction.
iv)	The bank sent a formal letter of offer dated 4 July 2006 (2/607) which set out that the bank required by way of security a "First Legal Mortgage in the Bank's standard form over the Property" and amongst other conditions required that "the Applicant's existing home mortgages (if any) must be redeemed on or before the completion of this… facility".
v)	The following day the bank sent a letter to the defendant firm (2/614) instructing it to act for the bank in connection with the facility, enclosing a copy of its facility letter.  There is thus no doubt that the defendant was aware that the bank required to obtain a first legal mortgage.
vi)	On 22 July 2006, Mr Mark Redler, the defendant's senior partner, met the borrowers.  He was told by them at that meeting that the property was charged to Barclays and that their debt to Barclays was approximately £1.5 million.  They told him that they wished to complete the remortgage by 31 July, and expressed a great deal of urgency about doing so.  Mr Redler obtained from his clients a signed mortgage document in the form provided by the bank, to be held pending completion.
vii)	On 28 July, a Friday, Mr Redler sent a letter by fax (2/668) to Barclays asking for a redemption statement as at Monday 31 July, stating that it was hoped to complete the remortgage on that day.  Barclays' initial response (2/682) sent on the Monday was to return the letter saying that it could not be acted upon unless a correct mortgage account number was quoted.  This may have crossed with a further fax from the defendant on the same date (2/683) repeating the request. 
viii)	Also on Monday 31 July, the defendant sent the certificate of title in the bank's required form by fax to its securities Department, requesting that the amount of the advance be sent by funds transfer to their client account. The funds were received by the defendant at 13.03 on 1 August.
ix)	The second letter to Barclays did produce a response, in the form of a faxed letter dated 31 July but apparently received on Tuesday, 1 August 2006 (1/407). That letter referred to two account numbers, and attached two documents entitled "Mortgage Valuation Statement", one for each account.  The letter made clear that these were not redemption statements, saying:
“ Thank you for your request for a balance in respect of the above accounts.  The amount quoted is an indication of the current balance outstanding at the date you have requested.  This may not be the figure required to effect full redemption.
IMPORTANT INFORMATION
THIS IS NOT A REDEMPTION STATEMENT
For a redemption figure to be issued, you must make a request for a Redemption Statement at least three working days before the intended redemption date.  Due to the flexible nature of the mortgage and linked accounts, the amount required to redeem is likely to differ from this quotation.
Should your clients wish to redeem the mortgage, please contact us on 0845 607 6603 to request a Redemption Statement.  You will need to provide your client's mortgage account number when you call.  ”
(Emphasis and capitalisation in the original). The significance of making clear that the documents were not "redemption statements" would be that the bank would not be bound to release its charge on receipt of the sum stated, for example if some error should be found, or further liability incurred to it by additional borrowing on a flexible account.
x)	Mr Redler's evidence was that he asked an employee, Miss Brown, to telephone Barclays and obtain a redemption figure.  Miss Brown gave evidence, exhibiting a telephone note she made (1/485) recording that she had spoken to someone called Vicky at Barclays and noting "figure to redeem is £1,235,785.07" with the details of the bank account to which it should be sent.  She was unable to say whether she had given any mortgage account numbers to Vicky in this conversation.  If she had seen the fax referring to the two accounts, she obviously did not notice that the figure given could only have related to one of them.
xi)	In his oral evidence, Mr Redler said that he could only recall seeing one of the pages from the Barclays fax, being the statement relating to the larger of the two accounts.  He said that he had telephoned Dr Ravindra Sondhi because the amount was lower than the £1.5 million he had been expecting, and Dr Sondhi had confirmed that it was correct, or at least not told him that it was too low.  He could not say why he would only have seen one page of the fax (which had five pages in all) and accepted that if he had seen the whole fax, or read the covering letter, he could not have failed to notice that the figure quoted was insufficient to discharge both accounts.  
xii)	In accordance with her instructions from Mr Redler, Miss Brown gave instructions for the amount she had been quoted by Vicky to be sent by telegraphic transfer to Barclays, and for the balance, deducting the firm's costs, to be sent to the borrower, all of which happened on the afternoon of 1 August 2006.  The form of mortgage deed was completed with the date 1 August 2006.
xiii)	Mr Redler did not seek to excuse his firm's omissions, which are accepted to have been negligent. At the conclusion of the witness evidence Mr Cousins confirmed that he did not seek to pursue any argument that Mr Redler or the defendant had acted otherwise than in good faith.
xiv)	The result was that the amount sent to Barclays was insufficient to discharge its secured debt and it subsequently refused to do so. It has not been contended  before me that Barclays had given any binding assurance that it would release its security. The defendant was not able to procure the registration of AIB's charge until it was in a position to submit a discharge of Barclays' charge.  For some time, Mr Redler did not alert AIB to the difficulty that had arisen.  He contacted Dr Sondhi who promised that he would return sufficient funds to enable the outstanding amount due to Barclays to be cleared, but failed to comply with this promise over a period of several months.  In the meantime, Mr Redler protected the priority of AIB's charge by continuing to renew his priority search at the land registry.
xv)	Eventually, the problem came to light.  The evidence before me does not deal in detail with what then happened, though it appears that AIB entered into direct discussions with Barclays. I have no information, for instance, as to whether AIB offered, with or without the assistance of the defendant, to discharge the outstanding sum due to Barclays, or if so why that did not occur. On 28 April 2008, AIB and Barclays entered into a deed of postponement by which Barclays permitted AIB's charge to be registered as a second charge on the property, limiting its priority in respect of its own charge to £273,777.42, plus interest, costs and expenses.  That principal amount was somewhat less than the balance outstanding at 1 August 2006 (approximately £309,000) by virtue of repayments that the Sondhi's had made in the meantime.  AIB's charge was finally registered on 9 May 2008.
xvi)	AIB obtained judgment against the Sondhi's for a total exceeding £3.5 million, and an order for possession of the property, on 14 July 2010.  It was subsequently sold for £1.2 million, of which just over £300,000 was paid to Barclays in satisfaction of their first charge, and the balance (after costs) of £867,697.78 to AIB on 14 April 2011.  Bankruptcy orders were made against the Sondhi's on 14 June 2011.
The Law
8.	In Bristol and West Building Society v Mothew [1998] Ch 1 Millett LJ prefaced his judgment by saying this:
“ The collapse in the property market which accompanied the recession at the beginning of the present decade caused mortgage lenders to suffer serious losses. Unable to recover their advances from the borrowers or by the enforcement of their security they have sought to recover them from the valuers or solicitors on whose valuations or advice they have relied. In some cases they have been the victims of a fraud to which the valuers and solicitors have been parties. In other cases, such as the present, they have been unable to accuse their solicitor of anything more serious than negligence. Believing that the common law rules of causation and remoteness of damage might not enable them to recover the whole amount of their loss they have turned to equity and alleged breach of trust or fiduciary duty. We have thus been concerned to decide just what is involved in these concepts. ”
9.	Time has moved on by 15 years or so to the fall in the property market in the second half of the last decade.  The issues referred to by Millett LJ have resurfaced and lie behind the present claim (although breach of fiduciary duty is not within the preliminary issues before me).  The admitted negligence of the solicitors in paying less of the advance money to Barclays and more of it to the Sondhi's than they should have done has no doubt caused AIB loss, in that its charge has been postponed to Barclays' security to the extent of about £300,000.  On a commonsense view, the remainder of the loss that AIB has suffered arises because the property that it lent against either never was worth the £4.25 million that it assumed when the advance was made, or fell steeply in value thereafter, or a combination of the two.  Neither of these factors was in any sense the fault of the solicitors, and if they are liable to make good these losses to the bank, it may be thought that that would represent a fortuitous recovery in respect of the bank's own unfortunate lending decision.  Nevertheless, Mr Cousins submits that this is the result that follows from the application of equitable principles.
10.	Both counsel started their submissions as to the law from the decision of the House of Lords in Target Holdings Ltd v Redferns [1996] AC 421. Lord Browne- Wilkinson delivered the main opinion, the other four Law Lords agreeing with him. In that case, the defendant solicitors had acted for a purchaser, Crowngate, which had agreed to buy a property from a company called Mirage for £775,000. Crowngate had arranged however that the property would first be passed through a chain of two intermediate purchaser companies, Panther and Kohli, with Kohli then selling to Crowngate at a stated price of £2,000,000. Crowngate applied to Target for a loan to fund the purchase from Kohli based on this higher sale price, supported by a valuation of the property at £2m. The solicitors also acted for Target and were aware of the chain arrangement that inflated the purchase price, but did not disclose it to Target which agreed to lend £1.7m on the security of the property, of which about £1.5m was to fund the price payable to Kohli. 
11.	The solicitors received the £1.5m on 28 June 1989. The following day they paid most of it to Panther (not Kohli) and on 30 June Panther used part of those funds to complete its purchase from Mirage at the agreed price of £775,000. As Lord Browne- Wilkinson said:
“It is common ground that Redferns had implied authority to pay the money to or to the order of Crowngate when the property had been conveyed to Crowngate and Crowngate had executed charges in Target's favour… [but]…In the course of acting as Target's solicitors Redferns had paid away the mortgage money in its client account to a stranger who had no contractual relationship with Crowngate and before completion of the purchase by Crowngate or the mortgage by Crowngate to Target. Such payments out of client account were otherwise than in accordance with Redferns' instructions from Target. It is common ground that the payments constituted a breach of trust by Redferns.” (p429)
12.	A few days later, however, by 5 July 1989, contracts and transfers were executed by which the property was conveyed by Panther to Kohli and by Kohli to Crowngate. These were backdated to 30 June. Crowngate also executed a mortgage to Target on 5 July, though this was apparently dated 31 July. By that date at least therefore "Target had obtained exactly what it had originally intended to obtain, that is to say a loan to Crowngate secured by valid charges over the property." (p430).
13.	Target argued that it was entitled at the date of the trial to have the trust fund restored by payment back of the amount paid out in admitted breach of trust, and that it was irrelevant that it had subsequently received the security it had expected. Lord Browne- Wilkinson analysed the principles on which the court would order restoration of trust monies wrongly paid away, or compensation in lieu, which he noted had been developed in the context of what he referred to as traditional trusts, and then said this at p 435:
“Even if the equitable rules developed in relation to traditional trusts were directly applicable to such a case as this, as I have sought to show a beneficiary becoming absolutely entitled to a trust fund has no automatic right to have the fund reconstituted in all circumstances. Thus, even applying the strict rules so developed in relation to traditional trusts, it seems to me very doubtful whether Target is now entitled to have the trust fund reconstituted. But in my judgment it is in any event wrong to lift wholesale the detailed rules developed in the context of traditional trusts and then seek to apply them to trusts of quite a different kind. In the modern world the trust has become a valuable device in commercial and financial dealings. The fundamental principles of equity apply as much to such trusts as they do to the traditional trusts in relation to which those principles were originally formulated. But in my judgment it is important, if the trust is not to be rendered commercially useless, to distinguish between the basic principles of trust law and those specialist rules developed in relation to traditional trusts which are applicable only to such trusts and the rationale of which has no application to trusts of quite a different kind.
This case is concerned with a trust which has at all times been a bare trust. Bare trusts arise in a number of different contexts: e.g. by the ultimate vesting of the property under a traditional trust, nominee shareholdings and, as in the present case, as but one incident of a wider commercial transaction involving agency. In the case of moneys paid to a solicitor by a client as part of a conveyancing transaction, the purpose of that transaction is to achieve the commercial objective of the client, be it the acquisition of property or the lending of money on security. The depositing of money with the solicitor is but one aspect of the arrangements between the parties, such arrangements being for the most part contractual. Thus, the circumstances under which the solicitor can part with money from client account are regulated by the instructions given by the client: they are not part of the trusts on which the property is held. I do not intend to cast any doubt on the fact that moneys held by solicitors on client account are trust moneys or that the basic equitable principles apply to any breach of such trust by solicitors. But the basic equitable principle applicable to breach of trust is that the beneficiary is entitled to be compensated for any loss he would not have suffered but for the breach. I have no doubt that, until the underlying commercial transaction has been completed, the solicitor can be required to restore to client account moneys wrongly paid away. But to import into such trust an obligation to restore the trust fund once the transaction has been completed would be entirely artificial. The obligation to reconstitute the trust fund applicable in the case of traditional trusts reflects the fact that no one beneficiary is entitled to the trust property and the need to compensate all beneficiaries for the breach. That rationale has no application to a case such as the present. To impose such an obligation in order to enable the beneficiary solely entitled (i.e. the client) to recover from the solicitor more than the client has in fact lost flies in the face of common sense and is in direct conflict with the basic principles of equitable compensation. In my judgment, once a conveyancing transaction has been completed the client has no right to have the solicitor's client account reconstituted as a "trust fund." ”
14.	Mr McPherson relies first on the sentence "Thus, the circumstances under which the solicitor can part with money from client account are regulated by the instructions given by the client: they are not part of the trusts on which the property is held." He submits that not every breach by a solicitor of the terms of his retainer is sufficient to make payment of the advance monies a breach of trust; it is necessary to look at those terms which regulate his authority to apply the monies held in his client account. His pleaded case is that the defendant had the claimant's authority "to apply the same in the completion of the transaction of remortgaging the property". That took place, he submits, when the claimant obtained its mortgage, ie on 1 August when the defendant with the borrowers' authority dated the mortgage deed they already held, and was in a position (by virtue of the funds held) to procure its registration as a first charge. The application of the funds for that purpose was a post completion step.
15.	Mr Cousins argues that 'completion' could not occur until the claimant in fact obtained a first legal mortgage. This it never did. His skeleton argument puts it thus: "…the terms on which the monies were paid to the defendant required that [they] should only be released in circumstances in which the Bank obtained a first legal mortgage". He accepted that in practice it would be most unlikely, if not impossible, that the lender would in fact obtain a first legal mortgage before or simultaneously with the payment out of the advance- even if the correct amount had been paid to Barclays it would have taken some appreciable time for Barclays to provide a release of its charge and for AIB's charge and that release to be recorded on the Register. In closing he accepted that a solicitor could properly release funds held in client account on receipt either of the actual documents required to obtain the title his client required, or an undertaking from a solicitor (or possibly direct from a party such as Barclays) to provide them, see Lloyds TSB Bank Plc v Markandan & Uddin [2010] EWHC 2517 Ch. Anything less would be a breach of trust, though the solicitor might escape from liability if the transaction in fact subsequently completed as it was intended to do, on the principles set out above from Target. 
16.	I have no doubt that the terms on which a solicitor is authorised to pay out monies held in his client account are to be determined by construction of his contract of retainer, and it is in that sense no doubt that Lord Browne Wilkinson said that they are regulated by the retainer rather than being terms of the trust. But equally a payment out of monies in breach of those terms of the retainer that govern the authority to pay would in my judgment amount to a breach of trust. Reading the judgment as a whole, it seems to me clear that Lord Browne- Wilkinson did not intend anything different, and the point was not at issue at any stage in the proceedings; for example at page 430D he said "It has at all times been common ground that Redferns committed a breach of trust when … [they] paid away Target's money otherwise than in accordance with Target's instructions."
17.	Of course it is the case that not all the terms of the solicitor's retainer relate to the circumstances in which he is authorised to pay out monies from client account.  A payment of money at a time when the solicitor is in breach of one of these other terms will not necessarily amount to a breach of trust. Further, not all the terms that relate to payment are necessarily preconditions to the authority to pay.  Thus, in Mothew the solicitor had negligently misstated to his lender client before completion that the borrower would be funding the balance of the purchase price from his own resources.  It was not alleged that the solicitor had deliberately concealed the truth from the lender, or consciously intended to mislead it.  Millet LJ considered the issue to be whether the correct performance of the undoubted obligation to inform the lender of the source of the balance of the purchase funds was a precondition to the solicitor's authority to pay out the advance monies, or whether a breach of that obligation had vitiated his authority to pay out those monies, and held that neither was the case.  It followed that the solicitor had paid those monies out with his client's instructions and was not in breach of trust (or of fiduciary duty) in doing so.  He said this:
“ [p15G] It is not alleged that the defendant deliberately concealed the arrangements which the purchasers had made with their bank from the society or that he consciously intended to mislead it. Nothing in this judgment is intended to apply to such a case. My observations are confined to the case like the present where the provision of incorrect information by a solicitor to his client must be taken to have been due to an oversight. In such a case his breach of duty is unconscious; he will ex hypothesi be unaware of the fact that he has committed a breach of his instructions; and if this means that his subsequent application of the mortgage money constitutes a breach of trust then it will be a breach of a trust of which he is unaware. I would not willingly treat such conduct as involving a breach of trust or misapplication of trust money unless compelled by authority to do so, and in my judgment neither principle nor authority compels such a conclusion…
[p22D] It is not disputed that from the time of its receipt by the defendant the mortgage money was trust money… The defendant held it in trust for the society but with the society's authority (and instructions) to apply it in the completion of the transaction of purchase and mortgage of the property. Those instructions were revocable but, unless previously revoked, the defendant was entitled and bound to act in accordance with them.
The society's instructions were not revoked before the defendant acted on them, and in my judgment there was no ground upon which the judge could properly conclude that his authority to apply the money in completing the transaction had determined…
[p24] The society's standing instructions did not clearly make the defendant's authority to complete conditional on having complied with his instructions. Whether they did so or not is, of course, a question of construction, and it is possible that the society could adopt instructions which would have this effect. But it would in my judgment require very clear wording to produce so inconvenient and impractical a result. No solicitor could safely accept such instructions, for he could never be certain that he was entitled to complete.
In my judgment the defendant's authority to apply the mortgage money in the completion of the purchase was not conditional on his having first complied with his contractual obligations to the society, was not vitiated by the misrepresentations for which he was responsible but of which he was unaware, and was effective to prevent his payment being a breach of trust. Given his state of knowledge, he had no choice but to complete. ”
18.	Staughton LJ gave a more brief judgment, saying this in relation to the issue of breach of trust:
“[p26F] …it is said that Mr Mothew was in breach of trust because he paid away the trust fund contrary to his instructions. He did indeed hold the £59,000 in trust; it was not his own money… But he did not pay it away contrary to the society's instructions. The cheque reached Mr Mothew with a letter dated 23 August 1988, which in effect instructed him to use it for completion of the proposed purchase. That was what he did.”
Otton LJ agreed with both judgments.
19.	The court's task is therefore to construe the terms of the retainer in order to ascertain what authority they confer on the solicitor to pay out money that he holds on trust for his client.  This requires the court not only to construe any express terms but also to take account of any implications that may properly be made as to the authority which the solicitor is being given, arising from the circumstances of the instruction, the nature of the transaction involved and the way in which such transactions are ordinarily dealt with.  In doing so, no doubt as Millet LJ indicated the court would lean against a construction which would mean that the solicitor could not know at the time he is required to pay money out whether he was authorised to do so or not.  This is nothing more or less than the normal process of construction of a contract for commercial services.
20.	In the present case, the written terms of the retainer did not deal explicitly with the precise circumstances in which the solicitor could pay out the money, so that it is necessary to fill in any gaps arising, on the ordinary basis of construction that I have described above.  He was instructed to obtain a first legal mortgage.  I have no doubt that the terms of the solicitor's retainer required him to obtain from his borrower client a duly executed form of legal mortgage in favour of the lender, held to the order of the lender, before, or simultaneously with, the payment out of any of the money that the lender had paid into his client account.  This he did.  Ensuring that it could take effect as a first legal mortgage however required subsequent steps to be taken, one of which at least (redemption of the charge in favour of Barclays) required the use of part of the money that he held.  It could not sensibly be said that the solicitor did not have authority to apply those monies for that purpose.  Nor in my view is it the case at the other extreme that the extent of his authority from the lender to release those funds became irrelevant at the moment that he held that charge, which would be the effect of Mr MacPherson's submissions.  
21.	In principle, redemption of the Barclays charge could have been dealt with in a number of ways, depending on the circumstances of the transaction.  Had there been separate solicitors acting for Barclays, for instance, I do not think there could be any doubt that Mr Redler would have been acting within the scope of normal conveyancing practice to have made a payment to those solicitors from funds he held, against their undertaking to provide a discharge.  In the absence of anything specific in his instructions from AIB, he would have implied authority from them to make the payment required to procure the undertaking. Equally, where as in this case he was dealing direct with Barclays as the prior charge holder, if he had received a statement from Barclays that the amount required to redeem the charge which amounted to an undertaking to redeem on receipt of that amount, it seems to me that it would have been within his authority from AIB to make that payment.  In either case, the payment would not amount to a breach of trust, although neither such payment would result in the immediate obtaining of a first legal mortgage.  No doubt, if the undertakings given were complied with, a first legal mortgage would be obtained in due course.  But the  position is not that the solicitor is in breach of trust unless and until the undertaking he has accepted is performed; he is never in breach of trust because it was within his authority to accept the undertaking and make payment in the first place.
22.	Questions as to the nature or quality of an undertaking that the solicitor may accept before payment out are also in my view to be approached as questions of construction of the extent of his authority to make payment arising under his contractual retainer.  When considering such questions, issues as to whether the acceptance of an undertaking is or is not within the ordinary conveyancing practice of responsible solicitors will be relevant, since it may very well be the case that the solicitor would be held to have implied authority for the purposes of completing a transaction in a manner which is within such ordinary practice (see eg Edward Wong Finance Co Ltd v Johnson Stokes & Master [1984] 1 AC 296 and Lloyds v Markandan, above).  Such issues relate to questions of negligence and breach of contract.  But there is clearly an overlap with the breach of trust issues, because if it is for instance determined that the solicitor's authority did not extend expressly or by implication to making payment against the receipt of a particular undertaking, it must follow that the payment was made without authority and therefore, in my judgment, in breach of trust.
23.	In the present case, in my judgment what the defendant's instructions authorised them to do with the funds paid to them was to pay to Barclays (or to its account) such sum as was required to procure a release of its charge, and to pay the balance to the borrowers or to their order. Had they complied with their instructions they would have paid (taking all the figures in round terms) £1.5m to Barclays and £1.8m to the borrowers. In the event they paid £1.2m to Barclays and £2.1m to the borrowers. In my judgment, in so doing they committed a breach of trust insofar as payment was made contrary to the authority they had been given.
24.	It does not however in my judgment necessarily follow that the whole of the payment out of £3.3m was made in breach of trust. The difference between what the defendant did and what it ought to have done if it had complied with its instructions was the £300,000 that should have been paid to Barclays but was instead paid to the borrowers. That in my judgment was the extent of the breach of trust committed. It was not a breach of trust to pay £1.2m to Barclays; that payment was made as partial performance of the authority and obligation to discharge Barclays secured debt. It was not a breach of trust to pay £1.8m to the borrowers, as that was the sum to which they were entitled. The breach consisted of the failure to retain an additional £300,000 and apply that to discharge of Barclays debt.
25.	The matter can be tested in this way, it seems to me. Suppose that having paid £1.2m to Barclays, the defendant had obtained a formal redemption statement showing, or otherwise realised, that the amount paid was insufficient, while still in possession of the remaining funds. It would plainly have been within its authority to retain and pay to Barclays the further £300,000 required, and pay over the balance of £1.8m to the borrower.  By paying £2.1m to the borrower, the defendant was in breach of its authority, but the extent of that breach was the £300,000 that it should have paid to Barclays instead.
26.	This is in my view consistent with the various authorities that were cited to me. Mr Cousins in particular relied on Knight and Keay v Haynes Duffell Kentish & Co [2003] EWCA Civ 223, in which he and Mr Brennan appeared for the successful appellants. That case was a negligence claim against solicitors who had allowed the claimants' cause of action against their original solicitors to become time barred, one of the issues being whether the trial judge was right to find that the original solicitors had improperly paid out monies held on client account for completion of an investment in shares of a private company and were in consequence liable to reconstitute the trust fund. The instructions given to the original solicitors were, it was found, only to pay over the monies held against completion of both the issue of shares to the investors and the assignment to them of the benefit of a trade name, which they required as security for their investment (see para 35). In fact the funds were released at the completion meeting when the shares were issued but the assignment of the trade name was not executed. If it had been, it would probably have been valueless in any event, as matters transpired, and it was argued that the investors had therefore suffered no loss. Aldous LJ, with whom the other Lords Justices agreed, said this:
“[37] The second ground upon which the defendants sought permission to appeal was that the judge had wrongly concluded that the breach of trust had caused the applicants loss. They submitted upon the basis of the speech of Lord Browne-Wilkinson in Target Holdings Ltd v Redferns [1996] AC 421, that the remedy for the breach of this trust was not reconstitution of the trust fund, but to put the claimants in the position that they would have been in but for the breach. In the present case the breach had been the failure to obtain the assignment. To remedy that breach Linnells needed to compensate the claimants for the loss of that assignment. In the present case that loss was negligible in that the trade mark had proved to be valueless or there was no evidence to prove that it was of substantial value.
[38] I reject that submission for two reasons. First, in the present case the breach was the release of the money. The trust required the money to be held against provision of both the shares and the assignment. As there had been no assignment, the money should not have been paid out. Second, the principle in Target only applies where the underlying transaction covered by the trust had been completed…
[39] In the present case there was a trust fund made up of money supplied by Mr Knight, Mr Hodgkinson, Mr McIntosh and subsequently Mr Keay. The transaction had not been completed. The breach was the payment and the remedy for that breach is reconstitution of the trust fund. The judge was right to reject this submission and there are in my view no grounds for giving permission to appeal. ”
27.	Mr Cousins' first submission is that the defendant held the advance on trust to be released only against provision of a first legal charge, but a first legal charge was never provided. In that respect, he said, the position was the same as that of the solicitors who were authorised to release funds to acquire shares only if at the same time they obtained an assignment of the trade name. What the bank received was a second legal charge, but a second charge, he submits, is a different asset altogether. He drew an analogy with a trustee who was authorised to buy a new car, but spent trust funds on a second hand one instead- that he said would not be an authorised use of funds and the trustee would be liable to reconstitute the fund by paying the whole price back. In this case, the solicitors had never obtained a first charge and so were not authorised to disburse any of the advance.
28.	I do not agree that the circumstances in Knight & Keay are comparable with the present case.  In that case, as the judge found, obtaining the assignment was a pre condition of the authority to release any funds at all. They never received any assignment of the trade name and so had no authority to release any funds. In this case, the solicitors' instructions to obtain a first charge necessarily required them first to obtain a duly executed charge in favour of the bank, which they did, and then to apply the advance so that the charge took effect as a first charge. It could never have been immediately effective as a first charge, simply because there already existed a charge which was bound to rank in priority until redeemed. It has not been suggested, and could not reasonably be suggested, that the solicitors were obliged to secure the redemption in some other way than out of the proceeds of the advance.
29.	Accordingly, the only precondition to the release of any funds was the receipt of a valid form of charge. Having received that, the solicitors were authorised to disburse the advance, but required to do so by paying sufficient to Barclays to secure redemption of its charge, and the balance to the order of the borrower. They failed to do so, to the extent of the shortfall in the amount paid to Barclays. Payment of that amount to the borrowers was in breach of trust, and they are liable to reconstitute the trust to that extent.
30.	There is no parallel between a charge which is, at the moment of creation, a second ranking security but can be (and is intended and required to be) promoted into a first ranking security by redeeming a prior charge, and a second hand car which can never be transmuted into a new one.  The former is what the solicitors were authorised and instructed to obtain in this case and the latter is, on Mr Cousins' hypothesis, an unauthorised purchase.
31.	In Lloyds TSB Bank Plc v Markandan & Uddin (a firm) [2010] EWHC 2517 (Ch) Mr Roger Wyand QC considered a case in which solicitors acting for a mortgage lender to a purchaser of property paid away the mortgage advance to a person whom they thought was a solicitor acting for the vendor of the property, but who transpired to be a fraudster (as was the supposed vendor). At the time of payment, they had received neither an executed transfer of the property to the intending purchaser nor any solicitor's undertaking to deliver such a transfer, and the issue was whether they committed a breach of trust in so doing. The claimant's case was that authority to pay was conditional upon completion occurring, which it never did, much as in this case the claimant contended, at least initially, that authority to pay was conditional on actual receipt of a first ranking legal charge. The judge accepted that a payment in breach of authority would be a breach of trust, and held that the circumstances in which a solicitor was authorised to release monies were a matter of construction of the terms of his instructions.  I respectfully agree with both propositions, as I have sought to set out above. He rejected that case that on the facts before him the authority was conditional on actual completion and delivery of a transfer, but held that it required the solicitors at least to have received a solicitor's undertaking to deliver a transfer. He said this:
“ 27 As Mr Aylwin submitted, it is necessary to separate the trust issues from the contractual issues. Any payment away by the Defendant which is not within the terms of its authority to pay away will be a breach of trust. On the other hand, any failure to make proper inquiries concerning the vendor's solicitors may be a breach of contract but not a breach of trust. 
28 The position is made plain by the judgment of Millett LJ in Bristol and West Building Society v Mothew … 
29 In the present case Miss Sandells' argument is very simple. It is that the Defendant did not have authority to pay away the moneys except to achieve completion and completion was never achieved. Mr Aylwin, on the other hand argues that the authority was to pay away in connection with the purchase of the Property by Mr Davies and this was what the Defendant did. 
30 I cannot accept Miss Sandells' construction, particularly when she submits that it means that payment can only be made when completion has been achieved. However, Mr Aylwin's construction would allow payment to be made well in advance of completion provided that the purpose was to further the purchase of the Property. In my view, the proper construction of the instructions is somewhere between these two extremes. The authority entitled the Defendant to pay away on receipt of the documents necessary to register title or, if paying away before that stage, on receipt of a solicitor's undertaking to provide such documents. 
31 In the present case the Defendant paid the money without receiving the requisite documents and without receiving a solicitor's undertaking to provide such documents. Accordingly the Defendant was in breach of the trust by paying the money in the circumstances in which the money was paid”
32.	In this case, the document required to vest in the claimant the interest it sought was only the duly executed charge, since the borrowers already owned the property. The defendant received that, so no question arises of their authority to release funds at any earlier point, such as on receipt of an undertaking. Mr Cousins submitted that the defendant was not even then authorised to pay funds to Barclays (or to the borrowers) unless it first had either a release of the Barclays charge, or an undertaking from a solicitor (or perhaps from Barclays itself) to release that charge. No doubt it would be prudent conveyancing practice to obtain such an undertaking, particularly if there could be any question whether the funds held would be sufficient to procure the discharge.  No doubt the instructions included an obligation to ensure that the borrowers complied with the requirement in the facility letter that the Barclays charge should be redeemed. But this in my view was as I have said an obligation governing the way in which the funds were to be paid out as between the prior chargeholder and the borrower, and not a precondition to paying any of them. 
33.	I do not agree that the authority should be construed so as to impose an absolute requirement that nothing could be paid to Barclays before a valid undertaking had been given. There is no such express term either in the letter of instruction or the CML handbook terms incorporated by that letter. The most nearly relevant provision is in para 10.3 of the handbook, which provides as follows:
“You are only authorised to release the loan when you hold sufficient funds to complete the purchase of the property and pay all stamp duty land tax and registration fees to perfect the security as a first legal mortgage or, if you do not have them, you accept responsibility to pay them yourself.”
This wording is obviously not directly applicable to a remortgage, and is not without ambiguity of language, but it emphasises that the solicitors must hold sufficient funds to procure the first ranking mortgage title sought before the loan is released, and provides for the consequences if the funds held are insufficient, ie that the solicitors will be responsible to make payment themselves.
34.	There was no doubt that the advance held by the defendant was sufficient to discharge Barclays' charge, and the defendant therefore had the funds and authority, on behalf of the freeholders and the bank as later chargee, to do so. To the extent that they made a payment to Barclays without a prior undertaking, they were no doubt required to retain funds sufficient to complete the discharge before releasing any to the borrower, and in that respect, as I have held, they were in breach of their authority and committed a breach of trust. But the extent of the breach was the amount they should have retained, and not the whole payment.
35.	I was also referred to UCB Loans v Grace and others [2011] EWHC 851 (Ch), but in that case the solicitors paid out the mortgage advance without having received a mortgage document executed by the borrower at all. It was conceded that such payment was made without authority. Not surprisingly, it was held to be a breach of trust. No charge was ever executed, and so the solicitors were not saved from the obligation to reconstitute the trust by the later completion of the transaction, as had been envisaged in Target. I do not therefore derive any assistance from that case, where the facts were altogether different.
36.	In Mortgage Express v Iqbal Hafeez [2011] EWHC 3037 (Ch) the claimant lender advanced funds for the purchase of various properties. These were paid by the defendant solicitors (acting for the claimant) to the account of "McGraths" which the defendant thought was a firm of solicitors, and against undertakings given by "McGraths" for completion of the purchase transactions. In fact the whole transaction was a fraud, the owners of the properties had never agreed to sell them, there was no such firm as McGraths, the undertakings were therefore not undertakings by a solicitor and had no value. It was common ground that the solicitors were obliged to hold the funds until "completion" of the transaction. Mr John Randall QC sitting as a deputy High Court Judge considered the two cases put by the claimant, the primary case being that insofar as "completion" of a transaction involved accepting a solicitor's undertaking, it must be truly an undertaking given by a solicitor. Alternatively, it was said, it must be from someone who is reasonably and honestly believed to be a solicitor. The defendant accepted the second proposition, and the judge, as I read his decision, founded it mainly on his finding that the solicitor had no reasonable grounds for believing that "McGraths" were a firm of solicitors. He dealt briefly with the primary case however, saying that if necessary he would have accepted that only a genuine solicitor's undertaking would suffice.
37.	That case, it seems to me, is also of no direct assistance, since I am not concerned here with the quality of undertaking (if any) that a solicitor is entitled to accept in lieu of actual delivery of title documents before releasing funds.
38.	I answer the first question, therefore, by finding that the defendant did commit a breach of trust, in the payment to the borrower of the amount which, at that date, should have been paid to redeem the Barclays charge. I do not think the evidence enables me to ascertain the amount exactly, but it is no doubt not far removed from the figure of £308,894.33 given in the fax of 31 July 2006.
39.	I turn then to the issue of remedy which, in the light of what I have held above, I can take shortly. Prima facie, the claimant is entitled to reconstitution of the trust fund by repayment of the amount wrongly paid away. In relation to the breach of trust that I have found, there are no grounds for an argument based on Target that such a remedy is not required to compensate the beneficiary for the loss caused by the breach. There are also further or alternative claims for equitable compensation or damages and a claim for interest. In the circumstances in which the breach consists of failure to discharge a prior mortgage, with the result that the claimant's interest has been postponed to Barclays debt to the extent of the capital left outstanding, plus interest and charges subsequently accruing due to Barclays and also secured by its charge, in my judgment the claimant is entitled to equitable compensation for the additional amounts accruing due to Barclays, which  have increased the amount secured in priority to the claimant's interest. The claimant should however give credit for the amounts paid by the borrowers to their Barclays account, since these have had the effect of reducing the loss caused by the defendant's breach of trust. All such amounts take effect as adjustments to the trustee's account to the beneficiary. Subject to any submissions the parties may wish to make, the result would seem to be that the amount of the defendant's liability at the date at which Barclays charge was eventually redeemed would be the amount paid at that date to Barclays (£273,777.42). To the extent that the claimant has not been paid that amount subsequently, it would be appropriate to make an award of interest at a suitable rate, as to which I will hear submissions if it cannot be agreed.
40.	In the circumstances, I do not intend to venture into the arguments that were addressed to me as to whether, if the defendant committed a breach of trust in paying out any part of the advance at all, the correct remedy would be based on reconstitution of the trust by repayment of the entire advance, subject only to a credit for actual recovery on sale of the property, save to deal with one matter which would require a finding of fact in the event that I am wrong in my conclusions above. That is the question as to what would have happened but for the breach of trust. Since the breach alleged is the payment out without authority, it seems to me the question may be approached in principle on one of two bases, namely what would the outcome have been if the solicitors had either:
i)	in fact dealt with the funds held in the manner they were authorised to do, or
ii)	instead of making the unauthorised payment that they did, had asked the bank for its instructions at that point, disclosing the reasons why the payment was outside their existing authority.
41.	In either case, it seems to me, the answer is the same on the facts of this case. There would have been a short delay while the solicitors obtained a redemption figure in a form that bound Barclays to release its charge, they would have paid that amount to Barclays and in due course have received that release and registered AIB's charge as a first charge. I am in no doubt that, in the somewhat implausible scenario that the solicitors, realising that they did not have a valid redemption quotation, approached AIB for instructions rather than simply dealing with the matter themselves, AIB would not have withdrawn from the transaction but simply instructed them to carry on with it, complying with their existing instructions. It was clear from the evidence that AIB as a whole was anxious to lend to the borrowers, and that the domestic remortgage was being driven by the need to facilitate the business lending which the bank was very keen to make. There would have been no reason for it to suppose that the failure to obtain a full redemption figure could not be corrected, or to use that failure as an excuse to withdraw from the mortgage lending.