Independent legal advice—the pitfalls for lenders (HSBC Bank Plc v Brown)

What practical lessons can be learnt from the judgment in HSBC Bank Plc v Brown? Emma Knight, a barrister at 13 Old Square Chambers, believes the case highlights the importance of lenders complying with the minimum requirements identified in RBS v Etridge.

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HSBC Bank Plc v Brown [2015] EWHC 359 (Ch)

What was the background to the case?

On 26 September 2002, Mrs Brown signed a legal charge in respect of her freehold property, Myddle Farm, securing ‘all money and liabilities’ owed to HSBC by her eldest son, Allen (the charge). Before the charge was entered into, HSBC had received from Mr Jones, a solicitor purporting to act for Mrs Brown, a signed copy of a certificate of execution confirming that Mr Jones had explained the terms of the charge, provided independent legal advice and witnessed Mrs Brown’s signature.

It was undisputed that Allen was indebted to HSBC and had failed to satisfy demands for payment. Accordingly, by way of its claim, HSBC was seeking to enforce the charge by seeking possession of Myddle Farm.

What were the legal issues that the court had to decide?

The main issue for the court was whether the minimum requirements identified by the House of Lords in Royal Bank of Scotland v Etridge (No 2) [2001] UKHL 44, [2001] All ER (D) 156 (Oct) had been complied with, such that HSBC was entitled to enforce the charge against Mrs Brown and obtain possession of Myddle Farm.

Why did these issues arise?

This central issue arose because Mrs Brown had provided security for the borrowing of her son, Allen, in circumstances where:

  • the transaction was not, on its face, to Mrs Brown’s financial advantage, and
  • there was a substantial risk that, in procuring Mrs Brown to provide the charge, Allen was in a position to, and did, exert undue influence over his elderly mother

What were the main legal arguments put forward?

Mrs Brown sought to argue that her relationship with her eldest son gave rise to a presumption of undue influence and HSBC had failed to comply with the minimum requirements imposed on it by Etridge, because she had not been contacted by HSBC or Mr Jones at all prior to signing the charge.

HSBC argued that, as per its standard procedure, it had:

  • contacted Mrs Brown
  • received notification from Mrs Brown that Mr Jones was her nominated solicitor
  • sent Mr Jones all the necessary documentation and information, and
  • received the certificate of execution along with the executed charge—any arguments that there were deficiencies in the advice given by Mr Jones were both outside HSBC’s knowledge and concern

What did the court decide, and why?

The court found that the charge was unenforceable and, consequently, dismissed HSBC’s claim for possession. The court reached this decision on the basis of a number of important findings of fact:

  • while Mrs Brown’s relationship with her son did not give rise to a presumption of undue influence, HSBC had been put on inquiry
  • there was no evidence that HSBC had written to Mrs Brown, that Mrs Brown had received any such correspondence, or that Mrs Brown had informed HSBC that Mr Jones was her nominated solicitor—it seemed likely that HSBC had learned of Mr Jones through her son, Allen, and/or by virtue of the fact that Mr Jones had purported to witness and provide independent legal advice in respect of an earlier charge signed by Mrs Brown in 1998
  • HSBC had failed to put Mrs Brown on notice of the seriousness of the transaction by failing to inform her of the purpose underlying the need for her to obtain independent legal advice
  • there was insufficient evidence for the court to conclude that HSBC had sent Mr Jones sufficient information and/or documentation to enable Mr Jones to properly advise Mrs Brown
  • Mr Jones had failed to discharge his responsibilities, he did not meet with Mrs Brown, he did not advise her and he did not witness her signature—the finding that Mr Jones, a solicitor, falsely provided the certificate of execution might seem surprising, however, this finding was based on the unchallenged evidence of both Mrs Brown and her younger son, Graham, and was supported by the absence of any fee being charged by Mr Jones to either HSBC or Mrs Brown
  • notwithstanding Mrs Brown’s evidence that she considered Myddle Farm to be Allen’s, the court could not conclude on the evidence that, had Mrs Brown received the correct information or advice, she would have signed the charge anyway
  • in failing to comply with Etridge, HSBC was put on notice that Mrs Brown had not received the appropriate advice and so proceeded at its own risk

To what extent is the judgment helpful in clarifying the law in this area? What practical lessons can those advising take away from the case?

This judgment highlights the need for lenders to not only comply rigidly with Etridge but also keep meticulous documentary evidence that they have so complied. It will not be unusual for lenders to find themselves in the position that HSBC appeared to find itself in, where they are unable to produce a witnesses who had personal, contemporaneous involvement with the events in question. In those circumstances, documentary evidence becomes crucial.

Lenders who fail to comply or document their compliance with Etridge proceed at their own risk, even where the surety’s solicitor has certified that the surety has been given independent legal advice. The judge in this case commented that, had Mrs Brown actually received the independent legal advice that Mr Jones had purported to have given, ‘there might have been a basis for contending that as things turned out HSBC’s failures, although not merely technical, had been overcome or marginalised and were forgivable rather than fundamental and vitiating’. However, as this case demonstrates, relying on the signature of a surety’s solicitor to save the lender from its own failings is a very risky strategy.

Interviewed by Barbara Bergin.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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