Family businesses and family homes revisited
The charging of the family home to provide security for lending to a family business has long been a problem for conveyancers asked to deal with the legal work involved. Many of us will recall the high-profile case of Royal Bank of Scotland plc v Etridge (No 2)  2 AC 773 and more recently Padden v Bevan Ashford Solicitors  EWCA Civ 1616, but these were only the tip of the iceberg. Lord Bingham of Cornhill clearly set out the issues in Etridge:
“The transactions which give rise to these appeals are commonplace but of great social and economic importance. It is important that a wife (or anyone in a like position) should not charge her interest in the matrimonial home to secure the borrowing of her husband (or anyone in a like position) without fully understanding the nature and effect of the proposed transaction and that the decision is hers, to agree or not to agree. It is important that lenders should feel able to advance money, in run-of-the-mill cases with no abnormal features, on the security of the wife’s interest in the matrimonial home in reasonable confidence that, if appropriate procedures have been followed in obtaining the security, it will be enforceable if the need for enforcement arises. The law must afford both parties a measure of protection.
The House of Lords then proceeded to give extensive guidance on how lenders should protect themselves in such situations. However, as a recent case shows problems can still arise for both lenders and family members in this situation.
Malik v Sheikh  EWHC 973 (Ch)
The case involved financial agreements between the Malik family business, Haji Ismail and Sons Ltd, and Mr Abdul Waheed Sheikh. Mr Sheikh already had a second charge over the Malik’s family home at 18, Cranborne Avenue, Southall, of which the Appellant, Mrs Sharifa Begum Malik and her two sons were the registered proprietors. On 29 January 2013, Mrs Malik signed two Land Registry Transfers by which she transferred for no consideration properties at 9 and 35 King Street, Southall, of which she was the sole registered proprietor, into the joint names of herself and Mr Sheikh. The Transfers declared that the properties were to be held on trust for Mrs Malik and Mr Sheikh as tenants in common in equal shares.
On 8 February 2013, those Transfers and a Land Registry Form DS1 signed by Mr Sheikh releasing the charge over 18 Cranborne Avenue were dated and delivered. On the previous day, Mr Sheikh had entered into an agreement with Mrs Malik’s two sons. Under this agreement, Mr Sheikh gave the Maliks an interest free loan of £200,000 and extended credit facilities to the family company when dealing with his own company. Mrs Malik was not a party to this agreement.
Unfortunately for Mr Malik, there were problems registering the Transfers due to the existence of charges on the two properties. Mr Malik then applied in June 2013 to register a Restriction against them in order to protect his interest in them. Apparently, at this time, Mrs Malik’s grandson was looking after her affairs, and objected on her behalf to the registration of the Restrictions on the basis that she had not been advised about the implications of transferring ownership of the two properties. The matter was then referred by Land Registry to the Property Chamber of the First-tier Tribunal.
However, in June 2014 the case was transferred to the Central London County Court because by then Mrs Malik had been diagnosed with dementia and lacked capacity to act in the proceedings. Mrs Malik’s grandson, Iqbal Malik, was ultimately appointed to act as her litigation friend.
The County Court dismissed Mrs Malik’s claim and upheld the validity of the two Transfers. Leave was granted for an appeal to the High Court but sadly, before the hearing of the appeal, Mrs Malik passed away. Mr Iqbal Malik then obtained an order to represent her estate on the hearing of the appeal.
Fancourt J. upheld the appeal and set aside the Transfers in favour of Mr Sheikh. The Judge should have concluded that a relationship of undue influence was to be presumed, arising from evidence of the relationship of influence between Mrs Malik and her sons at that particular time and the disadvantageous nature of the transaction into which Mrs Malik entered for their benefit. The facts of Mrs Malik’s advancing age, physical infirmity and immobility, impending mental degeneration, and inability to read or understand English well put her in a vulnerable position and liable to be taken advantage of. Her understanding of what was happening depended on what her sons said to her in Punjabi, without anyone independent explaining to her what she was signing. The Maliks were directors of the Company and healthy and active businessmen, whose livelihoods depended on the Company. Mrs Malik’s vulnerability was particularly accentuated where any dealing in relation to or for the benefit of the Company was concerned because she had ceased to be involved and had no direct interest in the Company. She depended on her sons for information about the Company’s position and requirements.
Referring back to the extract from Lord Bingham’s speech set out above, no doubt Mr Sheikh is not best impressed with this outcome and the protections given to him by the law. Remember, he had advanced an interest free loan of £200,000 to Mrs Malik’s sons and given up his existing charge over the Malik family home. The Judge was quite clear, however, that Mrs Malik was ‘potentially significantly disadvantaged by the various transactions – the value of the transferred properties was about £1 million. Legal advisers acting for the lender in similar cases should take heed of the problems here and ensure that proper independent advice has been given in accordance with the Etridge guidelines.