BL-2024-000734 - [2025] EWHC 2166 (Ch)

It is an established principle of English law that a chargee can only exercise the powers given to him under the charge for a purpose which is proper to that charge. In Quennell v Maltby [1979] 1 WLR 318, Denning MR said that equity would restrain a mortgagee from exercising their rights where the rights were exercised for an improper purpose (the improper purpose in that case being to go behind the protection from eviction provisions of the Rent Acts). In Downsview Nominees Ltd v First City Corp [1992] UKPC 34 Lord Templeman said

“Several centuries ago, equity evolved principles for the enforcement of mortgages and the protection of borrowers. The most basic principles were, first, that a mortgage is security for the repayment of a debt and, secondly, that a security for repayment of a debt is only a mortgage. From these principles flowed two rules, first, that powers conferred on a mortgagee must be exercised in good faith for the purpose of obtaining repayment and secondly that, subject to the first rule, powers conferred on a mortgagee may be exercised although the consequences may be disadvantageous to the borrower.”

In Cukurova Finance International Limited v Alfa Telecom Turkey Ltd [2013] UKPC 2, the Board said:

“In equity, a mortgagee has a limited title which is available only to secure satisfaction of the debt. The security is enforceable for that purpose and no other: Quennell v. Maltby [1979] 1 WLR 318, 322H (Lord Denning MR); Downsview Nominees Ltd v. First City Corporation Ltd. [1993] AC 295, 312G (Lord Templeman). It follows that any act by way of enforcement of the security (at least if it is purely) for a collateral purpose will be ineffective, at any rate as between mortgagor and mortgagee. The reason is that such conduct frustrates the equity of redemption which, as Sir John Stuart V-C observed in Jenkins v. Jones (1860) 2 Giff 99, a court of equity “is bound to regard with great jealousy.” (at [73]).

They also explained:

“More generally, however, the Board considers that if a chargee enforces his security for the proper purpose of satisfying the debt, the mere fact that he may have additional purposes, however significant, which are collateral to that object, cannot vitiate his enforcement of the security. If the law were otherwise, the result would be that the exercise of the right to enforce the charge for its proper purpose would be indefinitely impeded because of other aspects of the chargee’s state of mind which were by definition irrelevant …” (at [78])

The position appears similar to that which arises where a power is wrongly used by a trustee (the “proper purpose rule”, as discussed by David Richards JSC in Grand View Private Trust Co Ltd and another v Wen-Young Wong and Others [2022] UKPC 47). However it is clear beyond doubt that a chargee is not a fiduciary of a chargor prior to taking possession (Marquis of Cholmondely v Lord Clinton (1820) 2 J. & W. 1 at 182ff.). I therefore think that these are separate issues, and the “fraud on a power” authorities provide no assistance with this issue.