Summary

A financier had not been entitled to serve a formal demand as it had, at the time of the demand, held excess funds that had been wrongly deducted as capital repayments from a borrower's bank account, which meant that no sums were in fact due at the relevant time.

Facts

The court was required to determine whether the defendant financier (W) had wrongfully made capital deductions in relation to a facility agreement with the claimant borrower (P).

P had entered into a loan agreement with W to fund the purchase of a property portfolio. The agreement was governed by a 10-year facility letter and W's general mortgage conditions. P sold two of the properties it had purchased with the loan funds and used the funds realised to reduce its overall indebtedness to W. A variation to the original facility letter was effected by a side facility letter, the underlying purpose of which reflected P's desire to repay the loan early while avoiding pre-payment costs under the original facility. The repayment date was varied to December 31, 2013, with repayment due in full on or before that date. It also provided that P pay a £100,000 arrangement fee, the first instalment of which was due on the execution of the side facility letter, with successive instalments being due quarterly. It was common ground that the third and fourth instalments were not paid, although there was an issue as to when those payments were in fact due. Under the terms of the agreement, capital repayments were only to be deducted from P's account down to a particular threshold. On the basis of the two missed payments, W declared that an event of default had occurred and served a formal demand, demanding the repayment of all of P's outstanding indebtedness. On receipt of the demand, P notified W that the payments had been missed through oversight, and paid those amounts in full. Nonetheless, W moved to enforce its security rights, and notified tenants that rents were to be thereafter paid directly to W. P issued the instant claim for relief. The issues were whether (i) the formal demand was invalid as W had allegedly made debits in relation to capital repayments from P's bank account which were in excess of its contractual entitlement so that no sum was in fact owed when the formal demand was made; (ii) as a matter of construction, W was entitled to rely on non-payment of the repayment by instalments of the arrangement fee as an event of default; (iii) W was entitled to charge default interest on the missed arrangement fee repayment instalments.

Held

(1) As a matter of construction, it was difficult to accept W's argument that it had been contemplated that capital repayments would continue beyond the particular threshold under the facility agreement. Having made the arrangement under the side facility letter which had been carefully drafted, it would have been very odd if that agreement in some way affected P's capital repayment obligations: the agreement simply did not bite on that issue. Read objectively, a letter detailing deductions W had made could not be relied on to show that P had known that it had continued to make capital repayments: it was not evident on the evidence that P had been making repayments of capital. Furthermore, figures W relied on were far from compelling the conclusion that it was self-evident that capital repayments were being made: missing from those figures was any column dealing with capital repayments, and although it was a matter of simple arithmetic to calculate those repayments, they were certainly obscured. W's assertion that there could yet be documents that revealed that the parties had discussed capital repayments was very much in the nature of a smoking gun submission, save that there was no smoke, let alone a gun; it was a matter of pure speculation, ICI Chemicals & Polymers Ltd v TTE Training Ltd [2007] EWCA Civ 725 followed. The court was satisfied that on the basis of the construction of the agreements and the uncontradicted evidence, W held funds at the time of the formal demand that could have been used to pay the sum it demanded. Accordingly, W had not been entitled to make the formal demand. (2) If the court were wrong on the conclusion that W had made wrongful capital deductions from P's funds, P would have argued that its obligation to pay the two instalments of the arrangment fee was not due in accordance with the facility letter or under the general conditions as the repayment obligation, which the facility described as occurring quarterly, did not stipulate a specific date, which was required to establish an event of default. The fact that other clauses of the agreement stipulated specific dates did not mean that those dates could be simply transferred to a provision where a specific date had been deliberately excluded: where there was no specific date included, it was not possible to stipulate a due date. However, it would have been open to W to rely on the formal demand where it specifically referred to the clause that gave rise to the event of default: if it had been necessary, the court would have found that the formal demand was sufficient to give rise to the acceleration provisions of the facility agreement. Furthermore, the definition of a "loan obligation" under the agreement was wider than "loan" and included an arrangement fee. As such, a failure to make a repayment of a sum due under the arrangement fee could have been a breach of the agreement and hence an event of default within the meaning of the agreement. (3) Under the terms of the agreement, there were no grounds to say that default interest was payable on the two missed repayment instalments of the arrangement fee.

Judgment accordingly