Jeffries v Archer

This is a trial as to liability only pursuant to an Order of Master Teverson of 7^th September 2009. It is a dispute between the two shareholders of a company called Harbridge Holdings Limited (“Holdings”) and concerns the construction of a shareholders’ agreement (“the Agreement”) dated 10^th September 2004 and its application in the events which happened.

The claimant seeks relief in respect of a contractual obligation for the defendant to transfer her shares in the company to a third party under a so-called get-out clause contained in clause 9 of the Agreement. The claimant could not compel such a transfer if “Company Refinancing” had occurred as defined in clause 3(g) of the Agreement. In that case the claimant’s rights under clause 9 would have ceased. The defendant asserts in her defence that the conditions for Company Refinancing had been met so that the claimant had no rights under clause 9 at the time he sought to invoke them. The defendant also asserts that irrespective of the application of clause 3(g) the claimant did not fulfil the notice requirements of clause 9.

In 2004 the defendant wished to acquire an industrial site at Gomshall in Surrey with a view to obtaining planning permission and either selling the property with the benefit of that permission or selling the site after development. The site was owned by a company called Harbridge Engineering Limited (“Engineering”). The defendant wanted to acquire Engineering as a vehicle for owning the property and Holdings was incorporated on 13^th May 2004 for the purpose of the acquisition. However the defendant could not raise enough money to capitalise Holdings. Hence the introduction to and involvement of the claimant.

On 10 September 2004 the claimant and the defendant entered into the Agreement, the claimant acquiring 599 shares in Holdings for £150,000 and the defendant 399 shares for £100,000. They were at all material times the sole directors of Holdings. Engineering was acquired as a wholly owned subsidiary of Holdings, which acted at all times solely as a holding company. Again, the claimant and the defendant were the sole directors.

The Agreement provided for the claimant to make a director’s loan of £330,000 and the defendant a director’s loan of £50,000 to Holdings. The defendant’s loan was not to carry interest but it was acknowledged that as the claimant had raised the amount of his loan by borrowing on commercial terms it was to carry interest at the same rate as his borrowing.

The provisions about the loans are contained in clause 3 of the Agreement. Each loan was to be repayable in full on any transfer by the claimant or the defendant respectively of his or her total shareholding (clause 3(d)). However, subject to that and in the absence of agreement to the contrary, neither loan was to be repayable until after Company Refinancing as defined in clause 3(g). Thereafter the loans were to become repayable on demand.

Clause 3(g) provides:

Clause 6 stipulated the general rule and is headed “NO CHARGING OF SHARES”. It provides:

However the Agreement permitted both the claimant and the defendant to sell their respective shares by serving a Transfer Notice as defined by clause 7(b)(i) and following the procedure prescribed in the remainder of clause 7(b). In brief, if a shareholder wished to transfer his shares he or she was required to serve a Transfer Notice on the board offering to sell such shares to a person nominated by the board. There would then be an attempt to agree a price, failing which it was to be fixed by a valuer in accordance with the provisions of clause 7 (b) (ix). There was a provision for sale to the other shareholder(s) willing to purchase. The board then had 30 days from the determination of the price to find a purchaser willing to buy all the sale shares, failing which the vendor was permitted to sell to a third party at that price or a greater price. For present purposes nothing turns on any difficulties of applying the procedure specified in Clause 7 literally while the board comprised only the two shareholders.

Clause 9 of the Agreement was inserted for the benefit of the claimant alone. It is evident that it was included to ensure that the claimant, who had put up the lion’s share of the funding, should not be locked in to Holdings in circumstances where the defendant could not afford to buy him out. It provided as follows:

For the avoidance of doubt the provisions of clause 9(a) shall cease to apply forthwith upon Company Refinancing.”

On 19 July 2005 Holdings increased its capital. There was a supplemental shareholders’ agreement whereby the claimant repaid the defendant’s loan, investing a further £8,000 in Holdings reflected in an increase in his capital from 60% to 70% by means of a new share issue. In December 2005 planning consent was granted for the site and that consent was altered the following April to include a change from light industrial to office use.

The claimant says it was always intended that his loan should be repaid. In any event, it is common ground that in September 2006 the claimant and the defendant started negotiations with Lloyds TSB (“the Bank”) in order to raise a loan to repay the claimant.

On 4^th September 2006 Mr Simon Blackbourn, the Bank’s Guildford Branch Manager, produced Outline Terms and Conditions for the loan to Engineering (“the September 2006 Schedule”), headed “Subject to Final Credit Approval, Due Diligence and Contract”.

On 30^th November 2006 Mr Blackbourn signed a Business Loan Agreement (“the loan document”) on behalf of the Bank. Despite further correspondence and some pressure from the Bank, Engineering did not proceed with the loan document. Under the loan document a drawdown facility was offered for the express purpose of being “used for the repayment of directors’ loan in the name of Keith William Jeffries”. The facility was expressed to be subject to specified preconditions.

Correspondence continued between the Bank and the parties and their solicitors about the Bank’s requirements and matters of title. Efforts were also made to market the site. Then on 9^th January 2007 the defendant wrote to the claimant (confirming a conversation on 5^th January 2007) saying that on consideration she did not agree to the refinancing or to the sale of the company.

Relations deteriorated between the parties. The defendant unsuccessfully attempted to get the claimant to agree to a transfer to her of 10% of Holdings.

On 31^st May 2007 the claimant served a Transfer Notice on Holdings and the defendant pursuant to clause 7 of the Agreement stating that he wished to sell the entirety of his shares and offering to sell them to a person nominated by the Board. The defendant duly nominated herself, the valuation process was agreed and an expert determination of value was made on 15^th September 2008. On 24^th September 2008 the defendant gave notice that she intended to exercise her right to buy the shares but did not do so by 14^th October 2008, the time limit prescribed by the Agreement. She had written to the claimant on the 9^th October 2008 saying that she had not yet obtained funding and would not be able to comply with the deadline.

On 13^th October 2008 the claimant wrote to the defendant reminding her of the time limit and saying that he intended to exercise his right to find a third party purchaser. Receipt of that letter was acknowledged on 14^th October 2008. On 14 November 2008, the claimant wrote to the defendant to tell her that he had found buyers for his shares for the selling price as determined by the valuer and giving her notice that she would be required to transfer all her shares.

On 15^th December 2008, the claimant’s solicitors wrote to the defendant setting out the history and the obligations of the parties under the Agreement. The identity of the third party purchaser was disclosed and the price the purchaser was prepared to pay. On 23^rd December the defendant replied in the following terms:

Two issues arise. The first is whether there has been Company Refinancing within the terms of clause 3(g) of the Agreement. This depends on whether ‘the Company’ was ‘able to repay’ the KJ loan and, in particular, whether the conditions for conclusive proof of such ability to repay prescribed by clause 3(g) had been met. This involves consideration of whether the arrangements for the proposed loan from the Bank constituted (a) an unconditional offer and (b) an offer of a loan to the Company. It is common ground that for the purposes of clause 3(g) the Bank was a commercial lender. If the answer is no to either question (a) or (b), the further question (c) arises as to what other circumstances constituted ability to repay, and whether such circumstances were present in this case. In turn this raises the issue of what is meant by availability of funds in this context. The second, and independent, issue is whether the claimant gave a notice valid for the purposes of clause 9.

The claimant says that, even if the arrangements comprised in the loan document were to be construed as unconditional, the arrangements were to lend money to Engineering. There were no formalities in place to permit any moneys drawn down by Engineering to be passed up to Holdings. On the claimant’s behalf Mr Price submitted that “an unconditional offer…of a loan to the Company” for the purposes of providing conclusive proof of Company Refinancing under clause 3(g) can only refer to an offer of a loan to Holdings.

The expression “the Company” is not defined in the Agreement. However there can be no doubt as a matter of construction that Holdings, and only Holdings, is “the Company” referred to. Holdings is a party to the Agreement which concerns its shares and the respective rights and duties of its shareholders. There are numerous references in the Agreement to the Company which serve to identify it as Holdings. I observe however that in the definition of business in clause 1 (iii) the business of the Company is said to be “property investment/development”, so that even in the Agreement there is a degree of elision between Holdings and the business of its trading subsidiary.

Mr Wright submitted that as the shareholders and directors of Holdings and Engineering were one and the same and that money advanced to one was under the control of the other, Engineering must be included within the definition of “the Company” for the purposes of clause 3(g). Indeed, he said that as the single trading asset was held by Engineering, a reasonable person in the position of the parties would have expected that a commercial lender would advance the loan to Engineering and not to Holdings. He submitted that if “the Company” is taken to mean only Holdings, clause 3(g) is left without practical application.

I do not agree. While it might have been contemplated that Holdings would procure its subsidiary trading company to give security, it would not necessarily be anticipated that the loan would be made to the subsidiary when the object was to repay a loan to the holding company. There is some discussion in the correspondence about the identity of the borrower and whether it should be Engineering or Holdings and a conscious decision appears to have been taken by the claimant and the defendant to borrow the money in the name of Engineering.

I accept Mr Price’s submission that as a general principle the words of a contract should be interpreted in their grammatical and ordinary sense, unless it is necessary to construe them differently in order to avoid some absurdity, inconsistency or repugnancy.

The second part of clause 3 (g) is there to provide a straightforward means of demonstrating conclusive proof of ability by Holdings to repay the claimant’s loan. If such proof is to be demonstrated the terms of clause 3(g) must in my judgment be strictly adhered to. It is insufficient to show that a subsidiary with separate legal personality had an unconditional offer as this would open up further investigation as to whether the subsidiary could and would pass the loan moneys up to its parent company. It is important to bear in mind that the words “whether it chooses to do so or not” qualify repayment of the loan, not the ability to repay. Conclusive proof of the ability to repay means the ability of Holdings.

That interpretation only affects the mode of conclusive proof provided for by the sub-clause. It is not the only permissible method of proving ability to pay. When considering ability to repay more generally, offer of a loan to a subsidiary might demonstrate ability on the part of the parent. I observe that the Bank expressly limited use of the money to be advanced to repayment of the claimant’s loan.

I turn to the question whether (assuming I am wrong about whether a loan to Engineering for the purpose of repaying the claimant’s loan would qualify as a loan to “the Company”) the loan document comprised an unconditional offer within the terms of clause 3(g).

In my judgment the conditions of clause 3(g) would be satisfied once the relevant offer had been made, even though that offer expired and an unconditional offer could not subsequently have been negotiated. In other words, Company Refinancing is a once and for all event. The issue is thus whether there was an unconditional offer at any point from 30 November 2006 to January 2007 when the defendant decided not to proceed.

Mr Wright on the defendant’s behalf submitted that the words “unconditional offer” in clause 3(g) have to be construed in conjunction with the subsequent words “on reasonable commercial terms”. He submitted that no commercial lender would simply agree to advance significant sums without stipulations about security, proof of valuation and due diligence. He said that clause 3 (g) must have been intended to have some substantial application. His submission was that the preconditions referred to in the loan document were basic routine provisions comprised within the “reasonable commercial terms” which any commercial lender would have insisted on. Alternatively he submitted that on the true construction of clause 3(g) no requirement of the Bank which could as a matter of fact have been fulfilled at the relevant time would serve to make the offer a conditional one.

In my judgment the “terms” in clause 3(g) comprise such matters as rate of interest and repayment period. Plainly clause 3(g) was not intended to cover a loan offer on any terms, however unusual and onerous. I have to decide what goes beyond a reasonable term and is a condition in the sense employed in clause 3(g).

To my mind there are three possible ways in which an offer from the Bank could be argued to be conditional. One is that any loan arrangement remained conditional until after a loan agreement was signed by all parties and all preconditions in that agreement were satisfied. This is the position taken by Mr Price. He submitted that an offer remained conditional for the purposes of clause 3(g) at any time that it was subject to contract. In other words, there had to be a binding agreement that the money would be available for drawdown, even though Holdings might not in the event choose to take and use it to repay the claimant’s loan.

This construction arises out of the very fact relied upon by the defendant that a bank offer is never in practice wholly unconditional until the bank has completed due diligence to its satisfaction and bound itself to permit drawdown. Mr Price asserted that as it could not be said with certainty that the Bank would have lent the money, the offer of a loan was not unconditional. The company could choose whether or not to repay the loan, but it could not choose whether or not it was able to repay.

To the contrary, Mr Wright’s stance was that an offer was unconditional if the defendant could, subject only to performing merely administrative acts (which could be shown were within Holdings’ power at the relevant time), have accepted the offer by signing the loan agreement. He emphasised that clause 3(g) refers to an offer, not to a binding contract; thus an unconditional offer was something short of a concluded agreement with a drawdown facility. Clause 3(g) entitled “either shareholder” to produce the offer, which suggested that it was in truth an offer rather than a concluded agreement.

The second possibility is a variant of the first. The loan agreement could be said to be conditional if, despite having been signed on behalf of the Bank, there were still certain conditions which needed to be satisfied (for example, the conditions specified in the September 2006 Schedule) before the Bank was willing to proceed. Put another way, the Bank could and would have withdrawn from the arrangement while the offer was still subject to contract if certain conditions were not met. Mr Wright meets that possibility by saying that if there were any such conditions the Bank had, on the facts of the case, waived them by the time Mr Blackbourn signed the loan document on 30^th November 2006.

The third possibility is that even if both sides had signed, the preconditions for lending set out in the loan document itself had to be fulfilled before the loan offer became unconditional. Mr Wright submitted that those pre-conditions were terms of the lending rather than matters which made the offer a conditional one. Again, he said that in any event there was no condition which could not in fact have been fulfilled at the relevant time.

Plainly until any firm offer was made it could not be said that there was an unconditional offer within clause 3 (g). If that were not the case there would be uncertainty as to when Company Refinancing had occurred. It cannot in my judgment be said to have occurred when an offer was made in principle and then it subsequently became apparent that the company could have fulfilled the Bank’s then requirements. No firm offer would have been in place.

Mr Wright’s submission was that once Mr Blackbourn had signed the loan document on behalf of the Bank, it was open to Engineering to sign the loan document without any further prior conditions. In that case, all conditions other than those contained in the loan document would have fallen away.

That leads on to the second possibility. It depends on the facts whether Engineering would be permitted to complete the loan document without meeting certain prior conditions. Mr Wright submitted that all substantive conditions (other than the pre-conditions contained in the loan document itself) were in fact met by the time Mr Blackbourn signed the loan document on 30^th November 2006. If that were not the case he would not have signed. He was for example relaxed about the requirements that an environmental report (already completed) be re-addressed to the Bank, and that tenancy schedules be provided.

Mr Wright further submitted that all the conditions mentioned in the Bank’s September 2006 Schedule were administrative matters which Holdings and Engineering could have met if they had wished to proceed with the loan arrangement. There was no impediment to a charge on the site; there was no impediment to payment of costs; there was no impediment to fulfilling land registry requirements; there was no impediment to providing the requisite board resolutions; public liability insurance was in place. The offer, signed on behalf of the Bank, was in effect subject only to signature of the loan document by Engineering, subject to some further due diligence by the Bank (which would inevitably have resulted in a favourable report) and subject to provision of security which was available.

I am doubtful whether the principle is correct that there was an unconditional offer if all matters of due diligence could have been fulfilled. Holdings had to be in a position to repay the claimant’s loan, whether or not it chose to do so. If Holdings chose not to commit itself to the Bank’s terms there was no binding commitment on the Bank’s part to make the loan. Mr Blackbourn’s signature on the loan document did not to my mind mean that it was open to Engineering unilaterally to sign and complete the arrangement without having fulfilled the continuing requirements of the Bank.

However, even if that is wrong, the Bank’s preconditions for lending were not in my judgment merely administrative matters which could inevitably have been fulfilled if the loan document had been completed during the offer period.

I say “during the offer period”, because that is a crucial matter. Mr Wright submitted that the offer remained open until (at earliest) the defendant decided not to proceed. I do not agree. One of the terms of the offer was that security should be provided and the loan drawn down by 31^st December 2006. Thereafter it was not open to Engineering to complete the loan document and new terms had to be negotiated. The fact that the Bank appeared to be willing to negotiate on similar terms to those already on the table does not in my judgment mean that an offer was continuously in place. The issue whether there was an offer capable of immediate acceptance is one which can only be considered between the time Mr Blackbourn signed the loan document and the drawdown date.

One very important matter outstanding at the time Mr Blackbourn signed was the provision of adequate security. The point is similar whether it is considered as a matter outstanding under the September 2006 Schedule or as one of the preconditions specified in the loan document itself.

Vail Williams LLP had formally valued the site in May 2006 at £1.2m. One of the terms of the September 2006 Schedule was that “Vail Williams would confirm site value with planning at £1.2m is based on 6 months marketing timeline.” To my mind that imports a requirement that the site value was still £1.2m. However when the property was marketed by Gascoignes in November 2006 they took the view that “the value of the site would appear to be lower than you would have hoped for based on the marketing carried out thus far.” The highest offer received (subject to contract, and Gascoignes thought it was doubtful that the matter would successfully reach contract) was £850,000.

Mr Wright said that Mr Blackbourn was aware of this position when he signed the loan document and was not unduly worried about it. However, it is important in this context to consider the terms of the loan document itself:

The security specified in the Security Schedule was to be a first legal charge over the site. It is evident from the terms of the Security Covenants that the total amount owing at any time was not to exceed “40% of the latest valuation received by the Bank” of the security. On a reading of the loan document as a whole it was open to the Bank before drawdown, that is to say even after execution of the loan document by both parties, to insist on a valuation and confine drawdown to 40% of that value. In the event, a valuation report was not made or provided until 30^th January 2007. Because of difficulties in relation to obtaining vacant possession from tenants it was said that the Market Value of the property was “in the region of £1m”. As at 31^st November 2006 it was possible that the value was only some £800-850,000. 40% of £800,000 would not have been enough to repay the claimant’s loan.

If the September 2006 Schedule was still in play, the Bank’s requirements as to security set out in that Schedule (which incidentally contemplated a loan of only £350,000, not the loan of £400,000 specified in the loan document) would not have been met. The Schedule required a valuation of £1.2m.

If on the other hand the Bank was confined to the preconditions contained in the loan document (on the basis that once Mr Blackbourn had signed the loan document he is taken to have waived the requirements of the September 2006 Schedule) it seems to me that the security requirement was still a true outstanding condition and not either a “reasonable term” of the offer or a mere administrative matter which would certainly have been fulfilled before the drawdown date.

I have cited the figures by way of illustration only. It does not matter whether there would or would not in fact have been sufficient equity in the property to support a loan sufficient to repay the claimant. The fact is that Holdings had not produced the evidence required by the preconditions as to the value of the security and for the reasons I have given that was not a mere technicality. An offer is only unconditional if all requirements for the money to be borrowed have been met. Until they are met the offer is not unconditional; it is still open to the Bank to refuse to lend. Doubtless the Bank would have been satisfied if contracts had been exchanged for the sale of the site at a lower figure, but that did not happen. The fact remains that the drawdown date passed without the Bank’s conditions being met.

On this basis I do not need to consider the status of the other preconditions mentioned in the September 2006 Schedule or in the loan document. I agree with the claimant that there was no unconditional offer before the security pre-conditions for drawdown had been satisfied. In particular the required security had to have been offered, evidence had to be adduced as to value and the security documents produced. It is impossible to say that it was a foregone conclusion that the security conditions would have been met.

Accordingly for this reason also I find that there was no unconditional offer constituting conclusive proof of ability to repay for the purposes of clause 3(g).

Ability to repay must be considered against the background of the Agreement considered as a whole. Under clause 3 (f) one of the effects of Company Refinancing was that the claimant could demand repayment of his loan. That was intended to happen only when the company was in a position to repay it. The entitlement to call for repayment was evidently a safeguard where Company Refinancing had occurred but Holdings (i.e. the other director) did not choose to use the money to repay the loan.

Thus in considering ability to repay it seems to me that the clause requires that sufficient funds should not just be potentially available but should be actually and immediately available to repay the loan. An obvious example would be proceeds of sale of the site held to Holdings’ account. At the other end of the spectrum the fact that Engineering held the site as an illiquid asset would not constitute ability to repay. An assured drawdown facility given to Engineering restricted to the purpose of repayment might have been sufficient, at any rate if it could be demonstrated that it had been resolved to use the loan moneys, if drawn down, for the benefit of Holdings.

In short, the expression “ability to repay” requires the access to immediate funds. In my judgment Holdings never had such access.

The discrete issue therefore arises whether the claimant fulfilled the requirements of clause 9 which provide that he was to serve a notice,

The problem with this submission is that on 15th December 2008 the claimant’s solicitors served a further notice identifying the purchaser. Mr Wright’s response was that both notices were thereby invalidated; the situation was analogous to the service of two consecutive notices to quit. If the claimant wished to preserve his position, Mr Wright submitted, the second notice should have been served without prejudice to the first.

No authority was cited to me in support of this proposition and I do not accept it. It is true that the letter of 15th December 2008 gave the defendant an extension of time to purchase the claimant’s shares. I do not see how that could be held against the claimant. Apart from that, the letter did not seek to amend the timetable prescribed by the Agreement. The 3 month period for sale to a third party ran from the date of the determination of the value of the shares to be sold, not from the date of the notices required to be served under clause 7 or clause 9. The defendant cannot rely on her own lack of cooperation in support of an assertion that the claimant had not entered into a contract of sale prior to that date.

In my judgment the claimant therefore succeeds on liability and I will so order accordingly.