Prima Equity Ltd v West Bromwich Commercial Ltd

This is an application by the claimant Prima Equity Limited ("Prima") for summary judgment under CPR Part 24 on its claim for declaratory relief and for an order for an account. The background to this claim is that Prima is in the business of investing in properties and the defendant, West Bromwich Commercial Limited ("WB") is a commercial lender. Prima applied to WB for a facility to enable it to purchase a number of properties. WB was prepared to offer those facilities and the formal facility was incorporated into a facility letter dated 14 July 2006.

In effect, WB offered to lend to Prima £16,700,000 in relation to six freehold properties. The facility was to be for a period of ten years so that it expired on 14 July 2016. The nature of the facility was that the interest payments were fixed at 0.95 per cent over LIBOR and the capital repayments were to take place by way of instalments so as to reduce the loan to £12,716,000 as of 14 July 2016. In effect, this meant that £984,000 of capital was to be repaid with a bullet payment of £12,716,000 on 14 July 2016. There was a non-refundable signing fee of £47,950 which was to be paid at the moment of the making of the loan.

The loan was duly drawn down on 2 August 2006 and, pursuant to the facility, Prima executed assignments of rental which it would achieve under the six properties which were to be bought.

As a matter of fact, Prima decided that it wished to sell some of the properties, one of which was the property, 75 High Street, Brentwood, Essex, which was sold for some £2,124,789 on 24 March. Another property, 41 High Street, St Neots, Cambridgeshire was sold in January 2010, reducing at that date the loan balance to some £11,492,500.

The next event that is important for the decision in this case is that on 13 December 2011 a variation to the facility agreement was effected by letter dated 13 December 2011 ("the side facility letter"). The purpose of the side facility letter was that Prima wished to repay the loan earlier and it wished to avoid the pre-payment costs provided for in clause 7 of the facility agreement and replace it with a different fee structure for prepayment and it also wished to vary the break clauses which were in the leases. The repayment date, in other words the expiry of the agreement, was varied to 31 December 2013 and the loan was to be repaid in full on or before 31 December 2013. There was an amendment made under the heading of "Fees", which provided that the borrower would pay an arrangement fee of £100,000. I shall come back to this clause a little later because it is material.

Pursuant to the side facility letter, the initial instalment of the arrangement fee was paid on 14 December 2011 and a further instalment was paid on 27 March 2012. It is common ground that the third and fourth instalments were not paid before 11 October 2012. There is an issue as to when those instalments should have been paid. On 11 October 2012, WB made formal demand on Prima declaring that there had been an event of default and that the event of default consisted of a failure to make two payments of £12,500. WB then said that it was treating this event of default as one which enabled it to accelerate the payment of the whole loan and made demand for £8,243,547.36. In addition, the formal demand declared that, since Prima was in default under the facility letter, default interest at the rate of 2 per cent above the facility rate interest would be charged on the whole account from 11 October 2012.

On 12 October 2012, the solicitors acting for Prima notified WB that the non-payment of the two instalments had been an oversight. On 15 October, the outstanding amount of the instalments, £25,000, was paid by Prima to WB. On 15 November 2012, WB enforced its security rights and gave notification pursuant to the rent assignments of the secured properties that the rentals should be paid direct to WB.

The proceedings in this case have not been started by WB but a claim form was issued by Prima on 20 December 2012 seeking the relief which I have indicated. A number of issues have arisen for decision by me. Conveniently, they have been summarised by both counsel and I shall identify the issues which I intend to consider.

(1) Was the formal demand invalid because WB had already made debits from the bank account held with it which were in excess of its contractual entitlement so that no sum was in fact owing to it when it made its formal demand? (2) As a matter of construction, was WB entitled to rely on the event of default, namely the non-payment of the two instalments so as to trigger an event of default? (3) Whether WB was entitled to charge default interest on the whole of the sum claimed or only in relation to the amount outstanding, namely the two instalments totalling £25,000? I shall deal with each of those points in turn.

Wrongful deductions

The facility agreement makes express provision in relation to the payment of interest at clause 5.1:

In November 2012, Prima asked WB to provide a breakdown and calculation of the interest that had been charged on its account from 21 July 2011. Figures were then provided showing the interest calculation which is used on what was described as the "interest bearing balance" (IBB) and showed how this had been calculated together with the fees. It is the letter dated 28 November 2012 which showed these figures and indicated that the account balance as at 1 April 2012 was £8,397,030.32.

What is submitted by Mr Cunningham QC, counsel for Prima, is that it is therefore clear that as at the date of the demand, and indeed for the period from the dates when, whatever they are, the instalments should have been paid, the capital requirement in clause 6.1 was well below the figure of £12,716,000. Mr Cunningham therefore submits that WB had no contractual entitlement to make any capital deductions at all. What is apparent from the calculations which have been done is that a total sum of some £78,564.05 was deducted by way of capital on 23 January, 23 April and 23 July 2012 and the question in the circumstances is whether WB were entitled to debit those capital repayments.

If they were not contractual entitlements which WB could make, then WB was holding these monies which were then sufficient payment to cover the instalments of the arrangement fees and it was not argued by counsel for WB, Mr Simon Mills, that there would then have been a non-payment because WB would have been in sufficient funds by reason of, if it be right, the wrongful deduction of these capital repayments. Thus the issue is whether there was such entitlement to debit these capital repayments.

The side facility letter in itself makes no provision for the repayment in relation to clause 6 of the facility letter. It is the fact that clause 8 is the clause that dealt with fees. Of course, I accept that the headings are irrelevant for the purpose of construction as provided in the general conditions, but the terms of clause 8 are such that there is no doubt that clause 8 is dealing with a non-refundable signing fee. Since the amendment made by the signed facility letter is also in relation to a fee, it can fairly be said that it is something that is referable to that part of the agreement.

The facility letter itself did not have any provision in relation to the repayment obligations in relation to the signing fee. The reason for that was that the non-refundable signing fee was payable at the moment of draw-down, so there was no need to make any further provision nor as to what effect that might have in relation to clause 6. It simply did not arise. When the side facility letter was agreed, it was also contemplated that further sums would be repaid and this is taken up with the amendments to clause 10:

What is submitted by Mr Mills is that those terms make it absolutely clear that there were dates that were relevant here. It shows he says also that it is absolutely clear that the parties were accepting that there were changes to the structure of the facility agreement. He says that when the side facility letter is put against the original facility letter, it must be looked at in the context of what had occurred. It is necessary, therefore, he says to take into account that two of the properties had been sold, that those amounts had been credited to the account, that the overall loan had been reduced and that it was therefore inevitable that the term relating to repayments in clause 6 had to be construed in the context of the amount which had then been repaid and the amount of the loan that was then outstanding. He submits that the position was that it was contemplated that repayments of capital would continue to be made despite the terms of clause 6.1, which appears on the face of it only to require repayments down to the figure of £12,716,000.

As a matter of construction, I find this very difficult to accept. It seems to me that, having made this arrangement which was carefully drafted for insertion in a provision dealing with arrangement fees, which in itself was not referable in any way to being a repayment of the loan, that it would be very odd if this agreement in some way affected the repayment obligations. The agreement simply did not bite on that issue. It is therefore for that reason that Mr Mills has to look elsewhere to point to what can only be described as an argument on variation or estoppel by convention. His argument is that it is quite plain that the intentions of WB were that the capital repayments would continue and that did indeed occur.

I have seen an example of a letter explaining what the deductions were that were being made by WB. There is a letter dated (without a day) January 2012. That letter talks about "repayment" but the whole context of the letter is on the basis of the changes in interest rates and stipulates that a revised payment will be due on 23 January 2012 of £83,102.66. It then says this:

Mr Mills says the use of the word "repayment" as distinct from payment must indicate that these figures included an element of capital repayment. In my judgment, read objectively, this letter cannot mean that. Mr Mills answers that by saying it is necessary to look at the particular relationship that existed with repayments of capital having been made over a period of six years and that therefore Prima must have known that repayments of capital were being made.

I cannot construe that letter to have that meaning. It seems to me, if that was the meaning that was intended by it, it is highly misleading. I do not find that it was evident at all on the evidence I have seen that repayments of capital were being made. However, Mr Mills takes the argument one stage further and says that the annual statements of account, which were provided, would have shown that capital repayments were being made. I find that far from compelling that these items, which were completely unspecified in the figures provided by WB, would have been self-evident to Prima. Indeed, since repayments were being made not only through the sales of property but also voluntarily being made, it would have required some fairly careful arithmetic for Prima to have ascertained that WB were taking payments out over and above the interest payments.

Indeed, the subtlety of the exercise is demonstrated by the letter written by the solicitors for WB, Shoosmiths, dated 6 December 2012, when they were invited to provide a breakdown of the payments made since December 2011. It is very interesting to note by way of example the payment received on 23 January 2012. The amount received was £83,102.66 and it is then said the interest element of the payment was £66,574.28. Completely missing from the analysis of some four payments made like this is any column dealing with the capital repayment which, as I have said, over that period amounted to some £78,564.05. It may be a matter of simple arithmetic to work it out, but it was certainly being obscured.

Mr Mills says that in any event this cannot be clear and that this is one of those cases where it would be quite wrong to give summary judgment because there may be other material in the form of documents which may be disclosed by Prima which would put the case in another light which is not currently before the court. He says, for example, there may be documents showing that Prima had discussed this very element. Documents, he hastens to add, which of course would have to be non-privileged documents. But it seems to me that those are very much in the nature of a smoking gun type submission and, at the moment, there is really no smoke let alone a gun. As Moore-Bick LJ said in ICI Chemicals v TT Training [2007] EWCA Civ 725, at paragraph 14, "Such material has to be likely to exist and can be expected to be available at trial." It seems to me this at the moment is pure speculation. There is nothing apparently from the files of WB which would give any hint that there was some sort of acknowledgment or knowledge on the part of Prima that these repayments had been made.

In the light of this, I am satisfied that as a matter of the construction of the agreements and on the evidence placed before me, against which there is nothing to contradict it, there were the funds held by WB at the time it made its formal demand more than sufficient to pay the amount which it did then demand. It must follow, therefore, that it was not entitled to make that formal demand.

That finding by itself would be sufficient to dispose of the principal issue, but I will deal with the further points.

The construction issues

If I am wrong on the matters which I have already decided, then Prima would argue that the obligation to pay the two instalments was not due in accordance with the terms of the facility letter and the general conditions. I turn then to look at an event of default under the general conditions.

Event of default is defined in clause 12:

Then there is provision dealing with what happens when an event of default occurs. This is in sub-clause (2):

The terms of the side facility letter provide:

The starting point for this submission by Mr Cunningham is that there is no due date to be found within the wording of clause 8.1. There is a payment obligation in clause 8(1) but the question is when does that payment obligation arise. The words used are "on a quarterly basis". The context of this is that a clause which provides for an event of default must be clear as to when such an event would arise, and it is for this reason that a due date is stipulated. Otherwise the case would be that a borrower would not know when it was in breach and what could trigger the draconian consequences of an event of default. On the face of it, "quarterly basis" does not give any date. Payment on quarterly basis could be on the usual quarter days; it could be at the first day of a quarter; it could be at the end of a quarter. It simply does not stipulate a day.

Against that Mr Mills says it is quite clear as a matter of sensible construction the dates that were intended must be the end of the months. He says simple reference to the amendments to clause 10 show the month ends of 31 March and 30 September. He also says that the expiry date/repayment date have also been amended to the end of the year, 31 December 2012. He therefore submits that it is obvious that the repayment date is the end of each of those quarters, and that is quite sufficient.

To my mind that is not a sufficient basis for specifying a date. The draftsman deliberately did not put a specific date and it is consistent with the way that clause 8 had been drafted that clause 8 would not give rise to any liabilities by way of loan repayments, for example. It would not have fallen within the definition of loan.

It seems to me that it would be pushing as a matter of construction to say that where other clauses have stipulated specific dates, that those could simply be transferred into a clause that provided a different basis. It seems to me that is simply wrong. I accept the submission of Mr Cunningham that, in the absence of a specific date being given, it is not possible to stipulate a due date for the purposes of clause 12(1)(i). It seems to me that clause contemplates a specific date and, since none was provided in relation to this arrangement fee, that clause will not bite.

However, the matter does not end there because Mr Mills says that his client relies on clause 12(1)(ii) and he says that there is no question here that there were breaches of clause 8.1 of the side facility agreement. That much is common ground as I have indicated. Therefore, if there had been such a breach, it does not matter whether it was on the due date or not. It is not relevant. The answer is it is accepted that those two sums should have been paid certainly by the time the default notice was served. The question then arises: is it open to WB to rely on its formal demand in circumstances where it specifically referred to clause 12(1)(i) as giving rise to the event of default?

Mr Mills, it seems to me rightly, says that all that is necessary under clause 12(2)(ii) is that it should declare that all or part of the loan and the other loan obligations have become immediately due and payable. It seems to me that submission is right and that the formal demand dated 11 October 2012 states simply, "You have failed to make the last two payments of £12,500 as detailed in the amendment to clause 8(1)..." If it had been necessary, I would have found that the formal demand was sufficient to give rise to the acceleration provisions which it then stated.

As a second point, Mr Cunningham urged on me that it would be quite wrong to construe the side facility letter in such a way that a failure to pay the arrangement fee could give rise to the draconian consequences of an event of default and he argues that this is simply commercially unrealistic. He particularly relies on a number of points that are made by Mr Anup Vyas in his witness statement dated 9 January 2013 at paragraph 38. These points show the background to this arrangement. They show that at the time the side facility agreement was negotiated there had been loan repayments, that the amount had been reduced, that the expiry date had been changed, that the figures were such that there was uncertainties about the trigger date, and last of all and most importantly, he says the oddity and commercial implausibility of the result whereby a failure to pay a relatively small instalment of an arrangement fee should trigger repayment of the entirety of the loan.

Mr Cunningham in his submissions made the point that the missed instalments were a tiny fraction of the total amount outstanding. For example, the missed instalment of £12,500 amounted to 1 over 659 of the total amount outstanding. It is a fair submission. But if it is right that the arrangement fee is caught within the terms of this agreement, then merely because it happens to be a smaller breach numerically in terms of money than a more major breach, does not mean to say that it should not have such consequences. These banking documents are drafted generally to give the bankers protection and to ensure that fees and so forth are paid on time. I am certain that because the obligations here are such that the definition of a loan obligation is wider than loan they would cover in these circumstances an arrangement fee. This therefore is an obligation that can give rise to a breach. "Loan obligations" is defined under the general terms and conditions as "all present and future obligations and liabilities...". Therefore, if there is a failure to pay loan obligations, this can give rise to an event of default. That is exactly what can be declared under clause 12(2)(ii). I am, therefore, not convinced by the points made by Mr Cunningham, and set out in the witness statement of Mr Vyas, that this would not have been an event of default within the meaning of the agreement.

Default interest

The general conditions provide for the payment of interest in clause 2. Clause 2(4) states:

Mr Cunningham argues that this only contemplates default interest being paid on sums which have not been paid on due date and, therefore, he submits that it can only refer to the non-payment of the two instalments.

In my view, the wording of clause 2(4) is much wider than that because, if it had been a valid notice, there would have been due the accelerated sum and that would not have been paid because it became payable immediately after the notice had been served. It seems to me, therefore, default interest would have accrued on that overdue amount from that date. But, for the reasons I have given in this judgment, that will not arise. Interest at the default rate would only be payable on the amounts of the unpaid instalments from the periods when they were due, which has not yet been decided and the date when they were in fact paid.

I shall now ask counsel to deal with the consequential directions that follow from my judgment.