High Court finds no unfairness in bank's restructuring of loan arrangements

In a judgment which has only recently become available, the High Court has allowed an application by a bank for summary judgment in its claim against a high net-worth individual, pursuant to a guarantee, for monies due under a loan agreement: Bank of Beirut (UK) Ltd v Moukarzel [2021] EWHC 3777 (Comm).

This is an interesting decision for financial institutions seeking to pursue or defend claims against sophisticated commercial borrowers seeking to set aside any financial restructuring arrangements on the grounds of unfairness. It highlights that borrowers may find it difficult to establish unfairness in the relationship under section 140A of the Consumer Credit Act 1974 (CCA) particularly where: (a) they are a sophisticated counterparty; (b) there were sound commercial reasons for the terms of the lending; (c) there was a clear written warning that the borrower should seek independent legal advice before entering any arrangements; and (d) the financial institution has exercised restraint in its enforcement of any outstanding debt.

In the present case, the court was satisfied that there were no signs which would result in the conclusion that the relationship between the bank and borrower was unfair within the meaning of section 140A CCA. The court emphasised that this was commercial lending to a sophisticated commercial borrower, whereby the part-owner of a multinational group was replacing their own guarantee of some delinquent lending with a new loan on equivalent terms, effectively giving themselves another chance to clear the borrowing, rather than the bank proceeding to enforcement under the guarantee. Furthermore, the borrower could point to nothing about the terms, the way in which the restructuring was done, or about the bank's subsequent conduct which was suggestive of unfairness.

Background

Between 2006 and 2012, the claimant bank (Bank) provided loan facilities to a Swiss company trading in West Africa (Acacia). These loans were secured by corporate and personal guarantees, one of which was given by the defendant individual (who was one of the ultimate beneficial owners of Acacia).

In 2014, Acacia began to experience financial difficulties. Acacia fell behind on its repayments and the Bank suggested to the defendant that, instead of enforcing the guarantees, it could loan them a sum sufficient to repay Acacia's borrowing. The defendant would ultimately repay this loan. The defendant accepted the proposal. In 2016, Acacia went into insolvency. The Bank attempted to recover outstanding sums and afforded the defendant ample time to pay. In 2019, the Bank served a notice demanding the repayment of the entire loan. The defendant did not pay.

In March 2020, the Bank brought a debt claim for all outstanding sums due under the loan facility.

The defendant denied the claim. The defendant's case was that the relationship arising from the facility was unfair for the purposes of section 140A CCA.

Decision

The court found in favour of the Bank and allowed its summary judgment application.

The key issues which may be of broader interest to financial institutions are examined below.

Section 140A CCA

The court noted that section 140A CCA provides:

"(1) The court may make an order under section 140B in connection with a credit agreement if it determines that the relationship between the creditor and the debtor arising out of the agreement (or the agreement taken with any related agreement) is unfair to the debtor because of one or more of the following—

• • any of the terms of the agreement or of any related agreement;
  • the way in which the creditor has exercised or enforced any of his rights under the agreement or any related agreement;
  • any other thing done (or not done) by, or on behalf of, the creditor (either before or after the making of the agreement or any related agreement).

(2) In deciding whether to make a determination under this section the court shall have regard to all matters it thinks relevant (including matters relating to the creditor and matters relating to the debtor)."

The court also noted that section 140B(9) CCA provides that the burden is on the creditor to show that the relationship with the debtor was fair. However, the court highlighted that if a claimant relies on evidence which uncontested and suggests no basis on which the relationship could be said to be unfair, then the evidential burden, or the burden to raise specific complaints, switches to the defendant, who is then required to identify facts which suggest unfairness.

The court also acknowledged the guidance on the applicability of section 140A CCA in Plevin v Paragon Personal Finance Limited [2014] UKSC 61 and Deutsche Bank (Suisse) SA v Khan & Ors [2013] EWHC 482 (Comm).

Was there unfairness?

The court held that there were no signs which would result in the conclusion that the relationship was unfair within the meaning of section 140A CCA.

Sophistication of borrower

The court noted that the defendant was the beneficial owner of an international trading group of companies. In the court's view, this was someone who was familiar with offshore corporate holding structures, cross border commercial transactions and very substantial financial dealings.

Further, the court highlighted that the restructuring and facility were negotiated against the background of a corporate restructuring, which was carried out with professional advice.

The court concluded that in terms of the relationship between the Bank and the defendant, the Bank was dealing with a sophisticated borrower. This was someone who was an international trader on a very significant scale, and who was in a position to consider their options.

Fairness of terms

The court strongly disagreed that the facility provided for a penal or unreasonably high rate of default interest. In the court's view, there had been a sound commercial reason for selecting that rate. It was explained to the defendant at the time on that basis. The Bank had also shown its reason for saying that there was nothing surprising or unobjectionable about that rate, namely it was the same rate as had been used before. The court struggled to see how it would be unfair to use that rate again when the lending was restructured.

The court also said that it would not expect that the Bank should have told a borrower like the defendant that banks charge compound interest. It was not something that it would expect a bank to have to explain even to a relatively unsophisticated borrower, and certainly not something that it would expect to need explaining to somebody who had been involved in transactions of this kind for a number of years.

The court rejected the contention that the terms entered into were appropriate for a corporate counterparty, but were not appropriate for an individual. The court underlined the importance of the context. This was a corporate loan which was being restructured because it was in default and had not been repaid. It seemed to the court that, in some ways, the terms that the defendant was able to obtain here were extremely favourable, given that the lending was already in default.

Creditor's conduct before and at the formation of the agreement

The court underlined that the facility did contain a written warning that, if the defendant was in any doubt as to the consequences, they should seek independent legal advice. It was simply not fair to say that there was no guidance given in that regard.

The court also pointed out that, even ignoring that warning, the defendant was, or appeared to be, sufficiently sophisticated to seek their own advice if they needed it. The court said that even if the Bank had carried out an inadequate investigation of creditworthiness, it would struggle to see how that could amount to unfair conduct in the context of a relationship like this. The defendant was precisely the type of borrower who the court would consider could be expected to take a view about whether they could repay the loan for themselves.

The court rejected the suggestion that the Bank was deliberately putting in place the facility in the knowledge, or even in the hope, that the defendant would not be able to repay. In the court's view, the defendant was already on the hook. The Acacia borrowing was already attracting default interest. The entry into the facility did very little to change the defendant's position. Indeed, their position was improved by it.

Finally, there was no reason to think that the defendant had not read and understood the terms. There was no suggestion of any pressure being applied, and there was no complaint by defendant at any earlier point about any unfairness.

Creditor's conduct following formation and leading up to enforcement

The court highlighted that the Bank had acted with restraint in the enforcement of the debt. The defendant had become delinquent in October 2016 and was afforded with considerable time to pay, even in the face of repeated unfulfilled promises of payment.

Accordingly, for all the reasons above, the court found in favour of the Bank and allowed its summary judgment application.