Are the courts beginning to take a more lender-friendly approach to enforcing security and guarantees?

In relation to the enforcement of security and guarantees, the courts have traditionally take the approach of determining any uncertainty in favour of the entity providing the security or guarantee. Cases that exemplify this approach include Clayton's Case (1815-16) 1 Mer 572 and Hopkinson v Holt (1861) 9 HLC. Some more recent cases do however point to an approach that supports lender's usual practices and could ultimately lead to a more creditor-friendly approach.

In the case of Anfield (UK) Ltd v Bank of Scotland plc and others [2010] EWHC 2374 (24 September 2010), the High Court found in favour of a lender that had negligently failed to register its security. The lender advanced money to the borrower to enable the repayment of an earlier loan and the redemption of an associated charge. The lender was granted security for its loan but failed to register it and subsequently found itself in court competing for recourse to the borrower's assets against other creditors. Presented with arguments as to whether the lender could be subrogated to the security given for the earlier loan, the court ruled in favour of the bank, despite the failure to register, allowing the subrogation on the basis that the subsequent creditors would otherwise be unjustly enriched.

A different lender found similar support, on this occasion from the Court of Appeal, when a guarantor sought to invalidate a statutory demand made against it by the lender in White v Davenham Trust Ltd [2011] EWCA Civ 747 (28 June 2011). The guarantor called on the court's decision in John Remblance v Octagon Assets Limited to argue that it was unjust for the lender to pursue it before the lender was able (under the relevant insolvency rules) to issue a demand against the borrower. The Court of Appeal dismissed the appeal and in doing so supported the principle that a lender is free to exercise, or decline to exercise, its rights under the security and guarantees in whichever manner it may choose.

The case of Black Ant Co Ltd (in administration) [2014] EWHC 1161 (Ch) (15 April 2014) had lenders up and down the country breathing a sigh of relief when the High Court found that the restatement of an existing facility and the rolling-up of unpaid interest and fees did not cause of loss of ranking under the 'anti-tacking' provisions of the Land Registration Act 2002.

The borrower in this case was asked by the lender to execute new facility letters in respect of an existing facility which included amounts of unpaid interest and fees within the new principal amount. On the administration of the borrower, a competing creditor argued that the replacement of the facility letters constituted a deemed repayment and new borrowing of the existing facilities and that the rolling-up of interest and fees in particular was a further advance that the lender was not obliged under the terms of the original documentation to make. Had they found support, these arguments would have caused a loss of priority for the lender's charge but the court found that there was little documentary evidence to make the argument and looked to the commercial nature of the transaction between borrower and lender to find that the obvious purpose of the new facility was to subject the existing advance to the lender's updated terms and not to advance new money.

The decision in Black Ant was appealed by the second chargeholder in Urban Ventures Ltd v Thomas and others [2016] EWCA Civ 30 (29 January 2016) allowing the Court of Appeal to make a ruling on the point. The chargeholder pointed to a clause in the new agreements purporting to cancel the existing facilities to again make the argument that facility documentation had been replaced by a new contract and consequentially a new loan had been advanced.

Adding further support to the commercial practices of lenders, the Court of Appeal held that the question of whether there was a new advance was not answered by determining whether the new facility document was a variation or a wholesale replacement of the existing document. The principal and interest were contemplated by the original facility agreement and without an express agreement between the parties for the repayment and re-lending of the loan (or the unpaid interest), the sums could not be considered a new advance. The court did acknowledge that fees charged on subsequent renewals would need to be considered carefully and separately to see if they were contemplated by the original agreement; some fees payable under the terms of a renewal will constitute new advances for the purposes of the anti-tacking provisions.

While the above cases may indicate a slight change in approach by the courts, lenders should continue to take great care when taking security and guarantees. The absence of intercreditor documentation continues to be the source of many disputes between creditors both inside and outside of the courts and we continue to recommend that the intercreditor relationship is formally documented.