At present, many borrowers are struggling to comply with original loan agreements and also compromised or revised arrangements, put in place in good faith and designed to improve the position of the loans and to provide flexibility to facilitate repayment arrangements and/or additional time to achieve realisation of assets.
In the recent case of ACC V Frank Kelly and Ann Kelly Clarke J, 10 January 2011 [2009 No 5503 S] [2010 No. 84 COM] ACC sought to recover substantial loans made to Mr. Kelly and Mrs. Kelly who had developed a large buy-to-let property business. The central issue for consideration by Mister Justice Clarke (“Clarke J”) in the action by ACC for judgment relating to the unpaid balance of the loans was whether an agreement or arrangement had been entered during a series of meetings between the Kellys and ACC. The substance of which was that, provided the Kellys took certain steps designed to improve the position of the loans, ACC would not call in the loans. The defense was also permitted to proceed on the basis of promissory estoppel.
Promissory estoppel is a doctrine that provides if a party changes his or her position substantially either by acting or forbearing from acting in reliance upon a gratuitous promise, then that party can enforce the promise although the essential elements of a contract are not present. As a corollary, in circumstances where a person seeks to rely on the action of forbearance, then the compliance with the promise is required.
Clarke J held that the Kellys had not provided sufficient evidence that there was such an arrangement which required ACC to forbear in commencing enforcement action against the Kellys in circumstances where they had not acted in compliance with alleged agreement. On the balance of probabilities Clarke J found no agreement was reached either during the series of meetings between the parties to resolve difficulties encountered with the loans, or at any other time whereby ACC agreed that it would not enforce its entitlements.
In addition to the central issue described above, other questions for ruling were:
- Whether ACC had wrongfully put a receiver in place and whether the resultant actions of the receiver were wrongful;
- Proper execution of the mortgage deed;
- Application of surcharge interest to the loan account.
Claim of wrongful appointment of a Receiver
Mr. Kelly argued that ACC had wrongfully appointed a receiver, and that the said receiver entering into possession of the mortgaged property without a court order did not comply with the provisions of the Land and Conveyancing Law Reform Act 2009 (the “2009 Act”).
It was found to be clear from the mortgage document that ACC are entitled to
appoint a receiver in the event of a breach and that the non payment of the entire sum due when validly demanded, amounted to such a breach.
Clarke J confirmed that the provisions of the 2009 Act requiring a court order for a receiver to take possession applies only to mortgages created after the commencement of the relevant chapter 3 of the Act, being 1 December 2009. The mortgage in question pre dated 1 December 2009.
As such the legal position is clear that there was no barrier to the appointed receiver going into possession.
Proper Execution of the Mortgage Deed
It was determined that ACC were entitled to enforce the terms of the mortgage, despite the fact that it had not executed the mortgage. Clarke J found that this was of no relevance and it was only necessary that the Kellys accepted the facility and executed the mortgage.
Application of Surcharge Interest to the Loan Account
Clarke J held that if a borrower signs a facility letter which states that it is subject to the general terms and conditions of that Bank, the borrower is then bound by those general terms and conditions as much as by what is actually contained in the facility letter itself, subject only to the question of misrepresentation, which was not the case in this instance.
In essence on the findings of the court, ACC was entitled to call in the loan in April 2009, any time thereafter the entire sum due was in arrears and the surcharge as provided for in the general terms of conditions of 6% was chargeable from that date.
Obiter Comments - Nature of Demand Facility
Clarke J raised the question of the legality of a financial institution being entitled under a demand facility for no reason at all to call in the loan. Clarke J went on to suggest that it may be possible to argue that a financial institution needs at least some reason in order to call in the loan (at least in cases where the relevant facility contemplates a term arrangement) even though it may not be a reason which amounts to a breach of a term of the relevant facility. This was not a matter to be ruled on in this case.
Clarke J’s judgment emphasises the importance of clarity of arrangements when undertaking workout or settlement discussions between borrowers and lenders. It highlights the point that the borrower compromise arrangements are conditional on performance and in circumstances where settlement or compromise is not agreed, that lender patience or forbearance does not result in amendment or variation of the contractual terms.
It also highlights that importance for borrowers to read and understand the terms of a facility agreement and related general terms and conditions and where there is any confusion to seek professional advice and assistance. And it emphasis the importance of clear concise records being retained by both the lender and borrower. The judgment also provides some welcome judicial interpretation on provisions of the 2009 Act.