Third party legal charge secures all monies owed by borrower and related parties

The High Court has held that a third party legal charge secured not only the initial £27 million loan granted by a Bank to a property development company, but also secured further loans not only to the borrower but also other related companies.

The Facts

Bank of Ireland (the “Bank”) lent £27 million to Inis Developments Limited (“Inis”) to develop a block of flats in Stratford, London (the “Property”) in 2007. Further loans of £10 million and £6 million were lent to Inis in 2008 and an overdraft facility was also granted to it by the Bank in 2010. The Property was owned by Irish property developers Conal McFeely and Thomas McFeely (the “McFeelys”) and was held on trust by them for Ashwood Enterprises Limited (“Ashwood”). Inis’ liabilities were secured by way of a third party legal charge (the “TPLC”) over the Property given by the McFeelys as mortgagors with Ashwood’s consent. Ashwood and the McFeelys also provided guarantees of Inis’ liabilities to the Bank.

By 2010, the development remained incomplete, Inis was in default and the Bank was concerned that falling property values were presenting a risk to its security. At the same time, responsibility for the Bank’s loans had been transferred to the Irish National Asset Management Agency (“NAMA”). The Bank subsequently made a formal demand against the McFeelys in the sum of £39 million and appointed fixed charge receivers over the Property. The McFeelys claimed that the TPLC was limited to the original £27 million facility and that the appointment of the receivers was invalid because the Bank had overstated the redemption figure in its formal demand. Alternatively, they argued that the receivers’ appointment was invalid because the Bank was acting as agent for NAMA and NAMA could not appoint the receivers since it was not a party to the TPLC.

The decision

The TPLC was an “all monies” charge since it was expressed to secure all of Inis’ obligations including all present, future, actual or contingent obligations, whether incurred alone or jointly with another. The Court therefore decided that, under standard principles of contractual construction, a reasonable person who had all the background knowledge available to the parties at the time of the contract would have understood that the TPLC was intended to extend to all the liabilities owed by the Bank by Inis, Ashwood and the McFeelys. Of particular significance was the fact that the TPLC expressly allowed the Bank to grant Inis “or any other person any new or increased facility” without the need for the McFeelys’ consent.

With regard to the receivers’ appointment, the demand was made up of sums secured by the TPLC and the Bank had clearly reserved its right to demand further sums. There was therefore no basis for arguing that the receivers’ appointment was invalid on the grounds of overstated sums in the demand.

Furthermore, under the Irish NAMA Act 2009, the TPLC amounted to a “foreign Bank asset” because it was governed by English law. Although the TPLC was not formally assigned to NAMA, the Bank was required to hold the benefit of such a foreign bank asset at NAMA’s direction under the terms of the Irish legislation. Since the legal interest in the TPLC remained with the Bank, there was therefore no agency and so the receivers were correctly appointed by the Bank.

Comment

In this case, the Bank refused to impose a narrow construction on the bank’s security and held that such a view was overridden by the standard contractual interpretation test of what a reasonable person would consider to be the intention of the parties, having the knowledge of those parties at the time the contract was entered into. In addition, the Court confirmed that the effective transfer of loans and security under the Irish NAMA scheme did not invalidate the appointment of receivers under English law.

Ashwood Enterprises v Bank of Ireland [2014] EWHC 2624 (Ch)