Property Development

A limited Company was set up for the purposes of carrying out a specific property development project, (the Company). The property was acquired with the assistance of a loan from Bank B (the Bank) and a property development loan facility from the same Bank.

The two directors and shareholders of the Company gave personal guarantees to the Bank over any and all indebtedness of the Company to the Bank.

The Bank’s foreign parent Company had made a policy decision to quit the London property development market. However this was not known time. The result was that the Bank was looking for any possible reasons to exit existing facilities in order to meet targets imposed by its parent Company for reducing its exposure to property development.

The facility for a maximum draw-down of £3 million. After the Company had drawn down half of that amount the Bank refused any further lending citing “breach of the financial covenants” in the facility agreement.

The facility agreement was badly drafted. There were covenants relating to the loan to value and loan to development costs.

Despite lengthy correspondence between solicitors for the Company and the Bank in which a number of disputes were aired relating to the proper construction and interpretation of the loan agreement, which had in fact been poorly drafted, the Bank nevertheless issued statutory demands and served these on the two director Guarantors.

The two Guarantors made applications to have the Statutory Demand set aside.

The Guarantors were entitled to rely on the defences available to the Company and accordingly they advanced arguments concerning the meaning of “loan” in particular whether on a proper interpretation it meant the amount of loan as currently drawn at any one time or the total amount of the facility. It was submitted on behalf of the Company and the Guarantors that it could only properly mean the amount of the loan as drawn at any one time. For it to mean the total that could be drawn under the facility, it was submitted, would mean that an evaluation of “loan to value” or “loan to costs” could only properly take place at a point in time when the full amount of the loan had in fact been drawn when other variables could be assessed.

It was not necessary for the Court to judge the merits of those arguments at the hearing of the application to set aside the Statutory Demands. Instead the Court had to determine whether there was a genuine argument that required findings of fact that could only be made at a full trial of the case after full disclosure and hearing evidence. It was also submitted on behalf of the Guarantors that by using the draconian insolvency jurisdiction in this way the true intention of the Bank was to conceal the weaknesses in its own position that would be revealed if it was forced to give disclosure.

The applications to set aside the Statutory Demands were successful and the Guarantors received indemnity costs of the applications. The Court was particularly critical of the Bank’s conduct in the important matter of pre service correspondence where it had been particularly economical in its replies to the genuine concerns that had been advanced in correspondence by the Guarantors and their solicitors.

After payment of the Guarantors costs by the Bank the Company advanced a claim against both the Bank and its foreign parent for very significant losses caused by the Bank’s wrongful breach of its obligation to lend. The matter then settled on favourable terms.

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Patrick Selley. Keystone Law, 48 Chancery Lane, London, WC2A 1JF.

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