Non-performing loans - enforcement lessons

In the last year our financial services disputes team has secured a string of successful results in the English Commercial Court for our international bank clients. In this note we reflect on some of the different arguments run by borrowers and guarantors to hopefully help minimise challenges in any future enforcement actions undertaken by lenders.

Our team have recently advised on:

• judgment against an Indian shipping company and its promoters for US$38M;
• US$45M judgment for a syndicate of banks against companies with interests in a Nigerian oil production facility; and
• judgment of US$239M against a Cypriot guarantor for a loan to finance the construction of two oil rigs.

This article looks at three main areas:

• Notices of demand
• Service of documents
• Settlement agreements

The over-arching theme is the need for precision. The smallest deviation from any requirements set out in the finance documents, or any ambiguity in drafting, can give a defendant the opportunity to try and frustrate an application for summary judgment (such an application is available to obtain judgment without a full trial if there is no real (i.e. more than fanciful) prospect of the defendant being successful at trial).  Our comments below should be simple to implement, saving time and costs when it comes to proceedings.

Notices of demand

A notice of demand (or demand letter) is a critical part of recovering sums due under a loan agreement.  Importantly, the notice of demand will often be used to accelerate repayment of the loan, requiring the obligors to pay any outstanding amounts immediately rather than in accordance with the remaining repayment terms set the loan term.

Finance documents usually contain clauses specifying the information which a notice of demand must include.  A failure to meet what is required, or giving inaccurate information, will leave lenders susceptible to arguments that the notice of demand was invalid and, as a result, no sums demanded therein are not (currently) due and owing. 

In a recent case, a notice of demand served on a guarantor incorrectly referred to a clause in a separate guarantee given by another guarantor. The lender argued that the guarantor could have been under no illusion as to what the demand was referring to; however, the court held that the notice was not valid because guarantees and demands must be construed strictly. Anticipating the potential issue, TLT had included a fresh demand on behalf of the lender in a letter before claim referring to the correct clause, thereby remedying the issue prior to issue of proceedings.

In another of our cases, the guarantor argued that the notice of demand did not specifically reference further default interest accruing and that, as the borrower had since been dissolved, no further demand for default interest could be validly made. The notice demanded the sum then due “together with further interest thereon… at the contractual rates”. The Court held that the drafting was sufficient to include accruing default interest, but a simple reference to both future contractual and default interest would have prevented any such argument.

To prevent issues regarding the validity of a notice of demand, those drafting the notice should ensure they understand all of the requirements for the notice. If in any doubt, get the draft checked by lawyers.

Service of documents

A facility agreement usually include provisions requiring any documents served in connection with it (including notices of demand) to be served in accordance with specific requirements as set out therein.

In a recent hearing, a guarantor sought to defeat the lender’s application for summary judgment by arguing that there was no proof that a notice of demand had actually been sent (in this case, by recorded post) to the borrower and therefore the lender could not show compliance with the contractual requirements. The guarantor therefore argued that the notice of demand served on it was invalid, meaning the loan had not been accelerated so no sums were due at the time of service. It should be noted that the contractual provision did not require the notice of demand to be physically received by the borrower (a deeming provision was included), so it was the physical act of posting that the guarantor had called into question.

While the lender could not find any proof of posting by the time of the hearing, (the notice was served some 4 years prior), it did recover internal emails where employees had been instructed to send the notice by recorded post. This evidence, plus a contemporaneous letter from the borrower that appeared to acknowledge the notice of demand (without challenging whether service was valid, was sufficient to persuade the Court that the contractual notice provisions had been complied with.   

We recommend that when serving any notice of demand, or other document required under the facility agreement, evidence of steps necessary to ensure contractual compliance are preserved along with a copy of the demand as sent.  This includes keeping:

• a copy of any recorded delivery or courier documents;
• a record of the name of the employee who made the arrangements for service (in case a short witness statement is required from them);
• a copy or photo of the envelope showing the post has been prepaid and bears the stipulated address.

Settlement agreements

Settlement agreements are commonly used to achieve a commercial resolution with obligors, avoiding the need to resort to time consuming and costly enforcement action.

Any settlement agreements entered into, and the negotiations and communications surrounding them, should be treated with great care by lenders. Obligors often seek to rely on their existence and the content of the underlying discussions even when they have defaulted on the agreed repayment terms. 

In a recent application for summary judgment, the Court held that it was at least arguable (and was therefore sufficient to defeat the lender’s application) that the wording of a settlement agreement between the lender and guarantor meant it continued to be enforceable even after the guarantor was late paying an instalment. The relevant clauses were ambiguous as to whether any delay in payment meant the settlement agreement stood automatically revoked; or whether the lender needed to serve notice revoking it; or whether the lender was entitled to continue with enforcement action whilst the settlement agreement remained in place allowing the guarantor an opportunity to pay the final instalment. The court noted in particular that the late payment of the instalments had been acknowledged without any reservation of the lender’s rights to continue with enforcement.

The practical effect of the Court’s decision afforded the guarantor an opportunity to make the final settlement instalment. When the guarantor missed that deadline, the lender made a second application for summary judgment, which was successful. The ambiguous drafting of the settlement agreement, however, had caused a delay in obtaining judgment of 6 months plus additional legal costs.

Lenders should always obtain legal advice in relation to the drafting of settlement agreements, especially the provisions that deal with the consequences of an obligor failing to adhere to the agreed terms.

Further, all communications regarding settlement negotiations and subsequent agreements should be drafted carefully to ensure that they do not inhibit the lender from taking future enforcement steps. Settlement communications should be marked ‘without prejudice’. Lenders should also expressly reserve their rights in relation to any breaches of both the original finance documents and/or any settlement agreement to preserve their options for future action.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2021. Specific advice should be sought for specific cases. For more information see our terms & conditions