14 September 2021
Lending Focus - September 2021 – 5 of 6 Insights
In Re Arboretum Devon, the junior creditor's claim - that the senior security did not secure the borrower's obligations to repay the beneficiaries of the senior security – was unsuccessful. HHJ Cooke held that the junior creditor was prevented from challenging the agreed order of priority.
Arboretum Devon Limited (AD) required capital to buy land in Devon and develop holiday chalets. Lendy Limited (L) operated a peer-to-peer lending platform under the trading name of Saving Stream Security Holding Limited (SS). On 5 September 2016, AD entered into two loan agreements with L acting as Agent for the lenders, unspecified investors drawn from its lending platform; the amount of the advance was also unspecified (the L Loan Agreements). On the same date, AD granted a debenture to SS.
Separately but also on 5 September 2016, Shoby Investments Limited (SH) agreed to lend AD approximately £4.23 million. This too was secured by a debenture of the same date.
In March 2018, further security on after-acquired property was granted to SS and SH. Both entities and L entered into an intercreditor deed which held that SS's security would rank in priority to that of SH up to an amount of £7.85 million plus interest.
Administrators were appointed over AD in May 2019. Its business was sold for £902,500.
On the face of it, the sale proceeds were caught by the security net and flowed to SS under the terms of the intercreditor deed. However, SH now sought the court's intervention. It asked the court to confirm that SH was entitled to challenge the validity/enforceability of loans made by L to AD and the security held by SS.
The intercreditor deed contained the following Clause 2.9: "Neither Lender shall challenge or question:
Security was widely defined as including any mortgage, charge or other security interest.
Security Document was equally widely construed and included a definition of "Senior Debt Document" which included the Senior Debenture.
Within that debenture, "Secured Liabilities" were defined as "all present and future monies obligations and liabilities of the Borrower to the Beneficiaries whether actual or contingent and whether owed jointly or severally, as principal or surety or in any other capacity together with all interest (including without limitation default interest) accruing in respect of those monies obligations or liabilities pursuant to any Finance Document."
Finance Document was defined as "the Loan Agreement the Security Documents and all other agreements entered into between [L] (directly or as agent) or [SS] and [AD]."
SH contended that it had the right to challenge SS's entitlement to the monies flowing from the sale of AD's business i.e. the £902, 500 for the following reasons:
The court held that SH was prevented from challenging SS's entitlement to the sale proceeds by Clause 2.9:
The terms and definitions of the intercreditor deed are market standard.
Senior lenders can take comfort from this judgment, which demonstrates that these provisions are fit for purpose, fending off the junior creditor's challenge at an early stage.
by Cheng Bray
by Cheng Bray