Summary 

In a recent high court judgment (Necarcu Ltd v Oldham Athletic (2004) Association Football Club Ltd [2023] EWHC 2096 (Comm)) handed down on 28 June 2023, Judge Hodge KC offers a valuable consideration of the law of novation in the context of a loan agreement. The case also serves as an important reminder of the need to document arrangements clearly in writing to avoid having to trawl through documents to try to establish the terms of the agreement that was reached.

Facts relevant to the claim

Necarcu Ltd (Necarcu) issued a claim against Oldham Athletic (2004) Association Football Club Ltd (Oldham Athletic) for the repayment of loan monies allegedly due from Oldham Athletic pursuant to a loan agreement dated January 2017 (secured by a debenture dated after the loan on 10 February 2017).

Oldham Athletic disputed both the total sums advanced (Necarcu alleged this was £350,000) and the date the funds were received. Putting aside the disputes over quantum and timings (where the court found £350,000 had indeed been advanced with the final tranche advanced on 13 February 2017, and £160,000 being the total outstanding loan amount), there were separate lines of argument as to who was liable for the outstanding amount and the (rather high) simple interest of 20% p.a. 

Oldham Athletic contended either:

• that the loan agreement had been novated to Mr Simon Corney (at the time, the chairman, director and 97% shareholder of the football club)
• that the loan agreement had been varied to the effect that Mr Corney had personally assumed all liability thereunder. 

Central to this line of argument was a letter addressed to Mr Coney and set out in full below (discussed at paragraph 3 of the judgment): 

"Dear Mr Corney

Re: Debenture with Necarcu

We write to confirm that we have now made an agreement with Simon Corney. 

We can confirm that upon completion of the sale of Oldham Athletic (2004) Association Football Club Ltd the debenture with ourselves will be satisfied personally by Simon Corney.

Yours sincerely, 

Necarcu Ltd."

The sale mentioned in the letter was the proposed sale of the football club to RLJ Capital Global FZC, which completed on 28 January 2018 against a backdrop of financial uncertainty for Oldham Athletic and ended Mr Corney's 14-year association with the football club. 

Oldham Athletic's argument was twofold: the agreement evidenced under the letter had the effect of 

• novating the agreement and putting all liability on Mr Corney
• varying the loan agreement so as to relieve Oldham Athletic of any liability. 

Necarcu denied those claims, arguing amongst other things, that those lines of argument were conditional on Mr Corney receiving consideration for his shareholding in the football club, which Necarcu alleged never came to pass. 

These arguments were distilled into four issues including points on variation and estoppel which ultimately fell away. The two issues which remained were: 

• Who were the parties, and what were the terms of, the agreement referred to in Necarcu's letter? 
• Was there a novation? 

Added to the mix was a further letter upon which Necarcu sought to rely, purportedly dated 3 days after the original letter, addressed to Mr Corney; stating that the agreement referred to in the original letter was of no effect, and that Necarcu would rely upon its agreement with Oldham Athletic. The court expressed its doubts about the genuineness of that letter, with Oldham Athletic disputing that this had ever been communicated to Mr Corney or to the football club. 

Findings of the court 

After a detailed run through of the factual background and correspondence (with a lack of documentary evidence being a theme, and a lot of reliance put on a set of board minutes from a meeting of the directors of the football club to evidence the underlying agreement), the court found that there had been an express agreement for the novation of the loan agreement. The debenture over the assets of the football club had been discharged in September 2019. 

Elements required for a valid novation 

The judgment offers a helpful summary of the law of novation:

• Novation is the replacement of an existing contract with a new one, typically where the existing agreement between 'X' and 'Y' is replaced by a new agreement between 'X' and 'Z', with 'Z' assuming the rights and obligations of 'Y'. 
• Consideration is generally seen as being found in the various promises made between the outgoing and continuing parties, although it is common for the contracting parties to opt for novation to be effected by deed to avoid any issues related to consideration. 
• Novation requires the consent of all of the parties, which can be express or can be inferred from conduct. 

This need for all parties to consent is one key difference between novation and assignment, with novation also differing conceptually in that rights and obligations are extinguished and replaced, and novation also 'transferring' obligations and not just rights (as is the case with assignment). 

Court's conclusions on novation 

On the facts, the court found there was no need to infer novation by reference to the conduct of the parties, and that the evidence was sufficient to show there was an express agreement. In finding an express agreement, the court drew heavily upon a set of board minutes of the football club, a paragraph of which noted that "...the club will be sold debt free. Simon will be satisfying the Necarcu debt personally...". 

The court was satisfied that the agreement was being entered into by Mr Corney both in his personal capacity and for and on behalf of the football club. Necarcu received Mr Corney as a personal debtor who was expecting to receive money from the sale of his shares (and was therefore in a better position to pay Necarcu, with Oldham Athletic's accounts showing it was at a high risk of defaulting and Necarcu also sitting behind a prior secured lender); Oldham Athletic received discharge of its existing debt; and Mr Corney was able to sell his shareholding. The court was therefore satisfied that there was an agreement between Necarcu, Oldham Athletic and Mr Corney that was supported by consideration. This was not a case of a unilateral notification of one party to the existing agreement, which would be of no effect. 

The court found that the cancellation letter which Necarcu sought to rely on as evidence that the novation agreement had been terminated was a fabrication, and not delivered to Mr Corney at the relevant time. In any event, Judge Hodge KC was of the view that the novation agreement was conditional on the sale of the football club, and whilst that condition was still capable of being satisfied, Necarcu was not entitled to unilaterally withdraw from the agreement.

Key takeaways

There are a number of useful takeaways from this judgment:

• As well as the useful tour of novation, the case serves as a reminder of the importance of documenting agreed terms. One theme highlighted in the judgment is the lack of record of what was agreed between the parties. Whilst a novation need not be writing and can occur informally, having a written agreement in place avoids the need to pour through the factual background in the event of a dispute. Agreements will often require any novation to be evidenced in writing, in which case the general position is modified. 
• Furthermore, where the parties elect to novate by deed, then that must be in writing. Even where an agreement is silent on any need for writing, it is best practice for some form of writing to show the agreement. Where the parties go a step further and novate by deed, this serves the further purpose of avoiding any arguments around consideration (albeit the mutual promises of the bargain would tend to satisfy that).
• The need for all parties to consent is, as discussed above, a key difference between novation and assignment. Consent is a question of fact, but the easiest way to demonstrate that all parties have consented is to include them all as a party to the deed of novation. An assignment could be effected where obtaining the consent of all parties may present issues, but it is hard to see how this would work in the context of a transfer by the borrower given that it would only permit rights under the loan agreement to be transferred (and not the borrower's obligations to repay or to pay interest on the sums due). 
• This case is an unusual case in the loan arena given that, while loan agreements tend to incorporate a clear process for the transfer of loans by the lender(s), the majority do not contemplate the possibility of transfers by the borrower and may even expressly prohibit them. Being comfortable with the identity and creditworthiness of the borrower is a crucial part of the lender's decision to lend, therefore permission to transfer is not something most lenders wish to include (or would be happy to accept if a borrower proposed it during the term of the loan and the loan agreement did not prohibit it). This point might be particularly relevant at the time of a borrower request in a fact pattern similar to the one in this case, as a limited company is being replaced by an individual. The path that would more commonly be taken would be a refinancing of the loan by the incoming borrower, which permits the lender to consider the position of the borrower and to put in place appropriate ancillary drafting and arrangements given the borrower's identity, including covenants, security and any necessary guarantees. However, on the facts, Oldham Athletic was struggling financially and Necarcu ranked behind a prior secured creditor, so the ability to quickly replace the borrower with an individual receiving funds from the sale of the football club was, at least at one point, seen as preferable and that oddity was to the lender's benefit.

Find out more

To discuss the issues raised in this article in more detail, please contact a member of our Banking and Finance team.