In the recent High Court decision of Alpha Schools (Holdings) Ltd v Signal Alpha III Fund LP [2024] EWHC 2862 (Ch), ICC Judge Baister provides insight into the court's intolerance to improper conduct by creditors and the importance of documentation being clearly set out as binding when that is the intention. 

Background

The dispute arose out of a financing arrangement between Alpha Schools (Holdings) Ltd (Alpha), the parent of a group of companies operating 19 private schools in the UK and Signal Alpha III Fund LP (Signal), a private asset management company. Alpha was in need of new financing to acquire more schools and was also struggling with poor cashflow and a strained relationship with its current financiers, Barclays Bank. Alpha and Signal signed a non-binding term sheet in April 2024. The term sheet included the payment of a break fee of GBP350,000 if the refinancing did not complete by 10 May 2024. 

The deal did not complete by the desired deadline and as a result of pressure to go ahead with acquisitions and its doubts that Signal was a viable option, Alpha decided to refinance with Fintex Partners Limited (Fintex) in July 2024, with whom it had been having similar discussions to those with Signal. This was done without Signal's knowledge, with Signal only finding out via a Land Registry enquiry and a Companies House search. Consequently, Signal sought to enforce its rights by demanding payment from Alpha for just over GBP1 million in professional fees, transaction expenses and the break fee of GBP350,000. Signal also reserved its rights against Fintex and claimed unlawful conduct by Alpha. Signal served a statutory demand on Alpha following Alpha's refusal to pay the invoice. Alpha's claim was brought both to restrain Signal from presenting a winding up petition and to cross-claim in misrepresentation. Alpha also argued that it was not required to pay the break fee on the basis the part of the term sheet providing for its payment was not expressed to be legally binding. 

Misrepresentation

Alpha's case rested on its claim that Signal had made a number of misrepresentations to induce Alpha to refinance with it. Alpha relied on a number of points including multiple assurances as to timing for closing, confirmations that there would be "light touch" due diligence and that there was no need for a personal guarantee. 

Alpha further claimed that the representations were fraudulent misrepresentations and contended that this entitled Alpha to (i) rescind the term sheet and (ii) claim for damages significant enough to extinguish the alleged debt. 

Case law makes clear the grounds for considering an application to restrain the presentation of a winding-up petition are such that "the court will grant relief where the debt relied on in the petition, or to be relied on to petition, is disputed by the company bona fide on substantial grounds and/or where the company has a genuine and substantial cross-claim sufficient to extinguish the petition debt." (Angel Group v British Gas Trading Ltd [2013] BCC 265 and Coilcolor Limited v Camtrex Limited [2015] EWHC 3202 (Ch)). 

Alpha's cross-claim was argued to be genuine and substantial and sufficient to extinguish the petition debt, and one that would therefore qualify as more than "a mere "cloud of objections"" ((the expression used by Chadwick J in Re a Company (No 6685 of 1996) [1997] BCC 830).

Term Sheet 

The court considered arguments based on whether or not the part of the term sheet under which the break fee was required to be paid was legally binding. As is usual in term sheets of this nature, the terms were stated to be "indicative only and subject to finalization" and "intended for discussion purposes only". As is again usual, the term sheet expressly stated that only certain of its terms were legally binding, excluding payment of the lender's fee. The fact that the fee was only payable should the financing not complete was however argued to be persuasive in assuming subsequent agreements were not entered into and therefore arguably successful in ousting the application of the wording as to whether or not the term was legally binding. 

Judgment

ICC Judge Baister ruled in favour of Alpha and restrained Signal from presenting a winding up petition. It held that Alpha had a reasonably arguable case of misrepresentation entitling it to rescind the term sheet and claim damages extinguishing Signal's debt. It was considered that Alpha had made out a case of fraudulent misrepresentation to a sufficient degree of substance that raised it, by some margin, above being capable of being dismissed as no more than a 'cloud of objections'. There was sufficient material on the basis of which an inference of dishonest or fraudulent conduct could be drawn, but the court had to stop short of making a finding, given the court's jurisdiction being of a summary nature and the scope of its inquiry thus limited. The facts and matters that needed to be considered were of a kind that could only be disposed of at trial, following disclosure, after cross-examination and potentially involving expert evidence. 

The term sheet-based arguments were also decided to be ones that should not be determined summarily, but their analysis should be dealt with in ordinary proceedings, which would be the proper way of resolving this dispute.

The court's exercise of discretion in favour of Alpha and its decision on misrepresentation was supported by Signal's conduct which was considered 'aggressive' and 'abusive' in terms of the pressure it put on Alpha.

Concluding comments

This case discusses several points relevant to both lenders offering and companies seeking financing and serves as a reminder of:

• the importance of how both parties act in the process of negotiation and subsequently, and the fact that a court may take into account the nature of such conduct when considering claims 
• the care that needs to be taken in the drafting of term sheets to ensure that those terms that are intended to be legally binding are expressed to be legally binding, and the impact that agreeing or failing to agree subsequent loan documentation will have on the legally binding nature or otherwise of those terms and
• the dim view the courts will take of the use of the statutory demand mechanism as an alternative to court processes, which was said in this case not just to be high risk but foolhardy. 

Find out more

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