Default On A Secured Loan Facility: The English High Court Considers A Lender's Right To Terminate

• Published date: 20 May 2022
• Law Firm: Mayer Brown
• Author: Mr Ian McDonald, Miles Robinson, Mark Stefanini, Jonathan Cohen and Findley Penn-Hughes

In Lombard North Central Plc v European Skyjets Ltd¹, the English High Court has found that a loan agreement had been validly terminated by a lender following the default of a borrower, despite the lender having waived (through its conduct) its right to rely on certain other breaches. Although the dispute arose in the context of a finance transaction, the Court was asked to consider various issues which are likely to be relevant to most English law governed commercial contracts.

In particular, the judgment highlights the dangers of placing too much reliance on contractual "no waiver clauses" or equivalent "reservation of rights" wording to preserve legal rights in response to a breach, in circumstances where a party's purported reliance on such provisions/wording may be found to be inconsistent with their actual conduct and behaviour towards their counterparty following the breach.

The judgment also addressed the importance of strict compliance with contractual notice provisions, the way in which material adverse change clauses are interpreted by the English Court, and the scope of the "Braganza duty" in the context of termination rights.

Background

In October 2008 the lender, Lombard North Central Plc ("Lombard") and the borrower, European Skyjets Limited ("European Skyjets", and together with European Skytime Limited, the "Skyjet Parties") entered into a secured loan agreement in the amount of approximately US$ 8.8 million for the purchase of an aircraft. The loan was to be repaid by European Skyjets in 120 monthly instalments, with Lombard acquiring a first priority legal charge over the aircraft.

European Skyjets subsequently defaulted on several instalments, starting in 2009 and continuing through 2010 and 2011. Despite the missed instalments, European Skyjets did make several payments during this period, such that at times it cleared the payments arrears. Lombard and European Skyjets entered into restructuring related discussions during this time, but these discussions failed to reach an agreement.

In November 2012, European Skyjets was deemed to be insolvent. As a result, the loan agreement was terminated and an acceleration notice served by Lombard, with Lombard demanding that European Skyjets pay the then outstanding sum of US$5.9 million. On 17 December 2012, European Skytime went into administration.

Lombard subsequently bought proceedings against the Skyjet Parties for the outstanding balance on the loan of approximately US$5.9 million. Lombard maintained that it had validly terminated the loan agreement and had therefore validly enforced its security on the aircraft by selling it for US$3.1 million.

The Skyjet Parties brought a counterclaim for '26 million in damages against Lombard, claiming that it had no entitlement to terminate the loan agreement or sell the aircraft. The Skyjet Parties also claimed that Lombard had breached its duties as a mortgagee when selling the aircraft.

Decision

The...