Finance Litigation - The Latest Cases And Issues - July 2017

This month we consider the court's refusal to imply an obligation into a loan agreement that a lender should take steps in foreign proceedings to preserve security; the court's view on the failure to heed alarm bells in relation to potential undue influence; and more cases and issues affecting the industry.

No implied term in a loan agreement that creditor should take steps in foreign proceedings to preserve security

The High Court has recently refused to imply into a loan agreement an obligation on the creditor to take particular steps in foreign proceedings that might preserve security.

This was the finding in General Mediterranean Holding SA.SPF v (1) Qucomhaps Holdings Ltd, (2) Harkin, (3) Awni Abu-Taha, in which loans totalling US $6m were advanced to the first defendant and guaranteed by the second defendant. Security for the loan was given over a Czech company, Moravan.

The claimant sought to enforce the guarantee. By this time, Moravan had gone into administration under Czech law. The defendants argued that as a result of the claimant's failure to file a claim as a secured creditor in that administration, Moravan's assets were released to alleged fraudsters (who had held themselves out as creditors) and the assets were lost.

The defendants argued there was an implied term in the loan agreement to the effect that the claimant would co-operate with the defendants in relation to the performance of the loan and would not do or omit to do anything which would prevent the defendants from fulfilling the obligations under the loan. They argued this meant the claimant was under an obligation to take steps to preserve the security and by failing to file a claim in Moravan's administration, its assets were put beyond the reach of the claimant and the sureties under the guarantee. They argued that the defendants' obligations had been discharged by the loss of the security through the fault of the claimant to fulfil its obligation under the implied term.

At first instance, the court granted summary judgment to the claimant. The defendants appealed.

The High Court held that the argument on implication had no real prospect of success. Where a debtor or surety relied on a creditor's omission in order to discharge the obligation to repay, it had to be shown first that the creditor was under a duty in respect of the task it had omitted to do. The duty could be imposed by law, equity or by agreement between the parties. If there was no such duty imposed in equity, it would be unlikely that the courts would impose one by implication. The default position was that creditors did not have to take any steps and clear words in a contract would be needed to show otherwise.

The defendants alleged the claimant knew they were relying on Moravan's assets to repay the loan and the duty to step in should therefore be implied. The court disagreed, holding there was no evidence that the claimant had such knowledge and even if it did, that did not give rise to a duty on the claimant to claim in Moravan's administration. There was no real prospect of showing that the claimant had such a duty as a matter of law or in equity. Such a term would not be implied as it was not obvious and nor was...