High Court Considers Termination And Enforcement Of Security Rights In Context Of Default On Loan Agreement

• Published date: 06 May 2022
• Subject Matter: Finance and Banking, Transport, Charges, Mortgages, Indemnities, Financial Services, Aviation
• Law Firm: Herbert Smith Freehills
• Author: Ms Ceri Morgan, Emily Barry, Nihar Lovell and Nic Patmore

The High Court has found in favour of a lender in its claim against a dissolved airline business for sums due under a loan facility agreement (which was secured by an aircraft mortgage): Lombard North Central plc v European Skyjets Ltd [2022] EWHC 728 (QB).

This decision will be of broader interest to financial institutions seeking to accelerate a loan and enforce security. It is a useful reminder that a creditor's conduct, for example by accepting late payments or offering more time for outstanding payments to be made, may be held to waive an event of default.

In the present case, the lender was found to have waived its right to rely on the borrower's payment default (because of conduct outlined above), despite the inclusion of a "no waiver" clause in the loan agreement, and the use of reservation of rights language in communications with the borrower. While the lender's acceleration notice under the loan agreement referred to the payment default only (in respect of which the right to terminate had been waived), the court held that - on the construction of the loan agreement in question - the notice was valid because of an alternative event of default which had occurred (including a subjective material adverse change). Neither the loan agreement nor the mortgage (as drafted) required the relevant event of default to be specified in the notice, and such a requirement could not be implied in the circumstances of this case.

The court also confirmed that the lender's right to accelerate the loan was not subject to the so-called Braganza duty, derived from the Supreme Court's decision in Braganza v BP Shipping Ltd [2015] UKSC 17, i.e. the lender's discretion was not required to be exercised in a way which was not arbitrary, capricious or irrational in the public law sense.

We consider the decision in more detail below.

Background

In 2008, Lombard North Central Plc (the Lender) lent approximately USD 8.8 million to European Skyjets Limited (the Borrower) for the purchase of an aircraft, pursuant to a loan agreement (the Loan Agreement). The loan was to be repaid in monthly instalments. By way of security, the Lender acquired a first priority legal charge over the aircraft.

In October 2009, the Borrower failed to make the first payment due under the Loan Agreement. Between October 2009 and October 2011, there were a series of further payment related defaults. However, during that time, the Borrower also periodically cleared the payment arrears, although it subsequently went into payment default again at various points. After lengthy restructuring related discussions, which included the Lender obtaining third party advice from an accounting firm, the Loan Agreement was terminated and the loan accelerated by the Lender serving a notice (the Notice) in November 2012. The Borrower subsequently went into administration.

In due course, the Lender brought a claim against the Borrower for the...