Global menu

Our global pages

Close

Is there a general equitable duty on a lender to act in good faith?

  • United Kingdom
  • Litigation and dispute management

14-11-2018

Tracy David Standish & ORS v (1) Royal Bank pf Scotland PLC (2) Sig Number 2 Ltd (Formerly West Register Number 2 Ltd) (2018) [2018] EWHC 1829 (Ch)

The High Court has decided that it is not possible to ‘extrapolate’ from the decision in Medforth v Blake [2000] Ch.86 (‘Medforth’) a wide-ranging and implied general equitable duty of good faith or duty to act fairly owed by a lender/receiver to a customer.   The words ‘whether or not in possession’  in Medforth were made in the context of the equity of redemption and the mortgagee’s realisation of its security and, on the facts of this case, such implied equitable duties did not extend to broader complaints about the terms of a lending facility which was only incidental to the security.

Background

The claimants were shareholders in a company which owned and operated bowling sites (the “Company”). The Company executed a debenture over its undertaking and legal charges over its properties in favour of the first defendant and also entered into a facility agreement (the “Facility”).

The Company breached a financial covenant in the Facility and in 2011, the Facility was restructured and new terms were agreed. The new terms meant that 36.3% of the Company’s share capital was transferred to the second defendant and the first defendant could appoint an individual to observe at board meetings (‘X’).

A further restructure took place in 2012 which resulted in the first defendant writing off a portion of the Company’s debt and further shares were transferred to the second defendant. This transfer resulted in the second defendant holding 60% of the Company’s equity and 45% of the voting rights. The Company was sold in 2015. The claimants issued proceedings against the defendants and alleged that:

  • there was an overarching customer agreement between the first defendant and the Company which contained implied duties of good faith and/or equitable duties owed towards them as customers;
  • the first defendant breached certain equitable duties relying on Medforth. In particular they argued that the words ‘in possession or not’ in Medforth meant that there was a general duty of good faith owed by a mortgagee whether or not they were in possession.
  • the second defendant (or X) had breached its fiduciary duties to the claimants (in that it acted as a shadow director and thus owed statutory duties towards the claimants as members).

The defendants applied to strike out the claim.

The Decision

The court granted the defendants’ application and the claim was struck out.  The court concluded that as the claimants had not fully particularised the claim or identified a legal basis for their claim  it was bound to fail.  The court made  the following points:

  1. There was no reason to conclude that there was an overarching agreement between the claimants and the first defendant.  The claimants had failed to fully particularise their allegations in this regard.  In any event, there was no need for such an agreement in light of the fact that the parties had entered into facility agreements which governed the terms of the relationship.   
  2. Medforth was distinguished.  In Medforth, the court had held that receivers and mortgagees owe equitable duties (including the duty to act in good faith) to mortgagors when selling a mortgaged property even if not in possession.  However, the court observed that in Medforth, there was a specific set of facts: namely the actions of a receiver managing a mortgagor's business and the court’s comments (in that case) that the duties applied ‘whether or not in possession’ were made in the context of the equity of redemption.  The court stated that based on the facts of Medforth it was not possible to conclude that if a lender has security by way of a mortgage, but has not exercised or threatened to exercise that security, it owes a wide-ranging implied duty of good faith and duty to act fairly to the mortgagor.  The court reiterated that the duties imposed in Medforth were connected with the security.  In this case, the court observed that the complaints of the claimants were unrelated to the security rather they related to the Facility and the security was only an incident of the Facility.  The court also rejected the argument that this was a developing area of law.
  3. The claimants failed to establish any connections between the alleged shadow directorship and the actions complained of that would amount to a breach of fiduciary duty.

Comment

The court’s decision is positive news for lenders as it make clear that the implied duties in Medforth are limited to those facts.  It clarifies that the comments in Medforth ‘whether or not in possession’ relate to the decision that receivers owe the same duties as mortgagees to customers when selling mortgaged property albeit they do not take possession in order to do so. Had the court accepted the defendant’s argument,  it would have meant that such equitable duties extend way beyond matters relating directly to the realisation of a lender’s security and could potentially have extended the scope for claims against the lender relating to any aspect of its relationship with its customers.

For more information contact

< Go back

Print Friendly and PDF
Subscribe to e-briefings