TMF Trustee Ltd v Fire Navigation Inc.
| Jurisdiction | England & Wales |
| Judge | Mr Justice Phillips |
| Judgment Date | 01 November 2019 |
| Neutral Citation | [2019] EWHC 2918 (Comm) |
| Docket Number | Case No: CL-2018-000440 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 01 November 2019 |
[2019] EWHC 2918 (Comm)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS
OF ENGLAND AND WALES
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Rolls Building, Fetter Lane
London, EC4A 1NL
Mr Justice Phillips
Case No: CL-2018-000440
Robert Bright QC and Charles Holroyd (instructed by Reed Smith LLP) for the Claimants
James Collins QC and John Snider (instructed by Holman Fenwick Willan LLP) for the First to Third Defendants
Hearing dates: 24 May and 19 June 2019
Judgment Approved by the court
By a loan agreement, originally dated 29 June 2009 but amended and re-stated on 23 December 2016 (“the Loan Agreement”), the third and fourth claimants (“the Lenders”) provided the first and second defendants (“the Borrowers”) with a loan facility of US$69,020,047 to finance the acquisition of two vessels, the Megacore Honami and the Megacore Philomena (“the Honami” and “the Philomena”). The first and second claimants were parties to the Loan Agreement as Security Trustee and Agent respectively. By a deed of Guarantee dated 31 July 2013 the third defendant guaranteed the obligations of the Borrowers under the Loan Agreement.
The Loan Agreement provided, at clause 21.1, that “all amounts due from the Borrowers … shall be paid (a) without any form of set-off, cross-claim or condition …” (“the No Set-Off Clause”).
The first defendant purchased the Honami and the second defendant purchased the Philomena. Each of the Borrowers granted a mortgage over its vessel to secure the obligations under the Loan Agreement, the mortgagee now being the first claimant. The fifth claimant is said to be the assignee of the Lenders' rights under the Loan Agreement.
The Loan Agreement obliged the Borrowers to repay the facility in 11 equal quarterly instalments, with a final “balloon” payment of approximately US$40 million on the Maturity Date (defined as 31 December 2017, but requiring payment on 29 December 2017, the immediately preceding Business Day). By clause 18.1(a), non-payment when due or demanded was an Event of Default.
On 20 October 2017 the second claimant purported to serve an Acceleration Notice under the Loan Agreement, based on an alleged failure of the Borrowers to pay additional security for the Loan. The defendants dispute the validity of that notice and, as explained below, its invalidity is to be assumed for present purposes.
The defendants did not repay the principal sum of US$34,287,297.61 following service of the purported Acceleration Notice. Neither did they make repayment on 29 December 2017.
On 18 December 2017 the first claimant caused the Philomena to be arrested at Los Angeles and thereafter successfully applied in California for a court sale of the vessel (the vessel being sold at auction for US$19,000,000 to the fifth claimant) and summary judgment on its claim in rem for US$34,287.297.61 plus interest. The court did not determine the validity of the acceleration, but acted on the basis that the Loan would in any event have become repayable on 29 December 2017.
The claimants commenced these proceedings on 28 June 2018, seeking payment of the principal and interest said to be due under the Loan Agreement, their primary case being that the Loan had been validly accelerated on 20 October 2017, but in the alternative alleging that it was in any event repayable on 29 December 2017.
Following interim orders of Andrew Baker J in this court dated 22 and 25 September and 18 October 2018, the first claimant obtained possession of the Honami and sailed her to Singapore, where the first claimant caused the vessel to be arrested. The first claimant has applied in Singapore for a judicial sale of the vessel and intends to progress the proceedings in that jurisdiction to a judgment in rem enforceable against the proceeds of sale.
The claimants now apply in these proceedings for summary judgment against the first to third defendants (“the defendants”) for a money judgment, but primarily for declarations that (i) the principal amount of the Loan became repayable no later than 29 December 2017; and (ii) that an Event of Default under the Loan Agreement occurred no later than that date.
Mr Bright QC, for the claimants, emphasised that the primary purpose of the application is to obtain a determination that there has been an Event of Default under the Loan Agreement, both (i) to demonstrate that the interim orders of this court were rightly granted and (ii) to assist the first claimant in enforcing its security over the vessels in the proceedings in California (at the appellate level) and in Singapore. Mr Bright further stressed that the claimants were not interested in enforcing any judgment against the first and second defendants (other than by exercising their existing security rights) and would undertake not to apply to wind up the Borrowers, ensuring that the Borrowers would be able to pursue their cross-claims.
The claimants further accepted, but only for the purpose of this application, that the court should proceed on the basis that the claimants' purported acceleration notice was invalid and ineffective, that the arrest of the Philomena was therefore unlawful, that the claimants were thereby in repudiatory breach of the Loan Agreement, that such breach had caused the Borrowers inability to repay the Loan at maturity and that the Borrowers have a valuable cross-claim as a result.
Mr Bright submitted that, even on the above basis, the claimants are entitled to summary judgment as (a) the assumed repudiation of the Loan Agreement was never accepted by the Borrowers, so the Loan Agreement was in force at the Maturity Date, at which point the Loan became repayable and (b) the No Set-off Clause prevents the defendants from resisting such judgment (or obtaining a stay) on the basis of the assumed wrongdoings of the claimants, or any cross-claim to which they give rise.
Mr Collins QC, for the defendants, developed two alternative defences to the claim, each of which he submitted had a real prospect of success. The first was that the Loan Agreement was terminated before the Maturity Date because either (i) the claimants' repudiatory breach was such that the Loan Agreement terminated automatically; or (ii) the Borrowers accepted the claimants' repudiation by their conduct in failing or refusing to perform their own obligations thereafter. The second (alternative) argument was that, as it is accepted (for present purposes) that the claimants caused the Borrowers' inability to repay the Loan on maturity, the Borrowers have a defence based on the broad “prevention principle”, namely, that a party in breach of contract is excused where he has been prevented from performing the relevant obligation by the breach of the other party. Such a defence, Mr Collins argued, is not by way of set-off of a cross-claim, and so does not fall foul of the No Set-off Clause.
For reasons set out below, I consider that Mr Collins' second defence has at least a real prospect of success (on the basis assumed for the purposes of this application), requiring the refusal of the current application, with the result that the claim will proceed to trial. In those circumstances I do not propose to express a view on the first defence, which in my judgment is highly fact-sensitive. Neither is it necessary for me to consider Mr Collins' further arguments that there is in any event “some other compelling reason” why the case should proceed to trial.
There is a subsidiary dispute between the parties as to the default interest rate applicable. As that issue turns purely on the proper interpretation of the relevant provisions of the Loan Agreement, and as it was argued fully, with no suggestion that further evidence could be relevant, I will determine the matter below.
The essential facts
On 8 September 2017 the second claimant served a notice that the loan-to-value ratio between the fair market value of the vessels was less than provided for in the Loan Agreement, requiring the Borrowers to rectify the shortfall within a month by pre-payment or provision of additional security (“the LTV Notice”). The stated amount of the shortfall in the LTV Notice was some US$400,000 greater than it should have been at the date of service.
On 5 October 2017 the Borrowers emailed the Lenders informing them of the intended sale of the vessels, attaching signed Memoranda of Agreement (“the MOAs”) in relation to such sale, and seeking a waiver of the shortfall.
On 20 October 2017, as the Borrowers had not remedied the shortfall (and no waiver had been agreed), the second claimant served the purported Acceleration Notice, stating that the Loan and all accrued interest was immediately due and payable and demanding immediate repayment. The claimants took no steps to enforce against the vessels because of the purportedly imminent sales.
Following service of the Acceleration Notice, the parties entered into without prejudice negotiations for a standstill agreement to permit the orderly sale of the vessels or the refinancing of the loan. However, no standstill was agreed.
On 13 November 2017 the Borrowers emailed the Lenders saying that the delivery date under the MOAs had been pushed back to between 15 December 2017 and 15 January 2018. By mid-December 2017, the Lenders considered that the sales were unlikely to materialise.
On 15 December 2017 the first claimant issued proceedings in the US District Court for the Central District of California – Western Division against...
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