In ACC Bank Plc v. Friends First Managed Pensions Funds Ltd [2012] IEHC 435 (High Court, Finlay Geoghegan J, 26 October 2012) the bank sued Friends First for all the principal and interest in connection with a loan made to Friends First and others to purchase property. The bank’s recourse to Friends First under the Facility Letter was limited in recourse to the proceeds realised on any sale of the property and 46.6% of the interest. The limited recourse provisions provided that they would lapse in the event of a material variation of the co-ownership agreement between the borrowers without the consent of the bank.
The judgement of Finlay Geoghegan J determined that:
(1) Limited recourse provisions in the Facility Letter had not lapsed because variations to the co-ownership agreement without its consent were not material. The variations didn’t affect the ability of ACC to enforce its security or the borrower’s obligations to the bank;
(2) That a rate of 6% per annum interest surcharge amounted to an impermissible penalty and was not enforceable. The surcharge rate was double the interest rate and was disproportionate to the actual cost to ACC of the default; and,
(3) That interest did not continue to accrue against Friends First for as long as the principal remained outstanding on an indefinite basis as claimed by ACC. The Court held that, in the absence of specific provisions specifying the period of time for which interest should be paid, and arising from a general duty on the part of ACC to mitigate its loss, the Facility Letter contained an implied term that ACC would sell the lands within a reasonable period of time after demanding the loan after which the obligation to keep paying interest would cease. Having regard to the business model for which the loan was granted the Court decided that a reasonable period of time was 2 years from the date of the formal demand for repayment.
This decision stresses the importance of clearly drafted limited recourse provisions and setting out clearly the period of time for which interest will continue to accrue while the principal is outstanding on limited recourse loans. Lenders must also be aware that excessive or disproportionate rates of surcharge interest may not be enforced.
For further information on this decision or in relation to any general banking related matters please contact Gordon Judge () or Páraic McKeogh ().