Horn & Ors v Commercial Acceptances Ltd

Where an agreement and trust deed provide for two parties to contribute to lending in stated proportions, and require the lender to hold the security and repayments for them, the contributions ordinarily mean money advanced by each party on its own account, for its own benefit and at its own risk. The lender cannot, without contractual authority, syndicate its lending share with an undisclosed third party so that the third party bears part of the risk. A contractual prohibition on agency agreements reinforces that conclusion. Redemption proceeds must be distributed according to the agreed priority provisions. Payments to a third party cannot rank ahead of the other contracting party’s capital entitlement where the documents do not permit them.

The claimants were trustees of a pension scheme that agreed to provide top-up contributions to short-term property loans made by Commercial Acceptances Ltd (CA). The agreement and supplemental trust deed regulated the parties’ respective contributions, risks and entitlement to recoveries.

In relation to one loan, CA privately arranged for a third party, David Goldstein, to provide half of what CA represented as its senior contribution. After the borrowers defaulted, CA distributed the sale proceeds between itself and Goldstein before paying the trustees in full. The trustees claimed the resulting capital shortfall. The High Court, in [2011] EWHC 1757 (Ch), entered judgment for the trustees and also accepted an alternative rescission case. The central issue on appeal was whether the contractual reference to CA’s contribution included Goldstein’s contribution.

The appeal was dismissed unanimously. Lord Justice Rimer delivered the judgment, with Lord Justices Laws and Patten agreeing.

1. The agreement, trust deed and borrowers’ legal charge were construed as an exclusively two-party arrangement. Their references to CA’s contribution and the trustees’ contribution meant money respectively advanced by CA and the trustees on their own account, for their own benefit and at their own risk. The documents did not permit CA, as against the trustees, to make part of the loan on behalf of a third party who would bear the risk of that part.
2. The arrangements between CA and Goldstein were relevant only to identify the extent of CA’s own contribution. They could not alter the trustees’ rights under the prior agreement and trust deed. The contractual documents did not allow CA to make a private side arrangement binding on the trustees.
3. Clause 12.1.8 expressly prohibited CA from entering into an agency agreement with a third party in respect of any loan. CA’s arrangement with Goldstein made CA his agent in advancing his share of the loan and was therefore prohibited. CA could borrow money from a third party to make its own loan, but that would not make the third party a co-lender bearing part of the lending risk.
4. Under clauses 6 and 7, CA had to apply the redemption proceeds in the agreed order. The only payments capable of ranking ahead of the trustees’ capital entitlement were CA’s own capital contribution and its reasonable recovery expenses. CA had therefore been wrong to pay Goldstein before satisfying the trustees’ capital claim.

Having upheld the contractual interpretation, the court considered it unnecessary to determine the alternative arguments on rescission.

1. Court of Appeal (Civil Division) dismissed CA’s appeal and upheld the judgment for the trustees: [2012] EWCA Civ 958.
2. High Court of Justice, Chancery Division, Peter Smith J entered judgment for the trustees for £503,436.09, interest and costs after trial: [2011] EWHC 1757 (Ch).