Barclays Bank Plc v L. Londell McMIllan

A partner capital subscription loan made to an individual partner remains the partner’s personal liability where the contractual documents identify that partner as borrower. The firm’s undertaking to apply partnership capital towards repayment is collateral security, not a substitution of the firm as primary obligor.

Contractual purpose and liability are determined from the documents and relevant background, read as a unitary exercise. A transaction is not a sham merely because one party alleges a different subjective purpose; all parties must share the intention that the documents create different rights and obligations from those expressed. An unfair relationship under the Consumer Credit Act 1974 requires an assessment of all relevant circumstances, but ordinary commercial inequality and clear, standard loan terms do not of themselves establish unfairness.

Barclays Bank claimed repayment of a US$540,000 partner capital subscription loan made to L. Londell McMillan, a partner of Dewey & LeBoeuf LLP. The loan proceeds were paid into the firm’s account, and the firm undertook to apply the partner’s capital account towards repayment in specified circumstances.

Following the firm’s insolvency, the bank sought judgment against Mr McMillan personally. He argued that the loan was in substance made to the firm, that the agreement was a sham, that he had not received the proceeds, that there had been an implied representation that no event of default existed, and that the relationship was unfair under the Consumer Credit Act 1974. He also advanced a counterclaim alleging a duty to advise and sought an account.

1. Construction. The contractual documents made Mr McMillan the borrower and personally liable for repayment. The loan’s stated purpose was to assist his partnership capital subscription. The firm’s obligations under the undertaking were collateral. The structure amounted in law to an assignment to the bank of Mr McMillan’s right against the firm to repayment of his capital contribution. The documents contained no obligation on the firm to repay the loan as primary obligor. [2015] EWHC 1596 (Comm) [66]–[71].
2. The surrounding circumstances did not justify a different construction. The fact that the scheme was negotiated and administered through the firm, that the bank assessed portfolio risk by reference to the firm, and that repayment was expected to come from the firm did not displace Mr McMillan’s personal liability.
3. Sham. The agreement was not a sham. The relevant test requires a common intention among all parties to create rights and obligations different from those appearing in the documents. Mr McMillan understood that the loan funded his capital contribution, as did the bank. [1967] 2 QB 786 was applied.
4. Other contractual defences. Payment of the loan proceeds into the firm’s account was the agreed drawdown mechanism, and the firm acted as Mr McMillan’s agent for that purpose. There was no implied representation that no event of default existed. In any event, the alleged event of default had not been established, and the firm’s undertaking was negative in form: it prevented payment of the capital balance to the partner in preference to the bank but did not create an immediately enforceable debt for the bank.
5. Unfair relationship. The court applied the broad, fact-sensitive approach under sections 140A and 140B of the Consumer Credit Act 1974. The relationship was not unfair. Relevant factors included Mr McMillan’s experience and seniority, the clear and standard terms, the absence of unusual default or recovery provisions, the ordinary interest rate and tenor, and his freedom to use other sources of finance. The bank discharged the burden of proving that the relationship was not unfair.
6. The bank owed no relevant duty to advise Mr McMillan about the purpose or personal liability under a document whose terms were clear, or about the firm’s financial condition where the bank had no relevant knowledge or reason for suspicion. No causative loss was established. There was no basis for an account of principal because no repayment had been made on Mr McMillan’s behalf. Judgment was entered for the bank.