Shafiq Malik v Henley Homes PLC

A loan made without a fixed or minimum term is prima facie repayable on demand. A term that prevents an individual lender from recovering an interest-free loan without other persons’ consent is unusual and potentially onerous. It requires specific agreement and cogent evidential support.

Under Part 24 of the Civil Procedure Rules 1998, a defence must have a realistic prospect of success. It must carry some degree of conviction and be more than merely arguable. An appellate court should accord appropriate respect to a first-instance evaluative decision on that question, even where no oral evidence was heard.

Mr Malik sought repayment of substantial interest-free loans made to Henley Homes plc, of which he and two brothers-in-law were equal shareholders and formerly directors. The company admitted that more than £2.3 million was outstanding but alleged an oral agreement under which the loans were repayable only following a sale or other liquidity event, or with the three shareholders’ unanimous consent.

A Deputy High Court Judge granted summary judgment on liability in [2022] EWHC 2611 (Ch). A consequential ruling, including an interim payment order, followed in [2022] EWHC 2989 (Ch). The company appealed, principally contending that the judge had conducted an impermissible mini-trial, misappraised the contemporaneous material and overlooked evidence supporting its defence.

The central issue was whether the alleged restriction on repayment had a real or realistic prospect of being established at trial.

1. Appeal dismissed. The alleged agreement would have prevented an individual lender from recovering an interest-free loan of no fixed or minimum duration unless the other shareholders consented or the company was sold or wound up. Such an unusual and potentially draconian restriction cut across the lender’s prima facie right to repayment on demand. It therefore required a specific and binding agreement. The absence of any documentary trace and the thin, insufficiently particularised evidence entitled the judge to conclude that the defence lacked a realistic prospect of success.

2. The parties’ long-standing practice of reinvesting profits and making broadly equal withdrawals by mutual agreement did not materially support the alleged restriction. That conduct was readily explained by their harmonious family and business relationship. It did not show what their legal rights would be after the relationship broke down and the lender ceased participating in management.

3. The descriptions “director’s loan” and “shareholder’s loan” had no technical legal significance and did not determine the right to repayment. The documentary use of “director loan account” was nevertheless relevant because the company’s own case asserted that the parties had specifically agreed to make shareholder loans.

4. The first-instance judge was not entitled to treat the accounts’ classification of the loans as falling due within one year as materially inconsistent with the company’s case. Loans callable without notice could sensibly receive that classification even if unanimity were required. That error did not undermine the overall conclusion.

5. Under Part 24 of the Civil Procedure Rules 1998, a defence must have a realistic prospect of success and carry some degree of conviction; being merely arguable is insufficient. There were no reasonable grounds to believe that disclosure or a fuller investigation at trial would materially strengthen the defence.

6. The summary judgment decision was evaluative, not a pure conclusion of law. An appellate court should show appropriate respect and reticence even where the lower court heard no oral evidence. The decision was open to the judge and was not wrong for the purposes of rule 52.21(3)(a).

1. Court of Appeal (Civil Division): Dismissed Henley Homes plc’s appeal from the summary judgment. The court held that the alleged restriction on repayment had no real or realistic prospect of being established: [2023] EWCA Civ 726.
2. High Court, Business and Property Courts: A Deputy High Court Judge granted summary judgment on liability in favour of Mr Malik, with the amount to be assessed: [2022] EWHC 2611 (Ch). In a consequential ruling, the judge ordered an interim payment of £2,362,152 and allowed 42 days for payment: [2022] EWHC 2989 (Ch). Permission to appeal was refused below but later granted by Newey LJ, with a stay pending appeal.