Rajinder Kumar & Ors v LSC Finance Limited

The Court of Appeal dismissed the appellants' challenge to HH Judge Rawlings' findings. The court held that the Pattingham loan agreements were not regulated mortgage contracts for the purposes of the Financial Services and Markets Act 2000 because they fell within the investment property loan exception in article 61A(6) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001: less than 40% of the land was intended for use as a dwelling and the loans were made wholly or predominantly for business purposes. The judge's detailed factual findings about intended use and purpose of the loans were upheld.

The court also held that clause 4.3 of the Guarantees should be interpreted to prevent double recovery of interest by the lender and did not absolve the guarantor from liability to pay interest altogether; the clause operates to ensure the lender recovers only one amount of interest in respect of the same period and same principal. The Court refused the appellants' application to adduce fresh evidence and to introduce a further ground of appeal because the proposed evidence would not probably have an important influence on the result and did not meet the threshold for establishing that the judgment was obtained by fraud.

Background and parties. LSC Finance Limited, an unregulated lender, advanced a series of short-term loans for property development. The appellants were individuals and directors of development companies who borrowed (and gave guarantees) in respect of three adjoining plots of land at Pattingham. Following default, a dispute arose about the enforceability of the Pattingham loan agreements and whether they were regulated mortgage contracts under the Financial Services and Markets Act 2000. The appellants also challenged the construction of clause 4.3 of the standard guarantees and sought to adduce fresh evidence after trial.

Procedural posture. This is an appeal from HH Judge Rawlings in the Business and Property Courts in Birmingham (Claim No BL-2019-BHM-000122). The judge had identified multiple issues and made extensive factual findings. Only two issues proceeded on appeal: (1) whether the Pattingham loans were regulated mortgage contracts or fell within the investment property loan exception (article 61A(6) of the Regulations), and (2) the proper construction of clause 4.3 of the Guarantees. The appellants also sought to adduce fresh evidence and add a new ground of appeal based on subsequent criminal proceedings involving third parties.

Issues framed by the court.

• Whether the Pattingham loan agreements were regulated mortgage contracts, or qualified as investment property loans under article 61A(6) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the Regulations), such that they would not be regulated mortgage contracts under article 61 and therefore not unenforceable under s.26 of the Financial Services and Markets Act 2000.
• Whether clause 4.3 of the Guarantees precluded the guarantor from any liability to pay interest or whether it merely prevented double recovery of interest by the lender.
• Whether fresh evidence from later criminal proceedings should be admitted and a new ground of appeal allowed.

Court’s reasoning and conclusions. The court analysed the statutory framework: s.26 FSMA 2000 (unenforceability where regulated activity is carried on by an unauthorised person) and the definition and exceptions for regulated mortgage contracts in Articles 61 and 61A of the Regulations. The court emphasised that the enquiry concerns the facts as they were at the time the loan was entered into: intended use of the land and whether the loan was wholly or predominantly for business purposes. The Regulations provide a statutory presumption where a proper declaration appears in the agreement, but the declaration in the Pattingham agreements did not meet all the requirements of article 61A(3).

The Court of Appeal upheld the judge's extensive fact-findings that the borrowers (and related companies) intended the developments to be sold and the loans were made for business purposes, and that less than 40% of the land was to be used as dwellings for the borrowers. The defective form of the declaration did not negate the factual inquiry and the judge permissibly relied on documentary and other evidence in reaching his conclusions. Consequently the loans qualified as investment property loans and were not regulated mortgage contracts, so s.26 did not render them unenforceable.

On clause 4.3 of the Guarantees, the court applied normal principles of contractual interpretation and concluded the clause was intended to prevent double recovery of interest by the lender rather than to discharge guarantors entirely from any obligation to pay interest. That interpretation was consistent with the commercial context and with other provisions of the guarantee.

The application to adduce fresh evidence and to add a new ground of appeal was refused. The court applied the Ladd v Marshall criteria, Terluk guidance, and authorities on fraud and fresh evidence, and concluded the new material would not probably have an important influence on the result and did not meet the high threshold required to impeach the judgment for fraud.

The appeal was dismissed. The Court of Appeal agreed with the trial judge that the Pattingham loan agreements were investment property loans within article 61A(6) of the Regulations and therefore not regulated mortgage contracts under the Financial Services and Markets Act 2000; accordingly they were enforceable despite the lender being unregulated. The Court also upheld the trial judge’s construction of clause 4.3 of the Guarantees as preventing double recovery of interest rather than entirely relieving guarantors from interest liability. The application to adduce fresh evidence and to add a further ground of appeal was refused because the proposed evidence would not probably have an important influence on the outcome and did not meet the threshold for setting aside the judgment for fraud.

Appeal from the High Court of Justice, Business and Property Courts in Birmingham (HH Judge Rawlings sitting as a Judge of the High Court) Claim No BL-2019-BHM-000122; judgment of the Court of Appeal delivered [2024] EWCA Civ 254.