Will banks lose priority when amending and restating facilities? High Court considers meaning of "further advances" under anti-tacking provisions
The Wealth Finance Brief - 20 June 2014
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In the recent case of Re Black Ant Company (in administration) EWHC 1161 (Ch) the High Court provided comfort to secured creditors with first-ranking security that they will not ordinarily lose their priority position if they take steps to alter the terms of an existing transaction.
In Re Black Ant the High Court settled a dispute between two creditors: the applicant ("Urban") and the 2nd respondent ("Dunbar"). Both had security over properties owned by companies in administration (the "debtors"). Dunbar held a first legal charge whilst Urban held a second legal charge. Both Dunbar and Urban had previously advanced loan facilities to the debtors.
After the second charge had been registered at the Land Registry in favour of Urban, the debtors signed a new facility letter with Dunbar replacing Dunbar's original facility letter. Under the new facility letter:
- no new money was lent; and
- Dunbar required the debtors to sign up-to-date versions of their standard terms.
There were no accounting entries of any kind showing a notional repayment of the original advances or the making of any further advances.
The debtors failed to repay the amounts owing under the facility letter - including interest and fees, which Dunbar added to the debtors’ accounts.
Which of Dunbar and Urban had first claim to the proceeds of sale of the charged properties? This turned, effectively, on whether variations and extensions to the Dunbar facility had resulted in the original facility having been repaid and replaced by the making of a "further advance" under section 49(3) of the Land Registration Act 2002 (the "Act").
In line with section 48 of the Act , charges over registered land rank in accordance with the order in which they are entered on the register. Section 48, however, is subject to certain anti-tacking provisions (laid down in sections 49 and 50 of the Act) – "tacking" being the term by which a lender with first ranking security may make further advances ranking in priority to a second ranking security. The effect of these provisions is that if the first ranking charge holder has received notice of a second charge then, in the absence of agreement to the contrary between the charge holders, its priority is limited to (1) advances made prior to receiving notice of the second ranking charge; (2) "further advances" which the charge holder was obliged by its terms to make, provided that obligation was noted on the register of title, and (3) advances made up to an agreed maximum amount, provided that amount was noted on the register of title.
The final agreement between Dunbar and the debtor, which was signed after Urban's charge had been entered on the register, was worded as the offer of a facility and stated that: "This offer is in substitution of and not in addition to all previous Facility letters to you which shall be deemed cancelled". Urban argued that the original advances had therefore been repaid and that Dunbar had made "further advances" so that the effect of Dunbar substituting new facility letters for the old ones was to deprive it of its priority. It also argued that the debiting of unpaid interest and fees to the debtors represented "further advances" in which Dunbar could not claim priority, since it had no obligation under the facility letters or the terms of the charge to let them remain unpaid.
The High Court dismissed Urban’s application.
Without having any direct authority on the meaning of "further advance" the court gave the phrase its ordinary meaning and looked to the purpose of the statutory provisions. It concluded that the ordinary meaning of the phrase "further advance" was obviously an advance of further or additional funds – one that was not made in this instance.
The true construction of the conditions precedent did not support the argument that the parties had intended to enter into a new contract. Irrespective of this, "neither the parties, nor any reasonable reader of the facility letters with knowledge of the facts, would have said that a new advance had been made… Urban's main argument was artificial and wrong".
In addition, rolling up the unpaid interests and fees did not amount to making a further advance. The unpaid interest and fees were just amounts secured by the terms of the charge, which were contractually due in respect of the original advance and, by the express terms of the facility letter, they formed part of the indebtedness. "Again, neither the parties nor any outside party with knowledge of the facts would have regarded Dunbar as having made further advances."
Although this case turned on its facts, it provides comfort to secured creditors with first-ranking security that they will not ordinarily lose their priority position if they alter the terms of an existing transaction to (1) update standard terms (as the judge said, "a common enough situation") and (2) include rolled up interest and fees in respect of original advances. The result should usually be the same where the terms of the indebtedness secured by a first charge are varied by a supplemental or amended and restated facility agreement, at least so long as the amount of the secured debt remains the same, and there is no statement that the existing facility has been repaid. Counsel for Dunbar conceded that the outcome might have been different had the facility been a revolving one, under which advances are repaid and re-advanced when rolled-over, In practice, of course, there will often be an intercreditor agreement regulating the ranking of debt and priority of securities between secured lenders, which will govern the extent to which the underlying facility agreements can be varied without affecting the agreed ranking and priority, and a secured lender is usually well advised to insist upon this where a second ranking facility and security is contemplated.