Expert Witness Journal Dec 24 - Journal - Page 94
regardless of their nature/impact, depending on how
the provision is drafted.
Repayment Date) had ceased. Aplin LJ noted that in
these circumstances it could be open for the Lender to
pursue a claim for statutory or equitable interest.
We don't know yet whether the courts will determine
the Default Rate in this instance to be exorbitant, extravagant and/or unconscionable, and as stated it is
hard to provide a hard and fast guideline as to what
level of default interest will fall the wrong side of this
line as it will be fact dependent. We would recommend
this is considered on a case by case basis, rather than
as a point of lender "policy", and that records are kept
of the factors considered to be relevant in setting a default rate, which might include potential repercussions
for the lender from late payment and the quality of
the lender's other credit protections, such as the security and guarantees given for the loan.
Finally, the case serves as a helpful warning as to the
consequences of a default rate being found unenforceable. Care should be taken to ensure that in these
circumstances any standard rate of interest provided
for in the contract will still prevail in this instance to
avoid the lender being left relying on a claim for statutory or equitable interest, which may not be adequate
in the circumstances.
Comment
The case will not be fully determined until, at least,
the High Court have reconsidered whether the Default Rate amounts to an unenforceable penalty so we
will be watching, if you'll forgive the pun, with interest
for further updates to see how the High Court reappraise the Default Rate.
In the meantime however, the case does provide a
helpful reminder of the key principles to bear in mind
in relation to default interest clauses, both for lawyers
who are drafting these and/or advising clients on the
same, and on the principals determining what rate
should apply and when default interest should be levied.
It is helpful to see the courts continue to find that
default interest is likely to protect a legitimate interest
where applied to overdue payments, and indeed the
default interest clause as set out in the LMA's template
forms of facilities agreement on which many debt instruments are based provides only for default interest
to be levied in these circumstances. More caution may
need to be taken if the parties wish to expand the application of the default interest provision to other
breaches, as per the Facility Letter, as it may be harder
to demonstrate in those circumstances that applying
an increased interest rate is an appropriate means of
protecting a legitimate interest and not simply punitive, a means of deterring breach or a route to gain
further economic "upside", particularly on the basis
the same default rate will likely apply to all breaches
EXPERT WITNESS JOURNAL
About the Author
Kate Bowden
Kate is a Senior Associate in the Banking & Finance
team. Specialising in leveraged and acquisition finance, Kate has a broad practice which encompasses
general corporate finance, receivables and asset based
lending, venture debt, litigation funding and equity
margining, as well as distressed debt and restructuring. www.taylorwessing.com/en/people/united-kingdom/london/kate-bowden
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