No Set-Off – “Any” means any!

Phil Sheard, Finance Litigation Partner at Bexley Beaumont discusses his recent successful case where the judge’s finding on the no set-off clause reinforces the position that the exclusion of “any right of set off” means just that. Any means any!

Phil Sheard, Finance Litigator has recently acted for a client in a successful application for summary judgment in which it was awarded a sum in excess of £1.5M plus costs from two directors who personally guaranteed a bridging finance facility for a property development project.

The project ran into difficulties and the directors ultimately placed the borrower into Administration. The properties were sold by the Administrator leaving a substantial shortfall. The security trustee pursued the shortfall from directors pursuant to the personal guarantees they had provided and, in response, the two directors defended the claim and issued a counterclaim against the security trustee on the basis that:

The lender failed to make further monies available under the second facility and, but for that breach, they would have completed the project and then been able to sell the properties and repay the two loans;
They should be granted relief from the claim pursuant to what is known as the “prevention principle” by way of set-off or counterclaim; and
The set-off clause in the personal guarantees relied on by the Claimant did not apply.

The Court heard evidence that a further £300,000 would be needed to complete the project. The Lender was not prepared to advance the remaining £99,000 available under Facility 2 and the additional £200,000 required to complete the project.

The Court also heard evidence that one of the directors had been injecting his own funds but had taken the decision not to put in further funds.

The No Set-Off clause

The no set-off clause was as follows:

“All monies payable shall be paid without any right of set-off in respect of monies owing by the Company or the Lender to the Obligor or to the Guarantor…”

The judge found unambiguously that the clause prevents ‘any’ set-off. The judge followed case law that found that “any” means any. The judge dismissed the directors’ argument that as the counterclaim had not been decided it was not, therefore, “monies owing” and was not prohibited by the no set-off clause. He accepted the security trustee’s contention that the damages claimed by the directors can be ‘monies owing’ and could not be set-off.

The no set-off clause was unambiguous and did not allow any other interpretation that had a real prospect of success at trial. He also agreed that for a no set-off clause to be effective at all it should, and indeed must, be upheld at the preliminary or summary judgment stage.

The Prevention Principle

The judge found that the directors could not rely on the prevention principle.

The alleged breach of Facility 2 in not allowing further funds to be drawdown under Facility 2 was irrelevant to the security trustee’s summary judgment for the majority of the shortfall due under Facility 1 which was already in default at the time Facility 2 was agreed.

He found that the directors’ argument that the court should treat both facilities as one was to be fanciful and ignored the commercial reality of the situation.

Facility 1 had not only been exhausted but it was substantially extended. The parties had entered into a separate standalone agreement for Facility 2 and there was no acceptance by the lender of the breach of not repaying Facility 1 in lending Facility 2.

Facility 2 was a new contract with its own purpose, and it was fiction to view it in any other way. Accordingly, he found that Facilities 1 and 2 were similar but distinct contracts.

Facility 1 was breached when it was not repaid and that breach was not preceded by any breach by the lender and therefore the directors had no real prospect of succeeding by raising the defence of the prevention principle.

A subsequent breach of Facility 2, a separate and distinct contract, even if proved would have no bearing and they would not be able to resist liability for Facility 1.

He also found that, in any event, the defence would have no real prospects of success as the directors’ own evidence clearly and unequivocally showed that the only reason the project was not completed was that one of them chose not to use his available funds to complete the project.

Finally, for good order the directors’ Counterclaim was also struck out as having no real prospects of success on the basis that any claim for breach of Facility 2 in not allowing the drawdown of funds should have been made against the lender not the security trustee.

The most pleasing aspect to this decision was the judge’s finding on the no set-off clause which reinforces the position that the exclusion of “any right of set off” means just that. Any means any!

To discuss any of the above further, please feel free to contact Phil: philsheard@bexleybeaumont.com | 07780 937624