Summary of Judgment

Factual and Procedural Background

This appeal arose from a dispute between a corporate borrower ("Company B") and its individual guarantors (collectively, the Appellants) and the lender ("Company A") together with its appointed receivers (the Respondents) concerning (i) whether certain offers to repay the loan operated to stop interest running, (ii) whether the contractual default interest rate was a penalty, and (iii) if so, whether Company A was nonetheless entitled to statutory interest. The matter had previously been tried in 2023, when the trial judge held the default rate was a penalty; that decision was reversed in part on appeal and the Court of Appeal remitted the question for re-hearing. The remitted hearing, dealt with by Judge Farnhill, also addressed whether the borrowers had done enough to stop interest running. Judge Farnhill found that (a) the borrowers had not taken steps sufficient to stop interest running, and (b) the default rate was not a penalty. Company B and the individual Appellants appealed; the Court of Appeal (Judges Lewison, Newey and Arnold) heard the appeal and delivered the judgment summarized here.

Legal Issues Presented

1. What must a borrower under a secured loan do, short of actual repayment, in order to stop interest running on the loan?
2. Whether the default interest rate specified by the secured loan documentation in this case was a penalty at common law (applying the test in Cavendish Square Holding BV v Makdessi).
3. If the default rate was a penalty, whether the lender is nevertheless entitled to statutory interest on the outstanding debt.

Arguments of the Parties

Appellants' Arguments

• Attorney Cowen submitted that, in the refinancing context, the established tender doctrine should be adapted so that a borrower who (i) offers to repay in full, (ii) has an offer of replacement finance from a new lender capable of acceptance, and (iii) is refused by the existing lender, is relieved from liability to pay interest from the date when, pursuant to that offer, redemption would have occurred.
• Attorney Cowen argued that the three letters from the borrowers' solicitors (Company E) in March–April 2021 amounted, in the refinancing context, to tenders or offers sufficient to stop interest running.
• He further contended that the remitted issue required a broad re-evaluation under Makdessi and that the default rate was out of all proportion to Company A's legitimate interests and therefore an unenforceable penalty.
• He also advanced a submission that the Court of Appeal's decision in Çukurova extended equity's power to disallow interest in a wider range of cases.

Respondents' Arguments

• Attorney Wheeler argued for a narrow interpretation of the remitted issue and that the judge should apply the established tests without reopening matters beyond those remitted.
• Company A (through its counsel) contended the borrowers' communications were conditional, did not make immediately available payment in the contractual manner required, and therefore were not tenders; Company A engaged in negotiations and was entitled to require the contractual conditions for repayment and release of security.
• Company A submitted that the Default Rate served legitimate interests (notably credit-risk protection tied to a fragile refinancing exit) and was not out of all proportion to those interests; accordingly it was not a penalty.

Table of Precedents Cited

Court's Reasoning and Analysis

The Court of Appeal (Judge Lewison delivering the lead judgment, with Judges Newey and Arnold concurring) proceeded as follows:

1. Context and remittal: the court identified three issues remitted and explained the procedural history (first trial held Default Rate a penalty; appellate remittal required further hearing on penalty and other matters).
2. Factual findings affirmed from the remitted hearing: Judge Farnhill's findings included that an inspection was sham; knowledge imputed to Company A at drawdown; Company A's enforcement steps based on the non-residence default were void for the period before 7 August 2021; the loan remained outstanding and the borrowers did not set any funds aside to stop interest running.
3. Tender doctrine: the court reviewed authorities (Edmondson, Shearer, Gyles, Rourke, Barratt) establishing that to stop interest running a borrower must not only offer to pay but must have funds set aside and available; offers to refinance that are conditional and do not put funds immediately and unconditionally at the lender's disposal do not qualify as tenders.
4. Application to the correspondence: the court analysed the three principal letters relied on by the Appellants (16 March 2021, 23 March 2021, 7 April 2021) and agreed with the trial judge that each was conditional, uncertain in timing, and did not place immediately available funds in Company A's control; releases of security were proposed before full repayment contrary to the Facility Letter; therefore none amounted to a tender that stopped interest.
5. Scope of equity post-Çukurova: the court examined Çukurova and concluded it addressed an exceptional situation where the debt had been discharged at law and funds had been set aside in an account; Çukurova did not eliminate the distinction between an offer and a tender nor justify a broad equitable power to deem conditional refinancing offers to be tenders. The present case did not present the exceptional circumstances of Çukurova.
6. Penalty issue under Makdessi: the court set out the applicable legal test from Cavendish/Makdessi (whether a secondary obligation imposes a detriment out of all proportion to any legitimate interest). The remitted task required identification of primary obligations and Company A's legitimate interests in their enforcement. The trial judge conducted a granular assessment of legitimate interests (notably the "Credit Risk Interest" tied to the precarious refinancing exit) and, on the evidence presented (including expert evidence), concluded the Default Rate was not out of all proportion to those interests.
7. Appellate standard and challenge: the Court of Appeal applied established appellate principles (Re Sprintroom, Volpi, Lidl) and concluded no identifiable flaw—such as a gap in logic, inconsistency, or failure to take account of material factors—undermined the trial judge's evaluative conclusions. The Appellants had not produced evidence demonstrating the Default Rate was extortionate relative to Company A's legitimate interests.
8. Consequential question (statutory interest): because the court upheld the finding that the Default Rate was not a penalty, the question whether Company A would be entitled to statutory interest did not arise.

Holding and Implications

APPEAL DISMISSED

Holding: The Court of Appeal upheld the trial judge's conclusions that (a) the borrowers' communications did not constitute tenders that would stop interest running, and (b) the contractual Default Rate was not an unenforceable penalty.

Implications: The direct effect is that the judgment below stands; the borrowers remain liable for interest in accordance with the Facility Letter and the Default Rate is enforceable. The court did not identify any novel or general extension of equitable jurisdiction beyond the principles discussed in existing authority (notably Çukurova) and did not purport to create new precedent beyond applying settled tests (Makdessi and the tender authorities). The ancillary question of statutory interest did not arise and was not decided.