Key takeaways
The right to repay
Borrowers cannot be prevented from repaying; equity of redemption remains absolute.
Substance not labels
Courts assess substance over labels; sale and repurchase agreements may be loans.
Claim for damages
Lenders risk claims if their actions ‘clog’ equitable redemption under English law.
Shukla -v- St James Bank & Trust Company Ltd & another [2026] EWHC 851 (Comm)
This recent decision in the case above relates to a borrower’s right to repay a loan (even when in default) and to take back security, rather than a lender being allowed to retain higher value security for their own profit.
The dispute highlights the importance of drafting the financing documents with care and precision to ensure that they accurately reflect the parties’ intentions as to the true nature of their agreement. Labelling a document as something other than a loan or a debt will not bypass established legal principles (namely, the equity of redemption) allowing a borrower to recover pledged or secured assets, even in cases where the borrower is or has been in default.
The background facts
In September 2023, the claimant, Mr Shukla, entered into a Custody Agreement with St James Bank & Trust Company Ltd (SJB) which would facilitate SJB holding securities on behalf of the claimant. On 5 October 2023, the parties entered into a non-recourse and securities pledge agreement (Loan Agreement).
Pursuant to the Loan Agreement, SJB loaned the claimant US$2,047,396.50 (Loan) secured by 1,800,000 shares in a company, Humacyte Inc (Pledged Securities). Pursuant to Article 7.11(b) of the Loan Agreement, which provided that the Lender may sell up to a 100% participation in the transaction under the Loan Agreement to a "Participation Buyer," SJB and Omega & Corinth Group Ltd (Omega) executed a Participation Agreement on 5 October 2023. Pursuant to that agreement, Omega became the assignee of SJB’s rights under the Loan Agreement.
Article 6.1, “Events of Default,” listed 17 Events that would result in the Loan becoming immediately due and payable. Article 6.2, “Rights and Remedies of the Lender,” addressed the situation where the Borrower did not cure an Event of Default.
In June 2024, the claimant indicated he wished to repay the Loan but was informed by SJB that, pursuant to the Loan Agreement, he was contractually required to give 18 months’ notice and could not repay the Loan if there had been an Event of Default.
In July 2024, SJB wrote to the claimant indicating that there had been numerous Events of Default between November 2023 and January 2024, that he was consequently not entitled to exercise his right of repayment and that the Loan Agreement had been automatically and irrevocably terminated. At the same time, SJB wrote to the claimant on a without prejudice basis proposing to waive the Events of Default and reinstate the Loan Agreement for a limited period of time if the claimant agreed to modify the Loan Agreement to remove the right of repayment and to swap the Pledged Securities.
No agreement was reached on the proposed modification. The claimant subsequently notified SJB that as a result of the Event of Default, the Loan had become immediately due and payable and that he wished to make the repayment. The claimant sought instructions for the repayment but received no response. Instead, SJB sought to exercise their rights under Article 6.2, including an increase in the interest rate by 10% per annum.
The parties were unable to reach agreement on repayment and the return of the Pledged Securities. The claimant expressed concern that time was of the essence because the Pledged Securities were publicly listed and liable to fluctuate in price. The claimant requested a repayment statement with redemption details and requested confirmation that SJB would return the Pledged Securities upon receipt. The claimant had transferred the whole Loan amount to his English solicitors so that they could make immediate payment of the outstanding amount.
SJB replied, arguing that as a result of the Events of Default, it was entitled to deal with the Pledged Securities as it saw fit and had no obligation to redeliver them to the claimant. It contended that the claimant had irrevocably forfeited the equity of redemption, pursuant to Article 6(2)(a)(v), which provided that “in consideration of the Lender entering into this Agreement, the advance of funding hereby and the non-recourse aspect of the Loan, the Borrower irrevocably forfeits the equity of redemption…"
Ultimately, the claimant was obliged to commence proceedings against SJB and Omega, seeking declarations requiring them to redeliver the Pledged Securities against repayment of the sums due and damages suffered due to the failure to redeliver those Securities promptly in accordance with the Loan Agreement.
The Commercial Court decision
The Court decided the issues raised could be determined on a summary basis.
Nature of the Loan Agreement
The Court decided the terms of the Loan Agreement were consistent with the Loan Agreement being a secured loan rather than an outright sale of the Pledged Securities with a right to the claimant to re-purchase those shares or their equivalent. Specifically:
The common intention of the parties was that SJB would provide loan finance to the claimant albeit on non-recourse terms.
The language and structure of the Loan Agreement taken overall was the language of a loan combined with the transfer of a security interest, namely the Pledged Securities, which was to be returned with interest in the event that the Loan was repaid. The language and structure of the Loan Agreement did not read overall as a contract for the absolute transfer of the Pledged Securities with an option to buy them back. There was no term of the Loan Agreement which clearly transferred the ultimate beneficial interest in the Pledged Securities to the defendants.
Individual Articles of the Loan Agreement were consistent with a secured loan transaction.
The Court dismissed SJB’s argument that while the language of the Loan Agreement was that of a secured loan, the substance of the transaction was that of a sale with the claimant having no personal obligation to make repayment. While the defendants' remedies against the claimant might be limited to taking the Pledged Securities, the Loan Agreement did impose an express obligation on the claimant to repay the Loan on the Maturity Date and on the occurrence of an Event of Default. In other words, the Loan Agreement created a debt owed by the claimant to the defendants in respect of the Loan even if the remedy for non-payment of that debt was limited to enforcement against the Pledged Securities.
The Court acknowledged that the non-recourse elements of the Loan Agreement not only limited the defendants' remedies for breaches of the Loan Agreement to taking the Pledged Securities but also expressly provided for the claimant to forfeit the equity of redemption. Article 5.1, in particular, made clear that the defendants' remedies for payment and performance of the payment obligations were limited to the Pledged Securities and that the defendants should not have, under any circumstances, any right to any other assets of the claimant.
However, while these provisions were consistent with an absolute transfer of the Pledged Securities to the defendants, the Court did not think they were sufficient to justify disregarding the other provisions of the Loan Agreement which clearly identified the agreement as a loan coupled with a security interest rather than as an agreement for the outright transfer of the Pledged Securities. Indeed, on one view, the non-recourse provisions (including the exclusion of the equity of redemption) were provisions which would not be necessary if the Loan Agreement did provide for the absolute transfer of the Pledged Securities rather than giving the defendants a security interest in them.
In conclusion, the Loan Agreement was properly characterised as an agreement for a secured loan not a contract for the transfer of absolute ownership of the Pledged Securities to the defendants.
Clog on the equity of redemption
Under English law, the doctrine of equity of redemption applies to mortgages and other security interests and provides that they should be redeemable on the payment or discharge of the relevant debt or obligation. While, at common law, it is possible to have a contractual term whereby the right to redeem is lost if money is not repaid by a specified date, in equity there remains a right to redeem notwithstanding non-compliance with the contractual term.
Furthermore:
A condition which is repugnant to the contractual right to redeem and the equitable right to redeem is void.
A condition which imposes a penalty in respect of the exercise of the equitable right to redeem is void in equity.
A provision which regulates or controls the right to redeem is invalid if it is unconscionable.
Having considered the relevant provisions of the Loan Agreement, the Court decided they were repugnant to the contractual right to redeem and therefore void.
The Court went on to find that the defendants were in breach of their contractual obligation to cooperate in repayment of the Loan by (i) refusing the claimant's offer to repay the Loan Amount and (ii) failing to provide a settlement figure and instructions for repayment. The Court was also prepared to order an interim payment on account of damages to be assessed, with the amount to be determined by the Court if not agreed between the parties.
Comment
The Court commented that the trend of the authorities under English law was to respect the parties' commercial bargain even if on the application of the ordinary principles of contractual construction that bargain might leave one party with only very limited remedies in the event of a breach of contract by the other. However, the doctrine of equity of redemption remained a principle of English law, which applied to a loan agreement secured on pledged shares. As a matter of English law, those equitable principles can be upheld against contractual terms to the contrary and would not necessarily by bypassed by a breach of a contractual term by the borrower.
A lender cannot permanently block a borrower from recovering pledged assets, even if the contractual terms suggest otherwise and if a borrower is ready to repay, lenders should be cautious on how to cooperate in those circumstances.
This article was co-authored by Associate, Theodora Venieratou.
