In the recent case of Alpha Schools (Holdings) Ltd v Signal Alpha III Fund LP [2024], there are a number of key takeaways for both Lenders and their instructed solicitors.
Background
Alpha Schools (Holdings) Limited (“Alpha”) owns a portfolio of 19 private schools across the UK, however, in 2023 when it was looking to refinance its debt and change its existing lender, it turned to Signal Alpha III Fund LP (“Signal”). In April 2024 the parties signed a Term Sheet were Alpha agreed to pay a break fee of £350,000 if the refinancing with Signal did not complete. No loan completed, and Signal immediately issued an invoice for the break fee, and once the deadline for payment expired, immediately instructed its solicitors to enforce the debt by issuing a statutory demand followed by a winding up petition. However, Alpha responded by making an application for an injunction to restrain Signal from presenting a winding up petition, claiming (among other things) a cross-claim in misrepresentation.
Two takeaways for lenders:
- The representations that Signal made to Alpha prior to the refinance deal being signed were closely scrutinised by the Judge. The Judge noted that Signal had represented to Alpha that it was offering a fixed date for refinance and that Alpha agreed to this date being complied with, then it would insist on only “light touch” due diligence. This case puts lenders on notice that strategies to win business using what they might think of as “sales talk” (or that they believe to be inconsequential “mere puff”), could indeed be being construed as misrepresentation or even a fraudulent misrepresentation.
- Aggressive tactics (sometimes referred to as “sharp practices”) by certain lenders (in this case Signal) both prior to signing the loan and in relation to enforcement of the loan, will be noted by the court. In this case the Judge noted the “unwisely zealous” tactics of Signal in its attempt to win the client and finalise the refinance loan, as well as its “aggressive” tactics at enforcement following the alleged breach of the loan agreement and term sheet. In this case the consequences for Signal were that the injunction preventing them from presenting a winding up petition was successful and they had to pay Alpha’s costs, effectively meaning that enforcement of the debt was halted, unless Signal chose to issue a Part 7 Claim using similar arguments, which would be risky given this earlier judgment.
Three takeaways for solicitors of lenders:
- In this case, the break fee term that was referenced in the signed term sheet was found not to be binding as it had not clearly been identified as a material term of the loan agreement within the drafted term sheet. Therefore, clarity of drafting on loan term sheets is vital if you want to be able to enforce a debt solely based on them within insolvency proceedings.
- The representations made by lenders to their customers, prior to signing loans, are frequently being using by customers as a defence or cross claim to a winding up petition. However, to respond to such allegations, i.e. to evidence that there were no misrepresentations usually requires extended disclosure and witness statements. Therefore, when arguments of misrepresentations are used by borrowers or guarantors as a defence to a petition, it appears that it is more likely that Judges will conclude that such cases are more appropriate as Part 7 Claims, rather than the process under the Insolvency Act 1986. This is due to the fact that petitions hearings are more akin to summary judgment hearings, where the threshold for such a defence is lower, meaning it is easier for the debtor to overcome it.
- Solicitors should warn their clients not to use statutory demands and petitions (bankruptcy or winding up petitions) as a purely aggressive tactic of debt collection. This is particularly the case in such circumstances where the lender (in this case Signal) is accused of sharp practices in its lending. If solicitors act with “extraordinary speed” in enforcing invoices, and also send threatening letters to other third parties to try to force a debtor to pay, these tactics will be noted by the Court and could result in a finding that they amount to an abuse of process, meaning that the petition is very likely to be dismissed.
This update is for general purpose and guidance only and does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered. No part of this update may be used, reproduced, stored or transmitted in any form, or by any means without the prior permission of Brecher LLP.
