PT-2021-000393 - [2025] EWHC 2749 (Ch)

In the course of his submissions Mr Cowen prioritised the penalty issue because, as he put it, “in terms of the money, that is the most important point”. Without wishing to downplay the other aspects of this judgment, it is also highly significant in another respect: the critical difference between what I concluded in my First Judgment and what I have decided here is that I no longer consider the Default Rate to be a penalty. It merits being clear as to why.

First, I accept that I was wrong to conclude that LCL did not have a legitimate interest in enforcing the non-residence provision. It remains the case that the structure of the Loan, being made to a corporate entity, already contained a provision to address that risk. It is also the case that the Claimants’ attack on that structure was very weak and failed entirely. Having reached that conclusion I considered that the risk was addressed. That was to look at the point from the wrong time period and to focus too heavily on the probability element of risk and not sufficiently on magnitude. At the date of the Facility Letter, which as Makdessi makes clear is the relevant date, LCL could not know what a judge might later conclude. There was a risk and LCL had a legitimate interest in addressing it.

That, in itself, made no difference to the outcome of my First Judgment because I was also concerned, indeed more concerned, with the fact that the Default Rate responds equally to breaches of different primary obligations, the enforcement of those obligations involved different interests, and the risks associated with those interests were apparently of quite different orders of magnitude. As I observed in my First Judgment, why does a final and unappealable judgment for £20,000 merit the same protection as a letter of claim in respect of the same amount? Moreover, the best evidence that I had at the time was that such a judgment merited a 0.3% increase in interest if rendered before the date of the Facility Letter but a 3% increase after. I could find no explanation for that other than punishing the borrower.

What has become clear to me in the course of this hearing is how finely balanced, indeed precarious, the refinancing was. Mr Griffiths had concluded that the interest cover ratio was achievable, but it was a close-run thing and required a best-case assumption of a ratio of 125%. That now seems to me unduly optimistic in light of Jack Liondaris’ evidence regarding the view of Kent Reliance, a lender known for its more flexible approach, in respect of the security portfolio, and the evidence from Kent Reliance of the actual interest cover ratio it used. Mr Griffiths, of course, did not have the benefit of that evidence at the time of his Report. I now do, and it would be wrong to ignore it.

Similarly, Mr Griffiths drew comfort from the LTV, but again the evidence of Mr Theophanous concerning the realisation of 71 Hamilton Road and the evidence of Jack Liondaris about the factors that have impeded the attempts to refinance show that a fully apprised lender would likely be less comforted by them.

Finally, Mr Griffiths did not carry out, presumably because he was not asked to carry out, an interest rate sensitivity calculation. He recognised, however, that the rate he used of 5.5% (which was the rate LCL had used) was an industry standard rate and further recognised that interest rates would shift where there were issues with the security portfolio or the lender’s credit history. Even a small change could result in a funding shortfall on refinancing of tens of thousands of pounds or more.

This, it seems to me, explains why a lender in LCL’s position would legitimately be concerned even by an apparently small shift in the Claimants’ creditworthiness. Even something as apparently minor as the threat of proceedings presented a risk to such a finely balanced structure. Moreover, again as Jack Liondaris’ evidence demonstrated, while apparently small changes might simply reduce the amount offered by a refinancing lender (as was the case on the refinancing of 205 Downhills Way in 2023) it could equally cause them to pull out altogether (as was the case with 207 Downhills Way). Either way, the effect on these facts would be that the refinancing would fail.

LCL, indeed any lender, accordingly had a very strong interest in ensuring that the Claimants’ creditworthiness did not deteriorate, even slightly, during the life of the Loan, and that if it did shift that the Claimants were heavily incentivised to find a solution quickly. That, in my view, is an objective justification for the difference between the 0.3% shift to reflect defaults on debts owed to third parties before the Facility Letter was entered into – a known known in terms of their impact on the refinancing – and the Default Rate in respect of similar such defaults in the after – a known unknown. That, fundamentally, is what has changed in terms of my reasoning.

Before concluding it is right that I should express my gratitude to counsel for the way they have presented their respective clients’ cases before me. As may be apparent from the length of sections of this judgment, risk and probability are areas with which I have had to engage independently of this dispute. I therefore had questions on those issues that might not have been raised by other judges. Specifically, Professor Perry’s 1995 essay was not something to which either party referred but was, rather, something on which I asked for submissions. Mr Cowen and Mr Wheeler responded with analysis of admirable clarity, particularly given how little time they had to consider the points. I should further note that I did not raise with them Professor Perry’s 2014 essay, Professor Turton’s 2014 article, Professor Oberdiek’s 2017 book or Professor Pearl’s points on confounding from his 2016 book. This hearing was quite a short one, and there was limited scope to include within it a course on philosophy and statistics. In any event, it seemed to me that the points raised there either developed on points made in the 1995 essay, on which I was addressed, or were obvious and should be uncontroversial.