Where the terms of a facility letter stated that repayment was to be made "on demand", the court has recently held that even though the funds were to be advanced to carry out a project of development, they were indeed repayable on demand. This was stated in the case of Bank of Ireland v AMDC (Property Holdings) Ltd & ors on 19 March 2001 in the Chancery Division.
In that case, the claimant Bank sought summary judgment in connection with sums said to be due under a facility agreement dated 14 July 1999 in favour of the first defendant. The first defendant was to develop some residential property. The principal provisions of the facility letter were:
(a) the amount of the facility was GBP 1.4m
(b) its purpose was the development of 19 residential flats at the development site for sale on the open market
(c) the term was to be "... subject to a cashflow forecast to be agreed between the Borrower (the first defendant) and the Bank but with a maximum intended total exposure period of 12 months from the date of first utilisation of any of the Facilities."
(d) under "Repayment" the following words appeared: "On demand. "In the ordinary course of events:- "The facility will be repaid from the sale of the development within 12 months. The Bank will receive the full net sale proceeds of the properties to be sold until the facility is repaid in full."
The second, third and fourth defendants (who had undertaken to give guarantees) asked for an advance of GBP 75,000 and this was drawn down on 3 November 1999. No security was in fact given. On 24 December 1999 the Bank made formal demand for the security, and on 10 January made formal demand for the return of the GBP 75,000 (plus fee and interest).
The Defendants argued that either (1) the GBP 75,000 was advanced outside the terms of the facility agreement and was repayable within a reasonable time because the payment was made for the purpose of commencing work at the development site, and as the development site was not yet marketable, it was unreasonable for the bank to demand payment; or (2) (if that argument failed) that if the advance was made under the facility agreement, it was accepted that the agreement was to make repayment on demand, but the words "on demand" were not to be given their normal construction and must be construed against the background that the amounts under the facility were to be made available for a specific purpose to enable the development works to commence, and to enable the bank to demand repayment immediately would be repugnant to the object of the advance.
The court was not convinced by the arguments and held that the facility was payable on demand (applying Lloyds Bank v Lambert [1999] 1 AER 161). It held that the GBP 75, 000 was not advanced outside of the facility letter, and that the defendants could not have imagined the bank would be prepared to make such a loan in an undocumented form.
For further information, please contact Ruth Pedley by e-mail at ruth.pedley@cms-cmck.com or by telephone on +44 (0)20 7367 2098.
