Lombard v. Skyjets: Takeaways for Lenders and Restructuring Professionals – Financial Restructuring

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Actions will speak louder than words – whether in the form of a “non-waiver” clause in a contract or an express reservation of rights – when a court considers a lender’s response to default. of a borrower on its financing agreements. The authors of this article discuss a recent English High Court decision, which provides important guidance to lenders and restructuring professionals when communicating with distressed borrowers.

The recent decision of the English High Court Lombard North Central Plc v European Skyjets Ltd1 provides important guidance to lenders and restructuring professionals when communicating with distressed borrowers. Actions will speak louder than words – whether in the form of a “non-waiver” clause in a contract or an express reservation of rights – when a court considers a lender’s response to default. of a borrower on its financing agreements. While there were no big surprises to come out of the decision, the breadth and creativity of some of the arguments advanced by the borrower’s lawyers nonetheless provided the court with an opportunity to provide additional certainty to market players.


In October 2008, the lender (“Lombard”) lent approximately $8.8 million to the borrower, European Skyjets Limited (“Skyjets”). The funds were used to purchase an aircraft. The loan was secured by a first mortgage on the aircraft and was repayable in monthly installments.

Between 2009 and 2011, the borrower missed several installments. This led to restructuring discussions between the parties and fees levied by the lender in exchange for a de facto waiver to exercise its right of acceleration. In November 2012, the borrower was deemed insolvent and Lombard demanded that the borrower pay the outstanding amount (at that time approximately $5.8 million). The following month, the borrower entered receivership and Lombard sued for the outstanding balance, arguing that its actions in terminating and accelerating the loan agreement, enforcing its guarantee and selling the aircraft, were valid. The borrower filed a counterclaim, arguing that Lombard had no right to terminate the loan agreement or sell the aircraft. The borrower also claimed damages arising from Lombard’s breach of its equitable obligations in the performance of the warranty and the sale of the aircraft.


The court ruled in favor of Lombard. It was held that Lombard had the right to terminate and accelerate the loan agreement, albeit on the basis of misrepresentations and material adverse events of default (see point 3 below), and to assert its guarantee. This is despite the notice of acceleration itself citing a case of non-payment which the court concluded did not constitute a valid basis for exercising the right of acceleration.

The court ruling includes some important considerations for lenders when dealing with distressed borrowers, set out below.

1. “Non-waiver” clauses and letters of reservation of rights

Throughout the loan relationship, the borrower has missed a number of payments. Lombard had, during this period, granted the borrower additional time to make these payments and had effectively accepted the late payments. As such, the borrower argued that Lombard was not entitled to invoke these late payments as grounds for terminating and accelerating the loan agreement. Lombard responded by arguing that the “non-waiver” clause in the loan agreement, coupled with the issuance of rights reservation letters, meant that it was entitled to rely on these missed payments as acceleration pattern.

The court held that Lombard had, by its conduct, waived its right to rely on the missed payments to terminate and accelerate the loan agreement. Indeed, this was the case even though the termination/acceleration clause in the loan agreement did not require a default to continue when the notice of acceleration was served. The “non-waiver” clause and reservation of rights correspondence were not effective in displacing Lombard’s assertion of contract by its conduct.

Lenders should remember that their conduct in asserting breaches of the agreement will prevail over provisions intended to protect them in the loan agreement or in contemporaneous correspondence. This conduct could include giving the borrower more time to pay, accepting late payments, charging and accepting late payment charges, and delaying action.

2. Lender’s Obligations When Assessing the Value of Secured Property for the Purpose of a Financial Commitment

The loan agreement included a financial covenant which was assessed by dividing the value of the aircraft by the amount outstanding under the loan. The relevant clause stipulated that the value of the asset should be assessed according to the opinion of the lender.

The court determined that the clause obligates the lender to act reasonably, although there is no such obligation in the clause itself. The court did not accept the borrower’s argument that the covenant required the lender to first take all reasonable steps to determine the market value of the aircraft. The court also rejected the borrower’s argument that the lender was required to take steps to increase the value of the aircraft.

3. Rely on a Material Adverse Change

The loan agreement stated that an event of default will occur if “in the judgment of the lender, a material adverse change occurs in the business, assets, condition, operations or prospects of any company in the group or any credit support provider”. For a lender to rely on such an event of default to terminate an agreement, the court said it must be satisfied that the opinion was honest and rational and was formed at the time of service. of the opinion. The court was satisfied, based on evidence, that Lombard had considered the financial health of the borrower’s business to have deteriorated significantly and that the business was cash insolvent.

The court noted that, based on the wording of the clause, it was not necessary that the material adverse change actually had an objective adverse effect. However, lenders should carefully review these provisions and seek legal advice on the terms of the clause in question before taking action on the basis of a Material Event of Default relating to an Adverse Change.

4. Obligations of the lender upon sale of the secured aircraft

Lenders have a duty, when selling secured property, to take reasonable steps to obtain an appropriate price for the property. Skyjets argued that Lombard failed in this duty, due to its conduct when storing the asset, the sale process it approved and the price that was set. Some of the behavior complained of by the borrower included that Lombard should have sought cheaper storage, that the external valuation obtained by Lombard was too low, and that there were shortcomings in the sales process, including the time It took Lombard to appoint a sales agent and commission an external appraisal, and the aircraft was not advertised in some trade journals. The judge was not convinced that any of these factors meant that Lombard had breached the obligation.

While this outcome is consistent with long-established legal principles, lenders should still ensure that they take steps to meet this obligation when seeking to assert and sell secured property. These steps may include obtaining a specialist appraisal and sales advice. Alternatively, lenders may choose to appoint a receiver or administrator to effect the sale rather than the mortgagee itself, and effectively transfer that risk to the relevant charge holder.

5. Implied duty of good faith

Finally, the court rejected the borrower’s (very ambitious!) argument that Lombard’s decision to terminate the loan agreement on the basis of an event of default was subject to the Braganca to have to. The Braganca in short, the duty requires a party to exercise contractual discretion rationally and in good faith. In other words, Lombard’s rescission right was not the type to which this implied obligation to act in good faith applied; Lombard was able to exercise this termination right for its own purposes as it saw fit.


1. [2022] EWHC 728 (QB).

Originally posted by Lexis Nexis

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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