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Recital to intercreditor agreement means creditor is contractually estopped from challenging security

An intercreditor agreement provided that neither creditor would challenge the “validity” of the other’s security. The term “validity” was interpreted broadly to prevent a challenge to the general effectiveness of the security. In any event, the relevant security was effective as a matter of construction, and even if the judge’s interpretation was wrong, contractual estoppel based on the recitals of the intercreditor agreement would prevent one of the creditors from challenging the security: Arboretum Devon (RLH) Ltd [2021] EWHC 1047 (Ch)

Arboretum Devon (RHL) Ltd (Arboretum) obtained loans from various lenders through a peer-to-peer lending platform operated by Lendy Ltd (Lendy), for the purchase and development of land. Arboretum granted a debenture to a security trustee (the Security Trustee) creating fixed and floating charges over all of Arboretum’s assets. 

Arboretum borrowed more money from Shoby Investments Ltd (Shoby) which was also secured. All the parties later entered into an Intercreditor agreement (the Intercreditor Deed) under which they agreed that the security in favour of the Security Trustee would rank in priority to that held by Shoby up to a value of GBP7.845 million. Clause 2.9 relevantly provided that neither creditor would “challenge or question…the validity or enforceability of any Security constituted by a Security Document”.

Following Arboretum’s subsequent insolvency, the company was sold, realising approximately GBP900,000, entirely payable, subject to the challenges in issue, to the Security Trustee according to the priority agreed in the Intercreditor Deed.

Challenge to security

Shoby sought to challenge the Security Trustee’s security. It argued that, as a result of alleged misrepresentation and breach of warranty by Lendy, Arboretum bore no liability under the Lendy loan agreements but was instead only liable to Lendy on the basis of either a restitutionary claim or an implied loan, neither of which gave rise to obligations secured by the debenture. 

Did Clause 2.9 of the Intercreditor Deed prevent Shoby’s challenge? This was determined as a preliminary issue. 

Definition of “Secured Liabilities”

Under the debenture, “Secured Liabilities” were defined as: “all present and future monies obligations and liabilities of the Borrower to the Beneficiaries…. pursuant to any Finance Document”.

The judge agreed with Shoby that, on its proper construction, the term “Secured Liabilities” was limited to obligations and liabilities “pursuant to any Finance Document”. However, the judge concluded that, even if Shoby succeeded in showing that the lenders only had claims on a restitutionary basis or under an implied loan, those claims would still be Secured Liabilities under the debenture. The objective observer would not have understood the parties’ intention to be limited to creating security only for claims in contract under the Finance Documents, but instead that the parties had agreed to create security for contractual and non-contractual obligations arising more generally pursuant to the transactions provided for in the Finance Documents.

Construction of “validity” in the Intercreditor Deed

The dispute primarily concerned the meaning of the word “validity” in Clause 2.9. Shoby argued that the term should be construed narrowly to refer to matters such as whether the formalities of the security had been complied with. Shoby submitted that its challenges went instead to the value of the security, which did not fall within Clause 2.9 and therefore Clause 2.9 did not prevent it from challenging the security.

The judge held that the dispute between the parties was not over the amount lent by the lenders (the value of the security), but instead whether the obligation to repay the amounts advanced by the lenders was effectively secured or not. The judge concluded that it was unlikely that the parties had intended to limit the meaning of “validity…of any Security” to matters of formal validity, preferring a wider interpretation under which the phrase was “more generally to include the effectiveness of the security as a security for the acknowledged secured obligations”. Clause 2.9 would therefore preclude Shoby from bringing its intended challenge in any case.

Contractual estoppel

Even if the conclusions on the construction of the debenture and the Intercreditor Deed were wrong, a contractual estoppel would arise to prevent Shoby’s challenge. Recital A to the Intercreditor Deed provided that “[Lendy] has agreed to provide, or has provided, the Senior Debt to the Borrower on behalf of the [Lenders] secured by way of the Senior Security.” 

The judge found that Recital A amounted to a statement of fact agreed between the parties to the Intercreditor Deed from which neither of them could depart. Given that the definition of “Senior Debt” referred to “[l]iabilities…under the Senior Debt Documents”, which were in turn included under the definition of “Finance Documents”, the agreed statement of facts was clearly inconsistent with Shoby’s position that Arboretum’s obligations to the lenders were not “pursuant to any Finance Document”. Shoby was therefore estopped from advancing that claim.


The judge adopted a broad approach to contractual interpretation as to the meaning of ‘Secured Liabilities’. In doing so, weight appears to have been given to the context (ie the parties’ overall transaction) when determining the objective intention behind the parties’ drafting of particular clauses.

The case is also an instructive reminder that a party may find itself estopped from advancing a claim where it has agreed to a certain state of affairs, even if that state of affairs does not reflect reality. In this case, the contractual estoppel arose by virtue of the recitals to the Intercreditor Deed; parties should ensure that recitals to contracts are drafted with care.

Further information

For more information please contact Amy Edwards.