Ensuring enforceable “make whole” interest obligations
Joint Managing Partner
Prakash Raja Segaran
Wee Teck Lim
Senior Professional Support Lawyer
25 July 2022
MKY Capital Pte Ltd v MDR Ltd and Ethoz Capital Ltd v Im8ex Pte Ltd are two cases this year that considered a claim for payment of the full “make whole” interest amount. In both, the court refused to allow the claim. “Make whole” interest obligations are a particular feature of loans by credit funds and the cases provide a good illustration of the importance of careful drafting to ensure that such clauses are enforceable.
Two cases this year considered the enforceability of “make whole” interest obligations. These are obligations that require the borrower to pay the full amount of interest on the principal borrowed for the full tenor of the loan even if the loan is repaid early or in the event of default:
- In MKY Capital Pte Ltd v MDR Ltd  SGHC 152 (28 June 2022), a failure to properly provide for the obligation in the loan agreement resulted in the lender’s claim for the “make whole” interest being denied by the court. While the lender also tried to claiming running interest on the loan, the tender of payment by the borrower (less the “make whole” amount) was held to stop interest from running.
- In Ethoz Capital Ltd v Im8ex Pte Ltd  SGHC 12 (21 January 2022), an obligation to pay the total amount of interest for the tenor was expressed to have arisen on the drawdown date of the loan. Notwithstanding this, the Singapore High Court held that because the obligation only arose with respect to a default in payment and not early repayment, it was in fact a penalty clause and was accordingly unenforceable.
MKY Capital Pte Ltd v MDR Ltd: Early repayment of loan tendered
In MKY Capital Pte Ltd v MDR Ltd, the loan agreement provided as follows:
- “That the loan would be repaid in full by the due date”; and
- “Interest would accrue from day to day and shall be calculated on the number of days elapsed”.
Notably, the loan agreement did not include a clause for a “make whole” interest obligation, nor did it include an express clause allowing for early tender of repayment.
The Singapore High Court ruled as follows:
- As the loan agreement provided that the repayment was to be “by the due date”, this meant that the loan could be repaid before the due date and not necessarily only on the due date.
- As interest was provided to accrue from day to day and depended on the number of days elapsed, this meant that if the loan was repaid early, interest would cease to run.
Accordingly, the Court held that the borrower was entitled to tender early repayment of the loan and that upon repayment, interest would cease to accrue. Accordingly, the lender had no right to claim a “make whole” interest payment.
The lender also relied on another ground to try to claim a right to the interest. It argued that it was not obliged to accept the tender of payment as the rule was that the borrower had to be in funds to make a valid tender of payment. In this case, while another party had agreed to provide funds to the borrower, the funds had not been transferred to the borrower as it was dependent on the lender releasing the mortgage provided by the borrower. It was argued that as the borrower did not have the funds in hand, the tender was not a valid tender and hence the interest continued to run on the loan.
The Court observed that this rule was out of touch with the modern practice of lending and raising funds. It therefore ruled that if a borrower/mortgagor is able to demonstrate that he has been able to obtain an offer, or offers, of re-financing of the amounts owed to the lender/mortgagee, and the borrower/mortgagor then offers to make repayment on a specified date, that would ordinarily be sufficient to stop the incurrence of interest on the loan amount as at that date. The mere fact that the offer to make repayment does not fall within the paradigm case of a valid tender where a borrower attends upon the lender with the full sum in hand ought not to be a bar against a finding that the borrower has made a valid tender. The mischief that the principle is concerned with is to prevent specious tenders made with the intention of reducing the intervening interest, but with no genuine intent to repay at the stated time.
Ethoz Capital Ltd v Im8ex Pte Ltd: Default in making payment
Another case where the lender was unable to claim a “make whole” interest payment was Ethoz Capital Ltd v Im8ex Pte Ltd. There, however, the lender failed because the obligation to pay the future interest on a “make whole” basis was held to be amount to a penalty.
In this case, the lender, Ethoz Capital Ltd (Ethoz), had entered into four facility agreements with Im8ex Pte Ltd. While there were four facility agreements altogether, they were substantially each on the same terms except for the principal amount lent and will therefore be discussed here as if they had been a single agreement.
The facility agreement provided that a total of S$6.3 million was being lent. A flat rate of interest of 3.75% per annum on the entire amount for 15 years was charged. This meant that total interest charged was about S$3.5 million (Total Interest) or 56.25% of the principal amount. Clause 7 of the facility agreement provided that the Total Interest was deemed earned and accrued in full upon drawdown, and clause 14 of the facility agreement provided that upon the occurrence of an Event of Default, the borrower would immediately repay the outstanding principal amount as well as the rest of the Total Interest not already paid. The facility agreement also set out a monthly schedule of instalment payments for the total amount of the principal and Total Interest to be made over 15 years. When the borrower defaulted on the loan, Ethoz claimed for the principal and the Total Interest.
The Court ruled that the obligation to pay the Total Interest was a penalty:
- The accelerated obligation to make payment of the Total Interest was a secondary obligation not a primary obligation as it only arose upon the occurrence of an Event of Default.
- It noted that the clause on prepayment did not require payment of the Total Interest but only required that interest payments accrued under the schedule of payments as at the date of prepayment be paid.
- The amount to be paid – the amount of Total Interest remaining under the rest of the 15 year period – was not a genuine pre-estimate of damages as the remaining Total Interest had to be paid regardless of whether the breach was a minor late payment or a complete refusal to repay the principal.
Ethoz sought to argue that because clause 7 of the facility agreement provided that the Total Interest was deemed earned and accrued in full upon drawdown, the obligation was a primary obligation to pay Ethoz 1.56 times the amount of the principal in return for the loan. It relied on the English case of Wallingford v Mutual Society (1880) where the House of Lords held that under an agreement to pay a stipulated lump sum in return for a loan, the obligation to repay the full lump sum in the event of default was not a penalty. The Court distinguished the case before it from Wallingford v Mutual Society on the basis that in Wallingford v Mutual Society the lender was required to pay the full lump sum in all circumstances where the borrower here was not required to pay the Total Interest in the event of prepayment.
Lessons to be drawn
The two cases illustrate the importance of drafting in ensuring that that an intended obligation to pay the full interest over the entire tenor of a loan will be enforced.
- In MKY Capital Pte Ltd v MDR Ltd, the Court observed that if all 12 months of interest was incurred upon the disbursement of the loan, parties would have expressly provided that the interest for the entire loan tenor would accrue upon the disbursement of the loan, save that payment of such interest would be made in monthly instalments.
- Also fatal to the claim in MKY Capital Pte Ltd v MDR Ltd was the fact that the obligation to repay was expressed to be “by” the specified date rather than “on” the specified date. It has been thought that where a facility agreement for a term loan does not include a provision that entitles the borrower to make early repayment, the borrower has no right to make early repayment and interest on the full tenor becomes payable. The Singapore Court, however, gave short shrift to this proposition and lenders should therefore ensure that their agreements expressly deal with whether there is (or is not) a right to make early repayment and the consequences for interest payments in such a situation.
- In Ethoz Capital Ltd v Im8ex Pte Ltd, the lender’s wording followed that suggested in MKY Capital Pte Ltd v MDR Ltd. However, by making the “make whole” interest obligation arise only on default, it was struck down as a penalty clause.
Careful drafting will be needed to ensure that these issues are successfully avoided.