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Borrower Not Liable for $17 Million Early Repayment Fee

A corporate borrower will not have to pay a 6% fee on the early repayment of a $291 million loan after the Court of Appeal accepted that, on a correct interpretation of the loan agreement, it was obliged to pay off the debt prior to the maturity date and the repayment could not therefore be said to be voluntary.

The borrower had taken the loan to finance an overseas iron ore mining project. The loan was advanced in February 2011 on the basis that it would be repayable in 10 monthly instalments, starting in April 2012. The interest rate on the facility was 11.5% to reflect the considerable commercial risks. The loan could be repaid early in certain circumstances and had to be pre-paid in others.

In January 2012, prior to the date on which repayments were due to commence, the parent company of the borrower announced that the facility would be re-financed by means of a bank loan. Part of that money was used to repay the original lender in full, plus interest. However, the lender argued that, under the terms of the loan agreement, the borrower was liable to pay a 6% ‘pre-payment fee’. That fee was said to amount to more than $17 million.

The lender’s arguments failed at first instance and, in dismissing its appeal against that decision, the Court of Appeal acknowledged that, as two of the clauses in the agreement were ‘mutually exclusive’, the issues of construction raised were ‘finely balanced’ and that the wording of the loan agreement was ‘far from clear’.

However the court concluded that, as the borrower had been obliged to repay the entire loan on completion of the re-financing package, the early repayment of the loan could not be viewed as having been voluntary. Observing that the outcome of the case made ‘commercial common sense’, the court ruled that it mattered not that the re-financing package had itself been voluntarily entered into.