MKY Capital Pte Ltd v MDR Ltd and Ethoz Capital Ltd v Im8ex Pte Ltd There are two cases this year that have considered a request for payment of the full amount of “compensatory” interest. In both cases, the court refused to allow the application. ‘Compensatory’ interest obligations are a particular feature of loans made by credit funds and the cases illustrate the importance of careful drafting to ensure that these clauses are enforceable.
This year, two cases dealt with the enforceability of “recoverable” interest obligations. These are obligations that require the borrower to pay full interest on the principal borrowed throughout the term of the loan even in the event of early repayment or in the event of default:
- In MKY Capital Pte Ltd v MDR Ltd  SGHC 152 (June 28, 2022), failure to properly provide for the obligation in the loan agreement resulted in the court dismissing the lender’s claim for “remedy” interest. While the lender also attempted to claim running interest on the loan, the borrower’s offer to pay (minus the “paid” amount) was withheld to prevent interest from running.
- In Ethoz Capital Ltd v Im8ex Pte Ltd  SGHC 12 (January 21, 2022), an obligation to pay the full amount of interest for the term was expressed as having arisen on the date the loan was drawn. Notwithstanding this, the High Court of Singapore held that since the obligation only arose in the event of default in payment and not prepayment, it was in fact a penalty clause and therefore unenforceable.
MKY Capital Pte Ltd v MDR Ltd: Early repayment of loan offered
In MKY Capital Pte Ltd v MDR Ltdthe loan agreement provided:
- “That the loan would be repaid in full at maturity”; and
- “Interest would accrue from day to day and would be calculated on the number of days elapsed”.
In particular, the loan agreement did not include a “compensable” interest obligation clause, nor an express clause allowing for an early offer of repayment.
The High Court of Singapore ruled as follows:
- As the loan agreement provided that repayment was to be “at maturity”, this meant that the loan could be repaid before maturity and not necessarily only at maturity.
- As the interest accrued from day to day and depended on the number of days elapsed, this meant that if the loan was repaid early, the interest would cease to accrue.
Consequently, the Court held that the borrower had the right to request early repayment of the loan and that from the time of repayment, interest would cease to accrue. Therefore, the lender was not entitled to claim a “compensatory” interest payment.
The lender also invoked another ground for attempting to assert a right to the interest. She argued that she was not obligated to accept the payment offer since the rule was that the borrower had to have funds to make a valid payment offer. In this case, while another party had agreed to provide funds to the borrower, the funds were not transferred to the borrower because it was dependent on the lender canceling the mortgage provided by the borrower. It was argued that since the borrower did not have the funds on hand, the offer was not a valid one and therefore interest continued to accrue on the loan.
The Court observed that this rule was disconnected from modern lending and fundraising practice. It therefore held that if a borrower/mortgagor is able to demonstrate that he was able to obtain an offer, or offers, to refinance the amounts owed to the lender/mortgagor, and the borrower/mortgagor then offers to make the repayment on a specific date, this would normally be sufficient to stop interest being accrued on the loan amount on that date. The mere fact that the offer to repay does not fall within the paradigmatic case of a valid offer where a borrower deals with the lender with the full amount in hand should not preclude the conclusion that the borrower made an offer. valid . The evil with which the principle deals is to prevent specious offers made with the intention of reducing interim interest, but with no real intention of repaying when indicated.
Ethoz Capital Ltd against Im8ex Pte Ltd: payment default
Another case where the lender was unable to claim a “full” interest payment was Ethoz Capital Ltd v Im8ex Pte Ltd. In this case, however, the lender failed because the obligation to pay future interest on a “full” basis was considered to amount to a penalty.
In this case, the lender, Ethoz Capital Ltd (Ethoz), had entered into four facility agreements with Im8ex Pte Ltd. Although there were four settlement agreements in total, they were essentially each on the same terms, except for the principal amount loaned, and will therefore be discussed here as if they were a single agreement.
The facility agreement provided for a total of S$6.3 million to be lent. A flat interest rate of 3.75% per annum on the entire amount for 15 years was charged. This meant that the total interest charged was approximately S$3.5 million (Total interest) or 56.25% of the principal amount. Clause 7 of the Facility Agreement provided that Aggregate Interest was deemed to be earned and accrued in full at the time of drawdown, and Clause 14 of the Facility Agreement provided that upon the occurrence of an Event of Default , the borrower would immediately repay the unpaid principal amount as well as the rest of the total interest not already paid. The facility agreement also provided for a monthly installment schedule for the total amount of principal and total interest to be paid over 15 years. When the borrower defaulted on the loan, Ethoz claimed the principal and full interest.
The Court held 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 and not a primary obligation since it only arose upon the occurrence of an Event of Default.
- He noted that the prepayment clause did not require payment of full interest but only required that interest payments accrued under the payment schedule to the date of prepayment be paid.
- The amount payable – the amount of total interest remaining for the remainder of the 15-year period – was not a true pre-estimate of damages, as the total remaining interest had to be paid regardless of whether the default was a delay. minor payment or a total refusal to repay the principal.
Ethoz sought to argue that because clause 7 of the facility agreement provided that the aggregate interest was deemed to be earned and accrued in full upon drawdown, the obligation was a principal obligation to pay Ethoz 1.56 times the principal amount in exchange for the loan. It relied on the English case of Wallingford vs. Mutual (1880) where the House of Lords held that under an agreement providing for the payment of a stipulated lump sum in return for a loan, the obligation to repay the full lump sum in the event of default n was not a penalty. The Court distinguished the case before it from Wallingford vs. Mutual on the basis that in Wallingford vs. Mutual the lender was obligated to pay the full lump sum in all circumstances where the borrower was not obligated to pay full interest in the event of prepayment.
Lessons to be learned
Both cases illustrate the importance of drafting in ensuring that a scheduled obligation to pay interest in full over the life of a loan will be fulfilled.
- In MKY Capital Pte Ltd v MDR Ltdthe Court observed that if the 12 months of interest had been incurred when the loan was disbursed, the parties would have expressly provided that the interest for the total duration of the loan would accrue when the loan was disbursed, except that the payment of this interest would be made monthly.
- Also fatal to the claim in MKY Capital Pte Ltd v MDR Ltd was the fact that the obligation to repay was worded as “no later than” the date specified rather than “by” the date specified. It has been thought that where a facility agreement for a term loan does not include a provision allowing the borrower to make prepayment, the borrower does not have the right to make prepayment and interest over the total term become payable. The Singapore court, however, disregarded this proposition and so lenders should ensure that their agreements expressly address whether (or not) there is a right of prepayment and the consequences for debt payments. interests in such a situation.
- In Ethoz Capital Ltd v Im8ex Pte Ltdthe wording of the lender followed that suggested in MKY Capital Pte Ltd v MDR Ltd. However, by making the interest obligation to “repair” only arise in the event of default, it was nullified as a penalty clause.
Careful drafting will be required to ensure that these issues are successfully avoided.