Lenders beware of pre-contract negotiations: lessons from Alpha Schools (Holdings) Ltd v Signal Alpha III Fund LP

The decision in Alpha Schools (Holdings) Ltd v Signal Alpha III Fund LP [2024] has two stark lessons for lenders, and one for their solicitors:

1. It puts lenders on notice that strategies to win business using what they might think of as "sales talk" ("or "mere puff" as it used to be called" according to the judge in the case, Deputy ICC Judge Baister) may end up being construed as misrepresentation.
2. Where it is critical that a term set out in a term sheet is binding, it must clearly be drafted as such.
3. Aggressive tactics will not be tolerated by the courts. 

What happened?

Alpha Schools (Holdings) Limited (Alpha) owns a portfolio of 19 private schools across the UK. In 2023, in advance of expected VAT increases to private school fees (and a deteriorating relationship with its lender, Barclays) Alpha began negotiations with Signal (a private asset management company) to refinance its existing debt. Over the course of negotiations, Signal made a number of statements to encourage Alpha to refinance with them. These included (the Statements):

1. a fixed date for completion of the refinancing: this was important because it was understood by both Alpha and Signal that Alpha was under growing pressure to refinance its debt; and
2. agreeing to "light touch" due diligence: the parties acknowledged that Signal’s due diligence process could only be "light touch" in order to meet the agreed date for completion.

In April 2024, Signal and Alpha signed a term sheet, in which Alpha agreed to pay a break fee of £350,000 if the refinancing with Signal did not complete. Negotiations continued but the refinancing did not take place by the fixed date for completion and – with increasing concerns about Signal’s commitment to the deal – Alpha chose to refinance with a different lender, Fintex, in July 2024. 

In response, Signal immediately sent Alpha an invoice of more than £1,000,000 for legal costs and the break fee. When not paid, Signal then served a statutory demand on Alpha and threatened to petition for Alpha’s winding up. Signal also contacted Fintex directly claiming unlawful conduct by Alpha, and put Fintex on notice as to the threats Signal had made for Alpha’s for winding up and reserving its rights against Fintex directly. Alpha responded by making an application for an injunction to restrain Signal from presenting a winding up petition, claiming (among other things) a cross-claim in misrepresentation.

The court’s decision

The mispresentations

The court supported Alpha’s application to stop Signal presenting a winding up petition. Alpha needed to demonstrate that it could bona fide dispute the debt underlying the petition and/or a posit a “genuine and substantial cross-claim sufficient to extinguish the petition debt”. The court found that in respect of the Statements Alpha “made out a case of fraudulent misrepresentation to a sufficient degree of substance that raises it, by some margin, above being capable of dismissed as no more than a cloud of objections” – although the court was careful to point out that it wasn’t making a finding of fraudulent misrepresentation but rather that there was sufficient material on which to base such a finding were the claims to come to trial.  This alone was sufficient for the court to grant Alpha the relief it sought.

The break fee

As the term sheet did not explicitly include the break fee as a legally binding term (unlike certain other terms in the term sheet), at this stage the court was not prepared to find that the break fee was a binding debt. The court noted that its findings on the misrepresentations meant that Alpha had an arguable case for which Signal’s liability could exceed that which Alpha might owe in relation to the break fee.

"Aggressive" and "abusive" tactics

As to the role of Signal’s lawyers – who assisted with the statutory demand and wrote to Fintex – the judge was not impressed. The court noted that Signal reacted with "extraordinary speed" to news of Alpha’s refinancing with Fintex, and that it was "aggressive" in issuing the legal fee invoice. But it was the "disgraceful" letter to Alpha’s new lender that was condemned by the judge: "the purpose of writing this letter could only have been (a) to put improper pressure on Alpha to pay up without further inquiry, either in the form of direct pressure (the letter says "Alpha Schools have been informed that we are contacting you directly") or by way of indirect pressure exercised on Alpha by Fintex; or (b) to interfere with the business relationship between Alpha and Fintex with a view to damaging Alpha. This was abusive conduct."

The judge noted that the behaviour of Signal and its lawyers went against Signal’s interests in any event, because such abusive conduct supported the exercise of the court’s discretion in granting the injunction in favour of Alpha – and lent weight to the view that Signal might also have been prepared to be "unwisely zealous" when trying to win the work in the first place.