When settling an existing debt with a lender, it is important to ensure that the intention of both parties is clear and that you have taken all the necessary steps to ensure the full discharge of the debt in question.
If you are dealing with a lender’s representative (or agent), it is vital that they have the necessary authority to write off such debts on behalf of the lender. Borrowers beware – this responsibility falls to you.
In a recent High Court case, Stavrinides and others v Bank of Cyprus Public Company Ltd ([2019] EWHC 1328 (Ch)), it was held that the bank’s relationship manager (the “Agent”) had no actual or ostensible authority to write off a borrower’s debts, notwithstanding that the Agent had provided a letter from the bank (albeit initialed by the Agent) agreeing to do so.
The issues before the court
The write-off in question arose under an agreement by way of letter. This stated that the bank would write off over £3 million of secured debt upon payment by the Claimants of £1.65 million, in full and final settlement of all its existing indebtedness to the bank (the “Agreement”).
In this case, Mr Stavrinides and two of the companies under his control (the “Claimants”) sought either:
- an order for specific performance (the performance of a contractual duty) to force the bank to honour the terms of the Agreement; or
- damages for breach of the Agreement.
There was a dispute as to who had executed and initialled the Agreement, and over the manner in which the Agreement had been authorised by the bank. The Deputy Judge considered this in detail and agreed with the bank that the Agreement was “a forgery and that [the Agent] did not have actual authority to agree the terms of the apparent agreement set out it in it”.
The bank’s General Manager was permitted to write off debts of up to £10,000, although approvals to write off any sums above that amount required higher authority. The contents of the Agreement had never been discussed with the General Manager, nor had higher approval had been sought.
Further, the Deputy Judge also commented that, based on the knowledge of the Claimants as to the bank’s usual approval processes (which had not been followed) and the quantum of the write off being sought, it was unreasonable for them to rely on the ostensible authority of the Agent. The Claimants had made no enquiries as to the Agent’s authority regarding the Agreement and they were aware from past dealings that higher authority was required for significant decisions - at least from the bank’s General Manager and often from higher level.
It was held that the Agent had no actual or ostensible authority to write off the Claimants’ debts to the bank.
The Deputy Judge commented that, even if the Claimants had made enquiries as to the authority of the Agent, they should not have relied upon these enquiries. As a long standing client of the bank, they were fully aware of the usual approval process. The fact that the Agreement proposed to write off such a large amount of debt was enough to put the Claimants on notice of the Agent’s lack of authority – it would have been surprising and extraordinary for an Agent to have such authority.
The bank’s counterclaim for sums due on the Claimants’ accounts succeeded, rendering the Claimants liable for sums in excess of over £5 million (in addition to the £1.65 million paid in purported settlement under the Agreement).
Comment
Jonathan Porteous, Head of Banking and Finance at Stevens & Bolton, comments that, although the facts of the Stavrinides case are somewhat more colourful than those in a typical write-off scenario, the case provides an important reminder to borrowers to ensure that if there is any doubt as to the authority of a lender’s representative, or if there is a diversion from the usual protocol followed by that lender, it is best practice to request proof of authority and/or direct agreement with the lender to avoid any uncertainty.