A company has secured victory in its long-standing legal battle over the validity of a US$2.8 million (TT$17.7 million) loan it gave to the Hindu Credit Union Co-operative Society Limited before its collapse.
Delivering a majority judgment on Thursday, three out of five Law Lords of the United Kingdom-based Privy Council upheld SR Projects Limited’s final appeal against HCU liquidator Ramnath Dave Rampersad.
Lords Leggatt, Lloyd-Jones and Stephens agreed that although HCU acted unlawfully in entering into the loan agreement with the company while being in excess of its maximum liability limit under the Co-operative Societies Act and Regulations, such illegality could not invalidate the valid loan agreement.
However, Lord Kitchin and Lady Arden disagreed with their colleagues in their dissenting judgement, as they suggested that a High Court Judge and the Court of Appeal were correct to invalidate the agreement.
According to the evidence in the case, the company lent HCU the money between October 2004 and January 2005, based on the understanding that the loan was secured using a US$1.5 million promissory note and a deed of mortgage over several HCU properties.
When HCU was placed into liquidation by the Commissioner of Co-operative Development in 2008, it had only made a payment of US$256,000 towards the loan.
When the Government bailed out HCU in 2010 by establishing a grant relief payment scheme for depositors and shareholders, it did not extend to outside lenders such as the company.
Rampersad, who was appointed to liquidate HCU’s assets, filed the lawsuit to invalidate the agreement.
After the lawsuit was upheld by the local courts, the company appealed to the Privy Council, as the invalidation of the agreement meant that it would be considered an unsecured creditor and could only potentially recoup approximately 20 per cent of its investment through liquidation.
In deciding the case, Lord Leggatt ruled the local courts were correct to dismiss the company’s claim that HCU was not in breach of its maximum liability limit when it entered into the agreement.
He noted that at the time, the commissioner had approved a limit of $100 million and there was no evidence to suggest that separate limits were approved for loans and deposits as contended.
He noted that the evidence pointed to the fact that at the time of the agreement, HCU had far exceeded its maximum liability, as deposits alone amounted to $848 million.
While Lord Leggatt and his colleagues agreed HCU was in breach of the limit as required under the legislation and regulations, they ruled that such did not automatically quash the loan.
“There is no provision of the Act or Regulations which states or implies that a breach of the Act or Regulations generally, or of regulation 14(3) specifically, is to have the effect of making any contract which gives rise to a breach void or unenforceable,” he said.
“Nor can it be inferred from the purpose of the legislation that this was its intended effect,” he added.
Lord Leggatt also rejected submissions from Rampersad’s legal team that the failure to invalidate the agreement based on HCU’s illegal conduct would be contrary to the public’s interest. He noted that the position would have been different if the company knew the HCU was acting in breach and still chose to enter into the agreement.
“In sum, it cannot, in the Board’s opinion, be said that allowing a lender to enforce a loan agreement made and security accepted by the lender in good faith without knowing that the credit union was borrowing in excess of its legal limit would be harmful to the integrity of the legal system,” he said.
In their dissenting opinion, Lord Kitchin and Lady Arden strongly disagreed with the position taken by the majority.
“In our judgment, the approach taken by the Board is not correct: it amounts to putting the cart before the horse,” they said.
They stated that as HCU was only empowered to borrow based on conformity with the legislation and regulations, any deal signed in breach of it could not be considered valid. They disagreed with their colleagues that Parliament had to expressly address breach of the regulations, as they suggested that general law on ultra vires contracts could apply.
The court also noted that the decisions of the local courts would not have left the company without any redress but would directly affect depositors.
“The general law has never been that an ultra vires lender has no possibility of recovering any of his money,” they said.
They expressed concern that the approach taken by their colleagues was inconsistent with the statutory policy of the regulations, as it did not recognise “that the society exists for mutual benefit and that the members are protected”.
“Indeed, if the Board is correct, far from the members not getting any windfall, they are at risk of suffering a significant detriment, as depositors, in that the ultra vires lender will, subject to the rules applicable to insolvency, be paid out in full ahead of them,” they said.
The company was represented by Vernon Flynn, QC and Laura Newton, while Douglas Mendes, SC, Dharmendra Punwasee and Rishi Dass represented Rampersad.