How secure are secured liabilities?

14 June 2021

When finances become distressed, creditors examine all avenues to recover their debt which can result in any intercreditor agreements being thrown into the spotlight. The recent judgment of Re Arboretum Devon is another helpful reminder to lenders entering into an intercreditor agreement (ICA) that these should be drafted with the worst-case scenario in mind and using the clearest language in order to avoid disputes arising at the time of enforcement.

In this case, the senior creditor operated a peer-to-peer crowdfunding platform, by which it coordinated funds from various investors which were used to make secured loans to the borrower. The borrower had also borrowed funds on a junior secured basis from another lender. When the borrower had insufficient funds to repay the junior creditor, the junior creditor challenged the priority of the senior creditors’ rights under the ICA. A number of issues were raised before the court in relation to the claim, which primarily focused on the interpretation of various definitions throughout the ICA.

The key definition in the ICA which was considered by the court when assessing the claim was the definition of “secured liability”, which reads as follows:

Secured Liability: all present and future monies obligations and liabilities of the Borrower to the Beneficiaries whether actual or contingent and whether owed jointly or severally, as principal or surety or in any other capacity together with all interest (including without limitation default interest) accruing in respect of those monies obligations or liabilities pursuant to any Finance Document.”

1. “Obligations and liabilities” 

The first question was whether “obligations and liabilities” captured only contractual obligations arising under the finance documents or whether the term could be interpreted more broadly. This question arose due to the junior creditor alleging that flaws in the senior creditors’ loan and security documents meant that it was only entitled to an equitable claim in restitution against the borrower, and that such claim did not arise under a “finance document” and was therefore unsecured. The court agreed with the adoption of a broad approach and that “obligations and liabilities” should include all obligations associated with transactions under the finance documents, whether documented or otherwise and whatever their legal characterisation. In the context of this case, it meant that “secured liabilities” included liabilities of the borrower to the senior creditors arising under a claim in restitution even if the “finance documents” themselves were invalid (although in this respect the court expressed no opinion on the validity of the junior creditors’ assertion that the finance documents were, in fact, invalid) .

This wide interpretation could therefore capture oral obligations, hedging relationships, amendment agreements and waivers. As such, all parties to an ICA (and other finance documents) should be mindful of this when drafting any liabilities definitions and take caution to exclude any obligations or liabilities that are not intended to be caught.

2. “Pursuant to any finance document”

The second question focused on the word order in the definition. Specifically, the argument was made by the junior creditor that the words “pursuant to any finance document” meant that only sums due under a finance document were secured in favour of the senior creditor. Counsel for the senior creditor submitted in response that that the qualification "pursuant to any finance document" applied only to the second part of the definition, commencing "together with all interest… in respect of those monies…" and therefore questions regarding the limitation of the definition to liabilities arising “pursuant” to the finance documents applied only to interest. The judge agreed that based on word order alone the senior creditor’s interpretation was correct, however the judge went on to add that no reasonable observer would consider this to be the interpretation intended by the parties and therefore the phrase should apply to the definition as a whole (i.e. the interpretation advanced by the junior creditor). This provides a helpful reminder to draftspeople that plain English must be used, and documents should be drafted with the reasonable observer in mind.

3. Validity of claims

Separately to the analysis of the language above, the courts also considered a provision in the ICA that stated that no party could make a claim against the validity of the security of any other party. The junior creditor argued that theirs was not a claim regarding validity of the security, rather a claim about whether security existed at all (the issue in question related to the absence of signed documents). They argued that “validity” referred only to practical matters, such as whether security was properly registered and perfected. The judge dismissed this stating that the only thing not captured by “validity” would be the quantum of the debt owed. As the claim from the junior creditor in this case related to whether an obligation existed this constituted a challenge to the validity of the document and therefore the junior creditor was prevented from making the claim.

Once again, this provides a reminder of the importance of clear drafting in agreements.


Whilst a number of valuable points are raised by this case as flagged above, the outcome should be read in the context of the facts of the case – here the underlying senior secured creditors were individual crowdfunders who had advanced funds through an online platform and had no other means of recovering their funds if the junior creditor had succeeded in challenging the ICA. In any event, it is helpful for everyone to have yet another reminder of the importance of clear drafting with a view to potential challenges in a distressed scenario.