Minority shareholder required to repay £250,000 loan given to her during company sale process

About this case:

• Citation:
  [2024] CSOH 25
• Judgment:
  External link
• Court:
  Court of Session Outer House
• Judge:
  Lord Sandison

Keith Inch and Roderick Stuart sought combined payments of £250,000 from Margaret Totten on the basis of a loan agreement executed by the parties on 9 May 2018. The defender contested the nature of the agreement and argued that, even if it was a loan, the pursuers were personally barred from demanding the money.

The case was heard by Lord Sandison in the Outer House of the Court of Session. Brown, advocate, appeared for the pursuers and the defender, while initially represented, later appeared as a party litigant.

Told not to worry

The parties had all been business partners in a limited company, IA3, in which the pursuers held the majority stake. Negotiations to sell all the shares in the company began in 2018, and as they continued it became apparent that the defender would receive £250,000 less than anticipated from the sale. The defender’s evidence was that in order to persuade her to allow the sale, the pursuers told her they would make up the lost value and asked her to sign an agreement.

It was the defender’s position that she had understood that the money was a gift to her from the pursuers, although she accepted in cross examination that the written loan agreement she had signed in 2018 was not difficult to understand and she had denied an offer to take up independent legal advice. She accepted that she had likely signed the document without reading it, having assumed it was related to the sale of IA3.

The parties continued in business together through another company, Akari Group, which was later sold. During the sale of Akari, the question of the loan was brought up to the defender, who maintained that the pursuers had told her not to worry about it and that it would be sorted later. She maintained that she acted to her detriment during the sale process of Akari based on those representations, and thus personal bar was established.

For the pursuers it was submitted that the defender admitted there was a formal loan agreement on which she had made no repayments. There was no reason for her to be “given” anything by the pursuers as she was not in a position to stop the sale of IA3. In respect of personal bar, she had not given a clear account of any relevant representation, and no reasonable person would conclude in the circumstances that the debt had been waived.

Perfectly plain

In his decision, Lord Sandison observed: “Up to three questions may require to be addressed in order to determine the proper resolution of this action. Firstly, what exactly was said to the defender by the pursuers (and in particular the second pursuer) about the loan in the run-up to the sale of Akari Group? Secondly, did what was said form a proper basis upon which a reasonable person might conclude that the pursuers were representing that they intended the loan to be forgiven? Thirdly, did the defender in fact reach that conclusion and act in reliance on it to her detriment in agreeing to the sale of Akari Group?”

Addressing the first question, he said: “Nothing has been established about the circumstances of the sale of IA3 which would have justified the defender in thinking that the £250,000 was somehow to be regarded as a gift in that connection. Further, the documentation which she was asked to sign in order to receive that sum of money, along with contemporaneous email exchanges, made it perfectly plain that it was being advanced as a loan.”

On whether a reasonable person could assume the loan was forgiven, he added: “All that such a person could have taken from what was said to the defender was that the pursuers intended to have a discussion about the defender’s difficulties with the loan after the Akari Group deal was done. That discussion might have resulted in capital forgiveness in whole or in part, the remission of interest in whole or in part, or simply in a repayment schedule being agreed. It would not have been reasonable for a person in the position of the defender to conclude that any one of those outcomes was more probable than any other.”

Finally, Lord Sandison concluded on personal bar: “The defender had tried and failed to get [Akari’s buyer] to pay off the loan as part of their purchase of Akari Group. In these circumstances, I conclude that she would have regarded a bird in the hand as better than two in the bush and was prepared to agree to the sale of Akari Group on the offered terms regardless of anything having been said to her about how the loan was going to be addressed in future. It follows that her plea of personal bar would have foundered at this stage.”

Decree was therefore granted in the terms sought by the pursuers.