Rajinder Kumar & Ors v LSC Finance Limited

This dispute came out of short-term property development finance. LSC Finance Ltd was an unregulated lender. It specialised in short-term lending, particularly for buying and developing real property.

The borrowers were members of the same family who were also involved in family-run development companies. Between April 2017 and May 2018, LSC made a series of loans to those companies and to the family members personally to support land purchase and development projects.

The appeal focused on three personal loans made on 17 January 2018. Each loan was secured by a mortgage over one of three adjoining plots at Redhill Poultry Farm, Pattingham. The loans ran for 12 months.

After default, the borrowers challenged whether LSC could enforce the Pattingham loans. There had been many issues at trial, but the appeal narrowed the dispute to two points only. First, were these loans regulated mortgage contracts or investment property loans? Second, what did the interest wording in related guarantees actually mean?

The main issue was whether the Pattingham loan agreements were regulated mortgage contracts under the Financial Services and Markets Act 2000 regime, or whether they fell within the investment property loan exception in article 61A(6) of the Regulated Activities Order 2001.

That mattered because the court said that, if the loans were regulated mortgage contracts, they would on their face be unenforceable under section 26 of the 2000 Act because LSC was not authorised to conduct regulated business.

It was common ground that the Pattingham loans met the basic conditions for regulated mortgage contracts unless an exception applied. So the real fight was about the exception.

The second issue was narrower but commercially important. The court had to interpret clause 4.3 in standard form deeds of guarantee and indemnity. The borrowers said it meant the guarantor did not have to pay interest where the borrower was already liable for interest. LSC said it only prevented double recovery.

The Court of Appeal said the answer depended on a fact-sensitive enquiry into two things at the time the agreement was made. First, what use did the borrower intend to make of the land? Second, was the agreement entered into wholly or predominantly for the purposes of a business carried on, or intended to be carried on, by the borrower?

Both questions were fixed at the date of the agreement. If the intended use or purpose changed later, that later change did not alter the regulatory character of the contract. The court was clear that, for regulatory purposes, the character of the agreement is fixed when it is made.

The court also explained the role of a business-purpose declaration. If a declaration meets the statutory requirements, it can create a presumption that the agreement was entered into wholly or predominantly for business purposes, unless the lender knew or had reasonable cause to suspect otherwise.

In this case, the declaration was defective for that purpose. It used wording appropriate to other types of regulated agreement and did not properly state that the borrower understood the loss of protections that would apply if the agreement were a regulated mortgage contract under the 2000 Act. So LSC did not get the benefit of the statutory presumption.

But the court also rejected the idea that a defective declaration must be ignored completely. It said the statement remained part of the contract and could still be evidence of the borrower’s intended purpose. It simply did not have the same statutory effect as a compliant declaration.

The borrowers said Mr Kumar had told LSC in late 2017 that each plot would be used to build personal homes for himself, Mrs Kumari and Mr Verma, and that this was why the loans were taken in their individual names rather than through the companies.

The trial judge rejected that evidence, and the Court of Appeal would not disturb those findings. The appellate court noted that the judge had accepted evidence from LSC’s witnesses that they knew lending to individuals to purchase or develop houses for those individuals to live in would be regulated, and that LSC would not have made the Pattingham loans if it had been told that was the plan.

LSC’s case, accepted at trial, was that the Pattingham loans were originally intended to be made to a limited company. That changed because the land already had planning permission for four houses, but with a restriction that occupants had to live and work on the land. Mr Kumar had said he wanted the land acquired in the personal names of himself, his wife and his son so they could make separate applications to remove that restriction from each plot.

The court also relied on the wider factual picture accepted by the judge. The loan offers were inconsistent with an understanding that the borrowers were going to build dwellings for themselves. The judge also considered contemporaneous documents and a professional valuation.

The key factual finding was that, as at 19 January 2018, it was not the actual intention of Mr Kumar, Mrs Kumari or Mr Verma to build houses for themselves on the plots. Instead, their intention was to build one house on Plot 1, two houses on Plot 2 and one house on Plot 3, sell those houses to third parties and use the sale proceeds to repay the Pattingham loans.

Those findings meant both requirements for the investment property loan exception were satisfied. The loans were therefore unregulated investment property loans and enforceable.

The guarantee issue turned on two clauses in the same interest section. Clause 4.1 said the guarantor had to pay interest to the lender at 3% per month on sums demanded under the guarantee. Clause 4.3 said the lender was not entitled to recover any amount in respect of interest under both the guarantee and the arrangements between the borrower and the lender.

The borrowers argued that, if the borrower was already liable for interest under the facility agreement, the guarantor had no liability for interest at all. The Court of Appeal rejected that reading.

The court applied ordinary principles of contractual interpretation. It said the starting point was that both provisions in the same clause should be given work to do if possible. Clause 4.1 created an express obligation on the guarantor to pay interest. Clause 4.3 then limited recovery so the lender could not recover the same interest twice on the same principal sum for the same period.

The court said that reading made commercial sense. A lender may need an express guarantor interest obligation where it cannot recover from the principal debtor, for example in an insolvency situation. The guarantee was also described as a guarantee and indemnity, which supported a broader reading of the guarantor’s exposure.

The court also noted that another clause setting the guarantor’s maximum exposure expressly included interest. That made the borrowers’ interpretation harder to reconcile with the document as a whole.

This case is a good example of how courts test a later narrative against the documents created when the deal was being done. The court did not decide the issue by labels alone. It looked at the commercial reality shown by the evidence.

The judge relied on contemporaneous material including the loan offers and the professional valuation of the Pattingham land. The planning context also mattered. The move from a company borrower to individual borrowers was not treated as decisive by itself. The court looked at why that change happened and whether it fitted the wider transaction story.

The court also treated the wording in the loan agreements as relevant evidence, even though the declaration was defective for statutory presumption purposes. That is important for businesses. A drafting error may stop a lender getting a presumption, but the wording may still influence the factual analysis.

On the other hand, the court would not let a defective declaration do more than it legally could. It did not treat the declaration as conclusive and it rejected the idea that it created an estoppel in the lender’s favour.

If you are a lender, this case is about front-end transaction discipline. You need the borrower identity, intended land use, planning story and loan documents to match. If the deal is really a business development loan, the evidence should show that clearly at the time of contracting.

If you are a borrower, especially in a family-run property business, do not assume that borrowing in personal names will automatically make a later regulatory argument stronger. The court will ask what the real plan was when the agreement was signed and whether the documents support that plan.

If you are a broker or adviser, this case is a reminder to check whether the declaration is drafted for the correct regime. Using wording designed for a different type of regulated agreement can create avoidable risk and cost.

If you are signing a guarantee, do not focus on one apparently helpful sentence. Read the interest clause, indemnity wording and maximum exposure clause together. A clause that sounds protective may only stop the lender recovering the same amount twice.

For many businesses, the practical message is simple. Courts will not let labels do all the work. They will look at what the parties were actually trying to do, what the documents said at the time and whether the transaction made commercial sense.

That matters most where land may include dwellings, family members borrow personally, or a company deal is moved into individual names. A short legal review before completion is usually cheaper than arguing later about enforceability, declarations or guarantee exposure.

The Court of Appeal dismissed the appeal. It agreed with the trial judge that the Pattingham loans were investment property loans and therefore enforceable. It also agreed that clause 4.3 of the guarantees prevented double recovery of interest rather than removing interest liability altogether.

The court also refused a late application to adduce fresh evidence and add a further ground of appeal. The proposed evidence came from later criminal proceedings involving other matters. The court held that it would not have had an important influence on the result and did not justify reopening the case.

For most businesses, that procedural point is secondary. The durable lesson is about classification of mortgage-backed business lending, the value of contemporaneous documents and careful reading of guarantee interest clauses.