Developer must pay back shareholder loan before refinancing

A property developer has been prevented from refinancing a building project until it pays back a loan to a minority shareholder.

The developer had been working on a site with 102 flats. The project was funded by a £1.7m loan from another company and a loan of £1.3m from a minority shareholder.

It sold 76 units and had 15 ‘reserved’ by the second shareholder, whose company was renting the properties out to people involved in the project.

With the remaining units unsold, the minority shareholder said he was due to have his loan repaid. The developer denied this was the case.

The shareholder took legal action to prevent the developer from disposing of any proceeds from the sale of the flats or from disposing of any sums other than the usual day to day running costs.

He sought an injunction to require the sale of the 15 reserved units.

The developer said it was necessary to refinance so it could pay back the £1.7m to the second company.

The shareholder said there was no need for the developer to rearrange its finances as there were plenty of funds that could be released. The developer could pay him back if it sold the reserved properties.

The court granted an order restraining the developer from entering into finance arrangements without at least agreeing to pay the minority shareholder. It didn’t go so far as to require the sale of the 15 units but stated that the second company could be paid by selling them and therefore refinancing was not necessary.

The judge said the circumstances under which the flats had been reserved was very curious. No explanation had been provided.

Please contact Mandeep Singh for more information about the issues raised in this article or any aspect of company law.