A recent judgment in the Commercial Court (Shukla v St James Bank & Trust Company Ltd [2026] EWHC 851 (Comm)) has cast a spotlight on the doctrine of equity of redemption and the obligations of lenders in facilitating repayment.
The ‘equity of redemption’ is a fundamental principle that gives borrowers the right to reclaim ownership of assets they have provided as security for a loan, once the secured liabilities have been paid in full. Importantly, it prohibits lenders from including terms in loan agreements that would prevent a borrower from recovering their secured assets upon repayment. Such restrictive terms are known as “clogs” on the equity of redemption, and they are considered void.
The principle has been the subject of some criticism in contemporary times as being anachronistic and not appropriate for sophisticated commercial transactions; however, it remains law.
Summary of the claim
St James Bank & Trust Company Ltd (the Bank) had provided a loan to Mr Shukla (the Claimant) which was secured by certain listed shares. The security was given on a non-recourse basis, meaning that the Bank could not seek recovery for non-payment other than via the shares. Following a series of events of default, all obligations under the loan agreement became immediately due and payable. However, the Claimant claimed that when he came to repay the loan, the Bank refused to provide a redemption figure and asserted that it could retain its security and seize the secured shares.
The Claimant maintained his entitlement to repay the loan and redeem the security following the events of default and sought damages of US$15m for the decline in the value of those shares.
In response, the Bank argued that:
- the equity of redemption following an event of default was expressly excluded by the terms of the loan agreement, meaning that the agreement was terminated and the Bank could retain its security, even if its value surpassed the outstanding loan; and
- the documentation was structured as a sale and purchase agreement (with an option to repurchase the shares), rather than a conventional secured loan and therefore the doctrine of the equity of redemption did not apply in the circumstances.
In addition, the Bank argued that, in any event, there is no duty on a lender to cooperate in the repayment of a loan and as such it could not be liable in respect of the fall in value of the security.
The Court’s decision
The judge determined that, taken as a whole, the arrangement was, in fact, a secured loan agreement, thereby invoking the doctrine of the equity of redemption.
Despite drafting designed to limit the Bank’s recourse and confer wide powers over the shares, including powers which were consistent with rights of ownership, the agreement also included language typical of a loan transaction, such as references to a loan, to lender/ borrower and repayment obligations. Furthermore, there was evidence that the intention of the parties was for the Bank to provide loan finance to the Claimant. Provisions permitting substitution of the shares by the Claimant with other securities were also indicative of a security arrangement.
The Claimant was under an obligation to repay the loan on maturity or acceleration, even though enforcement was limited to the pledged shares. The Court emphasised that non recourse lending is a well-recognised form of loan under English law and does not of itself convert a transaction into a sale.
Critically, the agreement did not include any clear transfer of beneficial ownership of the shares to the Bank.
Consequently, it was held that the Bank’s attempt to exclude equity of redemption following an event of default was void.
Importantly, the judge also recognised an implied duty on the part of the Bank to cooperate with the repayment process. The Claimant retained a right to repay the accelerated loan following default and to demand re delivery of the shares (or their equivalent). Once the loan was accelerated, the Bank was obliged to cooperate by providing a redemption statement and repayment instructions. The Court held that the Bank’s refusal to do so was a breach of contract, entitling the Claimant not only to equitable relief but also to damages.
The Court awarded summary judgment in favour of the Claimant. The Bank was ordered to make an interim payment of damages and to disclose any profits or income derived from the secured shares since 1 October 2023.
Key takeaways
This case highlights the Courts’ reluctance to allow lenders to contractually exclude equitable rights in secured lending arrangements and underscores the importance of a lender’s cooperation where a borrower is seeking to repay its debt and redeem security.
Parties should be clear whether any similar hybrid arrangement is to be a secured loan or an option and, if the latter is intended, ensure that drafting is carefully checked to avoid recharacterisation as a secured loan.
If intended as a secured loan, clauses allowing unrestricted use or disposal of secured assets by the lender must not make redemption practically impossible.
Once a loan is repayable (including following acceleration), lenders may be required to provide redemption figures and payment details; in some circumstances, refusal can expose them to contractual damages, not just equitable remedies.