Whether Contracting with Friend or Foe, Legal Formality Always Matters

Even experienced businesspeople are all too often tempted to dispense with legal formality and do oral deals with those they know and trust. As a High Court case underlined, however, friendships have a nasty habit of turning sour and such arrangements are a positive invitation to dispute.

The case concerned an entrepreneur who experienced severe cash flow difficulties in part due to the result of the Brexit referendum. He said that, in order to help him out, a friend agreed during a telephone conversation to extend him a £250,000 interest-free loan. As security for the loan, he said that he transferred to his friend half of his 100 per cent beneficial shareholding in a Spanish company which held several valuable plots of land on the Costa del Sol.

The entrepreneur had offered to repay the loan and launched proceedings after his by that point former friend refused to transfer the shares back to him. The friend, however, gave a very different account of what had been orally agreed between them. He said that he had straightforwardly purchased the shares for £250,000 and was under no obligation to sell them back to the entrepreneur.

Ruling on the matter, the Court described the friend as a witness on whose evidence it could not rely and preferred the entrepreneur's account of what had been agreed. The Court noted that, given what the Spanish land was worth, £250,000 represented only a fraction of the value of a 50 per cent shareholding in the company.

The Court made an order reflecting its findings that the entrepreneur had the right to repay the loan on an interest-free basis and, after doing so, to require the friend to transfer the shares back to him.