Securities-backed lending after Shukla v St James Bank

Securities-backed lending after Shukla v St James Bank

Two things are now clear under English law: a non-recourse structure does not extinguish the borrower's equity of redemption, and a lender that refuses to cooperate with repayment runs a serious risk of a damages claim. The recent Commercial Court decision in Shukla v St James Bank & Trust Company Ltd [2026] EWHC 851 (Comm) is a timely reminder that the substance of a transaction matters more than its label, and that lenders who try to use technical defaults to retain collateral while blocking repayment will find little sympathy from the court.

What happened

St James Bank & Trust Company Ltd ('SJB') made a non-recourse loan of just over USD 2 million to Rajiv Shukla, secured over 1.8 million shares in a Nasdaq-listed company. Events of default occurred between November 2023 and January 2024 due to a fall in average trading volume, though neither party was aware of them at the time. When Shukla later sought to repay and recover his shares, SJB relied on those historic defaults to claim the agreement had automatically terminated on the occurrence of an event of default, refused to provide a redemption figure or payment instructions, and asserted it was entitled to retain the shares outright. The borrower applied for summary judgment and succeeded.

The key findings

The court characterised the arrangement as a secured loan, not a sale or title-transfer structure. Non-recourse mechanics limit the lender's enforcement to the collateral, but they do not eliminate the underlying debt or the equitable protections that attach to it.

On that basis, the agreement was subject to the doctrine prohibiting clogs on the equity of redemption. Contractual provisions seeking to forfeit the borrower's redemption right on default, or to restrict him to damages while leaving the lender free to deal with the shares, were struck down. Critically, the court confirmed that unconscionability is not required, and that a provision that is repugnant to the right to redeem is simply void, regardless of how sophisticated the parties are or how carefully the contract was negotiated.

The lender's refusal to cooperate also gave rise to a breach of contract claim. Once default occurred and the loan became immediately due, SJB was under an implied duty to provide an accurate redemption figure, payment instructions and a mechanism for releasing the collateral. The borrower was not required to make a formal tender when the lender had withheld the very information needed to make one. The court awarded an interim payment of USD 5 million, with damages to be assessed.

Despite a contractual exclusion, the court held that the lender was required to account to the borrower, both on mortgage in possession principles and on the wording of the agreement. Any payment was deferred to a later date.

Key implications and next steps for banks and lenders

The decision has clear practical consequences for banks and lenders operating securities-backed and margin-style transactions under English law. Lenders should review their securities-backed loan templates now. Provisions that seek to extinguish redemption rights on default, or that give the lender absolute-owner status over collateral while preventing repayment, are at real risk of being void. Non-recourse drafting will not save them.

Equally important is the operational point: when a borrower seeks to repay, the lender must engage. Sitting on a technical default and refusing to provide redemption mechanics is not a defensible position. It is a breach that can attract substantial damages, particularly where the collateral consists of volatile listed securities.