Void claims

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Part of the time honoured boilerplate on a debt security is the “void claims” term in the terms and conditions along the following lines:

Claims against Issuer for payment under the Notes will become void unless made within five years from the due date for payment.

This is, apparently, to work around a funny in Section 6 of the Limitation Act 1980 which provides that a cause of action for “demand loans”, only begins to run from the point of written demand.

Is a debt security a demand loan? It doesn’t easily fit into the parameters of Section 6 of the Limitations Act:

6. Special time limit for actions in respect of certain loans.

(1) Subject to subsection (3) below, section 5 of this Act shall not bar the right of action on a contract of loan to which this section applies.

(2) This section applies to any contract of loan which—

(a) does not provide for repayment of the debt on or before a fixed or determinable date; and

(b) does not effectively (whether or not it purports to do so) make the obligation to repay the debt conditional on a demand for repayment made by or on behalf of the creditor or on any other matter;

except where in connection with taking the loan the debtor enters into any collateral obligation to pay the amount of the debt or any part of it (as, for example, by delivering a promissory note as security for the debt) on terms which would exclude the application of this section to the contract of loan if they applied directly to repayment of the debt.

(3) Where a demand in writing for repayment of the debt under a contract of loan to which this section applies is made by or on behalf of the creditor (or, where there are joint creditors, by or on behalf of any one of them) section 5 of this Act shall thereupon apply as if the cause of action to recover the debt had accrued on the date on which the demand was made.

(4) In this section “promissory note” has the same meaning as in the Bills of Exchange Act 1882.

In that (most) debt securities do provide for payment of the debt on a determinable date — their maturity date — and while repayment is contingent on a demand (surrender the note itself) those two limbs (a) and (b) of Section 6(2) are “conjunctive”, so it has to be both, and a debt security with a stated maturity does not satisfy it. But that has never stopped timid legal eagles before and we don’t imagine it will start now.

So why the specific concern about the limitation period anyway?

Well, in issuing them, you fling your definitive notes to the wind, and as they flutter away you have no control thereafter over who holds them, how much attention they are paying, how good their memory is or whether they will ever pitch up to ask for their money back. This is what the void claims condition addresses: indefinite liability to repay money. You have five years, so help me, or your claim to repayment goes away with extreme prejudice.

For the issuer is in the lap of the gods: it can hardly force its creditors to demand the repayment it owes them, if it doesn’t know who those creditors even are.

They may have lost their notes, mislaid them, inadvertently buried them with their elderly mothers-in-law or just overlooked them for twenty-five years, having tucked them safely away in an envelope behind the carriage clock on the mantelpiece.

So what is a poor issuer meant to do, if a holder stumbles across a long-lost note on its mantelpiece, or while clearing out the mother-in-law’s attic, and tries to present it decades after it fell due for redemption? Well, how about paying it? The issuer borrowed it, after all, so — we must presume — budgeted upon its eventual redemption. That this came about much later than expected is hardly an imposition: unpresented notes accrue no interest, so this has been free money for the issuer. It could have placed the money on deposit and earned a tidy tum. Seeing as, remember, the Limitation Act does not extinguish a legal claim, but simply says one cannot launch a formal legal proceeding to recover it after a period, it seems to this old coot that all this business about void claims is so much hot air.

Query whether, in this age of electronic clearing, there is any real need for a void claims clause — if there was ever a need for one — seeing as payments are made automatically and without demand from account holders.

But the void claims condition goes unremarked, does no real harm — except to inattentive noteholders — and no-one much takes this point, so best to let sleeping dogs lie. We just thought you’d like to know.

See also

• Limitation Act 1980