The importance of correct drafting of security documents (Plant and another v Vision Games 1 Ltd and others)

The importance of correct drafting of security documents (Plant and another v Vision Games 1 Ltd and others)

Who has security rights over tax credits paid to a company which subsequently enters into insolvency proceedings? Andrew Ayres QC and James Kinman, barristers at Maitland Chambers, London, discuss their recent case of Plant and another v Vision Games 1 Ltd and others.

Plant and another v Vision Games 1 Ltd and others [2018] EWHC 108 (Ch), [2018] All ER (D) 151 (Jan)

What are the practical implications of this case?

This case serves as a salutary reminder to practitioners that security documents must be drafted so as to be compatible with the transactional documentation to which they relate, and that the security arrangements provided for must, so far as they can, be actually put into practice.

Attempting to rely upon generic security documentation, or provisions for arrangements which are not then actually put into practice, can lead to results which—at least from a lender’s perspective—are unwelcome, and it may not be possible to avoid those results merely by reference to what the lender perceives as the commercial sense of the arrangements, or extraneous concepts such as equitable proprietary interests.

What was the background?

This case involved the insolvency of Relentless Software Ltd, a developer of video games.

In order to fund the development of its games, the company obtained finance from Vision Games 1 Ltd (the funder). The terms on which the finance was provided were set out in three development and sales agreements (DSAs), each one of which related to a different game.

Under the terms of the DSAs, the actual development of the games was to be carried out by a subsidiary of the company called Relentless Vision 1 Ltd (RVL). The company would provide the employees and expertise which RVL required, while the funder would advance money into a ‘production account’ held by RVL on each occasion that pre-defined ‘milestones’ were reached. RVL would then apply this money towards its and the company’s costs of the development. Importantly, any money received by the company by way of tax credits were also to be paid into the production account. By contrast, receipts from the exploitation of the games were to be paid into an ‘exploitation account’, also held by RVL.

No withdrawals were to be made from the exploitation account save with the written consent of the funder, and all monies within the exploitation account were to be paid to the funder until it had been repaid the finance which it had advanced, together with an agreed return.

To provide the funder with security for its finance, the company entered into a ‘deed of charge’, by which it granted to the funder a fixed charge over all of its ‘book debts’, which were defined as ‘all present and future book and other debts and monetary claims due or owing to [the company] in respect of the [games]’. Further, the company undertook to pay the proceeds of all such book debts into a ‘designated account’ and, until it did so, to hold that money on trust for the funder.

As matters transpired, much of this contractual machinery was not well observed in practice. It was the company, rather than RVL, that developed the games. RVL was left as a subsidiary of the funder, rather than the company, as intended. no ‘designated account’ was ever put in place, and it is not clear whether the funder paid the finance for the production of the games into the production account, or directly to the company.

Unfortunately, following the company’s entry into insolvency proceedings, a dispute arose between its administrators and the funder (and RVL, of which the funder had taken control) as to whether or not the funder had any security rights over certain tax credits which had been paid to the company as a consequence of its development of the games under the DSAs.

The funder and RVL advanced three arguments.

  • First, they said that the tax credits were ‘book debts’ as defined by the deed of charge, and that, accordingly, they either fell within the scope of its fixed charge, or were held on trust pending their payment into a ‘designated account’. Any other result, they claimed, would be a commercial absurdity, as the funder would not have security over the fruits of the finance that it had provided.
  • In the alternative, it was said that the effect of the company’s obligation in the DSAs to pay the tax credits into RVL’s production account was to create a trust of those monies in favour of RVL.
  • Finally, the funder relied upon various promises made by the company in the run up to its insolvency, to the effect that it would pay the tax credits into the production account, and that the monies in the production account would be used to repay some of the sums owing from the company to the funder. The funder argued that these promises gave rise to a proprietary estoppel in its favour over the tax credits.

What did the court decide?

The court rejected each of the funder’s and RVL’s arguments.

As to the argument that the tax credits were subject to the fixed charge or trust applied to book debts by the deed of charge, there was a clear incompatibility between the literal provisions of the DSAs and the deed of charge insofar as they related to tax credits received by the company. The former directed the company to pay the tax credits into RVL’s ‘production account’ and the latter directed the company to retain them in its own ‘designated account’. The company could not do both.

This incompatibility had to be resolved by reading the general wording of the deed of charge (which only referred to ‘book debts’ as a broad category) as subject to the DSA provisions dealing specifically with the application of any tax credits received. Because the DSAs required the company to deal with the tax credits in a manner which was inconsistent with either the fixed charge or trust applied to ‘book debts’ under the deed of charge, the tax credits had to fall outside the scope of that defined term.

RVL’s arguments that the tax credits were held on trust for it were rejected for the simple reason that there was no reason to find that such a trust relationship existed. To the contrary, the judge found that any tax credits which RVL received from the company would have been held on resulting trust for the company.

There was nothing to suggest that transfers of money from the company to RVL were intended to vest beneficial ownership of that money in the latter. There was no liability owed by the company to RVL for such payments to discharge. RVL’s sole purpose was to act as a vehicle for the arrangements between the funder and the company, and any money which it held in the production account was to be used for defraying the costs of the production.

Finally, the funder’s and RVL’s attempt to fashion a proprietary interest arising by way of proprietary estoppel foundered because the company had done no more than promise to pay tax credits into the production account, and a promise to pay money cannot (without more) create a proprietary interest in that money. In any event, the judge found that the funder and RVL had not evidenced acts of reliance on the promises alleged sufficient to give rise to an estoppel.

Interviewed by Tracey Clarkson-Donnelly.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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About the author:

Neil specialises in banking and asset finance transactions with a particular emphasis on shipping finance, aviation finance, renewable energy finance and in providing corporate finance transactional support. Neil qualified as a solicitor with TLT in 2004 and worked as a finance solicitor in both the Bristol and London offices before joining the asset finance team at DLA Piper.