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Richard Ritchie, barrister at XXIV Old Buildings highlights the importance of clarifying the construction of a funding agreement following the decision in Re Beppler & Jacobson Ltd.
Re Beppler & Jacobson Ltd; TOC Investments Corporation v Beppler & Jacobson Ltd and others  EWHC 20 (Ch),  All ER (D) 37 (Jan)
The Chancery Division held that the first applicant company’s application for orders requiring it to be reimbursed for fees and other costs incurred in a liquidation would be allowed, where it had advanced money under a funding agreement on the understanding that it would recover the amounts so advanced out of the assets of BJUK, the company in liquidation, either upon the dismissal of the petition or on the winding up of BJUK. Further, the remedy of subrogation would be made available to TOC, since in the circumstances it was the remaining and appropriate way of ensuring that BJUK was not unjustly enriched.
The question in this case was whether a third party who had provided funds to pay for the fees and expenses of provisional liquidators (PLs) could recover those funds from the company. The funds had been provided pursuant to a funding agreement, which did not contain any right of recourse.
The funding, £2.7m, was provided in the context of petition under section 994 of the Companies Act 2006. The funder, TOC, was the parent of the petitioner. The company which was the subject of the petition was referred to as BJUK. PLs were appointed the day the petition was issued. Under a compromise, set out in an order of Newey J (the Newey Order), the respondents were to buy out the petitioner at a price to be determined at a future hearing and, failing payment, BJUK was to be wound-up. The Newey Order provided that on the purchase price being paid, the parties were to apply to court for an order that the fees and expenses of the PLs should be borne by BJUK. The funding agreement was entered into after the date of the Newey Order. The petition was eventually dismissed with directions for the determination of whether BJUK was to reimburse TOC.
The issues were:
The judge commented:
The drafting of the Funding Agreement has furnished the parties with ammunition, which they have deployed.
The arguments put forward were many and various.
TOC argued that in the context the word ‘advance’ meant a loan repayable on the happening of the relevant event—the dismissal of the petition or if the purchase price was not paid, the winding up of BJUK. Alternatively, there was an implied term to the same effect. Alternatively, it relied on IR 1986, r 4.30 and finally on the rule in Ex parte James.
The main arguments put forward on BJUK’s side relied on the absence of any express right of recourse in the funding agreement, the absence of any other terms consistent with a loan—such as the payment of interest—and the fact that there was an express clause requiring the PLs to repay any surplus, which it was said indicated that the parties had considered the question of repayment and therefore the absence of any other provision for repayment was deliberate. On subrogation they relied on the fact that the money advanced had become BJUK’s money and that it had therefore discharged its obligations under the Newey Order to the PLs.
The word ‘advance’ was ambiguous and took its meaning from its context. In the context it meant a loan subject to repayment. TOC was not making a gift or providing the money pursuant to an obligation. The funding agreement was not intended to negate IR 1986, r 4.30 or the Newey Order. The term dealing with repayment of any surplus was dealing with a different question and did not exclude repayment in other circumstances.
The funding agreement did not deal with the mode and event of repayment, which was clearly not on demand, and it was not possible to imply a term that the money should be repaid on the dismissal of the petition or, if the purchase price was not paid, on the winding-up of BJUK.
The funding agreement was not intended to be free-standing but to be read with the Newey Order and IR 1986, r 4.30(3). The advance was to be repaid by BJUK on the dismissal of the petition or, failing payment of the purchase price, on the winding up of BJUK as provided for in the Newey Order and/or IR 1986, r 4.30(3).
Alternatively, TOC was entitled to be subrogated to the PLs’ rights under IR 1986, r 4.30(3). The fact that the money advanced had become BJUK’s money prior to the PLs being paid was a matter of mechanics, which did not affect the basic fact that it was TOC’s money that was used to pay the PLs.
Without finally deciding, the judge doubted that the rule in Ex parte James would be of any assistance if the other arguments had failed.
This case was primarily about construction of the funding agreement in the particular context and followed the well-known authorities in this area. It indicates that IR 1986, r 4.30(3) will normally be followed in the absence of any clear indication to the contrary. In this case the Newey Order reinforced the basic position.
This was a classic case of a complex agreement which had failed to deal with a basic point, as can easily happen. The fundamental lesson for those lending money to fund PLs is to make sure that the advance is clearly stated to be a loan and to set out clearly the circumstances in which it is repayable and by whom, even if only by express reference to IR 1986, r 4.30(3).
Richard Ritchie is frequently instructed to advise and represent Official Receivers in litigation and is also instructed by BIS on topical aspects of insolvency law and practice where legal advice is required in formulating policy and guidance.
Interviewed by Barbara Bergin.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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First published on LexisPSL Restructuring and Insolvency
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