The appointment of administrators in the absence of an event of default (Re Capital Funding One Limited)

Daniel Webb, barrister at St Philips Stone, examines the decision in Re Capital Funding One Limited, in which the court had to consider whether, in connection with the purported appointment of administrators, an event of default had occurred where the parties to a joint venture agreement did not expressly agree the repayment terms of a loan.

Re Capital Funding One Limited; Capital Funding One Limited v King Street Bridging and others [2017] EWHC 3567 (Ch)

What are the practical implications of this case?

This case exposes the danger of failing to fully reduce an agreement to writing, especially when it is the basis for appointing administrators using the out-of-court process.

In circumstances where parties to a joint venture did not expressly agree the repayment terms of a loan, it was unclear exactly when liability to repay arose. The court had to do its best to fill the gap. In doing so, it was held that the applicant was not liable to repay at the time when the secured creditor purported to appointed administrators under a debenture.

As there was no liability to repay, there was no event of default under the debenture and no right to appoint administrators. The appointment was therefore held to be invalid.

What was the background?

Capital Funding One Limited (C) was a special purpose vehicle incorporated for peer-to-peer lending funded by third-party investors. By way of a largely informal joint venture with King Street Bridging Limited (K), K would regularly put C in funds for peer-to-peer lending to ultimate borrowers. K would receive invitations from C for funds, advance them to C, and C would lend the monies on. C would collect the revenue, which would tend to be shared between C and K.

On 25 November 2013, C granted K a debenture containing fixed and floating charges to secure all monies then or thereafter due to K. It was a term of the debenture that non-payment of sums due from C to K upon demand constituted an event of default. An event of default gave K the right to appoint administrators using the out of court process.

Between November 2013 and November 2015, a number of loans were advanced to C and on to ultimate borrowers. Certain of these borrowers repaid C late, meaning that K was repaid late. But at no point during this period did K made a demand under the debenture or even threaten to do so.

In or around September 2016, C invited K to loan funds to C to be advanced to a Mr Patel (Patel loan). When the time came for Mr Patel to repay C, he defaulted. On 13 September 2017, K purported to demand repayment from C of sums said to be due to K under the Patel loan. C did not meet this demand. K characterised this as an event of default under the debenture and purported to appoint administrators of C on 18 September 2017.

C challenged the appointment by way of application dated 16 October 2017. C contended that the appointment was invalid, since C had no obligation to repay K on 18 September 2017: there was no event of default. The administrators took a neutral stance.

What did the court decide?

His Honour Judge Hodge QC gave an ex tempore judgment on 7 December 2017. The key issue was whether C was liable to repay K when the purported appointment of administrators took place.

C contended that it was only liable to repay when C was itself paid by the ultimate borrowers: a ‘pay when paid’ arrangement. K contended that C’s liability to repay K arose when the ultimate borrower became liable to repay C: so if the ultimate borrower was in default to C, C was in default to K. The judge described these as the only sensible commercial possibilities.

It fell to be determined whether there was an express term as to either of these possibilities. In his reasoning, the judge remarked that K’s operations manager gave evidence that there was no specific discussion or formal agreement as to what would happen if C’s borrower did not repay. It was therefore found that there was no express agreement to pay when paid. Nor was there express agreement that repayment would be effected at the end of the term of the loan from C to its own borrower.

Absent an express term, the court was left ‘having to fill a gap in the express agreement between the parties’. Despite submissions as to the test for implying terms, the Judge observed that the gap was not necessarily filled by implying a term, but by seeking to identify what the parties must have intended.

The judge remarked that discerning this intention really came down to whether the parties mutually understood that the risk of a failure to repay C would fall on C or K. In the circumstances, it was held that the risk was understood to fall on K. K was to get its money back only when the loan to C was itself redeemed.

The court picked out three particular factors in support of this conclusion:

  • C had no separate source of outside funding and therefore no source of repayment other than the ultimate borrower
  • K was free to accept or reject any particular lending opportunity proposed by C
  • K made its decision by independently assessing the risks, taking into account the loan to value of the underlying security offered by C’s proposed borrower. K’s director had given evidence that the value of the security was very important to the arrangements

It followed that although Mr Patel had defaulted on his loan from C, C was not itself in default to K when the administrators were purportedly appointed. There was no event of default under the debenture and the appointment was invalid.

Case details

  • Court: Business & Property Courts in Manchester, Insolvency & Companies List (ChD)
  • Judge: His Honour Judge Hodge QC
  • Date of judgment: 7 December 2017

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Further Reading

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Out-of-court appointments—who can apply and in what circumstances? (Subscriber access only)

Out-of-court administration appointments—the procedure (Subscriber access only)

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