Capital Funding One Limited (the "Company") arranged short term bridging finance for borrowers who were unable to obtain loans from more conventional sources. The funding for these loans were obtained from King Street Bridging Limited ("King Street").
The arrangement between the Company and King Street was that the Company, having sourced potential borrowers, would approach King Street with a "lending opportunity" outlining the borrower and terms of the proposed loan. King Street would then consider the proposal and decide whether or not to lend the funds on that basis.
The loans were short term and attracted high rates of interest. The Company's business model depended on it splitting the revenue from the loans with King Street on a 50/50 basis - beyond the outstanding loans, the Company had no other assets. The Company and King Street had an informal relationship, with no written agreement in place governing the terms of their arrangement. Business was generally conducted orally and via email.
In November 2013, the Company granted King Street a debenture containing fixed and floating charges to secure all monies owed to King Street. In around September 2016, two borrowers defaulted on loans the Company had arranged for them. King Street then demanded that the Company repay the sums due under the loans - totalling £678,000 - on the grounds that, when a borrower defaulted, the Company was liable to repay under their arrangement.
The Company refused, asserting that it was not liable to repay King Street if the ultimate borrowers defaulted on their loans, and that King Street was well aware of this. King Street appointed Administrators in September 2017, maintaining that the Company's refusal to pay constituted an event of default pursuant to the terms of the Debenture.
The Company then sought an order declaring that the Administrators had not been validly appointed, because no event of default had occurred.
The application was successful and the Administrators were removed.
The Judge identified that the 'crucial issue' was whether the monies advanced by King Street were repayable only in the event that the Company received equivalent payments from the borrowers - in other words a "Pay when Paid" arrangement.
Because of the informal nature of the relationship between the two parties, there was some difficulty in ascertaining the exact terms of the agreement between the Company and King Street. As there was no express agreement as to whether or not a "Pay when Paid" arrangement was in place between the parties, the Judge identified that it was up to the court to "identify precisely what the parties themselves understood the position to be".
The Judge considered that King Street knew from the outset that it was the sole source of financing for the Company; that it had no assets beyond the outstanding loans; and that if a borrower defaulted on a loan, the Company would have no alternative means of repayment. Borrowers had defaulted on loans in the past with no consequences from King Street, and various emails and other pieces of circumstantial evidence suggested that the parties had always intended to share both the risk and reward equally.
The Judge therefore found that there had been no obligation on the Company to repay King Street in the event that borrowers defaulted on their loans. As such, no event of default had occurred and the Administrators had not been validly appointed.
In a general sense, this case is indicative of the approach courts will take when seeking to imply contractual terms between parties where no express agreement exists. Most importantly for the insolvency world, however, is that this case will serve as a warning as to the hazards of appointing Administrators through the "out of court" route. When advising on such an appointment, practitioners will need to carefully examine the nature of any floating charge in order to ascertain with certainty whether an Administrator can be appointed.