A cautionary tale regarding the appointment of administrators using the ‘out of court’ routePrint publication
Capital Funding One Limited (Capital) was a special purpose vehicle established for peer-to-peer lending. Capital would arrange short term bridging finance at high rates of interest for borrowers who were unable to obtain loans from more conventional sources. Capital had no assets itself, instead the lending was funded by third-party investors. One such investor was King Street Bridging Limited (King Street).
The arrangement was that Capital, having found potential borrowers, would offer King Street a ‘lending opportunity’ outlining details of the borrower and the terms of the proposed loan. King Street would then consider the opportunity and decide whether or not to advance the funds to Capital. Capital would then lend the monies on. King Street would regularly put Capital in funds for lending to ultimate borrowers. This whole arrangement was by way of an informal joint venture, there was no written agreement and business was conducted orally or by email.
In November 2013, Capital granted King Street a debenture containing fixed and floating charges to secure all monies owed then and in the future to King Street. One of the terms of the debenture was that non-payment of sums due to King Street constituted an event of default which gave King Street the right to appoint administrators using the out of court process.
Between November 2013 and November 2015 numerous loans were advanced to Capital which in turn advanced them to the ultimate borrowers. Occasionally the borrowers were late in repaying the loans to Capital which in turn meant that King Street was repaid late but at no point did King Street make a demand under the debenture.
In September 2016 the business relationship turned sour. Two borrowers defaulted on their repayments to Capital which meant that King Street was out of pocket to the tune of £678,000 and King Street demanded repayment. Capital didn’t meet the demand and so King Street purported to appoint administrators under the terms of the debenture.
Capital, however, challenged the appointment and sought an order from the court that the administrators had not been validly appointed because no event of default had occurred (Re Capital Funding One Limited  EWHC 3567 (Ch)).
What did the court decide?
The court agreed with Capital and found that the appointment was invalid and held that the administrators should be removed. The judge stated that the crucial issue was whether the monies advanced by King Street were repayable only in the event that Capital received equivalent payments from the borrower, in other words a ‘pay when paid’ arrangement. King Street contended that Capital’s liability to repay the advance arose when the ultimate borrower became liable to repay Capital, if the ultimate borrower was in default to Capital, Capital was in default to King Street.
Without a written agreement it was down to the court to identify what the parties understood the position to be in this situation. Did the parties intend that the risk of non-payment by a borrower fall on Capital or King Street? The judge decided that it was understood that the risk would fall on King Street. He picked out three particular factors in support of this conclusion:
- King Street knew from the outset that Capital had no other source of funding for the loans and no other assets and therefore if a borrower defaulted on a loan, Capital would have no alternative means to repay King Street;
- King Street was free to accept or reject any particular lending opportunity;
- King Street made its decision to advance funds by independently assessing the risks of each proposed borrower.
The judge therefore found that there was no obligation on Capital to repay King Street when the borrower had defaulted on his loan repayment. As such there had been no event of default under King Street’s debenture and therefore the appointment of administrators had been invalid.
From a general contractual point of view, this case highlights the danger of failing to fully reduce an agreement to writing. From an insolvency point of view, it exposes the hazards of appointing administrators through the out of court route. The nature of any floating charge must be carefully examined to ascertain whether an administrator can be validly appointed.