UK: You Say Advance, I Say Repay – What Does The Court Of Appeal Say?

Case: Leibson Corporation and Others v TOC Investments Corporation and Others [2018] EWCA Civ 763 (17 April 2018).

The Court of Appeal of England and Wales (“CA”) has provided clarification on constructing contracts. Its decision is based on principles of contractual interpretation, and serves as an important reminder of the need to have clear contractual terms in any agreement documenting the terms of a funding arrangement. When it comes to finance and funding arrangements, crucial terms such as the timing and terms of repayment should be expressly provided for. The decision also highlights the limits of IR 4.30 in simply identifying the source of payment for the remuneration and expenses of a provisional liquidator.

This alert is relevant to financiers, insolvency practitioners, and those providing funding to estates in an insolvency process.

The Facts

Beppler & Jacobson Limited (“BJUK”) appealed against a judgment ordering it to reimburse a third-party funder, TOC Investment Corporation (“TOC”) for the sum of approximately £2.7 million. TOC had advanced the funds to BJUK pursuant to the terms of a funding agreement dated 27 July 2012 between TOC, the PLs of BJUK, and BJUK acting by the PLs. The purpose of the advance was to fund the fees and costs of PLs who had been appointed over BJUK on 3 May 2012. The funding agreement contained no provisions relating to repayment (whether on demand or on a specified event or date), nor did it provide for the payment of interest.

The provisional liquidation came to an end when the judge presiding over the proceedings granted an order that the shares in BJUK be sold to one of its minority shareholders and that the fees and costs of the PLs were to be borne by BJUK (the “Newey Order”).

TOC argued that BJUK was obliged to repay it the £2.7 million on the following grounds (among others):

  1. that the use of word ‘advance’ in the funding agreement implied that the sum was a loan repayable on the happening of an event – in this case, the ending of the provisional liquidation; and
  2. that, on the proper construction of IR 4.30(3), BJUK was required to reimburse TOC for the funds.

BJUK argued that the funding agreement, properly construed, imposed no obligation, whether expressly or by necessary implication, to repay the advance to TOC. They also argued that IR 4.30(3) imposed no such obligation.

It was held at first instance that TOC was entitled to reimbursement on the basis of both the proper construction of the funding agreement and therefore by operation of IR 4.30(3). Permission for appeal was granted on 19 August 2016. The appeal was not heard until 12 December 2017, with judgment being delivered this year.

Court Of Appeal Decision

Funding Agreement: An Obligation to Repay?

The CA allowed the appeal. It held that, as a matter of construction, the funding agreement imposed no obligation on BJUK to repay the funds advanced by TOC. The CA surveyed settled principles of contractual construction in arriving at its decision, as endorsed in Arnold v Britton and others [2015] UKSC 36.

The general position is that, where money is lent without any provision as to repayment, a debt obligation is created that, absent specific repayment terms, is repayable on demand. However, this general position is subject to context. The CA held that the verb ‘advance’ is ambiguous and must be interpreted in the context in which it is used. In the context of this case, the CA held that the advance could not have been construed to be repayable on demand since that construction would have defeated the purpose of the advance – which was to facilitate the provisional liquidators doing their job for the course of the provisional liquidation.

The CA also identified the absence of a provision for payment of interest as suggesting that the advance was not repayable at some stage.

The CA dealt with an argument that implicit in the funding agreement was a term that the monies advanced must be repayable in their entirety once the provisional liquidation had come to an end. TOC raised this as a point of construction in light of an express provision (cl.3.4) in the funding agreement that certain surplus monies were to be repaid. But the court said that any such implied term would have been inconsistent with, and indeed would have contradicted, the express terms of the funding agreement. Such construction was therefore illegitimate.

The CA ended its task of construction of the funding agreement by finding that there was no need for the implication of such a term to make the funding agreement workable. Accordingly, the CA held that the strict requirements for implication of terms articulated in cases such as in Attorney-General of Belize and others v Belize Telecom Ltd and another [2009] UKPC 10, [2009] 1 WLR 1988 and Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and another [2015] UKSC 72 were not satisfied

Effect of Insolvency Rule 4.30(3)

In dealing with TOC's argument that IR 4.30(3) imposes an obligation on the company to repay advanced funds, the CA noted that by its terms, IR 4.30(3) stipulates that the cost and fees of provisional liquidators be borne by the company out of the assets of the company. The rule simply allocates accountability for the PLs' remuneration and expenses to the company and no one else; it does not prevent the company in provisional liquidation from obtaining funds from a third-party. The Newey Order simply reflected this rule. Nor could it be said that IR 4.30(3) be construed as creating a freestanding contractual obligation to repay third-party funding.

Doctrine of Subrogation or Unjust Enrichment

Finally, the CA held that any claim for unjust enrichment would “directly interfere with the manner in which the parties had allocated risk” and as such any claim under the doctrine of subrogation would not entitle TOC to reimbursement.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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