Capital Funding One Ltd v King Street Bridging Ltd & Ors

This is my extemporary judgment on the final substantive hearing of an application by Capital Funding One Limited (to which I shall refer as “CF1”), issued on 16 October 2017, for a declaration that Mr Paul Robert Boyle and Mr Thomas Bowes were invalidly appointed as administrators of CF1 by a debenture holder, King Street Bridging Limited (to which I shall refer as “KSB”), on 18 September 2017. The application is opposed by the first respondent, KSB. The joint administrators, who are the second and third respondents to the application, have indicated that their position is one of neutrality. On this application, Mr James Morgan QC appears for CF1 and Mr Mark Harper QC appears for KSB.

The matter first came before me on 25 October 2017 on paper when I approved a consent order giving directions for the conduct of the proceedings and directed (by paragraph 3) that the matter should be listed on 7 December 2017 with a time estimate of one day. I also directed that witnesses of fact were to attend the final hearing for cross-examination.

The evidence in support of the application is contained within the witness statement of Mr Wayne Smethurst, one of the three directors of the applicant, CF1, dated 16 October 2017, and exhibiting various documents as exhibit ‘WS1’. Evidence in answer is to be found in the witness statements of Mr Stuart Solomons, a director and shareholder and de facto managing director of KSB, and of Mr Michael Seward, who is a consultant and operations manager of KSB, both dated 13 November 2017, and exhibiting various documents to Mr Solomons’s witness statement as exhibit ‘SS1’. There is evidence in reply in the form of a second witness statement from Mr Smethurst dated 20 November 2017, which exhibits further documents as exhibit ‘WS2’.

Both counsel have submitted detailed written skeleton arguments which, together with the evidence and other documents indicated by way of pre-reading, I have had the opportunity to consider in advance of today’s hearing.

At the outset of the hearing, I pointed out that only one day had been set aside for this hearing, by agreement between the parties, and that the matter would therefore have to be shoe-horned into that timescale, including delivery of judgment. As a result, both cross-examination and oral submissions have necessarily had to be somewhat truncated.

In his skeleton argument, Mr Harper had indicated (at paragraph 3) that whilst provision had been made in the order for witnesses of fact to attend the hearing for cross-examination, in view of the issues that would determine the application he did not understand why that should be necessary. With some encouragement from the court, Mr Harper therefore indicated that he did not wish to cross-examine Mr Smethurst, who therefore gave no live evidence before me, his witness statements being taken as unchallenged.

Mr Morgan did indicate that he wished to cross-examine the witnesses for KSB. Mr Stuart Solomons was therefore cross-examined for a little over an hour. In his closing submissions, Mr Morgan made certain observations about Mr Solomons’s evidence; he described his performance as an “interesting” one. Mr Morgan indicated that some witnesses listen carefully to questions, try to answer the question put, and assist the court by doing their best in that regard. By way of contrast, Mr Morgan submitted that other witnesses have their own agenda, which they seek to try to push. Mr Morgan put Mr Solomons into the latter category.

Mr Morgan also referred to certain inconsistencies within Mr Solomons’s evidence. First, he contrasted what had been said at paragraph 17 of Mr Solomons’s witness statement, where he had said that funds loaned to CF1 by KSB had effectively adopted the timescale of the underlying loan to the borrower, whereas (and inconsistently Mr Morgan said) at paragraph 28 Mr Solomons had said that in his view the loans made by KSB to CF1 had been repayable on demand.

Mr Morgan emphasised that in evidence Mr Solomons had disclaimed any reliance on the underlying Lending Opportunity documents which had regulated the lending between CF1 and the borrowers from it. Mr Morgan also pointed out that Mr Solomons had claimed that KSB was relying solely on the terms of the debenture, which was not a position that had been adopted in Mr Harper’s skeleton argument.

Secondly, Mr Morgan pointed to quibbles and prevarications on the part of Mr Solomons about the use of the word “investor” in the Lending Opportunity documents. That was clearly a reference to KSB, as the recipient of the document and as the entity that would have been the investor if the lending opportunity were taken up by KSB, but Mr Solomons had quibbled about the status of KSB as an investor.

Thirdly, Mr Morgan pointed to Mr Solomons’s evidence about the debenture having been intended to protect the position of KSB if any of its loans should prove to be in jeopardy. Mr Morgan referred to the circumstances which had arisen in relation to one of the loans, that to JR Services, which (as appears from paragraph 28 of Mr Smethurst’s second witness statement) was clearly a case of jeopardy, and one where Mr Solomons himself had accepted that KSB had not been repaid in full, and yet reliance had not been placed on the debenture. Mr Morgan submitted that I should treat Mr Solomons as a completely unreliable witness.

I accept those submissions. I found Mr Solomons to be unreceptive to, and reluctant to address or properly to answer, Mr Morgan’s questions. He displayed a remarkable reluctance to engage with Mr Morgan; and throughout he had a tendency to look at the court, i.e. at me rather than at Mr Morgan, when Mr Morgan was questioning him.

Insofar as there is any difference between the evidence of Mr Solomons and that of Mr Seward, I unhesitatingly prefer the evidence of Mr Seward. I accept Mr Morgan’s description of him as being “a completely different kettle of fish”; he was a measured witness who listened to questioning and gave honest and apparently truthful answers. Insofar as there is any conflict between the evidence of Mr Solomons and that of Mr Seward, I unhesitatingly prefer the evidence of the latter.

The background to the present application turns on the somewhat informal arrangements between KSB and CF1 whereby KSB regularly put the latter in funds for the purposes of peer-to-peer lending opportunities on terms whereby revenues were to be shared between them. It is the case of CF1 that it was only liable to repay KSB in the event that it received equivalent sums from the underlying borrowers.

If that is so, then it is said that the purported appointment of Messrs Boyle and Bowes as joint administrators of CF1 was invalid. It is common ground that CF1 was incorporated in June 2013 in order to act as a special purpose vehicle for peer-to-peer lending funded by third-party investors.

KSB was incorporated at about the same time under the control of Mr Solomons and with Mr Michael Seward assuming responsibility for the management of its day-to-day operations. KSB would receive invitations for funds by way of documents describing themselves as “Lending Opportunity” and on the basis of those documents it would decide whether or not to advance funds to CF1 which, in turn, would lend the monies on to the ultimate borrower.

Those borrowers were usually persons in need of short term finance who, as Mr Solomons accepted, could not obtain that finance from more conventional funding institutions and where the level of risk justified the charging of a high rate of interest which, although it was not formulated in precisely that way, would effectively double in the event of non-repayment within the relatively short time-scale, measured in terms of a month or months, specified for repayment.

Mr Solomons in his evidence emphasised that, as its name suggests, KSB was in the business of providing bridging finance and the Lending Opportunity document expressly addressed, in section 5, the issue of the exit strategy, in terms of re-finance with a longer-term lender. Mr Solomons also accepted, as is common ground between the parties, that at the time the two entities were established and the first loans were made by KSB to CF1, it was expressly contemplated by both parties that KSB would be the only source of finance to CF1.

The crucial issue between the parties is whether, as CF1 contends, the moneys advanced by KSB, together with fees and interest, were repayable only in the event that CF1 received the equivalent payments from the borrowers, either directly or through realisation of its security. In other words, whether there was what has been characterised as a “Pay When Paid” arrangement.

Putting it another way, the issue is whether CF1 was effectively facilitating an investment by KSB where the latter bore the risk of non-payment by the borrower in return for high rates of return if the transaction were successful. It is recognised that insofar as CF1 was, as was usually the case, to receive a share of the revenue, then CF1 also bore the risk of not receiving that share. In the case of one of the transactions which is particularly relevant for the purposes of this application, namely the Patel loan, the terms on which the loan was made to CF1 by KSB provided for CF1 to receive no revenue share whatsoever.

Mr Morgan points out that, in that event, if the court were to reject his submissions, the entire risk would have been borne by CF1, with no corresponding entitlement to any revenue share whatsoever.

Mr Morgan relies on an email exchange on 30 August between Mr Seward and Mr Smethurst under the subject heading “Capital Funding JV” where, for new business issued after that day, the revenue model agreed was as follows: packager fee (i.e. to CF1) paid on completion, where applicable excluded from revenue share; lender (i.e. CF1) to charge £995.00 exit admin fee on redemption, excluded from revenue share. All other revenue, 50/50 on redemption; variations by exception on a deal-by-deal basis, for example where a rate is below 2.5%.

That email was drafted by Mr Smethurst, and received the single word response from Mr Seward: “Agreed”. Mr Seward accepted that he would have discussed that with, and secured the agreement to it of, Mr Solomons. I note that nothing is said in the email drafted by Mr Smethurst about capital, as distinct from fees and revenue.

Between November 2013 and November 2015, KSB funded a number of loans made by CF1 to end-borrowers, the basic mechanics of which are described at paragraph 9 of Mr Morgan’s skeleton argument. On 25 November 2013, CF1 had granted KSB a debenture containing fixed and floating charges to secure all monies then or thereafter due to it. The evidence of Mr Smethurst is that it was only to abide the unlikely event that CF1 did not transmit payments that it had received from borrowers to KSB that this debenture was entered into: see paragraph 14 of his first witness statement.

A number of the loans were not repaid by borrowers in accordance with the terms of their agreements with CF1 and therefore KSB received capital and interest later than it would otherwise have done. The case of JR Services, previously referred to, was particularly problematic; but at no point did KSB make demand under the debenture, or even threaten to do so.

In or around September 2016, CF1 identified lending opportunities in relation to a Mr Patel and, separately, a Mr Esquilant. Both Mr Patel and Mr Esquilant have defaulted on their loans to CF1. It was apparently in connection with those transactions that, on 13 September 2017, KSB purported to make demand of CF1 for payment of a sum of just over £678,000.00 said to be due and outstanding. It was in the absence of repayment of that sum that, on 18 September 2017, KSB purported to appoint the administrators of CF1 pursuant to the terms of the debenture.

I have been taken to the relevant provisions of the debenture, but nothing really turns upon their precise terms, save in one respect. The end result is that if, on 18 September, payments were due from CF1 to KSB in respect of the Patel transaction, it is common ground that KSB was entitled to make the appointment of the administrators because there was an “Event of Default”.

On the other hand, if no such payments were due, then there was no Event of Default, there was no “Enforcement Date”, and KSB was not entitled to make the appointment. This issue turns on the terms of the somewhat informal arrangements between KSB and CF1 as to the basis on which monies were paid from the former to the latter.

There is a separate issue as to whether or not KSB was itself a party to the Esquilant transaction, or whether the lender in that regard was Mr Solomons personally; but it is common ground that this is a non-issue and that it is unnecessary for the court to resolve it. That is because it is common ground that KSB was a party to the Patel transaction, and either there was a debt justifying the appointment or there was not. KSB’s position is no better in relation to the Esquilant transaction. Therefore, it is a non-issue whether KSB made the Esquilant loan because the Patel loan was undoubtedly made by KSB and, on KSB’s case, the Patel loan remains outstanding.

Mr Morgan accepts that monies were advanced by KSB to CF1; the question is on what terms those monies were advanced and, in particular, whether they were advanced on a Pay When Paid basis. Mr Morgan submits that it is clear that the terms of the parties’ agreement were not set out in any written document or documents but were formed by a combination of oral and written communications, against the background of a course of dealing. In those circumstances, he says that the court is entitled to look at the parties’ conduct for the purpose of determining what the full terms of the contract were.

Mr Harper has raised a preliminary point: He submits that the evidence before the court shows that the applicant, CF1, is insolvent on a cash-flow, or payments, basis. This is said to give rise to a separate Event of Default under the terms of the debenture, which defines “Event of Default” as including the company becoming subject to any “Insolvency Proceeding”, which is defined as including a case where a person is unable to pay its debts as they fall due.

On the meaning of that term, I was taken by Mr Morgan, in closing, to passages from the judgment of Mr Justice Briggs in the case of Re Cheyne Finance plc [2007] EWHC 2402 (Ch), reported at [2008] BCC 182, at paragraphs 41 and 44 to 46 in particular. It is said that the question of whether a party is unable to pay its debts as they fall due is a nuanced one requiring consideration of all the circumstances.

Mr Morgan made a number of preliminary points on that issue: First, insolvency was not the ground on which the appointment purported to be made. Secondly, the burden of proof must rest on KSB to prove that this alternative ground existed. Thirdly, that the test of insolvency on a cash-flow basis is a commercial test; it involves consideration of the person to whom liabilities are owed and the extent to which they have been called in. Fourthly, it is said that there is the barest of evidence on the point put forward by KSB. It is referred to only briefly by Mr Solomons, at paragraph 38 of his witness statement, where Mr Solomons simply says that CF1 would appear to be insolvent in any event, and that there is a cogent argument that administration is in the best interest of the creditors of CF1 as a whole, and that that is something which the court is entitled to take into account when determining the instant application. It was only in Mr Harper’s skeleton argument that insolvency was put forward as a separate, and independent, ground for the appointment of administrators.

Fifthly, Mr Morgan pointed to the filed accounts for the year ending 31 March 2016 which showed solvency on a balance-sheet basis. Mr Morgan also referred to a letter to the joint administrators’ solicitors (Pannone Corporate) from CF1’s solicitors (Freeths) of 9 November 2017 which is also said to support a position of balance-sheet solvency.

Mr Harper made it clear that what is said on the issue of insolvency by KSB is that there is undoubtedly a debt due to Revenue & Customs for corporation tax of £14,393 odd, which was due in respect of the tax year ending 2016 and which has not been paid.

Mr Morgan points to the fact that there have been no pleadings in this case and nothing on the subject of insolvency beyond what was said in Mr Solomons’s witness statement, as now supplemented by Mr Harper’s skeleton argument.

I am not satisfied that KSB has made out a case that the company has become subject to any “Insolvency Proceeding” for the purposes of the debenture. There is evidence that the company has not paid its corporation tax liability for a past tax year, but there is no evidence, in my judgment, that such non-payment was due to an inability to make the payment.

It may well be that CF1 has simply decided not to call on its parent company for the loan which is said to be due to it in order to finance the payment to Revenue & Customs. There is no sufficient evidence that it is unable to pay the corporation tax, as distinct from evidence that it has apparently simply chosen not to do so. In his second witness statement, at paragraph 41, whilst stating - in my judgment incorrectly - that insolvency would not constitute an Event of Default such that KSB could appoint administrators, Mr Smethurst does state, in terms, that CF1 is not insolvent. Absent cross-examination of Mr Smethurst on that point, which Mr Harper elected not to undertake, it does not seem to me that the court should go behind that assertion in the light of the limited evidence presently before the court. It would be procedurally unfair, as Mr Morgan put it, to allow KSB to rely upon this alternative asserted event of default when it had not relied upon it for the purpose of making the administrators’ appointment; and the matter has not been fully investigated in the evidence. Therefore, I reject Mr Harper’s alternative ground for supporting the appointment of the joint administrators.

At paragraph 30 of his skeleton argument, Mr Morgan identifies at least four possibilities as to the nature of the obligation on CF1 with regard to repayment to KSB. The first is that CF1 was under an immediate obligation to make payment to KSB without demand. Neither party has contended for that possibility which I accept can be dismissed as wholly unrealistic.

The second is that CF1 was under an obligation to make payment to KSB on demand. That was the position advanced by Mr Solomons; but I am satisfied that it is not supported by any evidence and is commercially, again, wholly unrealistic. Indeed, it was a position that was inconsistent with what Mr Solomons said in re-examination, in answer to questions from Mr Harper. Mr Harper put to him the hypothetical question as to when repayment of a loan made by KSB to an end borrower for a term of four months would fall to be made in terms of repayment to KSB; and Mr Solomons appeared to accept that the first time would be at the end of the four month term of the loan to the borrower. That was consistent with the position adopted by Mr Seward; and it was the analysis that, in his oral submissions to the court, Mr Harper put forward on behalf of KSB. It therefore seems to me that the contest is between (1) the third of the possibilities identified by Mr Morgan - that CF1 was under the same obligations to make payments to KSB as its own borrower was to CF1; the position for which Mr Harper contends - or (2) that CF1 was under an obligation to make payments to KSB only as and when it received the equivalent sums from the borrower, directly or through realisation of its security, as was contended for by Mr Morgan.

As I have indicated, I accept that it would have been wholly uncommercial for the parties to have exposed CF1 to the risk of demand from KSB the day after making a loan to a borrower, the purpose of which was to bridge his finance. Therefore, it seems to me that the only sensible commercial possibilities are that the obligation to repay arose at the same time as the obligation to repay CF1, or only when CF1 in fact received its money from the borrower, in other words “Pay When Paid”.

Mr Morgan identified a number of points which he says support the Pay When Paid analysis at paragraphs 33 through to 41 of his skeleton argument. I do not propose to repeat them in this judgment, although I have borne them firmly in mind. As a result of those points, and in the circumstances, Mr Morgan submitted that the court should conclude that it was a term of the agreements between CF1 and KSB, in relation to the Patel transaction, that CF1 was obliged to pay KSB only when CF1 itself received payment from the borrower, directly or through realisation of the borrower’s security. It is said that that was what the parties had agreed. Alternatively, such a term should be implied in order to prevent the agreement lacking commercial or practical coherence. If the court accepts that position, then the debenture was unenforceable and the appointment was invalid.

It was agreed that Mr Harper would, following conclusion of the evidence, advance his submissions before those of Mr Morgan.

Mr Harper emphasised that there were separate contracts of loan between, on the one hand, CF1 and KSB and, on the other hand, CF1 and its end borrower, such as Mr Patel. Mr Harper submitted that evidence of the witnesses as to their understanding of the contract was irrelevant. The task for the court was objectively to identify what the contract was, what its express terms were, then to construe those express terms, and finally to see if it was necessary to imply any further terms into the contract.

It was submitted by Mr Harper that CF1 had failed at all stages of the process. The contention was that CF1 was only obliged to repay KSB if and when CF1 was repaid by its own borrower; but that could not be a term of the contract unless such a term had been expressly agreed. If not expressly agreed, then CF1 would have to fall back on an implied term.

The Lending Opportunity documents at pages 79 to 80 of the bundle were documents which were sent out to KSB; they would be considered by Mr Seward, who would then decide whether he wanted to accept the opportunity offered. Mr Harper submitted that KSB would forward money to CF1 when requested, and that the Lending Opportunity document formed the basis of the loan between CF1 and the end borrower. It was also said to evidence the terms of the contract of loan between KSB and CF1.

Whatever others may have intended, it was submitted that an objective construction presented no other conclusion than that which Mr Solomons had ventured in re-examination in the witness box: that KSB could demand repayment only at the end of the contractual term of the loan between CF1 and the end borrower. In the case of Mr Patel, KSB would be entitled to demand repayment at the end of the four months term of the loan. That was the only term objectively concluded.

There was no evidence to support the case that Pay When Paid was ever agreed between CF1 and KSB. The highest CF1’s case ever attained was the evidence that Pay When Paid was what everybody understood; but whatever they understood as to the source of the repayment, there was no evidence of any agreement that KSB would only be entitled to repayment as and when CF1 was repaid.

In his brief rejoinder, Mr Harper emphasised that there was a difference between the contemplation of how a loan would be repaid and the content of a legal obligation to make repayment. CF1 was said to have been able to point to factors in the documents and communications which supported a contemplation that there would be payment when CF1 itself was paid; but there was no evidence to show that that had been agreed as the nature of the obligation for repayment, rather than being contemplated as the source of repayment.

At no time had Mr Seward, in his evidence, accepted an agreement between CF1 and KSB that CF1 would only be obliged to repay KSB once, or if, CF1 was repaid by its own borrower. The most it came to was evidence from Mr Seward that was the theory as to how repayment would be effected. That was said to be made clear by an answer that Mr Seward gave to a question from the court: “Was there ever any discussion about what would happen if CF1’s borrower did not repay?” Mr Seward’s answer was: “I do not recall any specific discussion about what would happen if the borrower did not repay”.

Therefore, Mr Harper submitted that since there was no express agreement as to Pay When Paid, CF1 had to imply a term into the contract of loan that the loan would not be repayable unless and until CF1 was repaid by its own borrower. As to that, the touchstone was said to be the test of necessity: the “Pay When Paid” term was said not to satisfy that touchstone because the contract worked perfectly well without it. The term was not necessary, the contract would work without it, and the term was not so obvious as not to need to be expressly stated. The parties had not contemplated what would happen in the event that CF1’s own borrower could not repay; the party’s agreement was silent as to that. There was said to be no need to imply a term to address the position.

Naturally, I was taken to the leading case of Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd [2015] UKSC 72, reported at [2016] AC 742. Insofar as material, the headnote reads as follows:

“A term would be implied into a detailed commercial contract only if that were necessary to give the contract business efficacy or so obvious that it went without saying. The implication of a term was not critically dependant on proof of an actual intention of the parties when negotiating the contract but was concerned with what notionable reasonable people in the position of the parties at the time at which they had been contracting would have agreed. It was a necessary, but not a sufficient, condition for implying a term that it appeared fair, or that the court considered that the parties would have agreed it if it had been suggested to them.”

Mr Harper took me to the leading judgment of Lord Neuberger at paragraphs 14 to 32, laying particular emphasis upon paragraphs 18 through to 21 and 23. When making his submissions, Mr Morgan placed particular emphasis upon what was said at the end of paragraph 21: “It may well be that a more helpful way of putting Lord Simon’s second requirement is, as suggested by Lord Sumption JSC in argument, that a term can only be implied if, without the term, the contract would lack commercial or practical coherence.”

Mr Harper also took me to what had been said by Lord Hughes, speaking for the Privy Council in the later case of Ali v Petroleum Company of Trinidad and Tobago [2017] UKPC 2, reported at [2017] ICR 531 at paragraph 7:

“A term is to be implied only if it is necessary to make the contract work, and this may be so if (i) it is so obvious that it goes without saying and the parties, although they did not ex hypothesi apply their minds to the point would have rounded on the notional officious bystander to say, and with one voice, ‘Oh, of course’, and/or (ii) it is necessary to give the contract business efficacy. Usually the outcome of either approach will be the same. The concept of necessity must not be watered down. Necessity is not established by showing that the contract would be improved by the addition. The fairness or equity of a suggested implied term is an essential, but not a sufficient, pre-condition for inclusion; and if there is an express term in the contract which is inconsistent with the proposed implied term, the latter cannot, by definition, meet these tests, since the parties have demonstrated that it is not their agreement.”

Mr Harper submitted that the parties did not apply their minds to the situation of the borrower who had defaulted. What CF1 had requested of KSB was a specific amount of borrowing for a specific term to make a corresponding loan to its own borrower, and that opportunity had been accepted by KSB. The loan for that period was repayable to KSB at the end of the period unless CF1 could establish some other term or agreement which curtailed or restricted the obligation for repayment. That was a straightforward application of contractual principles. Here there was said to be no express term. It was said that CF1 could not satisfy the test for implying a term into the contract; the contract worked without the term. It needed to be addressed by an express term, and not one left for implication if there was to be an obligation to repay KSB conditional only upon prior repayment of CF1 by its own borrower. Those were Mr Harper’s submissions.

Mr Morgan submitted that on the evidence of Mr Seward, there had been an express agreement as to Pay When Paid. Mr Morgan emphasised that the nature of the arrangement between KSB and CF1 was in the nature of a joint venture rather than a simple debtor/creditor relationship. He relied upon that fact, as identified at paragraph 28 of his written skeleton argument. He submitted that this must be the case of a joint venture because one party, CF1, was providing access to another party, KSB, to CF1’s borrowers.

Individual terms in relation to particular loans may have developed on a deal by deal basis; but there was no suggestion by either party that the basic situation had ever changed from the inception of the relationship. What had been agreed at the start had continued to apply throughout the basis of the relationship; and Mr Morgan submitted that on Mr Seward’s evidence, there was an express agreement between the parties as to Pay When Paid.

The split of revenue, as clearly contemplated by the August 2013 email, was to take place, in terms, on redemption; and the court should not distinguish between obligations as to the division of revenue and as to repayment of capital, the latter of which had not been expressly identified in the email.

Mr Morgan went through a series of contemporaneous emails between the parties which were said to show, when looked at cumulatively, that the parties had reached express agreement as to Pay When Paid; and that was said to be consistent with Mr Seward’s evidence. Alternatively, the court should imply a term on the footing that, without a Pay When Paid term, the contract would lack commercial or practical coherence.

Mr Morgan went so far as to submit that it was not necessary to show necessity. I cannot accept that submission in the light of Lord Hughes’s clear observations as to the need for necessity in the Ali v Petroleum Company of Trinidad and Tobago [2017] UKPC 2 case. Mr Morgan, however, went on to say that if there was no express agreement as to the terms of repayment, then the court had to fill a gap in the contract and decide what term as to repayment should be implied. Repayment of capital and interest clearly came together as a package; there was no separation of capital and interest in the underlying loan agreement because interest was to be rolled up. Pay When Paid was the only proper term to imply in those circumstances.

Mr Morgan relied upon nine factors in support of that: First this was not a single loan transaction, rather it was in the nature of a joint venture with elements of trust. Secondly, there was nothing formal in writing governing the terms of the relationship between the parties. Thirdly, at the outset of the relationship, both parties had known that CF1 had no separate source of outside funding or other assets. Fourthly, there was no obligation on KSB to lend in relation to any particular loan transaction proposed to it by CF1; KSB was free to accept or reject any lending opportunity proffered to it. Fifthly, KSB made its decision in reliance on the loan to value of the underlying security offered by the proposed borrower from CF1, and on KSB’s own assessment of the risks.

Sixthly, repayment was known not to be based on the covenant of CF1 because it was known that it had no assets other than the obligation to repay on the part of its borrower. Seventhly, if repayment were to be on demand, that would be entirely uncommercial, but so too would repayment in circumstances where the borrower was in default. The risk of default on the part of the borrower was a realistic one, and, indeed, was part of the business plan and model evidenced by the Lending Opportunity documents. Eighthly, a term as to Pay When Paid gave sufficient protection to KSB, and represented a commercially viable arrangement. There were clear incentives for CF1 to collect revenue because, except in the unusual transaction involving Mr Patel, CF1 enjoyed a share of revenue.

Mr Morgan submitted that there would clearly be an implied obligation on the part of CF1 to take reasonable efforts to take steps to ensure that its borrower effected repayment. CF1’s own business model depended on KSB for continuing business funding and therefore it was in CF1’s interests to promote the interests of KSB.

Ninthly, in relation to Mr Patel, on Mr Solomons’s own evidence and case the Patel transaction had proceeded on the basis that KSB would get everything from him and that there was no return in it for CF1. In relation to this specific contract, it was submitted that it would be incredible if CF1 had rendered itself liable to repay KSB even if it did not receive repayment from Mr Patel because in that event it would receive absolutely nothing at all in return. Mr Morgan submitted that there had to be an implied term; and the only proper implied term would be Pay When Paid. Those were Mr Morgan’s submissions.

It is necessary for me, first, to identify the express terms as to repayment, if any, agreed between the parties. When his evidence is analysed as a whole, I do not construe the evidence of Mr Seward as amounting to evidence of an express agreement that there would be repayment only if CF1 was itself repaid.

Mr Seward accepted that he had appreciated that CF1 would only repay KSB if CF1 was itself repaid by its own borrower; but he made it clear that the theory was that KSB would get its money when the loan was redeemed. I asked for clarification: I asked whether there were ever any discussions about what would happen if CF1’s borrower did not repay; and Mr Seward’s answer was that he did not recall any specific discussion about what would happen if CF1’s own borrower did not repay or redeem. The matter was really left to be looked at at the point of non-repayment; then it would be looked at on a case-by-case basis as and when that happened.

Mr Seward went on, as I understand his evidence to have been, to make it clear that there was no formal agreement; he was merely explaining the basis upon which he understood that the relationship would work. Therefore, I find that there was no express agreement as to Pay When Paid. Equally, however, there was no express agreement that repayment would be effected at the end of the term of the loan from CF1 to its own borrower.

Effectively, therefore, the court is left having to fill a gap in the express agreement between the parties. It should do so by attempting to identify precisely what the parties themselves must have understood the position to be. It seems to me really to come down to the question of whether the parties mutually understood that the risk of a failure to repay CF1 would fall on CF1 or on KSB. In support of the risk resting with CF1 is the fact that CF1 was dealing directly with the end borrower. It was CF1 that, as explained by Mr Solomons, was receiving fees at both ends, and was arranging the exit strategy by finding a borrower to replace the bridging finance being provided by KSB.

On the other hand, KSB knew at the outset of the relationship that it was the sole source of finance for CF1, and that if the borrower failed to repay, then CF1 would have no independent source of repayment. There is no suggestion that the nature of the relationship changed at any time during the course of the parties’ dealings. In those circumstances, the court has to try to fill a gap in the parties’ arrangements, not by way, necessarily, of implying a term, but of seeking to identify what, in those circumstances, the parties must have understood the true nature of the agreement to have been.

It is in those circumstances that the various factors identified by Mr Morgan seem to me to militate in favour of the Pay When Paid analysis of the obligation as to repayment. There was to be no source of repayment other than the ultimate borrower. KSB was free to accept or reject any particular lending opportunity; it knew what the exit strategy proposed was, and KSB had to make its own assessment as to whether to rely on that, bearing in mind the loan to value of the security offered. Mr Solomons was adamant that one looked to the loan to value of the security as a very important element of the security arrangements.

In my judgment, doing the best I can in trying to fill the gap in the parties’ express discussions, and bearing in mind Mr Seward’s evidence as to the underlying theory of the matter, it seems to me that the nature of the obligation to repay, which was never expressly addressed by either party and therefore has to be supplied by the court, is that KSB was to get its money back only when the loan to CF1 was itself redeemed.

I therefore accept the submissions of the applicant; and it follows that the joint administrators were never validly appointed. That concludes this extemporary judgment.