Anglo Petroleum Ltd & Anor v TFB (Mortgages) Ltd

The Court of Appeal dismissed the appellants' challenge to the validity and enforceability of a commercial loan, security agreement and guarantee under s 151 of the Companies Act 1985. The court applied the established approach of examining the commercial realities and the statutory mischief behind s 151(1) and s 151(2) and related provisions in s 152 and s 153. It held that the Compromise Agreement (reducing APL's indebtedness) and the charge given to Repsol did not amount to "financial assistance" to the purchaser and that APL's repayment of its indebtedness from loan proceeds did not, on the facts, constitute unlawful financial assistance. The court also held that TFB had not participated in any unlawful purpose: mere knowledge of APL's intended use of the loan did not make TFB a party to an illegality and the loan agreements did not necessitate unlawful performance.

This appeal arose from three related actions about the effect of s 151 of the Companies Act 1985 on three credit transactions dated 23 February 2001: a Credit Agreement by which Anglo Petroleum Limited (APL) borrowed £15m from TFB (Mortgages) Limited, a Security Agreement granting a floating charge and mortgages over petrol stations, and a personal Guarantee by Mr Paul Sutton.

The factual background was that, three months earlier, Kaluna Limited agreed to buy the entire issued share capital of APL from its parent Repsol for £1, while APL entered a Compromise Agreement promising to pay Repsol £15m (paid in two instalments) and granting a charge securing that reduced debt. APL used £9m of the loan from TFB to pay the second instalment to Repsol. APL and Mr Sutton contended that these steps constituted prohibited "financial assistance" within s 151 and therefore tainted the subsequent credit transactions.

The procedural posture: Peter Smith J tried preliminary issues and rejected APL's challenges. Permission to appeal was initially refused by the judge but later granted by Neuberger LJ. The Court of Appeal heard the appeal and considered two principal questions:

• Whether the repayment by APL of £9m (from TFB’s loan) amounted to giving "financial assistance" within s 151, either by (i) treating the Compromise Agreement and APL's liabilities as having been incurred for the purpose of Kaluna's acquisition (Route 1) or (ii) treating the payment as assistance discharging Kaluna's liabilities as guarantor (Route 2); and
• Whether, if s 151 were contravened by the use of the loan proceeds, TFB was prevented from enforcing the loan and security agreements by the doctrine of illegality — in particular whether TFB's knowledge of APL's intended use of funds made it a participant in the alleged illegality.

On the statutory issues the court followed authority that one must look at commercial realities and the mischief behind s 151. It concluded that the Compromise Agreement and the APL/Repsol charge were properly characterised as a bona fide restructuring that reduced APL's liabilities and did not amount to financial assistance to the purchaser. The court rejected the submission that the repayment of APL’s own indebtedness could be converted into unlawful financial assistance merely because the repayment was funded by borrowed money which reduced APL’s net assets by way of interest/fees. The judge's factual findings that there were genuine commercial reasons for the refinancing (access to favourable finance, working capital) were not disturbed.

On illegality, the court distinguished cases where a party shared a common design to perform an unlawful act (illustrated by Allan v Cloke) from cases where a party merely knew of the other’s intended use (Waugh v Morris and Hodgson v Temple). The loan purpose clause was a generic commercial restriction and did not obligate APL to take any particular unlawful step. Mere knowledge by TFB of APL’s intended use did not show participation in an unlawful purpose and did not make the credit and security agreements unenforceable. The court observed that public policy did not require imposing on a routine commercial lender a duty to investigate whether a borrower’s intended use might contravene s 151 when the legal effect would not have been obvious.

Accordingly the Court of Appeal dismissed the appeal, upholding the judge's conclusions that the credit transactions were valid and enforceable and that TFB did not participate in any illegality.

Appeal dismissed. The Court of Appeal held that (1) the Compromise Agreement and the APL/Repsol charge and the repayment of APL’s indebtedness did not, on their commercial reality, amount to "financial assistance" within the meaning of s 151 of the Companies Act 1985; and (2) even if s 151 could have been engaged, TFB did not participate in an unlawful purpose and mere knowledge of APL’s intended use of the loan did not render the credit transactions unenforceable.

Appeal from the Chancery Division (Peter Smith J) (HC04C00179). Permission to appeal was refused by the trial judge and subsequently granted by Neuberger LJ. The Court of Appeal delivered judgment in [2007] EWCA Civ 456 on 16 May 2007, dismissing the appeal.