The Funding Corporation Block Discounting Ltd v Lexi Holdings Plc

Permission to litigate against a company in administration should be granted where the proposed claim has a real prospect of success. The court should not finally determine disputed facts or construction issues unless the answer is sufficiently clear to show that the claim is fanciful. A short point of law may be decided at the permission stage where the evidence is complete and the issue can properly be determined without a trial.

In construing a release of security, admissible background may include the transaction’s genesis and objective purpose. Commercial language may bear an unusual meaning, or contain a linguistic error, where the surrounding circumstances strongly indicate that the ordinary meaning would defeat the transaction’s evident purpose. Bona fide proprietary rights acquired for value without actual notice are protected from avoidance under section 320(2)(b) of the Companies Act 1985.

The claimant sought permission under paragraph 43(6)(b) of Schedule B1 to the Insolvency Act 1986 to pursue a proprietary claim against assets held by administrators of Lexi Holdings plc. The fund represented the proceeds of sale of properties over which the claimant alleged that it had acquired legal or equitable security rights through assignments from Lexi.

The administrators argued that the assignments were ineffective because a contractual condition precedent had not been satisfied, and that the properties did not fall within a deed releasing Barclays’s prior security. They also relied on the avoidance of certain property sales under section 320 of the Companies Act 1985. The central issue was whether the proposed claim had a real prospect of success.

1. Permission and threshold. The application was governed by the seriously arguable case test stated in [1992] Ch 505, which was treated as equivalent in substance to the real prospect of success test under CPR Part 24. The court could decide a short point of law or construction at this stage where the necessary evidence was available, consistently with [2007] EWCA (Civ) 725.
2. The condition precedent requiring a deed of release did not make the claim fanciful. A deed had been obtained, and the parties’ subsequent conduct was capable of showing that any relevant condition had been satisfied or waived.
3. On the assumed evidence, Barclays had been shown draft documentation for the claimant’s facility before the deed of release. That evidence was potentially admissible and relevant background. Applying the approach in [1971] 1 WLR 1381 and [2002] 1 AC 251, it could illuminate the genesis and objective aim of the transaction and was not necessarily evidence of negotiations. The court was required to proceed on the hypothesis that the evidence might be proved at trial.
4. The phrases “on or about”, “third parties” and “financed in full” were each arguable in the claimant’s favour. “Third parties” did not necessarily require independent or arm’s-length borrowers. “Financed in full” could arguably mean financed by the claimant alone, rather than financed for 100 per cent of the loan value. In the commercial context, financing could occur when the purchase money was made available to Lexi’s authorised recipient, without proof that the money was traced directly to the borrower.
5. The avoidance of the property sales under section 320 did not necessarily defeat the claimant’s rights. Section 320(2)(b) protected rights acquired bona fide for value without actual notice by a person who was not party to the transaction. The claimant was not party to the avoidance proceedings and could pursue its proprietary claim in the sale proceeds without restoring the avoided transactions.
6. The claim therefore passed the reality test, although not by a wide margin. No material interference with the administration was shown. Permission was granted, with case-management directions to be addressed separately.