Capital Funding One Ltd v King Street Bridging Ltd & Ors

Where a lender funds an intermediary’s onward lending, the repayment obligation depends on the parties’ agreement objectively understood in its commercial context. If the express agreement leaves repayment unanswered, the court may fill the gap by identifying where the parties intended the risk of borrower default to fall. Relevant factors include the parties’ funding arrangements, the absence of any independent repayment source, the lender’s control over whether to fund particular opportunities, and the agreed exit strategy. A Pay When Paid arrangement may therefore arise even without an express term, although a term cannot be implied merely because it would improve the bargain: necessity remains essential.

Capital Funding One Ltd applied for a declaration that administrators appointed by its debenture holder, King Street Bridging Ltd, had been invalidly appointed. The appointment depended on whether sums advanced by King Street to fund an onward loan were due from Capital Funding One when the appointment was made. Capital Funding One argued that repayment was conditional on its receiving payment from the underlying borrower. King Street contended that repayment was due at the end of the underlying loan term and alternatively relied on a cash-flow insolvency event of default. The central issues were the contractual basis of repayment and whether the alternative insolvency ground was established.

The application succeeded. The administrators had never been validly appointed.

1. Insolvency ground. King Street had not established that Capital Funding One was unable to pay its corporation tax liability as it fell due. Non-payment alone did not prove inability to pay. It was procedurally unfair to permit reliance on an alternative event of default raised only in the evidence and skeleton argument, without proper investigation or cross-examination.
2. Repayment obligation. There was no express agreement that repayment would occur only if Capital Funding One was paid by its borrower. Equally, there was no express agreement that repayment was due automatically at the end of the borrower’s contractual term.
3. The court therefore had to fill a gap in the parties’ arrangements by identifying the true commercial nature of their agreement and where the risk of borrower default was intended to fall. The relevant circumstances included that King Street was Capital Funding One’s sole source of finance, that there was no other source of repayment, that King Street could accept or reject each lending opportunity, and that it assessed the underlying security and proposed exit strategy.
4. The arrangement was commercially inconsistent with Capital Funding One bearing liability immediately upon borrower default when it had no independent repayment source. The proper analysis was that King Street was to receive repayment only when the loan to Capital Funding One was itself redeemed. The Patel loan therefore created no debt payable when the administrators were appointed, so there was no event of default or enforcement date under the debenture.
5. The court rejected the submission that necessity was irrelevant to implication of terms, applying the approach in Ali v Petroleum Company of Trinidad and Tobago [2017] UKPC 2. The court did not need to imply the term expressly because it identified the parties’ agreement by filling the contractual gap.

First-instance judgment. No appellate history is stated in the judgment.