To a layperson this may came as a surprise. But, to those familiar with the secondary loan market, it is confirmation of existing law.

A “vulture fund”– including a newly incorporated company with a share capital of only £1 that has not traded and has been established for the purpose of acquiring a defaulted loan with a view to realising more by enforcing than had been expended on acquiring the debt can be a “financial institution” for the purposes of the transfer provisions of a loan agreement.

That is the lesson to be taken from a recent decision of the High Court of England & Wales in response to an application for directions made by the administrators of a company that had originally entered into a loan agreement with Anglo Irish Bank Corporation Limited (now Irish Bank Resolution Corporation Limited). The decision confirms, albeit in a slightly different commercial context, the conclusion reached by a majority of the Court of Appeal in the Argo case (The Argo Fund Ltd v Essar Steel Ltd [2006] EWCA Civ 241).

Those who trade in the secondary loan market–whether single names or portfolios of loans – will welcome this decision and they will take it to mean “business as usual”.

For borrowers, and for lenders under “club deals” or syndicated credit agreements, it is a reminder that if you wish to avoid having what you may see as a “vulture fund” as your lender or co-lender, as the case may be, then you will need to negotiate in your facility agreement specific transfer restrictions that are narrower and more prescriptive than permitting an assignment or transfer to a “financial institution”.

See below for a more detailed review of Re Olympia Securities Commercial plc (in administration) and ors v WDW 3 Investments Ltd and anor ([2017] EWCH 2807).

Re Olympia Securities Commercial plc (in administration) and ors v WDW 3 Investments Ltd and anor


Key facts

This case related to a facility agreement (the “Facility Agreement”) first entered into in 2005 by Olympia Securities Commercial Plc as borrower (the “Company”) and Anglo Irish Bank Corporation Limited as lender (now Irish Bank Resolution Corporation Limited) (“IBRC”) and a related interest rate swap. The loan and any sum due to IBRC under the swap were secured by a debenture granted over the assets of the Company.

The Company was part of a group of companies. Its business was commercial and residential property development. As is well-known, IBRC collapsed into special liquidation in the Republic of Ireland in February 2013 and the orderly winding-up of its affairs necessitated the sale of its assets. Accordingly, on 16 February 2014, IBRC (acting by its special liquidators) agreed to sell a portfolio of assets that included the loan to the Company the subject of the Facility Agreement to an entity called LSREF III Wight Limited ("LSREF").

On 16 May 2014, the sale agreement between IBRC and LSREF completed and as part of the completion arrangements, all of IBRC’s rights under the Facility Agreement were assigned to WDW 3 Investments Limited (“WDW”), as LSREF’s nominee. On 5 June 2014, WDW gave notice to the Company of the assignment. IBRC remained the counterparty under the swap but on terms that WDW would have the benefit and the burden thereunder. The debenture was assigned by IBRC to WDW who declared that it held it on trust for itself (for the loan) and for IBRC (for any swap liabilities).

WDW was incorporated, in England & Wales, only two weeks before the above-mentioned assignment, with share capital of £1.

On 30 June 2014, the loans the subject of the Facility Agreement became due for repayment but none of the sums due were repaid. WDW served notice of default on the Company and notified IBRC of a cross-default under the swap. In turn, IBRC terminated the swap and served demand on the Company for an early termination payment.

The Company subsequently entered administration.

By late 2017, the Company’s administrators found themselves in a position where they had repaid to WDW all of the principal lent under the Facility Agreement (and certain sums due under certain intercompany guarantees) and there remained available for distribution an amount of c£5m.

Background to the hearing

WDW claimed to be entitled to the monies held by the administrators, as secured creditor under the swap. The second respondent in the case, Arazim (Gibraltar) Limited ("Arazim"), was the sole shareholder of the Company and an unsecured creditor of the Company. Arazim disputed both that that the Company was indebted to WDW and that any debt that the Company owed was secured debt.

The administrators were neutral on the issues that arose and sought directions from the court (under paragraph 63 of Schedule B1 of the Insolvency Act 1986) in order that the dispute be resolved and all appropriate distributions be made.

Main issue

The main issue was whether the assignment of the Facility Agreement from IBRC to WDW was valid, which turned in the first instance on whether as a matter of construction WDW was a “financial institution” for the purposes of clause 23.2 of the Facility Agreement.

Clause 23.2 of the Facility Agreement provided:

“23.2 The Lender may…at any time transfer, assign or novate all or any part of the Lender’s rights, benefits or obligations under this agreement to any one or more banks or other financial institutions.”

There were two other issues: whether IBRC was entitled to terminate the swap and whether the sum payable thereunder was secured, which we do not consider further in this note.


Arazim argued that for an entity to be a “financial institution” to which IBRC was permitted to assign, the entity concerned had to operate on its own behalf in the field of regulated finance. Arazim submitted that WDW failed this test for two reasons: (i) because it was not trading when the assignment took place; and (ii) because it did not operate in the field of regulated finance, either before or after the purported assignment because its only purpose was to hold assets on trust for a third party.

In response, WDW argued that that was an “impermissibly narrow construction” of the phrase, particularly when viewed in the relevant commercial and contractual context.

Both parties sought to rely on the decision of the Court of Appeal in The Argo Fund Ltd v Essar Steel Ltd ([2006] EWCA Civ 241).

Decision and analysis

In the absence of an express definition in the Facility Agreement of the term “financial institution” or any other clause that supported a particular meaning, His Honour Judge Pelling QC, who presided over this case, found that the answer to the main question put to him lay in construing the contract. His judgment includes (at paragraphs 13-15) a useful summary of the current principles applicable to the construction of a contract governed by English law.

Judge Pelling found that he was not bound by the higher court’s decision in the Argo case because of the slightly different commercial contexts: in Argo, the court was concerned with a syndicated loan agreement and the assignee was an established trading company, whereas this case concerned a bilateral loan agreement and an assignee that has just been incorporated with no trading history.

In his judgment, Judge Pelling referred extensively to the decision of a majority of the Court of Appeal in Argo.

In Argo, the Court of Appeal gave a wide meaning to the term “financial institution”. Auld LJ stated (at paragraph 49 of Argo):

“…it is not a necessary characteristic of a transferee that its business should include bank-like activities, such as the lending of money, whether on the primary or secondary debt market or otherwise, or indeed that it should exhibit any particular standard of suitability or probity as a financial institution."

Auld LJ went on to conclude (at paragraph 50 of Argo) that the unrestricted assignment provision in the agreement in question, combined with the commercial context, meant that any requirement for a transferee to be a “sound and respectable lender” was “clearly outside what the parties could reasonably have intended or expected of the Agreement”. And further, if the parties intended to provide such a restriction they “could and would have done so in clear terms”.

Satisfied that he ought not to depart from the approach taken in Argo, Judge Pelling adopted the approach of the Court of Appeal and held that the meaning of the phrase “financial institutions” in clause 23 of the Facility Agreement is an entity which must be:

  1. a legally recognised form of being;
  2. which carries on its business in accordance with the laws of its place of creation (in this case, England and Wales); and
  3. whose business concerns commercial finance.

Judge Pelling went on to state that it was not necessary for the entity to be operating in the field of regulated finance, as long as its business concerns commercial finance. In His Honour’s words (at paragraph 21), this would include “commercial trust corporations, primary and secondary lenders and those who act as agents, trustees or fiduciaries” and also those “who provide managerial services on behalf of the providers or users of financial products and services”.

Judge Pelling found that it was “difficult to discern any relevant commercial context that could be said to illuminate how the concept of a financial institution would have been perceived by reasonable people in the position of the parties”. He went on to say that: “The best that can be said is that it is plain that the language used indicates that the parties intended to limit the class of potential assignees”.

As for the submissions made by Arazim that WDW could not be a financial institution due to its nominal (£1) capitalisation, and the fact it was not trading when the assignment took place, Judge Pelling found (at paragraph 23-24) as follows:

  1. that a qualification based on capitalisation finds no support from Argo which requires merely the points at a. and b. above;
  2. that it would be difficult to formulate a test, other than an arbitrary test, to determine which entities were sufficiently capitalised in order to be a financial institution;
  3. that there is no necessary connection between the capitalisation of a company and its trading volumes or commercial reputation;
  4. that had the parties wished to limit the scope of the financial institutions phrase to corporations with a minimum capitalisation, they could easily have done so by express provision but they chose not to do so;
  5. that the point assumes that only a company may be a financial institution is not justified, by Argo or commercial sense, noting that many internationally recognised financial institutions adopt partnership models; and
  6. that the proposition that an entity formed for the purpose of carrying on business concerning commercial finance could not become a financial institution until it has carried out its first transaction but that as soon as it has at that point it becomes a financial institution, irrespective of the economic significance of that transaction, is erroneous and “lacks reality”.

Judge Pelling’s response to submission made on Arazim’s behalf referring to WDW being a “vulture fund” and that as such it could be “expected to take a more aggressive approach to enforcement than a regulated bank or financial institution”, was to repeat Auld LJ’s observation at paragraph 52 in Argo:

“…The commercial reality of a dispute such as this is that a lender under a syndicated loan agreement, whether original or by way of transfer or assignment, may and should be entitled to recover from the borrower monies lent when they become due and that the borrower, whether distressed or otherwise, has and need have little interest as to the commercial or financial status of the body to which the role of lender has passed…”

Judge Pelling found the points about "vulture funds" were immaterial for two reasons. First, because the fact that WDW was not regulated did not matter as long as it was carrying on its business in accordance with the laws of its place of incorporation which it seemed that WDW was. Secondly, no evidence was put before the court in support of the enforcement risk point. Judge Pelling stated:

"In any event, had the original borrower wished to protect against assignment by IBRC then it could and should have negotiated a more restrictively drawn non-assignment provision than the one agreed. In fact, the inclusion of clause 23…expressly provided for the possibility of IBRC's interest thereunder being transferred as a non-performing debt on the secondary market.

For the reasons outlined above, Judge Pelling held that WDW was within the class of “financial institution” referred to in clause 23 of the Facility Agreement.

On the other issues, Judge Pelling found that IBRC was entitled to terminate the swap early (notwithstanding that IBRC had committed a bankruptcy Event of Default prior to serving such a notice) and the Company's obligation to pay the early termination payment under the swap was a secured obligation (notwithstanding the assignment of the debenture by IBRC to WDW).


This first instance decision will be welcomed by parties who are active in the secondary loan market. The decision in Argo has underpinned the market, including the explosion of non-performing loan portfolio transactions that has occurred after the financial crisis of 2008/9. Buyers and sellers alike will take comfort from Judge Pelling’s scrutiny of the Court of Appeal’s rationale and his finding that Argo remains good law. For borrowers, it is a timely reminder that restricting assignees of loans to “financial institutions” will provide no meaningful protection against the kind of entity that could become a lender in the place of the original lender. If parties wish to provide protection to that effect, clear words are needed.