How contributions to a loan are to be repaid following default will depend upon the terms of the agreement under which those contributions are made.
This was the finding of the High Court in Horn and others v Commercial Acceptances Ltd in which the parties contributed to short-term loans made by the defendant. Their agreement (and accompanying trust deed) provided that if there was a shortfall in repayments, the sums recovered would first go to repay the defendant's contribution before repaying the claimants' contribution.
The agreement also provided that the defendant would not enter into any agency agreement with any third party in respect of any loan. One of the loans defaulted and the property was sold. The defendant repaid itself in full out of the redemption monies leaving insufficient funds to prevent the claimants from making a capital loss.
Half the sum contributed by the defendant had in fact been contributed by a third party. The claimants claimed that as the defendant was acting as agent for the third party in breach of the agreement, its contribution to the loan should not have included the third party element. By removing that sum, there would have been sufficient redemption monies for the claimants' contribution to be repaid in full. The judge agreed and entered judgment for the claimants.
The defendant's appeal was dismissed. The agreement between the parties was clear. The contribution each made was to be on its own account and prohibited the defendant from acting as the agent of any third party in advancing any part of the loan, so as to share any risk with them. When the defendant received the redemption monies, only the capital contribution made by the defendant itself (plus fees and expenses) could be repaid in priority to repaying the claimant.
Things to consider
Clear wording here ensured the claimant did not lose the priority it had in relation to the redemption monies following repayment of the defendant.