MILAN (Reuters) - The indebted Chinese owner of AC Milan has failed to repay U.S. fund Elliott for covering an investment, paving the way for legal action that could see Elliott become the new owner of the Italian soccer club, a source familiar with the matter said.

Businessman Li Yonghong bought the Serie A club last year from former prime minister Silvio Berlusconi and has been injecting money into the club under the terms of the deal.

But on June 22 he failed to pay the remaining 32 million euro ($38 million) installment of two capital hikes worth a total of 120 million euros, prompting investment company Elliott to step in and fill the gap.

Li had until Friday afternoon to repay Elliott.

Failing to do so means the fund can now open legal proceedings which could result in it becoming the owner of AC Milan, the seven-times European Champions known as the Rossoneri (red and blacks), the source said.

Elliott had already given Li’s vehicle, Rossoneri Sport Investment Luxembourg, a 180 million euro lifeline last year to complete the purchase of the club.

The fund also lent around 128 million euros to the team to fund the acquisition of players and repay the club’s debt with banks.

Li and AC Milan could not immediately be reached for comment.

Li has been looking for months for new investors to share the financial burden of the loss-making club, which last week was banned from next season’s Europa League competition because of its uncertain finances.

The club is expected to have closed the financial year to the end of June with a loss of 75 million euros, a source close to the matter told Reuters last week.

The Ricketts family, owner of the Major League baseball team Chicago Cubs and U.S. television tycoon Rocco Commisso, who is owner of North American soccer team New York Cosmos, are among those interested in acquiring a controlling stake in AC Milan.