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England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Myers & Anor v Kestrel Acquisitions Ltd & Ors  EWHC 916 (Ch) (31 March 2015)
Cite as:  EWHC 916 (Ch)
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Strand, London, WC2A 2LL
B e f o r e :
| DENNIS EDWARD MYERS
PATRICIA ANN MYERS
|- and -
KESTREL ACQUISITIONS LIMITED
KESTREL HOLDINGS LIMITED
INDIGO CAPITAL PARTNERS LIMITED
INDIGO CAPITAL IV SARL
INDIGO CAPITAL IV LP
ALCHEMY PARTNERS NOMINEES LIMITED
ALCHEMY PARTNERS (GUERNSEY) LIMITED
SWIFT ADVANCES PLC
Guy Morpuss QC and Patricia Edwards (instructed by Macfarlanes LLP) for the Defendants
Hearing dates: 2, 3, 4 and 5 December 2014
Crown Copyright ©
Sir William Blackburne :
"2.3 The Notes shall rank equally with the Discounted Loan Notes so as to provide the same pre-tax return to the respective holders thereof and the Company undertakes to treat the Discounted Loan Notes in the same manner as if they constituted a single class of securities.
2.4 Without prejudice to the generality of Clause 2.3 above, the Company undertakes:-
2.4.1 not to redeem, repay or purchase any of the Discounted Loan Notes unless at the same time the Company redeems, repays or purchases a proportionate amount of the Loan Notes based on the respective total amounts of Discounted Loan Notes and the Loan Notes outstanding prior to such event; and
2.4.2 not to amend the Discounted Loan Note Instrument or the terms and conditions of the Discounted Loan Notes unless at the same time it makes appropriate amendments to this Instrument and the terms and conditions of the Loan Notes in order to give effect to clause 2.3 above."
"9.1 The Company may make any modification to this instrument (including, for the avoidance of doubt, to the Conditions) either:-
9.1.1 with the sanction of an Extraordinary Resolution of the Noteholders; or
9.1.2 without the sanction of an Extraordinary Resolution but unilaterally if the modification is consistent in all material respects with any modification being made to the Discounted Loan Note Instrument."
"3.1 The Debt will rank for all purposes and at all times in the following order: 3.1.1 first the Lender Debt; 3.1.2 second the Investor Debt; and 3.1.3 third the Intra-Group Debt.
3.2 This Intercreditor Agreement does not purport to rank: 3.2.1 any of the Investor Debt as between the Investors; and 3.2.2 any of the Intra-Group Debt as between the Intra-Group Creditors. "
The invalidity issue
"16…The court has no power to improve upon the instrument which it is called upon to construe, whether it be a contract, a statute or articles of association. It cannot introduce terms to make it fairer or more reasonable. It is concerned only to discover what the instrument means. However, that meaning is not necessarily or always what the authors or parties to the document would have intended. It is the meaning which the instrument would convey to a reasonable person having all the background knowledge which would reasonably be available to the audience to whom the instrument is addressed: see Investors Compensation Scheme Ltd v West Bromwich Building Society  1 WLR 896, 912-913. It is this objective meaning which is conventionally called the intention of the parties, or the intention of Parliament, or the intention of whatever person or body was or is deemed to have been the author of the instrument.
17 The question of implication arises when the instrument does not expressly provide for what is to happen when some event occurs. The most usual inference in such a case is that nothing is to happen. If the parties had intended something to happen, the instrument would have said so. Otherwise, the express provisions of the instrument are to continue to operate undisturbed. If the event has caused loss to one or the other of the parties, the loss lies where it falls.
18 In some cases, however, the reasonable addressee would understand the instrument to mean something else. He would consider that the only meaning consistent with the other provisions of the instrument, read against the relevant background, is that something is to happen. The event in question is to affect the rights of the parties. The instrument may not have expressly said so, but this is what it must mean. In such a case, it is said that the court implies a term as to what will happen if the event in question occurs. But the implication of the term is not an addition to the instrument. It only spells out what the instrument means.
21 …in every case in which it is said that some provision ought to be implied in an instrument, the question for the court is whether such a provision would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean…There is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?"
"…it is important to distinguish between two different kinds of implied terms. First, there are those terms which are implied into a particular contract because, on its proper construction, the parties must have intended to include them: see Attorney General of Belize v Belize Telecom Ltd  1 WLR 1988. Such terms are only implied where it is necessary to give business efficacy to the particular contract in question. Second, there are those terms which are implied into a class of contractual relationship, such as between landlord and tenant or between employer and employee, where the parties may have left a good deal unsaid, but the courts have implied the term as a necessary incident of the relationship concerned, unless the parties have expressly excluded it: see Lister v Romford Ice and Cold Storage Co Ltd  AC 555, Liverpool City Council v Irwin  AC 239."
"Wide, however, as the language is of s.50 [Companies Act 1862: the power to alter a company's articles by special resolution], the power conferred must, like all other powers, be exercised subject to those general principles of law and equity which are applicable to all powers conferred on majorities and enabling them to bind minorities. It must be exercised, not only in the manner required by law, but also bona fide for the benefit of the company as a whole, and it must not be exceeded. These conditions are always implied, and are seldom, if ever, expressed."
"To give a power to modify the terms on which debentures in a company are secured is not uncommon in practice. The business interests of the company may render such a power expedient, even in the interests of the class of debenture holders as a whole. The provision is usually made in the form of a power, conferred by the instrument constituting the debenture security, upon the majority of the class of holders. It often enables them to modify, by resolution properly passed, the security itself. The provisions of such a power to a majority bears some analogy to such a power as that conferred by s.13 of the English Companies Act of 1908, which enables a majority of the shareholders by special resolution to alter the articles of association. There is, however, a restriction of such powers, when conferred on a majority of a special class in order to enable that majority to bind a minority. They must be exercised subject to a general principle, which is applicable to all authorities conferred on majorities to bind minorities; namely, that the power given must be exercised for the purpose of benefiting the class as a whole, and not merely individual members only."
"So far as the "Good Faith" condition is concerned, there is no general doctrine of good faith in English contract law and such a term is unlikely to arise by way of necessary implication in a contract between two sophisticated commercial parties negotiating at arms' length. Leggatt J's judgment in Yam Seng Pte Ltd v International Trade Corporation Ltd …, on which Greenclose heavily relies, is not to be regarded as laying down any general principle applicable to all commercial contracts. As Leggatt J expressly recognized at  of that judgment, the implication of an obligation of good faith is heavily dependent on the context. Thus in some situations where a contracting party is given a discretion, the Court will more readily imply an obligation that the discretion should not be exercised in bad faith or in an arbitrary or capricious manner, but the context is vital. A discretion given to the board of directors of a company to award bonuses to its employees may be more readily susceptible to such implied restrictions on its exercise than a discretion given to a commercial party to act in its own commercial interests. "
"It is plain from these authorities that a decision-maker's discretion will be limited, as a matter of necessary implication, by concepts of honesty, good faith, and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality. The concern is that the discretion should not be abused. Reasonableness and unreasonableness are also concepts deployed in this context, but only in a sense analogous to Wednesbury unreasonableness, not in the sense in which that expression is used when speaking of the duty to take reasonable care, or when otherwise deploying entirely objective criteria: as for instance when there might be an implication of a term requiring the fixing of a reasonable price, or a reasonable time."
The Myers' contentions
"The result of the resolution in question, if valid, is to extinguish both these rights, and in fact all rights against the American company and its property, and to substitute for them the rights of a preference shareholder in an English company which had been formed. The holders of the debentures would cease to have any security or any right to recover principal or interest, and would in exchange become entitled to share in the divisible profits of the new company. That new company had acquired, not only the property subjected to the mortgage of the American company, but other properties of that company not charged to the debenture-holders; and the right of the preference shareholders would be confined to share in the profits of the entire company and to an interest, in case of dissolution, in its surplus assets.
In my opinion, the transaction embodied in the resolution is not a modification of the rights of the debenture-holders against the defendant company or their property; it is the extinction of all their rights against the company or its property. A right to share in profits produced by a business in which the mortgaged property may be used as a part, and part only, of the profit-producing undertaking, is not a right against that property. "
Conclusions on the invalidity issue
(a) the good faith term
(b) the threshold requirement
(c) were the amendments "modifications" within the scope of clause 9.1.2?
"The right of the stockholder…was to receive his principal moneys if the company went into liquidation or if the company committed any breach of the covenants on its part contained in the deed, and the right, whatever happened, on October 1, 1907, to be paid off. Those three rights the stockholders enjoyed down to September 6, 1904, and the effect of this resolution was so far to modify their rights against the company as to eliminate from those three rights the absolute right to repayment on October 1, 1907."
(d) the ICA argument on subordinations
The insolvency issue
"…the 'cash-flow' test is concerned, not simply with the petitioner's own presently-due debt, nor only with other presently-due debt owed by the company, but also with debts falling due from time to time in the reasonably near future. What is the reasonably near future, for this purpose, will depend on all the circumstances, but especially the nature of the company's business…The express reference to assets and liabilities is in my view a practical recognition that once the court has to move beyond the reasonably near future (the length of which depends, again, on all the circumstances) any attempt to apply a cash-flow test will become completely speculative, and a comparison of present assets with present and future liabilities (discounted for contingencies and deferment) becomes the only sensible test. But it is still very far from an exact test, and the burden of proof must be on the party which asserts balance-sheet insolvency…"
"…It [the PECO] has no effect…on the amount of the issuer's liabilities. To limit those liabilities as the issuer contends would contradict the parties' clearly expressed commercial intention as found in the contractual documents. The fact that the economic result of the PECO may be the same as if the noteholders' right of recourse had been limited to the issuer's assets is beside the point. "
"Essentially, s 123(2) requires the court to make a judgment whether it has been established that, looking at the company's assets and making proper allowances for its prospective and contingent liabilities, it cannot reasonably be expected to be able to meet those liabilities. If so, it will be deemed insolvent although it is currently able to pay its debts as they fall due. The more distant the liabilities, the harder this will be to establish. "