Mr Justice Eder:
Introduction
- These proceedings concern the proper construction
of
a Senior Facilities Agreement ("SFA") and an Intercreditor Agreement ("ICA") both dated 30 November 2010. Each
of
the parties to these proceedings is a party to the SFA and the ICA. In broad terms, the SFA governed the relationship between the First Defendant ("Truvo") (as original borrower) and the syndicate
of
lenders, while the ICA governed the relationship
of
lenders as between themselves. The Claimant, the
Bank of New York Mellon
(the "Agent"), is the agent and security agent under the SFA and the ICA. The Second Defendant, Deutsche
Bank
AG (London Branch) ("DB"), is one
of
the "senior lenders" under the SFA and the ICA and the holder
of
what has been referred to as "Senior Debt" (or "First Lien Debt") and Second Lien Debt
of
Truvo. In these proceedings, DB acts as a representative party, representing the interests
of
those lenders who, like DB, presently hold more Second Lien Debt
of
Truvo than Senior Debt. The Third Defendant, Millar Investments S.α.r.l. ("Millar"), is also one
of
the "senior lenders" under the SFA and the ICA and the holder
of
Senior Debt and Second Lien Debt
of
Truvo. It too acts as a representative party in these proceedings, representing the interests
of
those lenders who, like Millar, presently hold more Senior Debt than Second Lien Debt.
- Fundamentally, this dispute is about what level
of
consent was required from the lenders under the SFA to amend the terms
of
the SFA so as to change, as between Senior Lenders and Second Lien Lenders, the application
of
mandatory prepayments payable by Truvo under the SFA. In broad summary, it is Millar's case that consent was required only from lenders holding at least two-thirds
of
the total Senior Debt and Second Lien Debt (defined as "Majority Lenders"). In contrast, DB's case is that such amendment could not be made without the consent
of
all (i.e. 100%)
of
the lenders including the Second Lien Lenders.
- The proceedings were commenced by a Part 8 Claim Form issued by the Agent on 21 August 2012 seeking various declarations with regard in particular to the proper scope
of
Clause 27
of
the ICA and Clause 40
of
the SFA, the validity
of
the purported amendment
of
Clause 11.3
of
the SFA (as referred to below) and the entitlement
of
the parties to certain monies that have been paid into an escrow account pending the outcome
of
these proceedings.
- By a Consent Order dated 22 October 2012, permission was given for the claim to be continued pursuant to CPR 19.6(1) against DB and Millar. Both the Agent and Truvo have adopted a neutral position. So, the battle has, in effect, been undertaken between DB (represented by Mr John Higham QC) and Millar (represented by Mr Richard Snowden QC) in their representative capacities. All parties have served evidence in the form
of
witness statements including, in particular, statements from Mr Verle (on behalf
of
DB) and Ms Harrison (on behalf
of
Millar). However, given that the principal issue is limited to the proper construction
of
the SFA and ICA, much
of
this evidence is, in my view, inadmissible or irrelevant; as were certain parts
of
the skeleton arguments in particular that were submitted on behalf
of
DB which relied on such evidence. It is unfortunate that the scope
of
what evidence was admissible was not properly clarified prior to the commencement
of
the present hearing. Be that as it may, after discussion with Counsel, it became apparent (thankfully) that there was a large measure
of
agreement and I set out below a summary
of
what I believe is common ground with regard to the relevant factual background and the circumstances which have given rise to the present dispute.
- Nevertheless, there remained some controversy. In particular, Mr Higham QC made plain that in relation to the main issues
of
construction, he wished to rely on certain passages in some
of
the witness statements which, he submitted, were admissible and relevant to show what he described as the "commercial purpose"
of
the SFA and ICA in particular: (i) paragraphs 15 and 16
of
the first statement
of
Ms Harrison; (ii) paragraphs 40-44
of
the first statement
of
Mr Verle (which related to a phone discussion that he i.e. Mr Verle had with a Mr Iain Gunn on 20 July 2010); and (iii) paragraph 4
of
the second statement
of
Mr Verle. As to (i), Mr Snowden QC had no objection. As to (ii), Mr Snowden QC confirmed that there was no dispute as to the facts stated in these paragraphs by Mr Verle but submitted that such evidence was inadmissible and irrelevant, a submission which I accept on well-established principles. In any event, I do not consider that such evidence, even if admissible, would assist with regard to the present task. As to (iii), reference having been made to the level at which the various debts were traded in March 2011 (i.e. some 4 months or so after the date
of
the SFA and ICA), the main thrust
of
this paragraph is contained in the last sentence which states: "The Second Lien Debt would not have traded at such levels had it been the general understanding that the Second Lien Debt's priority in respect
of
mandatory prepayments could be removed at the whim
of
the Priority Lenders for the time being." Mr Snowden QC submitted that this evidence was again inadmissible and irrelevant. In my view, that submission is correct. At best, it is evidence
of
opinion in the nature
of
expert evidence in respect
of
which the leave
of
the Court would be required but has been neither sought nor granted. In any event, it is my view that, as formulated, such evidence, even if admissible, would have no probative value and therefore not assist in the present task given in particular the impossibility
of
testing the basis
of
the alleged absence
of
such "general understanding". Further, as submitted by Mr Snowden QC, it does not appear that it is right to suggest, even on Millar's case, that mandatory prepayments could be removed "at the whim"
of
the Priority Lenders given, in particular, the terms
of
Clause 40
of
the SFA as referred to below which required the consent
of
Truvo to any amendment. I revert to certain aspects
of
these matters later in this Judgment.
Factual Background
- Truvo and its corporate group are engaged in the business
of
directories, including the publication
of
printed classified directories and alphabetic directories. As a result principally
of
competition from online search engines, the directories industry has faced very significant challenges in the last decade. Truvo experienced significant financial difficulties in that period. Following negotiations with creditors, on 1 July 2010 certain companies within the Truvo group filed voluntary petitions under Chapter 11
of
Title 11
of
the US Bankruptcy Code in the US Bankruptcy Court for the Southern District
of New York
.
- There then followed detailed financial negotiations between interested parties with a view to establishing a restructuring plan so as to enable the Truvo group to exit the Chapter 11 proceedings and to continue its business operations. The details
of
such negotiations are not directly relevant save to note that it is common ground that at the time the restructuring plan was being developed, it was anticipated that the Truvo group would receive a potential tax rebate
of
approximately US$100 million from the US Internal Revenue Service as a result
of
the restructuring.
- In the event, a restructuring plan was agreed. It was filed on 1 July 2010 and subsequently amended on 22 October 2010, following which the Truvo group exited the Chapter 11 proceedings on 30 November 2010 and the SFA and the ICA were executed.
- In essence, the restructure involved Truvo acquiring the operating business and 100%
of
the interests
of
Truvo USA (Inc) ("Truvo USA") and issuing
new
debt with a nominal value
of
450 million in return for, inter alia, the release
of
approximately 775 million
of
senior
bank
debt owed by subsidiaries
of
Truvo USA (the "Former Debt"). The terms on which the 450 million
new
debt was issued are set out in the SFA. In summary, the
new
debt comprised (i) a Facility A1 debt and a Facility A2 debt, together "the First Lien Debt", in aggregate amounting to 350 million and repayable in full on 31 May 2015 and (ii) a Facility B1 debt and Facility B2 debt, together "the Second Lien Debt", in aggregate amounting to 100 million and repayable in full 6 months later i.e. on 30 November 2015. The holders
of
the Former Debt were allocated pro rata proportions
of
the First Lien Debt and the Second Lien Debt. The interest rate on the First Lien Debt was Euribor plus a margin
of
between 3 and 4 percent per annum whereas the interest rate on the Second Lien Debt was a cash element
of
Euribor plus 2 per cent per annum and a PIK margin, compounding at 6 monthly intervals,
of
4 percent per annum which was added to the principal amount
of
the Second Lien Debt.
The SFA
- At the outset, it is to be noted that Clause 1.2
of
the SFA provides that Section, Clause and Schedule headings are "...for ease
of
reference only." Clause 1.4 also provides: "This Agreement is subject to the [ICA]. In the event
of
any inconsistency between this Agreement and the [ICA], the [ICA] shall prevail."
- For present purposes, it is significant that the SFA includes detailed provisions for what is referred to as the "application
of
mandatory prepayments". These are set out in Clause 11
of
the SFA. In particular, Clauses 11.2(b) and (c) stipulate that subject to certain terms (including Clause 14
of
the ICA) Truvo "
shall ensure that the Borrowers prepay Utilisations in the following amounts at the times and in the order
of
application contemplated by Clause 11.3
..". "Utilisations" is a term defined to mean a "loan or letter
of
credit". The specified "amounts" include the amount
of
Disposal Proceeds, Flotation Proceeds, Insurance Proceeds, US Tax Proceeds and 75%
of
Excess Cashflow for any particular Financial Year (all defined terms). Detailed timing provisions are set out in Clauses 11.3(c), (d) and (f).
- Clauses 11.3(a) and (b) each provides for such prepayments to be "applied" in a particular order. In particular, Clause 11.3(a) provides in material part as follows:
"Subject to clause 14
of
the [ICA], a prepayment made under Clause 11.2
other than a prepayment
of
Disposal Proceeds resulting from a Business/JV disposal shall be applied in the following order:
(i) firstly, against the accrued PIK margin in respect
of
the Second Lien Loans, pro rata against each Second Lien Facility
;
(ii) secondly, in prepayment
of
Second Lien Loans pro rata
; and
(iii) thirdly, in prepayment
of
[the First Lien Loans] pro rata
"
- Clause 11.3(b) provides for the application
of
other prepayments in relation to Disposal Proceeds resulting from a Business/JV disposal but requires that all proceeds up to an amount equal to 3.7 x Trailing Attributable EBITDA (as defined)
of
the disposed business or Joint Venture interest be applied first in prepayment
of
the First Lien Debt pro rata.
- Clause 40
of
the SFA deals with amendments and waivers. Clause 40.1 expressly provides that the whole
of
Clause 40 is subject to the terms
of
the ICA.
- Clause 40.2 provides in material part:
"(a) Subject to Clause 40.3 (Exceptions) any term
of
the Finance Documents may be amended or waived only with the consent
of
the Majority Lenders and [Truvo] and any such amendment or waiver shall be binding on all Parties;
(b) The Agent may effect, on behalf
of
any Finance Party, any amendment or waiver permitted by this Clause 40.
(c)
."
In relevant respect, "Majority Lenders" is a term defined in Clause 1.1 to mean:
"(a)
(b) ...a Lender or Lenders whose Commitments aggregate more than 66⅔ percent
of
the Total Commitments
."
- Clause 40.3 sets out exceptions to the general rule in Clause 40.2(a). It provides in material part:
"(a) An amendment or waiver that has the effect
of
changing or relates to:
(iv) save as a consequence
of
any Structural Adjustment, the manner in which the proceeds
of
enforcement
of
the Transaction Security are distributed; or
(v) save as a consequence
of
any Structural Adjustment, any amendment to the order
of
priority or subordination under the [ICA]
shall not be made without the consent
of
all the Lenders;
(b) An amendment or waiver which has the effect
of
changing or which relates to:
(iv) the obligation to prepay under Clause 11.1
or paragraph (b)(ii)
of
Clause 11.2
;
shall not be made without the prior consent
of
the Super Majority Lenders
"
In relevant respect, "Super Majority Lenders" is a term defined in Clause 1.1 to mean: "
a Lender or Lenders whose Commitments aggregate more than 90%
of
the Total Commitments
"
- Finally, Clauses 43 and 44
of
the SFA provide for English governing law and the exclusive jurisdiction
of
the English courts.
The ICA
- The ICA was entered into between the Agent, the Lenders, including the First Lien Lenders and the Second Lien Lenders, the former Facility Agent, the former Security Agent and DB it its capacity as Daylight Lender.
- Section 1.2(b) provides that Section, Clause and Schedule headings are "...for ease
of
reference only." Clause 2.1 provides:
"Each
of
the Parties agrees that the Liabilities owed by the Debtors to [the First Lien Lenders] and the Second Lien Lenders shall rank in right and priority
of
payment in the following order and are postponed and subordinated to any prior ranking Liabilities as follows:
(a) first, [the Senior Lender Liabilities] and the Hedging Liabilities pari passu and without any preference between them; and
(b) second, the Second Lien Liabilities."
- Clause 2.2 provides in material part:
"Each
of
the parties agrees that the Transaction Security shall rank and secure the following Liabilities
in the following order:
(a)
;
(b) second, [the First Lien Liabilities] and the Hedging Liabilities pari passu and without any preference between them; and
(c) third, the Second Lien Liabilities.
Clause 2.3(a) provides:
"Each
of
the Parties agrees that the Intra-Group Liabilities and the Parent Liabilities are postponed and subordinated to the Liabilities owed by the Debtors to the Priority Creditors and the Second Lien Lenders."
- Clause 5.1(a) provides in material part:
"The Debtors shall not and shall procure that no other member
of
the Group will, make any Payments
of
the Second Lien Liabilities at any time unless:
(i) that Payment is permitted under Clause 5.2
"
- Clause 5.2 provides in material part:
"
, the Debtors may:
(a) prior to the Priority Discharge Date, make Payments to the Second Lien Lenders in respect
of
the Second Lien Liabilities then due in accordance with the Senior Facilities Agreement:
(i) if:
(A) the Payment is
of
:
(i) any
of
the principal amount
of
the Second Lien Liabilities in accordance with:
(3) Clause 14.1 (Non-Distressed Disposals) or Clause 14.3 (Mandatory Prepayment Proceeds (before Distress Event));
(4) Clause 11.2 (US Tax, Flotation, Disposal and Insurance Proceeds and Excess Cashflow)
of
the Senior Facilities Agreement;
"
- Clause 14.1(d) provides in material part:
"If any Disposal Proceeds are required to be applied in mandatory prepayment
of
[the First Lien Liabilities] or the Second Lien Liabilities then the Disposal Proceeds shall be applied in or towards Payment
of
:
(i) first
;
(ii) then, in accordance with Clause 11.3
of
the [SFA],
and the consent
of
any other Party shall not be required for that application."
- Clause 14.2(b) provides in material part:
"The net proceeds
of
each Distressed Disposal
shall be paid to the Security Agent for application in accordance with Clause 15
."
- Clause 14.3(c) provides in material part:
"If any Insurance Proceeds, US Tax Proceeds, Flotation Proceeds, Disposal Proceeds (to the extent not applied pursuant to paragraph (d)
of
Clause 14.1
) or Excess Cashflow are required to be applied in mandatory prepayment
of
[the First Lien Liabilities] or the Second Lien Liabilities then those Insurance Proceeds, US Tax Proceeds, Flotation Proceeds, Disposal Proceeds or Excess Cashflow shall be applied in or towards Payment
of
:
(i) first
(ii) then, in accordance with Clause 11.3
of
the Senior Facilities Agreement,
and the consent
of
any other Party shall not be required for that application."
- Clause 15
of
the ICA provides in effect for all amounts from time to time received or recovered by the Security Agent to be held by the Security Agent on trust to apply them in the "order
of
priority" therein prescribed. In particular, the order
of
priority provides inter alia for payment
of
the First Lien Lenders ahead
of
the Second Lien Lenders as stipulated in sub-paragraphs (f) and (g). Clause 16.4 provides for what is referred to as the "turnover"
of
enforcement proceeds.
- Clause 26.5 provides in material part:
"Except as otherwise provided in this Agreement the priorities referred to in Clause 2 (Ranking and priority) will:
(a) not be affected by any
amendment or variation to any
of
the Debt Documents
."
- Clause 27
of
the ICA deals with consents, amendments and override. In particular, Clause 27.1 (a) provides in material part:
"Subject to paragraph (b)
below,
this Agreement may be amended or waived only with the consent
of
the Agents, the Majority Priority Lenders and the Security Agent."
- Clause 27.1(b) provides in material part:
"An amendment or waiver (including, without limitation, as a result
of
any amendment, waiver or consent which relates to any defined term or clause incorporated into this Agreement by cross-reference) that has the effect
of
changing or which relates to:
(i)
Clause 15 (Application
of
proceeds)
;
(iii)
.the order
of
priority or subordination under this Agreement;
shall not be made without the consent
of
:
A.
B. The [First Lien Lenders];
C. The Second Lien Lenders;
"
- Clause 27.1(d) provides in material part:
"An amendment or waiver (including, without limitation, as a result
of
any amendment, waiver or consent which relates to any defined term or clause incorporated into this Agreement by cross-reference) that has the effect
of
changing or which relates to:
(iv) Clause 2.1 (Senior Creditor Liabilities) or Clause 2.2 (Transaction Security);
(vi) Clause 14 (Proceeds
of
Disposals, Recoveries from Report Providers and Application
of
Mandatory Prepayments) shall not be made without the consent
of
:
(A) each Former Agent, unless such change would not reasonably be considered to be detrimental to the interests
of
any Former Agent
; and
(B) the Daylight Lender, unless such change would not reasonably be considered to be detrimental to the interests
of
the Daylight Lender
."
- Finally, Clauses 29 and 30
of
the ICA provide for English law to govern and for the exclusive jurisdiction
of
the English courts.
Events following execution
of
the SFA/ICA
- Both Millar and DB were existing holders
of
old senior debt in the Truvo group which was discharged as part
of
the restructure in 2010. Accordingly, as part
of
the restructure, they were issued by Truvo with strips
of
Senior Debt and Second Lien Debt pro rata with the proportion
of
old senior debt held by them. Whilst upon execution
of
the SFA and ICA each existing lender was issued with strips
of
Senior Debt and Second Lien Debt, so that the ratio
of
the two tranches
of
debt held by each lender was the same, since then some lenders have increased or decreased their respective holdings
of
Senior Debt and/or Second Lien Debt (as both Millar and DB have done) and so no longer hold the two tranches
of
debt in the original proportions.
- Notwithstanding the reorganisation which took place in 2010, Truvo continued to experience financial difficulties. In particular:
a. As early as February 2011, Truvo's budget for 2011 contained material adverse variances from the forecasts provided in the Chapter 11 Proceedings and showed that it had little projected headroom against its financial covenants in the SFA.
b. Truvo's budget for the financial year 2012, which was delivered to lenders on 30 January 2012, forecasted a breach
of
its financial covenants under Clause 25.2
of
the SFA, starting with the delivery
of
the financial statements for the first quarter
of
the financial year 2012 onwards.
c. As a result
of
the forecasted breaches
of
covenant, Truvo's auditors advised that, absent any restriction
of
lenders' rights to enforce their security under the SFA, they would be required to qualify the annual financial statements for the financial year 2011 on the grounds that they were unable to approve the preparation
of
such annual financial statements on a going concern basis. A qualification to the audit could have had a negative impact on Truvo's operating performance and, ultimately, its financial position.
d. In the light
of
various provisions
of
the Belgian Companies Code applicable to Truvo, the Board resolved not to postpone the convening
of
the annual shareholders' meeting beyond 29 June 2012. As such, any agreement between Truvo and its lenders allowing the auditors to approve the preparation
of
the annual financial statements for the financial year 2011 on a going concern basis had to be reached by no later than 14 June 2012.
- In the event that no agreement could be reached and Truvo were to breach its financial covenants under Clause 25
of
the SFA (as it was forecasted to do), it would have been open to a two-thirds majority
of
the lenders to instruct the Agent to accelerate all liabilities by declaring that all sums owing under the SFA be immediately due and payable and to commence enforcement proceedings against Truvo (SFA, Clauses 27.2 & 27.21). In that case, all sums received or recovered by the Agent pursuant to the SFA would be applied in payment
of
(inter alia), first, the Senior Lenders and, thereafter, the Second Lien Lenders (ICA, Clauses 2 & 15). Thus, upon breach
of
covenant by Truvo and an acceleration
of
its liabilities, all sums would have been applied in discharge
of
the Senior Debt in priority to the Second Lien Debt.
The Consent Request by Truvo in June 2012
- It was against this background that Truvo sought to agree with its lenders to limit their rights
of
enforcement under Clause 25.2
of
the SFA. Discussions between Truvo and a sounding group
of
its largest lenders took place in May 2012. Following those negotiations, on 7 June 2012 Truvo submitted a consent request letter ("the Consent Request") to the Agent purportedly in accordance with Clause 40
of
the SFA requesting the consent
of
the Majority Lenders to certain proposed amendments to the SFA. The proposed amendments to the SFA included (so far as relevant to these proceedings): (a) the insertion
of
a
new
clause in the SFA limiting lenders' rights
of
enforcement in the event
of
any event
of
default resulting in a breach
of
the financial covenants set out at Clause 25.2
of
the SFA occurring between 30 June 2012 and 31 March 2013; and (b) an amendment to the mandatory prepayment provisions at Clauses 11.3(a) and (b)
of
the SFA. The latter proposed amendment was in the following terms:
"(c) delete paragraphs (a) and (b)
of
Clause 11.3 (Application
of
mandatory prepayments)
of
the [SFA] and replace them with the following:
(a) Subject to clause 14 (Proceeds
of
Disposals, Recoveries from Report Providers and Application
of
Mandatory Prepayments)
of
the Intercreditor Agreement, a prepayment made under Clause 11.2 (US Tax, Flotation, Disposal and Insurance Proceeds and Excess Cashflow) shall be applied in the following order:
(i) firstly, in prepayment
of
Facility A1 Loans and Facility A2 Loans pro rata and as contemplated in paragraphs (c), (d), (f) and (g) below;
(ii) secondly, against the accrued PIK Margin in respect
of
the Second Lien Loans, pro rata against each Second Lien Facility and as contemplated in paragraphs (c), (d), (f) and (g) inclusive below;
(iii) thirdly, in prepayment
of
Second Lien Loans pro rata and as contemplated in paragraphs (c), (d), (f) and (g) below
.".
- In passing, it is important to note that this proposed amendment in effect reversed the order
of
application
of
mandatory prepayment proceeds in the original Clause 11.3
of
the SFA to the detriment
of
the Second Lien Holders including DB and those represented by DB.
- Consent to the proposed amendments was given by the proportion
of
lenders holding 80.15%
of
"Total Commitments" (i.e. the aggregate
of
the Senior Debt and the Second Lien Debt). Lenders holding only 6.4%
of
the Total Commitments voted against the proposed amendments. Lenders holding the remaining 13.54%
of
the Total Commitments did not respond to the Consent Request.
- On 13 June 2012 the Agent executed the Consent Letter, confirming that the Majority Lenders had consented to the proposed amendments and that the amendments were accordingly granted and would become effective upon being countersigned by Truvo. Truvo promptly countersigned the Consent Letter.
- Had the Consent Request not been granted by the lenders, and the proposed amendments not been made to the SFA, the consequences for Truvo and the lenders would have been serious. First, Truvo would have received a qualified audit from its auditors, which as set out above could have had a serious negative impact upon its financial position. Further, again as set out above, upon the acceleration
of
Truvo's debt following a breach
of
its covenants, all sums would be applied in discharge
of
the Senior Debt in priority to the Second Lien Debt, irrespective
of
whether or not there had been any amendment to Clause 11.3
of
the SFA pursuant to the Consent Request.
Events since execution
of
the Consent Request
- On 14 November 2012 Truvo issued a certificate to the Agent disclosing that it was in breach
of
certain
of
the covenants in Clause 25.2
of
the SFA and giving notice
of
a default under the SFA.
- Following approval
of
a consent request relating to Truvo's default dated 14 December 2012 by lenders holding 80.14%
of
Total Commitments, the Agent: (i) served Truvo with acceleration and demand notices dated 21 December 2012 and (ii) on 28 December 2012 instructed the Security Agent to enforce the "Transaction Security" over monies which were the balance
of
proceeds
of
a tax refund to Truvo constituting "US Tax Proceeds" for the purposes
of
Clause 11
of
the SFA and which had been paid into an escrow account (the "Escrow Account"). (This formed part
of
a preliminary refund
of
US$ 106.7 million from the US Internal Revenue Service which was received by Truvo in November 2011).
- More recently, the Security Agent gave notice
of
exclusive control in respect
of
the Escrow Account and the Agent issued a notice to lenders confirming its intention to distribute the proceeds from the Escrow Account, totalling 74,641,396.98, in accordance with Clause 15
of
the ICA on 18 January 2013. According to Mr Snowden QC, the effect
of
what has happened is that the entitlement
of
the Senior Lenders and the Second Lien Lenders to the proceeds
of
the US Tax Proceeds in the Escrow Account is no longer affected by the outcome
of
this case because it is accepted that those monies have been validly paid to the Senior Lenders in discharge
of
the amounts outstanding under the SFA. There are, however, certain other monies which have been paid by Truvo to the Agent by way
of
mandatory prepayment under Clause 11
of
the SFA the application
of
which does or may depend on the outcome
of
this dispute and which have been held by the Agent in a separate escrow account pending determination
of
this dispute.
Principles
of
contractual interpretation
- There was broad agreement as to the applicable principles. In particular:
a. In approaching the question
of
the interpretation
of
a commercial contract, the aim is to ascertain what a reasonable person would have understood the parties to have meant by the words they used, with such reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time
of
the contract; see Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896 per Lord Hoffmann at pp.912H913D and Rainy Sky SA v Kookmin
Bank
[2011] 1 WLR 2900 per Lord Clarke at paragraph 12.
b. For the purpose
of
drawing inferences about what the contract meant, the law excludes from admissible background the previous negotiations
of
the parties and their declarations
of
subjective intent; see Investors Compensation Scheme (supra) per Lord Hoffmann at p.913B and Chartbrook Limited v Persimmon Homes Limited [2009] 1 AC 1103 per Lord Hoffmann at paragraph 42.
c. The law does not exclude the use
of
such evidence for other purposes, e.g. to establish that a fact that may be relevant as background was known to the parties or to establish the commercial nature and object
of
the contract; see Chartbrook (supra) ibid; The Tychy (No. 2) [2001] 2 Lloyd's Rep 403 per Lord Phillips MR at paragraph 29; see also Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 per Lord Wilberforce at pp.995H996A and Ocean Bulk Shipping v TNT Asia Limited [2011] 1 Lloyd's Rep 96 per Lord Clarke SCJ at paragraphs 38-39 and per Lord Phillips PSC at paragraph 48.
d. The process
of
interpretation is an iterative process involving the checking
of
each
of
the rival meanings against the other provisions
of
the document and investigating its commercial consequences in the context
of
the overall contractual scheme and purpose
of
the contract; see Sigma Finance Corp [2010] 1 All ER 571 per Lord Mance SCJ at paragraphs 9 and 12. An over-literal interpretation
of
one provision without regard to the whole may distort or frustrate the commercial purpose; see Re Sigma Finance Corp (supra) per Lord Collins SCJ at paragraph 35.
e. Where the language
of
the parties can be construed in two different ways, the court should adopt the interpretation which will make more commercial sense; see Barclays
Bank
plc v HHY Luxembourg SARL [2011] 1 BCLC per Longmore LJ at paragraphs 25 and 26 and Rainy Sky v Kookmin
Bank
(supra) per Lord Clarke at paragraphs 21 and 30.
- Despite this broad agreement, there was (at least initially) one difference between Mr Higham QC and Mr Snowden QC with regard to the applicable principles
of
construction concerning the relationship between Clause 40.2 and Clause 40.3
of
the SFA. In particular, Mr Snowden QC submitted that it was important to bear in mind that Clause 40.3 was, on its face, an exception to the general default position in Clause 40.2 (i.e. that any term
of
the Finance Documents may be amended or waived with the consent
of
the Majority Lenders and Truvo). On that basis, Mr Snowden QC submitted that although he would not go so far as to say that Clause 40.3 should be construed "narrowly" against DB nevertheless it should be looked at in a "questioning manner". Mr Higham QC rejected any suggestion that Clause 40.3 should be construed "narrowly" although I did not understand him to disagree with Mr Snowden QC that Clause 40.3 should be construed in what he described as a "questioning manner" which is, in my view, no different from the proper approach to the construction
of
Clause 40.2 or, indeed, any other clause in a commercial contract.
DB's submissions
- In summary, DB made the following submissions.
- The terms
of
the SFA and the ICA are clear. Clauses 11.2 and 11.3
of
the SFA and 14.1(d)(ii) and 14.3(c)
of
the ICA confer on the Second Lien Lenders an entitlement to priority
of
payment in respect
of
mandatory prepayments. Clause 11.3
of
the SFA, which sets out a mandatory prepayment waterfall, is expressly subject to Clause 14
of
the ICA and is expressly incorporated by cross-reference in Clauses 14.1(d)(ii) and 14.3(c)
of
the ICA. The provisions
of
such clauses are mandatory. For the purpose
of
determining what consents are required under the ICA, one must therefore approach the analysis as if Clause 11.3
of
the SFA was expressly set out in the ICA.
- The effect
of
these provisions is to reverse, in relation to mandatory prepayments, the ranking in right and priority
of
payment for which Clause 2
of
the ICA otherwise provides. The unusual reversal
of
priorities in relation to mandatory prepayments for the benefit
of
the Second Lien Lenders was specifically designed, at the time that the SFA and ICA were entered into, to support the pricing and marketability
of
the Second Lien Debt. Though the word "priority" is not expressly used in Clause 11.3
of
the SFA, its substance is to provide for a payment waterfall for mandatory prepayments conferring priority on the Second Lien Lenders and subordinating the First Lien Lenders to the Second Lien Lenders in right
of
payment in respect
of
mandatory prepayments. To give priority in right
of
payment to one class
of
creditor over another is necessarily to subordinate the latter in right
of
payment.
- Clause 27.1(b)
of
the ICA specifically requires the consent
of
the Second Lien Lenders for "an amendment
(including
as a result
of
any amendment
which relates to any
clause incorporated into [the ICA] by cross reference) that has the effect
of
changing or which relates to
(iii) the order
of
priority or subordination under the [ICA ]
". Correspondingly, Clause 40.3(a)
of
the SFA also requires all Lender consent for any amendment
of
the SFA which has the effect
of
changing or which relates to "the order
of
priority or subordination" under the ICA. Clause 40 is expressly subject to the terms
of
the ICA and so to Clause 27.1(b) thereof. The two clauses are obviously inter-related and the phrase "the order
of
priority or subordination" must bear the same meaning in both agreements.
- The opening words
of
Clause 27.1(b) are clearly intended to apply to amendments
of
clauses
of
the SFA which are incorporated by cross-reference in the ICA and are entirely apt to refer to Clauses 14.1(d) and 14.3(c)
of
the ICA and to Clause 11.3
of
the SFA which is incorporated into both provisions
of
the ICA by cross-reference.
- Clause 27.1(b)(iii) is stated in general terms and, unlike, for example, Clause 27.1(b)(i), which expressly refers to, inter alia, Clause 15, is not tied to any particular clauses
of
the ICA. The phrase "order
of
priority or subordination" under the ICA is not a defined term and there is no basis for interpreting it restrictively. However, it is plain from, inter alia, Clause 2.1
of
the ICA that where the ICA talks
of
the order
of
priority it means "priority
of
payment". There is no basis for limiting Clause 2.1 to what happens in the event
of
a deficiency arising on an enforcement
of
security or on an insolvency
of
Truvo. Clauses 5.1 and 5.2
of
the ICA, which support the provisions
of
Clause 2.1, make it plain that only expressly permitted payments, which include mandatory prepayments, can be made to Second Lien Lenders prior to discharge
of
the First Lien Debt. As stated above, Clauses 14.1(d) and 14.3(c)
of
the ICA, incorporating Clause 11.3
of
the SFA, confer on the Second Lien Lenders an entitlement to priority
of
payment in respect
of
mandatory prepayments. Clause 27.1(b)(iii) must naturally be taken therefore as referring to Clauses 14.1(d) and 14.3(c) (as well as to Clause 2.1). Clause 40.3(a)
of
the SFA must be interpreted similarly.
- Accordingly, as a matter
of
plain ordinary English, the consent
of
the Second Lien Lenders is required for any amendment which seeks to alter the entitlement
of
the Second Lien Lenders to priority
of
payment in relation to mandatory prepayments. In this respect the wording
of
the ICA and the SFA is clear and there is no ambiguity. This accords with commercial common sense for, indeed, it would make no sense to provide unusually for the priority
of
the Second Lien Lenders in relation to mandatory prepayments if at any time that priority could be removed without their consent at the whim
of
the First Lien Lenders (whose claims comprise 77.78 percent
of
the aggregate claims
of
First and Second Lien Lenders).
- Indeed, given that the SFA expressly contemplated that Second Lien Debt would be traded and that the commercial objective
of
Clause 11.3
of
the SFA was to support the value
of
the Second Lien Debt in the market, it would be commercially absurd and defeat the avowed commercial objective if, upon a third party acquiring a substantial tranche
of
Second Lien Debt at the market value, the value
of
that debt could be undermined by Truvo and the First Lien Lenders agreeing between themselves to expropriate the mandatory prepayment entitlements
of
the Second Lien Lenders. Paragraph 14
of
Harrison 2 does not begin to meet this. The fact that as a matter
of
law the Second Lien Debt would be capable
of
being traded after a reversal
of
the order
of
priority set out in the mandatory prepayment waterfall is nothing to the point. Such a reversal would plainly have a devastating effect upon the price upon which Second Lien Debt would be traded, as Ms Harrison implicitly, if somewhat cryptically, recognises.
- This interpretation
of
Clause 14.3
of
the SFA and Clause 27.1
of
the ICA is confirmed by a number
of
factors. First, if, as appears to be the case
of
Millar, the phrase "the order
of
priority or subordination" is intended to refer primarily or exclusively to the order
of
priority and subordination in Clause 2.1
of
the ICA, postponing the Second Lien Lenders to the First Lien Lenders, it makes little commercial sense for both the SFA and the ICA to require a change to that order
of
priority or subordination to be subject to the consent
of
the Second Lien Lenders. The requirement for the consent
of
the Second Lien Lenders must presumably be there to protect some commercial interest
of
the Second Lien Lenders. Secondly, Millar's interpretation gives no meaning to the phrase "including
as a result
of
any amendment
which relates to any
clause incorporated into this Agreement by cross-reference". Clause 2.1
of
the ICA does not incorporate by cross-reference any clause
of
the SFA. Clauses 14.1(d) and 14.3(c)(ii)
of
the ICA do. Thirdly, when the draughtsman
of
the ICA intended to refer specifically to Clause 2.1 thereof, he did so compare Clause 27.1(d)(iv)
of
the ICA. In Clause 27.1(b), however, whereas there is an express reference, inter alia, to Clause 15
of
the ICA, the reference to "the order
of
priority or subordination under this Agreement" is entirely general.
- Even if there might be said to be some ambiguity in the terms
of
the SFA and the ICA in this regard (which there is not), as noted above, where there are two possible interpretations
of
the commercial contract, the court will adopt that interpretation which makes more commercial sense. As noted above, the commercially sensible interpretation is that the priority entitlement
of
the Second Lien Lenders should not be taken away from them without their prior consent.
- It follows from the above that the amendment to Clause 11.3
of
the SFA with the consent
of
the Majority Lenders was contrary to both Clause 40
of
the SFA and Clause 27.1(b)
of
the ICA and that the Facility Agent was not permitted under Clause 40.2(b)
of
the SFA to effect on behalf
of
the Finance Parties the requested amendment to Clause 11.3
of
the SFA. It follows that, to that extent, the Facility Agent has executed the Consent Letter without authority and that the amendment to Clause 11.3 is not binding on the Second Lien Lenders.
Millar's Submissions
- Mr Snowden QC advanced Millar's case under 6 main heads which can be summarised as follows.
I. Ordinary commercial meaning
of
"priority" and "subordination"
- As a matter
of
natural language the purported amendment relates (in relevant respect) only to the order
of
application
of
the mandatory prepayment provisions and does not concern the "priority" and "subordination"
of
the Senior Loans and Second Lien Loans. On their ordinary commercial meaning, the terms "priority" and "subordination" are concerned with the ranking
of
a debtor's indebtedness in circumstances where there is a competition between creditors (whether between secured creditors on enforcement or between unsecured creditors on a formal insolvency) because there is a shortfall in available assets to meet liabilities. The expressions are not naturally used in connection with a debtor's obligations to make prepayments
of
(not yet due) indebtedness or the timing
of
such payments. By way
of
example:
a. In Re SSSL Realisations [2005] 1 BCLC 1, Lloyd J stated at [20] that "issues
of
priority only matter if the debtor is insolvent".
b. In Benjamin, Financial Law (2007) it is stated at para. 16.51 that "Questions
of
priority arise where (i) more than one person has claims against the same asset or fund
of
assets and (ii) the asset or fund is insufficient to meet all such claims in full".
c. In Wood, Project Finance, Securitisations, Subordinated Debt (2007), it is stated at para. 10.001 that "Subordination is a transaction whereby one creditor (the subordinated or junior creditor) agrees not to be paid by a borrower or other debtor until another creditor
of
the common debtor (the senior debtor) has been paid. Like security, subordination is relevant only if the debtor is insolvent because until then both junior and senior creditors can be paid in full. Hence the fundamental object
of
a subordination is that it should be successful on insolvency".
d. In Powell, "Rethinking subordinated debt" [1993] LMCLQ 357, it is stated at p. 358, under the heading "Objectives
of
Debt Subordination", that "The main aim
of
a subordination is to rank the unsecured debt
of
X on its insolvency. Until insolvency both Y and Z can be paid in full."
- In contrast, "prepayment" provisions (such as those in Clause 11
of
the SFA) are concerned with when and, if so, how a payment
of
debt not then due must be made by a debtor. Thus the obligation on a debtor to make a mandatory prepayment may arise (as it does in this case) by reason
of
the debtor's receipt
of
monies in particular circumstances. The obligation to apply those proceeds by way
of
mandatory prepayment against specified (but not yet due) indebtedness is not concerned with the "priority" or "subordination"
of
that indebtedness, i.e. how the indebtedness will rank on a shortfall in the assets
of
the Company.
II. The SFA and ICA themselves distinguish between issues
of
priority/subordination and prepayment
- There is a clear distinction in the SFA itself between the provisions which relate to priority and subordination, on the one hand, and those which relate to prepayment
of
(not yet due) debt on the other. This is consistent with the terms "priority" and "subordination" having their usual commercial meaning, rather than some extended meaning to include also "prepayments".
- Clause 11.3
of
the SFA, which contains provisions dealing with mandatory prepayments by Truvo, makes no reference at all to "priority" or "subordination". The same is true
of
Clause 14.3
of
the ICA (which cross-refers to Clause 11.3
of
the SFA). Rather both provisions are concerned simply with the "application"
of
any prepayment by Truvo.
- On the other hand, none
of
the other provisions
of
the SFA refers expressly to "priority" or "subordination" as between lenders under the SFA. Whilst a number
of
the provisions
of
the ICA do refer to "priority" or "subordination" as between lenders notably Clauses 2.1, 5.8, 15, 16.4, 26.4 and 26.5
of
the ICA none
of
those provisions refers to any sums payable to Second Lien Lenders by way
of
"prepayment" as having priority in any way. For example:
a. Clause 2
of
the ICA, which is entitled "Ranking and Priority", provides expressly for the priority
of
Senior Lenders over Second Lien Lenders, and makes no reference at all to prepayments to Second Lien Lenders. Clause 2.1 provides:
"...the Liabilities owed by the Debtors to the Priority Creditors [i.e. Senior Lenders] and the Second Lien Lenders shall rank in right and priority
of
payment in the following order and are postponed and subordinated to any prior ranking
of
Liabilities as follows:
(a) first, the Priority Lender Liabilities [i.e. the Senior Loans] ...; and
(b) second, the Second Lien Liabilities."
b. Similarly, Clause 15.1
of
the ICA, which provides for the order
of
priority in which proceeds are to be applied by the Security Agent, requires payments to be made to the Senior Lenders in "priority" to the Second Lien Lenders.
c. Clause 26.5
of
the ICA, which is entitled "Priorities not affected" provides that various matters, such as any reduction or increase in the principal amount secured by the Transaction Security, will not affect "the priorities referred to in Clause 2 (Ranking and priority)". The clear inference is that the draughtsman considered only the rankings in Clause 2 to be concerned with issues
of
"priority" and "subordination". There is no good reason why, had it been intended that the provisions concerning the order
of
application
of
prepayments in Clause 11.3
of
the SFA, as referred to in Clause 14.3(c)(ii)
of
the ICA, should give "priority" to the Second Lien Debt for the purposes
of
the ICA, that "priority" would not have been given the same protection as was given to the Senior Debt by Clause 26.5
of
the ICA.
- Ultimately, had the parties intended that amendments to the order
of
application
of
the mandatory prepayments under Clause 11
of
the SFA should be treated akin to having "priority" and be capable
of
amendment only with the consent
of
all lenders, it would have been easy to have included a provision to that effect. However, they did not.
- It is to be noted that it is only through a combination
of
the (fortuitous) cross-reference to Clause 11.3
of
the SFA in Clause 14.3(c)(ii)
of
the ICA and the words in parentheses in Clause 27.1(b)
of
the ICA that it is even possible for DB to argue that the exceptions in Clause 27.1(b)(iii)
of
the ICA and Clause 40.3(a)(v)
of
the SFA are engaged in this case. It may reasonably be inferred that it was not the intention
of
the draughtsman that Clause 40.3(a)(v)
of
the SFA (or Clause 27.1(b)(iii)
of
the ICA) has the effect for which DB contends. Had this been the intention, Clause 40.3(a)(v)
of
the SFA (and Clause 27.1(b)(iii)
of
the ICA) would doubtless have been applied much more precisely to Clause 11.3
of
the SFA.
III. Millar's construction
of
Clause 40
of
the SFA is consistent with the LMA standard senior facilities agreement
- The SFA in this case was based upon the standard precedent published by the Loan Market Association ("the LMA"): the "Senior Multicurrency Term and Revolving Facilities Agreement for Leveraged Acquisition Finance Transactions", November 2009 version ("the LMA Standard SFA"). This is usual in the European debt markets and would have been apparent to experienced investors. The purpose
of
LMA standard documentation, such as the LMA Standard SFA, is to promote certainty and uniformity in lending markets, so as to make agreement
of
lending documentation more straightforward and to increase the tradability
of
debt.
- The LMA Standard SFA therefore forms part
of
the surrounding circumstances leading to the conclusion
of
the SFA to which regard may be had in construing the SFA (Lewison, The Interpretation
of
Contracts (5th ed., 2011) at para. 3.06).
- Clause 41
of
the LMA Standard SFA, which deals with amendments and waivers, has essentially the same structure as Clause 40
of
the SFA. Thus:
a. The default position is that any term
of
the agreement may be amended with the consent
of
the "Majority Lenders" (i.e. lenders whose commitments aggregate more than 66⅔ per cent.
of
the "Total Commitments") unless a higher level
of
consent is specified by way
of
exception to the default requirement (LMA Standard SFA at clause 41.2)
b. The exceptions to the default rule, which require the consent
of
all lenders, are set out in clause 41.3
of
the LMA Standard SFA. Those exceptions include at clauses 41.3(a)(ii), (viii) and (xi):
"(ii) an extension to the date
of
payment
of
any amount under the Finance Documents [(other than in relation to Clause 12 (Mandatory Prepayment))];
(viii) Clause 2.3 (Finance Parties' rights and obligations), [Clause 12 (Mandatory prepayment),] Clause 29 (Charges to the Lenders) or this Clause 41;
(xi) [any amendment to the order
of
priority or subordination under the Intercreditor Agreement]".
(Footnotes omitted).
- The amendment provisions
of
the LMA Standard SFA therefore clearly distinguish between, on the one hand, mandatory prepayments (at clause 41.3(a)(viii)) and, on the other hand, amendments to the order
of
priority or subordination (at clause 41.3(a)(xi)). This is consistent with the fact that prepayment provisions are in general concerned with an obligation on the part
of
a debtor to prepay indebtedness which is not yet due and the application
of
those sums, and not the ranking (i.e. priority or subordination)
of
the underlying indebtedness in the event
of
a shortfall.
- The SFA in this case does not include clause 41.3(a)(viii)
of
the LMA Standard SFA. The only reference to "prepayments" or to "Clause 11" in Clause 40.3
of
the SFA is at Clause 40.3(b)(iv), which is not applicable in this case see below. The inference from the absence
of
such a provision must be that amendments to the mandatory prepayment provisions do not require "all lender" consent, but instead are subject to the default requirement
of
"Majority Lender" consent.
- In addition, the footnote to clause 41.3(a)(ii) in the LMA Standard SFA states expressly that:
"Lenders should consider sensitivities which they may have to the consequences
of
such amendments or waivers which change or relate to Clause 12 (Mandatory Prepayments) being subject to Majority Lender consent only. For example, an individual Lender may be sensitive to the consequences
of
being unwillingly bound by a Majority Lender decision in respect
of
...amendment to: (i) any threshold levels set under Clause 12.2 (Disposal, Insurance and Acquisition Proceeds and Excess Cashflow); and (ii) the Obligors' obligation to prepay the Facilities on a change
of
control, flotation or sale
of
all the Group's assets under Clause 12.2 (Exit)."
Thus the LMA specifically flags the risk to lenders
of
being bound by amendments to the mandatory prepayment provisions approved by the "Majority Lenders". Notwithstanding this, there is no restriction in the SFA in this case on the amendment
of
Clause 11 by "Majority Lender" consent.
IV. Clause 40.3(b)(iv) indicates that amendments to Clause 11 generally fall within the scope
of
Clause 40.2
of
the SFA
- Clause 40.3(b)(iv) requires consent to be given to be given by the "Super Majority Lenders" to amendments relating to the obligation to prepay under Clause 11.1 (Exit) or Clause 11.2(b)(ii) (Flotation Proceeds). The reference in Clause 40.3 to only certain, specific, amendments to the provisions
of
Clause 11 implicitly recognises that other amendments to Clause 11 are outside the scope
of
Clause 40.3; and thus supports the conclusion that amendments to Clause 11 generally fall within the default rule in Clause 40.2.
V. DB's construction
of
Clause 40 would give rise to an anomalous and uncommercial result
- DB's construction
of
Clause 40.3(a)(v), if correct, would give rise to a surprising, and entirely uncommercial, result. It would appear to be common ground between the parties that the fundamental obligation
of
the Company to make prepayments could be amended or removed entirely either with the consent
of
the "Super Majority Lenders" (in the case
of
the obligation to prepay upon an "Exit" or a "Flotation" Clause 40.3(b)(iv)) or the consent
of
the "Majority Lenders" (in the case
of
the obligation to prepay upon receipt
of
"US Tax Proceeds", the proceeds
of
a relevant "Disposal" or "Insurance Proceeds", or where the Company has "Excess Cashflow" Clause 40.2). However, on DB's construction
of
Clause 40 a higher level
of
consent would be required simply to alter the order
of
application
of
the proceeds
of
a prepayment than would be required to remove the obligation entirely. It is difficult to discern any commercial rationale as to why only "Majority Consent" or "Super Majority Consent" would be required to remove or alter the fundamental obligation
of
the Company to make a prepayment from certain proceeds and thereby enable the Company to use the proceeds for other purposes but the consent
of
all lenders would be required to alter the order
of
application
of
the prepayment within the SFA. (Alternatively, it would be possible for amendments by the Majority Lenders to other provisions
of
the SFA to affect the prepayment provisions. For example, any increase to the maximum "Capital Expenditure" under Clause 25.2(d)
of
the SFA could lead to a decrease in Truvo's "Excess Cashflow" available for prepayment under Clause 11
of
the SFA.) Such a result would have no logical or commercial sense and cannot be what the parties, objectively, can have intended.
- The construction
of
Clause 40 for which Millar contends, however, is entirely consistent with commercial sense. Given the importance
of
the identity
of
the debtor and its owners/controllers, a higher level
of
consent is required to amend Truvo's obligation to make a mandatory prepayment following an Exit or Flotation than other changes to the mandatory prepayment provisions. All other changes to the mandatory prepayment provisions may be effected by Majority Consent.
VI. The ability
of
the Majority Lenders to amend Clause 11.3 is consistent with commercial sense
- As set out above, were there to be a "Distress Event" in respect
of
Truvo (as there has now been), the prepayment provisions
of
Clause 11.3
of
the SFA would not survive. Instead, all sums received or recovered by the Security Agent "pursuant to the terms
of
any Debt Document" or "in connection with the realisation or enforcement
of
all or any part
of
the Transaction Security" (which would include all sums received or recovered under the SFA) would have to be applied, after payment
of
costs to agents etc., first towards the discharge
of
the Senior Loans and, then, towards the discharge
of
the Second Lien Loans (ICA at Clauses 2.1-2.2 & 15.1(f)-(g)). Any sums received or recovered by the Security Agent from proceeds that would but for Truvo's default have given rise to an obligation on the part
of
Truvo to make a mandatory prepayment are to be treated in the same way and applied in accordance with Clauses 2 and 15
of
the ICA, as DB accepts.
- In other words, the prepayment provisions were only ever intended to provide some benefit to the Second Lien Lenders in circumstances where there was no shortfall. In circumstances where there was or was anticipated to be a "Distress Event" (with an accompanying shortfall
of
assets), the intention was that monies be paid to the Senior Lenders ahead
of
the Second Lien Lenders, and not vice versa.
- Therefore the ability for the Majority Lenders to amend the application
of
the proceeds
of
a mandatory prepayment without the consent
of
each Second Lien Lender (as they did by the Amendment) is entirely consistent with commercial sense it will be the Senior Debts which will be discharged first in accordance with the express order
of
priority under the SFA and ICA. That is particularly so where, as was the case here, there was a real possibility
of
a "Distress Event" occurring (as it has indeed now done).
Discussion
- Although the submissions advanced by Mr Higham QC have a certain simplistic attraction, I do not accept that the terms
of
the SFA and the ICA are, as he submits, "clear". As with many commercial contracts, the road to meaning is here more like a rocky path with certain wobbly and somewhat confusing signposts often pointing in different directions. There may be many reasons for this. It is a matter
of
speculation but the problems thrown up in the present case may be because
of
the inherent nature
of
the original transaction involving so many different parties with different interests, the timescale within which the task
of
completing the transaction had to be achieved, the difficulty in producing two separate voluminous and very detailed documents i.e. the SFA and the ICA (the former extending to almost 250 pages and the latter to some 100 pages) which should in principle neatly marry or at least work together and the fact that, as is common ground, the basis
of
the SFA was a standard form precedent (as to which see further below). In any event, whatever the reasons may be (which are anyway legally irrelevant), the court is left to seek to construe the SFA and ICA as best it can in accordance with established principles as set out above.
- Equally, although certain
of
Mr Snowden QC's submissions have some superficial attraction, I am not persuaded that much, if anything, is gained by his exercise
of
comparison
of
the terms
of
the SFA with the LMA Standard SFA nor his submission that Millar's construction
of
Clause 40
of
the SFA is consistent with the LMA Standard SFA. Initially, Mr Higham QC submitted that any reference to the LMA Standard Form was inadmissible. However, in light
of
Mr Snowden QC's reliance on what appears in para 3.06
of
Lewison, The Interpretation
of
Contracts (5th Ed., 2011), Mr Higham QC withdrew that objection although he submitted that the cautionary words
of
Moore-Bick LJ in Seadrill Management Services Ltd v AOA Gazprom [2010] EWCA Civ 691 (quoted in Lewison) remained apt and applied mutatis mutandis to the present case. I accept that the exercise performed by Mr Snowden QC is
of
some intellectual interest and is indeed superficially attractive but, in my view, it involves too many dangers to provide a safe basis in law for the exercise
of
construction
of
the SFA as executed. This is because, as in Seadrill, there is no evidence
of
why specific changes were made in the present case, nor any evidence that the parties turned their minds to the specific differences between the two forms although it has to be said that, in my view, such evidence would in any event be inadmissible. Echoing the words
of
Moore-Bick LJ, the right course, in my view, when seeking to ascertain the (objective) intention
of
the parties is to consider the particular contracts on their own terms against the commercial background as it existed at the time they were made.
- Given the importance
of
the iterative process
of
construction as stated above which I wholeheartedly endorse, it is not easy in a case
of
this kind to decide where to start. On one view, the starting point should be the actual language used by the parties. Another view is that the starting point should be the commercial background. In my judgment, the starting point is not crucial provided that at each stage one bears in mind the cautionary words
of
both Lord Mance and Lord Collins in Re Sigma Finance Corp as referred to above. That is an essential indeed crucial part
of
the iterative process.
- Here, I propose to start with the actual words used in Clause 40
of
the SFA. Mr Higham QC stressed that by virtue
of
Clause 40.1, the whole
of
Clause 40 is subject to the terms
of
the ICA. That is,
of
course, correct; and accordingly I agree that it is necessary to consider the relevant terms
of
the ICA and, so far as relevant, what, if any, impact such terms may have on Clause 40
of
the SFA. In any event, there can be no doubt that Clause 40.2 sets out what might be described as the "default position" in effect permitting (subject always to the "exceptions" in Clause 40.3) any amendment or waiver to any term
of
the Finance Documents (a defined term including the SFA and a range
of
other specified documents) with the consent
of
the Majority Lenders and Truvo.
- For present purposes, the critical exception is,
of
course, Clause 40.3(a)(v)
of
the SFA which in effect provides that any amendment or waiver that has the effect
of
changing or which relates to "save as a consequence
of
any Structural Adjustment, any amendment to the order
of
priority or subordination under the [ICA]" shall not be made without the prior consent
of
all the Lenders. As to these latter words which,
of
course, lie at the heart
of
the current dispute, there are, in my view, two important points to consider.
- First, it is, in my view, noteworthy that the wording
of
Clause 40.3(a)(v) is concerned only with any amendment to the order
of
priority or subordination "
under the [ICA]
". This case is
of
course concerned with an amendment to Clause 11.3
of
the SFA. No question arises as to any possible amendment to any term
of
the ICA. It is,
of
course, correct that the wording
of
Clause 40.3(a)(v) is not specifically directed at the amendment
of
a particular contractual term; the focus is rather the amendment or waiver (whatever it may be) which has a certain "effect" to the "order
of
priority or subordination" under the ICA. Thus, it is necessary to consider whether or not the purported amendment to Clause 11.3 does have the effect
of
amending the order
of
priority or subordination under the ICA. Be that as it may, it seems to me that there is at least some force in Mr Snowden QC's submission that if it was the intention
of
the draughtsman to require the consent
of
all Lenders to an amendment
of
Clause 11.3, it is at least somewhat curious if not odd that Clause 40.3(a)(v) is drafted in the way that it is i.e. without any reference to Clause 11.3 or indeed the SFA at all. In my view, this is at least a possible pointer in favour
of
the case advanced by Millar.
- Second, the words used in Clause 40.3(a)(v) are "...priority or subordination
" There was some debate before me as to what, if any, difference existed between these words i.e. "priority" and "subordination" and the use
of
the word "or". Be that as it may, it is common ground that neither
of
these words appears in Clause 11.3 or indeed elsewhere (in any relevant sense) in the body
of
the SFA. This is in marked contradistinction to the clauses in the ICA (e.g. Clauses 2 and 15) which do in terms provide for lenders' debts to have "priority" and to be discharged in the specified "order
of
priority". Whilst accepting always the iterative process
of
construction, this is, in my view, another pointer in favour
of
the case advanced by Millar i.e. that Clause 40.3(a)(v) is not concerned with an amendment or waiver
of
Clause 11.3. More specifically, Clause 11.3 is at least arguably concerned with something entirely different i.e. the application
of
mandatory prepayments in a particular order. It is,
of
course, right that Clause 11.3 does specify that the stipulated payments shall be applied in the "following order" and, as Mr Higham QC rightly submitted, I am ready to accept that it is certainly possible as a matter
of
language to say that this would involve giving "priority" to each
of
the successive categories
of
payees identified in sub-clauses (i), (ii) and (iii), nevertheless the word "priority" does not appear in Clause 11.3. In my view, this is more than a fanciful textual point. It seems to me that there is, at the very least, some force in the argument that, as submitted by Mr Snowden QC, the proper inference is that the draughtsman studiously avoided the use
of
any reference to "priority" or "subordination" in Clause 11.3 for good reason and that there is no proper basis for reading the clause as if it did include such wording. Moreover, in my view, there is also at least some further force in Mr Snowden QC's argument that, as a matter
of
substance, the concept
of
applying mandatory prepayments in a particular order in the context
of
the exercise stipulated in Clause 11.3 is at least somewhat different from that
of
"priority" or "subordination". I consider this aspect further below in the context
of
considering the ICA and, in particular, Clause 14
of
the ICA which refers back to Clause 11.3
of
the SFA.
- In my view, it is at this stage that it is both convenient and important to address the points raised by Mr Higham QC with regard to "commercial purpose". I have already set out the arguments advanced by DB and also touched upon the evidence in paragraph 4
of
the second statement
of
Mr Verle which Mr Higham QC sought to rely upon in this context. But drawing the various points made together and at the risk
of
some repetition, these were, in summary, that the mandatory prepayment provisions as originally incorporated into the SFA were "unusual"; that they were included to meet the requirements
of
Lenders using mark-to-market accounting and to enable the Second Lien Debt to have some potential value in the market at the time
of
issue; that this did indeed have a positive effect on the price at which the Second Lien Debt was subsequently traded in the market as evidenced by the fact that in March 2011 the Second Lien Debt was then trading at 70 cents in the Euro whereas the First Lien Debt was trading at only 50 cents in the Euro thereby reflecting the US Tax Proceeds and the Cash Sweep mandatory prepayment provisions; that it would be commercially absurd and defeat the avowed commercial objective if, upon a third party acquiring a substantial tranche
of
Second Lien Debt at the market value, the value
of
that debt could be undermined by Truvo and the First Lien Lenders agreeing between themselves to expropriate the mandatory prepayment entitlements
of
the Second Lien Lenders; and that such a reversal would plainly have a devastating effect upon the price upon which Second Lien Debt would be traded. All
of
these matters were relied upon by Mr Higham QC (at least in his written skeleton argument) in support
of
the argument that it cannot have been the intention
of
the parties that the rights conferred by Clause 11.3
of
the SFA could be amended by the Majority Lenders only and without the consent
of
all the Lenders and that therefore the construction urged by Mr Snowden QC must be wrong.
- As attractively as this argument is put, there are at least two main difficulties with it. First, it involves in part at least reference to factual matters (i.e. the actual level at which both the First Lien Debt and the Second Lien Debt traded) many months after the date
of
execution
of
both the SFA and the ICA which, in my view, are inadmissible on well-established principles. Second, Mr Snowden QC did not accept the suggestion that the original terms
of
Clause 11.3 were "unusual" and, in any event, submitted that such characterisation was inadmissible and irrelevant. In response, Mr Higham QC submitted that the unusualness
of
Clause 11.3 was apparent even from the evidence
of
Millar's own witness, Ms Harrison, and was admissible on that basis. But, in my view, neither limbs
of
that submission is correct. In truth, the usualness or otherwise
of
the original terms
of
Clause 11.3 is (at least in part) a matter
of
opinion which would need to be proved by expert evidence in respect
of
which the leave
of
the Court would be required but such leave was neither sought nor granted. Although this court is generally keen so far as possible to avoid unnecessary technical points
of
evidence, this is a potentially important point
of
substance.
- However, even stripping away these two difficulties, there remains Mr Higham QC's core argument which it seems to me he can properly advance viz. that Millar's construction is commercially unreasonable, indeed Mr Higham QC would say absurd, because, viewed as at the date
of
execution
of
the SFA, it involves the possibility
of
the Majority Lenders in effect expropriating the rights
of
the Second Lien Holders by amending the terms
of
Clause 11.3 without their consent. Formulated in such way, I agree that that does indeed seem a startling proposition. However, in my view, this argument is over-simplistic and ignores the overall structure
of
Clause 11.3 as it appears in the context
of
the SFA as a whole for the reasons given by Mr Snowden QC in his submissions and summarised in paragraphs 73-75 above. Further, as I have already stated, it is wrong to suggest that it was open for the Majority Lenders to amend the terms
of
Clause 11.3 "at the whim"
of
the Priority Lenders since it is plain from Clause 40.2(a)
of
the SFA that any amendment also required the consent
of
Truvo. In any event, it seems to me that Mr Higham QC's submission in this context is largely circular: there is no "expropriation" if, in truth, the amendment can be made by the consent
of
the Majority Lenders and Truvo. In such event, the possibility that the terms
of
Clause 11.3 might be amended by the Majority Lenders and Truvo without the consent
of
all the lenders necessarily involved the possibility that such amendment might be to the detriment
of
those lenders other than the Majority Lenders who were not in favour
of
such amendment. In other words, if Millar's construction is correct, the possibility
of
detriment to such other lenders is inherent in the wording
of
Clause 11.3. This may or may not be surprising but, if Millar's construction is correct, such potential detriment is part
of
the scheme agreed by all the parties for good or ill. However surprising it may be, I am not persuaded that such possibility is so commercially unreasonable as to warrant what would, in effect, involve a rewriting
of
the complicated bargain struck by the parties if that is what the parties have agreed.
- I have focussed so far on the terms
of
the SFA. However, given the express terms
of
Clause 40.3(a)(v)
of
the SFA and the importance
of
adhering to the iterative process, I agree that none
of
the foregoing is determinative: the ultimate question remains whether or not any relevant proposed amendment has the effect
of
changing or which relates to an amendment to the order
of
priority or subordination under the ICA. Those are the crucial words which it is necessary to consider.
- So, turning to the ICA, it is necessary to consider the main thrust
of
Mr Higham QC's submissions in relation to that agreement which rested in particular on his analysis
of
Clauses 14 and 27
of
the ICA.
- As to the former, i.e. Clause 14, there is no doubt that both Clauses 14.1(d) and 14.3(c) provide that where relevant proceeds are required to be applied in mandatory prepayment
of
the Priority Lender Liabilities or the Second Lien Liabilities then they are to be applied as there stipulated and, in particular, that both Clauses 14.1(d)(ii) and 14.3(c)(ii) expressly provide (after initial payments) for such payments to be applied in accordance with Clause 11.3
of
the SFA. I agree that the proposed amendment to Clause 11.3 the subject
of
the Consent Request would inevitably affect the order
of
application
of
such proceeds. Indeed, Mr Snowden QC did not suggest otherwise. However, it remains to consider whether such amendment to the order
of
application
of
proceeds is properly to be characterised as an amendment to the order
of
priority or subordination under the ICA. In considering that question, it seems to me that there are a number
of
arguments which, as submitted by Mr Snowden QC, both individually and cumulatively point against such a construction.
- First, it is noteworthy that Clause 14 does not use the terms "priority" or "subordination" although I accept that that is,
of
course, not necessarily fatal to Mr Higham QC's argument if, in truth, Clause 14 can properly be said to be concerned in substance with such matters. As to that, it seems to me that there is at least some force in Mr Snowden QC's submission based upon the citation from Re SSSL Realisations and the textbooks referred to in paragraph 57 above, that in a general sense the terms "priority" and "subordination" are commonly utilised to describe the ranking
of
a debtor's indebtedness in circumstances where there is a competition between creditors because there is a shortfall
of
assets to meet liabilities in an insolvency situation (i.e. a situation
of
a type falling within Clause 2.1
of
the ICA where the words "priority or subordination" are expressly used). However, it seems to me that such words might well also be used to describe the order in which certain particular monies might be paid even without any insolvency as would possibly appear to be the case (as Mr Higham QC submitted) with regard at least to the use
of
the term "order
of
priority" in Clause 15
of
the ICA. All depends upon the context in which the particular words are used as, I understood, Mr Snowden QC was prepared to accept.
Of
course, Clause 14 is concerned with the "order"
of
application
of
mandatory prepayments and, in one sense, any change to such order will involve one party receiving certain payments prior to one or more other parties. That is one
of
the high points
of
Mr Higham QC's case which I fully recognise. It is also fair to note that as submitted by Mr Higham QC, when the draughtsman
of
the ICA intended to refer specifically to Clause 2.1
of
the ICA, he did so see Clause 27.1(d)(iv); and that, in contrast, in Clause 27.1(b), where there is an express reference inter alia to Clause 15
of
the ICA, the reference to the "order
of
priority or subordination under this Agreement" is entirely general. However, that point is, in my view,
of
little assistance when considering the terms
of
Clause 40.3(a)(v)
of
the SFA which ultimately lies at the heart
of
these proceedings.
- As noted above, Mr Higham QC had a further point with regard to Clause 2.1
of
the ICA viz. that if the phrase "the order
of
priority or subordination" is intended to refer primarily or exclusively to the order
of
priority and subordination in Clause 2.1
of
the ICA, it makes little commercial sense for the SFA (and also the ICA) to require a change to that order
of
priority or subordination to be subject to the consent
of
the Second Lien Lenders. In that context, Mr Higham QC submitted that this was because it would always be in the interest
of
the Second Lien Lenders to give their consent to any amendment to Clause 2.1
of
the ICA. I was initially impressed with this point and indeed regarded it as potentially fatal to Millar's case. However, as submitted by Mr Snowden QC, the fallacy in that argument is that it rested on the premise that the Second Lien Holders would always give their consent to an amendment
of
Clause 2.1 because, given the structure
of
Clause 2.1, it would always be in their commercial interests to do so. However, as Mr Higham QC accepted in the course
of
his reply, the stated premise was wrong. In the event, this point evaporated.
- Second, on Mr Higham QC's analysis, Clause 40.3(a)(v)
of
the SFA involves consideration
of
Clause 14
of
the ICA which in turn refers back to Clause 11.3
of
the SFA (what Mr Snowden QC referred to as the "ping-pong" exercise). Such exercise inevitably brings into play consideration
of
the nature and proper characterisation
of
the obligations under Clause 11.3
of
the SFA as to which my earlier comments apply and which I do not repeat. However, there is an additional point viz. in considering the scope
of
Clause 40.3(a)(v)
of
the SFA, it is my view that the case advanced by Mr Snowden QC also derives some support from a comparison with Clause 40.3(b)(iv)
of
the SFA which refers expressly to the possibility
of
an amendment to a particular clause
of
the SFA i.e. Clause 11.1 (Exit) and paragraph (b)(ii)
of
Clause 11.2. So, it would seem that if the draughtsman wanted to address the possibility
of
an amendment to a clause in the SFA, there was no difficulty in doing that. More importantly perhaps, the effect
of
Clause 40.3(b)(iv) is to permit an amendment or waiver
of
the obligation to prepay under inter alia Clause 11.1 F(Exit) with the prior consent
of
the Super Majority Lenders i.e. the consent
of
all the lenders is not necessary. If Mr Higham QC is right, the result is that although the full consent
of
all the lenders would be necessary to amend Clause 11.3, the prior consent
of
the Super Majority Lenders only would be sufficient to validate an amendment to the relevant obligation to prepay. As I say, it seems to me that this point does support the case advanced by Mr Snowden QC although it is important not to take it too far because there is, in my view, a possibly important distinction between, on the one hand, an amendment
of
an obligation to prepay and, on the other hand, the order in which any prepayment actually made be applied. However, the point remains that if Mr Higham QC is right, the disparity between the operation
of
these two clauses is, at the very least, somewhat curious if not odd.
- As to Clause 27
of
the ICA, Mr Higham QC's arguments had various limbs. Breaking these down and taking them in turn, the first was that Clause 11.3
of
the SFA was, in effect, incorporated into Clause 27 by virtue
of
the bracketed words in the opening part
of
Clause 27.1(b). Whilst accepting that this wording was somewhat inelegant, Mr Snowden QC submitted that this was not the case and he may well be right. However, there is no doubt that Clause 11.3 is referred to in Clause 14.1(d) and Clause 14.3(c) and for that reason could, I suppose, be treated as being "incorporated into [the ICA] by cross-reference". However, it seems to me that this does not ultimately assist Mr Higham QC unless it can be said that the proposed amendment to Clause 11.3
of
the SFA is caught by the other relevant words in Clause 27.1(b) i.e. it has "
the effect
of
changing or which relates to
.(iii) the order
of
priority or subordination under this Agreement
" This wording is,
of
course, identical to that which appears in Clause 40.3(a)(v)
of
the SFA and it seems to me, as Mr Higham QC submitted, that in principle they ought to be given the same meaning. However, again it does not seem to me that this ultimately assists Mr Higham QC given everything I have already said about Clause 40.3(a)(v)
of
the SFA.
- It is,
of
course, right that, as submitted by Mr Higham QC, Clause 27.1(b) does refer explicitly to certain terms in the ICA viz. in sub-clause (i) to both Clauses 12 and 15
of
the ICA. On this basis, I accept that, as submitted by Mr Higham QC, there is the obvious argument that if the draughtsman had intended sub-clause (iii) to refer primarily or exclusively to Clause 2.1, such express reference could have been similarly inserted; and that the failure to do so gives rise to the inference that it was not so intended but, on the contrary, was intended to embrace any amendment which has the effect
of
changing or which relates to the order
of
priority or subordination under the ICA. However, even accepting all the steps in such argument, the question remains whether the proposed amendment to Clause 11.3
of
the SFA had such effect. So, once again, one is thrown back on the various points with regard to that aspect which I have already considered and which it is unnecessary to repeat.
- Mr Higham QC went further. As noted, it was part
of
his submission that Millar's interpretation gives no meaning to the bracketed words in Clause 27.1(b) and their construction cannot be right because Clause 2.1
of
the ICA does not incorporate by cross-reference any clause
of
the SFA. By contrast, Clause 14.1(d) and 14.3(c)(ii)
of
the ICA do. In my view, there is nothing in this point: the bracketed words start off with the word "including" so that even though Clause 2.1 does not cross-refer to the SFA, I have no doubt that it falls within the embrace
of
sub-paragraph (iii).
Conclusion
- I do not consider that the process
of
construing the proper scope and effect
of
Clause 40.3(a)(v)
of
the SFA is straightforward. On the contrary, it is, as I have already stated, something
of
a rocky path. However, applying the iterative process and for the reasons stated above, the conclusion I have reached is that the construction advanced by Millar is correct viz. the proposed amendment in the Consent Request did not have the effect
of
changing or relates to an amendment to the order
of
priority or subordination under the ICA within the meaning
of
Clause 40.3(a)(v)
of
the SFA and that there is nothing in the ICA (including Clauses 14 or 27) which would justify a contrary conclusion. Accordingly, such proposed amendment did not require the consent
of
all the Lenders but only the consent
of
the Majority Lenders and Truvo (which consents were duly given) with the result that the amendment was, in my judgment, valid and effective. Counsel are requested to seek to agree a draft order (including costs) in light
of this judgment failing which I will deal with any outstanding issues.