England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		14 December 2009

HHJ David Cooke :

1. The claimant Cattles Plc ("Cattles") has brought this claim in order to determine a number of issues of construction and law in relation to the debts it owes to different classes of creditors, which are said to be presently a bar to achieving the financial restructuring it needs to survive. It is brought under Part 8, there being no dispute as to fact and the issues having been defined by agreement between the parties.
2. Cattles is a public company listed on the London Stock Exchange, though its listing is currently suspended pending finalisation of its accounts for the year ended 31 December 2008. It is the parent company of a group providing financial services to consumers and businesses, said to be typically those who may not have access to mainstream credit. The group operates by Cattles raising finance itself and lending on to the trading subsidiaries, of which the principal one is the first defendant ("Welcome"). Cattles is said to have financing liabilities of some £2.6Bn, which fall into three categories:

i) A number of syndicated and bilateral credit facilities ("the Facilities") totalling £1.625Bn, all made between Cattles as borrower and the second defendant ("RBS" or "the Bank") as lender and/or as facility agent for syndicated lending banks. For present purposes, the documentation in respect of all these facilities is in materially similar terms; where necessary I will refer to the terms of one of them, an £800m syndicated credit facility agreement dated 10 July 2006 which appears in Vol 2 Tab 1 of the hearing bundle ("the Facility Agreement"). RBS has the benefit of a group cross guarantee dated 3 April 1998 ("the Guarantee") by which Cattles, Welcome and other subsidiaries each guarantee the payment of all obligations owed by any of them to the Bank. It is common ground that these obligations include all amounts due under the Facilities.

ii) Several series of guaranteed senior unsecured loan notes ("the Notes") issued by Cattles, some denominated in currencies other than sterling. These notes have the benefit of guarantees by Welcome and certain other subsidiaries. I am told that the noteholders or their representatives are aware of these proceedings but have not sought to participate.

iii) Two sets of bonds ("the Bonds") issued by Cattles, £350m 7.875% bonds due 2014 and £400m 8.125% bonds due 2017, in respect of which HSBC Trustee (C.I.) Ltd acts as trustee. The bondholders do not have the benefit of any guarantee from Welcome or any other subsidiary and must therefore look only to Cattles to pay the principal and interest due on the Bonds.

3. None of these obligations is secured on the assets of any group company. Party A is a holder of certain Bonds, and by order of Norris J on 13 August 2009 is joined as representative of all the bondholders, and on terms that its identity is not to be disclosed unless the court so orders.
4. In the present financial position of the group, defaults are outstanding under the terms of all of the Facilities, Notes and Bonds. On 24 July 2009 the Trustee of the £400m Bond issue served a notice accelerating Cattles' liability to pay the principal due. As a result the Trustee may sue for payment, though it has not yet done so. No similar enforcement action has been taken in respect of the Notes or Facilities, though it could be at any time. The board of Cattles is required to consider whether there is a reasonable prospect of avoiding insolvent liquidation or administration, by means of an agreed restructuring or otherwise.
5. Cattles' principal assets are the amounts receivable by it from its trading subsidiaries, of which the largest is an amount of about £2.9Bn payable by Welcome to Cattles. The dispute arises because in the course of restructuring negotiations RBS has asserted that all or some of this upstream debt should not be paid, or claimable in a liquidation or administration of Welcome, until all amounts owed to RBS have been paid in full. The same points would no doubt apply to other subsidiaries.
6. The assertion is made on two bases:

i) First, that clause 6 of the Guarantee operates as a contractual prohibition on the claiming of any inter-company debt due between the companies party to it until all the guaranteed obligations to the Bank have been paid ("the Clause 6 point"), and

ii) Alternatively, that if Welcome were to enter into insolvent liquidation or administration and Cattles were to prove for the inter-company debt, Welcome's liquidator (or administrator) would be entitled to what was referred to as a right of quasi- retainer under the rule in Cherry v Boultbee (1839) 4 My & Cr 442 against Cattles, by virtue of which he would treat any dividend otherwise due to Cattles in respect of its inter-company debt as being initially satisfied by Cattles' own liability to counter-indemnify Welcome against Welcome's liability to the Bank under the Guarantee ("the Cherry v Boultbee point").

7. If correct, RBS's position has serious implications for the bondholders; they have no claim directly against Welcome or the other subsidiaries. Any recovery in an insolvency depends on assets flowing up to Cattles through claims for the inter-company debt, and if such claims are eliminated or restricted, the Bank will in practice achieve a significant priority for its claims over those of the bondholders. The Clause 6 point would have the effect that no upstream debt could be paid until the Bank had been paid in full, and accordingly the bondholders would receive nothing until the Bank had been paid. The Cherry v Boultbee point would not necessarily achieve such a complete subordination, depending on the amount of dividends due from Welcome to Cattles affected by the quasi retainer.
8. The bondholders' position is that:

i) Clause 6 of the Guarantee does not prohibit claims by Cattles against Welcome for any inter-company debt, but only such claims as arise from Cattles' capacity under the Guarantee as guarantor of obligations of Welcome. The £2.9Bn upstream debt does not arise in that capacity and so may be claimed in full.

ii) Welcome's right to exercise a quasi- retainer under Cherry v Boultbee has been excluded by contract in the provisions of clause 6 of the Guarantee and clause 15.7 of the Facility Agreement. RBS denies this as a matter of construction but in any event responds that it would be entitled to waive the application of the relevant part of clause 6, and has given a direction to disapply the corresponding provision of clause 15.7.

iii) If there is a right of quasi- retainer, it is for a lesser amount than the full potential counter- indemnity liability of Cattles.

9. The questions posed in the Part 8 claim form are these:

i) Whether, on the true construction of the Guarantee, Cattles is obliged:

a) not to make any claim against Welcome (including any claim against Welcome in respect of the inter-company loan made by Cattles to Welcome ("the Debt")); and/or

b) not to prove in a liquidation of Welcome in respect of any claim which Cattles has against Welcome (including any claim in respect of the Debt),

until such time as all Obligations (as defined in the Guarantee) to RBS of each of the Companies (as defined in the Guarantee) have been discharged in full, including all liabilities of each of the Companies under the Facilities.

ii) If the obligation imposed on Cattles by the Guarantee not to make claims against Welcome, and not to prove in a liquidation of Welcome, is not as described in (i) above,

a) whether, on the true construction of the Guarantee, Cattles is obliged:

i) not to make any claim against Welcome in respect of any payment made to RBS by Cattles pursuant to its guarantee of the indebtedness of Welcome to RBS ("the Indemnity Claim"); and/or

ii) not to prove in a liquidation of Welcome in respect of the Indemnity Claim,

until such time as all Obligations (as defined in the Guarantee) to RBS of each of the Companies (as defined in the Guarantee) have been discharged in full; and

b) if not as set out in (a), what, on the true construction of the Guarantee, the obligation is.

iii) If the answer to (i) is no, then, if Welcome and Cattles were both to enter into insolvent liquidation:

a) whether, subject to the terms of the documentation, the liquidators of Welcome would have a right of quasi-retainer pursuant to the rule in Cherry v Boultbee, exercisable against Cattles so as to entitle Welcome to retain dividends otherwise payable by Welcome to Cattles in respect of the Debt;

b) whether the right of quasi-retainer is excluded by the terms of the documentation including Clause 6 of the Guarantee and Clause 15.7 of the Facility Agreement;

c) if the liquidators of Welcome would have a right of quasi-retainer, whether the entitlement to retain is up to an amount equal to the full amount of Welcome's liability to RBS as surety of Cattles' obligations to RBS or some lesser amount and, if so, what amount.

iv) Would the answers to questions (i) to (iii) above in any way differ if Welcome were to enter into administration and a notice of intention to distribute pursuant to rule 2.95 of the Insolvency Rules 1986 were to be given by the administrator of Welcome.

10. Issues (i) and (ii) represent the respective positions of RBS and Party A on what I have referred to as the Clause 6 point. If I determine issue (i) in favour of RBS, issues (ii) and (iii) do not arise. On issue (iv), the parties were in agreement that the answers to the previous issues are the same whether the companies are in liquidation or administration (provided a notice of intention to distribute has been given).

The decision in SSSL

11. The facts and legal issues are similar but not identical to those in Re SSSL Realisations (2002) Ltd [2006] EWCA Civ 7, to which all counsel made reference. The Court of Appeal adopted the statement of facts of Lloyd J at first instance as follows:

"2 The Save group traded primarily as retailers of petrol, and had some 400 or so petrol stations. The trading pattern was that Group bought petrol and related products from suppliers, and sold it on to Stations who sold it to retail customers. Group was also in charge of bank borrowing for the whole Save group, and lent on to subsidiaries such funds as were necessary for their trading purposes. There were, therefore, substantial inter-company debts, above all on the part of Stations to Group for money borrowed and lent on to Stations, and for petrol products bought by Group and sold on to Stations. Stations owned the premises from which retail trading took place, and most other fixed assets used in the retail business.

3. The supply of petrol to Group gave rise to liabilities to Her Majesty's Customs & Excise for duty. It is possible to defer liability to pay the duty by providing a bond to the Customs & Excise to secure payment. AIG and members of the group of which it forms part are willing to enter into such bonds. As a condition of that transaction they require indemnities from the companies on whose behalf they provide the bonds. AIG (or another member of its group – it matters not which and I will treat AIG as if it were the only relevant party) entered into such a bond on behalf of the Save group. AIG also entered into a deed of indemnity on 30 September 1997 with 6 members of the Save group, including Group itself, the parent, and Stations. The issues I have to decide relate to the effect of that deed, which I will call the Deed.

4. Administration orders were made in relation to Group and each of its subsidiaries on 28 February 2001. Stations and the other subsidiaries went into creditors' voluntary liquidation on 8 May 2002. Group was wound up compulsorily on 9 May 2002. The administrators had sold the business and assets of the entire Save group for some £54.5 million. By far the largest proportion of that represented the property and other fixed assets owned by Stations, and almost £53.5 million of the price was attributed to Stations. When Stations' liquidators were appointed they received about £50.5 million from the administrators. They have paid a first dividend of 18p to those creditors whose debts are undisputed, and they hold some £39 million for distribution, including some in a trust account for preferential creditors. Group's main asset is the inter-company debt owed to it by Stations, of the order of £127 million. Stations also owes other subsidiaries about £38 million. AIG was owed almost £10 million. Under the Deed it is a creditor for the same amount in respect of each of Stations, Group and several other subsidiaries. Stations has other creditors, including banks for some £60 million, and trade creditors for some £6 million. The banks are creditors of each relevant member of the group for the same amount. Fuel suppliers have claims against Group for £27 million, and there are some other trade creditors of Group, of about £100,000."

12. The terms of the Deed included the following, which was referred to as a subordination clause:

"8.2 Postponement of Indemnitors' Rights

Until all amounts which may be or become payable by the Indemnitors to the Surety under this deed have been irrevocably paid in full no Indemnitor shall after a claim has been made by the Surety hereunder or by virtue of any payment made by it under this deed:

(a) be subrogated to any rights, security, cash cover or other monies received on account of that Indemnitor's liability hereunder.

(b) claim rank prove or vote as a creditor of any Indemnitor or its estate in competition with the Surety: or

(c) receive, claim or have the benefit of any payment distribution or security from or on account of any Indemnitor or exercise any right of set-off as against any Indemnitor."

13. The "Surety" was AIG, and it appears, although neither judgement sets out the full terms of the Deed, that Group, Stations, and the other companies were all defined as "Indemnitors". It was accepted before the Court of Appeal (see paragraph 19; the point does not seem to have been seriously contested below) that if the Deed was binding, clause 8.2 would be breached if Group proved in the insolvency of Stations for the amount of its inter-company debt, whether or not that debt related to the Deed. The liquidator of Group however sought to disclaim the Deed and appealed against the decision at first instance that he was not entitled to do so. Group further argued that it should be allowed to prove notwithstanding the breach, on the basis that the Deed was enforceable only by AIG, and on the facts in that case, AIG would suffer no loss. On appeal, Stations raised a new point that, if Group were successful in its appeal and therefore entitled to prove for the inter-company debt, Stations would nevertheless be entitled to a right of quasi-retainer under the rule in Cherry v Boultbee, the effect of which would be that Group would not receive any dividend on its debt until AIG had been paid in full.
14. Chadwick LJ gave the only judgement, the other members of the court agreeing with him. He rejected the appeal on the disclaimer point (paragraph 52-4). He held that Group should not be permitted to prove its debt in breach of clause 8.2, on the basis that the restrictions imposed were not for the sole benefit of AIG but also regulated the position between the Indemnitors themselves (paragraphs 64-67). At paragraph 68 he set out the position that would result if the position taken by Stations on the Cherry v Boultbee point was correct and said that if so:

"… Group would receive nothing in the liquidation of Stations. That would provide a further reason why (absent disclaimer) Group should not be permitted to prove in the liquidation of Stations in breach of clause 8.2(b) of the deed of indemnity: to permit Group to prove in Stations liquidation would be pointless. On the other hand if the conclusions which I have reached on the first two issues are correct, it must follow that the Cherry v Boultbee point will not arise. Group could not prove in the liquidation of Stations even if, by proving, it would receive a dividend. But the point has been fully argued in this Court and, as it seems to me, it is sensible to address it."

15. In the following section of his judgement he conducted a detailed review of the authorities and concluded that the rule in Cherry v Boultbee did apply in the circumstances and would entitle the liquidator of Stations to bring into account before paying any dividend on a proof by Group the whole amount of Group's potential liability to counter-indemnify Stations for any amount paid by it to AIG under the Deed. There is an issue between the parties, to which I shall return, as to whether these conclusions constitute a binding precedent in the circumstances.

The Clause 6 Point

16. I begin with the construction of clause 6 of the Guarantee. It is in these terms:

"Preservation of the Bank's claims

6. Until all claims of the Bank in respect of all of the Obligations of each Debtor have been discharged in full:

6.1 no Guarantor shall be entitled to participate in any security held by the Bank or money received by the Bank in respect of any Debtor's Obligations

6.2 no Guarantor shall in competition with or in priority to the Bank make any claim against any Debtor or any co-guarantor or their respective estates nor make any claim in the insolvency of any Debtor or any co-guarantor nor take or enforce any security from or against any Debtor or any co-guarantor

6.3 any payment received by a Guarantor in breach of clause 6.2 and any security taken by a Guarantor from any Debtor or any co-guarantor shall be held in trust for the Bank as security for the liability of the Guarantors to the Bank under this deed."

17. Other relevant provisions of the Guarantee are as follows:

Among the defined terms are

"Bank: The Royal Bank of Scotland Plc

Parent Company: Cattles Plc…

Companies: The Parent Company and the companies named in the schedule…

Debtor: each and any of the Companies

Guarantor: each and any of the Guarantors

Guarantors: all of the Companies

Obligations: all liabilities to the Bank of any kind….

1. The Guarantors in consideration of the Bank giving time or credit or banking facilities to any one or more of the Companies… jointly and severally guarantee to discharge on demand all the Obligations of each Debtor…

Interpretation

16.1 This deed shall confer upon the Bank the same rights as if it were a separate guarantee and indemnity by each of the Companies in respect of each of the other Companies"

18. It will be seen that each of the companies party to the Guarantee simultaneously falls within the definitions of "Companies", "Debtors" and "Guarantors". The draftsman has clearly created the separate terms so that the operative provisions may be more intelligible when applied to the many potential permutations to be catered for in the circumstances envisaged by the document, in which each of a number of companies guarantees the obligations of each of the others, and at the same time is the subject of guarantees given by each of them. As clause 16.1 makes clear, the Guarantee is to be construed as if it created as many separate guarantees as required for each company to guarantee the obligations of each other company- it would obviously be unmanageable in a group of any size to create and administer such guarantees as separate documents.
19. This drafting technique allows the Guarantee to be read in any of the contexts in which it may be relevant, with each party being considered a Guarantor or Debtor as that context may require. For instance, if the context is the amounts claimed by the Bank from Welcome, Welcome is a Debtor and Cattles and all other companies are Guarantors. Each operative provision may, against that context, be read accordingly. If a single term such as 'Companies' had been used throughout, clause 6.3 might have read as follows:

"6.3 any payment received by a Company in breach of clause 6.2 and any security taken by a Company from any Company shall be held in trust for the Bank as security for the liability of the Companies to the Bank under this deed."

While it may still have been possible to ascertain the intended meaning the result would be at best clumsy and at worst confusing.

20. For Party A, Mr Knowles submits that this usage leads to the conclusion that clause 6.2 restricts only the making of any claim which a Guarantor has arising out of its capacity as guarantor- such as a claim for counter-indemnity by the principal debtor, or contribution from a co- guarantor. Mr Trower for the Bank submits that the terminology is merely a matter of identification of the parties referred to and has no connotations for the interpretation of the substantive obligations.
21. Both counsel were agreed that the modern approach of the courts to construction of documents is to be found in the principles of construction set out by Lord Hoffmann in his judgment in Investors Compensation Scheme v West Bromwich Building Society [1997] UKHL 28, which I set out (not in full) below:

"(1) Interpretation is the ascertainment of the meaning which the document would convey to a 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.

(2) The background was famously referred to by Lord Wilberforce as the "matrix of fact," but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent…

(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax…

(5) The "rule" that words should be given their "natural and ordinary meaning" reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had… "

22. They also agreed that the language in which terms are defined in a document may assist in its construction: see Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38 and in particular the passage at paragraph 17:

"The judge declined to regard the terms Total Land Value and Minimum Guaranteed Residential Unit Value as indicative of an intention that MGRUV was to be the minimum Chartbrook would receive as the land value of a flat because both terms were defined expressions. They might just as well have been algebraic symbols. Indeed they might, and I strongly suspect that if they had been, they would have made it clear that the parties were intending to give effect to Persimmon's construction. But the contract does not use algebraic symbols. It uses labels. The words used as labels are seldom arbitrary. They are usually chosen as a distillation of the meaning or purpose of a concept intended to be more precisely stated in the definition. In such cases the language of the defined expression may help to elucidate ambiguities in the definition or other parts of the agreement: compare Birmingham City Council v Walker [2007] 2 AC 262, 268. I therefore consider that Lawrence Collins LJ was right to take into account the connotations of contingency to be derived from the defined terms."

23. The starting point is of course the wording of the provision itself. The document must be construed as a whole, and so other provisions of the documents may be referred to to explain the meaning of a particular clause. If it uses defined terms, the court may be assisted in determining its meaning by the nature of the defined terms used. Finally, the court may have regard to other wider matters of background as explained by Lord Hoffmann in the passage cited above. The process of construction is not complete until all these aspects have been considered.
24. The purpose of the clause is obviously to increase the Bank's realisations from the assets of any particular group company. It seeks to achieve this by restricting claims that might be made "in competition with or in priority to the bank". The claims that are restricted are "any claim". I agree with Mr Trower that on the face of it this is not subject to any limitation, and the question is whether a limitation is implied by the fact that the clause imposes its prohibition on a party described as "Guarantor".
25. I agree with Mr Knowles that in other provisions of the guarantee document the use of the terminology "Guarantor" and "Debtor" indicates the capacity in which a particular company is being referred to. Thus, for instance, clause 4 provides as follows:

" Arrangements with any Debtor and others

4. The Bank may without the consent of or notice to any Guarantor and without releasing or reducing the liability to the Bank of any Guarantor under this deed:-

4.1 allow to a Debtor or any Guarantor or any other person any time or indulgence …"

26. But this it seems to me arises out of the essential subject matter of the clause. It is intended to prevent the application of equitable rules which might otherwise release the obligation of a surety. It is directed to liabilities arising "under this deed" and so the opening wording refers to "any Guarantor" as the Guarantee only imposes liabilities on a party in the capacity of Guarantor. The obligations to the Bank of a Debtor arise outside the Guarantee, for example under facility documentation. The drafting is intended to enable the reader of the document to address the position of any one company (the first company) and establish whether its liabilities as Guarantor for any particular obligations have been released.
27. The equitable rules it is designed to counteract may operate if time or indulgence is granted either to the principal debtor or to any co-surety, and so clause 4.1 makes clear that it applies in both situations and in respect of all such other parties by using both the terms "Debtor" and "Guarantor", since in relation to the first company and the obligations under consideration, each other party has one (or possibly both) of these capacities (as well as referring to "any other person", who might for example be a director giving a personal guarantee for the liability of one company but not being a party to the deed). The terms used serve therefore both as identification of the parties referred to (i.e. every company other than the first) and to identify the capacities in which they are referred to.
28. The same might be said of clause 5, which provides that:

"5. The Guarantors' liability to the Bank… shall not be affected by:-

5.1 the absence of or any defective excessive or irregular exercise of borrowing powers of a Debtor ".

The term "Debtor" is chosen as appropriate because borrowing powers could only be relevant to obligations incurred by way of borrowing from the Bank, being of course a transaction undertaken by a party in the capacity of a Debtor. The clause might have, but did not, contained a corresponding provision designed to address any lack of capacity by any other guarantor to give guarantees.

29. In other places, where the subject matter of the clause refers to a party which will inevitably have the capacity of both principal debtor and guarantor in the circumstances the clause is intended to address, the draughtsman has not used terms which indicate one capacity only. Thus clause 12 dealing with additional parties becoming bound by the Deed uses a separate defined term "Additional Company" and clause 13 dealing with parties being released from their obligations under the Deed defines further terms ("Outgoing Company" and "Remaining Companies").
30. In all these instances, the subject matter of the clause is driving the selection of the appropriate defined term. They are not instances of the defined term circumscribing the subject matter of the clause itself. The draftsman starts with a situation or set of circumstances that his clause is intended to address, and selects from among the defined terms those which are most apt to indicate the identity, and where necessary the capacity, of the parties to which the clause requires to refer.
31. Another aspect of this drafting technique in which parties may be referred to by one or more terms is that it distinguishes only between the capacities they hold in relation to their obligations to the Bank. Any rights or obligations that the parties have as between themselves are outside the scope of clauses 3 and 5 for instance, and so the use of the defined term carries no implication one way or the other in relation to rights between the group companies.
32. Turning to clause 6.2 itself, in my judgement the use of the term "Guarantor" does not carry any implication of restriction on the width of the term "any claim". Such a restriction would be contrary to the purpose of the clause which, as I have indicated, is to maximise the share of the assets of a Debtor available to the Bank by preventing claims being made "in competition with or in priority to the Bank". In this context, the choice of the term "Guarantor" seems to me to be merely identifying that, if one is considering the position in relation to a particular company as Debtor, every other company's capacity in relation to the Bank and that company is as Guarantor. The subject matter of the clause, the situation the draftsman seeks to address, drives the choice of defined term. It does not follow that the converse is true, and the defined term limits the operative wording of the clause.
33. Mr Trower submits that clause 6.2 would achieve little if it addressed only the making of claims arising from another company's capacity as guarantor, and the taking or enforcing of security in respect of such claims. I agree. In the insolvency of a Debtor, the making of such claims would be prevented by the rule against double proof in any event, so the only effective ambit of the clause would be to apply a similar principle prior to the institution of formal insolvency. Given that, as Mr Trower accepted, a claim could only be made "in competition with" the Bank if the Bank has itself made a claim against a particular company, most obviously by having made demand for repayment of some or all of its facilities, for clause 6.2 to have the effect contended for by Mr Knowles, a situation would have to be postulated in which the demand was not paid by the subject company and yet neither the Bank nor the company's own directors put it into insolvency, while simultaneously another group company paid part, but not all, of the liability to the Bank, and sought to recover that amount from the subject company. Such a situation is not impossible to imagine but relatively unlikely and I do not agree that this clause can have been intended to address such a limited scenario.
34. In my judgement, the term "in competition with" refers not, as Mr Knowles submitted to a competition between a creditor (the Bank) and a surety to prove against the principal debtor for what is in essence the same debt, but to competition between two separate creditors (the Bank and another group company) for the assets of their common debtor. A claim is just as much in competition for the assets if it arises entirely separately from the guarantee arrangements set out in a deed such as is under consideration in this case. Protecting itself from such competition is, as Mr Trower also submitted, a perfectly sensible and ordinary commercial arrangement for a creditor such as a bank to make with parties such as a group of companies.
35. I do not accept the submission that the ambit of clause 6.2 is limited to claims qua guarantor because it appears in the same clause as clause 6.1, which must be so limited. Clause 6.1 deals with rights of participation by a Guarantor in security held by the Bank for the obligations of a Debtor. Any such right could only arise by virtue of the performance of a party of its obligations qua guarantor. This carries no implication for clause 6.2 because that clause is intended to deal with competition for the assets, which may arise from a claim made qua guarantor or in any other right.
36. Mr Knowles submitted that far from being a normal and commercially sensible provision, a clause such as this did not achieve the purpose of maximising the Bank's position overall, and achieving the commercial purpose therefore required it to be read in the more limited way he contended for. He referred me to a passage in Professor Goode's work "Legal Problems of Credit and Security" in which he says that such a clause "far from protecting the interests of the creditor, is positively inimical to those interests, for its effect is to benefit not only the creditor himself but all other unsecured creditors. To prohibit the creditor from proving for an independent liability is thus not wisdom but folly, for it prevents the creditor from getting the benefits of a double dividend."
37. The "double dividend" referred to is the effect achieved if the creditor allows the surety to prove for independent debts, but stipulates for a turnover clause under which the surety hands over the proceeds of such proof. This passage does not therefore suggest that a clause in terms of the present document is itself "folly", but only that it might be improved upon by an alternative approach.
38. Whether a clause in this form advantages the Bank or not in a particular case depends upon the relative amounts of the claims of the Bank, other group creditors and external creditors in each of the relevant companies. It is easy to construct a scenario in which the Bank would achieve a greater overall return from the assets of a subsidiary company by allowing its parent to make a claim for inter-company debt if the Bank itself represents a high proportion of the creditors of the parent company but a relatively low proportion of the creditors of the subsidiary. It appears that this was the position in the SSSL case. On the facts, the reverse is true in the present case.
39. This is no reason for imposing on the wording of the clause a meaning other than that which it would naturally bear. The Bank has chosen a mechanism which it expects to be to its advantage and if the consequences turn out to be adverse in a particular case then (unless it is entitled to waive the provisions of the clause, a matter to which I will return) it must live with them. Nor is it relevant that it might have chosen an alternative mechanism.
40. Nor in my judgement is the contra proferentem rule of any assistance to Mr Knowles. He submitted that if the clause could be read in two or more ways, the interpretation which was least favourable to the party putting it forward, i.e. the Bank, should be chosen. But although in the present case that would involve restricting "any claim" to claims qua guarantor because that would result in the least overall return to the Bank, for the reasons given above, in other plausible factual scenarios, that interpretation would improve the bank's position. It could not be the case that by applying the same rule of construction in different factual situations the court would come to a different conclusion as to the meaning of the same clause.
41. Finally, it is of some, albeit limited, assistance that a clause in similar but not identical terms was construed in the same way both at first instance and in the Court of Appeal in SSSL. The principal difference pointed to in the wording in that case was that the document did not have a selection of defined terms from which the draftsman chose according to the circumstances, it appearing that all the parties to the document other than AIG were referred to as "Indemnitors". Even though there was only one term, it was still a term which implied a role as a surety, but no point was taken that this in turn implied any limitation of the claims that were restricted to claims arising from that role.
42. So far as the first issue is concerned therefore, I answer it in the affirmative, save that the obligation of Cattles not to make any claim against Welcome, (including any claim in respect of the Debt) arises only insofar as such a claim would be "in competition with or in priority to" the Bank. No circumstances were envisaged in which such a claim might be made in priority to the Bank. I was not addressed by both parties on the meaning of "in competition with" and whether, for instance, it might extend to circumstances other than those in which the Bank had made a demand. I did however put it to Mr Trower, and he accepted, that it would be unlikely that the prohibition was intended to prevent Welcome making payments of its upstream debt in the ordinary course of business, because this would be the only way in which funds would flow back to Cattles to pay its obligations to the Bank and its other creditors.
43. The second issue was contingent on my giving a negative answer to the first, and does not therefore arise.

The Cherry v Boultbee point

44. The third issue is also contingent on a negative answer to the first and accordingly does not strictly arise. I propose to say something about it very briefly however in case I am wrong on the first issue. As to sub-paragraphs (a) and (c) of that issue, namely whether if Cattles were to prove in an insolvent liquidation of Welcome the liquidator of Welcome would have a right of quasi-retainer under the rule in Cherry v Boultbee, and if so whether this right would be in respect of the full amount of Welcome's liability to the Bank as surety for Cattles (strictly I think in respect of Cattles' obligation to counter indemnify Welcome against that liability), it was common ground that if SSSL is binding authority in so far as it dealt with the Cherry v Boultbee issues I am bound to decide both questions in the affirmative.
45. Mr Knowles submitted that although fully reasoned, and given after full argument, the opinion given by Chadwick LJ on these issues was obiter, because he had already decided the case by holding that Group was not entitled to disclaim the deed of indemnity and could not be permitted to prove in breach of it without the consent of Stations. It was, he submitted, not necessary to go into the Cherry v Boultbee issue and accordingly everything said on that subject was not part of the ratio of the case. Although he accepted that in principle the rule in Cherry v Boultbee would apply as between Cattles and Welcome if they were both in liquidation, Mr Knowles reserved the right to argue that the amount of the quasi-retainer was less than the full amount of the potential counter indemnity claim by Welcome against Cattles.
46. Mr Trower on the other hand submitted that the relevant passages were part of the ratio and constituted a separate reason for the decision. He referred me to a passage in the judgement of Lord Simonds in Jacobs v LCC [1950] AC 361 at 369 which I extract slightly more fully as follows:

"It is not, I think, always easy to determine how far, when several issues are raised in a case and a determination of any one of them is decisive in favour of one or other of the parties, the observations upon other issues are to be regarded as obiter. That is the inevitable result of our system. For while it is the primary duty of a court of justice to dispense justice to litigants, it is its traditional role to do so by means of an exposition of the relevant law. Clearly such a system must be somewhat flexible, with the result that in some cases judges may be criticized for diverging into expositions which could by no means be regarded as relevant to the dispute between the parties; in others other critics may regret that an opportunity has been missed for making an oracular pronouncement upon some legal problem which has long vexed the profession. But, however this may be, there is in my opinion no justification for regarding as obiter dictum a reason given by a judge for his decision, because he has given another reason also. If it were a proper test to ask whether the decision would have been the same apart from the proposition alleged to be obiter, then a case which ex facie decided two things would decide nothing."

47. It appears to me from the passage at paragraph 68 of the judgement of Chadwick LJ quoted above that Mr Knowles' submission must fail. The appeal in SSSL was not disposed of by deciding the disclaimer point; it was necessary to decide also the second point, namely whether Group should be allowed to prove notwithstanding a breach of the subordination provisions of the deed of indemnity. The conclusion on the Cherry v Boultbee point was said to be a further reason for the decision come to on this second point. It is true that Chadwick LJ could have decided the second point without going into these areas, but that was not the course he chose to take and, as is made clear in the passage above, if two reasons are given, both are part of the ratio.
48. Further, the Cherry v Boultbee point was expressly stated to be one of the points arising for decision on the appeal, and in those circumstances in my judgement the fully reasoned opinion expressed on it cannot be said to be obiter.
49. Accordingly I would hold myself bound to decide these two issues in accordance with the decision in SSSL. It is right to record also that I indicated to Mr Knowles in argument that even if I were to conclude that I was not bound by that decision, I should in any event have followed it rather than seeking to investigate the issues and express a conclusion of my own. A fully considered statement concurred in by all three members of the Court of Appeal would in any event be of great persuasive authority. I do not say that there are no circumstances in which a judge at first instance might venture to express a contrary opinion, but it would not in normal circumstances be appropriate to do so, particularly on a matter of potential commercial importance such as this.

Contractual exclusion

50. It remains to consider only subparagraph (b) of issue 3, namely whether the right of quasi-retainer is itself excluded by the operation of clause 6 of the Guarantee and/or clause 15.7 of the Facility Agreement. It is accepted that the right is capable of being excluded by contract. If it would be in this case, the Bank argues that it is entitled to waive both the provisions in this respect, and indeed it has purported to do so by service of a notice under clause 15.7.
51. This involves consideration of whether the operation of the rule in Cherry v Boultbee involves the making of a "claim" against a person liable to contribute to a fund, in this case Cattles. If so, it is argued that the relevant clauses prohibit the making of such a claim if it would be "in competition with the Bank" (clause 6) or "after a claim has been made under [the guarantee contained in the Facility Agreement]" (clause 15.7). I will not repeat the language of clause 6 which is recited above. Clause 15.7 of the Facility Agreement reads as follows (and the Bank is the Facility Agent and a Finance Party):

"Non-competition

Unless:

(a) all amounts which may be or become payable by the Obligors under the Finance Documents have been irrevocably paid in full; or

(b) the Facility Agent otherwise directs,

no Guarantor will, after a claim has been made or by virtue of any payment or performance by it under this Clause:

(i) be subrogated to any rights, security or moneys held, received or receivable by any Finance Party (or any trustee or agent on its behalf);

(ii) be entitled to any right of contribution or indemnity in respect of any payment made or moneys received on account of that Guarantor's liability under this Clause;

(iii) claim, rank, prove or vote as a creditor of any Obligor or its estate in competition with any Finance Party (or any trustee or agent on its behalf); or

(iv) receive, claim or have the benefit of any payment, distribution or security from or on account of any Obligor, or exercise any right of set-off as against any Obligor.

Each Guarantor must hold in trust for and immediately pay or transfer to the Facility Agent for the Finance Parties any payment or distribution or benefit of security received by it contrary to this Clause or in accordance with any directions given by the Facility Agent under this Clause."

52. For the way in which the rule in Cherry v Boultbee operates, I gratefully adopt the following section of Mr Knowles' skeleton argument:

"32. The authorities describe the rule in Cherry v Boultbee as follows:

(1) The essential rule as stated by Sargant J in Re Peruvian Railway Construction Co Ltd [1915] 2 Ch. 144, 150 is that:

"where a person entitled to participate in a fund is also bound to make a contribution in aid of that fund, he cannot be allowed so to participate unless and until he has fulfilled his duty to contribute"

(2) The operation of the rule involves the payment of fund's claim against the creditor by, in effect, the appropriation of the creditor's right to participate in the fund. Thus:

"The more popular explanation, which can be traced back to the judgment of Sir Joseph Jekyll in 1723 in Jeffs v Wood, is that the principle in effect provides a method of payment. The person administering the fund may assert that the debtor already has an asset of the fund in his own hands, in the form of the debt, which should be appropriated as pro tanto payment of his right to participate. The administrator in truth does not 'retain' anything as payment of the debt. Rather, he directs the debtor to satisfy his entitlement to a share of the fund from a particular source. The principle is better described as a right to appropriate a particular asset as payment, as opposed to a right of set-off or a right of retainer."

(3) As Buckley J stated in Re Leeds and Hanley Theatres of Varieties Ltd [1904] 2 Ch 45, 51 the creditor is treated as having been notionally repaid by the fund. Likewise, in Re Melton [1918] 1 Ch. 37 C.A. Swinfen Eady LJ summarised the operation of the rule as follows (p.54):

"The fund treated as being available for distribution must first be increased by the amount which Arthur owes, and then this assign is entitled to one fourth of that entire amount subject to this, that she must give credit for the 313l. that he has already notionally received."

(4) Scrutton LJ put the operation of the rule in the same way (p.61):

"If in the end it turns out that the debtor has paid more than 20s. in the pound he will get this overpayment back from either the principal creditors or the representatives of the surety. If in the end it turns out that the creditors have got more than 20s. in the pound the surplus will be returned to the surety or the debtor, whichever ought to have it"

(5) In Re Akerman [1891] 3 Ch 212 Kekewich J stated (p.219):

"Nothing is in truth retained by the representative of the estate; nothing is in strict language set off; but the contributor is paid by holding in his own hand a part of the mass, which, if the mass were completed, he would receive back."

(6) In SSSL Chadwick LJ stated (at [79(1)]):

"The general rule applicable in the distribution of a fund is that a person cannot take an aliquot share out of the fund unless he first brings into the fund what he owes. Effect is given to the general rule, as a matter of accounting, by treating the fund as notionally increased by the amount of the contribution; determining the amount of the share by applying the appropriate proportion to the notionally increased fund; and distributing to the claimant the amount of the share (so determined) less the amount of the contribution." "

53. Mr Trower submits that this mechanism does not involve the making of any claim by the fund; the fund simply makes a distribution to the beneficiary which takes account of the existence of an obligation to it by the same beneficiary. He referred me to Re White Star Line Ltd [1938] Ch 458 in which it was said (at p 479) that the exercise of Cherry v Boultbee rights by a fund did not amount to "claiming a share of the assets" of the beneficiary. It is true that it is no part of the process that the fund must make a demand, still less issue proceedings against the beneficiary, nor does it seek to recover or participate in any asset of the beneficiary. It is nevertheless the case that in order to take advantage of the rule, the fund must assert and rely on the existence of the beneficiary's obligation. The question here is whether to do so amounts to a breach of the relevant contractual provisions.
54. So far as clause 6 of the Guarantee is concerned, consistently with the approach I have adopted above, it therefore requires to be considered in relation to a particular factual scenario. If a right of quasi-retainer is potentially being asserted by Welcome, the relevant scenario relates to the insolvency of Cattles, and the debts it owes to the Bank. Cattles is thus in the position of "Debtor" and Welcome is "Guarantor". Welcome owes money on inter-company account to Cattles, which debt is an asset of Cattles. Welcome is itself insolvent and (it is to be presumed) will only pay a dividend in respect of its liability to Cattles. Welcome is also liable to the Bank as surety for Cattles and entitled to be counter indemnified by Cattles against that exposure. The right of quasi-retainer arises in relation to that claim for counter indemnity. The effect of exercising that right is substantially to reduce, and possibly eliminate, any dividend payable to Cattles, and thus an asset available to the Bank in the insolvency of Cattles.
55. The commercial purpose of clause 6.2, as I have indicated above is to maximise the amount of the Bank's recovery from the assets of a particular Debtor. The expression "make any claim" falls to be considered in that context. It is potentially a wide term, not necessarily restricted to issuing proceedings, or claiming a property right or a right to share in assets. In that context, it seems clear to me that the assertion of a right of counter indemnity to be taken into account in the payment of a dividend on Cattles' claim has the same commercial effect as making a claim in any conventional way. It reduces the amount of assets available in the insolvency of Cattles, to the benefit of Welcome, and so, in relation to the Bank's claims against Cattles, it is in competition with the Bank. Seen in that context, it is precisely within the scope of the protection that clause 6 is intended to give to the Bank and it could not be said to be commercially likely that if the Bank and Welcome have agreed that until the Bank has been paid in full by Cattles, Welcome will not make any claim against Cattles, they would have intended that a claim should be nevertheless given effect to by the particular operation of a rather obscure rule of equity.
56. In my view, therefore, the assertion of a claim sufficient to found a right of quasi-retainer constitutes the making of a claim for the purposes of clause 6.2.
57. The same would apply in respect of the prohibition against claims in clause 15.7. But so far as clause 15.7 is concerned, that is not the only relevant provision. It also provides that until the Bank has been paid in full "no Guarantor [ie Welcome] will… be entitled to any right of contribution or indemnity in respect of any payment made… on account of that Guarantor's liability under this clause". If Welcome has no right of counter indemnity for a payment actually made by it as surety, it cannot have a right of counter indemnity for its liability to make such a payment before it has actually done so. If it has no such right of counter indemnity there is nothing to be taken account of in a quasi-retainer. Clause 15.7 therefore also prima facie operates to exclude the application of the rule in Cherry v Boultbee in favour of Welcome.
58. This leads finally to the question whether if it is to its advantage to do so the Bank may waive the operation of these clauses. So far as clause 6 is concerned, in my opinion this issue is also determined on authority by the decision in SSSL. It will be recalled that Chadwick LJ determined that the operation of the relevant subordination provisions was not solely for the benefit of AIG but also for the benefit of the various group companies (see SSSL para 64-67). This was the first reason he gave for his determination of the issue as to whether Group should be permitted to prove notwithstanding that it would be in breach of the deed of indemnity for it to do so. There is no material difference between the terms of the deed of indemnity in that case and the terms of the Guarantee in this case and it follows that the Bank would not be able to waive the application of clause 6 so as to permit a quasi-retainer by Welcome without the consent of Cattles.
59. The same is not true in relation to clause 15.7, which expressly provides that relevant restrictions apply "unless… the [Bank] otherwise directs". I did not understand Mr Knowles to contest this, although it is of no avail to the Bank if the restriction in clause 6 continues to apply.
60. Accordingly, I would answer issue 3(b), if it arises, in the affirmative and hold additionally that it is open to the Bank to waive the effect of clause 15.7 of the Facility Agreement but not clause 6.2 of the Guarantee.
61. I will list a hearing at which this judgment will be handed down and I will deal with any matters arising. I invite the parties to agree a suitable form of order. I recognise that both parties may wish to take the matter further, and with a view to reducing costs of attendance on that hearing I indicate that I would be sympathetic to an application for permission to appeal on either side, as the issues raised in this case are clearly capable of argument and of considerable importance to the parties and potentially to others.