England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice
		23rd September 2010

MRS. JUSTICE PROUDMAN:

1. The first defendant is the Security Trustee of the European Directories Group of companies ("the Group") which operates a directories' business in several European countries. The group is urgently seeking to restructure its indebtedness which is in excess of €2 billion by a Part 8 claim. The claimants seek declaratory relief on two main issues of construction arising under an Intercreditor Agreement first entered into on 30^th June 2005.
2. In summary, the claimants seek to challenge the ability of the Security Trustee to grant a release, without the claimants' consent, of the liabilities owed by the relevant companies within the Group as part of the proposed restructuring. The Security Trustee, supported by the other defendants, says that it is entitled to release subsidiaries of the second defendant company, European Directories (DH6) BV ("DH6") from their liabilities to the claimants as guarantors of the obligations owed to the claimants under certain finance documents.
3. The group has the benefit of a €1.5 billion Senior Facilities Agreement ("the SF Agreement"). The claimants are lenders under the SF Agreement in respect of €17.75 million of the facility known as Facility D. Under clause 24 of the SF Agreement obligations under certain finance documents were guaranteed. Clause 4.1 contained a condition precedent to utilisation of the Senior Facilities provided by the SF Agreement that, among other things, various forms of security as specified in the second schedule to the SF Agreement and known as the Transaction Security be provided to the Security Trustee. All lenders, including the claimants (as lenders under Facility D) benefit from this Transaction Security.
4. The dispute has arisen in the context of the proposed restructuring of DH6 pursuant to which DH6's shares in its immediate subsidiary European Directories DH7 ("DH7") are to be sold. DH6 and DH7 are both incorporated in the Netherlands. The Group's business is carried on by various operating companies which sit below DH7 in the Group structure.
5. Key steps in the proposed restructuring are currently as follows:

(i) ensuring that the centre of main interests of DH6 is properly recognised as England and then placing DH6 into administration.

(ii) effecting a sale by the administrators of DH6 of the shares in DH7 to a new company Opholdco.

(iii) the Security Trustee will purport to exercise powers under clause 15.2(c) of the Intercreditor Agreement to transfer the liabilities (including guarantee liabilities) of 19 Obligors in the Group which are direct or indirect subsidiaries of DH7 to Opholdco in return for the issue of new debt instruments by Opholdco and another.

(iv) the Security Trustee will purport to exercise powers under clause 15.2(b) of the Intercreditor Agreement to release all guarantees and security granted by DH7 and the Obligor subsidiaries.

6. The essential question between the claimants and the defendants is whether the Security Trustee has the power it asserts to release the claimants' claims against the Obligor subsidiaries and to release the security given by them for those claims.
7. This raises the two issues of construction (recently reformulated by the claimants without objection from the defendants) which I am asked to decide, and to which the claimants say the answer is "no", and the defendants say the answer is "yes." In brief, they are whether on the sale of shares in DH7 by DH6 clause 15.2 of the Intercreditor Agreement permits the Security Trustee (i) to transfer, and (ii) to release, the liabilities of subsidiaries of DH7 which are also Obligors under the meaning of the Intercreditor Agreement.
8. The expression "Obligor" is defined in clause 1.1 of the Intercreditor Agreement (as amended) to mean each Original Obligor (that is to say, the subsidiaries of the parent company European Directories SA who were signatories to the amendment agreement) and any subsidiary of DH6 which becomes a party as Obligor in accordance with clause 19. Clause 19 provides that if any member of the group gives any security, guarantee, indemnity or other assurance against loss in respect of any of the Liabilities, the Obligors will procure that the person giving that assurance becomes a party to the Intercreditor Agreement by executing and delivering an Obligor Accession Deed to the Security Trustee. Liabilities are defined as Liabilities to any Lender (as also defined) under or in connection with any Finance Document.
9. Clause 15.2 is headed "Disposal after enforcement action". Its opening words set out three conditions for the application of the clause to be triggered. The words are:

"If any assets are sold or otherwise disposed of by (or on behalf of) the Security Trustee or by an Obligor or the Parent at the request of the Security Trustee (acting on the instructions of or with the consent of the Senior Facility Agent, or after the discharge in full of the Senior Liabilities the instruction of the Mezzanine Facility Agent) whether as a result of the enforcement of the Transaction Security or a disposal by an Obligor after any Enforcement Action,"

10. It is not in dispute that all the conditions will be satisfied in the present case. The three conditions are as follows:

(i) a sale or disposal of any assets, in this case a sale of DH6's shares in DH7.

(ii) by or on behalf of the Security Trustee or by an Obligor or the Parent at the request of the Security Trustee, in this case the disposal by DH6 through its administrators.

(iii) either as a result of the enforcement of the Transaction Security or a disposal by an Obligor after any Enforcement Action. In this case, the disposal of shares in DH7 by DH6, an Obligor, following an acceleration of liabilities which it is common ground qualifies as an Enforcement Action.

11. I flag here that the word "assets" in this opening part of clause 15.2 is wide enough to cover the sale of any assets, not merely shares. However, it plainly means the assets being disposed of, that is to say, in the present case the shares in DH7.
12. The remaining part of the opening words of clause 15.2 provide:

"... the Security Trustee shall be authorised (at the cost of the Obligors) to release those assets ..."

Pausing there -plainly again the assets being disposed of –

"... from the Transaction Security and is authorised to execute or enter into on behalf of and, without the need for any further authority from any of the Lenders, Subordinated Creditors or Obligors."

13. A colon follows, and particular authority in specified situations is set out in paras. 15.2(a), (b) and (c). The defendants say that the purpose and effect of clause 15 is to ensure that where assets are disposed of in the context of Enforcement Action being taken against the Group they can be disposed of free from any of the Transaction Security affecting those assets. Accordingly, so the argument runs, the purpose of the release is to facilitate the disposal of the assets by ensuring that a purchaser can obtain the assets "clean", meaning unburdened by any security given not only over the assets themselves but in connection with the existing lending to the Group, in order to maximise the value to be obtained from the sale. It is alleged that where the disposal is of an entire sub-group of companies through the shares in a holding company it is the security provided by each of those companies - the subsidiaries as well as the holding company – for which provision is made in the succeeding sub-clauses so as to achieve the purpose of the clause as a whole.
14. Clause 15(a) authorises release of the Transaction Security or any other claim over "that asset". I should mention at this point that there are drafting problems with clause 15, not least the frequent use of the word "that", which is not always helpful in identifying what is meant. Here, it is unhelpful that the use of "assets" has become the singular "that asset". Later in the clause the expression "holding company" all in lower case becomes "Holding Company", with capital initials, for no apparent reason. There is a very important use of "that" which is puzzling and which I shall come to later. At all events at this stage it seems to me plain for the purposes of clause 15.2(a) that the release of the Transaction Security contemplated is over any asset or assets sold or disposed of after Enforcement Action as contemplated by the opening words of the clause.
15. The crucial provisions for present purposes are clause 15.2(b) and (c) which I shall cite in full. The first half of each sub-clause (up to the first comma in each case) specifies the conditions for the operation of the sub-clause and the second reads on from the opening words of the clause specifying what it is the Security Trustee is authorised to do without further authority from any one else:

"(b) if the asset which is disposed of consists of all of the shares (which are held by an Obligor or European Directories (DH5) BV…) in the capital of an Obligor or any holding company of that Obligor, any release of the Obligor or holding company from all liabilities it may have to any Lender, Subordinated Creditor or other Obligor, both actual and contingent in its capacity as a guarantor or borrower (including any liability to any other Obligor by way of guarantee, contribution, subrogation or indemnity and including any guarantee or liability arising under or in respect of the Senior Finance Documents or Mezzanine Finance Documents) and a release of any Transaction Security granted by that Obligor or holding company over any of its assets under any of the Security Documents; and

(c) if the asset disposed of consists of all of the shares held by an Obligor or the Parent in the capital of an Obligor or any holding company of that Obligor and if the Security Trustee wishes to dispose of any liabilities owed by that Obligor or Holding Company, any agreement to dispose of all or any part of those liabilities on behalf of the relevant Lenders, Subordinated Creditors, Obligors and Facility Agents (with the proceeds thereof being applied as if they were the proceeds of enforcement of the Transaction Security) Provided that the Security Trustee shall take reasonable care to obtain a fair market price..."

16. Clause 15.2(b) and (c) apply in the situation where the asset or assets sold constitutes the entire shareholding held by an Obligor (in this case DH6) "in the capital of an Obligor or any holding company of that Obligor."
17. Mr. Zacaroli QC on behalf of the first defendant (the Security Trustee) pointed out, and the other parties accepted, that on analysis the use of the word "that" before Obligor in both sub-clauses makes little sense. This is because the clause specifically contemplates that it is not the shares of the Obligor which are being sold but the shares of a holding company. He says however that, although a wrong use of the word, it shows that the draftsman's mind was directed to the Obligor whose liabilities were to be released.
18. He then went on to contend that the sub-clause should be read as permitting a release not only of the liabilities and security of the Obligor or holding company whose shares are being sold (in this case DH7), but also of other Obligors whose shares are not being sold but are subsidiaries, direct or indirect, of DH7. This is on the basis that DH7 is a holding company for every operating company in the Group, including every such company which is itself an Obligor. Thus it is said that the requirements of clause 15.2(b) are satisfied in relation to each Obligor which is carried, as a subsidiary, with a disposal of shares in its holding company DH7. Put another way, it is contended that the sub-clause permits the release of any subsidiary company in the Group which is itself an Obligor where all of the shares of DH7 as the holding company – immediate or indirect – of that Obligor are being disposed of at the request of the Security Trustee following Enforcement Action.
19. The claimants' contention is that the sub-clauses only provide for one layer of release, that is a release of liabilities of the company the shares in which are being disposed of. That is the case whether the disposal is of shares in an Obligor or of shares in a holding company of an Obligor where the holding company itself is not an Obligor. In the present case it is the shares in DH7, an Obligor, which are being sold, and the holding company provisions are simply not engaged. Even if they were, however (since DH7 is a holding company) the position would remain the same since there is only authority to release the company whose shares are being sold.
20. The kernel of the dispute is the meaning of "release of the Obligor or holding company" in the second part of the sub-clause. The defendants contend that the claimants' argument is simply wrong. The principle reason is that the argument is said to ignore the fact that the second part of the clause provides for release in circumstances where the asset being disposed of consists of all the shares in the holding company of an Obligor. DH7 is such a holding company. It is said that the phrase "any release of the Obligor" in the second part of clause 15.2(b) refers not just to an Obligor the shares in which have been sold, but also to an Obligor the shares in the holding company of which have been sold.
21. Mr. Zacaroli maintained that the claimants' stance is unarguable on the basis that there will never be a holding company which is not an Obligor because of the provisions of clause 19. Thus he says that the provisions for the release of a holding company are meaningless unless "holding company" is intended to mean a holding company such as DH7 and "Obligor" is intended to include its subsidiaries.
22. I reject that part of his argument on three grounds. First, his own argument suffers from the same defect as to why, if it is correct, the clause provides for the release of a holding company at all. Secondly, although clause 19 provides for any person giving security to be an Obligor, this is not an automatic status. A formal procedure has to be followed of execution and delivery of an Obligor Accession Deed which might not be completed before a sale. Thirdly, and most importantly, it is not true to say that a holding company is necessarily an Obligor in circumstances where it owes liabilities. The release provided for in clause 15 relates to Subordinated Creditors and Obligors, as well as to Lenders, whereas an Obligor is someone who has a liability only to a Lender.
23. Mr. Zacaroli made it clear that the defendants do not argue that the wording is mistaken and needs to be interpreted as corrected in any material way within the principles enunciated in Investors Compensation Scheme Limited v West Bromwich Building Society [1998] 1 WLR 896. He submitted that the defendants' construction bears out the true meaning of the words used when interpreted against the relevant background. The defendants' case is that clause 15 applies generally where assets are being disposed of, and clause 15.2(b) and (c) focus specifically on the situation where a disposal is effected by the sale of shares in any Group company. The commercial purpose is to enable the purchaser from the Security Trustee to acquire the company unburdened by either guarantee liabilities or Transaction Security over its assets, thereby ensuring that the company is not burdened by liabilities under the old Group structure. It follows, he says, that the ambit of permitted releases is extended to guarantees and securities provided by companies subsidiary to the company whose shares are being sold.
24. Mr. Zacaroli said the following about the factual background based on the evidence. The Intercreditor Agreement is in a form which provides for a strict hierarchy of lenders. At the time the Intercreditor Agreement was entered into it was of benefit to all lenders to ensure that sale proceeds could be maximised by ensuring that the Group's trading operations could be sold free from debt burden. The shares in DH7, which is the holding company for all the operating companies, are worthless unless the purchaser can buy the whole trading operation free of the burden of existing debt. While it is true that the present position is that only the Senior Lenders are likely to be repaid under the waterfall provisions on a sale of the Group, that was not known at the outset and it was of benefit to all the lenders for a purchaser to be able to buy the Group cleansed of all liabilities through the shares in DH7.
25. The defendants say that on the claimants' construction the sale of a holding company with its subsidiaries as a whole could never be achieved and if the claimants' construction of clause 15 were correct the enforcement powers of the Security Trustee would be unduly constrained to no purpose. The Security Trustee would be prevented from transferring unencumbered title to a purchaser without going through a cumbersome and inflexible process of separate enforcement against each Obligor.
26. I accept the submission of Mr. Knowles QC for the claimants that the purpose of the clause has to be gleaned from its wording. The purpose ought not to be enlarged beyond the ambit of the clause itself, provided of course that the words do not lead to an absurd result without commercial purpose or sense. I bear in mind the decisions of the House of Lords in Investors Compensation Scheme Limited, and in Chartbrook v Persimmon Homes [2009] 1 AC 1101 to the effect that the Court attributes an intention to the parties in accordance with the meaning the clause would have conveyed to a reasonable commercial person. I also take heed of Lord Hoffmann's observation that with a commercial document of this kind the court is necessarily choosing between competing unnatural meanings.
27. Mr. Knowles submitted that on the authority of Liberty Mutual Insurance Company (UK) Ltd & Anor v HSBC Bank Plc [2002] EWCA Civ 691 at [56] and Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 at 717 G-H clear words are necessary for the claimants to be held to have effectively given up or excluded the legal rights which they would otherwise have over guarantees from subsidiaries. However, that begs the question as to what the parties did agree, which brings me back to the words used.
28. To my mind the defendants' interpretation of sub-clause 15.2 does not bear out what the clause actually stipulates. It seems to me plain that the reference to "Obligor or any holding company" is to the Obligor or holding company whose shares are being disposed of, not to other Obligors (whether or not their holding companies are Obligors) whose shares are not being disposed of. It is to my mind artificial to dissociate the expression "an Obligor or any holding company of that Obligor" in the first part of clause 15.2(b) from the two references to release of "the Obligor or holding company" in the second part. As a matter of grammar the two expressions mean the same thing, namely, the Obligor or the holding company whose shares are sold. The Intercreditor Agreement already has a defined term "Subsidiary" which could have been used if release of the liabilities of subsidiaries had been intended.
29. Similar considerations apply to clause 15.2(c). Again, the reference to "Obligor or holding company" is, grammatically, to the Obligor or holding company whose shares are being disposed of. Thus, where clause 15.2(c) provides that the Security Trustee is authorised to enter into any "agreement to dispose of all or part of those liabilities", the liabilities referred to mean only the liabilities owed by the Obligor or holding company whose shares are being disposed of, that is to say DH7 and only DH7.
30. I accept that the defendants' interpretation enables the Security Trustee to maximise the value on a disposal and thus to maximise the cash available to creditors or at any rate to those who now benefit under the priority waterfall provided for in the Intercreditor Agreement. However, the question is not what the clause ought to achieve in the events which have happened, but what it does provide on its true construction. It begs the question to say that the defendants' interpretation was potentially of benefit to all lenders. The issue is not what is or was beneficial, but what did the parties agree at the time.
31. I do not accept that the claimants' proffered interpretation is absurd or uncommercial such that it "flouts business commonsense" within the test postulated by Lord Diplock in Antaios Compania Navierra SA v Salen Rederierna A.B. [1985] AC 191 at p.201. It does not flout commonsense to have only one layer of release. As Mr. Knowles submitted, the particular restructuring now proposed is one which has recently been devised. It is not necessarily one which would have been anticipated at the date of the Intercreditor Agreement. The fact that other forms of Intercreditor Agreement do make express provision for the release of subsidiaries' liabilities cuts both ways and is irrelevant for present purposes. I have to look at the form of Intercreditor Agreement before me, and the question is whether clause 15.2 indicates that the claimants intended to authorise the Security Trustee to override their rights under their guarantees.
32. The issue is to what extent the provisions of this Intercreditor Agreement allow a sale to be cleansed from, that is to say unencumbered with the liabilities of, subsidiaries without the consent of those lenders whose rights are affected. In other words, from what guarantees and security is the sale entitled to be cleansed or encumbrance free? Does the clause make commercial sense at all in the way Mr. Knowles presses me to construe it? Or is the defendants' construction the one that, irrespective of strict syntax, the reasonable commercial person would understand the clause to mean? In my judgment it does not flout commonsense to say that the clause provides for a very limited level of release of securities on the sale of shares and that is what the wording does.
33. I therefore find in favour of the claimants.