England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Rolls Building Royal Courts of Justice Fetter Lane, London EC4A 1NL
		07/10/2015

Mr Justice Henderson:

Introduction

1. This case raises a short question of construction of a contractual provision contained in a complex securitisation structure which was set up in 2006.
2. In outline, the securitisation related to a bank loan of £918,862,500 ("the Loan") advanced in August 2006 to a number of Guernsey-registered limited partnerships, who used the funds to refinance a portfolio of commercial properties in England, Wales and Scotland. The intention was that the income derived from the properties would service the commitments of the borrowers under the Loan. The securitisation was effected by a company called Gemini (Eclipse 2006-3) Plc ("the Issuer"), which in November 2006 purchased the Loan and its related security from the original lender (Barclays Bank Plc), and funded the purchase by issuing £918,862,000 of secured floating-rate notes which fell due in July 2019 ("the Notes"). The Loan itself was repayable three years earlier, on 17 July 2016, and was subject to acceleration in the usual way upon the happening of various specified events of default.
3. The Notes were constituted by a Trust Deed dated 14 November 2006 entered into between the Issuer and BNY Mellon Corporate Trustee Services Limited ("the Trustee") as trustee. The Notes were divided into five classes, A to E, ranking in that order of priority. The detailed terms and conditions governing the Notes were set out in a prospectus. The rate of interest payable on the class A Notes was lower than the rate applicable to the other classes, reflecting their greater security. Similarly, the ratings assigned to the Notes by the main rating agencies reflected their relative rankings (ranging from triple A for the class A Notes to triple B for the class E Notes).
4. Until the financial crisis, the securitised structure ran smoothly. The rental income from the UK properties was used to pay the interest due under the Loan, which was in turn used to pay the interest due under the Notes (after meeting various other obligations which had priority under the securitisation arrangements). From October 2009, however, the interest due under the Loan was no longer paid in full by the borrowers on the due dates, and the value of the properties declined from £1,143,335,000 in August 2006 to £437,500,000 in March 2012. This substantial fall in value, and the failure to pay the interest on the Loan in full, constituted events of default in relation to the Loan, with the result that on 6 August 2012 the Loan was accelerated so that the full amount became due.
5. The acceleration was effected by the claimant in the present proceedings, CBRE Loan Servicing Limited ("CBRE"), in its role as the "Master Servicer" and the "Special Servicer" of the Loan under the documentation governing the securitisation structure. The original Master Servicer and Special Servicer had been a company in the Barclays group, but CBRE replaced it pursuant to Deeds of Assignment and Assumption executed in April and May 2009.
6. Following the acceleration of the Loan, administrators were appointed in Guernsey and England over the general partners of the borrowers, and receivers were appointed over the properties in England and Wales. In addition, CBRE entered into a supplemental hedging agreement with Barclays, whereby Barclays agreed not to terminate certain interest rate hedging transactions scheduled to expire in 2026, in circumstances where such termination would have resulted in a significant sum being owed by the borrowers to Barclays, provided that a programme for disposal of the properties was followed so as to enable a gradual termination of the hedging transactions over an agreed period.
7. The present position is that the administrators and receivers collect the rental income from the properties which remain unsold. As at January 2014, this amounted to approximately £8.4 million per quarter. After deduction of costs and expenses, the rental income is then paid over to CBRE (acting as the delegate of the Security Trustee) and applied by CBRE in payment of the periodic payments due under the hedging transactions, which rank in priority to the principal and interest on the Loan. The remainder of the rental income is then paid over to the Issuer. As at January 2014, the amount of rental income received by CBRE was about £7 million per quarter, and the periodic payments due under the hedging transactions were about £5.5 million per quarter, leaving around £1.5 million to be paid over to the Issuer.
8. In accordance with the disposal programme agreed with Barclays, some of the properties have been sold. By 21 March 2014, when CBRE filed its main evidence in support of the present proceedings, five properties had been sold since enforcement action had begun in relation to the Loan, and 30 properties remained unsold as continuing security for the Loan. The proceeds of sale were paid to Barclays as the counterparty to the hedging transactions, which were then partially unwound. Once the stage is reached when no further amounts are due under the hedging transactions, the proceeds of sale, and any surrender premiums paid by tenants of the properties, as well as the rental income, will be paid to the Issuer.
9. The question which now arises for determination, shortly stated, is how the relevant receipts should be characterised by CBRE in its role as Master Servicer. Should they be characterised as "principal", or as "interest", within the meaning of those terms (neither of which is defined) in the relevant documentation? The parties have been unable to reach agreement on this question. Hence the present proceedings, which were commenced by a claim form under Part 8 of the CPR issued on 21 March 2014.
10. Although the Loan has been accelerated, it is important to appreciate that the Notes have not. Accordingly, interest on the Notes remains payable in full on the specified interest payment dates, which are 25 January, April, July and October in each calendar year.

The Issue

11. The immediate context in which the issue arises is the Cash Management Agreement dated 14 November 2006, the parties to which were the Issuer, Barclays, the claimant's predecessor as Master Servicer and Special Servicer, the Bank of New York (as Cash Manager) and the Trustee. The main purpose of this agreement, as its title suggests, was to provide for the appointment of the Cash Manager and set out the functions which it was to perform. Clause 6.1 provided that the Cash Manager would maintain various ledgers, including "a ledger in respect of revenue amounts received by and paid by the Issuer" (defined as the "Revenue Ledger") and "a ledger in respect of principal amounts received by and paid by the Issuer" (defined as the "Principal Ledger"). Clauses 10 and 11 provided for transfers to, and distributions from, the Transaction Account opened by the Issuer and operated by the Cash Manager. Clause 13 was headed "Reports", and clause 13.1 was headed "Statements to Noteholders; Other Information". Clause 13.1(j) and (k) then said:

"(j) The Master Servicer will on or before each Calculation Date identify funds paid under the Credit Agreement [i.e. the agreement governing the Loan] and any Related Security, as principal, interest and other amounts on the relevant ledger in accordance with the respective interests of the Issuer and the Seller (if any) in the Loan.

(k) The Master Servicer will advise the Cash Manager of the determinations made pursuant to Clause 13.1(j) on or before each Calculation Date and the Cash Manager will allocate funds accordingly. Any such amounts to be paid to the Issuer will be paid to the Transaction Account and credited by the Cash Manager to the relevant ledger."

12. The Cash Management Agreement gives no guidance on how funds are to be identified as principal, interest or other amounts under clause 13.1(j), and the terms "principal" and "interest" (as I have said) are undefined. Accordingly, paragraph 12 of the claim form asks the court to rule how the funds that the claimant has received, and expects to receive, consisting of rent from the properties, surrender premiums received from tenants of the properties, and the proceeds of sale of properties, are to be classified under clause 13.1(j).
13. Depending on how the receipts are classified, they will fall to be applied in accordance with either the Pre-Acceleration Principal Priority of Payments or the Pre-Acceleration Revenue Priority of Payments referred to in clause 11.3 of the Cash Management Agreement. If the receipts are characterised as "principal", they constitute Available Issuer Principal and fall to be applied in accordance with the waterfall provisions in Condition 6.3 of the Notes. Under these provisions the principal on the class A Notes is repayable before the principal on the other classes of Notes (which are in turn to be repaid sequentially). It is therefore in the economic interests of the class A Noteholders that the receipts are to be characterised as "principal". If, on the other hand, the receipts are characterised as "interest", they constitute Available Issuer Income and fall to be applied in accordance with the waterfall provisions in Schedule 1 of the Cash Management Agreement, under which interest due and overdue on the class A Notes is required to be paid ahead of interest due and overdue on the other classes of Notes (again on a sequential basis). The provisions set out in Schedule 1, under the heading "Pre-Acceleration Revenue Priority of Payments", make no provision for repayment of principal on the Notes. It is therefore in the economic interest of the class B to E Noteholders ("the Junior Noteholders") that the receipts in the hands of the Master Servicer are characterised as "interest".

The Proceedings

14. Before moving on, I need to say a little about the parties to the proceedings. The claimant, CBRE, is (as I have said) the Master Servicer and Special Servicer. The first and second defendants are, respectively, the Issuer and the Trustee. The ninth defendant, Glastonbury Finance 2007-1 Plc, is a holder of class E Notes and has been appointed to represent the Junior Noteholders by order of Hildyard J made on 12 November 2014. The tenth defendant is named as "The Class A Noteholder", and has been appointed by the same order to represent the class A Noteholders. By paragraph 2 of his order, Hildyard J directed that the identity of the tenth defendant should not be disclosed pursuant to CPR 39.2(4), which states that:

"The court may order that the identity of any party … must not be disclosed if it considers non-disclosure necessary in order to protect the interests of that party …"

15. The tenth defendant was only willing to be joined to the proceedings, and to act as the representative of the class A Noteholders, on condition that its identity be not disclosed. The other parties were content to proceed on this basis, and the court was satisfied that it would be appropriate to make an order under CPR 39.2(4) for the reasons set out in a witness statement of Stephen Parker, the solicitor with conduct of the claim on behalf of the claimant, dated 12 May 2014. Relevant considerations included the unwillingness of the tenth defendant to be a party if its identity were disclosed, the price-sensitive nature of that information if it were made public, the immateriality of the tenth defendant's identity to the issues in the proceedings, the need to ensure that the court would hear argument on behalf of the class A Noteholders, and the unlikelihood of finding a class A Noteholder who was willing to be named. For similar reasons, anonymity has been granted to a representative Noteholder in other proceedings: see, for example, U. S. Bank Trustees Ltd v Titan Europe 2007-1 (NHP) Ltd [2014] EWHC 1189 (Ch). I should add that Hildyard J's order contained a proviso that the tenth defendant might be required to privately identify itself and prove its holding of the class A Notes to the court, but I did not consider it necessary to take this step.
16. I heard argument on behalf of the tenth defendant and the class A Noteholders from Mr Richard Sheldon QC and Ms Sue Prevezer QC, while the ninth defendant and the Junior Noteholders were represented by Mr Richard Lissack QC leading Mr Farhaz Khan. The case was opened by Mr John Brisby QC appearing with Mr Sharif Shivji for CBRE. I am grateful to all counsel for their helpful written and oral submissions.
17. None of the other defendants was represented at the hearing, on the footing that their interests had either been dealt with by agreement or would be adequately represented by the arguments advanced on behalf of the class A and Junior Noteholders. I was shown letters from their respective solicitors setting out their positions, but it is unnecessary for me to make further reference to them.

Further background

18. I have already described the general nature of the loan and securitisation transactions, and the context in which the present issue arises. It is convenient at this stage to fill in some more of the background which has a bearing on the arguments addressed to me.
19. The Loan was governed by a Credit Agreement dated 6 August 2006 ("the Credit Agreement"). Like most of the documentation, the Credit Agreement has been subsequently amended and restated on various occasions; but nothing turns on the wording of the different versions, and in this judgment I refer to the documents in the form in which they are included in the trial bundle, representing (as I understand it) the versions in force following acceleration of the Loan in 2012.
20. The rate of interest payable on the Loan was a floating rate linked to Libor. The interest was payable quarterly, on 17 January, April, July and October in each year, starting on 17 October 2006. By virtue of clause 6.5, interest on overdue amounts was payable at a higher rate. The portfolio of properties which provided security for the Loan was set out in schedule 1. By clause 14.6, the borrowers and their general partners (together defined, rather confusingly, as "the Guarantors") covenanted not to dispose of or substitute any of the properties, except as provided in the agreement. The clause then set out detailed provisions permitting the sale or substitution of properties provided that various conditions were satisfied.
21. In addition to the Loan, Barclays also made a junior ranking loan to the same borrowers in a maximum amount of £122,515,000 ("the Junior Loan"). Both the Loan and the Junior Loan had the same maturity date of 17 July 2016. Interest rate hedging arrangements were made with Barclays in respect of both loans. The hedging transaction in relation to the Loan was scheduled to expire (as I have said) on 17 July 2026, but the hedging transaction in relation to the Junior Loan was scheduled to expire 10 years earlier on the maturity date of the loans, i.e. 17 July 2016.
22. The Loan, the Junior Loan and liabilities under the hedging arrangements were secured over the assets of the borrowers, including the scheduled properties. The relationship between the Loan, the Junior Loan and the hedging transactions was governed by an Intercreditor Agreement dated 4 August 2006. This provided for the borrowers' liabilities to rank in the following order of priority: first, liabilities under the hedging arrangements; second, the Loan; and, third, the Junior Loan.
23. The arrangements under the Loan (but not the Junior Loan) were securitised in November 2006. The initial principal amounts of the Notes issued by the Issuer were as follows:

Class A Notes: £615 million;

Class B Notes: £30 million;

Class C Notes: £110 million;

Class D Notes: £88 million; and

Class E Notes: £75,862,000.

24. Since the Notes have not been accelerated, the effect of the relevant transaction documents is that:

(a) Available Issuer Income must be applied under the Pre-Acceleration Revenue Priority of Payments; and

(b) Available Issuer Principal must be applied under the Pre-Acceleration Principal Priority of Payments.

25. The Pre-Acceleration Revenue Priority of Payments is contained in Schedule 1 of the Cash Management Agreement. In outline, it provides for payment in the following order of priority: (i) the fees and expenses due to various transaction parties; (ii) amounts due to the Liquidity Facility Provider (other than Liquidity Subordinated Amounts); (iii) interest on each class of the Notes; (iv) Liquidity Subordinated Amounts; and (v) the Deferred Consideration, with any remaining surplus being payable to the Issuer.
26. The Pre-Acceleration Principal Priority of Payments is contained in Condition 6.3 of the terms and conditions of the Notes: see clause 11.3(b) of the Cash Management Agreement. The provisions of Condition 6.3 are very complex, involving numerous interlocking defined terms. At this stage, the important point to note is that they provide only for repayment of principal on the Notes. There is no provision for shortfalls in payments under the Pre-Acceleration Revenue Priority of Payments to be made up from amounts distributed under the Pre-Acceleration Principal Priority of Payments, or vice versa. In other words, the two waterfalls are mutually exclusive, the former relating to Available Issuer Income and the latter to Available Issuer Principal.
27. Available Issuer Income is relevantly defined in the Master Definitions Schedule dated 14 November 2006 as meaning:

"(a) All monies … (other than Prepayment Fees, Break Costs and principal (save to the extent that such principal represents any amount to be paid to the Special Servicer as a Liquidation Fee)) to be paid to the Issuer under or in respect of the Credit Agreement less the amount of any expected shortfall in such amount as notified by the Master Servicer or the Special Servicer, as the case may be, to the Cash Manager;

(b) … "

It can be seen, therefore, that the definition of Available Issuer Income excludes "principal", subject only to an exception for Liquidation Fees paid to the Special Servicer.

28. "Available Issuer Principal" is defined by reference to Condition 6.3. Paragraph (a)(ii) of Condition 6.3 says that:

"Available Issuer Principal means, in respect of any Calculation Date, the Available Pro Rata Principal, the Available Sequential Principal and any Available Voluntary Prepayment Amounts as at that Calculation Date."

29. The definitions in Condition 6.3(a) then continue as follows:

"(iii) Available Pro Rata Principal means the Available Allocated Loan Amount Component received in respect of the Loan during the Collection Period then ended;

(iv) Available Sequential Principal means, in respect of any Calculation Date, the aggregate of amounts of:

(A) any Available Release Premium;

(B) any Available Prepayment Redemption Funds;

(C) any Available Final Redemption Funds;

(D) any Available Principal Recovery Funds, and

in each case received in respect of the Loan during the Collection Period then ended;

…

(x) Principal Recovery Funds means the aggregate amount of principal payments received or recovered by or on behalf of the Issuer following the acceleration of the Loan or as a result of actions taken in accordance with the enforcement procedures in respect of the Loan and/or its Related Security … and Available Principal Recovery Funds means, in respect of any Calculation Date, the Principal Recovery Funds received or recovered by or on behalf of the Issuer during the Collection Period then ended as adjusted for:

(i) any amount of Basis Swap Breakage Receipts receivable by the Issuer under the relevant Basis Swap Transaction to the extent utilised in the calculation of Adjusted Loan Principal Loss in respect of that the [sic] Loan; less

(ii) any amount to be transferred to Available Issuer Income on the Interest Payment Date immediately following such Calculation Date for the purpose of paying Liquidation Fees, if any, payable on that Interest Payment Date in respect of the Loan;"

30. The distribution waterfall which applies to Principal Recovery Funds is that contained in Condition 6.3(b), which is headed "Application of Available Sequential Principal". It provides for payments to be made sequentially in repaying principal on the five classes of Notes in full, and so that no payment is made in respect of any subsidiary class until the principal on the Notes in the immediately preceding class has been redeemed in full.
31. The securitisation arrangements included the provision of a £64 million liquidity facility to the Issuer by the fourth defendant, Danske Bank A/S. The terms on which this facility was made available were set out in the Liquidity Facility Agreement dated 14 November 2006. In outline, where the income stream generated by the properties was insufficient to make the scheduled interest payments on the Notes as they fell due, the Issuer could draw on the facility in order to make up the shortfall. The evidence filed by Danske Bank explained that:

"The inclusion of suitably-rated liquidity support was a requirement of the agencies rating the Notes issued by the Issuer, as the liquidity support helps to ensure the timely payment of coupon to the holders of rated Notes notwithstanding any temporary cash flow issues arising from the underlying asset or assets, and this timely payment is a condition of a high rating."

This evidence also confirms that it was not the function of the liquidity facility to provide credit support, or to cover capital losses or capital repayments of the Notes.

32. The class A Noteholders and Danske Bank have compromised the claims of Danske Bank under the securitisation, including the interest of Danske Bank in the issue which I now have to determine. The essence of the compromise is that Danske Bank's claim is limited to £47.5 million, which it will receive regardless of the outcome of the present proceedings. Amendments have recently been made to the transaction documents, with which I am not concerned, in order to give effect to this agreement.
33. I can now turn to the rival arguments advanced by the class A Noteholders and the Junior Noteholders.

The arguments of the class A Noteholders

34. The primary argument of the class A Noteholders is that proceeds of sale of the properties, and surrender premiums paid by tenants of the properties, should be characterised as "principal". They accept that rental income from the properties should be characterised as "interest". On the footing that sales proceeds and surrender premiums are principal, they will constitute Available Issuer Principal under Condition 6.3(a), and will also constitute Available Sequential Principal (which includes Principal Recovery Funds). As such, they will fall to be distributed in accordance with Condition 6.3(b), which confers priority on the repayment of principal on the class A Notes.
35. As a general point, the class A Noteholders submit that this construction would recognise and give effect to the subordination of the Junior Notes to the class A Notes, as set out in Conditions 3.1(a) to (e) and 16. More succinctly, the prospectus for the Notes said on page 35:

"Payments of principal and interest in respect of the class B Notes, the class C Notes, the class D Notes and the class E Notes will be subordinated to payments of principal and interest in respect of the class A Notes …"

The priority afforded to the class A Notes is reflected in their higher ratings by the rating agencies, and in the lower rate of interest payable on them.

36. Next, the class A Noteholders submit that the overall structure of the transaction documents shows that rental income (and funding from the protections put in place to meet any shortfall in rental income) was to be treated as a repayment of interest on the Loan, with the object of providing a revenue stream to fund interest payments on the Notes (and on the associated hedging and liquidity facilities), while the proceeds of disposals of properties (in the absence of substitution), and surrender premiums paid by tenants, were to be treated as a repayment of principal on the Loan, with the object of funding repayments of principal on the Notes. As it is put in paragraph 29 of the class A Noteholders' skeleton argument:

"The structure contemplated that Rental Income (and the protections put in place to meet any shortfall) was to be the source of interest repayments on the Notes, and the capital value of the Properties was to be the source of repayments of principal on the Notes, whether by disposals of the Properties or, at the Maturity Date of the Loan, by a refinancing of the Loan secured against the Properties."

37. In a little more detail, before the default on the Loan the proceeds of sale or disposal of properties were treated as repayments of principal in accordance with clause 14.6 of the Credit Agreement. The general effect of these rather complex provisions was that, on a disposal, the Required Amount, which included the Minimum Prepayment Amount for the property specified in Schedule 1, had to be paid into a designated Sales Account, from which (in the absence of substitution of a property) a prepayment of the Loan had to be made in a principal amount equal to the Minimum Prepayment Amount: see clause 11.5(b)(ii).
38. With regard to the Notes, such prepayments of principal amounts of the Loan constituted Available Issuer Principal within the meaning of Condition 6.3, and as such fell to be applied in repayment of principal under the Notes in accordance with the prescribed waterfall. Condition 6.3 states that:

"Prior to the service of an Acceleration Notice or the Notes otherwise becoming due and repayable in full, the Notes then outstanding shall be subject to mandatory redemption in part on each Interest Payment Date if on the Calculation Date relating thereto there is Available Issuer Principal in an amount of not less than £1."

The definition of "Available Issuer Principal" included the "Available Pro Rata Principal", which in turn included amounts allocated to a particular property in the event of a disposal as prescribed in Schedule 1 of the Credit Agreement.

39. It follows, submit the class A Noteholders, that, prior to default, the proceeds of disposals of the properties were required to be applied in repayment of principal under the Notes.
40. For the position after default, it is necessary to consider the second constituent element of Available Issuer Principal, namely Available Sequential Principal. Available Sequential Principal includes "any Available Principal Recovery Funds", the latter expression being defined in Condition 6.3(a)(x) (set out above). The class A Noteholders submit that the proceeds of disposals of properties, and surrender premiums paid by tenants, constitute Principal Recovery Funds, because they are principal payments received or recovered by or on behalf of the Issuer following the Acceleration of the Loan or as a result of actions taken in accordance with the enforcement procedures in respect of the Loan and/or its Related Security. This submission gives effect, it is said, both to the subordination of the Junior Notes to the class A Notes, and to the overall structure of the transaction.
41. Furthermore, the position after acceleration of the Notes, which of course has not yet happened, is that the distribution of funds received would be governed by the Post Acceleration Priority of Payments set out in Schedule 2 of the Cash Management Agreement. Under this waterfall, funds received are to be applied in payment of principal and interest due to the class A Noteholders in priority to principal and interest due to the Junior Noteholders. Thus, it is argued, both prior to acceleration of the Loan, and after acceleration of the Notes, it is clear that the proceeds of disposals of properties and surrender premiums would be applied in repayment of principal due to the class A Noteholders in priority to sums due to the Junior Noteholders. It would therefore be anomalous if this were not also the position after acceleration of the Loan, and after enforcement action had been taken, but before the Notes were accelerated.
42. A further argument is based on the provisions for payment of a liquidation fee to the Special Servicer by the Issuer. The right to the Liquidation Fee arises under clause 15.4 of the Servicing Agreement dated 14 November 2006, as follows:

"If the Special Servicer is appointed in respect of the Loan, on each Interest Payment Date the Issuer shall pay to the Special Servicer:

…

(b) a liquidation fee (the "Liquidation Fee") equal to an amount of one per cent. (exclusive of VAT) of the aggregate of (i) the proceeds (net of all costs and expenses (including any swap breakage costs) incurred as a result of the default of the loan, enforcement and sale) together with (ii) any swap breakage gains, if any, arising on the sale of a Property or Properties while the Loan was a Specially Serviced Loan;

…"

43. Following default, the Loan became a Specially Serviced Loan, and the Special Servicer is therefore entitled to the Liquidation Fee which is based, among other things, on the aggregate net proceeds of sale of properties when they are sold. As I have already noted, the definition of "Available Issuer Income" in the Master Definitions Schedule excludes principal monies, subject to an exception for such principal as "represents any amount to be paid to the Special Servicer as a Liquidation Fee". The point which the class A Noteholders make is that there would be no need for this exception if the whole of the Liquidation Fee anyway had to be characterised as income. The same point is made, perhaps even more clearly, in relation to the definition of Principal Recovery Funds in Condition 6.3(a)(x), quoted in [29] above. There would be no need for the adjustment for amounts transferred to Available Issuer Income for the purpose of paying Liquidation Fees, if the net proceeds arising on the sale of a property would in any event be treated as "interest".
44. If their primary argument is rejected, the alternative case advanced by the class A Noteholders is that all receipts, including rental income, should be characterised as "principal" and "interest" pro rata according to the amount of outstanding principal and interest on the Loan at the time of receipt. On this basis, any principal so characterised would constitute Principal Recovery Funds and would fall to be distributed as Available Sequential Principal under Condition 6.3(b).
45. The argument relies on clause 10.7 of the Credit Agreement, which is headed "Partial payments" and provides as follows:

"If the Facility Agent receives a payment insufficient to discharge all the amounts then due and payable by the Guarantors [i.e. the borrowers] under the Finance Documents, the Facility Agent must apply that payment towards the obligations of the Obligors under the Finance Documents in the order set out in the Intercreditor Agreement."

Following acceleration of the Loan, the full amount outstanding in relation to the Loan is now due from the borrowers under clause 17.5 of the Credit Agreement.

46. By virtue of clauses 6.1(c) and (d), 6.3 and Schedule 2 of the Intercreditor Agreement, all receipts are to be applied according to a payment waterfall which includes, as its fourth item, "all amounts, whether principal, interest or otherwise, due and payable to the Senior Lender [i.e. the Issuer] in respect of the Senior Debt". Under this head, repayments of principal and interest on the Loan are accorded the same priority. Where the receipts are insufficient to make repayments under the fourth head in full, the argument is that the receipts should be applied pro rata according to the amounts of the respective liabilities within the head which are then outstanding.

The arguments of the Junior Noteholders

47. The primary argument of the Junior Noteholders is that, since the parties have failed to specify whether the relevant receipts are principal or interest, the common law provides an answer and should be applied. In the absence of any appropriation by either debtor or creditor, the common law rule or presumption is said to be that the receipts are to be applied as interest first, thereby falling within the meaning of Available Issuer Income, and only when all arrears of interest have been discharged as principal.
48. The relevant common law principle is stated as follows in Chitty on Contracts, 31^st edition, Vol. 1, para 21-068:

"Where there is no appropriation by either debtor or creditor in the case of a debt bearing interest, the law will (unless a contrary intention appears) apply the payment to discharge any interest due before applying it to the earliest items of principal."

The class A Noteholders do not dispute the existence of this general principle, which is well-established. It is therefore unnecessary for me to examine the cases which establish it, none of which were cited to me.

49. An alternative way in which the Junior Noteholders put their primary submission is that the parties must be taken to have been satisfied with the common law position when they agreed to the securitisation, including the absence of any definitions of "principal" and "interest", and the contract should be construed with that background in mind. They further submit that the commercial consequences of such an interpretation are both sensible and coherent, making good business sense in the overall scheme of the securitisation. Since the Notes have not been accelerated, they will continue to bear interest down to redemption in 2019. The properties will continue to yield rental income while they remain unsold, and the Issuer is also expected to receive proceeds of sale and surrender premiums. It makes good commercial sense that all these receipts should be allocated to the continuing payment of interest on the Notes, in priority to providing any return of principal, until such time as the Notes themselves are redeemed (whether by acceleration or upon maturity).
50. A further fact upon which the Junior Noteholders rely is that the Pre-Acceleration Principal Priority Payments waterfall makes no provision for amounts that may be owing to the Liquidity Facility Provider. By contrast, if the relevant receipts are characterised as interest the Pre-Acceleration Revenue Priority of Payments waterfall makes express provision for payments due to the Liquidity Facility Provider, in priority to the payment of any interest on the Notes. Furthermore, the fact that Danske Bank has entered into a compromise with the class A Noteholders is irrelevant for this purpose, because the securitisation documents need to be construed at the time when the arrangements were put in place, not in the light of subsequent developments.
51. The Junior Noteholders' secondary (although logically prior) case is that, if the transaction documents are capable of being construed so as to provide a clear answer, the relevant receipts should be characterised as "all monies" other than "principal", and as such fall within the meaning of Available Issuer Income. It is said that this would again make good business sense in the overall scheme of the securitisation, for essentially the same reasons as are relied upon in relation to the Junior Noteholders' primary case.

Discussion and conclusions

52. There is no dispute about the principles of contractual interpretation which the court should apply in resolving the present question. They are the familiar principles laid down by the majority of the House of Lords in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 and by the Supreme Court in Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900, in the judgment of the court delivered by Lord Clarke of Stone-cum-Ebony JSC ("Rainy Sky").
53. The key principles to be derived from Rainy Sky are set out in paragraphs [21] and [23] of Lord Clarke's judgment:

"21.The language used by the parties will often have more than one potential meaning. I would accept the submission made on behalf of the appellants that the exercise of construction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person, that is a person who has 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, would have understood the parties to have meant. In doing so, the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other.

…

23. Where the parties have used unambiguous language, the court must apply it …"

54. I should add that I have also had regard to the observations of Lord Neuberger of Abbotsbury PSC in Arnold v Britton [2015] UKSC 36, [2015] 2 WLR 1593, at [14] to [23]. Judgment in that case was delivered on 10 June 2015, after the conclusion of the hearing in the present case.
55. To the extent that a difference of approach may be called for in interpreting a complex suite of interlocking commercial documents, I was referred to the helpful and apposite statements of principle by Lord Mance and Lord Collins of Mapesbury in Re Sigma Finance Corp [2009] UKSC 2, [2010] 1 All ER 571, at [12] and [35] to [37]. Lord Mance said at [12] that the resolution of an issue of interpretation in a case of the present kind is "an iterative process", which involves "checking each of the rival meanings against other provisions of the document and investigating its commercial consequences". He also emphasised the importance of placing the document to be construed in the context of the overall scheme, and of "a reading of its individual sentences and phrases which places them in the context of that overall scheme".
56. To similar effect, Lord Collins said at [35]:

"In complex documents of the kind in issue there are bound to be ambiguities, infelicities and inconsistencies. An over-literal interpretation of one provision without regard to the whole may distort or frustrate the commercial purpose. This is one of those too frequent cases where a document has been subjected to the type of textual analysis more appropriate to the interpretation of tax legislation which has been the subject of detailed scrutiny at all committee stages than to an instrument securing commercial obligations …"

He added, at [37]:

"The instrument must be interpreted as a whole in the light of the commercial intention which may be inferred from the face of the instrument and from the nature of the debtor's business. Detailed semantic analysis must give way to business common sense: The Antaios [1985] AC 191, 201."

57. Finally, I was also referred to, and have taken into account, the observations of Lewison LJ, with whom the other members of the court agreed, in Napier Park European Credit Opportunities Fund Ltd v Harbourmaster Pro-Rata CLO 2 B.V. [2014] EWCA Civ 984 at [31] to [37]. In particular, Lewison LJ pointed out at [36] that "to say that ambiguity or unambiguity is the governing factor may be to miss the point". He cited the following observation of Lord Sumption in Sans Souci Ltd v V R L Services Ltd [2012] UKPC 6 at [14]:

"It is generally unhelpful to look for an "ambiguity", if by that is meant an expression capable of more than one meaning simply as a matter of language. True linguistic ambiguities are comparatively rare. The real issue is whether the meaning of the language is open to question. There are many reasons why it may be open to question, which are not limited to cases of ambiguity."

58. In the light of these principles, I return to the central question: how are the three relevant categories of receipt in the hands of the Master Servicer (i.e. rental payments, proceeds of sale and surrender premiums) to be characterised by the Master Servicer for the purposes of clause 13.1(j) of the Cash Management Agreement, read in the overall context of the securitisation and loan documentation? For convenience, I will repeat the wording of clause 13.1(j):

"The Master Servicer will on or before each Calculation Date identify funds paid under the Credit Agreement and any Related Security, as principal, interest and other amounts on the relevant ledger in accordance with the respective interests of the Issuer and the Seller (if any) in the Loan."

59. I can begin by clearing two points out of the way. First, nobody suggests that the relevant receipts should be characterised as "other amounts". The only relevant ledgers in clause 6.1 of the Cash Management Agreement are the Revenue Ledger and the Principal Ledger, and it is common ground that the receipts in question must be allocated to one or other of those ledgers. It is also worth noting in this context, as Mr Brisby QC pointed out, that the drafter of the Cash Management Agreement appears to have equated the terms "interest" and "revenue". The second point is that the Master Servicer clearly does not have an unfettered discretion to allocate the receipts as it pleases. Everybody agrees that the allocation must be made on the basis of a correct understanding of the nature of the relevant receipts as either principal or interest.
60. There is also a negative point to be made. Neither side has argued that any assistance can be gained from the final words of clause 13.1(j), viz "in accordance with the respective interests of the Issuer and the Seller (if any) in the Loan". In the present context, it is hard to see how the respective interests of the Issuer and Barclays in the Loan, as purchaser and vendor, could have any bearing on the characterisation of the relevant receipts as principal or interest. Nevertheless, there is one, admittedly slight, indication which I think may be provisionally drawn from this wording, namely that the focus of the enquiry is on the Loan and its Related Security, and the characterisation of the receipts in that context, rather than on the rights of the Noteholders and the priorities which flow from the securitisation.
61. This initial impression is strengthened, to my mind, by the fact that clause 13 (as a whole) appears to envisage the process of identification of funds by the Master Servicer under sub-paragraph 1(j) as a relatively routine matter which can be performed without undue difficulty or delay. The determinations are to be made on or before each quarterly Calculation Date (defined as three business days before the interest payment dates for the Notes). The fact that the terms "principal" and "interest" were left undefined also suggests to me that the determination was not envisaged as one requiring any legal sophistication, but merely the application of commercial common sense.
62. If the question is viewed in this way, the answer appears to me to be tolerably clear. The receipts should be characterised as principal or interest depending on their source, and the role which they play in the context of the Loan and its security, viewed as a matter of commercial common sense. It would in my judgment be wrong to interpret the clause as requiring close legal analysis of the kind which might be needed, for example, in deciding whether the receipts were capital or income for tax purposes (on which see IRC v John Lewis Properties Plc [2002] EWCA Civ 1869, [2003] Ch 513 (CA)). On the approach which I favour, I do not think anyone would disagree that the rental payments are to be characterised as interest (or revenue, or income – for present purposes, the terms seem to me interchangeable), whereas the proceeds of sale of properties should be characterised as principal, because they represent the realised capital value of a property which stands as security for the Loan. The position in relation to premiums received on the surrender of leases could in theory be more debatable, because the circumstances and basis of calculation of the premium might vary from case to case. I assume, however, that the type of surrender contemplated is one where the premium paid represents the capitalised value to the landlord of the remaining term of the lease. On that basis, the premium should in my view be characterised in the same way as the proceeds of sale of the property, i.e. as principal.
63. The conclusion which I have provisionally reached needs to be tested by considering its consequences in the context of the overall structure of the transaction documents. I accept the submissions of the class A Noteholders that the consequences of treating sale proceeds and surrender premiums as principal are well in line with what the parties might reasonably be expected to have contemplated when the securitisation was put in place and the Notes were sold to investors. In particular, I agree that treatment of these receipts as principal is consistent with the way in which the proceeds of sale or disposals of properties were treated as a repayment of principal under the Loan before the Loan was in default. Such treatment also seems to me to be consistent with the subordination of the Junior Noteholders to the class A Noteholders.
64. Conversely, I consider that there would be a lack of symmetry in the arrangements if the proceeds of sale and surrender premiums, representing as they do the underlying capital value of the security, were treated as revenue receipts and had to be used in full to pay interest on the Notes. It needs to be remembered in this connection that, on the class A Noteholders' primary case, the rental income received from the unsold properties will continue to be treated as income, and will be distributed in accordance with the Pre-Acceleration Revenue Priority of Payments. Thus there is no question, as the Junior Noteholders appeared at times to be submitting, of the Junior Noteholders being left without any income receipts to fund the continuing payment of interest on their Notes. There will, of course, be a shortfall, but that has been brought about by the financial crisis and the collapse of the cash flow model which underlay the securitisation, not by a mischaracterisation of receipts derived from the properties.
65. The basic fallacy in the Junior Noteholders' primary case, in my judgment, is that it seeks to apply the common law rules on appropriation of payments made by a debtor to his creditor, to the quite different question of characterisation of receipts which arises in the present case. The relevant question is how the receipts should be characterised in the hands of the Master Servicer, not the subsequent question of how receipts should be appropriated as between principal and interest in the hands of the Noteholders. I agree with the Junior Noteholders that the common law has a part to play in the characterisation of the relevant receipts, but the relevant common law principles are those which distinguish capital receipts from income receipts in the economy of a business, not those which allocate payments received by a creditor between outstanding amounts of income and principal.
66. The points which I have so far discussed are those which, in the context of the present case, appear to me to be decisive, and to establish that the primary case of the class A Noteholders should be accepted. The other points which were canvassed in argument are in my view of little or no significance, particularly in documentation of this complexity. Nor am I attracted by the secondary cases advanced on either side. Once the question is approached in the right way, the arguments in favour of the class A Noteholders' primary case are in my judgment clearly to be preferred.
67. For these reasons, my answer to the question in the claim form is that, upon the true construction of the Cash Management Agreement read in the context of the Loan and securitisation documents as a whole, rent from the properties is to be classified as "interest", but the proceeds of sale of properties and surrender premiums are to be classified as "principal".