England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS IN MANCHESTER
INSOLVENCY AND COMPANIES LIST (Ch.D)
IN THE MATTER OF Olympia Securities Commercial Plc (In Administration)
AND IN THE MATTER OF the Insolvency Act 1986

		Manchester Civil Justice Centre Manchester M60 9DJ
		23/11/2017

HH Judge Pelling QC:

Introduction

1. This is the hearing of an application by the Applicants ("the Administrators") for directions made under paragraph 63 of Schedule B1 of the Insolvency Act 1986. In essence the application concerns whether (as the First Respondent ("WDW") maintains) WDW is a secured creditor of Olympia Securities Commercial Plc (In Administration) ("the Company") for the sum of £6,324,214.50 being the sum allegedly due from the Company following the early termination of a series of interest rate swap agreements originally entered into by the Company with Anglo Irish Bank Corporation Limited (now Irish Bank Resolution Corporation Limited) ("IBRC") following various assignments to which I turn in more detail below. The Second Respondent ("Arazim") is the sole shareholder of the Company's sole shareholder and an unsecured creditor of the Company. It disputes both that the Company is indebted as alleged and that any debt that is owed is secured. The Administrators are neutral on the issues that arise but seek directions in order that the dispute can be resolved and all appropriate distributions made. I summarise the issues I have to resolve at paragraph 10 below because they are intelligible only against the factual background set out below.
2. There are no factual disputes between the parties relevant to the issues I have to resolve on this application. The issues are ones of law and/or that turn upon the true construction of various underlying documents to which I refer in detail below.

The Facts

3. The Company was part of a group of companies. Its business was commercial and residential property development. On 16 February 2005, the Company entered into a Facility Agreement with IBRC under which IBRC agreed to lend the Company sums of in excess of £50m ("Facility Agreement") in a series of payments identified as "tranche A" to "tranche F" – see clause 2 of the Facility Agreement. The Company subsequently provided guarantees to IBRC in relation to four other companies within the Arazim group. The Facility Agreement was varied on a number of occasions but it is common ground that the relevant version for present purposes is the final amendment and restatement made on 11 December 2009. The material terms of the Facility Agreement are set out as necessary below. The Facility Agreement was further varied by a Supplemental Facility Agreement dated 16 May 2014 ("SFA"), the operative provisions of which are contained in Schedule 3 to the SFA. Clause 7 provided that the definition of Repayment Date contained in the Facility Agreement be deleted and replaced with a provision that defined the Repayment Date as being 30 June 2014.
4. The facility provided under the Facility Agreement was a floating rate facility. In order to hedge against interest rate fluctuations, the parties entered into three interest rate swap agreements on various dates between 21 March 2005 and 26 March 2008 ("Swaps"). It is common ground for the purposes of this application that each of the Swaps was governed by an International Swap Dealers Association ("ISDA") Master Agreement dated 19 August 2008 ("ISDAMA"). I set out the provisions of the ISDAMA relevant to this application below. It is necessary to note at this stage only that the main body of the agreement consists of standard terms which are supplemented or varied by the terms set out in the schedule to the ISDAMA.
5. The loan the subject of the Facility Agreement (and any sum due to IBRC under the Swaps) was secured by a debenture granted to IBRC by the Company dated 11 December 2009 ("Debenture"). The terms of the Debenture material to this application are summarised below.
6. On 7 February 2013, the Minister of Finance in the Republic of Ireland placed IBRC in Special Liquidation under s.4 of the Republic of Ireland's Irish Bank Resolution Corporation Act 2013 for the purpose of achieving an orderly wind up of IBRC which necessarily included the sale of its assets. On 16 February 2014, IBRC acting by its Special Liquidators agreed to sell a portfolio of assets that included the loan to the Company the subject of the Facility Agreement to an entity called LSREF III Wight Limited ("LSREF").
7. On 2 May 2014, WDW was incorporated in England and Wales with share capital of £1. The agreement between IBRC and LSREF was completed on 16 May 2014 by three agreements under which (a) all IBRC's rights under the Facility Agreement were assigned to WDW as nominee of LSREF, (b) by a Security Assignment Deed ("SAD"), the Debenture was assigned by IBRC to WDW who declared that it held it on trust for itself and for IBRC, and (c) LSREF agreed with IBRC that all or any rights or liabilities arising in respect of the Swaps would accrue to or be borne by LSREF notwithstanding that IBRC remained the Company's counterparty under the Swaps. The relevant agreements giving effect to these arrangements are all in evidence. The detail concerning these arrangements is not material to the issues that arise on this application. On 5 June 2014, WDW gave notice to the Company of assignment to it of IBRC's rights and benefits under the Facility Agreement and the Debenture.
8. On 30 June 2014, the loans the subject of the Facility Agreement became due for repayment by reason of operation of clause 7 of the SFA but none of the sums due were repaid. This was an Event of Default under the Facility Agreement. WDW notified IBRC that an Event of Default under the Facility Agreement had occurred by reason of the Company's non-repayment. WDW argues that this constituted an Event of Default under the ISDAMA. On 15 July 2014, the Special Liquidators of IBRC terminated the Swaps with effect from 21 July 2014. On 22 July 2014, IBRC's liquidators served a Statement of Payment on Early Termination in purported compliance with the ISDAMA by which they claimed payment from the Company of the £6,324,214.50 ("ETP"). None of the parties before me disputed that this sum had been properly calculated.
9. On 20 October 2014, by a Deed of that date, IBRC assigned to MHB-Bank AG ("MHB") all the rights it had to or in the ETP. By an amending Deed dated 25 August 2016, the SAD was purportedly varied so as to declare that as and from 25 August 2016, WDW held the Debenture on trust for itself and MHB in place of IBRC.
10. To date the Administrators have repaid all of the principal sum lent under the Facility Agreement to WDW and the sums due under the intercompany guarantees given by the Company to IBRC referred to in paragraph 3 above. These sums exceed £100m. There remains for distribution £1.54m and €4.04m, gross of the remaining administrators' costs and expenses. The issues that have to be resolved on this application are concerned with three matters in dispute between the Respondents being (a) whether the assignment of the Facility Agreement from IBRC to WDW was valid, which turns in the first instance on whether as a matter of construction WDW is a "financial institution" for the purposes of the Facility Agreement ("Issue 1"); (b) whether in the circumstances that occurred IBRC was entitled to terminate the Swaps and demand payment by the Company of the ETP ("Issue 2") and (c) whether, on the assumption that the ETP became payable by the Company, the sum payable was secured by the Debenture ("Issue 3").

Issue 1

Introduction

11. As set out in the Application Notice, Issue 1 is whether WDW is:

" … a "financial institution" for the purposes of clause 23.2 of the … Facility Agreement …and, if not, what are the consequences (if any) in relation to the validity of the assignment of IBRC's rights under the Facility Agreement to [WDW] …"

12. Clause 23 of the Facility Agreement provides:

"23.1 The benefit of the Facility is personal to the Borrower, who may not assign or otherwise part with it in whole or part without the prior written consent of the Lender.

23.2 The Lender may (and the Borrower shall assist as required and irrevocably appoints the Lender to execute any requisite document on its behalf) at any time transfer, assign or novate all or any part of the Lender's rights, benefits or obligations under this agreement to any one or more banks or other financial institutions. All agreements, representations and warranties made in this agreement shall survive any transfers made pursuant to this clause. The Lender may sell down its participation in respect of the Finance Documents without the consent of the Borrower."

The Principles Applicable to Construction

13. The principles applicable to construing contracts are now well established and are not in dispute between the parties. They are relevant to each of the issues that have to be resolved on this application.
14. Since Investors Compensation Scheme Limited v. West Bromwich Building Society [1998] 1 WLR 896 was decided there has been a tendency in cases where the true meaning and effect of a contract has been in dispute for the proponents of rival constructions to emphasise either the textual or contextual at the expense of the other when contending that a particular interpretation should be adopted. That approach is misconceived. As Lord Hodge said in Wood v. Capita Insurance Services Limited [2017] UKSC 24 at paragraph 13: 

"Textualism and contextualism are not conflicting paradigms in a battle for exclusive occupation of the field of contractual interpretation. Rather, the lawyer and the judge, when interpreting any contract, can use them as tools to ascertain the objective meaning of the language which the parties have chosen to express their agreement. The extent to which each tool will assist the court in its task will vary according to the circumstances of the particular agreement or agreements."

15. Subject to that overarching point, in summary, the applicable principles are as follows:

(a) The court construes the relevant words of the relevant contract, in its documentary, factual and commercial context, assessed in the light of (i) the natural and ordinary meaning of the contractual provision being construed, (ii) any other relevant provisions of the contract, (iii) the overall purpose of the provision being construed and the contract in which it is contained, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party's intentions – see Arnold v. Britton [2015] UKSC 36 [2015] AC 1619 per Lord Neuberger PSC at paragraph 15 and the earlier cases he refers to in that paragraph;

(b) A court can only consider facts or circumstances known or reasonably available to both parties which existed at the time that the contract was made - see Arnold v. Britton (ante) per Lord Neuberger PSC at paragraph 20;

(c) In arriving at the true meaning and effect of a contract, the departure point in most cases will be the language used by the parties because (a) the parties have control over the language they use in a contract and (b) the parties must have been specifically focussing on the issue covered by the disputed clause or clauses when agreeing the wording of that provision – see Arnold v. Britton (ante) per Lord Neuberger PSC at paragraph 17;

(d) Where the parties have used unambiguous language, the court must apply it – see Rainy Sky SA v. Kookmin Bank [2011] UKSC 50 [2011] 1 WLR 2900 per Lord Clarke at paragraph 23;

(e) Where the language used by the parties is unclear the court can properly depart from its natural meaning where the context suggests that an alternative meaning more accurately reflects what a reasonable person with the parties' actual and presumed knowledge would conclude the parties had meant by the language they used but that does not justify the court searching for drafting infelicities in order to facilitate a departure from the natural meaning of the language used – see Arnold v. Britton (ante) per Lord Neuberger PSC at paragraph 18;

(f) 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 – see Rainy Sky SA v. Kookmin Bank (ante) per Lord Clarke at paragraph 2 - but  commercial common sense is relevant only to the extent of how matters would have been perceived by reasonable people in the position of the parties, as at the date that the contract was made – see Arnold v. Britton (ante) per Lord Neuberger PSC at paragraph 19;

(g) In striking a balance between the indications given by the language and those arising contextually, the court must consider the quality of drafting of the clause and the agreement in which it appears – see Wood v. Capita Insurance Services Limited (ante) per Lord Hodge at paragraph 11; and

(h) a court should not reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight because it is not the function of a court when interpreting an agreement to relieve a party from a bad bargain - see Arnold v. Britton (ante) per Lord Neuberger PSC at paragraph 20 and Wood v. Capita Insurance Services Limited (ante) per Lord Hodge at paragraph 11.

Discussion

16. Neither party relied on facts and circumstances known or assumed by the parties at the time that the document was executed other than those apparent or which are to be inferred from the terms of the agreement and other instruments that have to be construed. Both parties invited me to construe the phrase essentially on the basis of the language used viewed in the relevant commercial and contractual context and by reference to principles identified in previous decisions of the Court of Appeal where similar language was construed albeit in a different commercial and contractual context.
17. It was submitted on behalf of Arazim that to be one of the "financial institutions" to which IBRC was permitted to assign, the entity concerned had to operate on its own behalf in the field of regulated finance. It was submitted that WDW fails this test for two reasons – first, because it was non-trading at the date when the assignment took place and, secondly, because it did not operate in the field of regulated finance either before or after the purported assignment because its only purpose was to hold assets on trust for a third party. WDW submitted that was an impermissibly narrow construction of the phrase particularly when viewed in the relevant commercial and contractual context. Both parties relied on the decision of the Court of Appeal in Argo Fund Limited v. Essar Steel Limited [2006] 1 CLC 546 ("Argo") as supporting their respective submissions although it was accepted that this authority was only helpful by analogy.
18. Neither party was able to point to any provision within the contract itself that supported the construction for which they respectively contended. The phrase is not contractually defined and is ambiguous. There are no provisions within the Facility Agreement that either expressly or inferentially favour one construction over the other. It is difficult to discern any relevant commercial context that could be said to illuminate how the concept of a financial institution would have been perceived by reasonable people in the position of the parties, as at the date that the contract was made. The best that can be said is that it is plain that the language used indicates that the parties intended to limit the class of potential assignees.
19. In Argo, the court was concerned with a syndicated loan agreement. As is reasonably well known, different syndicate members may wish to transfer their rights under such agreements to third parties, often by sale in the secondary debt market – that is the market in which primary lenders sell the benefit of their nonperforming or underperforming lending to those willing to purchase it at a discount from the nominal value of the lending concerned. Argo Fund Limited was an established trading company that acquired commercial debt of various types in the secondary market with a view no doubt to realising more by enforcing collection in whole or part than had been expended on acquiring the debt. The relevant loan agreement permitted a syndicate member to transfer its interest to a "bank or other financial institution". The first instance judge had concluded that a transferee had to share at least some of the characteristics of a bank if it was to be a financial institution and that to satisfy that requirement it had to have at least the following characteristics:

" (1) be a lender of money, though not necessarily in the primary lending market, since 'institutions who buy debt in the secondary market thereby become lenders by definition';

(2) have a lending office, though the Agreement did not specify any particular form for it;

(3) maintain accounts of money lent to, and of amounts, in capital and interest due from, borrowers, which, by clause 20.5 of the Agreement, were to be 'in accordance with its usual practice';

(4) have the 'capabilities, financial, technical and capacity of lending money during the draw-down period, as 'quasi- primary lenders' in accordance with the terms of the Agreement'; and

(5) be a 'financial institution' in the sense of having 'a legally recognised form or being, which carries on its business in accordance with the laws of its place of creation and whose business concerns commercial finance'."

The Court of Appeal upheld the judge's conclusion that Argo Fund Limited was a financial institution as that phrase was used in the agreement relevant to that case, but did so by adopting a significantly wider test than had the judge. There were two substantive judgments – those of Auld LJ (with whom Hallett LJ agreed) and Rix LJ. Auld LJ concluded that:

" 49 … I would … hold – contrary to the reasoning of the Judge on this issue – that it is not a necessary characteristic of a transferee that its business should include bank-like activities, such as the lending of money, whether on the primary or secondary debt market or otherwise, or indeed that it should exhibit any particular standard of suitability or probity as a financial institution. All or most of Mr Rabinowitz's submissions in this respect turned on the use of the word 'bank' and reference to what was expected of it in different contexts after draw-down. However, those few residual obligations of lenders after draw-down are, in my view, insufficient to colour or restrict the range of entities to which debt may be passed in the secondary debt market. In such circumstances – for which the secondary debt market mostly provides – the borrower has had the benefit of the money. It is its substance and integrity in meeting its repayment obligations, not those of the original or transferee lender's ability to continue to hold the debt that will, in most cases, be the matter for concern.

50 As to 'suitability' of a transferee, given the spare terms of the Agreement's definition of 'Transferee', its separate provision for unrestricted assignment and its commercial context, the notion of a transferee having to be a sound and respectable lender, whether in the primary of secondary market, was, in my view, clearly outside what the parties could reasonably have intended or expected of the Agreement. If the parties had intended it to provide protection to that effect, they could and would have done so in clear terms. For example, they could have stipulated that it should be a body subject to a particular regulatory regime or regimes, or, as Hallett LJ mooted in the course of submissions, have expressed the restriction as 'a bank or other similar financial institution'.

51 I, therefore, end up with a broader interpretation than did the Judge of the term 'other financial institution' in the expression, 'a bank or other financial institution', in the Agreement. In my view, the Judge, in identifying the nature of the restriction imposed by the Agreement on the meaning of a transferee for the purpose of considering whether a putative transferee was entitled to claim repayment of debts of Essar passed to it, adopted too restrictive a meaning. He should have held that it was satisfied by proof that the putative transferee met the broad fifth criterion he identified in paragraph 38 of his judgement, namely having 'a legally recognised form or being, which carries on its business in accordance with the laws of its place of creation and whose business concerns commercial finance', and whether or not its business included the lending of money on the primary or secondary lending market.

52 The commercial reality of a dispute such as this is that a lender under a syndicated loan agreement, whether original or by way of transfer or assignment, may and should be entitled to recover from the borrower monies lent when they become due and that the borrower, whether distressed or otherwise, has and need have little interest as to the commercial or financial status of the body to which the role of lender has passed. Here, Essar is a long-standing defaulter in making repayment of a substantial loan provided for by an agreement which, by its very nature, provided for the eventuality of it being traded at a discount as a distressed debt in the secondary debt market. There is no basis, whether in law as a matter of construction of the Agreement, still less of justice, for permitting it to avoid honouring its debt through the device of mounting an attack, well-founded or not, on the financial or commercial character or status of its lender."

Rix LJ adopted a more restrictive approach to the issue and concluded that a financial institution is one that regularly makes, purchases, or invests in loans securities and other financial assets. However, as Mr Smith submitted, that did not represent the majority view.

20. I accept that in a technical sense the conclusion of the majority of the Court of Appeal is not determinative because that case was concerned with the construction of a phrase used in a different commercial context and a different contract from that which arises in this case. That said the differences are slight. The issue in Argo concerned the ability of a primary lender to assign or novate its interest under a syndicated loan agreement with a commercial borrower, whereas in this case the issue concerns the ability of a primary lender to assign its interest under a commercial loan agreement with a commercial borrower. There is no distinction of substance between the two situations that leads to the conclusion that the meaning of the phrase "financial institution" should be wider in one case than in the other.
21. I am satisfied that I ought not to depart from the approach adopted by the majority in Argo and thus I conclude that the true meaning of the phrase "financial institutions" in clause 23 of the Facility Agreement is that to be such an institution the entity concerned must be " … a legally recognised form or being, which carries on its business in accordance with the laws of its place of creation and whose business concerns commercial finance', and whether or not its business included the lending of money on the primary or secondary lending market. It is not necessary for an entity to be "… operating on its own behalf in the field of regulated finance" to be a financial institution applying this definition as long as its "… business concerns commercial finance …". This concept is intentionally widely drawn and will include for example commercial trust corporations, primary and secondary lenders and those who act as agents, trustees or fiduciaries either for buyers or borrowers on one side of a transaction or for the providers of services on the other and it would also include those who provide managerial services on behalf of the providers or users of financial products and services. In my judgment it is in principle wide enough to include WDW subject to the points I consider below.
22. The issue that remains is Mr Morgan's submission that however wide the definition, it cannot include as he puts it "… a non-trading £1 company …" Two different points arise from this submission – one based on the status of WDW as a "£1" company and one based on the fact that it was non-trading.
23. The first of these points is concerned with capitalisation. In my judgment this point lacks substance for the following reasons. First, a qualification based on capitalisation finds no justification in the formulation of the majority in Argo which requires that it merely be " … a legally recognised form or being, which carries on its business in accordance with the laws of its place of creation …". Secondly, no attempt has been made by Mr Morgan to formulate a test for a distinction between those entities that are capable of being institutions by reason of their capitalisation and those that are not. It is difficult to see how one could be formulated that was anything other than arbitrary. Whilst it is possible for parties to adopt an arbitrary definition by express contract provision, it is difficult to see how a court could do so in the absence of evidence of facts or circumstances known or reasonably available to both parties which existed at the time that the contract was made that pointed convincingly to such a conclusion. There is none here. Thirdly, there is no necessary connection between the capitalisation of a company or other incorporated entity and its trading volumes or commercial reputation. Fourthly, it would have been simple for parties who wished to limit the scope of the financial institutions phrase to corporations with a minimum capitalisation do so by express provision but the parties have chosen not to do so. Finally, the point assumes that only a company or corporation is capable of being a financial institution. That is not only not justified by the formulation of the majority in Argo but is contrary to commercial sense once it is remembered that many internationally recognised financial institutions adopt partnership models. Even if Mr Morgan's submission was intended to include suitably capitalised partnerships, LLPs and other entities including sole traders, the point concerning arbitrariness remains unanswered.
24. Turning now to the point that WDW was not trading at the date when the assignment took place, I consider this point too lacks reality. It involves the proposition that an entity formed for the purpose of carrying on business concerning commercial finance could not become an financial institution until it had carried out its first transaction but that as soon as it had carried out a single transaction at that point it becomes an institution however economically insignificant that transaction might be. In my judgment such an approach is erroneous. As was posited in the course of the argument, if correct, Mr Morgan's proposition would mean that a newly formed corporate entity wholly owned by a multi-national heavily capitalised commercial bank would not be a financial institution before it entered into a nominal £100 transaction but would became one thereafter. Such an approach is entirely artificial. In deciding whether a newly formed entity is or is not a financial institution for the purposes of clause 23 of the Facility Agreement it is necessary only that the entity should have been formed for the purpose of carrying on a business that concerns "commercial finance", as long as it is a legally recognised form or being, which carries on its business in accordance with the laws of its place of creation. There is no suggestion that WDW does not satisfy these last two requirements. In my judgment this definition is wide enough to encompass a party buying and selling debt in the secondary debt market and it is wide enough also to include corporate entities incorporated by such institutions to carry into effect their commercial activity. On this analysis, both LSREF and WDW were financial institutions.
25. At this stage it is worth repeating the observation of Auld LJ in paragraph 52 of his judgment in Argo – " … The commercial reality of a dispute such as this is that a lender under a syndicated loan agreement, whether original or by way of transfer or assignment, may and should be entitled to recover from the borrower monies lent when they become due and that the borrower, whether distressed or otherwise, has and need have little interest as to the commercial or financial status of the body to which the role of lender has passed…". None of the points made in the evidence filed on behalf of Arazim satisfactorily address this essential point. Mr Gliksman refers to WDW being " … a special purpose vehicle with a single purpose, namely to acquire a portfolio of non-performing real estate loans at a discount to their current face value. In common parlance [WDW] seems to be what is known as a "vulture fund"". That point does not assist on the issue I am now considering. The purpose that Mr Gliksman identifies concerns commercial finance and is so whether or not it is described as a "Vulture Fund" or not. In fact there is no distinction of relevance between the business of WDW as described by Mr Gliksman and Argo Fund Limited's business as it is described in Argo.
26. The points made by Mr Gliksman is that "… vulture funds were not generally regulated, whilst banks and other financial institutions would be. A vulture fund might therefore be expected to take a more aggressive approach to enforcement than a regulated bank or financial institution.". Both these points are immaterial. First, the fact that WDW is not regulated does not matter as long as it is carrying on its business in accordance with the laws of its place of creation namely England and Wales. There is no suggestion that this is not the case. Secondly, the enforcement risk point is not made out on the evidence. It is mere assertion. In any event, had the original borrower wished to protect against assignment by IBRC then it could and should have negotiated a more restrictively drawn non-assignment provision than the one agreed. In fact, the inclusion of clause 23 in the Facility Agreement expressly provided for the possibility of IBRC's interest thereunder being transferred as a non-performing debt on the secondary market.

Conclusion

27. WDW is within the class of "financial institutions" referred to in clause 23.2 of the Facility Agreement.

Issue 2

Introduction

28. As set out in the Application Notice, Issue 2 is whether WDW is:

"On the Company defaulting on its obligations under the Facility Agreement on 30 June 2014 was IBRC entitled to terminate [the Swaps] … pursuant to … [ISDAMA] … and demand …[the ETA] from the Company … notwithstanding that on 7 February 2013 IBRC suffered a 'bankruptcy' Event of Default within the meaning of section 5(a)(vii) of the [ISDAMA], which Event of Default is continuing?"

29. This issue depends ultimately on the true meaning and effect of clause 6 (a) of the ISDAMA, the text of which is set out below. Mr Morgan's submission is that the clause distinguishes between a defaulting and a non-defaulting party, provides that notice is to be given by a party described as a non-defaulting party and that in consequence a party who is a defaulting party is unable to serve a notice terminating the Swaps and demanding an ETA. Mr Smith submits that this is misconceived and depends upon an obviously wrong construction of the clause.

The relevant provisions of the ISDAMA

30. In so far as is relevant for present purposes, the ISDAMA provides as follows:

"2. Obligations

(a) General Conditions

(i) Each party will make each payment or delivery specified in each Confirmation to be made by it, subject to the other provisions of this Agreement.

…

(iii) Each obligation of each party under Section 2(a)(i) is subject to (1) the condition precedent that no Event of Default or Potential Event of Default with respect to the other party has occurred and is continuing, (2) the condition precedent that no Early Termination Date in respect of the relevant Transaction has occurred or been effectively designated and (3) each other applicable condition precedent specified in this Agreement.

…

5 Events of Default and Termination Events

(a) Events of Default. The occurrence at any time with respect to a party or, if applicable, any Credit Support Provider of such party or any Specified Entity of such party of any of the following events constitutes an event of Default (an "Event of Default") with respect to such party –

…

(vi) Cross Default. If the "Cross Default" is specified in the Schedule as applying to the party, the occurrence or existence of (1) a default, event of default or other similar condition or event (however described) in respect of such party…. under one or more agreements or instruments relating to Specified Indebtedness of any of them (individually or collectively) in an aggregate amount of not less than the applicable Threshold Amount (as specified in the Schedule) which has resulted in such Specified Indebtedness becoming, or becoming capable at such time of being declared, due and payable under such agreements or instruments, before it would otherwise have been due and payable or (2) a default by such party… in making one or more payments on the due date thereof in an aggregate amount of not less than the applicable Threshold Amount under such agreements or instruments (after giving effect to any applicable notice requirement or grace period)…

(vii) Bankruptcy. The party …

(1) is dissolved … (2) becomes insolvent or is unable to pay its debts … as they become due …

6. Early Termination

(a) Right to Terminate Following Event of Default. If at any time an Event of Default with respect to a party (the "Defaulting Party") has occurred and is then continuing, the other party (the "Non-defaulting Party") may, by not more than 20 days notice to the Defaulting Party specifying the relevant Event of Default, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all outstanding Transactions. … ."

31. As explained earlier in this judgment, the schedule to the ISDAMA sets out various variations to the standard ISDA terms that were agreed between the parties. By Part 1(c) of the Schedule, it was agreed that the cross default provision referred to in clause 5(a)(vi) would apply to the Company subject to an immaterial qualification. By Part 5(f) of the Schedule, it was agreed that:

"(f) Default under Loan

Until the Loan specified in the Facility Agreement is repaid in full, the Events of Default specified in Section 5(a)(i) to 5(a)(iv), and 5(a)(vii) and 5(a)(viii) of this Agreement will not apply with respect to [the Company] and any of its Credit Support Providers and in substitution thereof any Event of Default as defined in the Facility Agreement shall constitute an Event of Default in respect of [the Company] under this Agreement. For the avoidance of doubt, it shall also be an Event of Default if the Facility Agreement shall expire, terminate or otherwise not be in full force and effect as a result of an Event of Default thereunder.".

32. Clause 8.2 of the Facility Agreement provided that " subject to any provision of this agreement requiring earlier payment, the Liabilities shall be paid and repaid in full on the Repayment Date", Schedule 3 to the SFA provided that "Repayment date" meant 30 June 2014 and Cl. 22.1 of the Facility Agreement provided that an Event of Default under the Facility Agreement included "… failure to pay any sum due under the Finance Documents on the due date …".

Discussion

33. In my judgment Arazim's submissions in relation to this issue are mistaken for the reasons that follow. It was open to the Company to terminate the Swaps on the occurrence of IBRC's bankruptcy Event of Default. It did not do so. It was fully entitled not to do so but if that was its choice then the Company was forced to accept all the consequences of the contractual obligations imposed by ISDAMA continuing to exist. It would not have been open to IRBC to serve a Notice of Termination by reference to any failure on the part of the Company to make payments due under the Swaps the subject of the ISDAMA after its bankruptcy Event of Default because the effect of clause 2(a)(iii) of the ISDAMA was to suspend any payment obligations of a paying party (here the Company) to a receiving party (here IBRC) in respect of the Swaps the subject of that agreement for so long as the receiving party's Event of Default is continuing – see Lomas v. JFB Firth Rixson Inc [2013] 1 BCLC 27 per Longmore LJ at 25. However IBRC did not base its Notice of Termination on a failure by the Company to make payments under the Swaps.
34. On 30 June 2014, repayment fell due under the Facility Agreement – see Schedule 3 to the SFA – but the Company failed to pay. This is not in dispute. This was an Event of Default under the Facility Agreement that did not require any notice – see clauses 8.2 and 22.1 of the Facility Agreement. This event was also an Event of Default under the ISDAMA – see part 5(f) of the Schedule to the ISDAMA. It was this event that was the foundation of IBRC's notice under clause 6(a) of the ISDAMA purportedly terminating the ISDAMA.
35. Mr Morgan submits that failure by the Company to repay what was due under the Facility Agreement would have entitled IBRC to serve a clause 6(a) notice if but only if it had not itself committed the bankruptcy Event of Default referred to earlier. In my judgment this submission is mistaken for the following reasons.
36. The key part of clause 6(a) is the phrase "[i]f at any time an Event of Default with respect to a party (the "Defaulting Party") has occurred and is then continuing, the other party (the "Non-defaulting Party") may …." serve an early termination notice. Clause 6(a) is permissive as is apparent from the use of the word "may" and from the analysis at paragraph 25 of Longmore LJ's judgment in Lomas v. JFB Firth Rixson Inc (ante). This means that if the non-defaulting party in relation to a particular Event of Default ("ED1") chooses not to exercise the power to serve a clause 6(a) notice following that event the contract continues in full force and effect subject only to the suspension of the payment obligation conferred by clause 2.3.
37. One consequence of this is that the party who is the non-defaulting party in relation to ED1 may subsequently itself commit an Event of Default ("ED2"). In such an event the defaulting party in relation to ED1 is fully entitled to serve an early termination notice under clause 6(a) in respect of ED2 as long as the non-defaulting party in respect of ED1 has not itself served a clause 6(a) notice in relation to ED1. The phrases "Defaulting Party" and "Non-defaulting Party" in clause 6(a) do not refer to anything other than the status of the party concerned in relation to the particular "Event of Default" in respect of which a party served an Early Termination notice. That being so a party who is in default in relation to ED1 is fully entitled to serve an Early Termination notice in relation to ED2 providing that in relation to that event that party is the Non-defaulting Party. It follows that Mr Morgan is mistaken in submitting that clause 6(a) contains "nonsensical nomenclature" and is also mistaken in his submission that the clause ceases to be capable of "sensible operation" in any case where each party is both a defaulting and a non-defaulting party. Each is fully entitled to choose whether to serve an Early Termination notice in respect of the Event of Default for which it was the non-defaulting party. By definition the first in time to serve the notice will be the party that brings about Early Termination.
38. The clause 6(a) notice that brought the Swaps to an end was dated 15 July 2014 and was served by IBRC. The relevant part of the notice for present purposes is on page 2 of the Notice and is to the following effect:

"We received a notice from LSREF III Wight Limited that on 30 June 2014 an Event of Default (as defined in the Facility Agreement) occurred under the Facility Agreement as a result of your failure to repay the Liabilities (as defined in the Facility Agreement) on the Repayment Date (as defined in the Facility Agreement). The Event of Default under the Facility Agreement constitutes (i) an Event of Default under Part 5(f) of the Schedule to the Agreement in respect of the Counterparty, and (ii) a Cross Default Event of Default under Section 5(a)(vi)… "

IBRC was fully entitled to serve its clause 6(a) Notice because in relation to the relevant Event of Default (the Company's failure to repay the sums due under the Facility Agreement on the Repayment Date) IBRC was the non-defaulting party and the Company was the defaulting party and because the Company had not served a clause 6(a) notice in relation to IBRC's prior bankruptcy Event of Default. The bankruptcy Event of Default was of no effect other than to suspend the Company's payment obligations under the ISDAMA pursuant to clause 2(a)(iii).

39. Once an Early Termination notice has been issued, the clause 2 suspension ceases to apply and clause 6 code then applies – see MHB-Bank AG v. Shanpark Limited [2015] EWHC 408 (Comm) [2016]1 BCLC 527 per Cooke J at paragraphs 29-30. It follows that any sum due under the clause 6 regime from the Company to IBRC became payable notwithstanding the applicability of the clause 2 suspension down to the date of early termination.

Conclusion

40. IBRC was fully entitled to serve an Early Termination notice under clause 6(a) of the ISDAMA and the Company was liable to pay the ETP notwithstanding that IBRC had committed a bankruptcy Event of Default prior to the service of that notice.

Issue 3

Introduction

41. As set out in the Application Notice, Issue 3 is:

"Is any Early Termination Amount payable by the Company … secured by a debenture dated 11 December 2009 granted by the Company to IBRC and subsequently assigned by IBRC to WDW … "

Relevant Contractual and Debenture Terms

42. The Debenture was made between the Company and IBRC acting "… on its own behalf and on behalf of the Hedging Counterparty (if the Hedging Counterparty is the Lender or its Affiliate". By clause 3.1 of the Debenture:

"All the security under this Deed is created in favour of the Lender as continuing security for the payment and discharge of the Liabilities with full title guarantee"

Clause 1.1 of the Debenture contains the definitions relevant to that instrument other than those contained in the Facility Agreement and incorporated into the Debenture by reference by clause 1.2. Clause 1.1 defined "Liabilities" as meaning:

" all monies, obligations and liabilities which shall from time to time…be due, owing or incurred from each Obligor to the Lender and/or to the Hedging Counterparty under the Finance Documents whether actually or contingently"

and "Obligor" as any party to the relevant agreements including the ISDAMA other than "… the Lender and the Hedging Counterparty". It is not in dispute that the Company is and was an "Obligor" in relation to the ETP if otherwise it was due.

43. Clause 1.2.1 of the Debenture provided that:

"unless the contrary intention is expressed, all defined terms in the Facility Agreement have the same meaning here."

Thus, whilst the phrase "Hedging Counterparty" is not defined in the Debenture, the definition contained in the Facility Agreement applies. The definitions clause within the Facility Agreement (Clause 1.1) defines "Hedging Counterparty" as meaning "the party to the Hedging Arrangement other than the Borrower" and "Hedging Arrangement" is defined as meaning "… any … interest rate swap … and includes all related documentation …".

44. By the SAD, the Debenture was assigned by IBRC to WDW who declared that it held it on trust for itself and for IBRC. On 20 October 2014, IBRC assigned to MHB all the rights it had to or in the ETP by a Deed of that date, clause 2.1 of which was to the following effect:

"With effect from and including the date of this Deed…the Assignor [IBRC] assigns absolutely to the Assignee [MHB], and the Assignee accepts the assignment of, such right, title and interest (if any) as the Assignor has in and to the Early Termination Amount and the interest accruing from and including the Early Termination Date in accordance with the ISDA and any other rights associated with the payment of such amounts pursuant to section 8 of the ISDA."

At that point, the right to receive the ETP had been assigned to MHB but the Debenture had been assigned to WDW, who held it on trust for itself and IBRC. That was purportedly corrected by an amending Deed dated 25 August 2016, which purported to declare that as and from 25 August 2016, WDW held the Debenture on trust for itself and MHB in place of IBRC.

Discussion

45. Mr Morgan accepts that any liability that the Company had to pay the ETP to IBRC was secured by the Debenture. He submits that following the assignment of the benefit of the debenture to WDW, WDW became the "Lender" for the purposes of the Debenture but IBRC retained all rights to receive the ETP. When IBRC demanded payment of the ETP, it did so at a time when it no longer had the benefit of the Debenture. He submits therefore that the ETP could not be part of the "Liabilities" secured by the Debenture because following the assignment of the Debenture, the "Lender" was WDW not IBRC and IBRC was not a "Hedging Counterparty" because it is not an "Affiliate" of WDW as he submits is required by the definition in the Parties section of the Facility Agreement. It is submitted that it follows that the ETP was not secured under the Debenture.
46. Mr Smith submits that this analysis is wrong. He maintains that clause 3.1 of the Debenture as assigned confers on WDW a specifically enforceable right to have the Company's property appropriated to the payment of the ETP even though WDW has no right itself to receive the ETP. He relies on the statement of principle set out in paragraph 43 of the judgment of Briggs J as he then was in Re Lehman Brothers International (Europe) (In Administration) [2012] EWHC 2997 (Ch) that

"…it is not inherent in the nature of a charge that the chargee must be, or be a trustee or fiduciary for, the creditor. All that is necessary is that the chargee has a specifically enforceable right to have the relevant property appropriated to the payment or discharge of the relevant debt or other obligation. It is that right of specific enforcement which transforms what might have otherwise been a purely personal right into a species of proprietary interest in the charged property"

47. I accept Mr Smith's submission for the following reasons. The "Liabilities" that are secured by clause 3.1 of the Debenture include the liability to pay the ETP subject to the qualification that obligation must be one owing to the " … Lender and/or the Hedging Counterparty …".
48. The only "Lender" anywhere defined within the Debenture is IBRC. It is so defined in the Parties section of the Debenture. If and to the extent that regard cannot be had to the definition in the Parties section of the Debenture, it is clear that "Lender" under the Facility Agreement is IBRC because it is described as such in the Parties section of that document and because the core obligation to lend contained in clause 2 is that of the Lender who can only be IBRC. Mr Smith did not dispute that the effect of the assignment of the Debenture to WDW was that WDW became the "Lender" for the purposes of the Debenture. It is not in dispute that the right to receive the ETP was not at any stage assigned to WDW, although I do not accept Mr Morgan's passing submission that it could not have been – see clause 7(b) of the ISDAMA.
49. Mr Smith's central submission is that the phrase "Hedging Counterparty" as defined in the Facility Agreement is capable of applying to any party to "the Hedging Arrangement" as that concept is defined by the Facility Agreement that is "… any … interest rate swap … and … all related documentation …" Mr Smith submits that in the result the security granted by the Debenture secured all payments due under the ISDAMA whoever the Hedging Party might be or become. In my judgment this submission makes commercial sense when judged at the date the relevant agreements were made and receives support from the text of the Debenture when read as a whole.
50. The Parties section of the Debenture clearly contemplates that a Hedging Counterparty may either be the Lender as defined or an Affiliate of the Lender but also could be neither. This is the effect of the use of the word "if". The definition of "Hedging Counterparty" contained in the Facility Agreement has been incorporated by reference into the Debenture and clearly defines such a party entirely generally as long as the party is a party to the Hedging Arrangement as defined.
51. The Debenture contemplates that in the future the Lender might wish to and was entitled to assign or novate the benefit and burden of its rights and obligations under it – see clause 11.4. The ISDAMA contemplates that any party to it (necessarily including the Lender as defined in the Debenture) was entitled to make a transfer of all or any part of its interest in any amount payable to it from a Defaulting Party under clause 6(e). Thus it was within the contemplation of the parties that IBRC could both assign the benefit of any entitlement to an ETP and could assign the benefit of the Debenture. The Debenture secured obligations under other instruments apart from the ISDAMA including the Facility Agreement. Clause 23 of the Facility Agreement contemplates that IBRC might assign or novate its rights and obligations thereunder to third parties that satisfied the definition considered under Issue 1 above. Thus it was contemplated by the parties at the time when the Facility Agreement and later the Debenture were concluded as at least a possibility that different rights might be transferred to different third parties even though they were all secured by the Debenture.
52. As Briggs J made clear in the paragraph of his judgment quoted above, where a chargee is not the relevant creditor, all that is necessary is that the chargee has a specifically enforceable right as against the chargor to have the relevant property appropriated to the payment of the relevant debt. The effect of clause 3.1 of the Debenture when read together with the definition of "Liabilities" contained in clause 1.1 of the debenture is to confer on WDW a specifically enforceable right to require the Company to appropriate the property charged by the Debenture to discharge the ETP.
53. The assignment of IBRC's entitlement to receive the ETP to MHB does not materially alter the analysis set out above. WDW was as entitled to specifically enforce the Debenture in favour of MHB after that assignment as it was entitled to enforce it in favour of IBRC prior to that enforcement. Whilst Briggs J recognised that a party in the position of WDW might be a trustee for the creditor, he also recognised that this was not a necessary requirement. Whilst it is true to say that prior to 25 August 2016, WDW held the Debenture on trust for itself and IBRC, not MHB, that was not material as between WDW and the Company though it might have been as between WDW on the one hand and IBRC and MHB on the other. However any issue that might have arisen as between those parties was resolved by the amending Deed dated 25 August 2016.
54. The final point that I should mention is an argument by Mr Morgan to the effect that the ETP was not secured by the Debenture because once a termination occurred there ceased to be a "Hedging Arrangement". I am not able to accept that submission. The effect of an early termination is that set out in clause 6(c)(ii) of the ISDAMA – that is that " no further payments under section 2 … in respect of the Terminated Transactions will be required to be made but without prejudice to the other provisions of this agreement …". The effect of an early termination is that the primary obligations are replaced with a secondary obligation to pay the ETP but that obligation is as much "… monies … due from … Obligor to … Hedging Counterparty under …" the ISDAMA as the sums due under clause 2 of the ISDAMA. As Mr Smith submits any other conclusion would be absurd since removing the secondary obligation from the scope of the Debenture would be to remove security at a time when it is likely to be of most value. That is a highly uncommercial outcome that cannot realistically have been the intention of the parties.

Conclusion

55. For the reasons set out above, I conclude that the ETP is secured by the Debenture notwithstanding the assignment of the debenture by IRBC to WDW.

Summary of Conclusions

56. In summary:

(a) In relation to Issue 1, I conclude that WDW was within the class of "financial institutions" referred to in clause 23.2 of the Facility Agreement;

(b) In relation to Issue 2, I conclude that IBRC was entitled to serve Notice of Early Termination under clause 6(a) of the ISDAMA as and when it did and the Company was liable to pay the ETP notwithstanding that IBRC had committed a bankruptcy Event of Default prior to the service of that notice; and

(c) In relation to Issue 3, I conclude that payment by the Company of the ETP was secured by the Debenture notwithstanding the assignment of the Debenture by IBRC to WDW.

57. I will hear the parties further at the handing down of this judgment as to costs and what if any further directions are required.