England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		07/11/2012

Mr Justice Eder :

A - OVERVIEW

1 Introduction

1. These proceedings relate to an enforcement and restructuring of a group of companies known as the Stabilus Group that occurred in early April 2010. At their heart is a battle between a group of Senior Lenders and a group of Mezzanine Lenders and, in the middle, a Security Trustee.
2. The Stabilus Group carries on business as a leading manufacturer of gas springs and hydraulic vibration dampers which are used in the automobile industry and other industries. In 2008 the Stabilus Group was acquired by a private equity fund (Paine & Partners LLC, "Paine") for a net consideration of approximately €519 million. As part of this acquisition, companies in the Stabilus Group assumed substantial indebtedness to various lenders under Senior and Mezzanine Facilities Agreements (the "SFA" and the "MFA" respectively and together the "Facility Agreements") both dated 10 February 2008 and governed by English law. The indebtedness under these agreements was secured by guarantees and other security (such as share pledges and security over receivables) provided by companies in the Stabilus Group. The rights of the various lenders to the Stabilus Group were regulated (at least in part) by the terms of an intercreditor agreement dated 20 March 2008 and also governed by English law ("ICA"). In particular, the ICA provided, in effect, that the claims of the Mezzanine Lenders were completely postponed and subordinated to the claims of the Senior Lenders. Under these agreements, the 2^nd defendant ("JPMEL") was designated the "Security Trustee", the "Senior Facility Agent" and (at least initially) also the "Mezzanine Facility Agent". (Unless otherwise stated, capitalised terms used in this Judgment are as defined in these agreements.)
3. By April 2010, the Stabilus Group owed approximately €409 million to its Senior Lenders (including the claimant ("Saltri") which was part of what has been referred to as the Triton III investment funds or "Triton") and approximately €83 million to its Mezzanine Lenders (in effect the 1^st/3^rd and 5^th defendants (together the "Mezzanine Defendants")). By way of explanation, the 1^st/3^rd defendant, MD Mezzanine SA SICAR ("MDM"), is a party to these proceedings in its capacities as Mezzanine Facility Agent and as a lender under the MFA. MDM is an investment fund which is managed by AXA Private Equity. The 5^th defendant, ECAS S.à r.l. ("ECAS"), is also a lender under the MFA and is jointly represented in these proceedings with MDM. ECAS is an investment fund which is managed by European Capital.
4. It is common ground that from 2008 the Stabilus Group experienced severe financial difficulties, although the extent of those difficulties and the potential for recovery are matters in issue in these proceedings. As appears in more detail below, it is the Mezzanine Defendants' case that an important part of the story is the decision taken in about June 2009 to instruct N M Rothschild ("Rothschild") in relation to a possible sale of the Stabilus Group, the steps taken by Rothschild in that regard as well as the advice which they gave in the second half of 2009 and in the early part of 2010 which, say the Mezzanine Defendants, was wrongly ignored by JPMEL. In the event, on 8 April 2010 and acting on the instructions of 100% of the Senior Lenders, JPMEL in its capacity as Senior Facility Agent issued an Enforcement Notice to itself in its capacity as Security Trustee to accept an offer to transfer the business of the Stabilus Group to the 3^rd and 4^th parties "Acquilux" and "KG" (both of which were also part of the Triton III investment funds) subject to certain liabilities to the Senior Lenders (the "Restructure"). (For convenience, I shall refer to Saltri, Acquilux and KG as the "Triton Parties"). JPMEL's case is that it was both entitled and bound to follow such instructions and that it duly carried out the restructuring in accordance with the terms of the Enforcement Notice by entering into an agreement (the "Restructuring Agreement") which is described more fully below but which, in essence, resulted in the Mezzanine Lenders being left without any significant assets and, it is said, the Senior Lenders taking what has been referred to as a 36% "haircut".
5. In summary, the Mezzanine Defendants say that although they and the other Mezzanine Lenders were indeed left without any significant assets, there was in truth no write off or "haircut" by the Senior Lenders; that what happened was that the Stabilus Group was deleveraged by 36% to comply with German law, by means of an accounting mechanism whereby debt was converted into hybrid (quasi-equity/debt) instruments (referred to as Profit Participating Loans or "PPLs"); that one type of interest was exchanged for another; that the restructuring was the result of a bargaining exercise as between the Senior Lenders following which various groups of Senior Lenders obtained larger or smaller parts of the cake; that an important feature of these negotiations was that certain Senior Lenders (including Triton and others) held a blocking minority of the Senior Debt and were able to impose a deal in which Triton came out with the larger share of the cake, with others (viz. Anchorage and Goldman Sachs) also taking significant benefits and the remaining Senior Lenders obtaining lesser but still significant benefits; and that this resulted in the carving up of all the value of the Stabilus Group as between the Senior Lenders.
6. Against that background, the Mezzanine Defendants challenged the validity of the Restructure. The present proceedings were then initiated by Saltri in particular seeking declaratory relief that the Restructure was and is valid. The Mezzanine Defendants dispute this on various grounds: in particular they say that the Restructure was effected without authority or for an improper purpose and therefore "void". Alternatively, the Mezzanine Defendants advance claims for equitable compensation/damages for breaches of duty against the Security Trustee i.e. JPMEL but not, it should be noted, against the Senior Lenders themselves. That is the essence of the present dispute. I should make plain that Mr Smouha QC on behalf of the Mezzanine Defendants expressly disavowed any suggestion of bad faith on the part of JPMEL or any other party.
7. By virtue of a previous order of this Court, all issues of quantum are to be dealt with, if necessary, at a later stage. Accordingly, this Judgment is concerned with liability only.

2 The evidence

8. There were served witness statements from the following individuals who gave oral evidence:

a On behalf of the Triton Parties:

i Mr Andi Klein. He joined Triton Beteiligungsberatung GmbH in January 2009 as a senior investment professional. His role involves monitoring and researching the market to make recommendations for future investments that are primarily based in Germany, Austria and Switzerland. He began focussing his research on the Stabilus Group as a potential target for investment in May/June 2009 and was responsible for submitting a Debt Investment Proposal dated 30^th June 2009 to Triton's investment committee. Thereafter, he played a major role on behalf of the Triton Parties in acquiring Triton debt on the secondary market and in the eventual Restructure of the Stabilus Group in April 2010.

ii Mr Bobby Rajan. He is a senior director at the Alvarez & Marsal Group ("A&M"). In that capacity, he assists and advises corporates, larger creditor syndicates, original equipment manufacturers ("OEMs"), customer groups and boards throughout North America, Europe, Latin America and Australia. As appears below, he was appointed as a restructuring officer of the Stabilus Group in April 2009. In mid-May 2009, he became the chief restructuring officer ("CRO") and interim chief financial officer ("CFO") and was appointed to four management boards (i.e. Geschaftsfuhrer) of companies within the Stabilus Group. He continued as CFO until August 2009 when Mr Mark Wilhelms was appointed as permanent CFO, following which he (i.e. Mr Rajan) continued in his role as CRO and board member until April 2010.

iii Mr Mark Wilhelms. He joined the Stabilus Group and became its CFO on 3 August 2009, a role which he still occupies. As CFO, he manages the financial aspects of the Stabilus Group including the management of financial risks, devising the financial strategy and monitoring and analysing the financial results of the Stabilus Group.

b On behalf of JPMEL:

i Mr Peter Jaffe. He is a chartered accountant and a managing director of JPMEL. He has worked at JP Morgan for almost 15 years and has held various roles over that time. For the past 10 years he worked in the Special Credits Group ("SCG") within JP Morgan and for the past 4 years has been head of special credits for Europe, the Middle East and Africa ("EMEA"). He confirmed in cross examination that for practical purposes he took all the important decisions on behalf of JPMEL in its capacity as Security Trustee.

ii Mr Owen Medler. He is an investment banker and executive director at JP Morgan. He is formally employed by JP Morgan Limited but carries out work on behalf of various JP Morgan group companies including JP Morgan Chase Bank NA ("JPMCB") and JPMEL. At the times relevant to these proceedings, he was employed by JPMEL.

iii Mr Michael Weaver. He is the managing director of American Appraisal (UK) Limited ("AA"). He has 16 years valuation and advisory experience having started his career at Coopers & Lybrand now Pricewaterhouse Coopers LLP ("PwC") in 1995. In 2003, he started his own valuation business, Gravitas Partners LLP, with three other senior PwC colleagues. Gravitas Partners LLP was then purchased by AA in 2005. He now leads AA's UK practice and is chairman of the global firm's strategic advisery board. He has significant experience of valuing all types of financial assets, including businesses, shares, complex financial instruments and intangible assets for a variety of purposes including for mergers and acquisitions, restructuring, litigation, business strategy, tax and financial reporting. As set out below, in November 2009, AA was engaged to carry out a valuation of the Stabilus Group. In due course, it produced a draft report and then a final report to the Security Trustee setting out its opinion as to the enterprise value of the Stabilus Group as at 3 February 2010 (the "AA Report"). Mr Weaver was the person responsible for overseeing the project, for signing the valuation report and was the principal point of contact between AA, JPMEL and the Stabilus Group.

c On behalf of the Mezzanine Defendants:

i Mme Nathalie Faure Beaulieu. She is the regional managing director of European Capital Services Limited which is the sub-investment manager of European Capital Financial Services (Guernsey) Limited which is, in turn, the investment manager of ECAS. She was on the investment committee that originally approved ECAS' investment in March 2008 which resulted in ECAS becoming one of the Mezzanine Lenders under the MFA. From this time, she had little direct involvement herself but eventually took over the management of the investment on behalf of ECAS together with another colleague in about September 2009.

ii M. Olivier Berment. He is a managing director at AXA Investment Managers Private Equity Europe ("AXA Private Equity" or, for short, "AXA") which holds approximately US$30 billion of assets under management and, during the relevant period i.e. February 2008 to April 2010, acted as an adviser to MDM. In that capacity, he was part of AXA Private Equity's mezzanine team along with others including M. Stefano Mion and led by Mme Cecile Levi. He was directly involved with regard to events culminating in the restructure of the Stabilus Group.

iii Mme Cecile Mayer Levi. She is a managing director of AXA Private Equity. At the relevant time, February 2008 to April 2010, she was head of AXA Private Equity's mezzanine fund and responsible for a team of approximately 7 people including M. Berment and M. Mion. She was involved from the beginning with the investment by MDM in the Stabilus Group in 2008; in the formation of the Mezzanine Steering Committee (the "MSC") and the decision to appoint MDM as the Mezzanine Facility Agent in place of Lloyds Bank in March 2009; and thereafter in the events culminating in the Restructure in April 2010.

iv Mr Stephan Illenberger. He is on the executive board of AXA Private Equity. He was on that board when it approved the original investment and advised MDM to invest (in the event €29 million) in March 2008 in the Stabilus Group. He was not involved in the day-to-day management of the investment in the Stabilus Group until shortly before the meeting on 25 March 2010 as referred to below but it is plain that he was at least well aware of certain events as described below and the financial difficulties facing the Stabilus Group during this period.

9. In addition I heard expert evidence as to the enterprise value of the Stabilus Group as at 8 April 2010 from three experts viz (i) Mr Steve Lygo of Parmentier Arthur Group (instructed by the Mezzanine Defendants); (ii) Mr Tim Giles of Charles River Associates (on behalf of the Triton Parties); and (iii) Mr Andrew Robinson of Deloitte LLP (on behalf of JPMEL). All these experts submitted written reports and, pursuant to the order of the Court, also prepared and signed a Joint Memorandum setting out areas of agreement and disagreement.
10. There was also put in evidence expert reports in relation to German insolvency law from Professor Paulus and Dr Esser. They also produced and signed a Joint Memorandum. However, in the event, there was a large measure of agreement between these experts and it was agreed by the parties that their evidence could stand without cross-examination subject to any comments that any party might make.

3 Roadmap

11. The issues in the case were wide-ranging and, in some respects, somewhat diffuse. In order to seek to narrow the issues (or at least to identify them properly), I invited the parties to seek to agree a "roadmap". Unfortunately, this proved impossible. Be that as it may, it is convenient to summarise the overall shape of the remainder of this Judgment. First, after considering certain preliminary matters, I propose to set out an outline of the main events so far as possible in chronological order including a summary of the main terms of the most relevant agreements viz the SFA, MFA and ICA. I will then consider and summarise a number of legal principles following which I will then address the three main issues arising out of the case advanced by the Mezzanine Defendants in the (amended) roadmap attached as Appendix 1 to the Mezzanine Defendants' Closing Submissions which are, in essence, as follows:

(A) Did JPMEL comply with the duties it owed under Clause 14 of the ICA and, if not, what are the consequences of any such breach of duty?

(B) Did JPMEL comply with the duties it owed under Clause 15 of the ICA and, if not, what are the consequences of any such breach of duty?

(C) Did JPMEL act in breach of any, and if so what, fiduciary duty and, if so, what are the consequences of such breach?

In considering these issues, I will so far as possible deal with the points raised by the Triton Parties and JPMEL.

4 JPMEL's disclosure

12. Before turning to summarise the main events, it is appropriate to emphasise certain important matters with regard to the evidence and, in particular, the disclosure provided by JPMEL which was the subject of major complaint by Mr Smouha QC on behalf of the Mezzanine Defendants. In particular, it was Mr Smouha QC's submission that during the relevant period (i.e. the latter part of 2009 and early 2010), JPMEL failed properly to inform the Mezzanine Defendants as to what was happening and, in particular, as to what it was doing in its capacity as Security Trustee and thereafter in effect sought deliberately to "blank out" what had happened. There were, he submitted, consistent attempts to keep back information which he invited the Court to take into account in assessing JPMEL's case and the evidence called by both JPMEL and the Triton Parties.
13. In particular, Mr Smouha QC drew attention to the following matters at the time and prior to these proceedings:

a The Mezzanine Defendants were excluded from knowledge of JPMEL's preparatory steps for enforcement although Mr Jaffe had full knowledge of the restructuring negotiations, lock-in agreement (with its planned steps for JPMEL to take) and the Restructuring Agreement itself.

b It took several months and separate proceedings for the Mezzanine Defendants to obtain the Restructuring Agreement despite the fact that this was an agreement whereby JPMEL claimed to have disposed of the Mezzanine Defendants' assets on their behalf and with their authority.

c The AA Report was obtained without the knowledge of the Mezzanine Defendants (let alone their participation in the process, or giving them any opportunity to comment and to review the report) and again that was only obtained when produced under compulsion in proceedings in Luxembourg.

d The Mezzanine Defendants' requests at the time for sight of any valuation report and for a sales process were ignored.

14. In relation to these proceedings, Mr Smouha QC also drew particular attention to the following matters:

a So far as JPMEL was concerned, the disclosure position was particularly unsatisfactory. In particular, in carrying out disclosure, it would seem that an important distinction had been drawn by JPMEL between documents held, on the one hand, by them (i.e. JPMEL) and, on the other hand, by other entities within the JP Morgan group, including JP Morgan Chase Bank ("JPMCB"). As had appeared from a previous witness statement served on behalf of JPMEL at a previous interlocutory hearing when the Mezzanine Defendants applied to the Court for an order for specific disclosure, the essential factual basis for that distinction was that individuals who did anything for the Security Trustee only worked for JPMCB on secondment; and that the basis for treating documents as having been generated in different capacities was that the individuals in question did in fact address their minds to the distinction between companies and roles when they, for example, sent or received an email despite there being no physical separation in the holding of documents, emails etc, nor any distinction of access (there was one server and each individual's access remained unaffected). As I understand, the Court accepted that distinction in refusing to order specific disclosure. However, Mr Smouha QC submitted that the evidence given at trial by JPMEL's witnesses comprehensively undermined the evidence relied upon by JPMEL at the interlocutory stage to resist giving disclosure of Senior Lender documents. In particular, Mr Smouha QC submitted that it was plain that Mr Jaffe and Mr Medler were not "seconded" and did not even know of their supposed secondments; they had no conception about the differences between JPMEL and JPMCB: to them it was all one bank. Thus, Mr Smouha QC submitted that what he described as the "elaborate construct, no doubt at enormous expense, to have documents divided" was done on an incorrect factual basis, although it should be noted that Mr Smouha QC did not seek to renew his original application. In any event, Mr Smouha QC submitted that the result was that neither his clients nor the Court had the full picture.

b JPMEL's active consideration of conducting a sale process to establish value, its discussions with Rothschild, the confirmations sought and refused by Rothschild, the decision against Rothschild's advice not to conduct such a process are a factual part of the story that was completely "blanked" by JPMEL, both in the witness statements served on its behalf and in the opening skeleton arguments of both JPMEL and the Triton Parties. In particular, witness statements from those involved, including Mr Jaffe and Mr Medler on behalf of JPMEL, refer to the August 2009 Rothschild sale process and indeed rely on it but make no mention of the fact that each of them was actively involved in discussions with or about Rothschild in November 2009 to February 2010. The same approach was taken in the witness statement of Mr Rajan, called by the Triton Parties, despite his extensive involvement in those discussions.

c The very late production of internal documents (mainly manuscript notes) by JPMEL with regard to meetings which took place between Rothschild and representatives of JPMEL including its legal advisers, Baker & McKenzie. As appears below, these documents formed an important part of the case advanced by the Mezzanine Defendants. Until they were produced after the service of witness statements and shortly before the commencement of the trial, the documentary picture of these matters was fragmentary. The notes give a far fuller picture, although the documentary position was still unsatisfactory for the reasons stated above.

15. I agree with the thrust of much of these complaints. In particular, I agree that the original refusal by JPMEL to provide the wider disclosure sought by the Mezzanine Defendants does appear to have been on a basis which now seems, at least, somewhat doubtful although I remain uncertain whether the Court's decision would have been any different. However, as I have said, Mr Smouha QC did not seek to renew his application for further specific disclosure. The result is that I must consider the position on the basis of the material available although, as Mr Smouha QC submitted, I accept that I should and do bear well in mind his points of criticism.
16. I also agree that it is, to say the least, unfortunate that the notes from Baker & Mckenzie were produced so late. An explanation for the delay was proffered by Mr Miles QC in the form of a witness statement from the partner in charge of the disclosure process on behalf of JPMEL, Mr Andrew Keltie. He explained that the notes were not originally disclosed because of an oversight by Baker & McKenzie. However, although I am grateful for that explanation and accept that there was no deliberate attempt to conceal documents, I am bound to say that such explanation was, in my view, less than satisfactory. Be that as it may, the documents have now been produced, albeit belatedly and I accept that, as submitted by Mr Smouha QC, they do indeed form an important part of the story.
17. With those comments in mind, I turn to summarise the main events so far as possible in chronological order.

B – OUTLINE OF THE MAIN EVENTS

1 The Stabilus Group

18. The Stabilus Group was founded in 1934 and has its headquarters in Koblenz, Germany. It is a leading manufacturer of gas springs and hydraulic vibration dampers. These springs and dampers are used in motor cars (e.g. in the opening and closing of bonnets and boots and also for adjusting seats) and also in other products such as swivel chairs, furniture and industrial machines. Throughout the relevant period and despite the general economic downturn, Stabilus remained the global market leader such that even as late as March 2010 it had 72%, 40% and 22% market share in its three major sectors i.e. automotive, industrial/vehicle components and swivel chair production respectively, ten times larger than the next competitor in automotive and three times larger in industrial. The Stabilus Group employed some 3,000 employees across five continents with nine production plants located around the world and a number of regional sales offices. Most business is undertaken by companies and plants located in Europe and in North America. The largest plant is located in Koblenz.
19. The Stabilus Group was sold in August 2004 to a private equity firm, Montagu Private Equity. It was then sold again in 2008 to Paine for €519 million net of fees and expenses. At that time, and at all material times subsequently prior to the implementation of the Restructure in April 2010, the legal structure of the Stabilus Group was as follows:

a The ultimate holding company was Stable Holdings S.à r.l. ("Stable Holdings"), a Luxembourg company;

b The immediate subsidiary of Stable Holdings was Stable I S.à r.l. ("Stable I"), a Luxembourg company;

c The immediate subsidiary of Stable I was Stable II S.à r.l. ("Stable II"), a Luxembourg company;

d The immediate subsidiaries of Stable II include Stable Beteiligungs GmbH, a German company ("Stable GmbH") and US, Australian and Romanian subsidiaries;

e The subsidiaries of Stable GmbH include Stabilus GmbH ("Stabilus"), a Germany company and the principal operating company in the Stabilus Group.

2 The SFA and the MFA

20. The acquisition by Paine was "leveraged" in the sense that the purchase price was substantially funded by lending provided by lenders to the Stabilus Group and secured against the Stabilus Group's assets. To this end, on 10 February 2008, the SFA comprising €340 million senior facilities (term loans A, B and C, capex facility and revolving credit facility) was entered into by Stable I as Borrower; and the MFA comprising a €75 million mezzanine facility was also entered by Stable I as Borrower. The lending under the MFA was contractually subordinated to that under the SFA. As a reflection of its subordinated status, the Mezzanine Debt bore a higher rate of interest than the Senior Debt.
21. The parties to the SFA included Stable I as Parent, Original Borrower and Original Guarantor, JP Morgan plc as Mandated Lead Arranger, and JPMEL as agent (the "Senior Facility Agent") and as the Security Trustee. The parties to the MFA included Stable I as Parent, Original Borrower and Original Guarantor, JPMCB as Original Lender, JP Morgan plc as Mandated Lead Arranger, and JPMEL as the Mezzanine Facility Agent and as the Security Trustee. The relationship between the Senior Lenders and the Mezzanine Lenders was set out in detail in the ICA.
22. The liabilities under both the SFA and the MFA were guaranteed by various companies within the Stabilus Group (which acceded as guarantors to the SFA and the MFA) and secured by various security granted by the relevant Obligors in favour of the Security Trustee (the "Transaction Security"). The Transaction Security included: (i) a Luxembourg law pledge granted by Stable I over interest-free preferred equity certificates issued by Stable II (the "Preferred Equity Certificates Pledge"); (ii) a Luxembourg law pledge granted by Stable I over shares in Stable II (the "Share Pledge"); and (iii) a Luxembourg law pledge granted by Stable I over receivables due from Stable II (the "Receivables Pledge").
23. Both the SFA and the MFA were syndicated lending facilities, with the loans made available under them syndicated to a syndicate of Lenders who would then share responsibility for advancing the lending and who would share the rights in respect of such lending. The responsibility for syndicating the loans rested with JP Morgan plc as Mandated Lead Arranger. Both the SFA and the MFA were successfully syndicated with the result that the Senior Lenders and Mezzanine Lenders were both constituted of groups of different banks and other financial institutions.

2(i) The SFA

24. The SFA contained, as material, the following:

a Under Clause 29 of the SFA, the Senior Lenders appointed a Senior Facility Agent to act as their agent in connection with the Finance Documents. The Senior Facility Agent's duties are "solely mechanical and administrative in nature".

b JPMEL was appointed as the Senior Facility Agent.

c The Senior Facility Agent was obliged to act on the instructions of the "Majority Lenders" under the SFA (i.e. lenders "whose Commitments aggregate 66 2/3 per cent. or more of the Total Commitments"), Clause 29.7(a) of the SFA providing:

"Unless a contrary indication appears in a Finance Document, the Agent shall (i) exercise any right, power, authority or discretion vested in it as Agent in accordance with any instructions given to it by the Majority Lenders (or, if so instructed by the Majority Lenders, refrain from exercising any right, power, authority or discretion vested in it as Agent) and (ii) not be liable for any act (or omission) if it acts (or refrains from taking any action) in accordance with an instruction of the Majority Lenders."

d Clauses 26.1 to 26.17 of the SFA set out a number of Events of Default under the SFA, which include non-payment of any amount due pursuant to a Finance Document, non-satisfaction of various Financial Covenants and inability (whether actual or deemed) to pay debts as they fall due.

e Clause 26.19 provided, inter alia, that:

"On and at any time after the occurrence of an Event of Default which is continuing the Agent may, and shall if so directed by the Majority Lenders, by notice to the Parent:

[...]

(ii) declare that all or part of the Utilisations, together with accrued interest, and all other amounts accrued or outstanding under the Finance Documents be immediately due and payable, at which time they shall become immediately due and payable.

[...]

(vi) exercise or direct the Security Trustee to exercise any or all of its rights, remedies, powers or discretions under the Finance Documents."

2(ii) The MFA

25. Under the MFA:

a Under Clause 27 of the MFA, the Mezzanine Lenders appointed a Mezzanine Facility Agent to act as their agent in connection with the Finance Documents. The Mezzanine Facility Agent's duties are likewise described by the MFA as being "solely mechanical and administrative in nature".

b JPMEL was initially appointed as the Mezzanine Facility Agent but was replaced by Lloyds TSB and then (in April 2009) by MDM.

c The Mezzanine Facility Agent was obliged to act on the instructions of the "Majority Lenders" under the MFA (i.e. lenders "whose Commitments aggregate 66 2/3 per cent. or more of the Total Commitments"), Clause 27.7(a) of the MFA providing:

"Unless a contrary indication appears in a Finance Document, the Agent shall (i) exercise any right, power, authority or discretion vested in it as Agent in accordance with any instructions given to it by the Majority Lenders (or, if so instructed by the Majority Lenders, refrain from exercising any right, power, authority or discretion vested in it as Agent) and (ii) not be liable for any act (or omission) if it acts (or refrains from taking any action) in accordance with an instruction of the Majority Lenders."

d Clauses 24.1 to 24.17 of the MFA set out a number of Events of Default under the MFA, which include non-payment of any amount due pursuant to a Finance Document, non-satisfaction of Financial Covenants and inability (whether actual or deemed) to pay debts as they fall due.

e Clause 24.19 provided, inter alia, that:

"On and at any time after the occurrence of an Event of Default which is continuing the Agent may, and shall if so directed by the Majority Lenders, by notice to the Parent:

[...]

(ii) declare that all or part of the Utilisations, together with accrued interest, and all other amounts accrued or outstanding under the Finance Documents be immediately due and payable, at which time they shall become immediately due and payable.

[...]

(iv) exercise or direct the Security Trustee to exercise any or all of its rights, remedies, powers or discretions under the Finance Documents."

2(iii) The ICA

26. There are three main aspects of the ICA which are relevant in the context of the present case, namely: (i) the subordination of the Mezzanine Liabilities to the Senior Liabilities, (ii) the Security Trustee's powers in respect of enforcement of the Transaction Security and (iii) the appointment and obligations of the Security Trustee. The key provisions of the ICA in relation to each of these aspects are set out below.

2(iii)(a) The ICA – subordination

27. The subordination of the Mezzanine Liabilities to the Senior Liabilities was achieved by, and reflected in, a number of clauses:

a Clause 2.1 of the ICA provided that:

"Each of the Parties agrees that the Liabilities owed by the Obligors to the Lenders, and the Transaction Security granted by the Obligors to the Secured Parties, rank in the following order and are postponed and subordinated to any prior ranking Liabilities as follows:

(a) first, the Senior Liabilities; and

(b) second, the Mezzanine Liabilities."

b Clause 9.1 of the ICA (Payments to Senior Lenders) provided that the Obligors could make Payments to the Senior Lenders from time to time in respect of the Senior Liabilities whereas Clause 9.3 (Payments to Mezzanine Lenders) provided that the Obligors could only make Payments in respect of the Mezzanine Liabilities to the extent that (broadly speaking) such payments were in respect of interest, various fees and expenses, or, provided that the Senior Liabilities had been fully discharged, any other amount due and payable.

c Clauses 9.8 to 9.12 set out the mechanism for the issuing by the Senior Lenders (via the Senior Facility Agent) of a Stop Notice upon a Payment Stop Event. Payment Stop Events were defined to include any failure by an Obligor to make a payment due under the SFA, the breach of Financial Covenants in the SFA and various other Events of Default. The effect of the issue of a Stop Notice was that no payments could be made by the Obligors to the Mezzanine Lenders for 120 days following the issue of the Stop Notice. In particular, Clauses 9.9 and 9.10 provided, inter alia:

"9.9 Issue of a Stop Notice

(a) If a Payment Stop Event is continuing, the Senior Facility Agent may (on the instructions of the Majority Senior Lenders), issue a written notice to the Mezzanine Facility Agent on behalf of the Mezzanine Lenders and notify the Parent of that occurrence.

[...]

9.10 Effect of a Stop Notice

From the date of issue of a Stop Notice for the duration of the Stop Periods no cash payments may be made under Clause 9.3 (Payments to Mezzanine Lenders) in respect of any of the Mezzanine Liabilities."

d The right of the Mezzanine Lenders to take Enforcement Action was restricted. Clause 10.2 of the ICA provided that:

"Mezzanine Lenders: permitted enforcement

Until such time as the Senior Discharge Date shall have occurred, the Mezzanine Lenders (or the Mezzanine Facility Agent or Security Trustee acting on their behalf) may only take Enforcement Action if:

(a) the prior consent of the Majority Senior Creditors is obtained; or

(b) the Senior Lenders have accelerated their Liabilities or any of their Liabilities ... in which case the Mezzanine Lenders may take the same Enforcement Action that the Senior Lenders have taken but may not take any other Enforcement Action without the prior consent of the Majority Senior Creditors; or

(c) the Mezzanine Lenders have become entitled to do so as a result of the expiry of any Standstill Period arising as a consequence of any Enforcement Request issued on their behalf under Clause 10.3 (Enforcement Request); or

(d) they are permitted to do so as a result of Clause 11 (Effect of Insolvency Event)."

e By contrast, under Clause 14 of the ICA (as set out below) the Security Trustee was obliged to enforce the Transaction Security only at the request of the Senior Facility Agent. The Senior Facility Agent, in turn, was obliged to request such enforcement if instructed to do so by the Majority Senior Lenders (as noted above), provided that an Event of Default under the SFA had occurred and was continuing.

f The waterfall provisions contained in Clause 16 of the ICA, which sets out the order of priority of payments received by the Security Trustee (whether in connection with one of the Finance Documents or in connection with an enforcement), provides for the payment of the Senior Lenders before payment to the Mezzanine Lenders.

2(iii)(b) The ICA – Security Trustee's enforcement powers

28. The powers and obligations of the Security Trustee in respect of Enforcement Action are found primarily in Clause 14 (Enforcement of Security) and Clause 15 (Disposals and Claims) of the ICA.
29. Under Clause 14 of the ICA:

a As already noted above, save for situations (not relevant here) in which the Mezzanine Lenders were entitled to take enforcement action, the Security Trustee was to enforce the Transaction Security only at the request of the Senior Facility Agent (i.e. at the request of the Senior Majority Lenders). Clause 14.1 provided:

"Senior Facility Agent's directions

The Security Trustee will enforce the Transaction Security only at the request of either the Senior Facility Agent or the Mezzanine Facility Agent if it is entitled to request enforcement as a result of Clause 10 (Entitlement to Enforce). At all times after the request to commence enforcement has been issued and subject to the terms of [the ICA], the Security Trustee will act on the directions of the Senior Facility Agent (or, after the Senior Discharge Date, the Mezzanine Facility Agent) who shall be entitled to give directions and do any other things in relation to the enforcement of the Transaction Security (including in connection with, but not limited to, the disposal, collection or realisation of assets subject to the Transaction Security) that it considers appropriate including (without limitation) determining the timing and manner of enforcement against any particular person or asset."

b By Clause 14.3 the duties owed by the Security Trustee to the Mezzanine Lenders in respect of the enforcement of the Transaction Security, including in particular in respect of "the method, type and timing of that enforcement", were expressly set out. In particular, it was provided that the duty owed by the Security Trustee was "no different to or greater than the duty to the Obligors that would be owed by the Security Trustee, Receiver or Delegate under general law."

30. Under Clause 15 of the ICA, the Security Trustee was empowered to release assets from the Transaction Security both prior to and after Enforcement Action had taken place. Clause 15.2 (Disposal After Enforcement Action) provided, as material:

"Disposal after Enforcement Action

If any assets are sold or otherwise disposed of by (or on behalf of) the Security Trustee or by an Obligor at the request of the Security Trustee (acting on the instructions of or with the consent of the Senior Facility Agent, or after the discharge in full of the Senior Liabilities (other than the Hedging Liabilities) the instructions of the Mezzanine Facility Agent) either as a result of the enforcement of the Transaction Security or a disposal an Obligor after any Enforcement Action, the Security Trustee shall be authorised ... to release those assets from the Transaction Security and is authorised to execute or enter into, on behalf of and, without the need for any further authority from any of the Lenders, the Subordinated Lender or the Obligors:

(a) any release of the Transaction Security or any other claim over that asset [...]

(b) if the asset which is disposed of consists of all of the shares (which are held by an Obligor) in the capital of an Obligor or any holding company of that Obligor, any release of the Obligor or holding company from all liabilities it may have to any Lender, the Subordinated Lender or another Obligor ... and a release of any Transaction Security granted by that Obligor or holding company over any of its assets under any of the Transaction Security Documents; and

(c) if the asset disposed of consists of all of the shares (held by an Obligor) in the capital of an Obligor or any holding company of that Obligor and if the Security Trustee wishes to dispose of any Liabilities owed by that Obligor, any agreement to dispose of all or part of those Liabilities on behalf of the relevant Lenders, Obligors, the Subordinated Lender (as applicable) and the Facility Agents (with the proceeds thereof being applied as if they were the proceeds of enforcement of the Transaction Security) provided that the Security Trustee shall take reasonable care to obtain a fair market price in the prevailing market conditions (though the Security Trustee shall have no obligation to postpone any disposal in order to achieve a higher price)." (Original emphasis).

2(iii)(c) The ICA – appointment and obligations of the Security Trustee

31. Clause 17 of the ICA contained the bulk of the provisions dealing with the Security Trustee's appointment and obligations.

a By Clause 17.1 (Trust and Agency), the Secured Parties appointed the Security Trustee "as trustee, agent and administrator for the purpose of accepting and administering the Transaction Security for and on behalf of the Secured Parties" while the Security Trustee accepted its appointment "on the terms and subject to the conditions set out in [the ICA]" and declared that it would "hold the Trust Property on trust for the Secured Parties on the terms contained in [the ICA]."

b All of the parties to the ICA agreed, by Clause 17.1(d):

"that the Security Trustee shall have only those duties, obligations and responsibilities expressly specified in this Agreement or in the Security Documents to which the Security Trustee is expressed to be a party (and no others shall be implied)".

c The Secured Parties further agreed, by Clause 17.2(c), to release the Security Trustee:

"from any restrictions on representing several persons and self-dealing under any applicable law...to make use of any authorisation granted under [the ICA] and to perform its duties and obligations as Security Trustee hereunder and under the Transaction Security Documents."

d Clause 17.4 dealt with the Security Trustee's instructions and provided that, save in circumstances (not relevant here) where the Mezzanine Lenders had become entitled to commence enforcement, the Security Trustee was to act in accordance with instructions given to it by the Senior Facility Agent. In particular, Clause 17.4(a) provided:

"The Security Trustee shall ... unless a contrary indication appears in [the ICA], act in accordance with any instructions given to it by the Senior Facility Agent ... and shall be entitled to assume that (i) any instructions received by it from the Senior Facility Agent ... are duly given in accordance with the terms of the Finance Documents and (ii) unless it has received actual notice of revocation, that those instructions or directions have not been revoked."

e Clause 17.5 dealt with the Security Trustee's actions and provided, inter alia, that, subject to Clause 17.4, if the Security Trustee was directed by the Senior Facility Agent to exercise all or any of its rights, remedies, powers or discretions under any of the Finance Documents, "the Security Trustee may, and shall if so directed by the Senior Facility Agent, take any action as in its sole discretion it thinks fit to enforce the Transaction Security."

f Clause 17.6 (Security Trustee's discretions) sets out a number of assumptions the Security Trustee is entitled to make, and matters upon which it is entitled to place reliance. In particular, Clause 17.6(b) provided:

"The Security Trustee may ... if it receives any instructions or directions from the Senior Facility Agent ... to take any action in relation to the Transaction Security, assume that all applicable conditions under the Finance Documents for taking that action have been satisfied;"

g Clause 17.8 sets out a number of specifically excluded obligations, and includes a provision (under Clause 17.8(d)) that:

"Notwithstanding anything to the contrary expressed or implied in the Finance Documents, the Security Trustee shall not ... be under any obligations other than those which are specifically provided for in the Finance Documents;"

h Clause 17.9 states that the Security Trustee "shall not accept responsibility or be liable for" (inter alia):

"any losses to any person or any liability arising as a result of taking or refraining from taking any action in relation to any of the Finance Documents, the Trust Property or otherwise, whether in accordance with an instruction from a Facility Agent or otherwise unless directly caused by its gross negligence or wilful misconduct;

[...]

the exercise of, or the failure to exercise, any judgment, discretion or power given to it by or in connection with any of the Finance Documents, the Trust Property or any other agreement, arrangement or document entered into, made or executed in anticipation of, under or in connection with, the Finance Documents or the Trust Property;

any shortfall which arises on the enforcement or realisation of the Trust Property."

I should mention that I ruled at a very early stage of the trial that it was not open to JPMEL to rely on this provision so as to restrict its responsibility or to exclude liability with regard to the allegations in the present case. The reasons for that decision are set out in another Judgment which I do not propose to repeat here.

3 Financial difficulties of the Stabilus Group

32. Subsequent to its acquisition by Paine, the Stabilus Group encountered serious financial difficulties in the context of the onset of the global financial crisis. By October 2008 revenues and profits of the Stabilus Group began to fall sharply. By the end of December 2008, AXA Private Equity (which advised MDM as to its investments) was describing the November figures as "terrible".
33. By the end of January 2009 it was apparent that the Stabilus Group would soon be in breach of certain of its financial covenants under the SFA and the MFA and be unable to meet the interest payments due at the end of March 2009. In February 2009 the management of the Stabilus Group (the "Management") requested the deferral of interest payments and the agreement of the Lenders not to exercise their rights following the occurrence of an Event of Default under the SFA and the MFA. As a result, a group of Senior Lenders was established to act as a representative group (the "Senior Co-ordinating Committee", otherwise referred to as "SCC" or "Cocomm"). These Senior Lenders were: JPMCB; Allied Irish Banks; Commerzbank; DZ Bank; and BNP Paribas. JPMCB was chosen to act as co-ordinator.
34. It is important to note that although JPMCB and JPMEL both formed part of the JP Morgan group, their roles in relation to the Stabilus Group were very different i.e. JPMCB was (among its other roles) one of the Senior Lenders whereas, of course, JPMEL (among its other roles) was the Security Trustee, as well as the Senior Facility Agent. It was an important part of the case advanced on behalf of the Mezzanine Defendants that this distinction was often ignored or at least blurred, a criticism which is, in my view, well-founded at least in part. For example, it appears that at some time before February 2009, the performance of all JP Morgan's roles under the ICA and the SFA were, in effect, taken over by a business unit of JP Morgan called the "Special Credits Group" ("SCG") which was responsible for the oversight and management of JP Morgan's stressed and distressed portfolio in EMEA and Asia-Pacific. The relevant members of the SCG were all employed by JPMEL (including Mr Jaffe and Mr Medler) but it is clear that they also performed tasks for JPMCB and it would seem also for other entities within the JP Morgan group including, for example, JP Morgan London SLT, which from time to time were holders of part of the Senior Liabilities. As appears further below, it was only at a much later stage that JPMEL fully recognised that it had a distinct and independent role to perform as Security Trustee although even then the lines of demarcation often remained blurred.
35. In late February 2009 the Lenders agreed, on certain conditions, to defer interest payments and not to exercise certain rights that would arise on an Event of Default under the Facility Agreements. Certain conditions were imposed on the Stabilus Group, including the production of a three-year business plan to be presented to the Lenders in April 2009; the appointment of a chief restructuring officer ("CRO"); to use reasonable endeavours to procure a restructuring proposal from the then shareholders, Paine, by 30 April 2009; and to procure the delivery of a restructuring opinion to the Senior Lenders by 8 May 2009. Mr Medler performed the role of co-ordinator on behalf of JPMCB. In that role he conducted the day-to-day management of the SCC's business, but he did not have any authority to take decisions that would bind the SCC and the SCC did not have any authority to take decisions to bind the other Senior Lenders. Decisions were taken by the Senior Lenders' syndicate as a whole (or the relevant percentage required by the terms of the Finance Documents). At about this time, the Mezzanine Lenders also formed their own steering committee.
36. By 20 February 2009, the Stabilus Group had instructed Rothschild to advise it about its difficulties. A specific part of Rothschild's mandate was to "assist in valuing the Company and/or the Company's assets or operations".
37. In early March 2009, some Senior Lenders asked the Management to have a restructuring opinion prepared ("Sanierungsgutachten" or "SG Opinion") to assess a restructuring proposal against the three financial tests under German law: the liquidity test; an over-indebtedness test; and a restructuring ability test. In response to this request, on 18 March 2009, PwC were engaged by Stable I and its subsidiaries to perform an independent business review for supply to the Lenders and to provide information to the Lenders to assist them in determining their strategy. In addition, Rothschild was engaged by Stable GmbH to assist with the preparation of the three-year business plan that was required by the Lenders.
38. On or about 16 March 2009, Mr Medler reported to Mr Jaffe that "we" have asked PwC and Allen & Overy LLP to increase "contingency planning/planning B". PwC subsequently produced a report dated 29 April 2009 for the Senior Lenders identifying where, if there was no consensual restructuring and the Senior Lenders enforced their security and took control of the equity of the operating subsidiaries, the special purpose vehicle (or "SPV") to hold that equity should be located.
39. Meanwhile, by the end of March 2009, Events of Default had occurred under the SFA and the MFA which would have entitled the Senior Lenders to exercise their rights to instruct the Senior Facility Agent to accelerate the outstanding liabilities and to instruct the Security Trustee to enforce the Transaction Security. However, the Senior Lenders agreed to enter into a suspension of rights letter ("Senior Suspension of Rights Letter") agreeing not to accelerate or to make demand in respect of liabilities under SFA during the "Suspension Period". The Suspension Period was to terminate by 15 June 2009 at the latest (or such later date as agreed). A similar letter was entered into by the Mezzanine Lenders ("Mezzanine Suspension of Rights Letter").
40. By late March 2009 ECAS had concluded that the Mezzanine Debt was "under water" and that they were likely to have to write off their investment. At that stage, ECAS placed an enterprise value on the Stabilus Group of €378m. They also noted that Senior Debt was trading at 30-35%. By the end of March, they had attributed "a fair value of nil" to their investment in the Stabilus Group in their books.
41. Following the agreement of the standstill, the Stabilus Group continued to encounter difficulties. There was a downturn in the automotive sector; some of Stabilus' customers (such as General Motors and Chrysler) went into insolvency proceedings; there were problems with credit insurers who eventually withdrew cover with major suppliers; some suppliers, who were concerned at the failure of the Stabilus Group to comply with payment terms, began to demand payment on delivery; and "red listing" by customers. In mid-April 2009 Mr Rajan of A&M (a firm of specialist restructuring advisers) was appointed as an adviser and subsequently appointed as CRO to assist the Stabilus Group with a restructuring.
42. On 24 April 2009, the Management presented its original business plan ("OBP") to its Lenders. This was considered by them not to be acceptable due to the cashflow it projected. On 20 May 2009 the Stabilus Group's management presented a new business plan, which they called a Cash Optimised Business Plan ("COBP"), to the Lenders. This was designed to improve medium-term cashflow. It identified that the Stabilus Group had a need for new funding of about €35 million.
43. On 5 May 2009, Mr Medler circulated (including to Mr Jaffe) a PwC draft paper "setting out how the Senior Lenders may obtain control of the group".
44. On 20 May 2009, Rothschild gave a presentation to the SCC which placed particular emphasis on the concerns of the Stabilus Group's directors as to their potential liability under German insolvency law where a company is "over-indebted" or "illiquid".
45. On 29 May 2009, the Mezzanine Defendants' then financial advisers, Ernst & Young, ("E&Y"), provided a "First Draft Indicative Valuation" of the Stabilus Group. The covering email stated that there was a need to discuss the assumptions in more detail "which in this version lead to no remaining value for the mezzanine capital". E&Y valued the Stabilus Group at €186.4 million as at 31 May 2009, at a time when the Senior Liabilities were about €360 million (excluding interest).
46. On or about 31 May 2009, PwC delivered the first of two volumes of its "Independent Business Review". The second volume was delivered on 3 June 2009. The PwC Independent Business Review concluded that the Stabilus Group's debt needed to be restructured to reduce the "over-indebtedness" and that the Stabilus Group needed a cash injection of €34 million to address the "illiquidity". At about the same time, PwC produced a restructuring plan for the Senior Lenders. The plan assumed that the Stabilus Group had an enterprise value of €250 million and a future debt capacity of €184 million. (The debt capacity of the Stabilus Group was addressed in PwC's "Debt Capacity Review" dated 3 June 2009, which concluded that the Stabilus Group had a day one drawn debt capacity of €162 million but that it could support debt of up to €184 million based on assumptions regarding the likely utilisation of the proposed new money facility). This would have required a write-down of the existing debt of about €300 million: i.e. a write-down of a significant proportion of the Senior Liabilities and of all the Mezzanine Liabilities.
47. On 3 June 2009, a further version of the COBP extending beyond its initial three-year period to a period of five years was provided to the Lenders and a separate plan, the Equity Case Business Plan ("ECBP"), was also produced. It was also explained that unless new funding was in place by 15 June 2009, with a further extension of the standstill under the Suspension of Rights Letters, the Management would be under a mandatory obligation to file for insolvency in Germany.
48. By mid-June 2009 it was apparent that if new funds were not provided the directors would file for insolvency. In the event of insolvency PwC estimated the recovery for Senior Lenders at between 0% and 19% (if the share pledges were enforced and €34 million of new money was provided), or between 5% and 7% (if there were a liquidation and no new money). The Management's position was that they would file for insolvency in the week following 12 June 2009 if new money was not provided because the Stabilus Group would have run out of liquidity.
49. The negotiations within the Senior Syndicate were difficult and prolonged. By 16 June 2009 all but two of the Senior Lenders (both German banks) had agreed in principle to provide new money. Deka and Norddeutsche Landesbank, however, had formed the view that the Management should file for insolvency. The consent of all the banks was required because the new money was intended to rank ahead of the existing Senior Liabilities.
50. Following intense and last minute negotiations, on 18 June 2009 the Senior Lenders agreed to provide a new bridge facility (the "Bridge Facility") to the Stabilus Group in the sum of €25 million for a period of 90 days. The Suspension Periods under the Senior and Mezzanine Suspension of Rights Letters were also extended for 90 days (effective from 15 June 2009) to 13 September 2009.
51. As I have stated, under German law, a restructuring requires a liquidity test, an over-indebtedness test and a restructuring ability test. On 10 July 2009 PwC provided their interim report on the restructuring opinion (Sanierungsgutachten) required under German law in order to implement a proposed restructuring. PwC said that a clean (or satisfactory) restructuring opinion could not be given with the Stabilus Group's existing debt structure, but that the Stabilus Group could be turned around with a financial restructuring. According to PwC, in order to prevent over-indebtedness, approximately €300 million of existing debt needed to be subordinated, converted to equity or written off. A new money facility of €34 million would also have to be provided in addition to the Bridge Facility.
52. By about this time i.e. June 2009 the contemporaneous documents show that the general view of those concerned, including the Mezzanine Defendants, was that the value of the Stabilus Group was significantly below the value of the Senior Debt. For example:

a On 5 June 2009, Mr Mion agreed with a colleague's assessment that MDM's investment in the Stabilus Group should be fully written off as it had a fair market value of zero.

b On 29 June 2009, a member of the SCC reported to Mr Medler a discussion that she had had with a senior AXA representative, Mr von Meibom, who had recognised that the value of the Mezzanine Debt was zero.

c ECAS's Q2 2009 report on its investment in the Stabilus Group contained a valuation of just over €252 million for the second quarter of 2009 and stated that the ECAS investment had a fair value of nil.

d On 30 June 2009, AXA and ECAS gave a presentation to the Senior Lenders. AXA's aim was to become the shareholder of the Stabilus Group following a restructuring which included a write-off by the Senior Lenders of part of their debt and an injection of further cash. The main features of the Mezzanine Defendants' proposals were: (i) the Senior Lenders would write-off 40% to 60% of the value of their debt; (ii) the Mezzanine Lenders would write-off 80% to 100% of the value of their debt in return for the equity in the Stabilus Group; and (iii) new money of €20 million to €35 million would be provided at a "super-senior" level, with a contribution of €10 million from the Mezzanine Lenders.

53. This proposal was consistent with the Mezzanine Lenders' assessment of the value of the Stabilus Group at that time; although they did not believe that there was any value in their investment, their expectation was that the Stabilus Group would recover in the future, albeit their offer suggests that this would require a very significant reduction in its indebtedness. Their wish to obtain equity was a consistent theme of the negotiations from then on. They appear to have thought that they could persuade the Senior Lenders to agree to the Mezzanine Lenders having both an equity interest on a future exit (several years later) and control of the voting shares of the Stabilus Group (which would have given them control over management). They were hoping to achieve an outcome which would give them the hope of a future return. AXA's view at this time was that their strongest negotiating point was that, for the Senior Lenders to do something without the Mezzanine Lenders' consent, the Senior Lenders would need to exercise the pledge on the shares "with serious risks for the continuity of the company and the possibility of a liquidation scenario where their haircut is much larger than what they would take with us".
54. The Senior Lenders on the other hand took a very different view. They thought that since the enterprise value of the Stabilus Group broke well into the Senior Debt (so that the Mezzanine Debt was substantially under water), there was no reason (other than nuisance value) for the Mezzanine Lenders to be given an economic stake in the restructured Stabilus Group. The Senior Lenders were prepared to countenance a payment to the Mezzanine Lenders to smooth the way to a consensual restructuring but were not prepared to agree to the Mezzanine Lenders having a significant stake, when the economic value of their debt was, in their view, zero. The story that is told in the Mezzanine Defendants' witnesses' statements is one of disappointment at a failed negotiation.

4 Rothschild Marketing Process ("Starwars") and Subsequent Negotiations

55. In June/July 2009 the Management engaged Rothschild to conduct a marketing exercise for the sale of, or new money investment in, the Stabilus Group. The process (codename "Starwars") was originally supposed to have three stages. Stage 1 involved Rothschild approaching only five selected potential investors (because the Senior Lenders wanted to keep it "narrow") who reviewed an information document prepared by Rothschild and documents in a data room, and were asked to submit non-binding indicative offers by 14 August 2009. Participants were told that they were required to state the enterprise value that the indicative offer placed on the Stabilus Group, expressed in euros on a cash and debt free basis. As originally intended, stage 2 was to involve a number of selected participants having meetings with the Management and being provided with further information with a view to receiving one or more firm offers. Stage 3 was intended to involve final negotiations leading to a binding agreement.
56. Stage 1 was conducted to a relatively tight timetable. Thus, the gap between the invitation to submit indicative offers and the deadline for their receipt was short: the letter to Triton, for example, is dated Thursday 6 August 2009, and the indicative offers were in by Friday 14 August 2009. Participants were required to say that they could comply with the short timeframe, and specifically advised that "speed and deal certainty as well as value will be of utmost importance in the process". Despite the short timescale (and the process being conducted in August), Rothschild received indicative offers from all five selected potential bidders. In addition, Rothschild received an unsolicited bid from Tyrol Equity ("Tyrol"), which had got wind that Stabilus was looking for investment. Triton and Oaktree Capital were given access to a stage 2 virtual data room which contained further information on the business including commercially sensitive information and further access to the Management. They were selected by Rothschild as being the bidders with the most appetite.
57. The significance of this exercise is considered below. However, it is convenient at this stage to note a number of points which were emphasised by Mr Smouha QC:

a Though this was a restricted exercise with private approaches to identified potential investors, bids were received from all five selected bidders;

b All five selected bidders were not from the trade but from investors. There was also interest from Tyrol.

c The timing and the required speed could have put off potential bidders, but it did not.

d Bearing in mind both the accelerated timeframe and the positive responses, this is an indication of how much interest an auction of the Stabilus Group would be likely to attract. Rothschild also considered two term sheets from the Mezzanine Lenders which they had, uninvited, put forward to the Senior Lenders. Tyrol had not even had access to the Rothschild data room.

58. Rothschild provided an "overview" of all these indicative offers in a table which was provided to the Stabilus Group and to the SCC – but not to the Mezzanine Lenders. In summary, this table showed indicative offers in "€ millions" on the basis of an enterprise value ("EV") viz 167.4 (Oaktree), 130-140 (Pamplona), 180 (Orlando), 192.5-227.5 (Tyrol), 266 (HIG) and "266.3 (up to 345.0/365.0)" (Triton). Apart from the Triton figure, all these indicative offers were substantially less than the outstanding amount of Senior Debt (then around €360 million) and were not attractive to the Senior Lenders because they all involved the write-off of very substantial amounts of the Senior Debt. In the event, the process subsequently came to a natural end or "fizzled out". According to Mr Jaffe, this was in part because the "walls of the conventional process broke down because the participants were senior".
59. As to the Triton figure, the position was (and remains) confusing for a number of reasons. First, although described by Rothschild in the summary table as I have quoted, Mr Smouha QC emphasised that the document submitted by Triton dated 12 August 2009 containing its proposal stated in terms that Triton was "...pleased to offer on a cash and debt free basis an Enterprise Value of Euro 345-365 million…". In my view, that description was manifestly incorrect and indeed highly misleading. In particular, it is clear from other parts of the proposal document itself that some €180 million would not be paid in cash but would be "payable within 5-6 years earning cash interest"; and that the figure of €345/365 million included some €90-110 million described in Triton's proposal as follows:

"Euro 90-110 million in a Convertible Loan Note with the possibility for Lenders to convert their share of the Note into 20% of equity on a pro rata basis at closing if they wish to do so. At exit (ie a realization of Triton's common shares) the Note can be converted by the Company into the remainder of the 20% of common equity...The Note would be subject to certain minimum return criteria being met at Triton's Exit. We would seek to agree the detailed terms of the Convertible Note with the Lenders in the next phase but would assign the majority of the value to existing Senior Lenders."

I confess that it is not easy to ascribe any, and if so what, value to this jumbled string of words. A cynic might, I suppose, tender the possible view that it is so obscure and uncertain as to be virtually meaningless; and even a non-cynic might have some difficulty in disagreeing with that view. I do not know but I rather suspect that it was included for Triton's own tactical reasons to enable it seemingly to stand ahead of the crowd and thereby to increase its chances to get its foot in the door for further negotiations. Be that as it may, I agree with the view expressed by Mr Klein that it was incorrect to include the value attributable to the Convertible Loan Note in the determination of the EV; and it is therefore unsurprising that the Triton proposal also found no favour with the Senior Lenders.

60. Meanwhile, on 10 July 2009 PwC produced its interim report on the restructuring opinion which was provided to the Senior Lenders and to the Mezzanine Lenders. The report stated that PwC was not able to produce a positive restructuring opinion with the Stabilus Group's debt structure at that time. PwC discussed this report with the Lenders. PwC's initial view, that some €300 million of debt needed to be removed from the Stabilus Group's balance sheet to avoid "over-indebtedness" under German law, had not changed. The report also explained that the Stabilus Group required a new money facility of €34 million.
61. On 3 August 2009, Oaktree Capital made a "non-binding indicative bid" similar to the bid they submitted in the Rothschild process; the terms included a write-down by the Senior Lenders of all but €100 million of the Senior Liabilities in return for 15% of the equity in the Stabilus Group. The enterprise value of this proposal was about €167 million. This was not acceptable to the Senior Lenders.
62. At about the same time, MDM on behalf of the Mezzanine Lenders also put forward bids to Rothschild and submitted restructuring proposals to the Senior Lenders. These proposals were analysed by Rothschild to imply an enterprise value for the Stabilus Group of €208 million to €224 million. Accordingly, on the Mezzanine Lenders' own proposals, it was recognised that the value of the Stabilus Group at that time at least was substantially less than the amount of the outstanding Senior Debt and that the Mezzanine Lenders were therefore, in market terminology, "out of the money". This was also reflected by the fact that the Senior Debt was trading at a substantial discount to par value in the secondary market. The Mezzanine Lenders' proposals were not attractive to the Senior Lenders because, according to Mr Medler, they involved the Senior Lenders having to write off too much of their debt.
63. On 24 August 2009, the Mezzanine Lenders were provided with a copy of the term sheet setting out the Senior Lenders' proposals. The offer of €4 million as potential profit participating loans ("PPLs") to the Mezzanine Lenders was not acceptable to them because they believed that it did not take into account what they asserted to be their economic interest in the Stabilus Group or their wish to participate in a recapitalisation. This Senior Lenders' offer again reflected the view of the Senior Lenders that the Mezzanine Lenders did not have any economic interest in the Stabilus Group. The Mezzanine Lenders did not, at any stage in the restructuring negotiations, explain why the Senior Lenders were wrong to take this view in circumstances where the value of the Stabilus Group broke within the Senior Liabilities - as the Mezzanine Lenders appeared to have acknowledged (at least among themselves) at the time.
64. By late August 2009, the Mezzanine Lenders were becoming, to say the least, increasingly unhappy and indeed aggressive. In particular, they complained that their proposals were not being responded to, that they were not being involved in the process and that they would use all "legal means" to recover the damage alleged to their stakeholding in the Stabilus Group. They also began threatening to revoke the authority given to the Security Trustee under the ICA to enforce the Transaction Security.
65. As already noted above, during this period there was significant trading in the Senior Debt, all at a deep discount. Indeed, Triton through a special purpose vehicle had been acquiring heavily discounted Senior Debt since late July/August and continued to do so throughout the second half of 2009. By January 2010 Triton had acquired about 28% of the Senior Debt. Other third parties, including Oaktree Capital, also acquired Senior Debt as did Goldman Sachs and Anchorage. (The Senior Lenders which had purchased the Senior Debt at a substantial discount in the secondary market wanted equity returns and a higher write-down of debt while the original lenders, in particular the German banks, did not want a large debt write-down. It was, therefore, difficult to get a consensus on restructuring proposals among the Senior Lenders, a task made even more difficult by the continually changing make up of the Senior Syndicate.)
66. In this context, Mr Knowles QC submitted that it is relevant to note that it remained open to the Mezzanine Lenders to exercise their rights under the ICA (Clause 22.13) to purchase the Senior Debt at par value; that if the Mezzanine Lenders had indeed considered that the Stabilus Group's value exceeded the amount of the Senior Debt, then it would have been logical for them to have exercised this right; but at no time did they do so. Nor did they even purchase any Senior Debt in the market which they could have done at a significant discount. In effect, Mr Knowles QC submitted that the failure by the Mezzanine Defendants to exercise their rights under Clause 22.13 or even to purchase Senior Debt at a discount in the market is inconsistent with their case. It is certainly correct that the Mezzanine Defendants did not exercise their rights under Clause 22.13 of the ICA; nor did they purchase any Senior Debt in the market (although the reason for that, according to M Berment, was that the price kept rising beyond the authority which had been given). In my view, as submitted by Mr Smouha QC, the fact that the Mezzanine Defendants did not purchase any of the Senior Debt does not deprive them of any of their other rights under the ICA (whatever they may be) or lessen the obligations of JPMEL thereunder. However, the fact that the Senior Debt was and remained trading at a deep discount throughout this period is relevant with regard to the perceived value of the Stabilus Group in the market. I consider this further below.
67. Meanwhile, in about late August 2009, it also appears that Allen & Overy (who had, until that time, acted as legal advisers to various entities within the JP Morgan group, including JPMEL as Senior Facility Agent and Security Trustee and JPMCB as Senior Lender and chair of the SCC), recognised that there was a conflict (or at least a potential conflict) between the interests of the Senior Lenders and the duties of the Security Trustee. Accordingly, a decision was taken by JPMEL to take independent legal advice and, for that reason, JPMEL instructed Baker & McKenzie. According to Mr Jaffe, this was done on 25 September 2009, although it appears that it was certainly on the cards by about 14 September 2009. However, despite the recognised actual or potential conflict and need to use separate external legal advisers, Mr Smouha QC submitted in effect that bizarrely little if anything really changed in practice. In particular, Mr Smouha QC drew attention to the following matters:

a On 30 September 2009, JPMCB and JPMEL nonetheless signed a common interest confidentiality agreement by which JPMCB and JPMEL agreed that they "share[d] a common interest in relation to all or certain aspect of the Restructuring" pursuant to which documents and information were shared between them with a view, it seems, of being able to keep information from the Mezzanine Lenders (despite the fact that the Security Trustee was trustee and agent for them also under Clause 17.1 of the ICA).

b Although the conflict was recognised by the separation of advisers, no such separation was maintained by JP Morgan itself as to the people who were receiving the advice; nor does JP Morgan appear to have considered appointing a co-Trustee to take decisions regarding enforcement. The SCG continued to be responsible for all roles. No Chinese walls were set up and the same people acted on both sides. Thus information including legal advice to the Senior Lenders as to how to remove the Mezzanine Lenders if they did not consent to what was proposed to them, and strategies for effecting that removal were obtained, formulated and then shared with JPMEL in its capacity as the Security Trustee (the individuals involved being the same on both "sides" of the JPMCB/JPMEL notional divide). For example the strategy status memo of late November 2009 makes recommendations on the basis of legal advice as to "the Senior Lenders…ability to enforce and release junior debt claims and security, so stripping both Mezz and the current Shareholder from the structure".

c Mr Jaffe, as head of the EMEA SCG, was simultaneously both (i) "the most senior individual who took decisions on behalf of JPMEL in its capacity as the Security Trustee in the financial restructuring of the Stabilus Group of companies" (see letter from Baker & McKenzie dated 6 March 2012), and (ii) responsible for managing JP Morgan Group's interest in the Stabilus Group as a Senior Lender and for approving credit decisions.

d Mr Jaffe approved and controlled the strategy that JPMCB as Senior Lender and Chair of the SCC should follow, including the strategy which required JPMEL in its capacity as the Security Trustee to enforce the security, sell it, and transfer the Mezzanine Lenders' assets away to an affiliate of one of the Senior Lenders in exchange for other Senior Lenders, including JP Morgan, receiving equity-type consideration directly from the purchaser, all without informing the Mezzanine Lenders of what was proposed. Mr Jaffe then, wearing the Security Trustee's hat, had to agree to exercise the Security Trustee's powers in that way.

e Even after Baker & McKenzie were instructed, Mr Medler switched between identifying himself as acting for JPMCB as Senior Lender, JPMEL as Senior Facility Agent, and JPMEL as Security Trustee, while at all times reporting to his manager, Mr Jaffe, in relation to Senior Lender issues. This led to some absurd attempts at distinction, with Mr Medler signing releases in one hat to be allowed to see documents he had already commented on in another hat:

i Mr Jaffe informed AA that its "valuation will only be seen by JPM as Security Trustee". Mr Medler saw it in his role for the Security Trustee and provided comments on it to Mr Jaffe on 25 November 2009.

ii Yet on 3 March 2010 Mr Medler signed a release letter on behalf of JPMCB as a pre-condition to being provided with the final AA Report, an advanced draft of which he had already seen – and commented on – wearing his other hat as Security Trustee.

f JPMEL in effect continued to share freely its legal advice with the Senior Lenders, and vice-versa, even after its legal advisers were separated. JPMEL also shared its legal advice freely with the Management. However, it did not and has not shared that advice with the Mezzanine Lenders. On the contrary, it has gone to considerable expense to resist providing it, successfully persuading Hamblen J that, on an interlocutory basis at least, it should not have to provide it. Despite that, privilege in some of the advice has been waived.

68. Meanwhile, in September 2009, Novum Capital Restructuring GmbH ("Novum"), financial advisers to MDM, produced a valuation for MDM/AXA. The valuation gave "base case" enterprise values in a range of €318 million to €376 million in 2012 (on the assumption that the Senior Debt was some €360 million, interest was deferred, €34 million of new money was provided and the Mezzanine Lenders took a 100% haircut). These valuations were looking to a value in the future, and would of course have needed to be discounted to produce a present value (had that been the purpose of the valuations). In the same document Novum also included a very basic discounted cash flow ("DCF") valuation of the Stabilus Group of €501.3 million. Mr Giles, in his expert report, explains that the main reason for the difference between his valuation (€261.8 million) and the Novum valuation is the "unrealistically low WACC (i.e. weighted average cost of capital) of 7.73%" used by Novum as compared with 11.9% used by Mr. Giles. (Applying the WACC used by Mr. Giles to Novum's assessment reduces the enterprise value to €240 million.)
69. In the circumstances, the SCC formulated its own restructuring proposal. MDM and ECAS were invited to comment on that proposal or to provide their own alternative proposals.
70. On 17 September 2009, the Suspension Period under the Senior Suspension of Rights Letter was extended to 30 November 2009. The Bridge Facility was also extended to 30 November 2009, as was the Suspension Period under the Mezzanine Suspension of Rights Letter. By this time, attempts to conclude a restructuring of the Stabilus Group had already been continuing for over six months.
71. Towards the end of September 2009, Mr Jaffe assumed primary responsibility for JPMEL in its capacity as Security Trustee. A separate in-house legal team was also assigned to the Security Trustee. It had also become apparent that, as part of any restructuring, it was likely that the Security Trustee would need to enforce the Transaction Security and, for that reason, it was decided to obtain an independent valuation of the Stabilus Group. AA was instructed, in October 2009, to produce such a valuation. I consider this further below.
72. On 5 October 2009, the SCC invited the Mezzanine Lenders to make further proposals, provided the offer reflected the value of the Senior Lenders' economic interest. The Mezzanine Lenders then sought information on the Senior Lenders' proposals, in particular the trust structure that was being considered at that time (but which was not ultimately pursued).
73. In October 2009, the AXA mezzanine team had authority from AXA's Investment Committee to purchase Senior Debt in the secondary market at a maximum price of 40% of par value. AXA did not, however, purchase any Senior Debt.
74. In November 2009 Triton put forward its own restructuring proposal. Under this proposal the Senior Lenders would get €20 million on the first day and, on the basis of a potential exit at a future Enterprise Value of €400 million, would see the Senior Lenders recover 82% of the Senior Liabilities. At the end of November/beginning of December 2009 the Senior Lenders had a non-binding vote on the Triton proposal; holders of just over 25% of the Senior Liabilities, including Goldman Sachs and Anchorage, voted against the offer. Of the votes against the offer, 18% were Anchorage and Goldman Sachs. Triton commenced negotiations with Goldman Sachs and Anchorage.
75. On 23 November 2009, AXA's Investment Committee was asked for approval to invest up to €20 million in the Senior Debt with a minimum discount of 40%. The request was made in the context of the Triton proposal. AXA had spoken to Triton and understood that the suggested "hair-cut" for the Senior Debt would be 40% and for the Mezzanine Debt would be 100%.
76. However, changes in the composition of the syndicate of Senior Lenders (as a result of the trading in the Senior Debt) meant that it was not immediately possible to obtain support from the Senior Lenders for the proposal. In order to provide a final breathing space for further negotiation, the Suspension Periods under the Senior and Mezzanine Suspension of Rights Letters and the Bridge Facility were extended to 22 January 2010. Some of the Senior Lenders saw this as a final extension.
77. During this period (i.e. the second half of 2009), contemporaneous documents show that the Mezzanine Defendants appear to have been of the view that they were still "out of the money". For example:

a On 5 December 2009, Mr Jan Philipp Schmitz sent an email to M. Berment (both of AXA) which stated: "We need to discuss what's reasonable. Mezz is out of the money…".

b M. Berment, in his email dated 6 December 2009, did not suggest that the answer to the point that the Mezzanine Lenders are "out of the money" was to argue the contrary. He wrote:

"Argumentation of the banks and Triton: mez is out of the money so all what we propose to you is already a good gift.

Mez argumentation: you need our signature to finalise this deal and Triton now is under pressure because they are at risk with the senior they pay at a high price…"

c Mr Felix Hoelzer stated in an email on 11 December 2009 that Mr Illenberger "still takes the view that the value breaks in the senior (he said to me yesterday: 'we are clearly out of the money and only have some nuisance value')".

d In ECAS's Q4 Valuation Report, the EV from Q3 is stated as being €252 million. The Q4 2009 report was not a full valuation but rather a review of the performance in Q4 2009 to see whether there had been any significant change in the performance of the Stabilus Group and whether this may result in a change to fair value. The conclusion by ECAS was that no change should be made to fair value and that it should be held at nil.

78. During this period the Senior Debt traded in the secondary market within a range of 40 to 55 cents in the euro. This was consistent with the foregoing i.e. that the perceived value of the Stabilus Group broke well within the Senior Debt.

5 American Appraisal

79. Meanwhile, as early as August 2009 JPMEL came to the view (it appears on the advice of Allen & Overy) that it needed four different sorts of valuation: (i) a benchmark multiple analysis (adjusted to reflect current market environment); (ii) a DCF valuation; (iii) a leveraged buy out valuation ("LBO"); and (iv) a market tested valuation. It would appear that JPMEL wanted to get the first three of these, which are desktop exercises, from one valuer, and to rely on Rothschild for the market tested valuation.
80. In early September 2009, Mr Medler approached Mr Weaver of AA to carry out the desktop parts of the valuation. (Despite Mr Miles QC's protestations to the contrary, I take the view that as Mr Jaffe accepted in his oral evidence, it was inappropriate for Mr Medler to have been involved in the initial information provision process and in reviewing and discussing contents of a draft of the AA valuation. Nevertheless, Mr Medler's role in the process of instructing AA was limited and extended to providing relevant background information about the Stabilus Group, providing contacts with the Management and, in November 2009, passing on his comments on the first draft of the AA Report to Mr Jaffe. Following those comments, Mr Medler ceased to have any involvement with AA's valuation.) It was Mr Smouha QC's submission that Mr Medler gave AA what he, Mr Smouha QC, described as a "pretty clear steer" as to what sort of valuation (i.e. a low valuation) Mr Medler wanted. In that context, Mr Smouha QC drew particular attention to an email dated 4 September 2009 from Mr Medler to Mr Weaver in which he (Mr Medler) stated that he was looking for benchmark valuations based on transaction and trading comparisons with "a suitable and explained discount factor to reflect the current distressed position of the group" and referred to the attached background material which was prepared by the Management as part of the Rothschild marketing material which was"…. very positive and not the right starting point but a helpful intro to the business…"; as well as later instructions to AA that they should not "flex the Group projections for possible changes in trading conditions, exchange rates or tax changes, save for any sensitivities identified by PwC".
81. It seems to me that the suggestion underlying this submission by Mr Smouha QC is that Mr Medler was deliberately seeking to persuade or at least to influence Mr Weaver (in return perhaps for future work) to provide a "low" valuation which would be to the financial advantage of JPMCB and the other Senior Lenders. Mr Smouha QC pursued this line of attack both by reference to this email and more generally in cross-examination of, in particular, Mr Weaver going so far as to suggest that JPMEL "dangled" the prospect of future work in front of Mr Weaver if they (i.e. JPMEL) had a "good experience". In truth, that suggestion is a most serious allegation (both against JPMEL and Mr Weaver) which is not only not pleaded (as it should have been, if it were to be advanced) but was never properly put squarely to any of JPMEL's witnesses and, on the contrary, flies in the face of Mr Smouha QC's express repeated disavowal of any allegation of bad faith or dishonesty on the part of JPMEL. In any event, it does not seem to me that there is anything in the email dated 4 September 2009 or elsewhere to support such a suggestion, and I reject it. I consider further below the details of the valuation which Mr Weaver performed and, in particular, whether the specific criticisms advanced by Mr Smouha QC are justifiable. However, for the avoidance of doubt, I am satisfied that Mr Weaver carried out his task honestly to the best of his ability and with a view to providing a valuation which was entirely independent. Any suggestion to the contrary is, in my judgment, baseless.
82. On 16 September 2009, AA provided a formal presentation document of proposals for carrying out a valuation. On the basis of that presentation, Mr Jaffe decided to appoint AA to advise JPMEL in its capacity as the Security Trustee. Although a formal engagement letter was not signed until 12 November 2009, AA was orally instructed by Mr Jaffe to begin their work on or about 16 October 2009. On 17 November 2009, Mr Jaffe participated in a call with AA during which it provided an update on progress and expressed the view that the value of the Stabilus Group broke well within the Senior Debt. Shortly thereafter, AA provided its draft report.
83. It was Mr Smouha QC's submission that "tellingly", both AA's proposal and its signed engagement letter omit to mention that JPMEL was the Security Trustee for both the Senior and the Mezzanine Lenders, but mention only the Senior Lenders; and that the "Overview" contained in the AA valuation says only that, "JP Morgan is a member of, agent of and Security Trustee for the senior lenders that have provided the Stabilus Group with €380 million of senior debt by way of a revolving credit facility". What Mr Smouha QC states the documents say is correct; and it is also correct that the documents were wrong in failing to state that the Security Trustee acted for both the Senior Lenders and the Mezzanine Lenders. However, this was, in my judgment, a mistake (which Mr Weaver readily acknowledged) in particular because Mr Weaver was specifically told at the very first meeting that JPMEL acted as the Security Trustee both for the Senior Lenders and the Mezzanine Lenders, as appears from a contemporaneous note of that meeting. The suggestion that this mistake made by Mr Weaver in the report is "telling" echoes the previous suggestion that AA were intending to and did perform their task otherwise than in an independent fashion, a suggestion which again I reject.
84. AA spent a very considerable amount of time producing the AA Report - over 270 hours between their first instruction and the final report in February 2010. It is important to emphasise that throughout the process AA remained in touch with the Management to ensure that the financial information AA was relying upon was up to date and reliable. In particular:

a On 2 November 2009, Mr Weaver and his colleague Simon Jones met the Management in Koblenz. The majority of the meeting was spent discussing the business plans produced by the Management (the COBP and the ECBP – together the "Business Plans"), focusing on how they were prepared, how they related to industry forecasts, and the assumptions they were based on, so that AA could properly understand the Business Plans. Mr Smouha QC suggested in cross examination that most of the meeting was devoted simply to discussing the differences between the COBP and the ECBP. However, that would seem to be wrong: only a short time was spent on the differences, which were minor.

b On 16 November 2009, Mr Weaver had a telephone call with Mr Rajan. As Mr Weaver explained, the note sets out six bullets which relate to points for discussion with the Management on the call. Mr Rajan supplied Mr Weaver with what the Management considered the appropriate effective tax rate to apply to the Stabilus Group, i.e. 35%.

c On 19 November 2009, AA sent an abridged version of the first draft of the AA Report to the Management who subsequently confirmed to AA the factual accuracy of the information contained in the draft report.

d In the period between 22 January 2010 and 3 February 2010, AA enquired of and was advised by the Management that there had been no material change in the performance of the Stabilus Group or the industry generally that would have warranted any material change to the Business Plans and that the Business Plans still represented the Management's best estimate of the performance of the Stabilus Group over the forecast period.

e On 3 February 2010 (the date of the final report), AA was sent the December 2009 Management Accounts (prepared on 29 January 2010), which were the most up to date management accounts. In light of those accounts, AA made final adjustments to the WACC calculation to reflect the Stabilus Group's actual net working capital as at 29 January 2010 (which had decreased from €21.4m to negative €7.8m since the date at which the draft report had last been updated).

85. The first draft of the AA Report identified that the current EV of the Stabilus Group as at 2 December 2009 lay within the range of €220-230 million, including pension liabilities. Pension liabilities are sometimes included when considering EVs, but where the question is (as here) what a seller of an asset might actually obtain from the sale of an asset they need to be deducted, as the buyer will need to fund them and will therefore make a deduction from the price. Hence when considering what price the Security Trustee could have achieved in 2010, it is the value after pension liabilities which is relevant. So the relevant range given by the AA Report was about €190-200m.
86. Mr Smouha QC submitted that this was lower than some of the indicative offers received by Rothschild in August 2009 and therefore "ought to have rung alarm bells". I agree that it was lower than some of these other earlier indicative offers; but I do not accept that it should have rung alarm bells: on the contrary, the valuation fell broadly within the range of these other offers albeit at the lower end and, on its face, was, in my view, entirely unsurprising. I agree that it was substantially below the figures (i.e. €345-365 million) referred to in the Triton indicative offer but, for reasons which I have already explained, I consider that stated possible upper range as being highly misleading.
87. Mr Smouha QC had an alternative important line of attack which consisted of a number of steps as follows. First, he submitted that in carrying out its valuation exercise, AA relied specifically upon the indicative offers received by Rothschild in the course of the marketing exercise in July-August 2009. Second, such reliance was misplaced because the indicative offers received by Rothschild were not reliable, as Rothschild itself recognised and indeed repeatedly made clear to Baker & McKenzie, JPMEL's legal advisers in its capacity as Security Trustee. Third, the result was that the valuation exercise carried out by AA was flawed and itself unreliable for that reason.
88. With regard to this line of attack, although the Court did not have direct oral evidence from anyone at Rothschild or indeed Baker & McKenzie, it seems to me plain that Rothschild did indeed categorically refuse to confirm that the indicative offers received during the marketing exercise in July-August 2009 were reliable evidence of the fair market price of the Stabilus Group in November/December 2009 or early 2010 despite strenuous attempts to persuade them otherwise by, in particular, Baker & McKenzie. This appears from various documents including the notes of meetings from Baker & McKenzie which were disclosed belatedly and upon which Mr Smouha QC heavily relied. In particular, those show:

a On 4 November 2009, Ms Lynn Rosell Rowley of Baker & McKenzie emailed Ms Jennifer Wang of Rothschild:

"…If the Security Trustee intends to utilise the power of sale referred to above, it is required by the terms of the Intercreditor Agreement to take 'reasonable care to obtain a fair market price in the prevailing market conditions'. Therefore as advisors to the Security Trustee, it is our role to guide the Security Trustee on what steps need to be taken in order to ensure that it has done everything that it needs to do before it exercises the power of sale.

A key step for the Security Trustee is getting comfortable that the market has been adequately tested in relation to finding a potential purchaser for the business and of course, ascertaining what a potential purchaser would pay.

The work that Rothschilds has been doing is therefore crucial to our advice to the Security Trustee and to the Security Trustee's ability to act in certain circumstances…"

b On 12 November 2009, Mr Nick Tostivin of Baker & McKenzie met Mr Glen Cronin of Rothschild. The notes of that meeting show discussions about the difficulty of placing reliance on what Rothschild had done in at least two respects:

i Rothschild had not been retained by the Security Trustee (but by Stabilus) – so there were questions about how the Security Trustee could know about the process even though Mr Jaffe in fact did know "what has gone on wearing another hat". An exercise conducted by the Stabilus Group for its own purposes could never satisfy the Security Trustee's duty to expose the security to the market and seek to obtain the best price for it.

ii In any event, what Rothschild had done was only a market testing process which "would not suffice", when what was needed was a "market and sales process". The Security Trustee needed to know that a market and sales process (rather than just a market testing process) had been carried out.

c On 25 November 2009, Baker & McKenzie met Mr Andrew Merrett and Mr Glen Cronin of Rothschild. At this meeting Rothschild went through with Baker & McKenzie the process they had been through the previous August:

i It explained some of the limitations of the process it had conducted and that these had been at the request of the SCC.

ii It was the SCC which had suggested the potential buyers to approach (as opposed to there being an open marketing process) - "they didn't want it hawked around".

iii Mr Merrett told Baker & McKenzie that normally they would want to be able to show that it had been "offered to all".

iv Mr Cronin explained that there had been sufficient serious interest such that it "made sense to move forward" and "to create competitive tension".

v It was the Senior Lenders who had stopped the exercise before stage 2 was completed.

d At the end of the meeting, Baker & McKenzie specifically asked Rothschild if "there is anything in that lapse of time since July which leads them to believe they have to refresh the process because its not reflective of current market conditions". Mr Merrett said that he wanted to "take it away and think about it. Is no doubt world has changed a bit since August and need to consider whether that has material impact". (emphasis added)

e The next day, on 26 November 2009, Ms Jenny Brand of Baker & McKenzie emailed Mr Merrett of Rothschild saying that JPMEL wished to agree with Rothschild that it was entitled to rely on Rothschild's work on the marketing and sale process that it had carried out and that:

"…JPMEL wishes to receive certain confirmations from Rothschild as follows: 'In our opinion: we conducted a marketing and sale process on behalf of the Company which should have elicited bids from the financial and trade parties likely to be interested in buying the Stabilus group; the marketing and sale process we conducted gave a reliable indication of a fair market price for the Stabilus group under prevailing market conditions; and a further marketing and sale process in the short term would be unlikely to produce higher offers for the Stabilus group.' Please could you let us know if Rothschild would be willing to allow JPMEL to rely on its work, and to provide the above confirmations to JPMEL."

f On 30 November 2009, Mr Merrett asked (by telephone) for clarification. On 1 December 2009, Baker & McKenzie responded, explaining again the importance of these confirmations:

"As Nick mentioned in our meeting last Wednesday, the legal advice being given to JPMEL as Security Trustee under the finance documentation is heavily reliant on the steps that have been taken by Rothschild in conducting the marketing and sale process. With that in mind, the legal advice we are giving to JPMEL is only as good as the accuracy of the factual matrix on which it is based" (emphasis added).

The email went on to explain that JPMEL was trying to put itself in the same position as if it had instructed Rothschild to carry out "a proper marketing and sale process" such that JMPEL could "equally be able to rely on such confirmations".

g Mr Cronin responded on 2 December 2009 that Rothschild could not do so: "While we have made the request several times, we have no visibility on the execution mechanics which the Senior Lenders are considering, and as such what they will instruct JPMEL to do".

h Although Baker & McKenzie repeatedly requested the confirmations set out in the email of 26 November 2009 quoted above, Rothschild repeatedly refused to provide them. Instead, it said that it was only willing to provide a factual summary of the exercise that it had conducted, for the reader to "form his/her own opinion and conclusions from" but could not give the confirmations sought. In the event, the factual summary was set out in a letter to JPMEL dated 7 January 2010 – although this was not provided to the Mezzanine Defendants.

i Even after that letter, it appears that Baker & McKenzie continued to press Rothschild to reconsider, at the same time discussing with Mr Rajan how they might get Rothschild to change its position.

j Baker & McKenzie were clearly concerned. According to one note, they regarded the Rothschild letter as "- not v helpful – not related back to opinions requested/reliance". They were clearly also concerned by the fact that Rothschild had told them that the restricted marketing process had been because "they were bullied into talking to a limited no. of people (rather than properly hawking the company around)". Mr Rajan told Baker & McKenzie that some of the Senior Lenders "did not want a full blown M&A process run here". Another note shows that Baker & McKenzie also appreciated that there was, at the very least, a question of whether the Rothschild process was "…stale…time is getting on – gets more important the further we get from Aug 09".

k The notes also show that Mr Tostivin was concerned that "a proper investigation has to be done"; that the Security Trustee was not in a position to form a view as to whether the Rothschild process provided a reliable benchmark of price; and that the three questions that arose related to whether it had spoken to enough potential purchasers, whether the process was a reliable indication of price and whether if done again it would produce higher offers. Baker & McKenzie still wanted "to see the same 3 [questions] answered" [i.e. the confirmations sought from Rothschild] and also the "need to consider mezzanine".

l The concern that JPMEL was not going to get the confirmations from Rothschild, and accordingly did not have any marketing process or even market testing that it could rely on to support the plan, led to the request for an indemnity from the Senior Lenders in respect of what was described as this "missing plank". Baker & McKenzie appreciated that the protections in the ICA for the Security Trustee would not help in this regard because of the "carve out for unlawful misconduct". Hence the idea of asking "for an indemnity (from senior) – indemnity from all claims from Mezz". That indemnity was in due course requested and given (see below).

m On 13 January 2010, Baker & McKenzie tried again in a meeting with Mr Cronin to persuade Rothschild to change its position. In particular, it appears from the note of that meeting that Mr Tostivin explained that JPMEL's legal position was that it needed to take a position on the three questions but that on the factual matters that they raised it was not the right person to do so – Rothschild was; and that the Security Trustee "can't blindly follow instructions". He discussed the concern about liability, the question of indemnity and the fact that the Security Trustee was not protected against negligence and misconduct. It also appears from the note that Mr Cronin considered that Rothschild was "actually being asked to advise the Security Trustee and to give them comfort to act in a certain way" but explained why that was a problem. Mr Cronin said that he would discuss it internally.

n It would seem that Rothschild did then consider the position internally and, on 18 January 2010, told Baker & McKenzie that they wanted to speak to Stabilus first (who after all had been their client). On 21 January 2010, Mr Stevenson of JPMEL reported to Baker & McKenzie on a meeting Rothschild had had that morning with Mr Rajan of Stabilus. The note of that discussion shows Rothschild's position viz. "only thing prepared to do is provide additional work to update work [Rothschild] had done + market has changed [therefore] if acting for trustee would say would have to be done again" (emphasis added). The note also shows that when it was put to Rothschild that there was not time for that and they were asked if they would do a desktop analysis, they said "they are uncomfortable and think they would have to recommend full process" and then repeated (a third time): "would have to conclude is that full process would have to be run in order to give process – they say would have to re-run process or get something negative". Mr Tostivin of Baker & McKenzie is then recorded as saying: "probably not worth asking for as form they give it in is not important – if were sued by minority + ends up in court, people would be called + Merritt [sic] would say they told them ..... need to think that have an advisor saying its far from optimal + not good". The suggestion was then made that Rothschild just be asked for an update. Mr Tostivin said "updated facts don't get you there ... Do know important point of substance now. That is what Merrett would say in court".

89. As stated above, an important aspect of this part of the case advanced by Mr Smouha QC was that, although Rothschild itself was not prepared to confirm that the indicative offers received during the marketing exercise in July-August 2009 were reliable evidence of the fair market price of the Stabilus Group in November/December 2009 or early 2010, nevertheless the AA Report did rely upon such offers as evidence of value and, for that, reason, the AA Report was flawed and unreliable. As regards that allegation, it is true that the first draft of the AA Report expressly identified the outcome of the Rothschild exercise as part of the "key information provided to [it] which form[ed] the basis for the valuation conclusions contained in [its] report": see para. 1.5 of the draft and Appendix A to the draft report; that this reference was subsequently deleted; and that the reference to the Rothschild indicative offers was subsequently moved to a different section of the Appendix in the final version. It was Mr Smouha QC's case that this was, in effect, done on specific instructions from JPMEL because of Rothschild's refusal to give the confirmation sought although this did not change the position in fact i.e. that in truth AA had wrongly relied upon these indicative offers. There is no doubt that Mr Smouha QC is right to say that these changes between the first draft and final version of the AA Report came about following discussions between those representing JPMEL and Mr Weaver. However, the evidence of Mr Weaver (which I accept) is that AA was told even prior to receiving the Rothschild indicative offers that they would not be able to rely upon them; that AA looked at them briefly but it had no contact with Rothschild, performed no analysis of the Rothschild indicative offers and did not rely on them for the purposes of producing its valuation as Mr Weaver made plain in a contemporaneous email dated 22 January 2010; and that the moving of the reference to the offers to under a separate heading in Appendix A was a more accurate way of describing what had actually happened i.e. that AA had received a copy of the Rothschild document but had not relied on it. Thus, I do not accept the inference and conclusion urged by Mr Smouha QC.

6 Early 2010

90. By January 2010, the Stabilus Group had been in severe financial distress for over a year, trade credit was being withdrawn, credit insurance was unavailable and important automotive customers had reduced orders or ceased to place new orders. The Stabilus Group's financial position was such that its auditors refused to sign off on the going concern opinion that needed to be inserted in the Stabilus Group's audited accounts for the financial year end 30 September 2009. The auditors were unable to confirm that the Stabilus Group would be likely to continue as a going concern for at least the following 12 months. The Management told the Senior Lenders that if they did not believe that there was a better than even chance of a restructuring being implemented then they would file for insolvency.
91. On 13 January 2010, Triton put forward a further revised restructuring proposal that had been agreed with Goldman Sachs and Anchorage, but this was again rejected by the Senior Lenders. By this time, Triton, Anchorage and Goldman Sachs together held a blocking minority of the votes. Their support for any restructuring was, therefore, essential. Timing was also crucial: the Suspension Periods and the Bridge Facility were again about to expire i.e. on 22 January 2010. If this had happened without a viable restructuring having been agreed, the relevant Stabilus Group companies would have been forced to file for insolvency in Germany. This is especially so given that the Stabilus Group's auditors, Deloitte, had refused to sign off on the going concern opinion which needed to be inserted into the 2009 accounts on the basis that they were unable to confirm that the Stabilus Group would continue as a going concern for at least 12 months. Accordingly, there was a real degree of urgency in the need to agree on a restructuring proposal which would be supported by the Senior Lenders and which could be implemented. Many of the Senior Lenders took the position that they would not extend the Bridge Facility without a firm agreement on a restructuring proposal. Some of the Senior Lenders were increasingly concerned about lender liability (a liability under German law which may arise in circumstances where lenders continue to provide finance to a company at a time when it is known to be insolvent).
92. On 19 January 2010, MDM sent a proposed term sheet to the SCC. The SCC's view was that the proposal was unrealistic because it did not address two key features: that the Mezzanine Liabilities were of no value and that it was necessary to reduce significantly the debt on the balance sheet. The effect of this proposal would have been to delay addressing the "over-indebtedness" of the Stabilus Group.
93. Given the imminent expiry of the Suspension Periods and the Bridge Facility, the SCC's focus was on trying to secure a restructuring proposal that all the Senior Lenders would support. The concerns were increased by the fact that on 21 January 2010, MDM wrote to the Security Trustee purporting to revoke the Security Trustee's authority under the ICA to release or to dispose of the Mezzanine Liabilities or the Transaction Security pursuant to Clause 15.2(c) of the ICA. No contention is advanced by MDM or ECAS in these proceedings that this purported revocation was effective. Such a contention was at one point apparently maintained by them in the proceedings which they commenced in Germany against Stabilus, but has not been pursued.
94. On 23 January 2010 the Mezzanine Lenders wrote to (among others) the SCC saying that the Stabilus Group was "on the brink of insolvency". The letter accused the Senior Lenders of "fraudulently preventing an essentially possible restructuring and delaying otherwise inevitable insolvency proceedings", and alleged that "the Senior Lenders have caused damage to Stabilus and its other creditors…and are therefore liable on the basis of lender liability principles." The Mezzanine Lenders also said that if it was not possible to agree a viable solution over the weekend they would not agree to a further prolongation of the Mezzanine Suspension Period. The letter claimed that MDM had already made the President of the Luxembourg Court aware of this situation.
95. On 24 and 25 January 2010, there was an emergency meeting in Frankfurt with Triton, Anchorage, Goldman Sachs and a number of Senior Lenders which was attended by the management of the Stabilus Group (as observers). On 25 January 2010, in circumstances where the Suspension Period and the Bridge Facility had expired, the Management informed the Senior Lenders that if they did not have a commercial agreement by the end of the day they would have no option but to file for insolvency in Germany.
96. Late in the evening of 25 January 2010 or in the morning of 26 January 2010 a restructuring proposal put forward by Triton, Goldman Sachs and Anchorage was agreed in principle by the Senior Lenders. As a result, the immediate need for the Stabilus Group to file for insolvency was averted. On that date the Senior Lenders agreed not to take any steps to accelerate liabilities or to enforce the security under the SFA whilst restructuring negotiations were ongoing.
97. The news that a restructuring had been agreed in principle prompted MDM to issue a demand on 28 January 2010 to Stable I and others purportedly accelerating the sums outstanding under the MFA and demanding payment of such sums. This put further pressure on the Management to file for insolvency. However, in response, the Senior Facility Agent immediately issued a Stop Notice dated 28 January 2010 under Clause 9.10 of the ICA, the effect of which was to bar any payments being made in respect of the Mezzanine Liabilities for a period of 120 days. This in effect provided a further breathing space giving a period of time in which to complete the restructuring.
98. In late January 2010, Mr Jaffe asked AA to update the AA Report as there was a real sense of urgency and the process towards the Restructure was such that it was likely a formal valuation would be required. Mr Weaver of AA spoke to the Management who confirmed that the projections on which the valuation was based were still appropriate and that the COBP and the ECBP still represented the Management's best estimate of the performance of the Stabilus Group over the forecast period. AA also performed a critical assessment of the risks inherent in the ECBP and reviewed it against the available market indicators and the latest market expectations. The final version of the AA Report, dated 3 February 2010, concluded that the enterprise value of the Stabilus Group was in the range €220 million to €230 million including pension liabilities (€188-208m excluding pension liabilities of c. €31.9m). The Senior Liabilities at that time were in excess of €400 million. The valuation was consistent with the discounted rates at which the Senior Debt was then trading in the secondary market.
99. On 2 February 2010, the Senior Lenders received a letter from Heymann and Partners (the Management's legal advisers) which expressed concern at the continued delay to commit to a restructuring and stated that they believed a filing could now only be avoided if a termsheet between all Senior Lenders and Anchorage, Goldman Sachs and Triton was in place, confirmed by all parties to reflect their understanding and only subject to implementation.
100. On 5 February 2010, Mr Medler circulated a detailed memo seeking (among other things) approval of the most recent proposal negotiated by the SCC and other parties. On 15 February 2010 a term sheet was agreed and the Senior Lenders entered into a senior lock-in agreement (the "Senior Lock-in Agreement"). Under this agreement, the parties in effect agreed to use their commercially reasonable endeavours to implement the restructuring by the long stop date of 2 April 2010 (Clause 4(b) of the Senior Lock-in Agreement). However, the Majority Senior Creditors (as defined in the ICA) could at any time agree to terminate the Senior Lock-in Agreement (Clause 6(b) of the Senior Lock-in Agreement). At the same time the Suspension Period under the Senior Suspension of Rights Letter and the Bridge Facility were both extended to 2 April 2010.
101. In the period which followed, the documents required for the restructuring were negotiated and agreed. Throughout this process, the Senior Facility Agent was advised by Allen & Overy, the Security Trustee was advised by Baker & McKenzie, and Triton was advised by Ashurst. Freshfields advised the Stabilus Group. Financial advice was provided by PwC.
102. At the end of March 2010, the Mezzanine Lenders were approached again with a view to attempting to reach a consensual solution. On 25 March 2010 there was a meeting between the members of the SCC, Triton, Anchorage, the Mezzanine Lenders and their advisers. The Mezzanine Lenders presented a further restructuring proposal. The AXA Restructuring Proposal, entitled "Stabilus Reset – A New Beginning", presented at the meeting, proposed an injection of further funding of €40 million. Notwithstanding that Triton and Anchorage, who held a blocking minority share of the Senior Liabilities, made clear that they would not support the proposed terms, the proposal was put to the syndicate of Senior Lenders. None of the members of the Senior Lender syndicate supported the Mezzanine Lenders' proposal.
103. A further attempt was made to agree a consensual restructuring and an offer was made to the Mezzanine Lenders of a payment of €400,000 for their legal costs and a payment of €2 million to be made on 31 March 2012 for their consent to the Triton/Anchorage/Goldman Sachs proposal. The Mezzanine Lenders did not accept this or make a counter offer. Mr Jaffe was aware that there was still a possibility of a consensual restructuring at this stage. At around the same time (on 26 March 2010) the lawyers acting for JPMEL were, for the first time, sent drafts relating to a non-consensual restructuring by the lawyers acting for the SCC.
104. As the witness statements served on their behalf show, the Mezzanine Defendants were disappointed not to have managed to negotiate a consensual restructuring. I have no doubt that that was indeed the case, although it will be necessary to consider in due course whether such disappointment had any proper legal basis. Certainly, they seem to have expected to have been given value and included in the restructuring because that was their experience elsewhere. But, of itself, this expectation can provide no legal justification for such inclusion in the present case.
105. As Mr Smouha QC emphasised, it is also important to note that the Mezzanine Lenders consistently requested that what they considered to be a proper sales process be conducted, and stated that they intended to participate in such a sales process. For example:

a On 10 September 2009, MDM wrote to JPMEL (fao Paul Harris) and said that any sale of the Transaction Security or Mezzanine Debt required "an orderly sales process (public auction) in order to obtain the best value for all lenders", and asked to participate in any bidding process.

b On 21 January 2010, MDM again wrote to Mr Harris asking to be invited to participate in any public auction or other sales process initiated in connection with the enforcement of any Transaction Security; and copied a further letter to the same effect dated 23 January 2010 to JPMEL.

c On 11 February 2010, MDM copied JPMEL in on a letter which again set out its position that, in an enforcement situation, the Security Trustee was required to attempt to obtain the best price reasonably achievable for the relevant Transaction Security and that, among other things, this required potential bidders to be approached and the market for the respective collateral to be thoroughly tested, and that it would be interested in bidding. To similar effect was a letter from ECAS to the Security Trustee dated 12 February 2010.

d On 24 February 2010, MDM copied JPMEL in on a letter in which it again said that if the Security Trustee intended to take any enforcement action, it was obliged (inter alia) to arrange for the preparation of independent up-to-date valuations, to approach potential bidders and to undertake appropriate market testing. It said:

"…it is our view that it is possible and necessary to determine the value break and that JP Morgan Europe Limited in its capacity as security trustee is actually obliged to do so in case it intends to take any enforcement actions. However, the only proper and permissible way in order to make such determinations is to undertake the efforts we have set out in our letter dated 11 February 2010, i.e. arranging for the preparation of independent up-to-date valuations, approaching potential bidders and appropriate market testing.

Attempting to enforce any of the collateral without undertaking such efforts or without taking the results of such efforts into account would – of course – constitute an unlawful conduct as well as a breach of the contractual and fiduciary duties of the security trustee. This would be even more the case in a scenario where the enforcement is not a true realization of collateral, but only a non-consensual enforcement with the aim to transfer value to the present holders of the senior debt only and based on the unilateral view of those senior lenders regarding the value of the business without taking the rights of the Mezzanine holders and their views regarding the value of Stabilus in consideration. We can only repeat, in our view such procedure would be a clear breach of clause 15.2 of the Intercreditor Agreement….."

e On 29 March 2010, MDM wrote to JPMEL, setting out the benefits of the restructuring proposal that it had made on 25 March 2010, which had been rejected summarily, and warning expressly that the ICA did not allow an enforcement aimed solely at transferring the equity to some of the Senior Lenders, without any proper bidding process and without any cash-flow going down the waterfall; that no bidding process had occurred; and that it intended to participate in any sales process as it had a genuine interest in acquiring the Stabilus Group business.

106. Mr Smouha QC submitted that there are some striking features of this correspondence setting out what JPMEL should have done, i.e. tested the market to see what bids might be made:

a JPMEL's own advice was that it had not done a market and sales exercise, and Rothschild was saying that one needed to be done.

b JPMEL did not respond to say that it disagreed that an auction or open market and sales exercise was necessary, that would have allowed a Part 8 claim to be brought clarifying JPMEL's duties.

c Instead, it wrote acknowledging its fiduciary and contractual duties and saying that it would comply with them. There are many such letters, but see for example:

i JPMEL's letter of 6 April 2010 which said:

"…In paragraph 5 of your letter you state that 'there are clear statements by the Security Trustee that he acts solely for the benefit of the Senior Lenders'. The Security Trustee has not made any such statements and does not consider its role to be as such.

The Security Trustee is fully aware of the extent of its fiduciary duties to all of the Secured Parties and has at all times acted in accordance with those duties and will continue to do so…".

ii JPMEL's letter of 23 April 2010 following the purported exercise of its powers, in which it said:

"The Security Trustee acknowledges that, pursuant to the terms of its appointment under the Intercreditor Agreement and as a result of such appointment generally under English law, the Security Trustee owes certain fiduciary and other duties to the Secured Parties (which include the Mezzanine Lenders)".

d As is now known from disclosure, the Senior Lenders thought that proceeding in secret and without allowing the Mezzanine Lenders to challenge the proposed deal before it went through was to JP Morgan's advantage, as Mr Medler emailed to Mr Jaffe when announcing that enforcement had taken place "having implemented the restructuring we are in a far stronger position and effectively the only real option available to the Mezz is a claim for damages".

107. Further, Mr Smouha QC submitted that there were a number of important features generally with regard to events and matters during this early period in 2010. In particular:

a Despite the Mezzanine Lenders' repeated requests, neither Baker & McKenzie nor JPMEL ever met with the Mezzanine Lenders nor sought to discuss their interest in the Stabilus Group or indeed the proposals they had made, and this despite Baker & McKenzie expressly recognising that any proposals made by the Mezzanine Lenders were of direct relevance to JPMEL's consideration of the exercise of its powers as Security Trustee, as is clear from the following correspondence:

i On 9 February 2010, Ms Brand of Baker & McKenzie e-mailed Allen & Overy:

"…We note that attached to the letter of MD Mezzanine to the Senior Co-ordinating Committee dated 18 January 2010 is a term sheet for a proposed restructuring of the Stabilus Group, also dated 18 January 2010. We assume that this proposal has been considered by the Senior Lenders, and we would be grateful if you could let us know the basis on which the Senior Lenders have decided not to pursue the proposal."

ii Ms Cooper of Allen & Overy replied on 12 February 2010:

"…Given previous feedback from the Senior Lenders on proposals from the Mezzanine and ongoing discussions with the Senior Lenders in relation to the Senior Lender proposal, the Co-ordinating Committee didn't consider it appropriate to enter into negotiations with the Mezzanine Lenders on the proposal enclosed with their letter dated 18 January 2010."

iii Ms Rosell Rowley of Baker & McKenzie replied on 12 February 2010:

"Thanks for your email. As you will appreciate, the Security Trustee as part of its role needs to be comfortable that there has been a genuine and measurable marketing process. As part of that, it also needs to understand on what basis, amongst other things, (i) the decision has been made that the Senior Lender/Triton bid is the best deal on the table in the current market conditions and (ii) that other bids (such as the Mezzanine proposal) have not been pursued or are considered inappropriate. I am sure that there is a sound commercial rationale behind the decision that the proposal was not appropriate to pursue. However, as Jenny said, we need to understand that rationale more thoroughly in order to advise our client appropriately. Clearly, this is quite an important point that the Security Trustee needs to get comfortable on given some of the points raised in the latest letter from the Mezzanine."

b Similarly, at the meeting with the Mezzanine Lenders on 25 March 2010, the Mezzanine Lenders could not have made their interest in bidding for the Stabilus Group clearer. This is something which JPMEL ought to have sought to encourage and exploit, rather than trying to brush away, to encourage competitive bids for the assets. The terms proposed by the Mezzanine Lenders represented an implied value for the Stabilus Group of around €500 million. As pithily expressed in the one sentence reaction of Mr Wilhelms (the CFO of the Stabilus Group) when the Mezzanine proposal was communicated to him on 25 March 2010 itself: "hoert sich spannend an, da habe ich doch was verpasst". This translates as: "sounds very interesting and appealing, but I must be missing something".

c There is no evidence that this proposal was even considered by JPMEL. Instead, JPMEL purported to exercise its powers to sell assets to the Senior Lenders on the terms dictated by the Senior Lenders, and in doing so appears to have followed steps suggested by PwC – the "steps based on Preferred Anti-Mezz restructuring Plan", as the note of the call between Baker & McKenzie and Allen & Overy of 20 November 2009 records.

d Not only did JPMEL not go to market, it did not even try to negotiate with the purchaser over the price or terms of the sales.

e Internally, the SCG appears to have treated such exercise of the Security Trustee's powers as a foregone conclusion. The 9 March 2010 EMEA SCG Overview predates the purported enforcement by over a month and yet describes the "Enforcement via the Security Trustee (J.P Morgan)" entirely in the past tense. This is also consistent with the summary rejection of MDM's restructuring proposal on 25 March 2010 and JPMEL's failure to seek to elicit any further bids for the Stabilus Group: JPMEL had already determined to exercise its powers for the purpose of implementing the proposal agreed by the Senior Lenders, in which the members of the SCG wearing the Senior Lender and SCC hats had been instrumental - and which had been approved by Mr Jaffe wearing his JPMCB hat.

f In these circumstances, not even the formal requirements ended up being complied with. Ms Rosell Rowley of Baker & McKenzie e-mailed PwC on 31 March 2010:

"…The Security Trustee has received legal advice that, even following receipt of instructions from the Senior Lenders to exercise any of the Clause 15.2 Powers, it has a responsibility to satisfy itself that the relevant conditions have been complied with, before it takes any action.

… Therefore, the Security Trustee would like to have access to the work that has been undertaken by PwC in looking at the value and the business and prospects of the Stabilus Group (in the form of the Senior Deliverables, as defined in the assumption of duty letter) in order to ensure that it is working from a common platform to the Senior Lenders when it makes the decision on whether it can act in the manner requested…"

g This material from PwC was not in fact supplied to JPMEL until 21 April 2010 well after JPMEL's purported exercise of its powers, without a competitive sales process or negotiation, in secret, and against the wishes and interests of those to whom it admitted at the time, and on the pleadings still admits, that it owed a fiduciary duty.

h At no time did JPMEL actually conduct a proper sales process. Conducting a proper sales process, would, of course, have meant opening up the bidding process and someone who was not a Senior Lender might have bid. This would have included the Mezzanine Lenders, as well as other interested buyers such as Tyrol (the competitor which had invited itself to the table during the Rothschild sale process). The evidence of Mr Illenberger, one of the four members of AXA Private Equity's Executive Committee, was that had such a process been conducted, he would have authorised a bid of €470 million in line with AXA Private Equity's valuation of the company at the time which was around €500 million (which he knew AXA Private Equity's Investment Advisory Committee would have approved).

108. So far as relevant, I consider further below certain of these points in particular the suggestion that Mr Illenberger would have authorised a bid for around €470 million or more; and what, if any, legal justification the Mezzanine Defendants had and have to the course pursued by the Senior Lenders and JPMEL as Security Trustee. But it is important to note that I accept that the Senior Lenders as a whole genuinely thought that the Mezzanine Lenders were so far out of the money that their demands for equity (including those contained in their proposal dated 25 March 2010) were simply unrealistic and indeed had no basis whatsoever. Although invited to do so, the Mezzanine Lenders never provided any evidence that their claims had any value. Rather than giving a reasoned account of why they had value, they said that the Stabilus Group was on the brink of insolvency and would collapse without a consensual restructuring and made threats of litigation, indeed of "lengthy and potentially destabilising" litigation, "time and money consuming litigation" and "years of litigation" and "exhaustive legal action". That is indeed what has happened: they commenced and have pursued proceedings in Germany as well as the counterclaims here. (The allegations in Germany include the assertions that the restructuring was "an illegal expropriation, brought about by the collusion of the Security Trustee, Senior Lenders and management of the defendant". JP Morgan is described as the "string puller" and the AA valuation "a farce". The actions taken by the "players" are described as "brazen" and designed to "strip the Mezzanine Creditors … and appropriate their claims").

7 The Restructure

109. On 31 March 2010, PwC delivered its final restructuring opinion (the "Restructuring Opinion").
110. In the context of the developments set out above, by 6 April 2010 the Restructuring Agreement had been signed by the Senior Lenders and SPVs had been set up for the purposes of the Restructure (i.e. Acquilux and KG).
111. 2 April 2010, the long-stop date in the Senior Lock-in Agreement, was also the date on which the Suspension Period under the Senior Suspension of Rights Letter expired and the Bridge Facility became repayable. As a consequence of the work that had been done in February and March 2010 to implement the terms of the Restructuring Agreement reached on 25/26 January 2010 and recorded as heads of terms on 15 February 2010, there was no need for any further extension to the Suspension Period or the term of the Bridge Facility.
112. On the same day, i.e. 2 April 2010, instructions were given by the Senior Lenders under Clause 29.7 of the SFA to the Senior Facility Agent (i.e. JPMEL) to instruct the Security Trustee (i.e. JPMEL) to execute the Restructuring Agreement. JPMEL, as Senior Facility Agent, purported to provide itself, as Security Trustee, with a "Restructuring Documents Notice". This identified that the execution by the Security Trustee of certain documents was a condition precedent to the effectiveness of the Restructuring Agreement, and purported to instruct the Security Trustee to execute a Restructuring Agreement, a Replacement Intercreditor Agreement, a New Mezzanine Facility Agreement and a Supplemental Agreement to the SFA, containing in Schedule 5 a Replacement Senior Facilities Agreement.
113. The Restructuring Agreement was signed by (inter alia) the Senior Lenders and JPMEL on 6 April 2010. The Restructuring Agreement set out the various steps involved in the Restructure. In particular, the following steps took place on 8 April 2010 pursuant to the Restructuring Agreement and the machinery contained in the SFA and the ICA:

a An Acceleration Notice was issued by JPMEL as Senior Facility Agent to Stable I, inter alia, identifying existing Events of Default under the SFA and accelerating certain sums due under the SFA;

b An Enforcement Event Notice was issued by JPMEL as Senior Facility Agent to Stable I and Stable II;

c An Enforcement Notice was issued by JPMEL as Senior Facility Agent to JPMEL as the Security Trustee instructing JPMEL to enforce, inter alia, the Preferred Equity Certificates Pledge, the Receivables Pledge and the Share Pledge and to transfer the relevant Mezzanine Liabilities to Acquilux.

114. The enforcement was effected by way of:

a The disposal of rights in relation to Stable II through:

i the (private) sale to Acquilux of 94.9% of the shares in Stable II, 100% of the Preferred Equity Certificates, and 100% of the receivables pursuant to a Sale and Purchase Agreement between the Security Trustee and Acquilux for total consideration of €3 but subject to the existing debt burden; and

ii the (private) sale to KG of 5.1% of the shares in Stable II pursuant to a Sale and Purchase Agreement between the Security Trustee and KG for total consideration of €1 but subject to the existing debt burden;

(together the "Stable II Disposal");

b Pursuant to Clause 15.2(c) of the ICA, the transfer of the Mezzanine Liabilities (except for liabilities owed by Stable I and Stable Holdings) from the Mezzanine Lenders to Acquilux (the "MFA Transfer"); and

c The transfer of the Non-Performing Senior Debt (as defined in the Restructuring Agreement) from the Senior Lenders to Acquilux.

115. The Mezzanine Liabilities (except for liabilities owed by Stable I and Stable Holdings) and the Non-Performing Senior Debt transferred to Acquilux were then released (purportedly) pursuant to Clause 15.2(c) of the ICA. The release of the Mezzanine Liabilities is referred to as the "MFA Release". The liabilities owed by Stable I and Stable Holdings were left in place; those companies have since been placed into bankruptcy in Luxembourg.
116. It is important to note that, as submitted by Mr Smouha QC:

a JPMEL received no consideration for the purported MFA Transfer. However, Clause 10.2(a) of the Restructuring Agreement expressly provides that Acquilux and the Senior Beneficiaries agree, and that the Security Trustee acknowledges, that as consideration for the purported MFA Transfer, certain of the Senior Beneficiaries (but not any of the Mezzanine Lenders) would receive the rights and benefits conferred upon them by certain newly created financial instruments described as profit participating loans ("Mezzanine PPLs") in their capacity as lenders (as defined therein) in the proportions set out opposite the name of those Senior Beneficiaries in the PPL Schedule. Pursuant to this PPL Schedule, certain of the Senior Lenders, including JPMCB, received Mezzanine PPLs in consideration for the transfer.

b The Security Trustee then purported to exercise its power under Clause 15.2(b) of the ICA to release, on behalf of the Mezzanine Lenders, Transaction Security held as security for them and which had been granted by those Obligors which had been purportedly sold the MFA Release. No consideration was provided for such release.

c By notable contrast, Senior Debt was left owing and secured to the Senior Lenders (with future payments in respect of it apparently passing to those Senior Lenders rather than to the Security Trustee to pay down the waterfall in the ICA), and in so far as the Senior Lenders novated Senior Liabilities to Acquilux, they received PPLs in consideration (and were parties to a Replacement Intercreditor Facility and a new waterfall as provided therein).

117. The overall restructuring can be summarised as follows:

a Acquilux and KG acquired the shares, interest-free preferred equity certificates, and receivables issued and owed by Stable II thereby acquiring ownership of the Stabilus Group subject to its existing debt burden;

b Triton injected €36 million cash into the Stabilus Group and €31 million of Saltri III's existing Senior Debt was converted into equity;

c The Mezzanine Liabilities (except for liabilities owed by Stable I and Stable Holdings) and the Non-Performing Senior Debt was transferred to Acquilux and then released;

d A new (super super) senior revolving facility of €14.1 million was provided by the existing Bridge Facility lenders (excluding Triton);

e As to the remaining Senior Liabilities:

i Existing "dragged" Senior Liabilities were converted into two new super senior facilities of a total of approximately €25 million;

ii The other Senior Liabilities were converted into: (a) a new senior facility of approximately €119 million; and (b) a new mezzanine facility of €86 million;

f Senior profit participating loans ("Senior PPLs") and Mezzanine PPLs were issued. These are quasi-equity instruments whose value is uncertain since it depends on the performance of the Stabilus Group. They were allocated to the Senior Lenders in accordance with the "waterfall" agreed between the Senior Lenders and the Mezzanine Lenders in Clause 16 of the ICA.

118. The overall effect of the restructuring was to place the Stabilus Group on a sustainable footing with a substantially reduced debt burden.

8 The German proceedings

119. Proceedings were brought by MDM and ECAS in Germany (the "German Proceedings"). These proceedings were commenced on 29 December 2010 by MDM against Stabilus GmbH claiming repayment of the lending under the MFA guaranteed by Stabilus. ECAS was joined as co-claimant on 25 February 2011. In the German Proceedings, MDM and ECAS have made various allegations about the validity and propriety of the Restructure. The German Proceedings are at present continuing although no date for a final hearing has yet been set. Expert reports on English law and valuation have been served by both sides. As to the former, Stabilus has served an expert report and supplemental expert report from Sir Gavin Lightman refuting the contentions made by MDM and ECAS with regard to the construction of the ICA and the duties owed by the Security Trustee. Andrew Sutcliffe QC is the expert retained by MDM and ECAS.
120. Against that background summary of the main events, I turn to consider the three main issues in relation to alleged breaches by JPMEL of Clauses 14 and 15 of the ICA, and fiduciary duties generally. At the outset, it is convenient to summarise a number of general principles which in broad terms are relevant to all three issues.

C – GENERAL PRINCIPLES

1 Nature of the ICA

121. One general point raised by Mr Smouha QC is that the ICA is not an agreement designed to enable the implementation of a restructuring, let alone force upon the Mezzanine Lenders a non-consensual restructuring as occurred in the present case. For example, at paragraph §33(8) of their opening submissions, the Mezzanine Defendants say: "Nowhere does the ICA say that if the Senior Lenders wish to deleverage the company, they can implement a restructuring which removed the Mezzanine Debt." In effect, the argument was that the ICA cannot be used for the purposes of a restructuring at all, or at least a non-consensual one and, in effect, that it is impossible to enforce under the ICA as part of a restructuring without the consent of all, including junior, creditors. As submitted by Mr Miles QC, three observations should be made with regard to this argument. First, the starting point is wrong. The Court does not ask in general terms what an agreement is designed for. The task for the Court is to interpret the contract in accordance with well-established principles (which were not in dispute) and then to examine the events which have happened and to determine whether there has been a breach. Second, the argument, which is expressed in absolute terms, appears to be that the Mezzanine Defendants had a bargaining position under the ICA, however far out of the money their debt may have been, because a non-consensual restructuring was, they contend, impossible. This cannot be right. Suppose it was agreed by everyone at the time that the EV of the Stabilus Group was €200m. It appears on the Mezzanine Defendants' case that the ICA still required a consensual restructuring, because it was not "designed" to allow anything else to happen. In my judgment, that is demonstrably false. Third, the argument ignores cases such as HHY Luxembourg Sarl v. Barclays Bank Plc [2010] EWCA 1248 where a restructuring took place under an intercreditor agreement which was very similar to the present. Again in Re Bluebrook Ltd [2010] BCLC 338, a restructuring took place involving steps under an intercreditor deed. The Mezzanine Defendants say that the process of restructure was entirely different in the latter case because it involved a scheme of arrangement. That is correct but it ignores paragraph 7(vi) of the Judgment where Mann J said that it would have been possible to achieve the same result without a scheme had all the senior lenders participated and agreed, but that because a small minority of the senior lenders did not agree a scheme was required; and paragraph 7(vii) where he pointed out that the overall restructuring still involves the use of enforcement processes of the inter-creditor agreement, including the compulsory release of security and guarantees held by the mezzanine lenders and the transfer of assets that that document enables (those latter steps not being part of the scheme).
122. A further similar argument advanced by Mr Smouha QC was that under the terms of the ICA all realisations were required (a) to be made for cash and (b) to be put down the waterfall under Clause 16 of the ICA. I do not agree. There is nothing in the ICA which prevents a sale or disposal from being made for nominal consideration or being made for non-cash consideration. In particular:

a There is no requirement anywhere expressly stated in the ICA precluding the Security Trustee from selling or disposing of assets subject to the existing debt and thus for nominal consideration, or for non-cash consideration. Such a requirement would be a significant fetter on the Security Trustee's powers and, if this had been intended by the parties to be a requirement, it would have been expressly stated in the ICA.

b On the contrary, the language used in the ICA is entirely general in referring to the "enforcement" of the Transaction Security which may involve the "disposal, collection or realisation" of assets subject to that security (Clause 14.1 of the ICA). Moreover, Clause 15.2 makes clear that assets may not only be sold but can also be "otherwise disposed of".

c A requirement preventing a sale or disposal for nominal consideration or for non-cash consideration would be uncommercial as it would seriously restrict the ability of the Lenders to obtain a recovery on their claims, particularly in times where there is a shortage of liquidity in the market and where pure cash bids may not be forthcoming or may be low in amount. To take an example of a company with £200 million of debt: it would be very odd if the Security Trustee were required to accept a cash bid of £50 million free of all debt and was unable to accept a bid which purchased the equity for nominal consideration but subject to retaining £150 million of existing debt.

d Although research by Counsel would indicate that the point has not previously been taken that a sale/disposal cannot be made for nominal consideration and thus that the point has not been expressly considered by the courts, previous restructurings would seem to have proceeded on the basis that this is possible: HHY Luxembourg Sarl and another v. Barclays Bank plc and Ors [2011] 1 BCLC 336 (CA) at [7] and Re European Directories (DH6) BV [2012] BCC 46 at [23].

e Clause 15.2(c) of the ICA refers to the "proceeds" of enforcement as does Clause 16.2. Clause 16.1 refers to "amounts … received or recovered". These are apt to refer to non-cash as well as cash consideration. "Payment" may be made other than in cash. For the avoidance of doubt I do not consider that this conclusion is inconsistent with the requirement in the proviso that the Security Trustee shall take reasonable care "to obtain a fair market price". In particular, reading the entire wording, I do not consider that the reference to "price" necessarily means "cash".

f There is no reason why non-cash consideration (such as PPLs) cannot be allocated in accordance with the waterfall in Clause 16 of the ICA.

g The Triton Parties accepted that to the extent the Security Trustee received or recovered amounts from the enforcement of the Transaction Security, then these were required to be applied in accordance with the waterfall in Clause 16 of the ICA. However, in my view, it does not follow that any sale or disposal must be made for consideration which is capable of being applied in accordance with the waterfall. This is not what the ICA says. Clause 16 prescribes how amounts are to be dealt with once they are received or recovered but it does not itself prescribe the manner in which the Transaction Security can be enforced.

2 Fiduciary relationships and party autonomy in shaping duties

123. Running through many of the allegations advanced by the Mezzanine Defendants are wide-ranging allegations of "breach of trust" and "breach of fiduciary duty" against JPMEL in its capacity as Security Trustee. Such allegations are denied by both JPMEL and the Triton Parties. As to such allegations, it is I think sufficient to refer to the submissions made on behalf of JPMEL which I accept:

a First, unthinking resort to verbal formulae has created confusion regarding the fiduciary concept (Snell's Equity, 32^nd Ed., § 7-002).

b Second, a "fiduciary is not subject to fiduciary duties because he is a fiduciary; it is because he is subject to them that he is a fiduciary": Snell's Equity para 7-003.

c Third, a person in his position may be in a fiduciary position quoad a part of his activities and not quoad other parts: each transaction, or group of transactions, must be looked at: see e.g. New Zealand Netherlands Society "Oranje" Inc v. Kuys [1973] 1 WLR 1126 at 1130D – a decision of the Privy Council which has been followed in many subsequent cases. This is a point which certain of the Mezzanine Defendants' submissions ignore. The suggestion that because JPMEL as Security Trustee was a fiduciary in some respects it is a fiduciary in all respects is, in my judgment, wrong. The court has to consider the particular duty alleged to be breached: here the relevant duties are concerned with enforcement and, to a large extent, the ICA delineates the scope and nature of the duty.

d Fourth, "a fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence": Bristol & West BS v. Mothew [1998] Ch 1 at 18.

e Fifth, the essence of a fiduciary relationship is that the fiduciary subordinates his own interests to his principal's: (see e.g. Wollenberg v. Casinos Austria International Holding GMBH [2011] EWHC 103 § 208). In other words, the fiduciary is required to act loyally in the interests of the principal. In a commercial context a person will not be treated as under fiduciary obligations to A in a particular respect if he is entitled to act in his own interests or those of another, B, in preference to the interests of A.

f Sixth, where (as in the present case) sophisticated parties have chosen to govern their relationship through arms-length commercial contracts, the scope and nature of the duties owed between the parties are shaped by the terms of, and the language used in, those contracts: see the famous statement in Hospital Products Ltd v. United States Surgical Corporation [1984] 156 CLR 41 (at page 97) cited with approval in Halton v. Guernroy [2005] EWHC 1968 at § 139 and in Kelly v. Cooper [1993] AC [205] at [215]; and also see Henderson v. Merrett Syndicates Ltd [1995] 2 AC 145 at 206. This reflects the general approach of the courts to complicated financial transactional documents, in relation to which there is a particularly strong case for giving effect to the contract the parties have agreed: see e.g. Belmont Park Investments Pty Ltd v. BNY Corporate Trustee Services Ltd [2012] 1 AC 383 at 421.

g Seventh, the powers of a mortgagee in relation to realisation of the security are not held on trust for the mortgagor: see Snell's Equity para 7-006; Farrar v. Farrars (1888) 40 ChD 395 at 410-11. A mortgagee is entitled to act in its own interests even if this is detrimental to the interests of the mortgagor as to both the timing and manner of enforcement: Downsview Nominees v. First City Corp Ltd [1993] AC 295 at 312. If the mortgagee held the power as trustee he would be required to enforce only in the way that best served the interests of the mortgagor.

h The Mezzanine Defendants' argument that, in relation to enforcement of the security, the Security Trustee was a fiduciary and was therefore obliged to act in the interests of all the Lenders (including the Mezzanine Lenders), is in my view, fundamentally wrong for at least four reasons:

i First, the ICA subordinates the interests of the Mezzanine Lenders to those of the Senior Lenders.

ii Second, the Senior Lenders are given the right to control the timing and manner of enforcement and this is binding on the Mezzanine Lenders. The Senior Lenders are entitled to decide when and how to enforce even though this may be detrimental to the interests of the Mezzanine Lenders. The Security Trustee is obliged to follow these instructions (subject to the limits imposed by the ICA).

iii Third, the release provisions in Clause 15.2 of the ICA may be exercised contrary to the interests of the Mezzanine Lenders.

iv Fourth, Clause 14.3 of the ICA expressly states that the only duty of the Security Trustee to the Mezzanine Lenders in relation to sale is that of mortgagee to mortgagor, which is not a fiduciary duty (see further below).

124. The Mezzanine Defendants also argued that JPMEL, as a fiduciary, was in a position of conflict because of the role of JPMCB as a Senior Lender. Such argument is in my judgment flawed in law. As already noted, a person may be a fiduciary quoad some of its functions and not others. Here, the Security Trustee's only duties quoad enforcement of the security were those of a mortgagee. But there is no duty on a mortgagee to avoid conflict of interest with the mortgagor, nor could there be. Their interests diverge and there is therefore a built-in conflict. That is why a mortgagee is not a trustee of the power of sale for the mortgagor. The controls on the mortgagee's powers do not include the requirement to avoid conflicts between itself and the mortgagor (an impossible requirement, for the reasons just given) but, rather, consist of (i) the requirement on the mortgagee not to sell to itself and (ii) the duty of care to obtain a proper price and the requirement that the power be exercised bona fide for a proper purpose.

3 The general duties owed by a mortgagee to a mortgagor regarding price

125. It is important to note that Mr Smouha QC submitted that the arguments about JPMEL's duties arise solely in relation to enforcement under Clause 14 of the ICA i.e. the sale of the Stable II shares. In particular, he submitted that this was because Clause 14.3 provides that in the event that the Security Trustee is instructed to enforce the security conferred by the Transaction Security Documents, while the Senior Debt has not been discharged, in relation to the "method type and timing of that or the exploitation, management or realisation of any of that Transaction Security", the duties owed by the Security Trustee are no greater than those owed to the Obligors under general law, and the parties agree that these are to be equated to the duties owed by a mortgagee. By contrast, Mr Smouha QC submitted that the Security Trustee's duties in relation to its powers under Clause 15 of the ICA are powers of agency granted by the Lenders to the Security Trustee to sell assets belonging to the Lenders, not held by the Security Trustee on trust for them, in certain circumstances; that the duties owed by the Security Trustee when selling these assets are not expressed to be those that would be owed by a mortgagee; and that the power in Clause 15.2(c) is a power to sell assets (the Senior Debt and the Mezzanine Debt owed by those members of the group whose shares have been pledged as security and been sold, and, their subsidiaries). On this basis, Mr Smouha QC submitted that this means that there are important differences in the issues in relation to the disposal of the Stable II shares and the disposal of Mezzanine Debt. In particular, he submitted as follows:

a First, so far as Clause 15 of the ICA is concerned, the exercise of a fiduciary power for a collateral purpose is not permitted whereas under Clause 14, the position is different: a mortgagee can exercise its power for a mixed purpose.

b Second, as to provisos regarding authority, on the proper construction of Clause 15.2(c) there are two provisos that must be complied with before the Security Trustee has authority to dispose of assets which the Security Trustee does not own in law or equity but which belong to them. No equivalent issue arises under Clause 14.

c Third, so far as Clause 14 is concerned, an issue arises as to whether (as JPMEL and the Triton Parties contend) proof of loss is a requirement of actionability (as to which see below) but no such issue arises under Clause 15 because nothing in Clause 15 says that the power of sale of these assets is related to mortgagee powers and this is said to be a requirement for a mortgagor to prove.

d Fourth, as to the argument by the Security Trustee/the Triton Parties that "in deciding whether a mortgagee has fallen short of his duty, facts must be looked at broadly and he will not be adjudged in default unless he is plainly on the wrong side of the line", so far as Clause 14 is concerned, this principle is not duty-defining but sets out what must be shown to prove breach of the duty; and, so far as Clause 15 is concerned, such argument does not arise because that clause is concerned not with a mortgagee's power of sale but an "agency power".

126. In this context, I would like to pay tribute to a useful recent article by Professor Richard Hooley of King's College, London; "Release Provisions in Intercreditor Agreements" Journal of Business Law (2012) 213.
127. In the light of the express words of Clauses 14.3 and 15.2(c) of the ICA, the general law concerning mortgagees' powers and duties informs the proper interpretation of the ICA, although the question whether the Security Trustee properly exercised its powers falls to be considered against the contractual structure in which those powers are contained. The general law concerning the scope and effect of those powers was examined by the Court of Appeal in Silven Properties Ltd v. Royal Bank of Scotland plc [2004] 1 WLR 997 from which the following propositions may be gleaned:

a A mortgagee has no duty at any time to exercise his powers as mortgagee to sell, to take possession or to appoint a receiver and to preserve the security or its value or to realise his security. He is entitled to remain totally passive [13].

b A mortgagee is not a trustee of the power of sale for the mortgagor. In default of provision to the contrary in the mortgage, the power is conferred upon the mortgagee by way of bargain by the mortgagor for his own benefit and he has an unfettered discretion to sell when he likes to achieve repayment of the debt which he is owed [14] (citing Cuckmere Brick Co Ltd v. Mutual Finance Ltd [1971] Ch 949, 969g).

c A mortgagee is at all times free to consult his own interests alone as to whether and when to exercise his power of sale [14] (citing Raja v. Austin Gray [2003] 1 EGLR 91, 96, [59], per Peter Gibson LJ).

d The mortgagee's decision is not constrained by reason of the fact that the exercise or non-exercise of the power of sale will occasion loss or damage to the mortgagor [14] (citing China and South Sea Bank Ltd v. Tan Soon Gin (alias George Tan) [1990] 1 AC 536, 545).

e It does not matter that the time of sale chosen by the mortgagee may be unpropitious and that by waiting a higher price could be obtained: he is not bound to postpone in the hope of obtaining a better price [14] (citing Tse Kwong Lam v. Wong Chit Sen [1983] 1 WLR 1349, 1355b).

f If the mortgagor requires protection, whether by imposing further duties on the mortgagee or limitations on his rights and powers, he must insist upon them when the bargain is made and upon the inclusion of protective provisions in the mortgage. In the absence of such protective provisions, the mortgagee is entitled to rest on the terms of the mortgage and (save where statute otherwise requires) the Court must give effect to them [18].

g When and if the mortgagee does exercise the power of sale, he comes under a duty in equity (and not tort) to the mortgagor (and all others interested in the equity of redemption) to take reasonable precautions to obtain "the fair" or "the true market" value of or the "proper price" for the mortgaged property at the date of the sale [19].

128. The duties owed by a mortgagee to a mortgagor in respect of a power of sale were also examined by the Court of Appeal in Michael v. Miller [2004] 2 EGLR 151, from which the following further propositions may be derived:

a In exercising his power of sale over mortgaged property a mortgagee is under a general duty to take reasonable care to obtain the best price reasonably obtainable at the time. This is synonymous with "a proper price" ([131]). It is a matter for the mortgagee how that general duty is to be discharged in the circumstances of any case.

b Subject to any restrictions in the mortgage deed, it is for the mortgagee to decide whether the sale should be by public auction or private treaty ([132]). A public auction may not be appropriate, e.g. in a falling market ([133]).

c Just as a valuer will not breach his duty if his valuation falls within an acceptable margin of error, so a mortgagee will not breach his duty to the mortgagor if in the exercise of his power to sell the mortgaged property he exercises his judgment reasonably; and to the extent that that judgment involves assessing the market value of the property the mortgagee will have acted reasonably if his assessment falls within an acceptable "margin of error" ([135]).

d The mortgagee will only be liable if his conduct is "plainly on the wrong side of the line" ([136-7]).

e Insofar as the exercise of the mortgagee's power of sale calls for the exercise of informed judgment by the mortgagee, whether as to market conditions, or as to market value, or as to some other matter affecting the sale, the use of a bracket – or a margin of error – is available to the court in assessing whether there has been a breach ([138]).

D – THE ISSUES

1 Did JPMEL comply with the duties it owed under Clause 14 of the ICA and, if not, what are the consequences of any such breach of duty?

(i) Overview

129. As to Clause 14 of the ICA, it is necessary to deal at the outset with a point raised by JPMEL viz that the combined effect of Clauses 14 and 17.4 is to exclude the kinds of duties the Mezzanine Defendants say arise (i.e. to act in the interests of the Mezzanine Lenders and to avoid conflicts and/or not to favour the interests of other persons over the interests of the Mezzanine Lenders). As to this, JPMEL made the following submissions:

a The Security Trustee is obliged to act on the instructions of the Senior Facility Agent concerning enforcement, until such time as the Senior Debt has been discharged in full. It has no discretion to act otherwise: Clause 14.1 of the ICA (the Security Trustee will enforce "only at request of the [Senior Facility Agent]");

b By Clause 17.4 of the ICA, unless a contrary intention appears in the ICA the Security Trustee "shall act in accordance with any instructions given to it by the [Senior Facility Agent]". These include instructions as to enforcement. There is no contrary intention; indeed Clause 14.1 is consistent with this.

c Clause 17.8 of the ICA excludes obligations arising other than those specifically provided for in the Finance Documents. Clause 17.1(d) excludes duties, obligations and responsibilities other than those specifically provided for in the ICA or in the Security Documents to which the Security Trustee is a party, and states that no other obligations shall be implied.

d In relation to enforcement, Clause 14.3 expressly states that the extent of the duties of the Security Trustee in respect of enforcement of the security shall be no different to or greater than those owed by a mortgagee to a mortgagor under general law.

e The interests of the Senior Lenders are obviously capable of conflicting with those of the Mezzanine Lenders: that is inherent in the ICA. It is not possible to require the Security Trustee to act in the interests of the Mezzanine Lenders where it is validly instructed to act by the requisite percentage of the Senior Lenders (through the Senior Facility Agent).

130. In broad terms, I agree with those submissions. However, it is important to note that this does not mean that JPMEL was entitled simply to comply with an instruction (whatever it might be) from the Senior Lenders in relation to enforcement as a result of Clause 17.4 of the ICA nor that JPMEL had no further independent obligations – and I did not understand JPMEL to suggest otherwise. In particular, I understood JPMEL to accept that given (in particular) the terms of Clause 14.3 it owed at least certain duties in relation to the method, type and timing of enforcement of the Transaction Security equivalent to those owed by a mortgagee to a mortgagor. As to such duties, Mr Smouha QC initially submitted that a mortgagee (i) must consider the most appropriate means of sale which will normally but not always be by public auction in reasonable conditions and (ii) whatever the mode of sale must advertise the sale. In support of the latter submission (i.e. that the sale must be advertised), Mr Smouha QC relied upon a passage in Fisher & Lightwood, Law of Mortgage, 13^th Edition, at para 30.27. However, that submission was, in the event, abandoned, it being agreed that the duties were (at the very least): (a) to take reasonable care to obtain the true market value of and/or the best price reasonably obtainable for the Transaction Security at the time of sale or disposal; and (b) to exercise the power of sale bona fide and for its proper purpose. This was, as I understood, common ground.
131. However, there were, in this context, four important aspects which were not agreed viz (i) the burden of proof; (ii) whether the scope of the duty extended further than I have stated above; (iii) the suggested need to show proof of damage; and (iv) the ingredients relevant to the duty to exercise the power of sale for a "proper purpose".

(a) Burden of Proof

132. Mr Smouha QC submitted that where the sale was to a connected or affiliated/associated person (as he submitted was the case here), special principles apply because of the obvious conflict of interest between the duty to obtain the best price and any desire that an associate obtain a good bargain. In particular, Mr Smouha QC submitted as follows:

a The test for what constitutes a connected or affiliated/associated party is flexible. The touchstone is whether there is a risk of a conflict between the duty and the desire that an associate obtain a good bargain, leading to a possibility of unconscious preference. It does not require an equity interest, but is designed to deal with a risk that the vendor might have a conflict of interest in the sale. As Jacobs J put it in Australia and New Zealand Banking Group Limited v. Bangadilly Pastoral Co Pty Limited (1978) 139 CLR 195 at pp. 201-2:

"When there is a possible conflict between that desire and a desire that an associate should obtain the best possible bargain, the facts must show that the desire to obtain the best price was given absolute preference over any desire that an associate should obtain a good bargain … The closer the association, the greater the conflicts and the greater the possibility of unconscious preference." (underlining added).

b In Bangadilly, that test was satisfied where the same controlling mind was behind the two entities. See also Bradford & Bingley v. Ross [2005] EWCA Civ 394 at paragraphs 20-21, where Chadwick LJ had no hesitation in finding that Bradford & Bingley was connected to the purchaser of a property where the parent company of the purchaser had a put option which was likely to be exercised and which entitled the purchaser's parent to require Bradford & Bingley to buy the shares of the purchaser five years after the sale.

c Applying that test, the sale here to Acquilux was to a connected or affiliated/ associated party. In particular:

i Although, as Bradford & Bingley v. Ross (above) shows, it is not necessary to have an equity interest, it is sufficient. The contemporaneous documents show that JP Morgan (through JPMCB) was obtaining what it referred to as an equity interest taken in the form of PPLs issued to it by Acquilux. JPMEL is a subsidiary of JPMCB and as Mr Medler accepted in evidence: "We all look at JP Morgan as a single entity". Similar views were expressed by Mr Jaffe. The SCG viewed its role as being to support JP Morgan in general.

ii The sale was in effect a sale to the Senior Lenders on the instructions of the Senior Lenders. Acquilux was an SPV of one of the Senior Lenders (Triton) for whom JP Morgan acted as Security Trustee, and JPMCB was a Senior Lender as well. It was not in the Senior Lenders' interests that the Mezzanine Debt should be in the money: it would mean that the value of the Stabilus Group would have to be shared with the Mezzanine Lenders rather than being carved up among the Senior Lenders.

iii Further, in the period after 15 February 2010 to enforcement, i.e. after the Senior Lock-In Agreement, and while JPMEL as Security Trustee was continuing to negotiate an indemnity against wrongdoing and the confirmation from the Senior Lenders that they were paying the market price, JPMEL was connected to the purchasers via its promise in the Senior Lock-in Agreement. Both JPMCB as Senior Lender and JPMEL as Senior Facility Agent contractually committed, pursuant to Clause 4 of the Senior Lock-In Agreement, to use all commercially reasonable endeavours to implement the Restructure in accordance with the Annexed Term Sheet. It was fundamental to the Annexed Term Sheet that the Security Trustee take the various steps set out in the Senior Lock-in Agreement. That both JPMCB and JPMEL as legal entities had promised to support the sale is another obvious "possible conflict" with the duty to obtain the best price.

d In these circumstances and having regard to the decision of the Privy Council in Tse Kwong Lam v. Wong Chit Sen [1983] 1 WLR 1349, the burden shifted to JPMEL; and indeed there was a heavy onus upon JPMEL to show that in all respects it had (at the very least) acted fairly and used its best endeavours to obtain the best price reasonably obtainable.

133. Although the general principles summarised above were not substantially in dispute, there was an important issue about whether the sale in question here was in fact such as to be subject to those principles. In particular, as to the allocation of PPLs by Acquilux to the Senior Lenders, JPMEL advanced three main points viz:

a First, for all purposes material to the present question, PPLs are a form of debt for legal and accounting purposes, or (as Mr Klein put it) credit-instruments with equity-like features. They do not give any ownership interest or voting powers or control over the company which issues them. When they were referred to in the evidence as having some of the characteristics of equity, that simply meant that the measure of recovery under the PPLs is dependent on the performance of the issuing company. Even then, as PwC explained, the PPLs do not, properly speaking, entitle the holders to participate in the "profits" of the Stabilus Group. The important point for present purposes is that they do not give any form of ownership, shareholding, voting powers or other control over the issuer. As M. Berment explained, whilst PPLs could be regarded as having some equity like features, they are not equity in the company and they give no special voting rights or rights to appoint board members. M. Berment referred to them as being like bonds.

b Second, JPMEL itself was not allocated any PPLs. They went to JPMCB. The Mezzanine Defendants' argument requires the court to ignore the separate corporate personality of the JP Morgan companies. There is no basis in law, principle or on the evidence for the court to do so.

c Third, the proportion allocated to JPMCB was tiny, around 3.2% of the Senior Liabilities. Even if (which they do not) the PPLs gave voting or other ownership interests, that would not render JPMCB interested in Acquilux for the purposes of the equitable rule.

For these main reasons, JPMEL submitted that the sale here was unaffected by the principles relied upon by the Mezzanine Defendants and that accordingly the burden of proof remained throughout on them i.e. the Mezzanine Defendants to prove any breach of duty.

134. These arguments give rise to difficult issues which are, in the event, unnecessary to resolve. For present purposes, I am content to assume, in favour of the Mezzanine Defendants, that the burden of proof lies on JPMEL and that, in the circumstances of the present case, the burden is a heavy one.

(b) Scope of Duty

135. As I have stated, it was common ground that JPMEL was (at least) under a duty: (a) to take reasonable care to obtain the true market value of and/or the best price reasonably obtainable for the Transaction Security at the time of sale or disposal; and (b) to exercise the power of sale bona fide and for its proper purpose. However, Mr Smouha QC's submissions went further. In particular, he relied in particular upon one passage in the speech of Lord Templeman in Tse Kwong Lam v. Wong Chit Sen [1983] 1 WLR 1349 viz.

"A mortgagee who wishes to secure the mortgaged property for a company in which he is interested ought to show that he protected the interests of the borrower by taking expert advice [1] as to the method of sale, [2] as to the steps which ought reasonably to be taken to make the sale a success and [3] as to the amount of the reserve. There was no difficulty in obtaining such advice orally and in writing and no good reason why a mortgagee, concerned to act fairly towards his borrower, should fail or neglect to obtain or act upon such advice in all respects as if the mortgagee were desirous of realising the best price reasonably obtainable at the date of the sale for property belonging to the mortgagee himself": [1359G].

136. On the basis of this passage, I understood Mr Smouha QC's submission to be that in a situation where a mortgagee sells property to a connected or affiliated person there was, in effect, an absolute obligation on the mortgagee both (i) to take and (ii) to act upon independent expert advice in particular, so far as the present case was concerned, as to (a) the method of sale and (b) the steps which ought reasonably to be taken to make the sale a success. I agree that the first part of this passage does indeed appear to support what I shall refer to as an "absolute obligation". However, the second part of this passage (in particular the reference to "no good reason") is, in my view, to the contrary and points rather to a much broader approach; and there are other passages in Lord Templeman's speech which also suggest that there is no inflexible absolute obligation of the kind urged by Mr Smouha QC. For example:

"…..the sale must be closely examined and a heavy onus lies on the mortgagee to show that in all respects he acted fairly to the borrower and used his best endeavours to obtain the best price reasonably obtainable for the mortgaged property". [1335F] (underlining added).

"….Mr Scott [as he then was] rightly accepted that in the circumstances the mortgagee must shoulder the burden of proving that the mortgagee took all reasonable steps to obtain the best price reasonably obtainable". [1355G].

"…..In the view of this Board on authority and on principle there is no hard and fast rule that a mortgagee may not sell to a company in which he is interested. The mortgagee and the company seeking to uphold the transaction must show that the sale was in good faith and that the mortgagee took reasonable precautions to obtain the best price reasonably obtainable at the time". [1355B].

Given these other passages, I strongly doubt that Lord Templeman was seeking to prescribe an inflexible absolute obligation in the passage relied upon by Mr Smouha QC. Further, whatever the scope of the duty of a mortgagee may be in an "ordinary" property case, the circumstances of the present case would seem to me to be very different. In particular, it is in my view important to bear in mind the underlying subject-matter (i.e. the Stabilus Group) as well as the particular nature of the relationships between the parties in the present case as governed by the ICA. Given that the ICA itself does not in terms contain any such absolute obligation, it is also necessary to consider as a matter of principle the basis upon which the suggested absolute obligation might be said to arise. In my view, it could not sensibly be suggested that such an absolute obligation would arise by reason of the operation of some rule of law. Nor, in my view, could it be said to be the result of a process of construction of the ICA. As it seems to me, the only other possible alternative is that it is, in effect, a term which is to be implied into the ICA, although recent authority would indicate that this is no different from the process of construction. In any event, as formulated, it does not seem to me that the suggested absolute obligation is "necessary" to make the ICA work nor justifiable as an implied term on any other conceivable basis. For all these reasons, I am unable to accept the existence of the absolute obligation advanced by Mr Smouha QC.

137. This conclusion is also consistent, in my view, with the main thrust of the authorities including those referred to earlier in this Judgment, for example Michael v. Miller [2004] 2 EGLR 151; as well as the views expressed by Professor Hooley in the article referred to above at p. 231 (though it is noted that Professor Hooley mistook Lightman J for Robert Walker LJ when referring to Silven). In particular, the authorities do not prescribe - indeed expressly resist prescribing - any particular procedure which a mortgagee should adopt in deciding the manner in which the charged asset should be sold (whether as to marketing or advertising or otherwise. Thus, for example, Silven at [19] (where it was stated that the mortgagee "must take proper care by fairly and properly exposing the property to the market or otherwise to obtain the best price reasonably obtainable at the date of sale" (italics added)), Medforth v. Blake [2000] Ch 86 at p102A-B ("These duties are not inflexible. What a mortgagee or receiver must do to discharge them depends on the particular facts of each case."), Michael v. Miller at [132] ("there can, almost by definition, be no absolute requirements") and Newport Farm Ltd v. Damesh Holdings [2004] NZLR 721 PC at [25] all show that the courts have been careful to resist laying down any prescribed procedures or processes which a mortgagee must follow. All that can be said is that the mortgagee must take reasonable steps in the circumstances. Apart from the absence of any authority supporting the Mezzanine Defendants' argument there are other important considerations. Marketing or advertising may, in the particular circumstances, be unnecessary, pointless, impracticable or even potentially damaging. Whether marketing or advertising should take place depends on all the circumstances at the time of enforcement.
138. Moreover, in deciding whether reasonable steps have been taken by a mortgagee to obtain the best price, the steps taken by the mortgagee and those acting with it must, in my judgment, be looked at in the round whether under Clause 14 or Clause 15 of the ICA. The issue is a commercial one, to be viewed in practical commercial terms: Newport Farm at [24]. As submitted by Mr Miles QC, the test of whether a mortgagee has complied with his duty of care is generally the same as that for any other duty of care: he will only be adjudged negligent if he has acted as no mortgagee of reasonable competence acting with ordinary care and (where appropriate) acting on competent advice would act – although, as I have accepted, I proceed on the basis in this case that the burden of proof is on JPMEL and that such burden is a heavy one. In deciding whether he has fallen short of his duty, the facts must be looked at broadly and he will not be adjudged to be in default unless he is plainly on the wrong side of the line. Thus, if two or more alternative courses of action are available, there is no negligence if the course taken might have commended itself to a competent mortgagee, even though subsequent events show that it was in fact the "wrong course": Lightman and Moss at [13-039]. See also Michael v. Miller [113] and [135].

(c) Proof of Damage?

139. In essence, JPMEL and the Triton Parties both submitted that any claim for breach of a mortgagee's duties is not actionable without proof of damage; that, in particular, a party alleging breach of duty by a mortgagee to take reasonable precautions to obtain a proper price must also prove that they have suffered some damage as a result of the impugned transaction and the court will not order an inquiry unless that is shown; and that the same rule applies in the present case with the result that in order to succeed the Mezzanine Defendants must demonstrate that any sale should have been at a value (net of pensions) in excess of the existing Senior Debt at the time of the restructuring (i.e. €409 million). In support of that submission, reliance was placed upon Newport Farm, in particular per Lord Scott at [22]:

"Section 103A codifies the duty which, under the general law, a mortgagee exercising a power of sale would be taken to owe to the mortgagor (see Cuckmere Brick Co Ltd v. Mutual Finance Ltd [1971] Ch 949). It does not produce a duty breach of which is actionable without proof of damage. If a mortgagor wants an inquiry as to damages for breach of the section 103A duty, the mortgagor must, in their Lordships' opinion, satisfy the court that it has suffered at least some damage."

140. On one view, this point only arises if the burden of proof is on the Mezzanine Defendants; but in any event, this was disputed by Mr Smouha QC on three main grounds viz: (i) Newport is of no real relevance because it was concerned with the particular terms of a New Zealand Statute; (ii) what is stated in that passage by Lord Scott was obiter; and (iii) pursuant to the order of Hamblen J the trial in this case has been bifurcated so that any question of actual damage does not arise at least at this stage. (As stated above, I should mention that Mr Smouha QC submitted that this point only arose in relation to Clause 14, not Clause 15 of the ICA). More generally, Mr Smouha QC submitted that it is highly unattractive and contrary to principle that a mortgagee should be free to carry out what he submitted was, in effect, a secret sale, in breach of duty, of an asset where desktop valuations vary significantly - and then require the mortgagor to prove what would have been the result of the sales process which it has wrongfully failed to carry out; that this gives an incentive to secretive wrongful misconduct; that desktop valuations vary very considerably; that on the facts here JP Morgan's internal valuations were arrived at by blending low and high valuations which were hundreds of millions of euros apart; and that the Court should not endorse the tactical advantage which Mr Medler considered that JP Morgan secured by the restructuring as he stated in an email: "…having implemented the restructuring we are in a far stronger position and effectively the only real option available to the Mezz is a claim for damages". Further, Mr Smouha QC submitted that because JPMEL did no marketing whatever, the Court has been placed in the invidious position of having no evidence of what bids would have been made, by whom, at what price or on what terms; that this arises directly out of JPMEL's failure (contrary to Rothschild's clear advice) to test the market in any way, and any uncertainty as to valuation or price should be resolved against the party whose breach caused the absence of the relevant evidence (i.e. JPMEL): see Armory v. Delamirie (1772) 1 Stra 753 and the analysis of Sales J in Law Debenture v. Elektrim [2009] EWHC 1801(Ch) at paragraphs 164-5 and 176.
141. Whatever the strength of these points, it does not seem to me that they detract from the general statement of principle as stated by Lord Scott in Newport Farm Ltd v. Damesh Holdings Ltd. Moreover, in my view, there is much to commend such a principle. In particular, even if the position were that mortgaged property had been sold at the instance of the mortgagee at a price less than the market price, it seems to me odd that the mortgagor could assert a breach of duty on the part of the mortgagee in circumstances where, for example, such sale at such reduced price had had no impact on the mortgagor's interest. In my view, it is not just a question of quantum. Consistent with the statement by Lord Scott, it seems to me that absent proof of loss (and putting on one side the question of burden of proof), there is and can be no actionable breach of duty.

(d) Proper Purpose

142. As to Clause 15 of the ICA, Mr Smouha QC submitted that the exercise of a fiduciary power for a collateral purpose is not permitted. However, in relation to Clause 14 of the ICA, he accepted that, although there was a duty on JPMEL under Clause 14 to exercise the power of enforcement for a proper purpose or, put negatively, not to exercise the power of enforcement for an improper purpose, the position was different i.e. the exercise of the power for a collateral purpose was valid unless it was no part of the mortgagee's purpose to recover the debt. In that context, he submitted that the proper purpose of the power of enforcement under Clause 14 is the recovery, in whole or in part of the amount secured by the mortgage relying, in particular, upon the passage in Fisher & Lightwood's Law of Mortgage, 13^th Ed. at paragraph 30-22 and Meretz Investments v. ACP [2007] Ch 197 at 271-2, where Lewison J said:

"The cases do support the proposition that a power of sale is improperly exercised if it is no part of the mortgagee's purpose to recover the debt secured by the mortgage. Where, however, a mortgagee has mixed motives (or purposes) one of which is a genuine purpose of recovering, in whole or in part, the amount secured by the mortgage, then in my judgment his exercise of the power of sale will not be invalidated on that ground. In addition I consider that it is legitimate for a mortgagee to exercise his powers for the purpose of protecting his security."

143. In general terms, I did not understand that such propositions were controversial although there was some dispute between the parties as to whether breach of the proper purpose duty requires dishonesty. In particular, Mr Smouha QC submitted that breach of the duty does not necessarily involve dishonesty relying on the passage in Snell's Equity, 32^nd Edition, at p320 and a number of authorities including Vatcher v. Paul [1915] AC 372 per Lord Parker at p378, Regentcrest v. Cohen [2001] 2 BCLC 80 per Jonathan Parker J at para 123; whereas the Triton Parties and JPMEL relied upon certain comments of Scott V-C in Medforth v. Blake [2000] Ch 86. Without deciding the point, I am content to assume in Mr Smouha QC's favour that breach of the proper purpose duty does not necessarily involve dishonesty.

(ii) The Mezzanine Defendants' case under Clause 14 on the facts

144. Under this head, I deal first with the Mezzanine Defendants' case that on the evidence JPMEL failed to discharge the (heavy) burden of showing that it "took and followed expert advice as to the method of sale"; and "took and followed expert advice as to the steps which ought reasonably to be followed to make the sale a commercial success". For reasons stated above, I do not consider that, formulated in this way, this is necessarily the correct test. Rather, in my judgment, JPMEL's duty under Clause 14 was: (a) to take reasonable care to obtain the true market value of and/or the best price reasonably obtainable for the Transaction Security at the time of sale or disposal; and (b) to exercise the power of sale bona fide and for its proper purpose. Notwithstanding, it is convenient to consider the various specific allegations advanced on behalf of the Mezzanine Defendants which were in essence as follows:

a Focusing specifically on the obligation to "take and follow expert advice", this is an unusual case because JPMEL's breach lay not in failing to take advice: on the contrary, it took advice from the "very senior and respected" Mr Merrett of Rothschild. The advice was not what it wanted to hear, and it was duly ignored. The whole thrust of what JPMEL was doing was wrong: it was not seeking to see what it could do to make the sale a success. It was seeking to obtain what it needed to implement whatever deal the Senior Lenders wanted. This may be because it was Mr Jaffe's first non-consensual restructuring without court involvement. Certainly he struggled to explain his understanding of the Security Trustee's duties throughout his evidence. The confusion can only have been amplified by his admitted continuing role, in another hat, on the Senior Lender side supervising Mr Medler.

b JPMEL was advised by Rothschild that if Rothschild were instructed, it would have to recommend that a full sales process be carried out. Either this was advice which JPMEL did not follow – a breach of the Tse Kwong Lam test; alternatively, if the court takes the view that Rothschild's advice as to what it would have to advise if instructed, was not advice as to what should be done, JPMEL took no advice at all as to the proposed method of sale – also a breach of the Tse Kwong Lam test.

145. As to the factual basis of these submissions, I have already summarised the relevant events in the earlier part of this Judgment but, at the risk of some repetition, it is convenient to identify the key points relied upon by Mr Smouha QC which were as follows:

a Mr Jaffe confirmed that JPMEL recognised that it needed a sales process: see Mr Jaffe's evidence at Day 3/p40:13-16 discussing the "Stab Update" paper. That is an important document. It shows that JP Morgan considered that the Rothschild July-August 2009 process, which it had not expected to be a success, could be very useful as a means of providing JPMEL with evidence that a solution that the Senior Lenders put together among themselves was better than the price a market sale would produce.

b From as far back as August 2009, JPMEL was of the view (on the basis of advice from the Senior Lenders' then legal advisers, Allen & Overy) that it would need not only a desktop valuation but also some form of market valuation.

c After the recognition of the conflict between JPMEL's duties and the Senior Lenders' interests led to Baker & McKenzie's instruction, Baker & McKenzie's initial advice was that JPMEL needed to be sure that "the market was adequately tested in relation to finding a potential purchaser for the business and of course ascertaining what a potential purchaser would pay. The work that Rothschild has been doing is therefore crucial to our advice to the Security Trustee…".

d Baker & McKenzie subsequently emphasised that a mere market testing exercise – i.e. with a sale to a pre-determined bidder - was not enough. It said that it would "[distinguish] between market + sale process and market testing process. Latter would not suffice".

e Allen & Overy and Baker & McKenzie were plainly correct that desktop models would not suffice. A bidding process produces clear evidence of what someone will actually pay. Desktop models contain a wide range of results - JP Morgan's own internal desktop models showed a range of valuations which were then weighted to produce a result. (By way of example, the November 2009 valuation is derived from blending valuations of €183m, €338m, €473m.) Desktop models attempt to value the intrinsic worth of the company – not what the assets being sold under Clause 14 would actually realise if marketed and sold.

f In November 2009, the Security Trustee sought from Rothschild, who acted as adviser to the company from April 2009 up to and including April 2010, three confirmations. They were :

"In our opinion: (a) we conducted a marketing and sales process on behalf of the Company which should have elicited bids from the financial and trade parties likely to be interested in buying the Stabilus group; (b) the marketing and sale process we conducted gave a reliable indication of a fair market price for the Stabilus group under prevailing market conditions; and (c) a further marketing and sale process in the short term would be unlikely to produce higher offers for the Stabilus group."

g Rothschild were plainly appropriate experts:

i Mr Jaffe agreed that Rothschild was "the most appropriate person to give a view on those questions".

ii Mr Jaffe is not an M&A banker; by contrast, Rothschild has expertise in M&A and Mr Merrett "is a very senior and respected M&A banker".

iii It seems that Mr Jaffe thought that if Rothschild had been able to provide the confirmations it may have meant that a sales process by the Security Trustee was unnecessary, though (inconsistently) elsewhere in his evidence Mr Jaffe identified that the August 2009 process was not, even in August 2009, considered by him as a substitute for a future sales and marketing process by JPMEL.

h In the event, Rothschild's response as recorded in the note dated 21 January 2010 and reported by Mr Stevenson (an in-house lawyer for the Security Trustee) was:

"Only thing prepared to do is provide additional work to update work they had done and market has changed. Therefore if acting for trustee would say that would have to be done again.

Said not time for that, asked for desktop analysis. They are uncomfortable and think they would have to recommend full process....

Would have to conclude is that full process would have to be run in order to give process.

They say would have to re-run process or get something negative."

Later in the same note, Mr Tostivin advised: "- need to think that have fin advisor saying it's far from optimal and not good".

i This note is an important document as the only contemporaneous evidence of what took place at the meeting between Mr Jaffe and Mr Stevenson of JP Morgan, and Mr Rajan, and Mr Merrett and Mr Cronin of Rothschild on the morning of 21 January 2010. It evidences the discussion of JPMEL's duties as Security Trustee; JP Morgan's suggestions as to how it might avoid conducting a sales process; Rothschild's insistence that they would recommend a full sales process even though JPMEL's position was that time was short; and Rothschild's reasons for declining to provide the confirmations sought. It is the document that held up the service of the Mezzanine Defendants' skeleton argument, as on the morning that the skeleton was due to be served, JPMEL sought to withdraw it from the trial bundles (it having been disclosed in June) and then later withdrew any objection to it being before the court. In particular, it evidences unequivocal advice that if Rothschild were instructed, they would have to recommend a full process in January 2010, which, in context, means a full sales and marketing process, by contrast to the limited exercise which Rothschild had conducted in July - August 2009 (an exercise they considered that they had been "bullied" into limiting by some of the Senior Lenders and which was a much more limited exercise than they had wished to do) which, as Mr Jaffe admitted in evidence, could not be relied on as indicators of value in January 2010. Such admission is inconsistent with Mr Jaffe's evidence in his witness evidence viz: "….In enforcing the Transaction Security [JPMEL] acted on the instructions of 100% of the Senior Lenders having first satisfied itself by obtaining appropriate legal and financial advice that it had the power to do so, and, that being the case, that it was obliged to do so…"

j In fact, the only financial advice which the documents show JPMEL receiving was that if it was instructed, Rothschild would not be happy doing a desktop analysis and would have to recommend a full process. As the advice from Baker & McKenzie put it, Rothschild's position meant that "in determining whether will be exercising our power in a proper way ... missing a plank". The "missing plank" was the confirmations that a market and sales process had been carried out, gave reliable indications of price, and would not be likely to produce higher offers if repeated. Having received Rothschild's advice that the full process should be repeated, JPMEL did not get advice from any other M&A adviser.

k Far from being assurance that JPMEL was acting in accordance with its obligations, the indemnity obtained by JPMEL was an explicit acknowledgment that there was a risk that it was outside them. It was not a standard indemnity (despite Mr Medler's attempt to present it as "typical" at paragraph 196 of his witness statement, before the Baker & McKenzie notes had been disclosed). JPMEL already had an indemnity (under Clause 24.1 of the ICA and specifically from the Senior Lenders under Clause 29.10 of the SFA where it acted "as Security Trustee under the Finance Documents" and without gross negligence or wilful misconduct), but wanted an (additional) indemnity to cover against the risk that, in complying with instructions from the Senior Lenders, it was acting "outside scope of current finance documents and protections given in those" or outwith the exclusion for gross negligence and misconduct. The Senior Lenders gave an indemnity to JPMEL which, whilst excluding gross negligence and wilful misconduct, then specifically provided that compliance with the instruction to enter into the Restructuring Agreement was not wilful misconduct or gross negligence. The indemnity was designed to get around the problem of breach of duty, not to ensure that there was no breach: it was palliative, not curative. It simply transferred financial risk of breach, via the Senior Lenders, to the Stabilus Group.

l As to the AA valuation, this could not give comfort that the Security Trustee was complying with its obligation to achieve the best price reasonably obtainable in the market for the following reasons:

i Mr Jaffe's evidence was clear: a Security Trustee needs a marketing and sales process. He agreed a market testing process would not suffice. Indeed, his evidence (unsurprisingly) was that a marketing and sales process provides a more reliable indication of what the market will pay than a desktop valuation.

ii The AA valuation was not a marketing and sales process. Nor indeed did it involve market testing. It was a desktop analysis, and commissioned in unsatisfactory circumstances at that. As Mr Jaffe conceded:

Q: On the basis of the advice you had received, you were clear in your mind that reliance on a desktop valuation by itself would not be sufficient.

A: Yes."

iii It was clear from Mr Jaffe's evidence that the AA valuation was always understood to be only part of the Security Trustee's requirements in fulfilling its duty to use reasonable care.

iv The AA valuation was lower than some of the bids made at the market low – as would immediately strike anyone looking at it. Mr Medler immediately noted when he saw it "Roths!". The AA Report did not leave JPMEL in a position to conclude that no exposure to the market was necessary.

v In any event, the AA Report was "patently flawed and unreliable".

m Equally, the confirmation from the Senior Lenders that the price complied with the Security Trustee's obligations was not independent. As Mr Tostivin noted in response to Mr Medler's suggestion that the confirmation was a "stitch up" that the Court would "look straight through", "if OM [Mr Medler] was suggesting that the Security Trustee try to obtain confirmation from someone unconnected and independent, then it had tried to do that (with Rothschild) and had been unsuccessful". Unlike the indemnity and the AA valuation, it did not make it into the SCG presentation.

n As to the allegation that the sale was made for an improper purpose:

i The sale to Acquilux and KG was made for nominal consideration: see, for example, the express reference to "nominal consideration" in the Enforcement Notice. Only €2 was received for the shares of Stable II: see Clause 7.2 of the Restructuring Agreement.

ii Mr Jaffe accepted in cross-examination that "the Senior Lenders regarded the Security Trustee and its powers under the intercreditor as a vehicle for achieving the senior lenders' objective of a restructuring………….a restructuring, which almost by definition, was contemplated not to be in the Mezzanine interest".

iii JPMEL did not exercise its powers to sell the Transaction Security (which includes the Stable II shares) in order to obtain repayment of the sum owed by the Obligors. Rather, the enforcement took place to enable a restructuring to take place. As a result of the sale of the Stable II shares, only €2 was received by JPMEL to apply down the waterfall.

o The proper purpose of enforcement is to recover the debt secured by the borrowing. The effect that the exercise of the enforcement power had on the liabilities of (a) Stable Holdings/Holdco and (b) Stable I/Parent is therefore critical: the assets against which enforcement took place were Stable I/Parent's shares in Stable II/Midco, which were transferred to Acquilux and KG. The enforcement did not reduce these debts by more than nominal consideration - €4.

p The steps which the Restructuring Agreement involved were as follows:

i The first 3 steps are incorporation of Acquilux; acceleration of the Senior Debt; and an instruction to the Security Trustee to take various enforcement steps;

ii Step 4 (Clause 7 of the Restructuring Agreement) is the first enforcement measure, which is enforcement of the security granted by Stable I/Parent, by entering into share sale agreements with Acquilux and KG. The consideration for this is set out in Clause 7.2: €1 from each of Acquilux and KG.

iii Step 5 (Clause 8 of the Restructuring Agreement) is the replacement of the managers of Stable II/Midco, following the sale.

iv Step 6 (Clause 9 of the Restructuring Agreement) is the contribution of €3m in equity to Stable II/Midco by KG. Stable II/Midco has of course at this point been transferred to new ownership.

v Step 7 (Clause 10 of the Restructuring Agreement) is the "disposal" of the Mezzanine Debt, purportedly under Clause 15.2(c) of the ICA to Acquilux. This transfer of the Mezzanine Debt, owned in law and equity by the Mezzanine Lenders, was for no consideration received by the Security Trustee (who acknowledged the issue direct to certain Senior Lenders of PPLs: see Clause 10.2(a)). It is important to note that the effect of the transfer of the Mezzanine Debt to Acquilux was that it became an intercompany debt and ceased to be Mezzanine Debt within the terms of the Finance Documents: see Clause 10.3 of the Restructuring Agreement.

vi However, the companies under Stable II, and Stable II itself, continued as guarantors of, and to be security for, the obligations of Stable I and Parent. Accordingly, Step 8 (Clause 11 of the Restructuring Agreement) was the release, again for no consideration, of all the companies other than Parent and Holdco from their guarantees and to release them from the Security.

vii Steps 9, 10, and 11 involved the termination of the hedging liabilities, and the swapping of various parts of the Senior Debt for PPLs. This did not involve the exercise of the Security Trustee's enforcement powers such as to realise proceeds to apply down the ICA waterfall: rather the Senior Lenders themselves novated their liabilities to Acquilux, receiving PPLs from Acquilux in consideration.

viii Step 12 (Clause 15 of the Restructuring Agreement) relates to the performing Senior Debt. There was a debt push-down from Acquilux to Stable GmbH/Bidco, and, importantly, a replacement Senior Facilities Agreement and a Replacement Intercreditor Agreement were agreed: see Clauses 15.4 and 15.5. Some of the Senior Debt was converted into new Mezzanine Debt: see Clause 15.6. (It will be recalled that Mr Jaffe told Mr Medler on 24 January 2010 that the right to take part in the new Mezzanine Debt was an "option I would like to have" but that he was "not wedded to being in" it). Again, this did not involve the exercise of the Security Trustee's enforcement powers to realise proceeds to apply down the ICA waterfall.

q As a result of these transactions, only €4 was put down the waterfall to discharge the debt owed under the Finance Documents. This is not an enforcement which has been designed to pay off the maximum amount owed under the Finance Documents. It was not part of JPMEL's aim, in undertaking these transactions, to reduce in whole or in part the amounts owed under the Finance Documents: they have only been reduced by €4.

r The Mezzanine Defendants did not suggest that this was dishonest. Just as in Howard v. Ampol [1974] AC 821 [I4/82] the directors honestly thought they were entitled to exercise the power to issue shares to stop a takeover, but were wrong, so too here JPMEL no doubt honestly thought that it could exercise the power of enforcement to sell the security for nominal consideration. But in doing so, it was no part of its purpose to effect a repayment of the amounts owed under the Finance Documents.

(iii) Discussion

146. These are forceful submissions. At their heart, are two important broad points which I accept. First, as submitted by Mr Smouha QC, I accept that there were three main difficulties with regard to placing any reliance on the marketing and sales process carried out by Rothschild viz: (i) it was carried out to what appears to have been a tight timetable in a "holiday period"; (ii) it had only progressed to the end of stage 1 and had not therefore had the benefit of the kind of "competitive tension" which would or at least might have arisen if the process had progressed to stage 2; and (iii) it did not of itself necessarily provide guidance as to what might be a proper market price later in early 2010 having regard both to the change in market conditions (whatever they might be) and the financial position of the Stabilus Group at that time.
147. Second, as submitted by Mr Smouha QC and as Mr Jaffe himself accepted in the course of his cross-examination, I also accept that there are inherent limitations of any desktop valuation which would seem obvious. In particular I accept (i) however well executed, any desktop valuation (particularly with regard to a business like the Stabilus Group) will necessarily depend on certain assumptions and estimations as to which different valuers may legitimately have different views; and (ii) any figure or range produced by such desktop valuation will not necessarily produce the market price that might have been achieved in the market because, ex hypothesi, such figure or range was not the result of any "competitive tension".
148. However, even bearing in mind the foregoing and also the heavy onus which I am prepared to assume lies on JPMEL, I do not consider there was any breach of duty by JPMEL under Clause 14 in effecting the Restructure and, in particular, not carrying out a further sales and marketing process or taking further independent advice with regard to such possible process. This is so for the following reasons.

(a) No absolute obligation

149. First, for the reasons set out above, I do not accept that there was any absolute obligation of the kind alleged by Mr Smouha QC. In particular, I do not accept that there was any absolute obligation on JPMEL to carry out a "marketing and sale process" or "market testing process" or other kind of "bidding process". Nor do I consider that there was any absolute obligation either to accept what Mr Smouha QC says was the advice received by JPMEL from Rothschild alternatively, if JPMEL could legitimately ignore such advice, to obtain alternative independent advice. In my judgment, the obligation on JPMEL was: (a) to take reasonable care to obtain the true market value of and/or the best price reasonably obtainable for the Transaction Security at the time of sale or disposal; and (b) to exercise the power of sale bona fide and for its proper purpose.

(b) Nature of underlying assets

150. Second, in considering whether JPMEL was in breach of such obligation(s), it seems to me important to recognise the nature of the underlying assets which were not, for example, a single piece of real property but a huge global business operation which had been in severe financial difficulties since early 2009 and, by early 2010, on the brink of insolvency. That was the reality of the position.

(c) Rothschild's role

151. Third, it is important to consider the particular role played by Rothschild and what Rothschild actually did (and did not do) in 2009. I have already summarised this above but at the risk of repetition it is important to note the following:

a Rothschild was not and never had been an adviser of JPMEL in its capacity as Security Trustee. Nor was it, nor had it ever been, an adviser of any of the Lenders. By the end of 2009 or early 2010, there is little, if anything, in the documents to show what it knew of the financial position of the Stabilus Group or the arrangements with any of the Lenders.

b Rather, it was the Management who asked Rothschild in July 2009 to conduct a marketing exercise for the sale of, or new money investment in, the Stabilus Group. The suggestion that Rothschild was "bullied" by the Senior Lenders into accepting a restricted process with which they (i.e. Rothschild) were unhappy is, to my mind, inherently unlikely and, in my view, not borne out by the contemporaneous documents. According to the note of the meeting dated 25 November 2009 attended by Mr Stevenson of JPMEL and Messrs Merrett, Cronin and Wang of Rothschild, Mr Merrett confirmed at the meeting that Rothschild had run a vanilla sales and marketing process, that it was a sales and marketing process and not just a process conducted to get a price. The note describes (a) what Rothschild advised the Stabilus Group and (b) the approach of the Senior Lenders. The note does not record or otherwise suggest that Rothschild felt "bullied". This description appears in a later note of a meeting between JPMEL's lawyers (i.e. Baker & McKenzie) and Mr Rajan at which Rothschild was not present. Mr Klein denied in evidence that he felt that the Rothschild process might not have been one that was being intended to lead to a sale. His evidence was that this was a genuine competitive bidding process. Mr Rajan's evidence, which I accept, was that he did not recollect that there was any "bullying" involved in the process. Mr Medler did not recall any kind of "bullying". Rather, his evidence (which I accept) was that there was a two-way conversation. The SCC did not have any idea how the filters were applied to the shopping list. Rothschild asked for views and various Lenders on the steering committee responded to that request making comments based on what they had been advised and on its own experience. Some members of the SCC expressed their views that the sales and marketing process should be targeted; they preferred a less public process.

c The implied suggestion by the Mezzanine Defendants that the Senior Lenders would not have wanted to achieve the best price is not, in my view, commercially realistic and inconsistent with the evidence. The nature of the process was decided by the Stabilus Group (which was advised by Rothschild). Rothschild subsequently described the process in the letter of 7 January 2010. The letter made it clear that the reader should form their own opinion on the basis of the information that had been provided. Mr Jaffe's evidence was that JPMEL would have preferred something more, but as a result of the negotiations and discussions, this is what they got. His evidence (which I accept) was that in his opinion the letter showed that a proper marketing process had taken place in July and August 2009 and showed the range of the bids. Whether or not Rothschild favoured a less targeted sales and marketing process, there is no suggestion from Rothschild in this letter that the targeted process, which was favoured by some of the Senior Lenders, was not appropriate in this case. The sales and marketing process did not formally come to an end but none of the bids were pursued and Rothschild did not invite the bidders to make further offers. Neither the SCC nor the Senior Lenders were involved in the decision to stop the process. Triton was not formally told that the process had come to an end. I am therefore satisfied that Mr Jaffe genuinely considered that the marketing and sales process carried out in July/August 2009 was "proper".

152. Moreover, as I have already described, it is certainly the case that from late November 2009, Baker & McKenzie acting on behalf of JPMEL sought repeatedly to persuade Rothschild and to reach an agreement with them that JPMEL could rely on Rothschild's work on the sales and marketing process and obtain certain confirmations in relation to the process; that JPMEL's objective during the latter part of 2009 and January 2010 was to try to obtain legal reliance on the Rothschild process; that Rothschild refused to provide such confirmation; and, in essence, that Rothschild's position was that if JPMEL was its client, it would want to run the sales and marketing process again. I agree that all of that is an important part of the story and, in my judgment, there is little doubt that the failure to obtain the confirmation which had been sought from Rothschild must have been, to say the least, a major disappointment. I do not accept Mr Jaffe's attempts in evidence to brush this away. And, in my view, there is much force in Mr Smouha QC's criticisms with regard to what would seem to be the attempts by, in particular, both Mr Jaffe and Mr Medler to "blank" this part of the story in their witness statements which might not have surfaced at all but for the late disclosure of the notes made by Baker & McKenzie which I have already referred to. However, it is again important to emphasise that Rothschild was not and had never been an adviser to JPMEL and that, as appears from one of the notes, it (i.e. Rothschild) had "no visibility on the execution mechanics… and as such what [the Senior Lenders]… will instruct JPMEL to do." This comment is, in my view, important because it reflects the fact that Rothschild was not fully aware of all the circumstances specific to the financial position of the Stabilus Group and did not know what was proposed at that stage to be done with any confirmation it might give. The context of the comment about doing the process again was that JPMEL had asked for confirmation that a new sales and marketing process would lead to the same values as in August 2009. The question was not whether the value would have increased massively since then (bridging the difference between the upper indicative bid of €266.3m and the then current Senior Liabilities of over €400m). In such circumstances, the refusal by Rothschild to provide the confirmations sought is hardly surprising. However, notwithstanding the difficulties identified by Mr Smouha QC, which I accept, the indicative bids remained, at the very least, an indication of value, particularly as they remained consistent with other indicators of value. In this context, I should mention that in cross-examination, Mr Smouha QC appeared to rely heavily upon the Bluebrook case and the process run by Rothschild in relation to the restructuring with which that case was concerned. Every case is, of course, different. However, it seems to me that at the very least Bluebrook does not assist the Mezzanine Defendants. There, as in the present case, Rothschild conducted a limited exercise (in that they targeted only a limited number of financial rather than trade buyers) which was not taken beyond the indicative bid stage because management did not consider there was a worthwhile level of interest or cash value in the offer received. Notwithstanding the limited and incomplete nature of the process, the court accepted that the process run by Rothschild in that case was useful in that (in conjunction with the DCF valuation by PwC) it pointed to a value well below the senior debt.

(d) The AA Report

153. Fourth, as I have described, JPMEL had obtained the AA Report. In my view, there can be no doubt as to the credentials of AA and the general ability of that organisation and Mr Weaver to carry out such valuation. Further, as I have stated, I am satisfied that Mr Weaver carried out his task honestly, to the best of his ability and with a view to providing a valuation which was entirely independent. On its face, the AA Report was a substantial and impressive document which had been carefully prepared. As I have stated, its essential conclusion was that the then EV of the Stabilus Group (based on the premise of a going concern and market value) fell within the range of €220m-€230m, including pension liabilities. This conclusion was based upon three separate valuation methodologies as set out in the AA Report viz (i) a DCF (ie discounted cash-flow) with an EV in the range €205m-€250m; (ii) market multiples with an EV in the range of €220-€245m or €215m-€240m (depending on different assumptions); and (iii) a leveraged buy-out with an EV in the range of €210m-€245m.
154. Mr Smouha QC submitted that the AA Report was nevertheless "patently flawed and unreliable" for a number of reasons. One of the difficulties with this submission is that certain of the alleged flaws which Mr Smouha QC asserted were "patent" (and which therefore he said should have been known to Mr Jaffe) were never put properly to Mr Jaffe or Mr Weaver in cross-examination. I deal with this aspect of the case and the alleged flaws themselves in the AA Report below. However, in summary, it is my conclusion that there were no significant flaws in the AA Report, patent or otherwise. Although the AA Report was only a desktop valuation and therefore had certain limitations for the reasons I have described above, it is in my view important to bear in mind that it had been produced in co-operation with the Management and was based, in substantial part, on detailed Management projections as summarised in Appendix B to the AA Report. Whilst recognising its limitations, it seems to me that having regard to all the circumstances and together with all the other information available, JPMEL was entitled to rely upon it.

(e) Criticisms of the AA Report advanced by the Mezzanine Defendants

155. In support of the submission that the AA Report was flawed, Mr Smouha QC relied upon the expert evidence of Mr Lygo. In summary, it was Mr Lygo's view that the AA Report contained a number of flaws and that the fair market price of the Stabilus Group was in the region of €490m - €500m (including pension liabilities) at the time of the Restructure i.e. more than double the valuation figure in the AA Report and well in excess (some €80-€90m) of the Senior Debt at that time. This compares with the view of Mr Giles, the Triton Parties' expert, which was that the EV was of the order of €262m or €230 million after deducting pension liabilities and that the range of reasonable valuations was from €170m to no more than €270m.
156. I deal below with the specific criticisms of the AA Report advanced by the Mezzanine Defendants.

1 The AA Report was out of date

157. First, Mr Smouha QC submitted that the AA Report was "out of date" simply because it pre-dated the Restructure by two months. I do not accept that criticism. In particular, it was Mr Jaffe's evidence (which I accept) that a period of two or three months between a formal valuation and the implementation of a restructuring is not unusual; and he believed that the AA Report was current enough to rely upon for the Restructuring because it had been refreshed in February by reference to Business Plans which the Management still believed to be accurate and, in his view, it still reflected the performance and the value of the Stabilus Group. Although it was suggested to Mr Jaffe that he did not think about this question at all, it was clear from his answers that he actively thought in April 2010 that the AA Report was still current and that this was the reason why he did not consider it needed updating. In my judgment, that view was entirely justified and reasonable. In this context, it is also noteworthy that the AA Report was in line with the implied EV of the Mezzanine Defendants' own restructuring proposal of 25 March 2010 of around €283m and the EV range for 2010 of €153.9m to €241.8m set out in the PwC Restructuring Opinion.

2 The AA Report was based upon an "outdated business plan"

158. Second, Mr Smouha QC raised a somewhat similar but more fundamental point or series of points which were in essence that the AA Report was based upon an "outdated business plan" which AA had been "specifically instructed by JPMEL not to flex"; that the AA Report failed properly to take account of the fact that the Stabilus Group was essentially an excellent company, being a global market leader with a large share of the market; that, although it had obviously suffered as a result of the general downturn in the market after 2008, there had been a significant improvement both in market conditions generally and, more specifically, in the performance of the Stabilus Group since the Business Plans had been prepared many months previously in mid-2009 at what was effectively the bottom of the market; that, looking forward, the prospects for recovery of the Stabilus Group had also similarly improved; that if these matters had properly been taken into account, the valuation of the Stabilus Group would have been significantly higher than that arrived at by AA; and that this should have been appreciated by JPMEL.
159. This part of the case advanced by the Mezzanine Defendants was in large part founded upon the evidence of their expert, Mr Lygo. In truth, the main difference between Mr Lygo, on the one hand, and Mr Weaver, Mr Giles and Mr Robinson, on the other hand, was a matter of timing which depended on an assessment as to when and how quickly the world would recover from the downturn after 2008 and what part the Stabilus Group would or might play in such recovery. In that context, it is striking that timing apart, Mr Lygo's approach is not very different from that of the Business Plans in relation to the prospects for recovery. Rather, as appears from a helpful graph produced by Mr Giles, what Mr Lygo has done is essentially to argue (on the basis of 3 months figures, and without taking into account the views of the Management) that the entire projected revenue curve for 5 years should be shifted significantly upwards. In my judgment, the graph serves to demonstrate the speculative nature if not lack of realism of Mr Lygo's evidence. I deal with this further below.
160. There is no doubt that, on their face, Mr Lygo's reports and his evidence in cross-examination strongly supported this important part of the Mezzanine Defendants' case and, so far as necessary, I consider it in some detail below. There is also no doubt that Mr Lygo was a most forceful witness who often expressed his views most persuasively in somewhat strident terms. However, it is convenient at this stage to make three general comments as to Mr Lygo's evidence. First, it seemed to me that his evidence was, in some respects at least, somewhat theoretical. Second, in my view, it suffered considerably because it was, in significant respects, based on hindsight or a rosy outlook not based on the evidence. Third, and in my view most importantly of all, he had at no stage had the benefit of direct discussions or even contact with the Management.
161. The last of these points is, of course, in sharp contrast with Mr Weaver. In particular, as I have already stated and at the risk of repetition, between its instruction and 3 February 2010, AA spent over 270 hours in producing the AA Report. During the process, Mr Weaver and his team remained in touch with the Management to ensure that the financial information AA was relying upon was up to date and reliable. Importantly, following meetings in Koblenz and discussions with Mr Rajan in November 2009 (as I have already described), AA sent an abridged version of the first draft of the AA Report to the Management, who confirmed to AA the factual accuracy of the information contained in the draft. Thereafter between 22 January 2010 and 3 February 2010 AA enquired of and were advised by the Management that there had been no material change in the performance of the Stabilus Group or the industry generally that would have warranted any material change to the Business Plans and that the Business Plans still represented the Management's best estimate of the performance of the Stabilus Group over the forecast period. On 3 February 2010 (the date of the final AA Report), AA was sent the December 2009 Management Accounts (prepared on 29 January 2010), which were the most up to date management accounts. In light of those accounts AA made final adjustments to the WACC calculation to reflect the Stabilus Group's actual net working capital as at 29 January 2010 (which had decreased from €21.4m to negative €7.8m since the date at which the draft AA Report had last been updated).
162. In considering Mr Lygo's evidence, it is of course right to observe that, unlike Mr Weaver (who was, in truth, a witness of fact in these proceedings), Mr Lygo was not instructed at the time of the Restructure. He only became involved after the event as an expert in these proceedings. To that extent, it is obvious that he cannot be criticised for not being in contact with the Management at the time. Indeed, Mr Lygo fairly records in para 1.11 of his report that he had had no access to the Management and had been unable to discuss issues he considered to be of relevance. However, it is, in my view, important to note that Mr Lygo's first expert report in these proceedings was apparently prepared and served without Mr Lygo having been provided with the witness statements of, in particular, Mr Wilhelms and Mr Rajan. I have to say that I find that quite remarkable. I recognise that in many cases it is unnecessary and sometimes perhaps even inappropriate for an expert to read the written statements signed by the witnesses of fact. However, in the present case, it seems to me that the evidence of Mr Rajan and Mr Wilhelms was important if not crucial in considering the financial performance of the Stabilus Group and its prospects for recovery; and the fact that Mr Lygo did not see it when he prepared his first report is particularly regrettable because certain of the views expressed in that report are at odds with the evidence of Mr Wilhelms and Mr Rajan. In my view, the foregoing severely impairs the value of that first report. Nevertheless, Mr Smouha QC submitted in effect that this did not really matter because, in particular, (i) the views of Mr Wilhelms and Mr Rajan were, at best, over-cautious and (ii) the views of Mr Lygo were unaffected by such evidence and, in any event, to be preferred. I do not accept that submission. In my view, Mr Wilhelms and Mr Rajan were both honest witnesses who gave their evidence in a moderate and careful way. They had detailed knowledge of the Stabilus Group and (unlike Mr Lygo) they were able to give direct evidence as to its financial performance over that relevant period (including, for example, their knowledge of such issues as stockpiling and seasonal variation) and, in particular, the prospects of recovery. In my view, their evidence (as well as that of Mr Weaver who was in direct contact with the Management at the time) is generally to be preferred to that of Mr Lygo.
163. I should mention that in the context of the suggestion that there were very good prospects of recovery for the Stabilus Group in early 2010, Mr Lygo sought to rely at least initially upon events after April 2010 and in particular in the latter part of 2010. In my view, that is a false exercise. It is nothing more than hindsight. Mr Smouha QC bravely sought to support that exercise on the basis that it was, he submitted, a "sense" check. Of course, I accept that it may provide a basis for checking that the assessment made in early 2010 turned out to be correct. But, in my view, it provides no relevant check as to whether the assessment was, or was not, correctly made at the time. That exercise can only be carried out on the basis of information available at the time.
164. As to the detail of this part of the case advanced by Mr Smouha QC, he emphasised that the essential question was not about the Stabilus Group gaining increased market share (although the crisis did in fact have the effect of the Stabilus Group increasing its market share as its competitors struggled) but rather when it would be able to reap the benefits of its existing market share as and when the market recovered. In summary, he submitted as follows:

a It was clear to all concerned that the Stabilus Group was a fundamentally sound group of companies which was suffering not because of any inherent problem but as a direct result of the global economic downturn in its markets, and that it would eventually recover in line with its markets. In particular: (i) in its interim report on the restructuring opinion in July 2009, PwC commented on the causes of the liquidity crisis the Stabilus Group faced: "Stabilus' current liquidity crisis results from the overall development of the market and its financial structure following three buy-outs. There are no major strategic or operating weaknesses that caused the current crisis."; (ii) in its final Restructuring Opinion in March 2010, PwC stated: "Stabilus' current liquidity crisis is a consequence of the impact of the economic downturn on volumes and the highly leveraged financing structure. The current crisis is not a result of major strategic or operating weaknesses"; (iii) Rothschild recognised that trading performance would improve as the economic crisis came to an end with the Stabilus Group well-positioned to benefit disproportionally once markets began to improve. This was also recognised by PwC in connection with what it characterised as the turnaround phase for Stabilus Group projected to occur between FY 2010 and FY 2012: "The relevant markets are expected to revert towards previous levels as soon as the economy starts to recover ... Stabilus' strategic advantages should help sales to grow at least in line with the market''. Both statements were repeated in PwC's final Restructuring Opinion of 31 March 2010 although "should help sales to grow" was changed to "will help sales to grow", indicating more certainty on PwC's part in the light of Stabilus Group's improved performance. Crucially, this was also recognised by the Management, whose 3 June 2009 Business Plans were prepared on the basis of an expected 'V curve'. i.e. a continued fall in performance, followed by a period of steady recovery towards previous levels as graphically set out in PwC's interim restructuring opinion of 31 May 2009. As this graph shows, the Management were more conservative than the industry forecasters as to when and how quickly recovery would occur.

b What in fact happened is that the downward phase anticipated by the Management and forecasters was even steeper than budgeted by the Management so that the Stabilus Group undershot its FY 09 target (for the year October 2008 – September 2009). However, the recovery anticipated by the Management and forecasters then also occurred earlier than planned and at a steeper rate than budgeted. This is graphically illustrated by the chart contained at p.51 of Mr Lygo's first report, which is reproduced below with a cut off date of 31 March 2010. This shows the 'V curve' anticipated by the Management and forecasters, with the bottom of the curve as of October 2009 and a clear trend to recovery with actual figures exceeding budget (i.e. above the Management's Business Plans) from October 2009 onwards.



c This coincided with the start of a global recovery in the car market, as evidenced by, for example, the JD Power monthly Seasonally Adjusted Annualised Selling Rates ("SAAR") for light vehicles forecast released in December 2009 which, as confirmed by Mr Lygo, highlights the early signs of recovery apparent in the car market at that time. The graph relates to forecast sales of cars rather than production. The monthly SAAR is calculated by taking the latest monthly sales figure, annualising it and then making adjustments for seasonal variations intended to capture historic consumer buying patterns (e.g. months after new registrations come in will be peak months, whereas the month immediately before is likely to see lower sales than other times of the year). This trend was also visible from the industry forecasters' steady increase of their production forecasts for cars from Q2 2009 onwards as appears from para. 4.16 to 4.19 of Mr Lygo's first report and the chart at para. 4.18 which sets out the upward trend in graphic form.

d The Stabilus Group was well-placed to benefit from this general recovery. In particular, the Stabilus Group was the overwhelming market leader in the automotive sector with a market share of some 76%; it stood to benefit disproportionately from the recovery of the global car market as Rothschild had anticipated, and had begun doing so by early 2010. That trend was not anticipated by anyone – the Management or industry forecasters – to stop and any suggested cyclical effects are illusory. It is also what in fact happened as confirmed by the performance of the Stabilus Group later in the year.

e The monthly management reports and Short Term Cash Flow Statements ("STCFS") available as of early April 2010 and all the measures of performance during Q1 2010 go only one way and demonstrate a trend of increasingly better performance versus budget.

f That the recovery could be anticipated to continue into the coming months (and was not down to any transitory destocking or to some other intangible and unprovable cause) is also apparent from Stabilus' order entry and order book levels as summarised in an analysis set out at Appendix H to Mr Lygo's first report. Appendix J gives monthly sales values. Comparing the value of order entry (new orders received in the month) with monthly sales in Appendix J shows they were broadly similar - sometimes higher, sometimes lower but at the same general level. The average order entry for October 09 - March 10 was €29.5m with sales averaging €28.5m, so order entry levels were in keeping with, albeit slightly ahead of, sales. Order book (total value of orders on hand), on the other hand, had risen since October 09 (€103.6m) to Mar 10 (€111.3m). The March 2010 figure represented nearly 4 months sales value at the average for October 09 - March 10 (111.2 / 28.2 = 3.9 months). The work in hand could thus be anticipated to occupy the Stabilus Group up to July 2010. Alternatively, at the March 2010 sales level of €33.5m, the order book would represent 3.3 months' work, i.e. to early July 2010.

165. The main difficulty with the above analysis is that it is in relevant respect largely at odds with the evidence of Mr Wilhelms and Mr Rajan.
166. The starting point is to understand the Business Plans. As I have already stated, the Management had originally created a "bottom-up" business plan (i.e. the OBP) in the early part of 2009. The OBP was not positively received by either group of Lenders as it forecasted a negative net cash flow after tax from FY08/09 to FY09/10 and negligible cash flows thereafter. In early May 2009, therefore, the Management liaised with Rothschild, Mr Rajan and PwC to produce an updated plan at the behest of the Lenders which showed additional ways to improve cash flow. The product of this work was what became known as the Cash Optimised Business Plan (i.e. the COBP). In addition to the COBP, an equity case business plan (i.e. the ECBP) was produced (on 3 June 2009) for the purposes of the Rothschild sales exercise. As explained by Mr Wilhelms, the difference between the ECBP and the COBP was that the ECBP included a small number of additional projects aimed at delivering good mid-term results but there was very little difference between the two and the underlying assumptions were similar in both plans.
167. I should mention that some of Mr Smouha QC's cross-examination about the differences between the two plans was based on an incorrect premise about how DCF valuations work. Mr Weaver explained that in the short term the cash flows under the COBP were higher than in the ECBP but in the longer term it was the other way around. Questions were asked on the basis that this was wrong in that the earnings before interest, taxes, depreciation and amortisation (the "EBITDA") line under the ECBP was slightly higher throughout than under the COBP. This fails to distinguish EBITDA from the cash flows used for the purposes of a DCF valuation. The cash flows are calculated after several adjustments to the EBITDA. In my view, Mr Weaver's evidence about the cash flows was correct. Again there is nothing in this point.
168. In summary, as explained by Mr Rajan, the COBP was an exercise by which Management looked for ways to preserve cash over a 3 to 4 year period without ruining the viability of the Stabilus Group. It was a "team effort" with input from the Management, Rothschild and PwC taking into account data sources including Electronic Data Interface Reports produced by OEMs, data from forecasting bodies and information from plant and sales departments.
169. AA used the ECBP to derive the cash flow forecasts for use in its DCF valuation.
170. As explained by Mr Weaver, AA generally uses the Business Plans created by the management in its valuations and it was AA's decision (and not, as alleged by Mr Smouha QC, JPMEL's decision) to include an assumption that the Business Plans would not be "flexed". As Mr Rajan and Mr Wilhelms explained throughout the period from their creation, the Management considered that the Business Plans provided a reasonable estimate for the future financial performance of the Stabilus Group and that the data contained in them continued to represent a reasonable estimate for the future sales and EBITDA for the Stabilus Group up to the date of the AA Report and the Restructure; and that is what the Management told AA.
171. In addition to the AA Report, the Business Plans were also relied upon in the following reports and valuations:

a The impairment valuation of the Stabilus Group in the consolidated financial statements for Stable II for YE 30 September 2009 (which were audited by Deloitte SA with an unqualified audit opinion).

b PwC's Restructuring Opinion dated 31 March 2010, which records that the Management confirmed to PwC that the Business Plans were "still the correct plan to use". This is just at the time of the restructuring. Furthermore, PwC expressed the views that "While some individual assumptions are ambitious, overall, the operating plan appears to be reasonable" and "Management's business plan projections seem to be realistic and plausible and correspond with general market expectations".

c The expert report of Mr Giles, in which Mr Giles reviewed the ECBP against actual results up to 31 March 2010 and concluded correctly in my view that the cash flow forecasts in the ECBP were a reasonable basis for a valuation of the Stabilus Group as at April 2010.

172. It is noteworthy that MDM also used the Business Plans as the basis for its own valuation analysis in March 2010 (on which its restructuring proposal dated 25 March 2010 appears to have been based). Indeed, it would seem that almost everyone was using the same cashflows (i.e. the Business Plans) for the purposes of valuing the Stabilus Group in 2009-10.
173. There is no doubt that the Stabilus Group outperformed the Business Plans in certain respects in late 2009 and early 2010, whilst underperforming them in others. For example, by the end of February 2010, sales were ahead of plan in the automotive sector (+18.4%) and behind the plan in the swivel chair sector (-14.3%) and the industrial sector (-6.1%). The industrial sector had made the largest contribution to gross profit in 2009. (It was suggested, incorrectly, to Mr Wilhelms that by the end of March 2010 the EBITDA of the business had been outperforming the Business Plans for six months in a row. In fact actual EBITDA had come in below the Management projection for December 2009). It is primarily on this basis that Mr Smouha QC suggested that these improvements represented a "trend"; that the Stabilus Group had "turned a corner and was on the path to recovery", and that the Business Plans were therefore out of date. However, the Management, who knew the business best, did not consider at the time that the Stabilus Group had "turned a corner" nor that the improvements in results demonstrated a "trend" that could be relied upon to continue in the future. Throughout the period to April 2010, the Management continued in the belief that the Stabilus Group would perform in line with the Business Plans going forward and that EBITDA for the year would be around €44m, i.e. in line with the Business Plans. That was the clear evidence of both Mr Rajan and Mr Wilhelms which I accept. In particular, it was the Management's belief in the period to the end of March 2010 that the apparent improvements in certain figures were likely due to the "transient effect" of a number of factors including:

a Government backed scrappage schemes and the emergence of the key OEMs (i.e. General Motors and Chrysler) from bankruptcy in late 2009.

b The stockpiling of parts by the Stabilus Group's customers, which the Management feared could indicate an intention on the part of those customers to replace the Stabilus Group with a different supplier, and which could in any event have the effect of boosting sales in the short term while negatively impacting on future sales.

c The effect of customers ordering parts prior to the Easter period, thereby inflating the March sales figures.

174. As explained by Mr Rajan and Mr Wilhelms, the Management had no reason to suggest to the Lenders that they would outperform the Business Plans. In particular:

a Owing to uncertain market conditions, it was very hard to predict whether the Stabilus Group would perform ahead of, behind or on in line with expectations.

b Although sales had been ahead of the Business Plans, the Management still believed that there were a number of "risk items that could have pushed [Stabilus] off course". These included: the Stabilus Group being "red listed" by key OEMs (including Toyota, BMW and Ford) in December 2009, which created a risk of loss of future orders and sales from those OEMs; the refusal of three major credit insurers in early 2010 to provide credit insurance in relation to the Stabilus Group; the refusal of its auditors (Deloitte LLP) in January 2010 to sign off on the going concern opinion in the audit of the Stabilus Group accounts for FY 08/09 (i.e. Deloitte was not in a position to confirm that the Stabilus Group would be likely to continue as a going concern for at least 12 months); and the fact that the Stabilus Group was not in a position to finance its debt burden.

175. Taking these factors into account, the Management took the view through late 2009 and early 2010 that any deviation between the Business Plans and actual results was the result of normal fluctuations and not such as to suggest that the Business Plans required to be updated. Thus, as Mr Wilhelms explained, the Management took the view that updating the Business Plans was neither appropriate nor necessary. I accept that evidence.
176. In response, Mr Smouha QC sought to attack the credibility of both Mr Wilhelms and Mr Rajan. In particular, Mr Smouha QC sought to rely upon that fact that Mr Wilhelms had a direct and very substantial interest in the outcome of these proceedings, in the form of 1.5% carried interest in the Stabilus Group given by Triton as a result of the Restructure and held by him personally. There is no doubt that Mr Wilhems has such an interest. However, given the Restructure that occurred and his continuing role in the Stabilus Group, such interest does not seem unusual or exceptional; and in any event, as I have said, I regarded him and Mr Rajan as honest witnesses whose evidence I accept.
177. Mr Smouha QC also sought to rely on a passage in Mr Wilhelms' oral evidence about what he understood to be meant by "forecasts" to argue that the Management did not think of the Business Plans as containing projections. In my view, this is in reality an attempt to exploit a semantic point (and a semantic point concerning evidence given in a second language). When this point arose Mr Wilhelms was looking at the sales forecasts (expressly called "forecasts") contained in the STCFs. He made clear that that was the kind of document he described as a "forecast". That is a document which can be regularly updated. That is precisely what happened with the sales forecasts, which were updated weekly. This part of the evidence is about labelling. It does not follow that the Business Plans, which clearly contained projections for a number of years ahead, were not the Management's projections for future performance.
178. In addition, Mr Smouha QC sought to rely upon a letter from MDM to the SCC (and copied to various others including the Management) dated 24 February 2010 in which it was suggested that the Business Plans were based upon outdated financial information. However, this was no more than a general assertion and, in my view, is of no assistance. Moreover, it is also inconsistent with: (i) the failure of the Mezzanine Defendants to raise any alleged deficiencies of the Business Plans in the bi-weekly calls with the Management; (ii) other correspondence being received from the Mezzanine Defendants at the time (in particular, letters dated 11 February 2010 and 29 March 2010); (iii) internal documents produced by the Mezzanine Defendants at the time (including the Investment Memo created by MDM's "Mezzanine Team" on 23 March 2010); and (iii) the evidence of the Mezzanine Defendants' own witnesses (i.e. Mme Levi and Mme Beaulieu).

3 WACC

179. Third, Mr Smouha QC made a series of attacks with regard to the WACC figure determined by AA which was in the range 11%-12%. I consider the various elements of such attacks below but it is convenient to note at the outset that that range is broadly comparable with other similar figures including that implied by the Paine acquisition (11.3%) as well as that determined by Ernst & Young (11.9%) and by Mr Giles (ie 11.9%). The WACC determined by Mr Lygo (8.0% to 8.5%) is an outlier.
180. The first main element of this series of attacks is that the AA Report overstated the requisite risk free working capital adjustment although again this point was not put to any of JPMEL's witnesses of fact. The risk free rate is the return on an investment that carries no risk. It is common ground that the rate is to be derived from the yield on long-dated German sovereign debt on 8 April 2010. Mr Weaver used a rate of 4% based on the promised yield to maturity of a 20-year German government bond. Mr Lygo used a rate of 3.758%. Mr Giles used a rate of 4.2% derived from the data set out in Exhibit 5.2 to his report and based on the average yield of long dated zero-coupon bonds which is a standard approach. On the other hand, Mr Lygo appears to have used only one bond in order to derive his estimate and he does not provide the source data. Thus, as between Mr Lygo and Mr Giles, it is my view that the evidence of the latter is to be preferred. In any event, there is no proper basis, in my view, for criticising the approach adopted by Mr Weaver. In any event, Mr Lygo accepted that such adjustments are "a matter of valuation judgment". Thus, in my judgment, there is no basis for the suggestion that this was a "flaw" in the AA Report still less that this was a flaw which was "obvious" or "patent".

4 Beta – monthly or weekly?

181. Fourth, Mr Smouha QC submitted that the AA Report wrongly included a monthly beta rather than a weekly beta. "Beta" is the measure of the systematic risk inherent in a company's investment returns. In other words, it is a measure of the relative volatility or risk of a security as compared with the market as a whole. The beta is derived from identifying comparable companies, calculating leveraged beta from data obtained from sources such as Bloomberg, de-levering the beta and then re-levering the beta to the specific company. For a listed company, its beta is a representation of the relative movement of the price of a share compared with the movement of the price of the underlying share market. A beta of 1 suggests that a company's share price moves at the same rate as the underlying market. Typically, companies which operate in cyclical sectors or sell discretionary products will tend to have betas above 1 and these companies will have higher betas than non-cyclical companies or companies that sell staple goods (which tend to have betas below 1). In addition, companies operating with a high degree of fixed costs also have higher betas. As explained by Mr Robinson, the Stabilus Group, as suppliers of automotive components, would be expected to have a relatively high beta (and certainly a beta higher than 1) as the sector it operates in has a higher systematic risk than the market.
182. The AA Report used a beta (1.5) derived by utilising returns information from a range of publicly-traded comparable companies relative to a benchmark index i.e. the DJ Stoxx 600 Index; the figure of 1.5 was based on the median of the monthly betas of the publicly traded comparable companies, normalised for different gearing levels and after consideration of correlation statistics.
183. One of the difficulties is that the allegation that the AA Report used an incorrect beta was not put to Mr Weaver (nor indeed any of JPMEL's witnesses of fact). However, this was the subject of the expert evidence. The main difference was whether the betas used should be monthly (as adopted by the AA Report) or weekly (as suggested was appropriate by Mr Lygo). Both Mr Giles and Mr Robinson explained, in my view convincingly, why monthly (as opposed to weekly) betas should be used. In particular:

a It is necessary to distinguish between two different problems: measurement error and systematic bias. The point made by Mr Lygo relates to measurement error i.e. the fact that insufficient data points may mean that the beta is not measured accurately and could be higher or lower than the "true" beta without being biased in any one direction. However, the answer to this point is that potential measurement error arises when insufficient observations are taken, which is a particular risk when trying to determine the beta for a single company. Where deriving betas over a 5 year period or for a group of companies, the number of observations used is far greater, so the risk of any measurement error is reduced.

b On the other hand, the use of weekly rather than monthly data frequently leads to systematic bias. This is because if the relevant asset is not traded sufficiently close to the end of the observation period, there may be a lack of correlation between the observed price and the true market price. The presence of such bias can be seen from the fact that the monthly beta is always higher than the weekly data. There is a 1 in 32,678 chance of this occurring simply because of fewer data points.

c It is principally for this reason that leading practitioners and academics (including McKinsey, Professor Damodaran, Tim Ogier, John Rugman and Lucinda Spicer (all of PwC) and the London Business School) generally seem to recommend the use of monthly rather than weekly observation intervals. The PwC document also supports the view that the use of monthly observations is typical - as does the opinion of Mr Robinson, and the sources which he cited. Mr Lygo could not cite any texts or sources which supported his different approach.

d Mr Lygo's riposte that although the monthly observations are always higher than the weekly ones, there is no reason to consider that it is the weekly rather than the monthly observations which are biased does not, in my view, assist. Where there is a pattern of bias, it is necessary to identify the reasons for that bias. In the present case, the reason which can be identified is that thin trading or asynchronous trading affects betas measured using weekly observations substantially more than it affects betas measured using monthly observations. As submitted by Mr Knowles QC, it seems to me that Mr Lygo generally appeared to confuse and to conflate the separate issues of measurement error and systematic bias.

e Mr Lygo's approach of stripping out what he considered to be the illiquid stocks from his analysis also does not seem to assist. The appropriate way to test for asynchronous trading is to identify the number of trades in the stock per day. Mr Lygo, however, simply identified the number of non-trading days, which does not assist as a stock can still be thinly traded if it trades every day (e.g. trading only 20 times per day). It is the coincidence of actual trades with the index closing price that is the critical issue.

f A regression analysis undertaken to calculate the beta showed the estimate derived from monthly data to be more indicative of the market's impact on the stock (i.e. the R2 is greater).

g A separate analysis performed by Mr Robinson indicated that a leveraged beta of 1.43 to 1.56 is appropriate for the Stabilus Group as at April 2010, similar to Mr Giles' leveraged beta of 1.4.

184. For all these reasons, I do not consider that the AA Report was flawed with regard to the choice of "beta" still less that there was any flaw which was "obvious" or "patent".

5 Alpha factor

185. Fifth, Mr Smouha QC submitted that the AA Report incorrectly applied what is known as an "alpha factor" which is, in effect, a specific company risk premium and reflects the additional illiquidity and lack of marketability of smaller companies. This was adjudged in the AA Report to be in the range 2%-3%. Unfortunately, this criticism was again not put to Mr Weaver nor to JPMEL's other witnesses. The highest it was put was that it should have been obvious to JPMEL that AA was using an alpha factor when JPMCB did not use one in its own internal models. That was not part of the pleaded case but, in any event, the JPMCB models were not, in my view, comparable on this point (as to which see further below). Mr Giles explained why he would not expect an accounting or holding valuation to include this element. Though much time was spent on this point at trial, in my judgment, it leads nowhere. In my view, both Mr Giles and Mr Robinson explained convincingly why it was right for AA to apply an alpha factor.
186. In support of this criticism, Mr Smouha QC again relied upon the evidence of Mr Lygo who did not apply any alpha premium in his calculations. However, as submitted by in particular Mr Knowles QC, it seem to me that the approach of Mr Lygo was flawed and the approach of Mr Giles (and also the AA Report) is to be preferred for the following reasons:

a As appears from the work of Professor Damodaran, an adjustment for illiquidity/lack of marketability is a standard adjustment for smaller companies and unlisted companies: the adjustment reflects the smaller number of potential buyers for such assets and the fact that the assets can be sold less easily than shares in a large listed company. As Mr Giles said, the data is very well established that small companies trade at lower prices than equivalent large companies and that is because they are less liquid.

b The effect of leaving out an illiquidity premium from the discount rate would be equivalent to assuming that an investment in Stabilus is as liquid as the shares in the largest listed companies. This would seem to be unreasonable.

c Other valuers also added additional premiums for small company risks and company specific risks. For example, ECAS itself included additional premiums of 4% and 5% for small company risks and company specific risks.

d Mr Giles' evidence (which I accept) was that the factor of 2.85% which he used to reflect illiquidity was "very conservative" and would have been greater if market conditions were also being adjusted for. Without an alpha, the assumption would be that Stabilus shares were the most liquid shares on the stock market, "on anyone's judgment, that is unreasonable". Mr Robinson considered that a range of 2% to 3% for a specific company risk premium was appropriate.

e Mr Lygo's contention that this discount is mainly concerned with minority shareholdings is incorrect. The discount is applicable to both minority and controlling interests and reflects characteristics of the Stabilus Group: that it was a smaller company; that its shares were unlisted; that the market for them was more illiquid and they could be bought and sold less easily than shares in a large listed company; and that Stabilus was distressed and it might have been difficult to sell Stabilus in the market at the time. Similarly, Mr Lygo's assertion that insofar as the discount reflects the distressed state of the Stabilus Group as at April 2010 then this is already reflected in the working capital adjustment is not well founded. It is correct that the working capital injection resolves the immediate cash needs of the Group, and therefore removes that element of distress in the sense of the business running short of cash, but it does not resolve the wider issues in terms of the effect of red listing, credit insurer cover, stock piling and relationships with customers in general.

187. For the avoidance of doubt, I do not consider that any of the foregoing is affected by the evidence of Mr Medler in cross-examination that the Stabilus Group was not immediately suffering from competitive disadvantage because of its small capitalisation or at that current point in time was the leader in its field.
188. For all these reasons, I do not consider that the use of an alpha factor rendered the AA Report "flawed" still less that this is a flaw which was "obvious" or "patent".

6 Tax Rate

189. Sixth, Mr Smouha QC submitted that the AA Report used an incorrect tax rate (35%). This criticism appears to be grounded primarily on the fact that JPMCB used a tax rate of 20-22% on some of its internal models. However, this ignores the fact that AA was talking to the Management to gather information for their valuation (and JPMEL knew that). The effective tax rate is exactly the sort of information JPMEL could have expected the Management to provide to AA and as I have already noted above the Management did indeed provide AA with the rate of 35%. In my judgment, there was no reason for JPMEL to second guess AA on this point. Moreover, the suggestion put to witnesses that 22% was the effective tax rate was not supported by Mr Lygo, who himself used a notional 30% tax rate. Again, I do not consider that the tax rate used by AA represented a "flaw" in the AA Report whether patent or otherwise.

7 Limited acquisition finance?

190. Seventh, Mr Smouha QC submitted that the AA Report was in effect not reliable because AA had been told to assume that acquisition finance would be limited. As to this, the question for JPMEL was the fair market price in the prevailing market conditions. The availability or otherwise of finance was, in my view, a relevant if not a key factor in the market conditions. As Mr Giles explained (and I accept) the availability of finance (liquidity) was relevant to the question of value in the prevailing market conditions. In any event, the assumption was in my view a sensible one in the circumstances. Mr Robinson provided helpful evidence that acquisition finance was tight in the first quarter of 2010. (He was clearly able to give that evidence, being part of an M&A team at Deloitte). Mme Levi's evidence suggested that this was not so. However, it appeared that this evidence was based on a print-out concerning deals which were almost all below €100m. In cross-examination, Mr Smouha QC also explored with Mr Giles the assumption that the Stabilus Group was distressed. Mr Giles said that it was in a distressed position and that it would have been for him to come up with a suitable factor to reflect that. He thought it was wholly right to take this into account. I agree.

8 Failure to take account of available tax losses in AA's DCF valuation

191. Eighth, on the basis of Mr Lygo's evidence, Mr Smouha QC submitted that AA was wrongly instructed to assume that the Stabilus Group had no surplus assets and in particular that it had no available tax losses. The evidence with regard to this point (which Mr Smouha QC submitted was worth €21m) was somewhat exiguous. Mr Lygo apparently relied on what he was instructed was said in a memorandum prepared by Warth & Klein Grant Thornton ("WKGT"), but which he said he had not in fact seen even at the date of his supplemental report, in support of his evidence that a purchaser would attribute value to 50% of the losses. In fact that memorandum, which was only provided on the morning of Mr Lygo's cross-examination, says only that the probability that a German Court would find that the tax losses would be available to a purchaser is "between nil and one hundred per cent". It appears that WKGT then took a figure of 50% as being a value which might be attributed to the tax losses as falling midway between 0% to 100%. In the present context, that approach is, in my view, not very satisfactory. It is also inconsistent with a document issued by PwC in February 2012 which addresses the specific point from which it would seem that, as a matter of German law, such tax losses would not in fact have been usable by a new owner. On this basis, I do not consider that the AA Report can be said to be flawed on this account still less that any flaw was "obvious" or "patent".

9 Multiples

192. Ninth, Mr Smouha QC submitted that the AA Report used "obviously the wrong multiples" which were "inconsistent with its own observed multiples". In particular, Mr Smouha QC submitted:

a There is a clear discrepancy between the multiples set out in Appendix D of the AA Report and the multiples in fact used by AA, as set out in para. 7.10 of the AA Report; the multiples used by AA are lower than the lowest multiple for any of the comparables. There is no quantitative analysis in the AA Report for this; para. 7.7 of the report simply set out a list of ten bullet points, some positive, some negative. This flaw was already apparent in the very first draft of the report (sent to JPMEL on 18 November 2009), which had a paragraph 7.7 in identical terms to that contained in the final report. The flaw was noticed by Mr Medler and Mr Jaffe at the time, and drawn to AA's attention, but no correction was made in that respect to the final report so that the flaw expressly noted by JPMEL remained in the final report. In other words they had seen that the multiple used was not supportable by the comparables analysis done.

b The Summary Draft Conclusions presented by Mr Weaver to Mr Medler and Mr Jaffe on 17 November 2009 did contain a proposed quantitative methodology for the application of a discount to the peer group multiples, being the use of a 25% discount on the median multiple. This was not used in the draft report circulated the next day, which had no explained methodology in this respect as noted above. Had that methodology – a 25% discount on median – been applied to the final report, the result would have been as follows 0.75 x median control multiple of 9.1 x €44.5m = €304 million.

c AA also produced a table of LTM (ie last twelve month) EBITDA median multiples (para. 7.4 of the AA Report) which it should have used at the very least as a cross-check for its conclusions on value, and which any reader of the report could use in that way. While Mr Weaver tried to explain this table away as inaccurate or unreliable (i) AA was able to obtain the data to prepare the table and set it out in its report; (ii) if as Mr Weaver said, his concern was that there were outliers – companies with very low or very high multiples – he could easily have excluded these outliers and proceeded with at least a cross-check of value on the basis of an LTM EBITDA; and (iii) by way of comparison, this is exactly what Mr Medler did when he received Mr Weaver's first indicative table of LTM EBITDA multiples on 16 September 2009.

d Had Mr Weaver performed such a cross-check, he would have obtained the following results:

i The LTM EBITDA to end of December 2009 was known as of 3 February 2010 and in fact sent to Mr Weaver on that date as part of the December management report. It was of €34.7 million. Using that figure and applying the 15.0x median EBITDA apparent from AA's own table, the value would have been of €520 million.

ii Even discounting by 25% in line with AA's 17 November 2009 methodology – no discount in fact being appropriate – this would have led to values around €390 million, a far cry from the value of €220-230 million placed by AA on the Stabilus Group, and a value which should at least have caused AA to query its valuation.

e What this graph was showing was that the values of the companies in AA's selected peer group had not fallen in line with their fall of earnings. In April 2008 for instance, EBITDA would have been in the region of €80 million which would have led to a value applying the median of about 6.9 x 80 = €552 million. By December 2009, earnings had fallen to around €30 million, but value had not been wiped out commensurately, as the market expected a return to pre-crisis EBITDA levels.

193. I do not accept these criticisms for the reasons given by Mr Weaver. In particular, he described how the multiples selected by AA had been arrived at by exercising professional judgment, based on AA's experience and taking into account the factors set out in paragraph 7.7 of the AA Report. Much cross-examination by Mr Smouha QC was devoted to the suggestion that AA did not properly justify its choice of multiples. In particular it was suggested by Mr Smouha QC that there was no "quantitative analysis". In my view, that proceeded on the flawed premise that the selection of multiples is a quantitative rather than a qualitative exercise. As Mr Giles explained, there is no such "quantitative" method; it is a matter of judgment. Therefore the allegation based merely on the comparison of the multiples chosen by AA with the median is a crude one not based on any methodology.
194. As to the qualitative decision, the AA Report explains the reasons for selecting the multiples. In particular, Section 6 explains AA's views on growth prospect. Thus, §6.1 explains the importance of long-term growth prospects to all aspects of the valuation, including market multiples; §6.3 explains that the key question is whether above "normal" growth was achievable; §6.4 explains that there are considerable doubts over the ability to generate above normal growth in the long term; §6.7 refers to the uncertainties about improving margins or increasing sales growth above historical performance; §6.8 and §6.9 run through the risk factors concerning long term growth. Section 7 has to be read together with Section 6 (§6.1 makes this explicit). §7.7 refers back to some of the points made in Section 6. The first bullet point refers to size, growth and profitability compared to the comparables. The fifth refers to risks associated with the Stabilus Group's operations (which is the subject of §6.8-6.9). Hence the repeated suggestion that AA did not justify the selection of multiples is, in my view, not sustainable.
195. I accept, of course, that the point about growth in profitability is a key issue here. Mr Giles explained that growth prospects are critical to choice of the multiple. The question for an investor is not simply whether a company has stable revenues; the attractiveness of an investment depends on growth prospects – and in particular whether the company will generate more than "normal" profits (see §6.3 of the AA Report). Mr Giles explained that it was important to distinguish stability from growth; and that, while a good company, the Stabilus Group did not have strong growth prospects – in fact it was growing at 3% less than the automotive sector. I accept, of course, that the question of "growth" is or at least may be distinct from "recovery" but it seems to me that that these were both adequately addressed by AA. Once the reasoning in the AA Report is understood properly the suggestion that the choice of multiples was wrong (let alone obviously flawed) is groundless. I accept the evidence of Mr Giles that AA's choice of multiples was reasonable.
196. In this context, I should mention that Mr Smouha QC cross-examined a number of the witnesses about a comment made by Mr Medler in an email to Mr Jaffe about the draft AA Report on 18 November 2009 where Mr Medler suggested that the analysis in §7 of the draft differed from that in Appendix D and said that he was not sure why the difference was not explained or commented on. As to this: (a) the comments were passed on by Mr Jaffe to Mr Weaver; (b) he was clearly satisfied that the draft AA Report did provide an explanation for the choice of multiples and that the multiples selected were consistent with the appendix so this was a point that was raised and considered; (c) AA maintained its view and (as just explained) was in my judgment right to do so; and (d) the email from Mr Jaffe shows that JPMEL was taking care to ensure that the AA Report was properly prepared. In my view, the above damages rather than supports the case that the AA Report was obviously flawed.
197. For these reasons, I do not consider that the multiples used by AA were flawed still less that there was any flaw which was "obvious" or "patent".

10 Other documents relied upon with regard to "valuation"

198. For the sake of completeness, I should mention that Mr Smouha QC also sought to rely upon two internal JPMCB models dated November 2009 and March 2010 (both apparently prepared by Mr Jamie McLaughlan who acted for JPMCB) and an Accounting Policy Memo (also referred to as a Troubled Debt Restructuring, or TDR Report) produced internally to a specific format for the purpose of US Regulatory requirements. In summary, Mr Smouha QC submitted that these documents showed valuation figures based upon a discounted cash flow which were substantially higher than that produced by AA and consistent (or at least more consistent) with the Mezzanine Defendants' case. Moreover, in the course of cross-examination of Mr Jaffe, Mr Smouha QC suggested that JP Morgan deliberately brought down the value shown in the March model from the November model by changing the weightings attached to the downside case and the base case in the DCF calculation. Mr Miles QC submitted that such suggestion was in effect tantamount to an allegation of dishonesty which Mr Smouha QC had expressly disavowed; that if that suggestion was to be advanced it should have been pleaded; and that if it had been advanced, JPMEL would have wished to call further witnesses of fact to deal with the point.
199. In my view, there is much force in Mr Miles QC's submissions. However, as also submitted by Mr Miles QC, it seems to me that there is, in any event, nothing in this point even if it was open to the Mezzanine Defendants to run it. In particular, it seems to me plain from the face of the documents that they were not truly "valuations" but only internal working drafts containing numerous flaws and forming part of an iterative process. Moreover, the March Memo in any event records on its face that JPMCB considered the book value of its Senior Debt to be just $6.8m (or 43% of par value) in March 2010 (having "charged off" (i.e. written off)) $9m in Q3 09). The document is therefore consistent with the overwhelming evidence at the time that the Senior Debt was impaired and that the Mezzanine Lenders were out of the money. Even if (which it does not) the model did reflect JPMCB's view of value, the estimated value ascribed to the Stabilus Group by the model was €281m. Furthermore, the cashflows in the Model are based on the COBP. The principal point relied upon by Mr Smouha QC was that the WACC in the Models was 10% in November 09 and 9% in March 10 (lower than those used by AA). Mr Giles was asked about the WACCs and it was pointed out that they contained no alpha. He agreed and explained, in my view convincingly, that he would not expect an alpha in a holding valuation rather than a sales valuation. This makes sense: the alpha factor reflects the additional risk in the context of a sale of investing in a small capitalised company (compared to the index as a whole) and it is included where the question is how much a purchaser would pay. In my judgment, Mr Giles was rightly dismissive of these models (if seen as valuations) as "slapdash" and rough and ready.
200. A further document which Mr Smouha QC sought to rely upon is one entitled "EMEA Special Credits Group Overview: Risk University". As explained by Mr Jaffe, "Risk University" is an internal educational programme run by JP Morgan for junior people at the bank during which groups within the bank (including the SCG) provide a very general overview of what they do. This particular document was a draft of a presentation that would be updated from time to time. It contained an overview of the proposed Stabilus restructuring which included the sentence: "Overall, recoveries to reinstated senior lenders are 88-96% based on an EV of range of €200-400m". This was relied upon by Mr Smouha QC to suggest in particular that the stated range of €200-400m represented JP Morgan's view of the value of the Stabilus Group in March 2010. As Mr Miles QC submitted, this is demonstrably false. The range 88-96% represented a range of potential recoveries based upon EVs of €200-400m at an exit date of 2014 as was clear from the enlarged version handed up during Mr Jaffe's re-examination. It did not represent a current valuation as at March or April 2010. It comes from a PwC document produced for the Senior Lenders in February 2010 called "Illustrative Returns Analysis" which Mr Jaffe did not believe he saw at the time. Further, it contains a series of possible recoveries for the Senior Lenders on the basis of EVs at that date ranging from €150m to €600m. These are not "valuations"; they are an assumption or input of the relevant spreadsheet to show recoveries if those EVs were reached at the date of a subsequent sale.
201. For all these reasons, I reject the criticisms of the AA Report advanced by Mr Smouha QC. Moreover, I accept the evidence of Mr Giles that the range of reasonable valuations was from €170m to €270m. In particular, the latter figure represents the maximum reasonable valuation of the Stabilus Group as at 8 April 2010.

(f) Impossibility/impracticality of a sales/marketing process

202. Fifth, a further sales and marketing process commencing in late January/early February 2010 would, in my judgment, have been wholly impractical if not impossible as well as potentially damaging. As to this, the Mezzanine Defendants' case shifted somewhat during the trial. At times, it seemed to me that Mr Smouha QC was inclined to accept that this was indeed the case (although he made no formal concession to such effect) and instead seemed to suggest that such a process could and should have been carried out by JPMEL at an earlier stage i.e. in late 2009 or early January 2010. In any event, such a process (whenever Mr Smouha QC says it should have occurred) was, in my judgment, wholly impractical if not impossible as well as potentially damaging. For example, Mr Jaffe was asked in cross-examination, whether, on 8 December 2009 (when JPMEL was still in discussion with Rothschild), JPMEL considered "just getting on with the sales process." Mr Jaffe's response was that the Stabilus Group would not have withstood a full sales and marketing process, because of the waivers, the suspension periods and the overall situation of the Stabilus Group; and when asked whether he considered bringing in another M&A specialist, Mr Jaffe's response was that it would be for the Stabilus Group to run such a process and the Stabilus Group was not in a position to run another sales and marketing process in all the circumstances at the time and that it was not a realistic possibility. I accept that evidence. Similarly, Mr Medler gave evidence on the practicability of undertaking a sales and marketing process in early 2010. His evidence (which I also accept) was that he did not think it would have been possible and that it would have been a very high risk strategy from the Senior Lenders' perspective. Mme Levi also accepted that selling a company under a short time frame does not help to maximise value and that the value of the company could become more depressed if the reality is more widely appreciated that it is in considerable financial difficulties.
203. By the time of the meeting on 21 January 2010 with Rothschild and at all material times thereafter, it was in any case in my judgment, wholly unrealistic and too late for another sales and marketing process to be undertaken for the following reasons:

a On 22 January 2010 the Suspension of Rights Periods expired and the Bridge Facility became repayable.

b Also on 22 January 2010, AXA filed a motion in the Luxembourg Court. Their internal e-mail records that the aim was to impose a temporary block on enforcement by the Senior Lenders, so that if the Senior Lenders did not talk to AXA, the Management would be forced to file for insolvency.

c On 23 January 2010, the pressure on the Management of the Stabilus Group was further compounded by the Mezzanine Lenders sending a letter to the SCC (copied to Stable I) which stated that the Stabilus Group was "on the brink of insolvency" and referred to "inevitable insolvency proceedings". In my judgment, absent some agreement by the Senior Lenders or further financial support from some other source, this was a fair assessment of the financial position of the Stabilus Group at that time.

d At this stage there were lenders expressly stating that they would not extend any more. Some Senior Lenders were saying they would not extend unless it was to provide a period in which to implement a restructuring.

e At this time the Management needed a "deliverable restructuring"; an extension of the standstill and the Bridge Facility would not have been enough to provide comfort to the Management – they would have had to file for insolvency unless there was "a short-term deliverable solution" on restructuring. This was not simply a threat used for the Senior Lenders; this was based on advice to the Management from their own legal advisers.

f As I have already set out above, this led to a crucial moment in the history. On 24 January 2010 there was an emergency meeting in Frankfurt which was attended by Triton, Anchorage, Goldman Sachs and a number of the other Senior Lenders. As explained in particular by both Mr Rajan and Mr Wilhelms in their evidence (which I accept), the Management had convened the meeting because if the Senior Lenders did not organise themselves to find a solution for the Stabilus Group, the Management would have been obliged to file for insolvency. As Mr Wilhelms put it, the Stabilus Group was facing massive insolvency risk and could be described as a sinking ship. The Management (Mr Wilhelms, Mr Rajan, Mr Hosan, Mr Krotz and Dr Kessel) and their advisers attended the first part of the meeting. The Management made it clear to Triton, Anchorage, Goldman Sachs and the Senior Lenders that if the terms of a restructuring proposal could not be agreed at the meeting then the Stabilus Group would have no option but to file for insolvency. The Management then left the Senior Lenders to try to reach agreement; the Management's aim was to obtain some form of comfort letter that a deal would be progressed with urgency. The negotiations among the Senior Lenders were intense; the meeting lasted from 1 pm on Sunday 24 January 2010 to 6.30 am on the following Tuesday, when a deal was orally agreed between 100% of the Senior Lenders.

g Following this meeting, further instability to the Stabilus Group's financial position was caused on 28 January 2010 by the Mezzanine Lenders issuing payment demand letters requiring payment of over €35m by 3 February 2010. As he accepted in evidence, M. Berment recognised that there was no way the Stabilus Group could have paid this amount: it was a tactic used deliberately to increase the pressure on the Management and the Senior Lenders and could have compelled the Management to file for insolvency. The Senior Lenders issued a Stop Notice on the same day but in response, on 29 January 2010, the Mezzanine Lenders wrote to JPMEL stating that irrespective of the Stop Notice the sums demanded remained due and payable. In any event, as stated by Mr Medler in evidence, to persons outside the financial community, like OEMs, an acceleration is a default the consequence of which is insolvency irrespective of any such notice. The Management, on advice, was once again faced with the question whether it needed to file for insolvency. Their view was that filing for insolvency could only be avoided if three conditions were satisfied one of which was a positive opinion from a QC that the Mezzanine Lenders could not request payment under the current conditions (and if the opinion were negative or ambiguous the Management would assume the Mezzanine Lenders' claim was valid and would need advice on how under such circumstances filing could be avoided). The Management were, however, subsequently reassured by the Senior Lenders that the Stop Notice issued under the SFA on the same date was effective and would enable the restructuring agreed in Frankfurt to proceed. Nevertheless the Mezzanine Lenders' lawyers maintained in correspondence that the Management remained under a duty to file. On 10 February 2010 the Stabilus Group confirmed that the restructuring terms that had been agreed were a "deliverable proposal" and asked the Senior Lenders to execute an amendment of the standstill.

h In the two weeks following the Frankfurt meeting and as confirmed in evidence by Mr Wilhelms and Mr Rajan, the terms of the agreement were further negotiated and were set out in an agreed term sheet set out in a schedule to the Senior Lock-in Agreement signed on 15 February 2010. The agreement with the Senior Lenders took away the immediate requirement on the Management to file for insolvency because it was a commitment by the Senior Lenders to implement the agreed restructuring which the Management had concluded would remedy the Stabilus Group's financial position. Moreover, it seems to me that the fact and terms of the Senior Lock-in Agreement in effect precluded any sales and marketing process as Mr Smouha QC appears to have recognised in certain parts of his cross-examination of Mr Klein, Mr Medler and Mr Jaffe. Absent the agreed abandonment or variation of such agreement by the Senior Lenders, it is difficult if not impossible to understand how JPMEL might have carried out any sales or marketing process.

i By this stage in 2010, therefore, it was clear that if the Stabilus Group was going to survive there would have to be a full restructuring of its debt. Without that, it is clear that in accordance with principles of German Law, the Management would have to have filed for insolvency.

j In addition, as explained by Mr Wilhelms and Mr Rajan, the fact that the Stabilus Group was undergoing a restructuring was widely known; and it was necessary to sort out the restructuring of the debt in order to restore confidence of OEMs, many of which had "red-listed" the Stabilus Group and who would not grant new contracts and would look to alternative suppliers (and, as explained above, there was a concern at this time that OEMs were stockpiling). Hence a restructuring was crucial to the survival of the Stabilus Group.

204. I fully recognise that the documents appear to show that when it was suggested to Rothschild that there was insufficient time for a full sales process, Rothschild did not agree and appears to have said, in effect, that there was sufficient time. However, as I have already stated, when such view was expressed Rothschild did not have detailed knowledge of the financial position of the Stabilus Group at that time and, for that reason, such expression of view does not, in my judgment, carry any real weight.
205. Against that background, I am satisfied that it would have been wholly impracticable if not impossible to seek to undertake a further sales and marketing process in these circumstances. Moreover, even if such process had been possible and practicable (which in my view it was not), seeking to market the Stabilus Group would have potentially damaged its value. Even in a vacuum, it was known that the Stabilus Group had been the subject of two sales and marketing processes in as many years (in 2008 and 2009) and a third process would seem very likely to have worried the Stabilus Group's suppliers and customers with potentially damaging effects. In addition to this, the Stabilus Group was in a distressed state. It could not pay its debts as they fell due. It was widely known to be undergoing a financial restructuring. Its relations with both suppliers and customers were fragile. As a result of the difficulties already mentioned above, the Stabilus Group's future with OEMs depended on finalising the restructuring and getting its balance sheet onto a sustainable basis. A further sales and marketing process in these circumstances would have sent out a thoroughly muddled and potentially damaging message, putting the restructuring in doubt due to the added delay.
206. Moreover, I am also satisfied that marketing the Stabilus Group again would in all probability have been pointless for the following reasons:

a The sales and marketing process in 2008 had solicited "negligible trade interest" and it is unrealistic to suggest that there would have been significant trade interest in the much harder economic times of late 2009/early 2010.

b The sales and marketing process that had taken place in July/August 2009 had led to the identification of the highest bidders, including Triton. Triton had taken the process forward with the Senior Lenders and the negotiations with Triton were what the restructuring negotiations had become.

c The bids had been indicative bids at stage 1 of the sales and marketing process. As Mr Merrett explained at the meeting on 25 November 2009, if due diligence is not done at the beginning, it is more likely that bidders will seek to reduce the price when they find things during due diligence.

d As Mr Giles explained, the highest offer made at an indicative stage may reduce during the process. He described this as well known strategy.

e There was no reason whatever in early 2010 to think that a better offer would be forthcoming.

207. In essence, the Mezzanine Defendants' case was that if a sales and marketing process had been undertaken, this would have opened up the sale to the entire market and created "competitive tension" resulting in bids in effect worth in excess of the Senior Liabilities. That would have required bidders to come in with bids placing the EV at more than about €400m. Though challenged to do so, the Mezzanine Defendants never produced any evidence of a higher value still less any evidence to suggest that the EV exceeded €400m or that anything like that figure might be achieved in a competitive bidding process. In my judgment, even on the basis that the burden is on JPMEL, any such suggestion is not credible. In my judgment, there was and is no reasonable basis for thinking that anything even approaching that would have been likely or even possible. All the contemporaneous evidence is strongly to the contrary. In particular:

(1) An impairment review undertaken by ECAS itself as at 31 March 2009 which valued the Group at €317 million. As a consequence ECAS reduced the value of its investment to nil, at which value it remained.

(2) A draft valuation prepared by Ernst & Young on behalf of MDM in May 2009 which valued the Group at €186 million. Although MDM witnesses sought to criticise Ernst & Young's work as basic, it is clear that ECAS agreed at the time with the methodology used.

(3) The PwC Interim Report of 10 July 2009 which indicated an EV at 30 September 2009 of between €129.7 million and €203.8 million.

(4) The bids made during the Rothschild process in August 2009 which ranged from €130 million to €266.3 million (ignoring the higher Triton figure for reasons already stated).

(5) The AXA exit valuation of August 2009 which, on the management case, projected exit valuations of €251.5 million in 2011, €289.5 million in 2012 and €337.5 million in 2013. An equivalent valuation for 2010 (i.e. using the same multiple of 5.0 against EBITDA for 2010 of €44.0 million) would be €220 million.

(6) PwC's valuation dated 8 September 2009 of Stabilus GmbH as at 30 June 2009 which indicated a base case EV of €208.1 million.

(7) The impairment review of 30 September 2009 set out in the Stabilus Group's financial statements audited by Deloitte which showed an indicative EV for the Stabilus Group of €226.2 million.

(8) PwC's Restructuring Opinion of 31 March 2010 which showed an indicative exit value in 2010 of between €153.9 million and €241.8 million.

(9) The opinion on fair value at acquisition contained in the financial statements of Servus Holdco audited by KPMG which indicated a valuation of €247.2 million.

(11) The AXA investment memorandum of March 2010 showing an exit value in 2014 of €520m.

208. The foregoing is also consistent with the evidence which I have already referred to that throughout this period, the Senior Debt was being traded not only below par but at a very steep discount ie between about 40-70 cents which would seem to imply a valuation range of approximately €160m to €280m. In response, Mr Smouha QC submitted that the fact that a quoted company's debt is trading below par does not mean that its stock is worthless; that any suggestion to the contrary is a complete non sequitur; and that here, the debt trading had its own dynamic, disconnected from the intrinsic value of the Stabilus Group: some German banks wanted to sell for their own reasons e.g. because of concerns relating to the trustee structure, and some vulture funds (including Triton and Oaktree) wanted to buy for their own reasons. I am prepared to accept that there is or may well be no direct correlation between a company's intrinsic value and the trading price of its debt and that there may well have been particular reasons why that was so with regard to the Stabilus Group in 2009-2010. Nevertheless, it seems to me that the fact that the discount here was so substantial and that it continued consistently and continuously throughout this period provides strong corroborative force for the conclusion that the Mezzanine Lenders were "under the water" by a very large margin.
209. Despite all the above, it was and remained the evidence of Mr Illenberger that if there had been a bidding process, AXA would have been prepared to make an offer of €470m in cash for the Stabilus Group as of March 2010. Mme Levi said that she agreed with that evidence and that such cash bid was "in line" with their own valuation of the Stabilus Group of €500m. I do not accept that evidence. There is no documentary evidence whatsoever that AXA had considered, let alone decided, paying €470m or anything approaching that figure in cash (or otherwise) for the Stabilus Group in March 2010; and AXA never approached the Senior Lenders or JPMEL with any cash bid for the Stabilus Group, let alone a bid of €470m. On the contrary, the contemporaneous documents show a very different picture which is wholly inconsistent with such evidence:

a First, there are the minutes of a meeting of the Mezzanine Investment Committee (the "MIC") on 24 March 2010. This is, in my view, an important document. The minutes show various attendees including Mr Illenberger and Mme Levi (who signed the minutes). The minutes also show that the MIC decided to approve a new €40m investment as part of a restructuring; and Mr Illenberger accepted in evidence that it continued to be the view of AXA that there needed to be a restructuring of the capital structure of the Stabilus Group. However, there is nothing in those minutes or elsewhere to indicate that the MIC (or AXA itself) ever countenanced a cash offer outside a restructuring, let alone an offer of €470m in cash. On the contrary, what these minutes do show is that the view being expressed by the "Investment Team" was that the valuation of the Stabilus Group could (i.e. in the future) reach at least €470m plus pension. However, it is plain that this was not the valuation in March 2010 still less a figure that anyone had in mind offering as cash in March 2010. On the contrary it was a possible projected valuation figure looking some years ahead which, as appears from other documents and confirmed by Mme Levi in evidence, was in fact sometime in 2014.

b Similarly, a document entitled "Investment Memorandum" prepared by the AXA Mezzanine Team dated March 2010 expresses the view that the Stabilus Group was delivering results in line with the revised Business Plan and that assuming the Stabilus Group returned to an EBITDA of €80m (as justified by historical performance), the "exit scenario" in 2014 would have an EV of €520m. The conclusion of the Memorandum was a recommendation to invest up to €15m as a preferred shareholder loan. Again, there is no mention anywhere in the document about the possibility, let alone the desirability, of investing €470m in cash. On the basis of these figures, the suggestion by Mr Illenberger that AXA would have been prepared to invest €470m in March 2010 is, in my view, fanciful.

c A similar picture also emerges from another document entitled "Mezzanine Vehicles – General Overview" which appears to have been produced for the purpose of a Board Meeting in Luxembourg on 6 April 2010 and which Mr Illenberger accepted in evidence was probably produced at least in part by the MDM "Mezzanine Team". The document summarises the "actions undertaken" in relation to the Stabilus Group as "IC approval to back a €40m new Equity provided a debt of €220m and equitization of mezzanine and remaining senior debt", thus reflecting the minutes of the MIC referred to above. Again there is no mention of any intention or even preparedness to invest €470m into the Stabilus Group.

210. In addition, it is to be noted that as at April 2010 the average investment per transaction of all AXA Mezzanine Funds was €17m (the largest being €65m), which Mr Illenberger accepted. Mr Illenberger also accepted that an investment into the Stabilus Group of the size he was suggesting would have been 30 times the average investment by the AXA Mezzanine Funds and that it would have increased the Mezzanine Funds' exposure to the automobile sector from 4.8% to over 35%. Despite Mr Illenberger's protestations to the contrary, this seems a most unlikely investment strategy. Mr Illenberger sought to avoid that conclusion by saying that other AXA non-mezzanine funds could have invested. I suppose that is a possibility but in the absence of any disclosure on that topic, it was impossible to test such assertion and, in my view, it is unnecessary to reach any conclusion on it.
211. In summary:

a By mid-January 2010 the Management would have filed for insolvency unless the Senior Lenders had agreed in principle a restructuring and believed that the restructuring was likely to be delivered;

b Once the Restructure had been agreed in principle it was essential to proceed with the restructuring negotiations and complete them by the deadline of 2 April 2010;

c This was needed not merely to avoid insolvency but also to put the Stabilus Group on a proper commercial footing with its customers and suppliers;

d Running a simultaneous sales and marketing process would have been impracticable, if not impossible;

e Running such a sales and marketing process would also have been potentially damaging;

f There was no reasonable or realistic basis for thinking that a further sales and marketing process would attract any offers better than those being made by Triton in the context of the restructuring negotiations;

g There was no reasonable or realistic basis for supposing that any purchaser would come forward with a cash or equivalent bid within a measurable distance of the Senior Liabilities of about €400m.

212. For those reasons, it is my conclusion that there was no breach by JPMEL of any of its duties under Clause 14 of the ICA. For the avoidance of doubt, I have reached this conclusion on the basis, in favour of the Mezzanine Defendants, that the burden of proof is on JPMEL to show absence of breach and that such burden is a heavy one.
213. In addition, as I have already stated above, it is my conclusion that, even if JPMEL had carried out a full marketing and sales process, the overwhelming likelihood is that there was no realistic prospect of obtaining a price in excess of the Senior Liabilities. In my judgment, it follows that, even if a deal might have been obtained by pursuing that process which was better than the terms of the Restructure, the Mezzanine Defendants have not suffered any loss and that, for the reasons stated above, there is no actionable breach of duty by JPMEL.

2. Did JPMEL comply with the duties it owed under Clause 15 of the ICA and, if not, what are the consequences of any such breach of duty?

214. Mr Smouha QC submitted that JPMEL did not comply with its obligation to exercise reasonable care to obtain the fair market price of the Mezzanine Debt and thereby was in breach of its obligation under the last part of Clause 15.2 of the ICA which I have already quoted above. As to such obligation, I have already considered and rejected the argument advanced by Mr Smouha QC that under Clause 15 any disposal could only be done for "cash". It is unnecessary to say anything more on that point. In any event, Mr Smouha QC admitted that under this part of Clause 15.2, the critical question was not the value achieved under the Restructuring Agreement as a whole but whether or not JPMEL exercised reasonable care to obtain the fair market price of the Mezzanine Debt. In my view, the short answer is that the Mezzanine Debt was "under the water" and had no value at the time of the Restructure.
215. In response, Mr Smouha QC drew attention to the consideration provided by Acquilux as set out in Clause 10.2 of the Restructuring Agreement and to the fact that it had been the subject of negotiation as JPMEL was not happy to 'request' the issue of PPLs from Acquilux. The final form reads:

"(a) Acquilux and the Senior Beneficiaries agree, and the Security Trustee acknowledges, that as consideration for the transfer under clause 10.1, certain of the Senior Beneficiaries will receive the rights and benefits conferred upon them by the Mezzanine PPL in their capacity as Lenders (as defined therein) in the proportions set out opposite the name of those Senior Beneficiaries in the PPL Schedule.

(b) The rights and benefits referred to in clause 10.2(a) are conferred directly by Acquilux upon the relevant Senior Beneficiaries pursuant to the terms of the Mezzanine PPL, at the instruction and request of all of the Senior Beneficiaries made pursuant to this clause 10.2(b). The Senior Beneficiaries hereby agree that the payment of consideration in accordance with this Clause 10.2 is made in full discharge of any and all obligations owed by the Security Trustee to them to receive or recover any amount pursuant to Clause 15.2(c) of the Intercreditor Agreement in respect of the transfer effected pursuant to Clause 10.1 and to apply the proceeds of enforcement pursuant to Clause 16.1 of the Intercreditor Agreement in respect of the transfer effected pursuant to Clause 10.1"

216. Mr Smouha QC also drew attention to the fact that when JPMEL was asked what those PPLs were worth by a Request For Information in these proceedings, its response was that it did not know. Thus, Mr Smouha QC submitted that it was very hard to see how JPMEL can have exercised reasonable care to obtain the fair market price of the Mezzanine Debt, but yet have no idea what value was received in exchange. In that context, Mr Smouha QC further relied upon certain answers given by Mr Jaffe in cross-examination on this point when he admitted that he could not say what consideration (if any) had been received for the PPLs in isolation, nor the value (if any) received for the entire package of assets. It is also fair to note, as Mr Smouha QC pointed out, that Mr Jaffe agreed in cross-examination that it was not possible to say what the value of the Restructuring Agreement was; and that the Restructuring Agreement did not create something whereby a fair market price was paid but rather re-allocated liabilities i.e. it gave the Senior Lenders new positions in terms of debt and "got rid of the Mezzanine". However, in my view, on the basis that (as I have found) the Mezzanine Debt was under the water and had no value, none of the foregoing assists the Mezzanine Defendants.
217. Mr Smouha QC submitted in the alternative that if it were appropriate under Clause 15.2 of the ICA to have regard to the value of the Restructuring Agreement as a whole, the Mezzanine Defendants relied upon their case generally under Clause 14 of the ICA. In my view, this alternative case fails for reasons similar to those set out above and which I need not repeat.
218. Mr Smouha QC advanced a further case viz that there was an obligation on JPMEL not to exercise its powers under Clause 15 of the ICA for an improper purpose. In particular, Mr Smouha QC submitted that certain of the steps of the Restructuring Agreement were not effected for the purpose of maximising the sums which could be applied down the waterfall but for the collateral purpose of effecting a restructuring; that the PPLs were received outside the waterfall and JPMEL does not even know what they were worth; and that the aim of transferring the Mezzanine Debt was not to maximise the proceeds to be applied down the waterfall but to facilitate a wider restructuring. I do not accept these submissions. In my view, they are based on a number of fallacies with regard to the structure of the ICA the details of which I have already considered above and which I need not repeat. In short, given the terms of the ICA and the fact that the Mezzanine Debt was "under the water", I do not consider that there is any basis for saying that JPMEL exercised its powers under Clause 15 of the ICA for an improper purpose.
219. Given these conclusions, it is also unnecessary to say anything about what would have been the consequences of any such breach of duty and, in particular, the argument advanced by Mr Smouha QC that the transfer of the Mezzanine Debt was made "without authority and of no effect".
220. For these reasons, it is my conclusion that there was no breach by JPMEL of any of its duties under Clause 15 of the ICA. For the avoidance of doubt, I have again reached this conclusion on the basis in favour of the Mezzanine Defendants that the burden of proof is on JPMEL to show absence of breach and that such burden is a heavy one.

3. Did JPMEL act in breach of any, and if so what, fiduciary duty and, if so, what are the consequences of such breach?

221. I have already set out the relevant terms of Clause 17 of the ICA (see paragraphs 31(a)-(h) above) and summarised my views with regard to the applicable principles concerning the various allegations advanced against JPMEL by the Mezzanine Defendants of "breach of trust" and "breach of fiduciary duty" and, more specifically, the Mezzanine Defendants' case that in relation to enforcement of the security, JPMEL as Security Trustee was obliged to act in the interests of all the lenders (see paragraph 123 above). I do not propose to repeat what I have already stated. For present purposes, it is sufficient to focus on the specific allegation advanced by the Mezzanine Defendants viz. that JPMEL as Security Trustee was under a duty to avoid conflicts of interest and a duty not to favour the interests of itself or others over the interests of the Mezzanine Lenders; and that JPMEL acted in breach of such duty without any informed consent. As to such alleged breach of fiduciary duty, Mr Smouha QC relied in particular on the following matters:

a Despite Mr Jaffe recognising in cross-examination that JPMEL as Security Trustee was trustee for all the lenders, including the Mezzanine Lenders, and his belief that the Security Trustee was not entitled to favour the Senior Lenders in making decisions as to how to act, Mr Jaffe accepted that he had decided not to engage with the Mezzanine Lenders and identified that he had not in fact considered whether the Mezzanine Lenders should have the same access to the Security Trustee and the information it was receiving as the Senior Lenders.

b Instead, as Mr Jaffe accepted, the Senior Lenders regarded the Security Trustee and its powers under the ICA as a vehicle for achieving the Senior Lenders' objective of a restructuring; and appreciated that the restructuring was in the interests of the Senior Lenders and not to be in the Mezzanine Lenders' interests.

c The measures which were put in place to separate out Mr Jaffe and avoid conflicts of interests were wholly ineffectual.

d No Chinese walls were set up within JP Morgan or the SCG.

e Mr Medler (i) continued, in his capacity as Senior Lender, to report to Mr Jaffe throughout the period up to April 2010; and (ii) continued to be involved in the Security Trustee's activities. For example, Mr Jaffe asked Mr Medler to comment on the draft AA Report, which had been sent by Mr Weaver only to Mr Jaffe.

f Throughout the period to April 2010, Mr Jaffe, notwithstanding his assumption of the decision making role on the part of the Security Trustee, continued to be responsible, in his role as Head of the SCG, for Mr Medler and JPMCB as a Senior Lender. Mr Jaffe continued to receive information, provided input and was responsible for approving credit decisions in respect of JP Morgan's senior interest in the Stabilus Group. The claimed internal division of responsibilities is not borne out by disclosure.

g JPMEL had an actual conflict of interest in exercising its powers as it did. Once JPMEL (and JPMCB) signed the Senior Lock-in Agreement, there was a stark conflict of interest between JPMEL's commitment as signatory and its duty to take reasonable care to obtain the fair market price. The connection between JPMEL and JPMCB was very close: it shared staff; shared offices; and its staff gave no thought to which corporate entity they were acting for: it was all the bank. As Mr Medler said in cross-examination: "We all look at JP Morgan as a single entity". JPMCB signed the Senior Lock-In Agreement and there was a conflict between JPMEL's duties and the Mezzanine Lenders' interests that their debt remain with them on the one hand, and JPMEL's interest that JPMCB should receive Mezzanine PPLs on the other.

h The purchaser: knew that no auction process was being carried out, although the Mezzanine Lenders were protesting that one needed to be held; knew that the Mezzanine Lenders were protesting that JPMEL was not complying with what it then acknowledged was its fiduciary duty to the Mezzanine Lenders; knew that there was a risk the Mezzanine Lenders were right; and decided to take the risk of going ahead with the purchase.

222. As to these allegations, I accept that JPMEL at the very least acted inappropriately in failing to put in place "Chinese walls" and in sharing information with one or more Senior Lenders to the exclusion of the Mezzanine Lenders; and, without deciding the point, I am prepared to assume in favour of the Mezzanine Defendants that this constituted a breach of JPMEL's duty as Security Trustee. However, I do not consider that such conduct was causative of any relevant loss or otherwise gave rise to any material consequence in particular with regard to the role of JPMEL as Security Trustee in the enforcement of the security. In such circumstances, it does not seem to me that any of such matters relied upon by Mr Smouha QC is of assistance to the Mezzanine Defendants. The remainder of these allegations must equally fail because: (i) they rest upon a false premise as to the nature of the duties imposed upon JPMEL as Security Trustee as set out in paragraphs 121-128 above; and (ii) more specifically, as submitted by Mr Miles QC, the combined effect of Clauses 14 and 17.4 of the ICA is, in my view, to exclude the kinds of duties the Mezzanine Defendants say arise (i.e. to act in the interests of the Mezzanine Lenders and to avoid conflicts and/or not to favour the interests of other persons over the interests of the Mezzanine Lenders) as set out in paragraph 129(a)-(e) above.

E - CONCLUSION

223. For all these reasons and subject to any further submissions with regard to the precise wording of any order, it is my conclusion that the Claimant (i.e. Saltri) is entitled to the declarations sought in the Particulars of Claim and that the claims advanced by the Mezzanine Defendants against JPMEL should be dismissed. Counsel are requested to agree a draft order for my approval. Failing agreement, I will deal with any outstanding issues.