A recent case will be of interest to all those involved in
negotiating the restructuring of groups of companies labouring
under too much debt where there is a hierarchy of lenders.
HHY Luxembourg SARL and another v Barclays Bank plc and
others arises out of the European Directories Group of
companies' urgent need to restructure indebtedness in excess of
€2billion.
It concerned a question that is key to determining the negotiating
strength of the different categories of lenders - arguably
the second most important issue after the question of where the
value breaks (
see attached) - and against the backdrop of which the terms of
a consensual restructuring will be negotiated.
Namely: when enforcing at the holding company level, do the senior
lenders have the ability to see that the operating companies are
sold free and clear of any security, debt and guarantee claims held
by any junior creditors over the shares in the operating companies
and their subsidiaries and over the those companies themselves,
against the wishes of such junior creditors.
The answer to the question, as in this case, lies in the true
construction of the relevant provisions in the intercreditor
agreement. Here, the result turned on the meaning of the words
"Obligor or any holding company" which the court found to
refer to the Obligor or holding company whose shares are being
disposed of, and not to other Obligors i.e. subsidiaries of the
Obligor whose shares are being disposed of. Accordingly, the
claimants' contention that the intercreditor provided for only
'one layer of release', that is a release only of the
liabilities of the Obligor, the shares in which are being disposed
of, prevailed.
The judge accepted that with an intercreditor agreement, the court
is necessarily choosing between competing unnatural meanings.
Lessons that can be taken from this decision as to how the court
will approach its construction of wording in an intercreditor
agreement include the following:
- the question is not what the clause ought to achieve in the events which have happened but what does it provide on its true construction;
- the court will attribute an intention to the parties in accordance with the meaning the clause would have conveyed to a reasonable commercial person;
- clear words will be needed for junior lenders to be held to have effectively given up or excluded the legal rights which they would otherwise have over guarantees from subsidiaries; and
- the purpose of a clause is to be gleaned from its wording and ought not to be enlarged beyond the ambit of the clause itself, provided that the words do not lead to an absurd result without commercial purpose.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 05/10/2010.
