Contributed by Sally Willcock
In HHY Luxembourg SARL v Barclays Bank PLC & Ors 2010 EWCA Civ 1248, the English Court of Appeal has ruled in favor of senior lenders in the restructuring of the European Directories Group, a business that operates in a number of European jurisdictions. The Court of Appeal overturned a High Court decision and held that the intercreditor agreement between the junior and senior lenders authorized the security trustee to release both the liabilities of the company that was being sold, as well as the liabilities of its subsidiaries. This enabled the senior lenders to enforce their rights and sell the business free of the senior and the junior debt. The decision of the lower court had caused considerable concern as it had meant that the security trustee would have to go through a lengthy and expensive procedure to effect a release of the debt of each of the subsidiaries. This commercially would have had the effect of strengthening the hand of junior lenders at the expense of senior lenders, and might in some cases effectively block a restructuring.
In the UK, non-consensual restructurings frequently take the form of enforcement by the senior lender of security over the shares of a holding company. The shares in the holding company are then sold to a third party, which is often a newco controlled by the senior lenders. At the center of the dispute in European Directories was the meaning of a clause in an intercreditor agreement that allowed the security trustee to transfer liabilities and release the guarantees and security. The Court was asked to decide whether the clause enabled releases to be granted by the security trustee not only of the single obligor whose pledged shares were being sold, but also of its subsidiaries.
Relevance of the Decision
The judgment is of relevance to many other ongoing and completed restructurings under English law-governed documentation where the applicable intercreditor agreement predates the Loan Market Association’s standard intercreditor agreement, issued in February 2009 and which is now generally used. Prior to this, many intercreditor agreements contained security releases similar to those in the European Directories intercreditor agreement. For cross-border groups operating in Europe, group financing facilities are very commonly governed by English law, and English courts often exercise jurisdiction over the restructurings of the entities so that the impact of the decision extends to many cross-border European groups.
The European Directories Group operates a directories business across a number of European jurisdictions. Its business is substantially carried on by various operating companies that sit structurally below European Directories DH7 (BV) (‘DH 7’). In June 2005, DH7, its parent (DH6), and a number of other group companies entered into a number of lending facilities. The senior loan facility was divided into a number of tranches, with Facility D being subordinated to the other facilities. Further mezzanine and PIK lenders were in turn subordinated to the senior facilities. At the closing of the facilities, the various tranches of lenders entered into an intercreditor agreement, which contemplated that any company within the group that had provided a guarantee or security in respect of the amounts owed to lenders would be an “Obligor.” “Obligor” was defined to be “each original Obligor and any subsidiary of the company which becomes a party as an Obligor.” The provision then cross-referenced a clause in the loan agreements that required any member of the group subsequently providing security or a guarantee to become an Obligor by executing and delivering an accession deed to the security trustee.
After European Directories experienced financial difficulties, it proposed a restructuring that would place D6 into English administration proceedings with D6’s pledged shares in D7 being sold to a newco. The newco would issue debt and equity to the senior secured creditors, and the security trustee would effect a release of the guarantees and security given under the facilities by all members of the group that were Obligors under the original facilities. As a result of the restructuring, the junior lenders would receive no recovery against the parent or any of the subsidiary obligors.
A number of junior lenders challenged the ability of the security trustee to effect the proposed release and argued that the release by the parent Obligor did not operate to simultaneously release the liabilities of all the Obligor’s subsidiaries.
The Court of Appeal accepted that the release provisions were capable of bearing either the interpretation for which the senior lenders argued or the interpretation pressed for by the subordinated junior lenders. The Court went on to hold that where there were two possible alternative constructions of a clause, it had to consider which was the most commercially sensible.
In finding for the senior lenders, the Appeal Court accepted the senior lenders’ argument that a better price would be obtained by selling the assets and business of the group as a going concern rather than disposing of every company or asset within the group separately and that a sale as a going concern would be achieved much more easily by a sale of shares in one or more companies higher up the corporate structure. The junior creditors had no effective response to this argument. The Appeal Court concluded that it could not have been the intention of the parties to the intercreditor agreement for an unnecessary further layer of expense to be incurred by requiring a series of separate sales in different jurisdictions. It would not only dilute distributions, but would also provide every single junior creditor with a hold out position if the clause were to be construed in this way.
Although it is possible, an appeal of the decision to the Supreme Court is unlikely, as the case in essence is one of construction of a document and does not raise a novel point. Although the wording of the intercreditor release clause will need to be considered in each particular case, the decision in European Directories provides some comfort for senior lenders contemplating or already having concluded restructurings with intercreditor release wording similar to the provisions in this case or otherwise ambiguous and capable of two literal meanings.
Notably, the wording of the Loan Market Association’s standard Intercreditor Agreement, which has generally been adopted since February 2009, has more clearly phrased drafting that allows for a release by the security trustee of subsidiary liabilities.