The Court of Appeal today ruled in favour of the senior lenders in the ongoing restructuring of the European Directories Group. Overturning the earlier decision of the High Court, the Court of Appeal found that the Security Trustee was authorised to release guarantee liabilities and security as part of a senior lender proposed restructuring plan.
Senior lenders will be reassured by a judgment which sought to give effect to the commercial rationale behind intercreditor arrangements. The judgment is another set back for subordinated creditors who have frequently been excluded from recent restructurings by virtue of intercreditor provisions similar to those examined in these proceedings.
Background
The European Directories dispute relates to certain provisions of the Intercreditor Agreement which give the Security Trustee the power to release liabilities (including guarantee liabilities) and security of Group companies under certain finance documents as part of a senior lender restructuring proposal. Similar powers have been used by Security Trustees in a number of recent restructurings in order to implement disposals of assets which are not supported by all creditors. Often such powers are exercised in conjunction with a pre-pack administration.
In this instance, senior lenders had proposed a restructuring of the European Directories Group which involved placing a holding company into administration and effecting a sale by the administrators of a single subsidiary to a newly incorporated vehicle. As a result of this sale, the operating group would be ultimately owned by this newly incorporated vehicle. As part of the senior lenders' proposal, the Security Trustee would exercise powers under the Intercreditor Agreement to release certain Group companies of all guarantees and security that had been granted by such companies.
A number of second lien lenders challenged the Security Trustee's ability to effect such a release and originally sought declaratory relief from the High Court on construction of the Intercreditor Agreement. On 23 September 2010, the High Court found in favour of the second lien claimants with Mrs. Justice Proudman of the view that the Security Trustee was only authorised to release the liabilities of the particular company which was subject to the disposal and not any subsidiaries of that company. The Court of Appeal today overturned that decision enabling the Security Trustee to release liabilities and security of both the company subject to the disposal and its various subsidiaries. Leave for appeal was not granted by the Court of Appeal; however, the second lien lenders could apply to the Supreme Court for leave to appeal.
Equally possible interpretations
The Court of Appeal accepted that the release provisions of the European Directories Intercreditor Agreement were capable of being interpreted in accordance with the submissions of both the senior lenders and the second lien lenders. However, where there are two equally possible interpretations of a clause, the Court asserted that the more commercially sensible interpretation should prevail.
Commercial effect
The senior lenders had contended that the purpose of their restructuring proposal was to maximise the return to creditors and that a single sale of the Group as a going concern was the most effective way to achieve this. The Court did not disagree with these contentions and seemed to accept the need to release both guarantees and security of Group companies in order to give proper effect to such a sale.
Reflecting on the interpretation proposed by the second lien lenders, the Court observed that any release of liabilities and security could only be implemented by the Security Trustee if there was a separate sale of each Group company. The Court viewed such a complicated restructuring process as futile and costly. Furthermore, the Court acknowledged that the second lien lender interpretation would give powers to the second lien lenders which were contrary to the order of priority established elsewhere in the Intercreditor Agreement.
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