Words not clear enough to ‘wash off’ junior creditors

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:

1. 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;
2. the court will attribute an intention to the parties in accordance with the meaning the clause would have conveyed to a reasonable commercial person;
3. 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
4. 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.

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