Court of Appeal confirms Security Trustee’s powers of release on a debt restructuring

27/10/10

HHY Luxembourg v Barclays Bank Plc and Others

In an important judgment delivered on Friday 22 October 2010, the Court of Appeal, on an expedited appeal, overruled a judgment of Proudman J on 23 September which had caused considerable uncertainty as to a Security Trustee's powers to release security and debt as part of a debt restructuring process.

The dispute arose out of the proposed debt restructuring of the European Directories group of companies, which operates in some eight European jurisdictions.  The group has liabilities to Priority Senior Lenders, Second Lien Lenders, Mezzanine Lenders and PIK Lenders amounting in aggregate to more than €2 billion.  The value of the group operating companies if released from their debt and security obligations and sold as an operating group is estimated to be less than €1 billion, meaning that even the Priority Senior Lenders, who are owed some €1.34 billion, will not be repaid in full if the restructuring proceeds.  The Second Lien Lenders, the Mezzanine Lenders and the PIK Lenders will receive nothing from the restructuring.

The proposed debt restructuring involves the release of the operating companies from their debt and security obligations, followed by a sale of the shares in their holding company, DH6.

The Intercreditor Agreement contains a long and complex clause authorising the Security Trustee if certain conditions are met to release debt and security obligations.  A provision in the same or similar form is commonly found is Intercreditor Agreements both in the UK and in the USA.  The Second Lien Lenders contended that the Security Trustee's power of release was limited to a single layer of release such that the Security Trustee could release the debt and security obligations of the single company immediately below DH6 in the group structure (DH7), but not the operating companies which lie below DH7.  Proudman J granted a declaration against the Security Trustee, DH6 and the Senior Priority Lenders to this effect.

On appeal, the Court of Appeal reversed Proudman J.  It was common ground that DH6 is the holding company of each of the operating subsidiaries.  The Court of Appeal held that the release provisions are to be read as empowering the Security Trustee to release the debt and security obligations of each direct or indirect subsidiary of the DH6.  A transcript of the judgment is expected to be available within a few days.