Trimast Holding Sarl v Tele Columbus GmbH

The issues for decision in the present case are:-

Tele Columbus is a cable TV business in Germany. It was the subject of a highly leveraged buy-out. Part of the funding was provided under a Senior Facilities Agreement with ING Bank NV as lead agent for a syndicate of providers. Under the Senior Facilities Agreement the funding provided was:-

The facilities provided under the Senior Facilities Agreement were at variable rates of interest. With the object of providing some cash flow stability, the Senior Facilities Agreement required Tele Columbus to hedge the interest rate liabilities on one half of its borrowing. Accordingly on 8 January 2007 Tele Columbus swapped its liability to pay variable rates of interest on €590 million of the senior facilities for a liability to pay interest at a fixed rate on that sum. This was achieved by two hedge agreements, each for €295 million, one with ING and the other with Rabobank (“the Hedge Counterparties”). The Hedge Counterparties assumed the risk that over the term of the hedging arrangement the obligation to pay variable interest rates would be more onerous than the benefit of receiving interest at a fixed rate from Tele Columbus. But they secured the opportunity of gaining a benefit if, over the term of the hedging arrangement, rates moved in the other direction. The hedge agreements contained provisions for early termination. If the respective obligations of the parties crystallised in that way before the term of the arrangement had run its course then the Hedge Counterparties might be better off or worse off than if the arrangement had run its course.

In addition to the Senior Facilities Agreement with ING Tele Columbus entered into agreements with three other groups of funding providers (“the Additional Facilities”).

The rights inter se of the providers of the Senior Facilities and of the Additional Facilities were governed by a contemporaneous Intercreditor Agreement. This ranked the various liabilities. The priority liabilities were together Facilities A, B and C, the Revolving Credit and liabilities to the Hedge Counterparties. Thereafter the remaining Senior Facilities and the subordinated Additional Facilities were ranked. A principal effect of the Intercreditor Agreement was to establish the priority of the Hedge Counterparties. They ranked alongside the providers of the top ranking Senior Facilities. That is not surprising given that (as the definition of “Hedge Counterparties” in the Intercreditor Agreement made clear) they were not third party commercial risk takers but were themselves Senior Lenders (or affiliates of such).

Clause 9.2 of the Intercreditor Agreement provided that Tele Columbus might not pay any present or future liability (whether actual or contingent) owed to a Hedging Counterparty at any time unless either (a) that payment was permitted under clause 10 of the Intercreditor Agreement or (b) the prior consent of lenders identified in Senior Facilities Agreement was obtained. Clause 10 permitted Tele Columbus to make payment to a Hedging Counterparty of any sum then due (provided that there was no payment due from the Hedging Counterparty to Tele Columbus).

Clause 9.5 of the Intercreditor Agreement contained a method of accounting and a mechanism for striking a balance in the event of early termination of a hedging transaction entered into between Tele Columbus and the Hedge Counterparties. Clause 9.6 was then in these terms:-

“If, on termination of any hedging transaction…occurring after the commencement of any Enforcement Action, a settlement amount…falls due…from [Tele Columbus] to a Hedge Counterparty then that amount shall be paid by that Hedge Counterparty or [Tele Columbus] to [ING], treated as the proceeds of enforcement of the Transaction Security and applied in accordance with terms of this agreement”.

It is unnecessary for the purpose of weighing the arguments to explore the meaning of “Transaction Security”. But it is essential to understand the meaning of “Enforcement Action” and to know how the proceeds of enforcement of a Transaction Security were to be applied.

“Enforcement Action” is a defined term, spread out over seven sub paragraphs covering approximately half a page. For present purposes it is sufficient to note:-

Clause 11.10 of the Intercreditor Agreement explained what Enforcement Action the Hedge Counterparties were permitted to take. It said:-

“The Hedge Counterparties shall not take any Enforcement Action at any time except that they may terminate or close-out any hedging transaction…prior to its stated maturity…if…(d) an Event of Default has occurred under…the Senior Facilities Agreement in respect of any Senior Finance Document (other than a Hedging Agreement)…or (f) the consent of the Majority Priority Senior Lenders is obtained”.

It is unnecessary to explain any of the defined terms (the general sense of which can be readily gathered). There is one qualification to this. Clause 11.13 said that no restriction on the taking of Enforcement Action should restrict the making or receiving of any payment that was otherwise permitted under clause 10.

If a Transaction Security was enforced then, by the provisions of clause 17 of the Intercreditor Agreement, it was held by ING upon trust to apply it first in discharging costs, and then, under “waterfall” arrangements, to distribute it pro rata amongst the priority senior lenders and the Hedge Counterparties, and then amongst the subordinated lenders in turn.

By clause 13 of the Intercreditor Agreement if any Lender (which includes the Hedge Counterparties) receives or recovers any payment which is not authorised by clause 10 or clause 13 then the recipient holds the payment on trust for the Security Agent (and must promptly pay it over) to be applied under the provisions of that Agreement.

This, then, was the structure of the funding arrangements into which Tele Columbus entered. Tele Columbus encountered financial difficulties which led to default under the Senior Facilities Agreement. On 21 July 2009 Tele Columbus requested a “standstill”. On 27 August 2009 it entered into a Standstill Agreement with the providers of facilities under the Senior Facilities Agreement and with the Hedge Counterparties. The basis upon which that agreement was entered is set out in two recitals:-

“(B)

The Company has asked the Lenders and the Hedge Counterparties to consider not taking any action in respect of certain Defaults related to matters the subject of the presentation for a certain period of time;

(C)

Accordingly the Company has asked the Lenders and Hedge Counterparties to enter into this Agreement to reflect their agreement to refrain from taking any action in the light of such Defaults…”.

The standstill created by the Agreement lasted (with extensions) until November 2009.

The Standstill Agreement contained its own definition of “Enforcement Action”. In language, structure and content this was clearly based upon the definition of “Enforcement Action” in the Intercreditor Agreement. As I read the new definition, its principal function was to clarify the scope of “enforcement” (by expanding upon the definition of “Obligor” and by specifying various matters that otherwise fell within general words of description in the original definition). It did not seek to introduce some radically different concept of “enforcement”. The new meaning of “Enforcement Action” included the making of any demand for or accepting payment of any present, future, actual or contingent liability or the acceleration of such; but it specifically excluded “for the avoidance of doubt, action taken to close-out the hedging transactions under the Hedging Agreements pursuant to clause 3[(c)] below”. For the purposes of the Standstill Agreement any early termination of a hedging agreement under an obligation in the Standstill Agreement itself would not constitute “Enforcement Action” (as defined in the Standstill Agreement).

By clause 3(c) of the Standstill Agreement the parties to it agreed and acknowledged that the Hedge Counterparties should be authorised to “and shall” close-out all hedging transactions prior to their stated maturity and that:-

“the Closed-out Amount…shall become due and payable (subject to the other provisions of this Agreement and the other Finance Documents, including without limitation clause 2.3 above)…”.

Clause 3(c) also provided that interest should accrue in respect of the liabilities owed to each Hedge Counterparty as a result of that action at a stated rate.

The specific reference to clause 2.3 is a reference to a provision whereby the parties (including the Hedge Counterparties) each agreed that during the standstill period it would not take any “Enforcement Action” (as that term is defined within the Standstill Agreement) with respect to or in connection with any “Specified Default” or require or vote in favour of the exercise of any right of acceleration conferred by the Senior Facilities Agreement. The general reference to the other provisions of the agreement was a reference (in particular) to clause 2.5 of the Standstill Agreement whereby the Hedge Counterparties (along with the lenders) agreed that any accrued interest which may fall due for payment during the standstill period should not be due and payable until the end of the standstill period.

Although clause 3(c) said that the “Closed-out Amounts” were “due and payable” it did not specify to whom they were so due and payable. When clause 3(c) said that the sums were so due and payable “subject to …the other Finance Documents” it was (by virtue of clause 1.2.2 of the Standstill Agreement) referring to the documents as so defined in the Senior Facilities Agreement, but it did not specify which particular provisions were engaged.

Clause 10 of the Standstill Agreement said that in the event of any inconsistency between the terms of any “Finance Document” and the terms of the Standstill Agreement then the latter would prevail.

In due performance of their obligations under the Standstill Agreement the Hedge Counterparties each entered into a Cancellation Agreement on 27 August 2009 closing out the relevant hedging transactions. It is agreed that the “Closed-out Amount” arising under each agreement is €7,603,450.

The claimant (“Trimast”) subsequently acquired the Hedge Counterparties’ rights in relation to these sums. The fact that it did so cheaply, acquiring the rights as distressed debt, is neither here nor there for the purposes of determining legal rights: but Tele Columbus says it is a material factor to be taken into account in deciding what remedy to grant. The question argued before me is: what is the nature of those rights?

I begin by noting three matters of common ground. First, it is accepted that the grant of a declaration is discretionary. In Financial Services Authority v Rourke [2002] CP Rep 14 Neuberger J said:-

“The court should not, however, grant any declarations merely because the rights, facts or principles have been established and one party asks for a declaration. The court has to consider whether, in all the circumstances, it is appropriate to make such an order…When considering whether to grant a declaration or not, the court should take into account justice to the claimant, justice to the defendant, whether the declaration would serve a useful purpose and whether there are any other special reasons why or why not the court should grant the declaration”.

Second, it is common ground that there is no immediate prospect of Tele Columbus paying the Closed-out Amounts plus interest to anyone. It continues to be in financial difficulties and is negotiating a restructuring package with its creditors.

Third, Trimast’s stated position is that it “currently” has no intention of commencing proceedings to lead to judgment for the total of the Closed-out Amounts plus interest to date. Any attempt to do so would constitute a breach of clause 11.10 of the Intercreditor Agreement. But Trimast submits that merely seeking a declaration as to what the true legal position is (even if it is not possible to obtain coercive orders to give effect to that established legal position) does not amount to Enforcement Action for the purposes of the Intercreditor Agreement: and it says that it is appropriate and just to grant a declaration that the Closed-out Amounts (and accrued interest thereon at the contractual rate) are due and payable by Tele Columbus to Trimast.

Tele Columbus submit that I should not grant a declaration for some or all of the following reasons:-

Some of the points made by Tele Columbus are powerful. But I have decided that it is appropriate for me to address the issues and give a declaration for the following reasons:-

I turn to the declaration to be made. The declaration which Trimast seeks is that the Closed-out Amounts and accrued interest are due and payable by Tele Columbus to it. In a draft order submitted during the course of the argument Trimast said that it would seek that declaration subject to its acknowledgement that it was bound by the terms of the Intercreditor Agreement and was also bound not to take any Enforcement Action as therein defined except as permitted by the Intercreditor Agreement.

Its argument in support was simple. Clause 9.2 of the Intercreditor Agreement says that Tele Columbus may pay a hedging liability if that action was permitted by clause 10 of the Intercreditor Agreement or the prior consent of the Majority Senior Lenders has been obtained. Clause 10 of the Intercreditor Agreement says that Tele Columbus can make payments to Hedge Counterparties in respect of liabilities under hedging agreements then due (provided that no payments were due from the Hedge Counterparty to Tele Columbus which were unpaid). Clause 3(c) of the Standstill Agreement (to which the Majority Senior Lenders subscribed) required the hedging transactions to be closed-out and declared that “the Closed-out Amount shall become due and payable” subject to the provisions of inter alia the Intercreditor Agreement. Accordingly clause 10 of the Intercreditor Agreement governs the position, and payment should be made to Trimast. The Standstill Agreement itself shows that this was the understanding of the parties because clause 3(c) provides that interest should accrue in respect of the liabilities owed “to each Hedge Counterparty”.

Tele Columbus says that this reading of the Intercreditor Agreement is wrong. It says that the relevant payment clause is not clause 10 but clause 9.6. It says that the termination of the Hedging Agreements pursuant to clause 3(c) of the Standstill Agreement is a “termination of [a] hedging transaction under the Hedging Agreements” and it says that that “[occurred] after the commencement of any Enforcement Action” because in the Intercreditor Agreement “Enforcement Action” include “the premature termination or close-out of any Hedging Liabilities”. The Cancellation Agreements constitute the termination of a hedging transaction after the commencement of the premature termination or close-out of a Hedging Liability. Tele Columbus submits that “close-out” is a process and not an event (demonstrated by the use of the concepts of “commencement of premature termination” and “premature termination”). Since the termination occurred after the commencement of the termination clause 9.6 governs the position.

Tele Columbus has an alternative route to the same conclusion. The definition of “Enforcement Action” in the Intercreditor Agreement includes “…the taking of any steps…in relation to the…reorganisation of [Tele Columbus] or any suspension of payments…of any indebtedness of [Tele Columbus]…”. It is submitted that the request made on 21 July 2009 for a “standstill” amounts to the taking of a step in relation to the reorganisation of Tele Columbus or a suspension of payments of its indebtedness. Since the Cancellation Agreements (which create the sum due and payable) came afterwards clause 9.6 governs the position.

Trimast argues that this analysis defies common sense. Its argument proceeds as follows. The liability to pay arises by virtue of the Standstill Agreement. The object of that Agreement (according to its recitals) was to embody a general agreement to refrain from taking action based on defaults. Action taken to close-out hedging transactions under Hedging Agreements pursuant to clause 3[(c)] was specifically not to constitute Enforcement Action for the purposes of the Standstill Agreement so that it makes absolutely no sense to treat it as if it did for the purposes of the Intercreditor Agreement, so as to engage the terms of clause 9.6. This is demonstrated by the requirement to pay interest to the Hedge Counterparties.

I reject this “reading back” argument. Clause 3(c)(i) of that Agreement says that the Closed-out Amount should become due and payable subject to the provisions of inter alia the provisions of the Intercreditor Agreement. So the question is: what do the provisions of the Intercreditor Agreement mean? It is not possible to construe the Intercreditor Agreement in the light of the Standstill Agreement. The Intercreditor Agreement has to be construed on its own terms. So the fact that the Standstill Agreement contemplated (in the context of providing for interest) that the liabilities were due to “the Hedging Counterparties” does not assist in determining whether that is actually so under Intercreditor Agreement.

But on the reading of the Intercreditor Agreement itself I hold that Trimast is right and Tele Columbus is wrong. These are my reasons:-

Subject to argument about the precise terms of the condition I would declare accordingly.