Strategic Value Master Fund Ltd v Ideal Standard Interntional Acquisition SARL & Ors

The Ideal Standard group manufactures and sells bathroom furnishings, fixtures and shower enclosures for residential, commercial and institutional buildings. It employs some 12,000 people in over 20 countries worldwide. It is owned, through Ideal Standard International Acquisition SARL (“the Company”), by private equity funds that are advised by Bain Capital Ltd (“Bain Capital”) and its affiliates. The Company is incorporated in Luxembourg.

In 2007, Bain Capital sponsored the acquisition of Ideal Standard by the Company which was newly incorporated for that purpose; and, as part of that transaction, the Company entered into the Senior Facilities Agreement (“SFA”) dated 3 October 2007. A number of companies within the Ideal Standard group were parties to it. They were incorporated in various jurisdictions; including Bulgaria, France, Japan, Korea, the USA, Egypt, Germany, Greece and Spain. Under the SFA, Bank of America NA and Banc of America Securities Ltd (collectively “Bank of America”) and Credit Suisse International (“Credit Suisse”) agreed to lend money to the Company and other members of the Ideal Standard group. Other lenders participated in the loan, among them Strategic Value Master Fund Ltd (“SVMF”). Between them Bank of America and Credit Suisse held two thirds of the loan. This made them “Majority Lenders” as defined by the SFA. SVMF holds interests in approximately 10 per cent of the loan. Following most of the events covered by the declarations sought in this litigation Bank of America and Credit Suisse sold their interests in the loan to two companies connected with Bain Capital. These two companies are the second and third defendants. Before the sale Bank of America and Credit Suisse had asserted that Events of Default had occurred under the SFA such as to entitle them to serve notice accelerating the loan. Following the sale the second and third defendants have purported to withdraw that notice and to have waived such Events of Default as might previously have occurred. The Company, however, denies that the alleged Events of Default occurred.

SVMF seek declarations to the effect that the Events of Default did indeed occur and that the purported withdrawal of the notice and waiver of the Events of Default were ineffective.

Mr Ewan McQuater QC and Mr Edmund King presented the case for the claimant. Mr David Wolfson QC and Mr Matthew Cook presented the case for the defendants.

The SFA is clearly a professionally drawn instrument. Excluding its Schedules it runs to 161 single spaced pages. It begins with a number of pages of definitions and general provisions. I will refer to them as necessary. Clause 1.2 (e) says that “… headings in this Agreement do not affect its interpretation”.

The amount of the loan was divided into a number of different categories:

Facility A, amounting to $150,000,000;

Facility B, amounting to $910,000,000;

The Acquisition Facility, amounting to $75,000,000;

A Revolving Credit Facility, amounting to €79,000,000-odd.

Clause 2.8 provides:

Clause 3 of the SFA set out the purposes for which each category of loan could be used. Clause 10 set out how each of the loans was to be repaid. Facility A was to be repaid in six monthly instalments over a period which began six months after the acquisition of the Ideal Standard group and ended seven years after the acquisition. Facility B was to be repaid in two instalments: 50 per cent on the seventh anniversary of the acquisition; and the remainder on the eighth anniversary of the acquisition. The Acquisition Facility was to be repaid on the seventh anniversary of the acquisition. The Revolving Credit was to be repaid at dates determined in accordance with clause 13. Each loan carried interest at a margin above LIBOR; or, in the case of a loan in Euro, EURIBOR. The margin varied depending on the ratio of net debt to EBITDA. But margin applied at the highest rate specified in the SFA while an Event of Default was continuing.

Clause 22 contained a number of financial covenants. Clause 22.2 contained a covenant by the Company to ensure that the ratio of Total Net Debt (as defined) to EBITDA (as also defined) would not exceed the ratio shown in a table contained in that clause. That ratio decreased over time. It also contained a covenant by the Company that the ratio of EBITDA to interest costs would be or exceed the ratio shown in another table contained in that clause. That ratio increased over time. Thus these undertakings, if met, would ensure that the Company became progressively less leveraged over time; and that its interest cover progressively increased over time.

EBITDA is a common acronym standing for “earnings before interest, taxes, depreciation and amortisation”. It is itself the subject of an elaborate definition in the SFA which describes it as “the consolidated profits of the Group from ordinary activities” after various adjustments (both positive and negative).

Whether these undertakings were met was to be tested at periodic intervals. If the Company was in breach of these undertakings, clause 22.5 enabled it to cure a breach by exercising what the SFA calls the Equity Cure Right. The clause begins as follows:

If the recalculation has the effect that the financial undertakings are met, then they are deemed to have been satisfied on the relevant test date. Clause 22.5 goes on to say:

Clause 23 contains a number of general covenants. They include clause 23.13 which provides, so far as material:

There are exceptions to this general prohibition, which are irrelevant for present purposes. Clause 23.18 provides, so far as material:

Clause 24 defines Events of Default. These include non-payment of amounts due. They also include breaches of other obligations, defined as follows:

Insolvency is also an Event of Default. This is dealt with by Clause 24.6 which so far as relevant reads:

Clause 24.18 deals with acceleration of the loans. It reads, so far as relevant:

Some reference to the definitions is necessary at this point. A “Utilisation” is the principal amount of a loan (see definitions of “Utilisation” and “Loan” in clause 1). It does not include accrued interest. A Default is continuing if it has not been remedied or waived (see clause 1.2 (a) (xvii)). Clause 25.7 provides that the Facility Agent must act in accordance with instructions given to it by the Majority Lenders and, if so instructed by the Majority Lenders, must refrain from exercising any right, power, authority or discretion vested in it. In the absence of instructions it may act (or refrain from acting) as it considers to be in the best interest of lenders.

Clause 30 deals with amendments and waivers. Clause 30.1 provides:

Clause 30.2 sets out exceptions to this general provision. Clause 30.2 (a) specifies certain amendments or waivers which require the consent of all lenders. Clause 30.2 (b) specifies certain amendments or waivers which require the consent of each lender directly affected by the amendment or waiver. These include:

Clause 30.4 says:

Clause 39 says that the SFA is governed by English law; and clause 40 gives the courts of England and Wales exclusive jurisdiction.

It is common ground that, absent a valid Equity Cure, the Company was in breach of its financial obligations under clause 22.2 as regards interest cover as at 30 September 2009, 31 December 2009 and 30 March 2010. The issue is whether the actions it took amounted to a valid Equity Cure. What it did was as follows. Ideal Standard International Holding Sarl (“ISI Holding”) withdrew € 75 million from a cash pool held by Ideal Standard Financial Services BVBA (“ISFS”). The cash pool is a centralised treasury arrangement into which group companies put their excess cash and from which other group members may make withdrawals for operating and capital expenditure purposes. ISI Holding used some € 45 million-odd to prepay a loan which it had taken from the Company. It used the balance of just under € 30 million to redeem PPPECs which it had issued to the Company. A PPPEC (which stands for profit participation preferred equity certificate) is a type of financial instrument commonly used by Luxembourgeois companies. It has a capital and an income element. The capital is treated for accounting purposes as a debt of the issuer. The income element is in part a fixed element akin to interest; and in part a profit participation amount, which is linked to the profits of the issuer. The effect of these two transactions was that ISI Holding owed no money to the Company; and that the Company received the whole of the € 75 million. The Company used the money it received as follows. € 45 million-odd went to prepay a loan which it had taken from its parent company Ideal Standard International Topco SCA (“Topco”). The balance was used to redeem PPPECs which it had issued to Topco. The effect of these two transactions was that the Company owed no money to Topco; and Topco now received the whole of the € 75 million. Topco is a company which is outside the Ideal Standard group (as defined by the SFA). The € 75 million was at its free disposal. Topco now lent the whole of the € 75 million to the Company. The Company immediately lent that amount to ISI Holding. ISI Holding deposited the money in the cash pool. All these transactions took place on the same day: 29 October 2009. As Mr McQuater says, the money started in the cash pool and ended in the cash pool: all on the same day. It was, to use his expression, “round-tripped”. However, it is not alleged that any of these transactions was a sham. In his evidence served on behalf of SVMF Mr Carr says:

Mr Carr thus acknowledges that the effect of the transactions was to give the Company “short term liquidity”; and his complaint seems to be that the Company did not have any “fresh injection of capital”.

It is also common ground that the Company’s liabilities exceeded its assets as shown on its balance sheet. But it is equally common ground that an excess of liabilities over assets is not a ground upon which a corporation incorporated in Luxembourg can be wound up. There is no evidence that the Company traded in any other jurisdiction; and in view of its obligation in clause 23.18 not to undertake commercial activities, it is unlikely that it did.

On 2 February 2010 the Facility Agent, on the instructions of the then Majority Lenders, gave notice under clause 23.18. The notice alleged that the Equity Cure was ineffective to cure the Event of Default; and also asserted a further Event of Default; namely that the Company was insolvent. It will be recalled that one of the available options under clause 23.18 was to make the loan immediately repayable. However, that was not the chosen option. Instead the Majority Lenders exercised a different choice. The notice instead declared that all sums outstanding under the SFA “shall immediately become payable on demand”. In other words, the loans were not immediately repayable; but would become so if and when a demand was made.

In the following months the Company’s solicitors complained bitterly that the service of the notice of acceleration was causing untold financial damage to the Company, which they spelled out in detail. But the Majority Lenders would not withdraw the notice. Ultimately the impasse was resolved by the buy-out of their interests.

Following the change of identity of the Majority Lenders the new Majority Lenders gave instructions to the Facility Agent. These instructions were contained in a letter dated 30 June 2010. The Company was an addressee of the letter and was described by paragraph 4 as “a party to this letter in order … to have the benefit of and to be able to rely upon the provisions of paragraph 3.” Paragraph 3 of the letter contained the instructions to the Facility Agent. It instructed the Facility Agent to:

By paragraph 5 (c) of the letter the Company waived all claims against the Facility Agent; and by paragraph 6 it agreed to pay the costs of the Facility Agent in complying with the letter.

By letters dated 30 June 2010 and/or 8 October 2010 the Facility Agent complied with those instructions.

There are four main issues for me to decide:

Was the Equity Cure effective?

Was the Company insolvent within the meaning of the SFA? and

If the answer to either of those questions is “yes” were the Majority Lenders entitled (a) to waive the breaches of the SFA and/or (b) to withdraw the Default and Acceleration Letter and/or (c) to enter into a binding agreement not to make a demand for payment based on the Events of Default specified in it?

Did the Majority Lenders in fact enter into an agreement not to make a demand based on those Events of Default?

Mr McQuater QC commended the recent decision of the Supreme Court in Re Sigma Finance Corp [2010] BCC 40. Having referred to a number of well-known authorities on the interpretation of commercial contracts Lord Mance said:

Lord Collins said:

It is, of course, well-known that a court should not adopt an interpretation of a contract that flouts commercial common sense. But the flouting of commercial common sense is not a pre-condition to a consideration of the commercial consequences of rival interpretations. In Barclays Bank plc v HHY Luxembourg SARL [2010] EWCA Civ 1248 Longmore LJ said:

I entirely accept this as a principle of interpretation. Nevertheless I must also bear in mind the important warning of the Court of Appeal in Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd [1990] QB 818, 890:

Mr McQuater’s submissions on the commercial purpose of the clauses on which he relied concentrated on them entirely from the perspective of the lenders; and minority lenders at that.

Mr McQuater stressed the commercial importance of the financial obligations. They were essential for the lenders to be able to monitor the financial health of the Company and the group. If the financial obligations were not met the Equity Cure gave the Company a chance to put things right; but to say that things were put right by “round-tripping” money would destroy the effectiveness of the test. As he said more than once the overall effect of what the group did was that there was no new money. And if there was no new money it could not be said that the commercial purpose of the financial obligations and the safety valve contained in the Equity Cure had been met. This submission corresponds with the complaint that Mr Carr made in his evidence. As a matter of generality, there is considerable force in this submission. However, the commercial purpose of the clause must be found in the SFA itself, interpreted with the help of any admissible background. There are a number of features of the Equity Cure that need to be examined.

The first point to note is that a breach of the financial undertakings can be cured by borrowing more money. This is described in 22.5 as a Cure Loan. A company in financial trouble would not usually be regarded as improving its financial health by going further into debt, particularly where the new loan is a loan of capital used for the notional cover of interest. It would be like paying one’s mortgage interest by using a credit card. Second, the principal amount of the loan (referred to in the clause as the Cure Amount) is added to EBITDA. Money borrowed by a company would not normally be regarded as part of its earnings (or in the words of the definition in the SFA as contributing to the consolidated profits of the group). Third, although the amount of the loan is added to EBITDA, it is not included in Total Debt. Thus although the cash received is added to the Company’s earnings, the corresponding liability to repay the debt is not added to its liabilities. (I note also that if the cure takes the form of a new subscription for shares, the amount raised is also added to EBITDA and is not treated as part of the Company’s capital). Fourth, the recalculation is to be made “solely” for the purpose of ascertaining compliance with the financial undertaking. Fifth, the Cure Amount will be considered as part of EBITDA for four consecutive Relevant Periods. This applies whatever happens to the cash.

For all these reasons the snapshot of the Company’s financial health following the operation of the Equity Cure, if effected by means of a loan, would give a very distorted image. These features make it very difficult, in my judgment, to approach the clause on the basis of some a priori notion of its commercial purpose. Although in his written submissions Mr McQuater said that the whole point of an Equity Cure was “to improve the Company’s financial strength”, he modified that in the course of his oral address by saying that an improvement in the Company’s liquidity or cashflow could also meet the commercial purpose of the clause. Mr McQuater’s original formulation of the commercial purpose of the clause cannot, in my judgment, live alongside the explicit recognition in the clause that an Equity Cure can be effected by borrowing more money. So far as the modified formulation is concerned, as I have said Mr Carr’s evidence acknowledges that the Company’s liquidity was improved by the transactions, albeit on a short-term basis.

Mr McQuater’s argument stresses the need for “new money”. However, that is not what the clause says. What it requires is “additional … Debt”. Moreover, it seems to me that the existence (or otherwise) of additional debt does not depend on what the Company does with the money it has borrowed. Nor does debt cease to be debt because the borrowed money is the subject of an onward loan. Suppose that the Company borrows money from a bank, which is debited to its loan account. That, as it seems to me, would satisfy the requirement of “additional … Debt”. Suppose it then transfers that money to its current account; and suppose that the current account is in credit. In point of legal analysis it has re-lent that money to the bank, with the result that there are two debts: one owed by the Company to the bank, and the other owed by the bank to the company. I cannot see that the original bank loan would cease to be additional debt because the cash was deposited in the Company’s current account, even if the loan and the deposit took place on the same day. Suppose now that the Company’s current account was overdrawn, and the loan was used in reduction of the overdraft. Does that make any difference? I cannot see why it should; although the amount of the loan came from the bank’s funds and immediately went back into the bank’s funds. It would be possible to depict these hypothetical examples as a circular and simultaneous flow of money from the bank, through the Company and back to the bank, but I do not think that this alters the analysis. Moreover, the SFA itself provides for revolving credit. Revolving credit will often entail the making of short term loans, where on repayment of one such loan it may be immediately replaced by another. This is recognised in clause 10.2 of the SFA. Thus the SFA itself contemplated that there could be a succession of loans repaid and re-lent immediately. In a sense this money would have been “round-tripped”; but the SFA treats it as entirely legitimate. Accordingly, I do not consider that Mr McQuater’s description of the money as having been “round-tripped” is an answer to the problem.

In the present case after the Company had redeemed the PPPECs issued to Topco those PPPECs were not re-issued. Thus the Company was no longer bound to allow Topco to participate in its profits, in its capacity as holder of the PPPECs. The PPPECs were replaced with a loan. In place of owing Topco some € 45 million-odd, it owed Topco € 75 million. The financial position of the Company had indeed changed. In my judgment these transactions fell within the terms of the Equity Cure. The debt that the Company owed Topco was “additional” debt because:

The debt did not exist before 29 October 2009; and

The amount of the Company’s debt to Topco was greater than its previous debt.

Mr McQuater had two other subsidiary attacks on the Equity Cure. The first was that the redemption of the PPPECs was a breach of clause 23.13. The argument was that the PPPEC included an income element and any interest payable in respect of that element was treated as a dividend. Thus redemption of the PPPECs amounted to the payment of a dividend or the making of a distribution, both of which were prohibited. I do not accept this argument. The fact that income is (or may be) treated as a dividend when paid does not, in my judgment, alter the nature of the transaction of redemption. The buyer of shares traded on a stock exchange may buy the shares cum div where the transaction takes place near the time of declaration of a dividend. The dividend, when paid, will undoubtedly be a dividend; and will represent income in the hands of its recipient. But the price paid for the shares will be a capital sum. The capital value of the shares will reflect the entitlement to the dividend, but that is simply one of the bundle of rights that the buyer buys. In the present case the PPPECs were redeemed for a capital sum. The redemption is not, in my judgment, caught by clause 23.13.

The second subsidiary attack was that the “round-tripping” of the money amounted to a breach of clause 23.18. This clause prohibited activities and incurring liabilities except for “business as a holding company” or “normal treasury and holding company activities”. The difficulty with this argument is two-fold. In the first place there is no evidence about what is comprised within the business of a holding company or what are “normal” treasury and holding company activities. Second, as Mr Wolfson pointed out, the SFA itself contemplates short term loans on a revolving credit basis. These loans would be drawn down by the Company. Since the Company is itself prohibited by the SFA from trading it must necessarily pass those monies round the group (or deposit them into the cash pool). The nature of the revolving credit means that short term loans are repaid and may be immediately replaced with fresh short term loans, which may be for the amounts repaid. For the purposes of the SFA this must have been regarded as a permitted activity of the Company. I do not therefore accept this argument either.

It follows that the attacks on the Equity Cure fail.

The question under this head is whether the English “balance sheet” test of solvency applies to the Company even though it is incorporated in Luxembourg and does not undertake any activities in England and Wales. Mr McQuater says that it does: Mr Wolfson says that it does not. I repeat, for convenience, the operative words of the clause:

Mr McQuater said that since the SFA was governed by English law, English law would always be an “applicable” law. It was the law that applied to the SFA. However, I do not consider that “applicable” means applicable to the contract. Rather, in my judgment, it means the law applicable to the company in question. The law that is applicable to a company will be, in the first place, the law of its place of incorporation; and, in addition, the law of any other jurisdiction which has the power to wind it up (or initiate any equivalent insolvency process). As far as the commercial purpose of the clause was concerned, Mr McQuater emphasised the need for the lenders to have certainty; and that since all the lenders at the inception of the SFA were English they would naturally have been concerned to apply the English test of insolvency, which included the balance sheet test. There are, in my judgment, two answers to this point. First, this appreciation of the commercial purpose of the clause looks at it only from the perspective of the lenders. As Mr Wolfson said, why should the board of directors of a group company incorporated and trading in, say, Bulgaria or Japan be looking over their shoulders at the English test of insolvency? Second, the lenders’ interests in the loans were transferable. There is nothing in the SFA to prevent those interests from being transferred to assignees with no connection to England and Wales, as has indeed happened.

In my judgment whether a company is, or is deemed to be, insolvent is to be determined according to the system or systems of law relevant to that company.

The first thing to note about the giving of a notice under clause 24.18 is that it can only be given by the Facility Agent. None of the lenders are entitled to give notice themselves. Second, the Facility Agent must comply with the instructions of the Majority Lenders. If they instruct him to serve notice under that clause, then the clause itself says that he “shall” serve it. But conversely under clause 25.7 if the Majority Lenders instruct him not to serve a notice, then he must not do so. Although clause 24.18 envisages that the Facility Agent “may” give notice under that clause, and clause 25.7 (d) envisages that in the absence of instructions he may act in the best interests of all the lenders, in practice it is the Majority Lenders alone who will decide whether or not to give notice. Third, as mentioned, clause 24.18 gives a range of options open to the Majority Lenders. Under clause 24.18 (b) they may declare that the whole of the loans, including accrued interest, is payable immediately. Under the same sub-clause they may exercise that right in relation to part of the loan only. Under clause 24.18 (c) they may declare that the whole of the loan becomes immediately payable on demand. Likewise they may exercise that power in relation to part of the loan only. Unlike clause 24.18 (b) the power under clause 24.18 (c) does not apply to interest. Fourth, once the power under clause 24.18 (c) has been exercised a demand triggering immediate liability to repay can only be made by the Facility Agent “on the instructions of the Majority Lenders”. Thus any discretion that the Facility Agent might have had to serve the notice is removed when it comes to making the demand itself.

One point of contention between the parties was whether the service of notice under clause 24.18 (c) meant that the loan was payable on demand in substitution for the repayment timetable set out under clause 10; or whether it was payable on demand in addition to that timetable. If the former then the Company would have no liability to repay any part of the loan unless and until a demand was made. If the latter, then the Company would have to continue to make the scheduled repayments in the absence of a demand for more. The scheduled repayments for Facility A were due under clause 10.1 at six monthly intervals. In the case of Revolving Credit, each loan had to be repaid at the end of its Interest Period. This was defined by clause 13.2 as a period of one, two, three or six months; in each case selected by the borrower. It is not difficult to imagine that a minority lender would need some certainty about repayment of a loan. If the Majority Lenders were empowered, by the service of notice under clause 24.18 (c), to remove from him his entitlement to be repaid on a fixed date, and to make him wholly dependent on their discretionary decision whether or not to make a demand, I would have expected clear words to that effect in the SFA. There are none. On the contrary such clue as there is is given by clause 30.4 which says that the rights and remedies of each Finance Party “are cumulative”. In addition, Mr McQuater accepted that, with the consent of all affected lenders, the Majority Lenders could waive or withdraw a notice given under clause 24.18 (c). If the effect of such a notice was to remove all liability to comply with the scheduled repayments, the question would then arise: if such a notice were withdrawn, would the timetable for repayment be automatically reinstated; or could a minority lender refuse to consent to the waiver or withdrawal of a clause 24.18 (c) notice unless the timetable were varied? The SFA is silent on the point. It cannot have been intended that a minority lender could dictate terms about variation of the repayment schedule; and the need for making any implication about automatic reinstatement of the contractual timetable is avoided if the effect of service of a clause 24.18 notice is not to displace it but to add a cumulative right or remedy.

In my judgment, therefore, the effect of service of notice under clause 24.18 (c) is not to substitute repayment on demand for liability to make the scheduled repayments; but to give the Majority Lenders an additional right to make demand.

At one point in the argument Mr McQuater appeared to me to be aligning himself with Lady Macbeth: “what’s done is done” and “what’s done cannot be undone”. However, as I understood it he accepted that, with the consent of all affected lenders, notice given under clause 24.18 (c) could be withdrawn or waived. On that basis, the giving of such a notice is not irreversible. It can be withdrawn. The real question, then, is: is the consent of all affected lenders necessary before the Majority Lenders can withdraw a notice?

Mr McQuater’s argument is that the withdrawal of a notice is an amendment or waiver of a “term of the Finance Documents” falling within clause 30.1 (a); and, moreover, is an amendment or waiver which relates to “any extension of the … maturity of …any commitment of and Lender”. Thus the amendment or waiver is ineffective without the consent of each affected lender.

Mr Wolfson points out that the SFA deals with waiver in a number of different places. Clause 1.2 (xvii) of the SFA refers to a Default being continuing “if it has not been remedied or waived”. This clearly contemplates that a Default may be waived. Clause 22.5 says that if the financial undertakings are not complied with on any Quarter Date, but are complied with on the next Quarter Date, then any previous breach and resulting Event of Default are “deemed to have been waived”. This clearly contemplates that both a breach and an Event of Default may be waived. Notice under clause 24.18 may only be given if an Event of Default “is continuing” (i.e. it has not been remedied or waived). Clause 30 itself distinguishes between two types of waiver. The first is a waiver of “any term” of the Finance Documents, which is referred to in clause 30.1. The second is a waiver of “rights and remedies” which is dealt with by clause 30.4. Thus for the purposes of the SFA there are at least four types of waiver:

Waiver of a breach;

Waiver of an Event of Default;

Waiver of a right or remedy; and

Waiver of a term of the Finance Documents.

What, asks Mr Wolfson, is the term of the Finance Documents that is said to have been waived? It cannot be clause 24.18 (c) since that term remains in being; and can be invoked by the Majority Lenders if there is an Event of Default in the future. The better analysis is to regard clause 24.18 as giving the Majority Lenders a series of rights. The invocation of that clause is the exercise by the Majority Lenders of a right which, for practical purposes, is given to them alone. Since clause 2.8 says in terms that the rights of each party is a separate right, and clause 30.4 says that a party can waive those rights which he alone has, it must follow that the Majority Lenders are empowered to withdraw a notice without the consent of other lenders. This conclusion, he says, gains added strength from a consideration of the shape of the SFA as a whole. In practice, only the Majority Lenders can decide to give notice under clause 24.18. They can waive a breach or an Event of Default which would preclude them from giving such a notice. If they do not waive a breach or an Event of Default, but decide to give notice under clause 24.18, it is they alone who can decide which of the various rights in clause 24.18 they choose to invoke. If they choose to invoke the right contained in clause 24.18 (c) it is they alone who can decide whether to make a demand for payment. The right to make a demand for payment is just that: a right. So it follows that the Majority Lenders can decide not to make a demand and, moreover, can agree with the Company that they will not do so, at all events in relation to past Events of Default. If the Majority Lenders have all these rights, it is illogical and makes no commercial sense to conclude that they do not have the right to withdraw a notice given under clause 24.18 on their instructions.

Mr McQuater, on the other hand, says that the supposed dichotomy between waiver of a right and waiver of a term is a distinction without a difference. In support of this submission he relies on the decision of the House of Lords in Banning v Wright [1972] 1 WLR 972. In that case a tenant had sub-let without consent in breach of covenant. The lease contained an option to renew if the rent was paid and the covenants were observed. The landlord started proceedings for forfeiture. The proceedings were compromised. As part of the compromise the tenant paid the landlord £3,000: £1,250 for continuance of the unauthorised sub-tenancies and £1,750 for allowing tenant to retain the option to renew despite the breach of covenant. The issue was whether the £1,750 was consideration “for the variation or waiver of any of the terms of the lease”. This phrase appeared in section 22 (4) of the Finance Act 1963. The issue was, therefore, one of statutory construction. The first question was to decide what the £1,750 was paid for. Lord Hailsham LC examined the correspondence and said:

He then turned to the second question which was whether the sum was properly described as consideration “for the variation or waiver of any of the terms of the lease”. As to that he said:

Having thus defined the term “waiver” he applied it to the facts. He said:

In the Court of Appeal, affirming the decision of Foster J, Russell LJ (with whom Sachs and Buckley LJJ had agreed) had distinguished between waiver of a breach and waiver of a term. Lord Hailsham was unimpressed with this distinction. He said:

He then considered an alternative way of looking at the case. He said:

Lord Reid also disagreed with Russell LJ’s distinction between waiver of a breach and waiver of a term. He said:

Lord Morris of Borth-y-Gest dissented. He pointed out that after the compromise the tenant was still bound by the covenants in question, all of which remained in full force and effect. He continued:

He applied the same analysis to the option to renew. He said:

He concluded:

Lord Simon of Glaisdale agreed with Lord Hailsham. He added:

Lord Salmon agreed with Lord Hailsham.

Mr McQuater argues with force that what has happened in the present case is indistinguishable from what happened in Banning v Wright; and which was held to amount to a waiver of a term of the lease. He says that there is no distinction to be drawn between waiver of a term and waiver of a breach of a term. He relied particularly on Lord Hailsham’s alternative (and simpler) analysis. Before the Notice of Acceleration was withdrawn (assuming it was validly withdrawn), the loans were repayable on demand; after the Notice was withdrawn they were not repayable on demand. This must be either because the contractual rights and obligations of the parties had been amended by agreement, or because some part of them had been waived. Lord Hailsham preferred the latter analysis, but on either view, the terms of the Finance Documents have been either “amended” or “waived”.

Mr Wolfson says that it is clear that clause 30.1 which deals with waiver of a “term” and clause 30.4 which deals with waiver of a “right or remedy” belonging to an individual lender are intended to deal with distinct matters. In order to make sense of the distinction being drawn by the SFA, the same wide interpretation given to the term “variation or waiver of any terms of the lease” in the Finance Act 1963 in Banning v Wright cannot be given to waiver of a “term” in clause 30.1, since that would mean that both clause 30.1 and clause 30.4 would overlap in relation to the waiver of a right arising from a term. Accordingly, he submits that the only construction that can be put upon waiver of a “term” in clause 30.1 which maintains the distinction that the parties have drawn between waiver of a “term” (30.1 and 30.2) and waiver of a “right or remedy” (30.4) is to construe clause 30.1 as applying where the waiver extends beyond the rights of the waiving party. Thus, if a lender (whether a Majority Lender or not) waives its own rights, then clause 30.4 applies. However, if the Majority Lenders wish to waive the rights of all relevant lenders on an issue, then clauses 30.1 and 30.2 apply.

In Banning v Wright the House of Lords were considering the meaning of the phrase “waiver of any of the terms” in the context of a particular statutory provision. I am construing the phrase in the context of the SFA. The contexts are different; and, as has frequently been said: in law context is all. In view of the fact that five judges (Foster J; Russell, Sachs and Buckley LJJ and Lord Morris) all preferred a construction which differed from that favoured by the four judges in the majority in the House of Lords it is, I think, impossible to say that the construction favoured by that majority is the only possible meaning that the phrase can bear. Moreover Lord Hailsham himself said that “When a contract is broken the injured party in condoning the fault may be said either to waive the breach or to waive the term in relation to the breach.” Lord Hailsham cannot, therefore, have meant that it is a legal solecism to speak of waiving a breach. Lord Simon also emphasised that a waiver is the giving up of a right. So it cannot be a legal solecism either to speak of waiving a right.

In the present case the draftsman of the SFA has drawn clear distinctions between waiving breaches, waiving Events of Default, waiving rights and remedies and waiving terms. I agree, therefore, with Mr Wolfson that the broad meaning adopted by the majority of the House of Lords in Banning v Wright cannot be directly transposed into the SFA. Which of the possible meanings should be adopted is, in my judgment, constrained by the commercial purpose of these provisions of the SFA. In my judgment the limiting factor proposed by Mr Wolfson is the one that makes the best commercial sense: viz. that a party may give up his own rights but not other people’s. This interpretation ties in with clause 2.8. In my judgment giving up the right to rely on a particular invocation of the rights afforded to the Majority Lenders by clause 24.18 is not a waiver of that term. That term remains in being and is available to be used on future occasions. I hold therefore that clause 30.1 is not engaged, with the result that the exceptions to it listed in clause 30.2 are not engaged either.

It follows, therefore, that the notice was validly withdrawn.

I answer this question on the assumption that I am wrong in concluding that the notice given under clause 24.18 was validly withdrawn. I must assume that although the Majority Lenders purported to withdraw it, the withdrawal was ineffective because not all affected lenders consented to the withdrawal. The agreement not to make a demand must be found (if at all) in the letter of instruction of 30 June 2010. That letter does, in my judgment, amount to a contract. It was plainly intended to create enforceable obligations (hence paragraph 4 of the letter); and the Company gave consideration (see paragraphs 5 and 6 of the letter). The question is: what was the content of the agreement?

The Majority Lenders agreed to instruct the Facilities Agent:

To waive the breaches;

To waive the Events of Default;

To “revoke and withdraw” the notice of acceleration

To notify the Company of the waivers and withdrawal.

On the assumption that I am making, the agreement would have been effective in so far as it related to the waiver of the breaches and the waiver of the Events of Default. However it would have been ineffective under the SFA in so far as it related to the withdrawal of the notice. It was clearly drafted on the assumption that the withdrawal would be effective; an assumption that in the event would have been falsified. How is the court to approach an agreement when the underlying assumption on which it is based is wrong?

In Anglo Continental Educational Group (GB) Ltd v Capital Homes (Southern) Ltd [2009] CP Rep 30 Arden LJ said of an agreement for the sale of land with development value:

In my judgment that principle applies here. I would therefore interpret the agreement on the basis that what it means is that as between the Company and the Majority Lenders the notice will be treated as if it had been withdrawn. If the agreement is interpreted in that way it must follow, as a matter of necessary implication, that the Majority Lenders would not make any demand for payment based on that notice. Such an interpretation would make that part of the agreement effective rather than ineffective; and produces a result that the parties are likely to have agreed over an improbable result. I hold therefore, that if I am wrong in deciding that the notice was validly withdrawn, the Majority Lenders have made a binding agreement not to make any demand under it.

It follows from my conclusions that I should refuse to make the declarations sought in paragraphs 1 to 11 of the claim for relief.