Christophorus 3 Ltd & Anor, Re

On 23 January 2014 I heard an urgent application by the directors of a company called Christophorus 3 Limited (“the Company”) for the following relief:

The application was supported by two witness statements of Andrew MacCallum, a director of the Company, dated 20 and 22 January 2014 respectively, and a further witness statement of Mr Downs, one of the Proposed Administrators, dated 20 January 2014.

The application was urgent because the relief sought formed part of an elaborate scheme for the restructuring and refinancing of the predominantly German-based Auto-Teile-Unger (“ATU”) group. The scheme had been devised as the only practicable means of saving the ATU group from compulsory insolvency, and a number of steps (set out later in this judgment) had already been taken towards its implementation. The making of an administration order in this jurisdiction, and the entry by the Proposed Administrators into the SPA, were essential to the success of the scheme. It was made clear to me that there was no “plan B” to fall back upon if the scheme was for any reason unable to proceed.

A crucial requirement of the scheme was that the assets to be sold under the SPA (which included, through an intermediate holding structure, the shares in the operating companies of the ATU group) should be sold “clean”, released from all the existing indebtedness of the group secured on them. Achievement of this objective depended, among other things, on the granting of effective releases from the relevant existing liabilities by the Security Agent under and in accordance with the terms of an Intercreditor Agreement dated 15 October 2010 (“the ICA”). The Security Agent, Morgan Stanley Bank International Limited (“MSBIL”), was in principle willing to give the necessary releases, pursuant to the provisions of clause 14.2 of the ICA. Nevertheless, in view of some possible doubts about the interpretation of the clause, MSBIL reasonably required the protection of a court order authorising it to proceed before it gave the releases, which in turn had to precede entry into the SPA.

Definitive resolution of the issues of construction raised by clause 14.2 of the ICA would have required the commencement of separate proceedings, with representative parties joined to argue for and against the rival interpretations. The court would then have been able to grant declaratory relief binding on all interested persons. Time did not permit this course to be followed, but, as a second best, arrangements were made for MSBIL to be separately represented, and counsel for the Company and MSBIL between them ensured that the rival arguments were properly drawn to my attention. I was also asked by counsel for MSBIL (Mr Richard Snowden QC, leading Mr Ben Shaw) to provide a reasoned judgment on the construction of the clause as part of my decision whether to grant the relief sought.

In the event, I heard argument at the hearing on 23 January from Mr William Trower QC (leading Mr Marcus Haywood) on behalf of the applicants, from Mr David Allison on behalf of the Proposed Administrators, and from Mr Snowden QC on behalf of MSBIL. At the end of the hearing, I said I was satisfied that it would be appropriate to grant the relief sought, and that MSBIL had power under clause 14.2 both to grant the necessary releases and to request the Company (through the administrators) to enter into the SPA. An administration order was therefore duly made, and (so far as I am aware) the implementation of the scheme then proceeded as originally planned.

Since the background to the scheme is a little complex, and the questions of construction of clause 14.2 are not entirely straightforward, I said I would prefer to give the reasons for my decision on those questions in writing at a later date. The parties agreed that this would be acceptable. This judgment now contains my reasons.

The ATU group was founded in 1985. It has operating subsidiaries in Germany, Austria, the Netherlands, the Czech Republic, Switzerland and Italy. In September 2013 it had 646 branches and employed approximately 11,000 people. The core business of the group is the installation of automotive replacement parts, tyres and maintenance items, and the sale of automotive merchandise for most vehicle models. The main operating entity in the group has at all material times been a German limited partnership called A.T.U. Auto-Teile-Unger Handels GmbH & Co. KG (“Handels”). Handels, in turn, holds the shares in the group’s individual operating companies.

Before the restructuring with which I am now concerned, the ultimate holding company of the group was a company incorporated in Luxembourg, which indirectly owned Handels through two intermediate holding companies incorporated in Germany, to which it will be sufficient to refer as “Holding” and “Investment” respectively.

The main external financing arrangements of the ATU group comprised:

The ranking and priority of the RCF, the Senior Notes and the Junior Notes are governed by the ICA. Under the terms of the ICA, the Senior Liabilities (comprising the sums due under the RCF and the Senior Notes Indenture) rank first, followed by the Junior Liabilities (comprising the sums due under the Junior Notes Indenture). As between the Senior Liabilities, by virtue of a Recoveries Sharing Agreement also dated 15 October 2010, the sums due under the RCF rank above the Senior Notes. The liabilities under the RBFA are not subject to the contractual provisions of the ICA, but for reasons which I need not go into it is common ground that they have priority, in practice, over the sums due in respect of both the Senior and the Junior Notes.

The ICA is governed by English law. The parties to it include MSBIL, both as facility agent for the Senior Priority Lenders and as security agent for the Secured Parties. Under the terms of the ICA:

As matters now stand, it is not possible for the Junior Noteholders, any intra-group lenders or other subordinated creditors to give instructions or directions to MSBIL in its capacity as the Security Agent while the Senior Liabilities remain outstanding.

Since at least the beginning of 2013 the ATU group has been experiencing serious financial difficulties. During 2013 various attempts were made to secure refinancing of the group’s debts, but these efforts all proved unsuccessful. They included a significant marketing process undertaken by Lazard & Co., Limited (“Lazard”), following which no formal indicative bids were made for all or any part of the group. As part of that process, in October 2013 Lazard was instructed to provide an independent valuation of the group, which demonstrated that there was a substantial deficiency with regard to the Senior Noteholders, and that even if the group were valued as a going concern on a debt free/cash free basis, such “enterprise value” was materially lower than the aggregate amounts due under the RCF, the RBFA and the Senior Notes Indenture. On any view, therefore, the Junior Notes are worthless.

As Mr Downs explains in his evidence, his colleague Peter Spratt, as one of the Proposed Administrators, was given the opportunity to review and comment on the scope of the marketing process undertaken by Lazard. Having done so, he was satisfied that the process was comprehensive, thorough and proper. Lazard’s valuation was also reviewed by Mr Downs, who was satisfied that the assumptions made by Lazard were reasonable and fair.

Some 55% of the Senior Notes are beneficially owned by Centerbridge Partners Europe LLP, through a Luxembourg company. In the early summer of 2013, Centerbridge approached the ATU group with a view to formulating its own restructuring proposals. On 26 June 2013 it signed a non-disclosure agreement, and agreed not to trade debt securities in the group. Various professional advisers were appointed, and in mid-September 2013, following negotiations, Centerbridge agreed to provide the group with interim financing to address its short term liquidity needs and working capital requirements, prior to the finalisation of a comprehensive restructuring solution. The interim financing was provided pursuant to the RBFA, which had been entered into on 28 August 2013.

Meanwhile, on 15 July 2013, the Company was incorporated in England and Wales as a wholly-owned subsidiary of Handels. It seems clear that the primary, if not the only, reason for incorporating the Company in England and Wales was to enable advantage to be taken in due course of English insolvency law and procedure, including in particular the administration regime in Schedule B1 to the Insolvency Act 1986 and the ability of administrators to enter into “pre-pack” sales of a company’s assets. It was also essential, as I shall explain, for the Company to begin its life as a subsidiary of Handels, even though it was destined to become the vehicle for disposing of the assets of the group.

On 5 December 2013, the Senior Noteholders who agreed to the restructuring proposal (together beneficially owning more than 80% of the outstanding principal amount of the Senior Notes) entered into a Lock-Up Agreement to ensure that the implementation of the restructuring would occur as soon as practicable on the agreed terms.

On 18 December 2013, the Company entered into a share purchase agreement with the Luxembourg holding company of the group, under which the Company agreed to acquire all of the shares in Holding. This acquisition was subject to a condition precedent, which was waived on 15 January 2014. At that point, therefore, the Company moved up the group hierarchy and became an intermediate holding company placed above Holding.

On 14 January 2014, the Company acquired an inter-company loan receivable in the sum of €102,697,892.01 (“the ICL”) for a purchase price of €1 (being its fair market value) and provided security over the ICL in favour of certain of the group’s existing lenders.

On 14 and 15 January 2014, the Company also entered into pledge agreements (governed by German law) under which:

Also on 15 January 2014, the Company entered into an Obligor Accession Deed acceding to the terms of the ICA, with the intention that it should thereby become an Obligor as defined in the ICA.

These steps having been taken, the scene was set for the next stage in the restructuring plan. That stage comprised the placing of the Company into administration, and the sale by the Company (through the Proposed Administrators) of all the Company’s assets, including the shares in Holding, to ATU Luxembourg for a nominal consideration. ATU Luxembourg (“Bidco”) is a wholly owned indirect subsidiary of a company recently incorporated in the Cayman Islands (“Topco”) that will, as a result of completion of a consent solicitation process initiated in January 2014, be indirectly owned by all of the Senior Noteholders. For present purposes, it is unnecessary for me to describe the precise details of the proposed new corporate structure and the refinancing of the group’s debt. It is enough to say that, if the SPA goes ahead, and if the relevant companies are effectively released from their current indebtedness, the group will receive new investment of €109 million, a substantial proportion of the group’s indebtedness will be replaced with equity participation in Topco and Holdco (another Cayman company interposed between Topco and Bidco), and both the RCF and the €25 million outstanding under the RBFA will be repaid in full. There will be nothing for the Junior Noteholders, but the evidence before me clearly establishes that they no longer have any prospect of receiving a return in any form of enforcement or insolvency process. Indeed, a liquidation analysis conducted for the Company by Schultze & Braun estimates that in a liquidation the Senior Noteholders could expect to receive only 3.72% of their outstanding debt.

As I have explained, it is essential to the working of the scheme that MSBIL, in its capacity as the Security Agent under the ICA, will be in a position to grant an effective release to the relevant entities within the group from all of their Liabilities (as defined in the ICA). Those liabilities include all amounts owing in relation to the Senior Notes and the Junior Notes down to the date of release, the Transaction Security (as defined in the ICA), and all associated guarantee liabilities. The release will be implemented by the Security Agent, acting on the instructions of the Senior Notes Trustee, which will in turn be acting on the instructions of the consenting Senior Noteholders, including Centerbridge, being holders of at least 50.1% of the Senior Notes.

So far as material, clause 14.2 of the ICA reads as follows:

It is clear that any release by the Security Agent will be given after the happening of an Enforcement Action, which is widely defined in clause 1.1 of the ICA. Accordingly, the power of the Security Agent to give a release depends on satisfaction of the threshold condition expressed in the words “if any assets are sold … by an Obligor at the request of the Security Agent … as a result of … a disposal by an Obligor after any Enforcement Action”. This therefore raises the question whether, at the time of the SPA, the Company will be an “Obligor” within the meaning of the clause. If it will be, I see no reason to doubt that the threshold condition will be satisfied and the power to give a release will in principle be exercisable by the Security Agent.

Assuming the threshold condition to be satisfied, a similar issue then arises under sub-paragraph (b) of the clause. The Security Agent may only execute or enter into a release:

It is convenient at this point to set out the definition of “Obligor” in clause 1.1 of the ICA. It means:

Clause 18.10 is headed “New Obligor”, and provides as follows:

There is no doubt, in my judgment, that the Company thereby became a party to the ICA as an Obligor. The question which has given rise to doubt, however, is whether the Company retained that status after it ceased to be a subsidiary of Handels. That is the first question which I need to decide.

The second question which arises is much simpler to identify. Where there is “a sale of all or substantially all of the assets of the Group”, as in the present case, the proviso to clause 14.2 requires, so far as relevant, that the sale “shall be … implemented under any court approved process”. The question, in short, is whether a sale by the Proposed Administrators, following their appointment by the court, will be a sale implemented under a court approved process within the meaning of the proviso. If not, the further question arises whether the court should give its approval to the sale.

I will now consider these questions in turn.

As I have explained, the definition of “Obligor” in the ICA requires any new Obligor to be a subsidiary of Handels at the time when it becomes a party to the ICA by execution and delivery to the Security Agent of an Obligor Accession Deed. It is clear that this condition was satisfied when the Company executed the necessary deed on 15 January 2014, but it ceased to be satisfied when, later the same day, the Company was moved up the group structure to become an intermediate holding company. Can it therefore be said that the Company’s status as an Obligor came to an end when it ceased to be a subsidiary of Handels?

In my judgment a number of factors strongly suggest that this question should be answered in the negative.

First, and most obviously, that is not what the definition of Obligor says. On a natural reading, the condition of being a subsidiary of Handels has to be satisfied at the time when the company in question becomes a party to the ICA by executing an Obligor Accession Deed. Once it has become a party, however, its position is governed by clause 18.10(c) of the ICA and the terms of the Accession Deed itself. The effect of those provisions is that the new Obligor assumes the same obligations, and becomes entitled to the same rights, as if it had been an original party to the ICA. This is spelt out in the Accession Deed:

Secondly, it would make no commercial sense if, having executed an Obligor Accession Deed, a company had to remain a subsidiary of Handels in order to retain its status as an Obligor. This would mean, for example, that it would lose its status as an Obligor if it were sold to an entity outside the group, or if it remained in the group but for any reason ceased to be a subsidiary of Handels. If such a strange result had been intended, one would expect to find it clearly articulated in the ICA and/or the Obligor Accession Deed, and not left to be inferred from a possible ambiguity in the definition of “Obligor”.

Thirdly, there is nothing in the wording of clause 14.2(b) itself to suggest that the power of release cannot be exercised by the Security Agent in respect of a sale of assets by a company which has ceased to be a subsidiary of Handels. On the contrary, the focus of the clause is on enabling a sale to be effected free from existing liabilities. From that point of view, the position of the vendor in the corporate structure would seem to be irrelevant, and the main commercial purpose of the clause is to maximise the return that can be obtained from the assets sold, probably in the context of an actual or impending insolvency. It is worth noting that similar purposive considerations influenced the Court of Appeal when construing a clause of a similar nature in Barclays Bank Plc v HHY Luxembourg SARL [2010] EWCA Civ 1248, [2011] 1 BCLC 336: see in particular the judgment of Longmore LJ at [18] to [26]. As Longmore LJ said at [25], the intention of the parties to the ICA (in that case) was that it should be “a co-operative document between parties with similar interests, who would want to maximise recovery if at all possible”.

Fourthly, the ICA contains no express requirement that an “Obligor” should serve any particular commercial purpose, or that it should have been trading for any particular length of time. What matters is the contractual obligations undertaken by an Obligor, whether original or added pursuant to clause 18. It should therefore make no difference if, as in the present case, a company was incorporated with the main (or even the sole) object of becoming an Obligor, of being moved up the corporate structure once it had achieved that status, and of then being used as the vehicle for a sale of the group’s assets. Although pre-planned and in some senses artificial, these steps serve the very real commercial purpose of maximising recovery for the group and facilitating a refinancing which will enable it to continue to trade. I am satisfied that a purpose of this nature falls fairly and squarely within the purview of clause 14, just as it did in Barclays Bank v HHY Luxembourg.

Finally, it should be noted that the Company had been a subsidiary of Handels since its incorporation on 15 July 2013. The Company therefore had that status for six months. Even though the Company never traded, and its actions followed a predestined path, it could not in my view be said that its status as a subsidiary was so fleeting or evanescent that it should be disregarded altogether.

I find the cumulative force of these points compelling. The counter-argument seems to me to place unwarranted weight on the admitted requirement that a new Obligor should be a subsidiary of Handels at the point of accession, and to serve no intelligible commercial purpose. It should therefore be rejected. I agree with the preferred view of all counsel, namely that the Company remained an Obligor within the meaning of clause 14.2(b) at all material times after its move up the corporate chain on 15 January 2014.

On behalf of the Company, Mr Trower QC submits that the proposed sale of the shares in Holding to Bidco under the SPA will satisfy this condition, because:

I accept this submission. Where administrators have been appointed by the court, I see no difficulty in describing the administration as a “court approved process”. In addition to that, the administrators so appointed are themselves officers of the court. They derive their powers, including their power to sell assets, from the Insolvency Act 1986, and in the exercise of those powers they are potentially subject to the control and supervision of the court. They are bound to perform their functions with the objective of achieving one of the objectives specified in paragraph 3 of Schedule B1 to the 1986 Act, the relevant purpose in the present case being the second one, namely “achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration)”. The evidence placed before the court on this application contains full details of the proposed sale, and includes all the information that is required to be disclosed in due course to the Company’s creditors in accordance with Statement of Insolvency Practice (SIP) 16, Pre-Packaged Sales in Administrations: see paragraph 7 of Mr Downs’ witness statement. In exercising its discretion whether to make an administration order, the court was therefore well aware of what was proposed and of the background matters which I have summarised in this judgment. In those circumstances, it seems to me a natural and proper use of language to describe the proposed sale as one which will be implemented under a court approved process, even though the actual decision to enter into the SPA will be taken by the Proposed Administrators.

The main counter-argument is that it is not enough for the sale to be effected by court-appointed administrators, and the court must itself positively approve both the principle and the terms of the proposed sale. It is suggested that this interpretation gains support from the fact that some form of court approval of the sale itself would clearly be necessary in a form of insolvency process which had not been initiated by a court order, such as a voluntary liquidation. There is some force in that point, but in my view it would be unduly restrictive to construe the requirement as importing approval of the sale by the court in circumstances such as those of the present case, where the sale will be made by court-appointed administrators who are themselves officers of the court.

Even if that is wrong, I would accept Mr Trower’s alternative submission that this is a case where the court can, and should, expressly grant the administrators permission to enter into the proposed sale. The evidence satisfies me that it would be an entirely proper exercise of the Proposed Administrators’ powers to enter into the SPA, and that this is the only way forward which offers any realistic prospect of saving the business of the group as a going concern. The case therefore falls within that part of the guidance helpfully given by Lewison J (as he then was) in Re Hellas Telecommunications (Luxembourg) II SCA [2009] EWHC 3199 (Ch), [2010] B.C.C. 295, where he said at [8]:

It is unnecessary for me to explain in this judgment why I was satisfied that an administration order should be made. It is enough to record that I was abundantly satisfied, on the evidence: