The Bank of New York Mellon (London Branch) v Truvo NV & Ors

These proceedings concern the proper construction of a Senior Facilities Agreement (“SFA”) and an Intercreditor Agreement (“ICA”) both dated 30 November 2010. Each of the parties to these proceedings is a party to the SFA and the ICA. In broad terms, the SFA governed the relationship between the First Defendant (“Truvo”) (as original borrower) and the syndicate of lenders, while the ICA governed the relationship of lenders as between themselves. The Claimant, the Bank of New York Mellon (the “Agent”), is the agent and security agent under the SFA and the ICA. The Second Defendant, Deutsche Bank AG (London Branch) (“DB”), is one of the “senior lenders” under the SFA and the ICA and the holder of what has been referred to as “Senior Debt” (or “First Lien Debt”) and Second Lien Debt of Truvo. In these proceedings, DB acts as a representative party, representing the interests of those lenders who, like DB, presently hold more Second Lien Debt of Truvo than Senior Debt. The Third Defendant, Millar Investments S.á.r.l. (“Millar”), is also one of the “senior lenders” under the SFA and the ICA and the holder of Senior Debt and Second Lien Debt of Truvo. It too acts as a representative party in these proceedings, representing the interests of those lenders who, like Millar, presently hold more Senior Debt than Second Lien Debt.

Fundamentally, this dispute is about what level of consent was required from the lenders under the SFA to amend the terms of the SFA so as to change, as between Senior Lenders and Second Lien Lenders, the application of mandatory prepayments payable by Truvo under the SFA. In broad summary, it is Millar’s case that consent was required only from lenders holding at least two-thirds of the total Senior Debt and Second Lien Debt (defined as “Majority Lenders”). In contrast, DB’s case is that such amendment could not be made without the consent of all (i.e. 100%) of the lenders including the Second Lien Lenders.

The proceedings were commenced by a Part 8 Claim Form issued by the Agent on 21 August 2012 seeking various declarations with regard in particular to the proper scope of Clause 27 of the ICA and Clause 40 of the SFA, the validity of the purported amendment of Clause 11.3 of the SFA (as referred to below) and the entitlement of the parties to certain monies that have been paid into an escrow account pending the outcome of these proceedings.

By a Consent Order dated 22 October 2012, permission was given for the claim to be continued pursuant to CPR 19.6(1) against DB and Millar. Both the Agent and Truvo have adopted a neutral position. So, the battle has, in effect, been undertaken between DB (represented by Mr John Higham QC) and Millar (represented by Mr Richard Snowden QC) in their representative capacities. All parties have served evidence in the form of witness statements including, in particular, statements from Mr Verle (on behalf of DB) and Ms Harrison (on behalf of Millar). However, given that the principal issue is limited to the proper construction of the SFA and ICA, much of this evidence is, in my view, inadmissible or irrelevant; as were certain parts of the skeleton arguments in particular that were submitted on behalf of DB which relied on such evidence. It is unfortunate that the scope of what evidence was admissible was not properly clarified prior to the commencement of the present hearing. Be that as it may, after discussion with Counsel, it became apparent (thankfully) that there was a large measure of agreement and I set out below a summary of what I believe is common ground with regard to the relevant factual background and the circumstances which have given rise to the present dispute.

Nevertheless, there remained some controversy. In particular, Mr Higham QC made plain that in relation to the main issues of construction, he wished to rely on certain passages in some of the witness statements which, he submitted, were admissible and relevant to show what he described as the “commercial purpose” of the SFA and ICA in particular: (i) paragraphs 15 and 16 of the first statement of Ms Harrison; (ii) paragraphs 40-44 of the first statement of Mr Verle (which related to a phone discussion that he i.e. Mr Verle had with a Mr Iain Gunn on 20 July 2010); and (iii) paragraph 4 of the second statement of Mr Verle. As to (i), Mr Snowden QC had no objection. As to (ii), Mr Snowden QC confirmed that there was no dispute as to the facts stated in these paragraphs by Mr Verle but submitted that such evidence was inadmissible and irrelevant, a submission which I accept on well-established principles. In any event, I do not consider that such evidence, even if admissible, would assist with regard to the present task. As to (iii), reference having been made to the level at which the various debts were traded in March 2011 (i.e. some 4 months or so after the date of the SFA and ICA), the main thrust of this paragraph is contained in the last sentence which states: “The Second Lien Debt would not have traded at such levels had it been the general understanding that the Second Lien Debt’s priority in respect of mandatory prepayments could be removed at the whim of the Priority Lenders for the time being.” Mr Snowden QC submitted that this evidence was again inadmissible and irrelevant. In my view, that submission is correct. At best, it is evidence of opinion in the nature of expert evidence in respect of which the leave of the Court would be required but has been neither sought nor granted. In any event, it is my view that, as formulated, such evidence, even if admissible, would have no probative value and therefore not assist in the present task given in particular the impossibility of testing the basis of the alleged absence of such “general understanding”. Further, as submitted by Mr Snowden QC, it does not appear that it is right to suggest, even on Millar’s case, that mandatory prepayments could be removed “at the whim” of the Priority Lenders given, in particular, the terms of Clause 40 of the SFA as referred to below which required the consent of Truvo to any amendment. I revert to certain aspects of these matters later in this Judgment.

Truvo and its corporate group are engaged in the business of directories, including the publication of printed classified directories and alphabetic directories. As a result principally of competition from online search engines, the directories industry has faced very significant challenges in the last decade. Truvo experienced significant financial difficulties in that period. Following negotiations with creditors, on 1 July 2010 certain companies within the Truvo group filed voluntary petitions under Chapter 11 of Title 11 of the US Bankruptcy Code in the US Bankruptcy Court for the Southern District of New York.

There then followed detailed financial negotiations between interested parties with a view to establishing a restructuring plan so as to enable the Truvo group to exit the Chapter 11 proceedings and to continue its business operations. The details of such negotiations are not directly relevant save to note that it is common ground that at the time the restructuring plan was being developed, it was anticipated that the Truvo group would receive a potential tax rebate of approximately US$100 million from the US Internal Revenue Service as a result of the restructuring.

In the event, a restructuring plan was agreed. It was filed on 1 July 2010 and subsequently amended on 22 October 2010, following which the Truvo group exited the Chapter 11 proceedings on 30 November 2010 and the SFA and the ICA were executed.

In essence, the restructure involved Truvo acquiring the operating business and 100% of the interests of Truvo USA (Inc) (“Truvo USA”) and issuing new debt with a nominal value of €450 million in return for, inter alia, the release of approximately €775 million of senior bank debt owed by subsidiaries of Truvo USA (the “Former Debt”). The terms on which the €450 million new debt was issued are set out in the SFA. In summary, the new debt comprised (i) a Facility A1 debt and a Facility A2 debt, together “the First Lien Debt”, in aggregate amounting to €350 million and repayable in full on 31 May 2015 and (ii) a Facility B1 debt and Facility B2 debt, together “the Second Lien Debt”, in aggregate amounting to €100 million and repayable in full 6 months later i.e. on 30 November 2015. The holders of the Former Debt were allocated pro rata proportions of the First Lien Debt and the Second Lien Debt. The interest rate on the First Lien Debt was Euribor plus a margin of between 3 and 4 percent per annum whereas the interest rate on the Second Lien Debt was a cash element of Euribor plus 2 per cent per annum and a PIK margin, compounding at 6 monthly intervals, of 4 percent per annum which was added to the principal amount of the Second Lien Debt.

At the outset, it is to be noted that Clause 1.2 of the SFA provides that Section, Clause and Schedule headings are “...for ease of reference only.” Clause 1.4 also provides: “This Agreement is subject to the [ICA]. In the event of any inconsistency between this Agreement and the [ICA], the [ICA] shall prevail.”

For present purposes, it is significant that the SFA includes detailed provisions for what is referred to as the “application of mandatory prepayments”. These are set out in Clause 11 of the SFA. In particular, Clauses 11.2(b) and (c) stipulate that subject to certain terms (including Clause 14 of the ICA) Truvo “…shall ensure that the Borrowers prepay Utilisations in the following amounts at the times and in the order of application contemplated by Clause 11.3…..”. “Utilisations” is a term defined to mean a “loan or letter of credit”. The specified “amounts” include the amount of Disposal Proceeds, Flotation Proceeds, Insurance Proceeds, US Tax Proceeds and 75% of Excess Cashflow for any particular Financial Year (all defined terms). Detailed timing provisions are set out in Clauses 11.3(c), (d) and (f).

Clauses 11.3(a) and (b) each provides for such prepayments to be “applied” in a particular order. In particular, Clause 11.3(a) provides in material part as follows:

“Subject to clause 14 … of the [ICA], a prepayment made under Clause 11.2 … other than a prepayment of Disposal Proceeds resulting from a Business/JV disposal shall be applied in the following order:

(i)

firstly, against the accrued PIK margin in respect of the Second Lien Loans, pro rata against each Second Lien Facility …;

(ii)

secondly, in prepayment of Second Lien Loans pro rata …; and

(iii)

thirdly, in prepayment of [the First Lien Loans] pro rata …”

Clause 11.3(b) provides for the application of other prepayments in relation to Disposal Proceeds resulting from a Business/JV disposal but requires that all proceeds up to an amount equal to 3.7 x Trailing Attributable EBITDA (as defined) of the disposed business or Joint Venture interest be applied first in prepayment of the First Lien Debt pro rata.

Clause 40 of the SFA deals with amendments and waivers. Clause 40.1 expressly provides that the whole of Clause 40 is subject to the terms of the ICA.

Clause 40.2 provides in material part:

“(a)

Subject to Clause 40.3 (Exceptions) any term of the Finance Documents may be amended or waived only with the consent of the Majority Lenders and [Truvo] and any such amendment or waiver shall be binding on all Parties;

(b)

The Agent may effect, on behalf of any Finance Party, any amendment or waiver permitted by this Clause 40.

(c)

…… .”

In relevant respect, “Majority Lenders” is a term defined in Clause 1.1 to mean:

…

(b)

...a Lender or Lenders whose Commitments aggregate more than 66⅔ percent of the Total Commitments….”

Clause 40.3 sets out exceptions to the general rule in Clause 40.2(a). It provides in material part:

“(a)

An amendment or waiver that has the effect of changing or relates to:

……

(iv)

save as a consequence of any Structural Adjustment, the manner in which the proceeds of enforcement of the Transaction Security are distributed; or

(v)

save as a consequence of any Structural Adjustment, any amendment to the order of priority or subordination under the [ICA]

shall not be made without the consent of all the Lenders;

(b)

An amendment or waiver which has the effect of changing or which relates to:

……

(iv)

the obligation to prepay under Clause 11.1 … or paragraph (b)(ii) of Clause 11.2 …;

……

shall not be made without the prior consent of the Super Majority Lenders……”

In relevant respect, “Super Majority Lenders” is a term defined in Clause 1.1 to mean: “…a Lender or Lenders whose Commitments aggregate more than 90% of the Total Commitments…”

Finally, Clauses 43 and 44 of the SFA provide for English governing law and the exclusive jurisdiction of the English courts.

The ICA was entered into between the Agent, the Lenders, including the First Lien Lenders and the Second Lien Lenders, the former Facility Agent, the former Security Agent and DB it its capacity as Daylight Lender.

Section 1.2(b) provides that Section, Clause and Schedule headings are “...for ease of reference only.” Clause 2.1 provides:

“Each of the Parties agrees that the Liabilities owed by the Debtors to [the First Lien Lenders] and the Second Lien Lenders shall rank in right and priority of payment in the following order and are postponed and subordinated to any prior ranking Liabilities as follows:

(a)

first, [the Senior Lender Liabilities] and the Hedging Liabilities pari passu and without any preference between them; and

(b)

second, the Second Lien Liabilities.”

Clause 2.2 provides in material part:

“Each of the parties agrees that the Transaction Security shall rank and secure the following Liabilities … in the following order:

(a)

…;

(b)

second, [the First Lien Liabilities] and the Hedging Liabilities pari passu and without any preference between them; and

(c)

third, the Second Lien Liabilities.

Clause 2.3(a) provides:

“Each of the Parties agrees that the Intra-Group Liabilities and the Parent Liabilities are postponed and subordinated to the Liabilities owed by the Debtors to the Priority Creditors and the Second Lien Lenders.”

Clause 5.1(a) provides in material part:

“The Debtors shall not and shall procure that no other member of the Group will, make any Payments of the Second Lien Liabilities at any time unless:

(i)

that Payment is permitted under Clause 5.2 …”

Clause 5.2 provides in material part:

“……, the Debtors may:

(a)

prior to the Priority Discharge Date, make Payments to the Second Lien Lenders in respect of the Second Lien Liabilities then due in accordance with the Senior Facilities Agreement:

(i)

if:

(A)

the Payment is of:

(i)

any of the principal amount of the Second Lien Liabilities in accordance with:

……

(3)

Clause 14.1 (Non-Distressed Disposals) or Clause 14.3 (Mandatory Prepayment Proceeds (before Distress Event));

(4)

Clause 11.2 (US Tax, Flotation, Disposal and Insurance Proceeds and Excess Cashflow) of the Senior Facilities Agreement;

……”

Clause 14.1(d) provides in material part:

“If any Disposal Proceeds are required to be applied in mandatory prepayment of [the First Lien Liabilities] or the Second Lien Liabilities then the Disposal Proceeds shall be applied in or towards Payment of:

(i)

first …;

(ii)

then, in accordance with Clause 11.3 … of the [SFA],

and the consent of any other Party shall not be required for that application.”

Clause 14.2(b) provides in material part:

“The net proceeds of each Distressed Disposal … shall be paid to the Security Agent for application in accordance with Clause 15 ….”

Clause 14.3(c) provides in material part:

“If any Insurance Proceeds, US Tax Proceeds, Flotation Proceeds, Disposal Proceeds (to the extent not applied pursuant to paragraph (d) of Clause 14.1 …) or Excess Cashflow are required to be applied in mandatory prepayment of [the First Lien Liabilities] or the Second Lien Liabilities then those Insurance Proceeds, US Tax Proceeds, Flotation Proceeds, Disposal Proceeds or Excess Cashflow shall be applied in or towards Payment of:

(i)

first …

(ii)

then, in accordance with Clause 11.3 … of the Senior Facilities Agreement,

and the consent of any other Party shall not be required for that application.”

Clause 15 of the ICA provides in effect for all amounts from time to time received or recovered by the Security Agent to be held by the Security Agent on trust to apply them in the “order of priority” therein prescribed. In particular, the order of priority provides inter alia for payment of the First Lien Lenders ahead of the Second Lien Lenders as stipulated in sub-paragraphs (f) and (g). Clause 16.4 provides for what is referred to as the “turnover” of enforcement proceeds.

Clause 26.5 provides in material part:

“Except as otherwise provided in this Agreement the priorities referred to in Clause 2 (Ranking and priority) will:

(a)

not be affected by any … amendment or variation to any of the Debt Documents ….”

Clause 27 of the ICA deals with consents, amendments and override. In particular, Clause 27.1 (a) provides in material part:

“Subject to paragraph (b) … below, … this Agreement may be amended or waived only with the consent of the Agents, the Majority Priority Lenders and the Security Agent.”

Clause 27.1(b) provides in material part:

“An amendment or waiver (including, without limitation, as a result of any amendment, waiver or consent which relates to any defined term or clause incorporated into this Agreement by cross-reference) that has the effect of changing or which relates to:

……

(i)… Clause 15 (Application of proceeds) …;

……

(iii)…….the order of priority or subordination under this Agreement;

shall not be made without the consent of:

A.

…

B.

The [First Lien Lenders];

C.

The Second Lien Lenders;

……”

Clause 27.1(d) provides in material part:

“An amendment or waiver (including, without limitation, as a result of any amendment, waiver or consent which relates to any defined term or clause incorporated into this Agreement by cross-reference) that has the effect of changing or which relates to:

……

(iv)

Clause 2.1 (Senior Creditor Liabilities) or Clause 2.2 (Transaction Security);

……

(vi)

Clause 14 (Proceeds of Disposals, Recoveries from Report Providers and Application of Mandatory Prepayments) shall not be made without the consent of:

(A)

each Former Agent, unless such change would not reasonably be considered to be detrimental to the interests of any Former Agent …; and

(B)

the Daylight Lender, unless such change would not reasonably be considered to be detrimental to the interests of the Daylight Lender ….”

Finally, Clauses 29 and 30 of the ICA provide for English law to govern and for the exclusive jurisdiction of the English courts.

Both Millar and DB were existing holders of old senior debt in the Truvo group which was discharged as part of the restructure in 2010. Accordingly, as part of the restructure, they were issued by Truvo with strips of Senior Debt and Second Lien Debt pro rata with the proportion of old senior debt held by them. Whilst upon execution of the SFA and ICA each existing lender was issued with strips of Senior Debt and Second Lien Debt, so that the ratio of the two tranches of debt held by each lender was the same, since then some lenders have increased or decreased their respective holdings of Senior Debt and/or Second Lien Debt (as both Millar and DB have done) and so no longer hold the two tranches of debt in the original proportions.

Notwithstanding the reorganisation which took place in 2010, Truvo continued to experience financial difficulties. In particular:

In the event that no agreement could be reached and Truvo were to breach its financial covenants under Clause 25 of the SFA (as it was forecasted to do), it would have been open to a two-thirds majority of the lenders to instruct the Agent to accelerate all liabilities by declaring that all sums owing under the SFA be immediately due and payable and to commence enforcement proceedings against Truvo (SFA, Clauses 27.2 & 27.21). In that case, all sums received or recovered by the Agent pursuant to the SFA would be applied in payment of (inter alia), first, the Senior Lenders and, thereafter, the Second Lien Lenders (ICA, Clauses 2 & 15). Thus, upon breach of covenant by Truvo and an acceleration of its liabilities, all sums would have been applied in discharge of the Senior Debt in priority to the Second Lien Debt.

It was against this background that Truvo sought to agree with its lenders to limit their rights of enforcement under Clause 25.2 of the SFA. Discussions between Truvo and a sounding group of its largest lenders took place in May 2012. Following those negotiations, on 7 June 2012 Truvo submitted a consent request letter (“the Consent Request”) to the Agent purportedly in accordance with Clause 40 of the SFA requesting the consent of the Majority Lenders to certain proposed amendments to the SFA. The proposed amendments to the SFA included (so far as relevant to these proceedings): (a) the insertion of a new clause in the SFA limiting lenders’ rights of enforcement in the event of any event of default resulting in a breach of the financial covenants set out at Clause 25.2 of the SFA occurring between 30 June 2012 and 31 March 2013; and (b) an amendment to the mandatory prepayment provisions at Clauses 11.3(a) and (b) of the SFA. The latter proposed amendment was in the following terms:

“(c)

delete paragraphs (a) and (b) of Clause 11.3 (Application of mandatory prepayments) of the [SFA] and replace them with the following:

(a)

Subject to clause 14 (Proceeds of Disposals, Recoveries from Report Providers and Application of Mandatory Prepayments) of the Intercreditor Agreement, a prepayment made under Clause 11.2 (US Tax, Flotation, Disposal and Insurance Proceeds and Excess Cashflow) shall be applied in the following order:

(i)

firstly, in prepayment of Facility A1 Loans and Facility A2 Loans pro rata and as contemplated in paragraphs (c), (d), (f) and (g) below;

(ii)

secondly, against the accrued PIK Margin in respect of the Second Lien Loans, pro rata against each Second Lien Facility and as contemplated in paragraphs (c), (d), (f) and (g) inclusive below;

(iii)

thirdly, in prepayment of Second Lien Loans pro rata and as contemplated in paragraphs (c), (d), (f) and (g) below….”.

In passing, it is important to note that this proposed amendment in effect reversed the order of application of mandatory prepayment proceeds in the original Clause 11.3 of the SFA to the detriment of the Second Lien Holders including DB and those represented by DB.

Consent to the proposed amendments was given by the proportion of lenders holding 80.15% of “Total Commitments” (i.e. the aggregate of the Senior Debt and the Second Lien Debt). Lenders holding only 6.4% of the Total Commitments voted against the proposed amendments. Lenders holding the remaining 13.54% of the Total Commitments did not respond to the Consent Request.

On 13 June 2012 the Agent executed the Consent Letter, confirming that the Majority Lenders had consented to the proposed amendments and that the amendments were accordingly granted and would become effective upon being countersigned by Truvo. Truvo promptly countersigned the Consent Letter.

Had the Consent Request not been granted by the lenders, and the proposed amendments not been made to the SFA, the consequences for Truvo and the lenders would have been serious. First, Truvo would have received a qualified audit from its auditors, which as set out above could have had a serious negative impact upon its financial position. Further, again as set out above, upon the acceleration of Truvo’s debt following a breach of its covenants, all sums would be applied in discharge of the Senior Debt in priority to the Second Lien Debt, irrespective of whether or not there had been any amendment to Clause 11.3 of the SFA pursuant to the Consent Request.

On 14 November 2012 Truvo issued a certificate to the Agent disclosing that it was in breach of certain of the covenants in Clause 25.2 of the SFA and giving notice of a default under the SFA.

Following approval of a consent request relating to Truvo’s default dated 14 December 2012 by lenders holding 80.14% of Total Commitments, the Agent: (i) served Truvo with acceleration and demand notices dated 21 December 2012 and (ii) on 28 December 2012 instructed the Security Agent to enforce the “Transaction Security” over monies which were the balance of proceeds of a tax refund to Truvo constituting “US Tax Proceeds” for the purposes of Clause 11 of the SFA and which had been paid into an escrow account (the “Escrow Account”). (This formed part of a preliminary refund of US$ 106.7 million from the US Internal Revenue Service which was received by Truvo in November 2011).

More recently, the Security Agent gave notice of exclusive control in respect of the Escrow Account and the Agent issued a notice to lenders confirming its intention to distribute the proceeds from the Escrow Account, totalling €74,641,396.98, in accordance with Clause 15 of the ICA on 18 January 2013. According to Mr Snowden QC, the effect of what has happened is that the entitlement of the Senior Lenders and the Second Lien Lenders to the proceeds of the US Tax Proceeds in the Escrow Account is no longer affected by the outcome of this case because it is accepted that those monies have been validly paid to the Senior Lenders in discharge of the amounts outstanding under the SFA. There are, however, certain other monies which have been paid by Truvo to the Agent by way of mandatory prepayment under Clause 11 of the SFA the application of which does or may depend on the outcome of this dispute and which have been held by the Agent in a separate escrow account pending determination of this dispute.

There was broad agreement as to the applicable principles. In particular:

Despite this broad agreement, there was (at least initially) one difference between Mr Higham QC and Mr Snowden QC with regard to the applicable principles of construction concerning the relationship between Clause 40.2 and Clause 40.3 of the SFA. In particular, Mr Snowden QC submitted that it was important to bear in mind that Clause 40.3 was, on its face, an exception to the general default position in Clause 40.2 (i.e. that any term of the Finance Documents may be amended or waived with the consent of the Majority Lenders and Truvo). On that basis, Mr Snowden QC submitted that although he would not go so far as to say that Clause 40.3 should be construed “narrowly” against DB nevertheless it should be looked at in a “questioning manner”. Mr Higham QC rejected any suggestion that Clause 40.3 should be construed “narrowly” although I did not understand him to disagree with Mr Snowden QC that Clause 40.3 should be construed in what he described as a “questioning manner” which is, in my view, no different from the proper approach to the construction of Clause 40.2 or, indeed, any other clause in a commercial contract.

In summary, DB made the following submissions.

The terms of the SFA and the ICA are clear. Clauses 11.2 and 11.3 of the SFA and 14.1(d)(ii) and 14.3(c) of the ICA confer on the Second Lien Lenders an entitlement to priority of payment in respect of mandatory prepayments. Clause 11.3 of the SFA, which sets out a mandatory prepayment waterfall, is expressly subject to Clause 14 of the ICA and is expressly incorporated by cross-reference in Clauses 14.1(d)(ii) and 14.3(c) of the ICA. The provisions of such clauses are mandatory. For the purpose of determining what consents are required under the ICA, one must therefore approach the analysis as if Clause 11.3 of the SFA was expressly set out in the ICA.

The effect of these provisions is to reverse, in relation to mandatory prepayments, the ranking in right and priority of payment for which Clause 2 of the ICA otherwise provides. The unusual reversal of priorities in relation to mandatory prepayments for the benefit of the Second Lien Lenders was specifically designed, at the time that the SFA and ICA were entered into, to support the pricing and marketability of the Second Lien Debt. Though the word “priority” is not expressly used in Clause 11.3 of the SFA, its substance is to provide for a payment waterfall for mandatory prepayments conferring priority on the Second Lien Lenders and subordinating the First Lien Lenders to the Second Lien Lenders in right of payment in respect of mandatory prepayments. To give priority in right of payment to one class of creditor over another is necessarily to subordinate the latter in right of payment.

Clause 27.1(b) of the ICA specifically requires the consent of the Second Lien Lenders for “an amendment … (including … as a result of any amendment … which relates to any … clause incorporated into [the ICA] by cross reference) that has the effect of changing or which relates to … (iii) the order of priority or subordination under the [ICA ] …”. Correspondingly, Clause 40.3(a) of the SFA also requires all Lender consent for any amendment of the SFA which has the effect of changing or which relates to “the order of priority or subordination” under the ICA. Clause 40 is expressly subject to the terms of the ICA and so to Clause 27.1(b) thereof. The two clauses are obviously inter-related and the phrase “the order of priority or subordination” must bear the same meaning in both agreements.

The opening words of Clause 27.1(b) are clearly intended to apply to amendments of clauses of the SFA which are incorporated by cross-reference in the ICA and are entirely apt to refer to Clauses 14.1(d) and 14.3(c) of the ICA and to Clause 11.3 of the SFA which is incorporated into both provisions of the ICA by cross-reference.

Clause 27.1(b)(iii) is stated in general terms and, unlike, for example, Clause 27.1(b)(i), which expressly refers to, inter alia, Clause 15, is not tied to any particular clauses of the ICA. The phrase “order of priority or subordination” under the ICA is not a defined term and there is no basis for interpreting it restrictively. However, it is plain from, inter alia, Clause 2.1 of the ICA that where the ICA talks of the order of priority it means “priority of payment”. There is no basis for limiting Clause 2.1 to what happens in the event of a deficiency arising on an enforcement of security or on an insolvency of Truvo. Clauses 5.1 and 5.2 of the ICA, which support the provisions of Clause 2.1, make it plain that only expressly permitted payments, which include mandatory prepayments, can be made to Second Lien Lenders prior to discharge of the First Lien Debt. As stated above, Clauses 14.1(d) and 14.3(c) of the ICA, incorporating Clause 11.3 of the SFA, confer on the Second Lien Lenders an entitlement to priority of payment in respect of mandatory prepayments. Clause 27.1(b)(iii) must naturally be taken therefore as referring to Clauses 14.1(d) and 14.3(c) (as well as to Clause 2.1). Clause 40.3(a) of the SFA must be interpreted similarly.

Accordingly, as a matter of plain ordinary English, the consent of the Second Lien Lenders is required for any amendment which seeks to alter the entitlement of the Second Lien Lenders to priority of payment in relation to mandatory prepayments. In this respect the wording of the ICA and the SFA is clear and there is no ambiguity. This accords with commercial common sense for, indeed, it would make no sense to provide unusually for the priority of the Second Lien Lenders in relation to mandatory prepayments if at any time that priority could be removed without their consent at the whim of the First Lien Lenders (whose claims comprise 77.78 percent of the aggregate claims of First and Second Lien Lenders).

Indeed, given that the SFA expressly contemplated that Second Lien Debt would be traded and that the commercial objective of Clause 11.3 of the SFA was to support the value of the Second Lien Debt in the market, it would be commercially absurd and defeat the avowed commercial objective if, upon a third party acquiring a substantial tranche of Second Lien Debt at the market value, the value of that debt could be undermined by Truvo and the First Lien Lenders agreeing between themselves to expropriate the mandatory prepayment entitlements of the Second Lien Lenders. Paragraph 14 of Harrison 2 does not begin to meet this. The fact that as a matter of law the Second Lien Debt would be capable of being traded after a reversal of the order of priority set out in the mandatory prepayment waterfall is nothing to the point. Such a reversal would plainly have a devastating effect upon the price upon which Second Lien Debt would be traded, as Ms Harrison implicitly, if somewhat cryptically, recognises.

This interpretation of Clause 14.3 of the SFA and Clause 27.1 of the ICA is confirmed by a number of factors. First, if, as appears to be the case of Millar, the phrase “the order of priority or subordination” is intended to refer primarily or exclusively to the order of priority and subordination in Clause 2.1 of the ICA, postponing the Second Lien Lenders to the First Lien Lenders, it makes little commercial sense for both the SFA and the ICA to require a change to that order of priority or subordination to be subject to the consent of the Second Lien Lenders. The requirement for the consent of the Second Lien Lenders must presumably be there to protect some commercial interest of the Second Lien Lenders. Secondly, Millar’s interpretation gives no meaning to the phrase “including … as a result of any amendment … which relates to any … clause incorporated into this Agreement by cross-reference”. Clause 2.1 of the ICA does not incorporate by cross-reference any clause of the SFA. Clauses 14.1(d) and 14.3(c)(ii) of the ICA do. Thirdly, when the draughtsman of the ICA intended to refer specifically to Clause 2.1 thereof, he did so – compare Clause 27.1(d)(iv) of the ICA. In Clause 27.1(b), however, whereas there is an express reference, inter alia, to Clause 15 of the ICA, the reference to “the order of priority or subordination under this Agreement” is entirely general.

Even if there might be said to be some ambiguity in the terms of the SFA and the ICA in this regard (which there is not), as noted above, where there are two possible interpretations of the commercial contract, the court will adopt that interpretation which makes more commercial sense. As noted above, the commercially sensible interpretation is that the priority entitlement of the Second Lien Lenders should not be taken away from them without their prior consent.

It follows from the above that the amendment to Clause 11.3 of the SFA with the consent of the Majority Lenders was contrary to both Clause 40 of the SFA and Clause 27.1(b) of the ICA and that the Facility Agent was not permitted under Clause 40.2(b) of the SFA to effect on behalf of the Finance Parties the requested amendment to Clause 11.3 of the SFA. It follows that, to that extent, the Facility Agent has executed the Consent Letter without authority and that the amendment to Clause 11.3 is not binding on the Second Lien Lenders.

Mr Snowden QC advanced Millar’s case under 6 main heads which can be summarised as follows.

As a matter of natural language the purported amendment relates (in relevant respect) only to the order of application of the mandatory prepayment provisions and does not concern the “priority” and “subordination” of the Senior Loans and Second Lien Loans. On their ordinary commercial meaning, the terms “priority” and “subordination” are concerned with the ranking of a debtor’s indebtedness in circumstances where there is a competition between creditors (whether between secured creditors on enforcement or between unsecured creditors on a formal insolvency) because there is a shortfall in available assets to meet liabilities. The expressions are not naturally used in connection with a debtor’s obligations to make prepayments of (not yet due) indebtedness or the timing of such payments. By way of example:

In contrast, “prepayment” provisions (such as those in Clause 11 of the SFA) are concerned with when and, if so, how a payment of debt not then due must be made by a debtor. Thus the obligation on a debtor to make a mandatory prepayment may arise (as it does in this case) by reason of the debtor’s receipt of monies in particular circumstances. The obligation to apply those proceeds by way of mandatory prepayment against specified (but not yet due) indebtedness is not concerned with the “priority” or “subordination” of that indebtedness, i.e. how the indebtedness will rank on a shortfall in the assets of the Company.

There is a clear distinction in the SFA itself between the provisions which relate to priority and subordination, on the one hand, and those which relate to prepayment of (not yet due) debt on the other. This is consistent with the terms “priority” and “subordination” having their usual commercial meaning, rather than some extended meaning to include also “prepayments”.

Clause 11.3 of the SFA, which contains provisions dealing with mandatory prepayments by Truvo, makes no reference at all to “priority” or “subordination”. The same is true of Clause 14.3 of the ICA (which cross-refers to Clause 11.3 of the SFA). Rather both provisions are concerned simply with the “application” of any prepayment by Truvo.

On the other hand, none of the other provisions of the SFA refers expressly to “priority” or “subordination” as between lenders under the SFA. Whilst a number of the provisions of the ICA do refer to “priority” or “subordination” as between lenders – notably Clauses 2.1, 5.8, 15, 16.4, 26.4 and 26.5 of the ICA – none of those provisions refers to any sums payable to Second Lien Lenders by way of “prepayment” as having priority in any way. For example:

Ultimately, had the parties intended that amendments to the order of application of the mandatory prepayments under Clause 11 of the SFA should be treated akin to having “priority” and be capable of amendment only with the consent of all lenders, it would have been easy to have included a provision to that effect. However, they did not.

It is to be noted that it is only through a combination of the (fortuitous) cross-reference to Clause 11.3 of the SFA in Clause 14.3(c)(ii) of the ICA and the words in parentheses in Clause 27.1(b) of the ICA that it is even possible for DB to argue that the exceptions in Clause 27.1(b)(iii) of the ICA and Clause 40.3(a)(v) of the SFA are engaged in this case. It may reasonably be inferred that it was not the intention of the draughtsman that Clause 40.3(a)(v) of the SFA (or Clause 27.1(b)(iii) of the ICA) has the effect for which DB contends. Had this been the intention, Clause 40.3(a)(v) of the SFA (and Clause 27.1(b)(iii) of the ICA) would doubtless have been applied much more precisely to Clause 11.3 of the SFA.

The SFA in this case was based upon the standard precedent published by the Loan Market Association (“the LMA”): the “Senior Multicurrency Term and Revolving Facilities Agreement for Leveraged Acquisition Finance Transactions”, November 2009 version (“the LMA Standard SFA”). This is usual in the European debt markets and would have been apparent to experienced investors. The purpose of LMA standard documentation, such as the LMA Standard SFA, is to promote certainty and uniformity in lending markets, so as to make agreement of lending documentation more straightforward and to increase the tradability of debt.

The LMA Standard SFA therefore forms part of the surrounding circumstances leading to the conclusion of the SFA to which regard may be had in construing the SFA (Lewison, The Interpretation of Contracts (5^th ed., 2011) at para. 3.06).

Clause 41 of the LMA Standard SFA, which deals with amendments and waivers, has essentially the same structure as Clause 40 of the SFA. Thus:

The amendment provisions of the LMA Standard SFA therefore clearly distinguish between, on the one hand, mandatory prepayments (at clause 41.3(a)(viii)) and, on the other hand, amendments to the order of priority or subordination (at clause 41.3(a)(xi)). This is consistent with the fact that prepayment provisions are in general concerned with an obligation on the part of a debtor to prepay indebtedness which is not yet due and the application of those sums, and not the ranking (i.e. priority or subordination) of the underlying indebtedness in the event of a shortfall.

The SFA in this case does not include clause 41.3(a)(viii) of the LMA Standard SFA. The only reference to “prepayments” or to “Clause 11” in Clause 40.3 of the SFA is at Clause 40.3(b)(iv), which is not applicable in this case – see below. The inference from the absence of such a provision must be that amendments to the mandatory prepayment provisions do not require “all lender” consent, but instead are subject to the default requirement of “Majority Lender” consent.

In addition, the footnote to clause 41.3(a)(ii) in the LMA Standard SFA states expressly that:

“Lenders should consider sensitivities which they may have to the consequences of such amendments or waivers which change or relate to Clause 12 (Mandatory Prepayments) being subject to Majority Lender consent only. For example, an individual Lender may be sensitive to the consequences of being unwillingly bound by a Majority Lender decision in respect of...amendment to: (i) any threshold levels set under Clause 12.2 (Disposal, Insurance and Acquisition Proceeds and Excess Cashflow); and (ii) the Obligors’ obligation to prepay the Facilities on a change of control, flotation or sale of all the Group’s assets under Clause 12.2 (Exit).”

Thus the LMA specifically flags the risk to lenders of being bound by amendments to the mandatory prepayment provisions approved by the “Majority Lenders”. Notwithstanding this, there is no restriction in the SFA in this case on the amendment of Clause 11 by “Majority Lender” consent.

Clause 40.3(b)(iv) requires consent to be given to be given by the “Super Majority Lenders” to amendments relating to the obligation to prepay under Clause 11.1 (Exit) or Clause 11.2(b)(ii) (Flotation Proceeds). The reference in Clause 40.3 to only certain, specific, amendments to the provisions of Clause 11 implicitly recognises that other amendments to Clause 11 are outside the scope of Clause 40.3; and thus supports the conclusion that amendments to Clause 11 generally fall within the default rule in Clause 40.2.

DB’s construction of Clause 40.3(a)(v), if correct, would give rise to a surprising, and entirely uncommercial, result. It would appear to be common ground between the parties that the fundamental obligation of the Company to make prepayments could be amended or removed entirely either with the consent of the “Super Majority Lenders” (in the case of the obligation to prepay upon an “Exit” or a “Flotation” – Clause 40.3(b)(iv)) or the consent of the “Majority Lenders” (in the case of the obligation to prepay upon receipt of “US Tax Proceeds”, the proceeds of a relevant “Disposal” or “Insurance Proceeds”, or where the Company has “Excess Cashflow” – Clause 40.2). However, on DB’s construction of Clause 40 a higher level of consent would be required simply to alter the order of application of the proceeds of a prepayment than would be required to remove the obligation entirely. It is difficult to discern any commercial rationale as to why only “Majority Consent” or “Super Majority Consent” would be required to remove or alter the fundamental obligation of the Company to make a prepayment from certain proceeds – and thereby enable the Company to use the proceeds for other purposes – but the consent of all lenders would be required to alter the order of application of the prepayment within the SFA. (Alternatively, it would be possible for amendments by the Majority Lenders to other provisions of the SFA to affect the prepayment provisions. For example, any increase to the maximum “Capital Expenditure” under Clause 25.2(d) of the SFA could lead to a decrease in Truvo’s “Excess Cashflow” available for prepayment under Clause 11 of the SFA.) Such a result would have no logical or commercial sense and cannot be what the parties, objectively, can have intended.

The construction of Clause 40 for which Millar contends, however, is entirely consistent with commercial sense. Given the importance of the identity of the debtor and its owners/controllers, a higher level of consent is required to amend Truvo’s obligation to make a mandatory prepayment following an Exit or Flotation than other changes to the mandatory prepayment provisions. All other changes to the mandatory prepayment provisions may be effected by Majority Consent.

As set out above, were there to be a “Distress Event” in respect of Truvo (as there has now been), the prepayment provisions of Clause 11.3 of the SFA would not survive. Instead, all sums received or recovered by the Security Agent “pursuant to the terms of any Debt Document” or “in connection with the realisation or enforcement of all or any part of the Transaction Security” (which would include all sums received or recovered under the SFA) would have to be applied, after payment of costs to agents etc., first towards the discharge of the Senior Loans and, then, towards the discharge of the Second Lien Loans (ICA at Clauses 2.1-2.2 & 15.1(f)-(g)). Any sums received or recovered by the Security Agent from proceeds that would but for Truvo’s default have given rise to an obligation on the part of Truvo to make a mandatory prepayment are to be treated in the same way and applied in accordance with Clauses 2 and 15 of the ICA, as DB accepts.

In other words, the prepayment provisions were only ever intended to provide some benefit to the Second Lien Lenders in circumstances where there was no shortfall. In circumstances where there was or was anticipated to be a “Distress Event” (with an accompanying shortfall of assets), the intention was that monies be paid to the Senior Lenders ahead of the Second Lien Lenders, and not vice versa.

Therefore the ability for the Majority Lenders to amend the application of the proceeds of a mandatory prepayment without the consent of each Second Lien Lender (as they did by the Amendment) is entirely consistent with commercial sense – it will be the Senior Debts which will be discharged first in accordance with the express order of priority under the SFA and ICA. That is particularly so where, as was the case here, there was a real possibility of a “Distress Event” occurring (as it has indeed now done).

Although the submissions advanced by Mr Higham QC have a certain simplistic attraction, I do not accept that the terms of the SFA and the ICA are, as he submits, “clear”. As with many commercial contracts, the road to meaning is here more like a rocky path with certain wobbly and somewhat confusing signposts often pointing in different directions. There may be many reasons for this. It is a matter of speculation but the problems thrown up in the present case may be because of the inherent nature of the original transaction involving so many different parties with different interests, the timescale within which the task of completing the transaction had to be achieved, the difficulty in producing two separate voluminous and very detailed documents i.e. the SFA and the ICA (the former extending to almost 250 pages and the latter to some 100 pages) which should in principle neatly marry or at least work together and the fact that, as is common ground, the basis of the SFA was a standard form precedent (as to which see further below). In any event, whatever the reasons may be (which are anyway legally irrelevant), the court is left to seek to construe the SFA and ICA as best it can in accordance with established principles as set out above.

Equally, although certain of Mr Snowden QC’s submissions have some superficial attraction, I am not persuaded that much, if anything, is gained by his exercise of comparison of the terms of the SFA with the LMA Standard SFA nor his submission that Millar’s construction of Clause 40 of the SFA is consistent with the LMA Standard SFA. Initially, Mr Higham QC submitted that any reference to the LMA Standard Form was inadmissible. However, in light of Mr Snowden QC’s reliance on what appears in para 3.06 of Lewison, The Interpretation of Contracts (5^th Ed., 2011), Mr Higham QC withdrew that objection although he submitted that the cautionary words of Moore-Bick LJ in Seadrill Management Services Ltd v AOA Gazprom [2010] EWCA Civ 691 (quoted in Lewison) remained apt and applied mutatis mutandis to the present case. I accept that the exercise performed by Mr Snowden QC is of some intellectual interest and is indeed superficially attractive but, in my view, it involves too many dangers to provide a safe basis in law for the exercise of construction of the SFA as executed. This is because, as in Seadrill, there is no evidence of why specific changes were made in the present case, nor any evidence that the parties turned their minds to the specific differences between the two forms – although it has to be said that, in my view, such evidence would in any event be inadmissible. Echoing the words of Moore-Bick LJ, the right course, in my view, when seeking to ascertain the (objective) intention of the parties is to consider the particular contracts on their own terms against the commercial background as it existed at the time they were made.

Given the importance of the iterative process of construction as stated above which I wholeheartedly endorse, it is not easy in a case of this kind to decide where to start. On one view, the starting point should be the actual language used by the parties. Another view is that the starting point should be the commercial background. In my judgment, the starting point is not crucial provided that at each stage one bears in mind the cautionary words of both Lord Mance and Lord Collins in Re Sigma Finance Corp as referred to above. That is an essential indeed crucial part of the iterative process.

Here, I propose to start with the actual words used in Clause 40 of the SFA. Mr Higham QC stressed that by virtue of Clause 40.1, the whole of Clause 40 is subject to the terms of the ICA. That is, of course, correct; and accordingly I agree that it is necessary to consider the relevant terms of the ICA and, so far as relevant, what, if any, impact such terms may have on Clause 40 of the SFA. In any event, there can be no doubt that Clause 40.2 sets out what might be described as the “default position” in effect permitting (subject always to the “exceptions” in Clause 40.3) any amendment or waiver to any term of the Finance Documents (a defined term including the SFA and a range of other specified documents) with the consent of the Majority Lenders and Truvo.

For present purposes, the critical exception is, of course, Clause 40.3(a)(v) of the SFA which in effect provides that any amendment or waiver that has the effect of changing or which relates to “save as a consequence of any Structural Adjustment, any amendment to the order of priority or subordination under the [ICA]” shall not be made without the prior consent of all the Lenders. As to these latter words which, of course, lie at the heart of the current dispute, there are, in my view, two important points to consider.

First, it is, in my view, noteworthy that the wording of Clause 40.3(a)(v) is concerned only with any amendment to the order of priority or subordination “…under the [ICA]…”. This case is of course concerned with an amendment to Clause 11.3 of the SFA. No question arises as to any possible amendment to any term of the ICA. It is, of course, correct that the wording of Clause 40.3(a)(v) is not specifically directed at the amendment of a particular contractual term; the focus is rather the amendment or waiver (whatever it may be) which has a certain “effect” to the “order of priority or subordination” under the ICA. Thus, it is necessary to consider whether or not the purported amendment to Clause 11.3 does have the effect of amending the order of priority or subordination under the ICA. Be that as it may, it seems to me that there is at least some force in Mr Snowden QC’s submission that if it was the intention of the draughtsman to require the consent of all Lenders to an amendment of Clause 11.3, it is at least somewhat curious if not odd that Clause 40.3(a)(v) is drafted in the way that it is i.e. without any reference to Clause 11.3 or indeed the SFA at all. In my view, this is at least a possible pointer in favour of the case advanced by Millar.

Second, the words used in Clause 40.3(a)(v) are “...priority or subordination…” There was some debate before me as to what, if any, difference existed between these words i.e. “priority” and “subordination” and the use of the word “or”. Be that as it may, it is common ground that neither of these words appears in Clause 11.3 or indeed elsewhere (in any relevant sense) in the body of the SFA. This is in marked contradistinction to the clauses in the ICA (e.g. Clauses 2 and 15) which do in terms provide for lenders’ debts to have “priority” and to be discharged in the specified “order of priority”. Whilst accepting always the iterative process of construction, this is, in my view, another pointer in favour of the case advanced by Millar i.e. that Clause 40.3(a)(v) is not concerned with an amendment or waiver of Clause 11.3. More specifically, Clause 11.3 is at least arguably concerned with something entirely different i.e. the application of mandatory prepayments in a particular order. It is, of course, right that Clause 11.3 does specify that the stipulated payments shall be applied in the “following order” and, as Mr Higham QC rightly submitted, I am ready to accept that it is certainly possible as a matter of language to say that this would involve giving “priority” to each of the successive categories of payees identified in sub-clauses (i), (ii) and (iii), nevertheless the word “priority” does not appear in Clause 11.3. In my view, this is more than a fanciful textual point. It seems to me that there is, at the very least, some force in the argument that, as submitted by Mr Snowden QC, the proper inference is that the draughtsman studiously avoided the use of any reference to “priority” or “subordination” in Clause 11.3 for good reason and that there is no proper basis for reading the clause as if it did include such wording. Moreover, in my view, there is also at least some further force in Mr Snowden QC’s argument that, as a matter of substance, the concept of applying mandatory prepayments in a particular order in the context of the exercise stipulated in Clause 11.3 is at least somewhat different from that of “priority” or “subordination”. I consider this aspect further below in the context of considering the ICA and, in particular, Clause 14 of the ICA which refers back to Clause 11.3 of the SFA.

In my view, it is at this stage that it is both convenient and important to address the points raised by Mr Higham QC with regard to “commercial purpose”. I have already set out the arguments advanced by DB and also touched upon the evidence in paragraph 4 of the second statement of Mr Verle which Mr Higham QC sought to rely upon in this context. But drawing the various points made together and at the risk of some repetition, these were, in summary, that the mandatory prepayment provisions as originally incorporated into the SFA were “unusual”; that they were included to meet the requirements of Lenders using mark-to-market accounting and to enable the Second Lien Debt to have some potential value in the market at the time of issue; that this did indeed have a positive effect on the price at which the Second Lien Debt was subsequently traded in the market as evidenced by the fact that in March 2011 the Second Lien Debt was then trading at 70 cents in the Euro whereas the First Lien Debt was trading at only 50 cents in the Euro thereby reflecting the US Tax Proceeds and the Cash Sweep mandatory prepayment provisions; that it would be commercially absurd and defeat the avowed commercial objective if, upon a third party acquiring a substantial tranche of Second Lien Debt at the market value, the value of that debt could be undermined by Truvo and the First Lien Lenders agreeing between themselves to expropriate the mandatory prepayment entitlements of the Second Lien Lenders; and that such a reversal would plainly have a devastating effect upon the price upon which Second Lien Debt would be traded. All of these matters were relied upon by Mr Higham QC (at least in his written skeleton argument) in support of the argument that it cannot have been the intention of the parties that the rights conferred by Clause 11.3 of the SFA could be amended by the Majority Lenders only and without the consent of all the Lenders and that therefore the construction urged by Mr Snowden QC must be wrong.

As attractively as this argument is put, there are at least two main difficulties with it. First, it involves in part at least reference to factual matters (i.e. the actual level at which both the First Lien Debt and the Second Lien Debt traded) many months after the date of execution of both the SFA and the ICA which, in my view, are inadmissible on well-established principles. Second, Mr Snowden QC did not accept the suggestion that the original terms of Clause 11.3 were “unusual” and, in any event, submitted that such characterisation was inadmissible and irrelevant. In response, Mr Higham QC submitted that the unusualness of Clause 11.3 was apparent even from the evidence of Millar’s own witness, Ms Harrison, and was admissible on that basis. But, in my view, neither limbs of that submission is correct. In truth, the usualness or otherwise of the original terms of Clause 11.3 is (at least in part) a matter of opinion which would need to be proved by expert evidence in respect of which the leave of the Court would be required – but such leave was neither sought nor granted. Although this court is generally keen so far as possible to avoid unnecessary technical points of evidence, this is a potentially important point of substance.

However, even stripping away these two difficulties, there remains Mr Higham QC’s core argument which it seems to me he can properly advance viz. that Millar’s construction is commercially unreasonable, indeed Mr Higham QC would say absurd, because, viewed as at the date of execution of the SFA, it involves the possibility of the Majority Lenders in effect expropriating the rights of the Second Lien Holders by amending the terms of Clause 11.3 without their consent. Formulated in such way, I agree that that does indeed seem a startling proposition. However, in my view, this argument is over-simplistic and ignores the overall structure of Clause 11.3 as it appears in the context of the SFA as a whole for the reasons given by Mr Snowden QC in his submissions and summarised in paragraphs 73-75 above. Further, as I have already stated, it is wrong to suggest that it was open for the Majority Lenders to amend the terms of Clause 11.3 “at the whim” of the Priority Lenders since it is plain from Clause 40.2(a) of the SFA that any amendment also required the consent of Truvo. In any event, it seems to me that Mr Higham QC’s submission in this context is largely circular: there is no “expropriation” if, in truth, the amendment can be made by the consent of the Majority Lenders and Truvo. In such event, the possibility that the terms of Clause 11.3 might be amended by the Majority Lenders and Truvo without the consent of all the lenders necessarily involved the possibility that such amendment might be to the detriment of those lenders other than the Majority Lenders who were not in favour of such amendment. In other words, if Millar’s construction is correct, the possibility of detriment to such other lenders is inherent in the wording of Clause 11.3. This may or may not be surprising but, if Millar’s construction is correct, such potential detriment is part of the scheme agreed by all the parties – for good or ill. However surprising it may be, I am not persuaded that such possibility is so commercially unreasonable as to warrant what would, in effect, involve a rewriting of the complicated bargain struck by the parties if that is what the parties have agreed.

I have focussed so far on the terms of the SFA. However, given the express terms of Clause 40.3(a)(v) of the SFA and the importance of adhering to the iterative process, I agree that none of the foregoing is determinative: the ultimate question remains whether or not any relevant proposed amendment has the effect of changing or which relates to an amendment to the order of priority or subordination under the ICA. Those are the crucial words which it is necessary to consider.

So, turning to the ICA, it is necessary to consider the main thrust of Mr Higham QC’s submissions in relation to that agreement which rested in particular on his analysis of Clauses 14 and 27 of the ICA.

As to the former, i.e. Clause 14, there is no doubt that both Clauses 14.1(d) and 14.3(c) provide that where relevant proceeds are required to be applied in mandatory prepayment of the Priority Lender Liabilities or the Second Lien Liabilities then they are to be applied as there stipulated and, in particular, that both Clauses 14.1(d)(ii) and 14.3(c)(ii) expressly provide (after initial payments) for such payments to be applied in accordance with Clause 11.3 of the SFA. I agree that the proposed amendment to Clause 11.3 the subject of the Consent Request would inevitably affect the order of application of such proceeds. Indeed, Mr Snowden QC did not suggest otherwise. However, it remains to consider whether such amendment to the order of application of proceeds is properly to be characterised as an amendment to the order of priority or subordination under the ICA. In considering that question, it seems to me that there are a number of arguments which, as submitted by Mr Snowden QC, both individually and cumulatively point against such a construction.

First, it is noteworthy that Clause 14 does not use the terms “priority” or “subordination” although I accept that that is, of course, not necessarily fatal to Mr Higham QC’s argument if, in truth, Clause 14 can properly be said to be concerned in substance with such matters. As to that, it seems to me that there is at least some force in Mr Snowden QC’s submission based upon the citation from Re SSSL Realisations and the textbooks referred to in paragraph 57 above, that in a general sense the terms “priority” and “subordination” are commonly utilised to describe the ranking of a debtor’s indebtedness in circumstances where there is a competition between creditors because there is a shortfall of assets to meet liabilities in an insolvency situation (i.e. a situation of a type falling within Clause 2.1 of the ICA where the words “priority or subordination” are expressly used). However, it seems to me that such words might well also be used to describe the order in which certain particular monies might be paid even without any insolvency – as would possibly appear to be the case (as Mr Higham QC submitted) with regard at least to the use of the term “order of priority” in Clause 15 of the ICA. All depends upon the context in which the particular words are used as, I understood, Mr Snowden QC was prepared to accept. Of course, Clause 14 is concerned with the “order” of application of mandatory prepayments and, in one sense, any change to such order will involve one party receiving certain payments prior to one or more other parties. That is one of the high points of Mr Higham QC’s case which I fully recognise. It is also fair to note that as submitted by Mr Higham QC, when the draughtsman of the ICA intended to refer specifically to Clause 2.1 of the ICA, he did so – see Clause 27.1(d)(iv); and that, in contrast, in Clause 27.1(b), where there is an express reference inter alia to Clause 15 of the ICA, the reference to the “order of priority or subordination under this Agreement” is entirely general. However, that point is, in my view, of little assistance when considering the terms of Clause 40.3(a)(v) of the SFA which ultimately lies at the heart of these proceedings.

As noted above, Mr Higham QC had a further point with regard to Clause 2.1 of the ICA viz. that if the phrase “the order of priority or subordination” is intended to refer primarily or exclusively to the order of priority and subordination in Clause 2.1 of the ICA, it makes little commercial sense for the SFA (and also the ICA) to require a change to that order of priority or subordination to be subject to the consent of the Second Lien Lenders. In that context, Mr Higham QC submitted that this was because it would always be in the interest of the Second Lien Lenders to give their consent to any amendment to Clause 2.1 of the ICA. I was initially impressed with this point and indeed regarded it as potentially fatal to Millar’s case. However, as submitted by Mr Snowden QC, the fallacy in that argument is that it rested on the premise that the Second Lien Holders would always give their consent to an amendment of Clause 2.1 because, given the structure of Clause 2.1, it would always be in their commercial interests to do so. However, as Mr Higham QC accepted in the course of his reply, the stated premise was wrong. In the event, this point evaporated.

Second, on Mr Higham QC’s analysis, Clause 40.3(a)(v) of the SFA involves consideration of Clause 14 of the ICA which in turn refers back to Clause 11.3 of the SFA (what Mr Snowden QC referred to as the “ping-pong” exercise). Such exercise inevitably brings into play consideration of the nature and proper characterisation of the obligations under Clause 11.3 of the SFA as to which my earlier comments apply and which I do not repeat. However, there is an additional point viz. in considering the scope of Clause 40.3(a)(v) of the SFA, it is my view that the case advanced by Mr Snowden QC also derives some support from a comparison with Clause 40.3(b)(iv) of the SFA which refers expressly to the possibility of an amendment to a particular clause of the SFA i.e. Clause 11.1 (Exit) and paragraph (b)(ii) of Clause 11.2. So, it would seem that if the draughtsman wanted to address the possibility of an amendment to a clause in the SFA, there was no difficulty in doing that. More importantly perhaps, the effect of Clause 40.3(b)(iv) is to permit an amendment or waiver of the obligation to prepay under inter alia Clause 11.1 F(Exit) with the prior consent of the Super Majority Lenders i.e. the consent of all the lenders is not necessary. If Mr Higham QC is right, the result is that although the full consent of all the lenders would be necessary to amend Clause 11.3, the prior consent of the Super Majority Lenders only would be sufficient to validate an amendment to the relevant obligation to prepay. As I say, it seems to me that this point does support the case advanced by Mr Snowden QC although it is important not to take it too far because there is, in my view, a possibly important distinction between, on the one hand, an amendment of an obligation to prepay and, on the other hand, the order in which any prepayment actually made be applied. However, the point remains that if Mr Higham QC is right, the disparity between the operation of these two clauses is, at the very least, somewhat curious if not odd.

As to Clause 27 of the ICA, Mr Higham QC’s arguments had various limbs. Breaking these down and taking them in turn, the first was that Clause 11.3 of the SFA was, in effect, incorporated into Clause 27 by virtue of the bracketed words in the opening part of Clause 27.1(b). Whilst accepting that this wording was somewhat inelegant, Mr Snowden QC submitted that this was not the case and he may well be right. However, there is no doubt that Clause 11.3 is referred to in Clause 14.1(d) and Clause 14.3(c) and for that reason could, I suppose, be treated as being “incorporated into [the ICA] by cross-reference”. However, it seems to me that this does not ultimately assist Mr Higham QC unless it can be said that the proposed amendment to Clause 11.3 of the SFA is caught by the other relevant words in Clause 27.1(b) i.e. it has “…the effect of changing or which relates to….(iii) the order of priority or subordination under this Agreement…” This wording is, of course, identical to that which appears in Clause 40.3(a)(v) of the SFA and it seems to me, as Mr Higham QC submitted, that in principle they ought to be given the same meaning. However, again it does not seem to me that this ultimately assists Mr Higham QC given everything I have already said about Clause 40.3(a)(v) of the SFA.

It is, of course, right that, as submitted by Mr Higham QC, Clause 27.1(b) does refer explicitly to certain terms in the ICA viz. in sub-clause (i) to both Clauses 12 and 15 of the ICA. On this basis, I accept that, as submitted by Mr Higham QC, there is the obvious argument that if the draughtsman had intended sub-clause (iii) to refer primarily or exclusively to Clause 2.1, such express reference could have been similarly inserted; and that the failure to do so gives rise to the inference that it was not so intended but, on the contrary, was intended to embrace any amendment which has the effect of changing or which relates to the order of priority or subordination under the ICA. However, even accepting all the steps in such argument, the question remains whether the proposed amendment to Clause 11.3 of the SFA had such effect. So, once again, one is thrown back on the various points with regard to that aspect which I have already considered and which it is unnecessary to repeat.

Mr Higham QC went further. As noted, it was part of his submission that Millar’s interpretation gives no meaning to the bracketed words in Clause 27.1(b) and their construction cannot be right because Clause 2.1 of the ICA does not incorporate by cross-reference any clause of the SFA. By contrast, Clause 14.1(d) and 14.3(c)(ii) of the ICA do. In my view, there is nothing in this point: the bracketed words start off with the word “including” so that even though Clause 2.1 does not cross-refer to the SFA, I have no doubt that it falls within the embrace of sub-paragraph (iii).

I do not consider that the process of construing the proper scope and effect of Clause 40.3(a)(v) of the SFA is straightforward. On the contrary, it is, as I have already stated, something of a rocky path. However, applying the iterative process and for the reasons stated above, the conclusion I have reached is that the construction advanced by Millar is correct viz. the proposed amendment in the Consent Request did not have the effect of changing or relates to an amendment to the order of priority or subordination under the ICA within the meaning of Clause 40.3(a)(v) of the SFA and that there is nothing in the ICA (including Clauses 14 or 27) which would justify a contrary conclusion. Accordingly, such proposed amendment did not require the consent of all the Lenders but only the consent of the Majority Lenders and Truvo (which consents were duly given) with the result that the amendment was, in my judgment, valid and effective. Counsel are requested to seek to agree a draft order (including costs) in light of this judgment failing which I will deal with any outstanding issues.