Edgeworth Capital Luxembourg SARL & Anor v Maud

The Defendant is one of two Guarantors under a guarantee entered into on 12 September 2008 (the “Guarantee”) in favour of The Royal Bank of Scotland (“RBS”). The Guarantors’ liability under the Guarantee is joint and several. The Guarantee also contains an indemnity. Pursuant to clause 2.1 of the Guarantee the liability of the Guarantors is capped at €40,000,000.

Ramblas Investments B.V. is a company incorporated in the Netherlands with its “centre of main interests” in Spain (“Ramblas”). On the same date as the Guarantee, Ramblas entered into a junior loan agreement with RBS under which RBS was arranger, original lender (“Original Lender”) and facility agent (the “Junior Loan Agreement”) for a loan facility of €200,000,000 available to Ramblas. The full sum of €200,000,000 was drawn down by Ramblas on 12 September 2008.

Amounts due under or in connection with the Junior Loan Agreement fall within the liabilities guaranteed by the Guarantee.

The Defendant and his co-guarantor also, and again jointly and severally, entered into a loan agreement with RBS for €75,000,000 (the “Personal Loan Agreement”).

It is common ground that pursuant to a Transfer and Assignment Agreement dated 30 November 2010, and a Transfer and Assignment Agreement Transfer Deed dated 17 December 2010, the Claimants acquired all present and future rights of RBS as Original Lender under the Junior Loan Agreement, and under the Personal Loan Agreement and the Guarantee (the “Transfer”).

It is further common ground that as a result of certain interest payment defaults under the Personal Loan Agreement occurring in June and September 2010, cross-default provisions in clause 19 of the Junior Loan Agreement were triggered. In light of this cross-default, an acceleration notice was sent to Ramblas on 30 December 2010 demanding payment of all sums owing under the Junior Loan Agreement. Further notices of demand were sent to Ramblas on 6 Jan 2011 and 11 December 2012.

Ramblas failed to pay the sum owing under the Junior Loan Agreement. Consequently, on 17 January 2011, the Claimants issued proceedings in the High Court of England and Wales to recover the sums owing pursuant to the Junior Loan Agreement and the Personal Loan Agreement.

On 17 June 2011, in the proceedings to recover the sums owing pursuant to the Junior Loan Agreement, Mr Justice Teare made an order, by consent, that Ramblas pay €216,582,038.05 inclusive of interest up to 13 June 2011, and interest thereafter (the “Order”).

On 4 March 2014, and in Spain, Ramblas entered into the Spanish voluntary insolvency process known as concurso. In the concurso, the Claimants’ debt claims against Ramblas have been classified by the Insolvency Administrator as being subordinated. The Claimants have challenged that classification in the Spanish Insolvency Court. No ruling has yet been issued.

No payment has been received by the Claimants from Ramblas pursuant to the Junior Loan Agreement or the Order. A demand letter was sent by RBS as facility agent, acting on the instructions of the Claimants, to the Defendant on 7 October 2014 demanding payment of €40,000,000 under the Guarantee. No payment has been received from the Defendant.

The Claimants commenced the present proceedings in the High Court of England and Wales as a result. The Guarantee is governed by English Law and the parties to it agreed to the exclusive jurisdiction of the English courts.

In light of other proceedings now before the Courts that are of concern to the same parties, and the possible consequences of the decision on this trial for those proceedings, I have produced this judgment as quickly as I can. I hope I can be forgiven in that circumstance if I concentrate on the essential points; I mean no disrespect to the full range of argument made on each side.

At this, the trial of the proceedings, the Defendant’s position has been that under Article 97.2 of the Spanish Act 22/2003, dated 9 July 2003 (the “Spanish Act on Insolvency”), the Guarantee, and consequently the debt owing to the Claimants under the Guarantee, has been extinguished.

The Claimants contend that Article 97.2 of the Spanish Act on Insolvency applies to extinguish “guarantees” (i.e. securities) granted by the debtor the subject of the concurso, and in particular to what have been termed “guarantees in rem”; that is, guarantees committing property of the insolvent debtor. It does not, they contend, operate to extinguish the Guarantee as that is a guarantee granted by a third party, i.e. the Defendant.

As a matter of record, there has not yet been a cancellation of any “guarantees” in the concurso. There is also a question about whether Spanish law is the applicable law. However none of these matters are material to the outcome of this trial if Article 97.2 does not operate to extinguish a guarantee granted by a third party.

Having heard expert evidence on the issue whether Article 97.2 operates to extinguish the Guarantee as a guarantee granted by a third party I am fully satisfied that Article 97.2 does not so operate.

The Claimants called Professor Angel Rojo Fernandez-Rio and the Defendant called Mr Pablo Urena Gutierrez. Professor Rojo is Professor of Commercial Law at the University of Madrid. Mr Urena is the head of the Spanish legal firm Urena, Abogados. Although I did not accept all the views expressed, I valued the evidential contribution that each expert was able to make in their reports to the Court and at the trial.

Article 97.2 provides, in the translation of the Spanish Act on Insolvency put before the Court by the parties (a translation published by the Spanish Ministry of Justice):

“If the creditor classified as specially related to the debtor on the list of creditors does not challenge that status in a timely and correct manner, the insolvency Court, on expiry of the term to challenge and with no further ado, shall hand down an order declaring the collateral of any kind constituted in favour of the claims that party might hold to be extinguished, ordering, when appropriate, the reinstatement of possession and cancellation of the entries at the relevant registers. Claims listed under Subparagraph 1 of Article 91 when the insolvent debtor is a natural person are excluded.”

“Persons specially related to the [insolvent] debtor” are described under Article 93. By Articles 89 and 92.5 the claims against the insolvent estate held by a person specially related to the insolvent debtor are (subject to exceptions, considered below) “classified, for the purposes of the insolvency proceedings” as subordinated.

In approaching the proper construction of Article 97.2 the experts both referred to Article 3.1 of the Spanish Civil Code. This provides in one translation:

“Legal precepts shall be interpreted in the true sense of their words in view of their context, the historical legislative history and the social reality of the time in which they must be applied, fundamentally in view of their spirit and purpose.”

The experts were in agreement that the wording of Article 97.2, and in particular “collateral of any kind” (sometimes translated as “guarantees of any kind”) were capable of bearing a literal meaning wide enough to extend to third party guarantees. I accept that evidence. It is supported by an objective consideration of the wording.

It was suggested by the Defendant that the experts intended to convey that the words were not capable, on their literal meaning, of bearing any other (narrower) meaning; that is, that it was not possible for the words to bear a meaning that did not include third party guarantees. I do not accept that suggestion. In my understanding of their evidence, the experts recognised that Article 97.2 did not refer specifically to third party guarantees, but that the words “guarantees of any kind” were wide enough to refer to third party guarantees, and the question was whether the words did so refer.

The Defendant argues that the addition of the words “of any kind” in Article 97.2 “simply makes it impossible to say … that the article refers to only guarantees ‘of certain kinds’”; but in fact it is not impossible for a literal interpretation to honour the words “guarantees of any kind” and yet recognise that a question remains whether the language extends to any provider (ie including a third party) of a guarantee of any kind.

I add that if (contrary to my assessment of their evidence) the experts intended to convey that the only possible literal meaning of the words was one that included third party guarantees I would, with respect, not have accepted their opinion. It would not be supported by an objective consideration of the wording. It would not be supported by the approach of the Spanish Court of Appeal in a decision in 2013 and to which I refer further below. And in many ways the very fact, range and depth of the evidence and argument before me at this trial simply served to demonstrate that the words were capable of different literal meanings, and certainly different meanings if “interpreted in the true sense of their words in view of their context” as Article 3.1 of the Spanish Civil Code requires.

Moreover, the expert opinion available did not cause me to understand that the Spanish Act on Insolvency uses a single clear scheme of language or definition in the particular area under discussion. To take three examples: in Article 87.6 “fianza de tercero” is used to describe what was on occasion translated as “third-party guarantee”; in Article 94.2 the expression “garantias personales o reales” is used apparently to make clear that it is to both personal guarantees and guarantees in rem to which reference is there being made. In Article 97.2 itself the Spanish is “garantias de cualquier clase” which in the translation above was rendered as “the collateral of any kind”.

When I turn to context, the material points are, I find, those considered in the following paragraphs.

First, it is valuable to examine the framework of the legislation, and consider the detail within that framework. Article 97.2 is within Title IV of the Spanish Act on Insolvency, “The Report by the Insolvency Practitioners and Determination of the Insolvent Debtor’s Assets and Liabilities”. Chapter II within that Title addresses the “determination of the aggregate assets” of the insolvent estate, and Chapter III addresses the “determination of the aggregate liabilities” of the insolvent estate.

These enable the Insolvency Practitioner to prepare a report to the Court under Chapter I, to which (among other things) an inventory of aggregate assets and a list of creditors is to be attached. Chapter IV provides for publication of the report and challenge to the inventory of aggregate assets and to the list of creditors. Article 97.2 is part of Chapter IV; Article 97 as a whole being entitled “Consequences of failure to challenge and subsequent amendments”. The framework of Title IV, and the contents within Title IV, contain no suggestion why it should be the business of Article 97.2 to address third party guarantees.

It is useful next to examine an argument of Mr Peter Arden QC and Mr Patrick Harty, for the Defendant, based on other language to be found within Article 97.2 itself. The argument was to the effect that the final sentence of Article 97.2 itself supports a construction of Article 97.2 that extends to third party guarantees. The final sentence of Article 97.2 provides, in translation: “Claims listed under Subparagraph 1 of Article 91 when the insolvent debtor is a natural person are excluded.”

In my judgment the sentence does not illuminate the subject of whether Article 97.2 extends to third party guarantees. The sentence is concerned with a specific, employment law related, exception to the circumstances in which creditors with a special relationship to the insolvent debtor will be liable to receive an order declaring collateral extinguished.

The subparagraph 1 of Article 91 to which the final sentence of Article 97.2 refers is within Chapter III of the Spanish Act on Insolvency and within section 3 of that Chapter (“On ranking of claims”). Chapter III begins with Article 89.1 requiring claims included on the list of creditors to be classified “for the purposes of the insolvency proceedings” as preferential, ordinary and subordinated. After Article 90 (“Claims with special preference”) Article 91 turns to “claims with general preference”. By Article 91.1 the first of those claims with general preference are (subject to certain limits) claims for salaries “that are not recognised special preference”, for compensation arising from the end of the contracts, and for compensation arising from an industrial accident or disease.

Mr Arden QC submits that the only way in which the last sentence of Article 97.2 can be given any meaning is if Article 97.2 can cover personal guarantees given by third parties, and in that way it prevents credits identified in Article 91.1 from losing the benefit of third party guarantees. I do not accept this: Article 91.1 accords general preference for, among other things, claims for salaries “that are not recognised special preference”. A creditor might have a guarantee or collateral from the debtor in respect of that claim (eg a guarantee in rem); he or she might, if specially related to the debtor, lose that guarantee under Article 97.2 were it not for the final sentence of that Article. Considered in that way, for the last sentence of Article 97.2 to have meaning it does not have to cover personal guarantees given by third parties.

Mr Mark Phillips QC, Mr William Willson and Mr Ryan Perkins were right to point out that the last sentence of Article 97.2 is not alone in this respect: Article 92.5 creates another specific, employment law related, exception. This time the exception is to the circumstances in which a creditor with a special relationship to the insolvent debtor may see their claim subordinated.

Mr Arden QC responds by saying that an argument that would leave the last sentence of Article 97.2 as superfluous or simply repetitive of another provision is an argument to be rejected. However I do not agree that, appreciated in the way described above, the last sentence of Article 97.2 is either superfluous or repetitive. And I can well understand the legislature having a particular focus, discussed by Professor Rojo in his evidence, to make clear provision in the case of employment-related claims in an insolvency.

It is next relevant to ask whether there is any objective reason for Article 97.2 extending to third party guarantees. That was one of the questions behind the opinion expressed by the Spanish Supreme Court in SC (Civil Division, 1^st Chamber) Judgments No 51/2013 of 20 February (RJ/2013/4353) at paragraph 43. The Supreme Court, whilst considering Article 97.2, used the point - that if the Article included guarantees established by third parties then their cancellation would benefit only third parties - to support a conclusion that the particular argument being advanced before the Court would lead to an absurdity. On the trial before me, no credible objective reason for Article 97.2 extending to third party guarantees has been identified.

On behalf of the Defendant it was canvassed that Article 97.2 was directed to encourage funding of companies through capital rather than debt; but I see nothing that supports the suggestion that this was what the Spanish legislature was addressing when enacting this Article in its place within the framework of the Spanish Act on Insolvency.

Separately Mr Urena referred to a decision of the Spanish Supreme Court of 10 October 2011 in which reference was made to the “circumstances justifying the subordination” in Article 97.2 as being “to completely root out the abstract possibility of there being abuses derived from the influence and control which the holder of the secured credit might have exerted over the debtor company.” That may show why Article 97.2 addresses extinguishing collateral granted by the debtor but not why it should extend to third party guarantees.

When Mr Urena said in evidence that the “ratio” of the provision was in his opinion to avoid the possibility of the person specially related to the debtor acting “in their own benefit and against the interest of the concurso itself” I can understand that opinion and its relationship to the reference made by the Spanish Supreme Court in 2011. However when he added that the “ratio” was also to avoid the possibility of the person specially related to the debtor acting “against the interests of third parties” I cannot see how that view can be taken from a consideration of the Spanish Act on Insolvency.

The special relationship of the creditor that is involved for the purpose of Article 97.2 is of course with the debtor not a third party guarantor. The Spanish Civil Code contains, as Mr Urena pointed out, provisions to protect guarantors. These can in certain circumstances allow an action to cancel the guarantee. This serves, to my mind, to support rather than detract from the proposition that it is not in a provision (such as Article 97.2) concerned with the list of creditors of the insolvent estate that one will find the Spanish legislature pursuing a policy of protecting third parties such as third party guarantors.

Mr Urena offered the view that the consideration that the third party guarantor’s right of subrogation against the insolvent debtor may be subordinated if the creditor’s claim was subordinated (because of the creditor’s special relationship with the debtor) may be relevant. In my judgment that consideration does not point to a conclusion that the purpose of Article 97.2 was (in whole or in part) to address third party guarantees. There is nothing to explain why, if this was the purpose, Article 97.2 should be concerned to extinguish a third party guarantee where the guarantor knew at the point of giving the guarantee that the creditor was specially related to the guarantee.

Finally, and on the other hand to the points considered above, it is perfectly possible to see why Article 97.2 should refer to guarantees or collateral given by the debtor, and in particular to what have been termed “guarantees in rem”; that is, guarantees committing property of the insolvent debtor. The legislator, having reached the policy decision that some persons specially related to the debtor should be subordinated in relation to some claims, would understandably be concerned to address collateral held by those persons against the assets of the insolvent estate.

Before leaving the key issue, I add that neither expert referred to an instance of Article 97.2 being interpreted by the Spanish Courts as extending to a third party guarantee, or even being applied in that way in the course of a Spanish insolvency process.

In the circumstances, it is not necessary to decide other points that were argued. Some of those points concerned issues of wider general importance and it is undesirable to express a concluded view where that is unnecessary for the outcome in this case. I will limit myself to the observations below out of respect for the arguments advanced.

Insolvency Regulation The Claimants contend that a debt arising under a contract governed by English law is not capable of being discharged, at common law, by insolvency proceedings in a foreign jurisdiction. The Defendant argued in response that Spanish Law applied pursuant to the Insolvency Regulation (Council Regulation No 1346/2000). This prompted a commanding and skilful review of the Regulation by Mr Phillips QC for the Claimants in closing submissions, and I am sorry not to elaborate on that review in greater detail in this judgment.

In my view the mere fact that the Article 97.2 is to be found in legislation dealing with insolvency is not enough to bring it within the Insolvency Regulation. A close analysis of Article 97.2, of the legislation in which it is found, and of the Insolvency Regulation is required. Having regard, in particular, to paragraphs (6), (11), (12), (22), (23) and (25) of the preamble to the Regulation and Articles 1.1, 4 and 25 of the Regulation, if Article 97.2 did indeed extinguish third party guarantee obligations as contended by the Defendant I would have great difficulty in accepting that Article 97.2, in that respect, was a provision that fell within the Insolvency Regulation.

Judgments Regulation The Defendant submitted that if the present matter was not governed by the Insolvency Regulation then it must be governed by the Judgments Regulation, in the form in force before January 2015 (Council Regulation No 44/2001). The submission is open to the objection that it uses too broad a brush, and does not distinguish sufficiently between jurisdiction and recognition. In any event I am entitled to have confidence that the Spanish courts would reach the conclusion that (a) English law governs the question of discharge of the Guarantee and (b) that even if Spanish law governs that question the answer would be that, as a third party guarantee, the Guarantee would not be extinguished under Article 97.2.

Submission to the jurisdiction The Defendant argued that Spanish Law applied because the Claimants have submitted to the jurisdiction of the Spanish Courts. In Rubin and another v Eurofinance SA; In re New Cap Reinsurance Corpn Ltd (in liquidation) [2012] UKSC 46; [2013] 1 AC 236, the Supreme Court of the United Kingdom accepted the submission of the liquidators of New Cap that, having chosen to submit to New Cap’s Australian insolvency proceedings, the appellant syndicate should be taken to have submitted to the jurisdiction of the Australian court responsible for the supervision of that proceeding; that “[i]t should not be allowed to benefit from the insolvency proceedings without the burden of complying with the orders made in that proceedings” (see at [157]-[167] per Lord Collins); and see also Stichting Shell Pensioenfonds v Krys and another [2014] UKPC 41 at [32], and the description of what Bacon CJ termed “the compact” in Ex p Robertson; In re Morton (1875) LR 20 Eq 733 at 737-8).

In my view there is a real question whether a submission to the Spanish insolvency proceedings would be held to extend to a submission to the effects of Article 97.2 if and to the extent that that Article 97.2 did indeed extinguish third party guarantee obligations as contended by the Defendant. Again the mere fact that Article 97.2 is to be found in legislation dealing with insolvency may not be enough to mean that, where the Article goes beyond matters concerned with the administration of an insolvent debtor, it is part of what a creditor is taken to have submitted to. That may still be the case even where, as here, the creditor has taken the step of challenging their classification as a creditor specially related to the debtor.

Indemnity Even if Article 97.2 applies to a third party guarantee, the Claimants also have (under clause 2.1(c) of the Guarantee) the benefit of an indemnity and the question remains whether the operation of Article 97.2 above will also apply to extinguish an indemnity. This question was not addressed as thoroughly by the expert evidence as I would have wished had it been necessary to reach a final view. In particular I was not clear whether Spanish Law sees an indemnity as being a contract that is as different in nature from a guarantee as it is in the eyes of English Law. In these circumstances it is not useful for me to say more on this aspect given the conclusions I have reach on points that are decisive.

Mr Arden QC and his team have helped me appreciate all points that might be made on behalf of the Defendant, and I am grateful to them. However in the circumstances, the Claimants are entitled to judgment on the Guarantee.