Cheyne Finance Plc, Re

A contractual payment waterfall should be construed as a whole and in light of the commercial purpose expressed in the surrounding provisions. Where receivers are required to manage assets to achieve timely payment of senior debts as they fall due, a provision requiring payment of present senior obligations before cash provision for future obligations may properly be construed on a pay as you go basis. The court should not adopt a strained construction merely to cure risks of unfairness deliberately accepted in a sophisticated contractual insolvency regime.

The receivers of Cheyne Finance Plc sought urgent directions concerning the construction of clause 12.1(b) of a Security Trust Deed. Following an Enforcement Event, but before an Insolvency Event, monies received were to be applied in satisfaction of or provision for Senior Obligations.

The competing constructions were whether present obligations had to be paid in full before cash was set aside for future obligations, or whether provision had first to be made for all Senior Obligations and available funds then distributed pari passu. The central issue was the internal priority between payment of debts already due and provision for debts falling due in the future.

1. Construction adopted. Clause 12.1(b) was construed according to the pay as you go construction. After the first priority had been satisfied, monies were to be used to pay Senior Obligations then due and payable in full. Any surplus was then to be used as cash provision for future Senior Obligations. Only after the relevant senior obligations had been paid or provided for could monies pass to junior priorities.
2. Commercial coherence. Clause 10.2 required the receivers to manage the assets with the objective of securing timely payment in full of Senior Obligations as they fell due. The pay as you go construction operated harmoniously with that objective. The pari passu construction would conflict with it by requiring provision for future obligations before paying obligations already due.
3. Meaning of provision. The references to provision in clause 12 concerned cash provision from monies in the receivers’ hands. They did not permit provision by reference to Cheyne’s other non-cash assets.
4. Fairness and insolvency policy. The risk that creditors with later maturities might receive less was a consequence of the parties’ deliberately chosen definition of Insolvency Event and contractual regime. It did not justify a strained construction of clause 12. The regime was designed to replace the statutory insolvency scheme between the parties, and the court should respect the commercial objective of an orderly run-off.
5. Unresolved statutory point. The court assumed, without deciding, that the contractual reference to Insolvency Act 1986, section 123(1), excluded balance-sheet insolvency. It left open whether certainty of inability to pay debts at a later date could amount to a present inability to pay debts as they fall due.

The construction issue was resolved in favour of the receivers’ pay as you go construction. The appropriate form of order was to be addressed subsequently.