Kahn & Ors v Interested Party A & Anor

A contractual priority-of-payments provision which ranks successive classes of secured creditors does not, without clear wording, require prompt payment or create priority within a class according to debt maturity dates. Receivers retain their ordinary discretion as to realisation, reserves and distributions, subject to the prescribed inter-class priority and pari passu treatment within a class.

An insolvency-redemption clause requiring payment to the holders of notes on a specified redemption date applies to all outstanding notes. It substitutes a single obligatory payment date, including for notes otherwise falling due on the insolvency-acceleration date. It does not alter substantive priority where the security document creates no intra-class maturity-based priority.

A Jersey structured investment vehicle entered receivership after an Automatic Enforcement Event and an Insolvency Acceleration Event. Its assets were insufficient to meet liabilities to Senior Creditors, including several series of US medium-term notes with different maturity dates.

The receivers sought directions on the construction of clause 6.6 of the Security Trust Deed and section 10.01(c) of the Indenture. The High Court, Chancery Division, in [2008] EWHC 463 (Ch), held that clause 6.6 gave priority within Senior Creditors according to debts then payable, and treated most earlier-maturing notes as payable on the later insolvency redemption date.

The receivers appealed the ruling on the Security Trust Deed. The Bank of New York appealed the ruling on the Indenture. The central issue was whether the documents created maturity-based priority among Senior Creditors.

1. The receivers’ appeal was allowed and BNY’s appeal was dismissed. The declarations made below were incorrect because clause 6.6 of the Security Trust Deed did not create priority among Senior Creditors by reference to the dates on which their debts became payable.
2. Clause 6.6 was a provision governing the priority of payment between successive classes of creditor. It did not impose a duty to pay money at a particular time, nor a duty to distribute each receipt immediately. Its pro rata and pari passu language prescribed the allocation of money when payment was properly made to a class; it did not elevate Senior Creditors with earlier maturity dates over other Senior Creditors.
3. This construction operated sensibly both before and after insolvency. Before an Insolvency Acceleration Event, receivers could pay current Senior Creditor liabilities if reasonably satisfied that remaining assets would meet future liabilities. After insolvency, they retained the ordinary discretion of receivers as to realisation and reserves. They could not pay a debt before it was due, but could retain sums where necessary to ensure pari passu and pro rata treatment when debts within the class later fell due.
4. The competing construction would have made intra-class priorities depend on arbitrary matters, including the timing of receipts and the company’s choice of the notice period under section 10.01(c) of the Indenture. Clearer language would have been required to produce that result.
5. Section 10.01(c) imposed a new obligatory payment date on all outstanding notes, whether fixed by notice or, in default, at the end of 30 days. This included notes otherwise maturing on the date of the Insolvency Acceleration Event. The provision assisted orderly administration and did not affect substantive payment priority under clause 6.6.

• Court of Appeal (Civil Division): allowed the receivers’ appeal and dismissed BNY’s appeal, overturning the relevant declarations made below.
• High Court, Chancery Division: in [2008] EWHC 463 (Ch), gave directions in the receivership and held that clause 6.6 created maturity-based priority within Senior Creditors. It also held that section 10.01(c) postponed notes maturing after, but not on, the Insolvency Acceleration Event.