Re Golden Key Ltd (In receivership)

The Court of Appeal considered the construction of section 5 of the commercial paper terms of issue and the related provisions of the Collateral Trust and Security Agreement (CTSA) (notably sections 7.3, 7.4 and 7.5) to decide whether a Mandatory Acceleration Event (MAE) or the delivery of an Acceleration Redemption Notice (ARN) (and the resulting Acceleration Redemption Date (ARD)) determined which tranches of commercial paper would be repayable together. The court applied the ordinary principles of contractual interpretation (including the objective commercial aim of the parties as part of the background) and treated the documentation as an integrated scheme.

It held that the ARN (delivered on 24 August 2007) was the operative event that fixed the ARD and that section 5 postponed repayment only of commercial paper whose Maturity Date had not already arrived on or before the date on which the ARN was delivered. Commercial paper which had already matured retained its accrued right to payment and was to be dealt with under the priority/defeasance provisions in the CTSA (sections 7.3 and 7.5) rather than by pari passu distribution under section 7.4.

Background and parties: Golden Key Ltd was a structured investment vehicle funded principally by short-term commercial paper (CP). Parties C and D (the "Longs") held CP maturing in September 2007 and contended that by virtue of section 5 of the terms of issue all CP maturing and unpaid on or after 23 August 2007 became repayable on the Acceleration Redemption Date 24 September 2007. Parties A and B (the "Shorts") contended that only CP whose Maturity Date had not arrived by the date of the Acceleration Redemption Notice ( ARN ) were affected; CP whose Maturity Date had already arrived retained the right to repayment on that Maturity Date under the CTSA priority and defeasance provisions. The appeal came from Henderson J in the Chancery Division, Companies Court ([2009] EWHC 148 (Ch)).

Nature of the application / relief sought: Declaration/interpretation proceedings as to the effect of section 5 of the CP terms and the related CTSA provisions: whether all outstanding CP were accelerated to the ARD and therefore to pari passu repayment on that date, or whether CP which had already matured retained their rights to repayment on their Maturity Dates.

Issues framed:

• Does the occurrence of a Mandatory Acceleration Event (MAE), the delivery of an Acceleration Redemption Notice (ARN) or the arrival of the Acceleration Redemption Date (ARD) operate to accelerate or to postpone Maturity Dates for outstanding CP?
• If acceleration/postponement occurs, does it affect CP whose Maturity Dates had already arrived by the date of ARN delivery?
• How should section 5 of the CP terms be read in context with CTSA sections 7.3–7.5, the paying agency agreement and the wider transaction documentation?

Court’s reasoning (concise): The court reviewed the contractual matrix and applied established principles of interpretation (ICS and Prenn cited). It recognised drafting deficiencies in section 5 and the need to give weight to commerciality where the documents were ambiguous. The CTSA envisaged successive operating states (pre-wind down, post-confirmation/pre-ARD, post-ARD) and expressly provided for daily application of section 7.3 (defeasance) until the ARD, and for pari passu distribution under section 7.4 only upon the ARD. The court concluded that the ARN (delivered pursuant to CTSA section 3.3(b)) is the operative notice that fixes the ARD and starts the regime that will lead to pari passu distribution; however, the ARN does not divest holders of CP of accrued rights where a Maturity Date had already fallen on or before the date of delivery of the ARN. The Paying Agent’s practical duties and the availability of funds (note defeasance account mechanics) did not displace those accrued rights.

Practical outcome: The appeal was dismissed: section 5 postpones repayment only for CP whose Maturity Date had not arrived by the time the ARN was delivered; CP already matured on or before the ARN remained payable under the CTSA priority regime.

Appeal dismissed. The court held that delivery of the Acceleration Redemption Notice (24 August 2007) fixed the Acceleration Redemption Date, and section 5 postponed repayment only of CP whose Maturity Date had not arrived on or before the date of delivery of the ARN; CP that had already matured retained their accrued right to payment and were to be dealt with under the CTSA priority/defeasance provisions (sections 7.3 and 7.5) rather than by pari passu distribution under section 7.4.

Appeal from the High Court of Justice, Chancery Division (Companies Court), Henderson J: [2009] EWHC 148 (Ch). The Court of Appeal delivered judgment allowing application of its construction and dismissed the appeal: [2009] EWCA Civ 636.