Cattles Plc v Welcome Financial Services Ltd & Ors

A contractual subordination clause preventing a guarantor from making any claim against a debtor in competition with a bank is not limited to claims arising from the guarantor’s capacity as surety. It may also prevent recovery of an independent inter-company debt where that recovery competes with the bank for the debtor’s assets. The equitable rule in Cherry v Boultbee may be excluded by contract. An assertion sufficient to found a quasi-retainer is itself a claim for this purpose. Where a subordination provision protects both the bank and the group companies, the bank cannot waive it unilaterally. A separate facility provision may be waivable where its wording expressly permits the bank to direct otherwise.

The claimant sought declarations under Part 8 concerning the construction of a group guarantee and related facility agreements. The claimant owed substantial sums to the second defendant bank and held a substantial inter-company debt owed by the first defendant. The bank contended that the guarantee prevented the claimant from claiming or proving for that debt until all guaranteed obligations had been discharged.

Alternatively, the parties disputed whether the first defendant could rely on the rule in Cherry v Boultbee to appropriate dividends otherwise payable on the inter-company debt against its counter-indemnity claim. The court also considered whether the contractual provisions excluded that right and whether the bank could waive them.

1. Clause 6.2. The claimant was prohibited from making a claim against the first defendant, including a claim for the inter-company debt, where the claim was in competition with or in priority to the bank. The word any was not confined by the defined term Guarantor. That term identified the relevant company’s role in the particular guarantee context; it did not restrict the substantive scope of the clause.
2. The commercial purpose of clause 6 was to maximise the bank’s recovery from the assets of a particular debtor. A claim for an independent inter-company debt could compete with the bank just as much as a claim arising from the guarantee. The claimant’s obligation therefore arose only insofar as its claim was in competition with or in priority to the bank. No circumstances had been identified in which it would be in priority.
3. The court considered itself bound by Re SSSL Realisations (2002) Ltd. The Court of Appeal’s fully reasoned conclusion concerning the rule in Cherry v Boultbee was not obiter merely because another ground had also been decided. The court held that, if applicable, the rule entitled the first defendant to account for the full potential counter-indemnity liability.
4. The right of quasi-retainer was capable of contractual exclusion. In the circumstances, asserting the counter-indemnity relied on to found that right constituted the making of a claim under clause 6.2 because it reduced the assets available to the bank in the claimant’s insolvency and was therefore in competition with the bank.
5. Clause 15.7 of the facility agreement also prima facie excluded the quasi-retainer, including because it withheld any right of contribution or indemnity before the bank had been paid in full. The bank could waive clause 15.7 because that clause expressly permitted a direction to the contrary. It could not waive clause 6.2 without the consent of the claimant, since that provision also benefited the group companies.

Issue (i) was answered affirmatively subject to the qualification concerning competition with or priority to the bank. The contingent issues did not arise, save for the court’s observations.