Barclays Bank Plc & Ors v HHY Luxembourg SARL & Anor (Rev 1)

A complex commercial agreement must be construed according to the meaning it would convey to a reasonable person, having regard to its language, context and overall scheme. Where a clause is capable of two meanings, the court should adopt the more commercially sensible construction.

A power to release liabilities and security upon a post-enforcement disposal of all the shares in an obligor or any direct or indirect holding company may extend to subsidiary obligors transferred indirectly by that disposal. The construction may reflect the agreement’s purpose of enabling an efficient sale and maximising creditors’ recovery.

The European Directories Group was in serious financial difficulty. A proposed restructuring involved placing DH6 into administration, selling its shares in DH7 to a new company, transferring certain liabilities and releasing guarantees and transaction security given by companies beneath DH7.

The inter-creditor agreement authorised the security trustee to take specified steps following an enforcement-related disposal. Proudman J held that clause 15.2 permitted the release only of the entity whose shares were sold. The appellants contended that it also covered subsidiary obligors transferred indirectly through the sale of their direct or indirect holding company.

The central issue was whether clauses 15.2(b) and 15.2(c) authorised the proposed releases and transfers in respect of the obligors beneath DH7.

1. The appeals were allowed unanimously. The judgment of Proudman J was set aside. Clause 15.2 authorised the proposed release of the liabilities and transaction security of obligors beneath DH7, and the corresponding disposal of liabilities on behalf of the lenders.

2. The meaning of a disputed commercial provision is the meaning conveyed to a reasonable person. Its language must be read in the context of the document’s scheme as a whole. The court therefore considered the corporate structure, the facilities agreements and the inter-creditor agreement rather than treating the wording of clause 15.2 in isolation.

3. The words referring to a disposal of all the shares in an obligor or any holding company of that obligor could naturally be read from the bottom upwards. On that reading, each operating subsidiary was the relevant obligor and DH7 was its direct or indirect holding company. The sale of all the shares in DH7 therefore satisfied the condition for releasing the liabilities and security of each subsidiary obligor.

4. That interpretation also accorded with the agreement’s commercial purpose. The inter-creditor agreement established priorities among creditor groups, regulated enforcement, empowered the security trustee to effect releases and required enforcement proceeds to be distributed through the agreed waterfall. Those arrangements were intended to facilitate an efficient disposal and maximise recovery.

5. Once two constructions were available, the more commercially sensible construction was preferable. Requiring separate sales of every subsidiary obligor would have been futile and expensive because the same releases could ultimately have been achieved through multiple transactions. Treating that unnecessary process as a bargaining opportunity for subordinated creditors would have inverted the agreed relationship between priority and deferred creditors and could have allowed one creditor to obstruct the restructuring.

Longmore LJ delivered the judgment. Jacob LJ and Kitchin J agreed. The parties were invited to agree the appropriate form of order.

1. Court of Appeal (Civil Division): The appeals were allowed unanimously. The judgment of Proudman J was set aside: [2010] EWCA Civ 1248.
2. Chancery Division: Proudman J held that clause 15.2 permitted only the release of the liabilities and security of the entity whose shares were being sold. No citation for that judgment is stated.