Cattles Plc v Welcome Financial Services Ltd & Ors

A guarantee clause which prevents a guarantor from making any claim against a debtor in competition with, or in priority to, the bank may extend to claims wholly independent of the guarantee. Its meaning depends on the words used, the deed as a whole and the commercial context. Where the clause is unambiguous, the contra proferentem rule does not apply.

Accordingly, a parent company was prevented from enforcing an inter-company debt against a subsidiary in competition with the bank until all relevant obligations to the bank had been discharged in full.

Cattles Plc was the parent of a financial-services group. It had lent money to its subsidiary, Welcome Financial Services Ltd. Royal Bank of Scotland plc had facilities with Cattles and guarantees from Cattles, Welcome and other group companies. Holders of bonds issued by Cattles had no subsidiary guarantees.

The High Court held that clause 6.2 of the group guarantee stopped Cattles from claiming or proving for its inter-company debt against Welcome in competition with, or in priority to, the bank until Welcome's obligations to the bank were paid in full. Party A, representing the bondholders, appealed from that declaration: [2009] EWHC 3027 (Ch).

The central issue was whether the words any claim in clause 6.2 were confined to claims arising from Cattles's position as guarantor, or included its ordinary inter-company debt claim.

1. Appeal dismissed. Lloyd LJ gave the reasons. Sir Paul Kennedy and Mummery LJ agreed. The first declaration was correct.

2. Clause 6.2 was not confined to a guarantor's rights of subrogation, indemnity or contribution. Read in the context of the deed, its prohibition on a guarantor making any claim against a debtor in competition with, or in priority to, the bank encompassed Cattles's claim for repayment of the inter-company debt owed by Welcome.

3. The court relied on the generality of any claim; the breadth of competition and priority between creditors competing for inadequate assets; the draftsman's express use elsewhere of the limiting phrase liabilities under this deed; and the lack of a sufficient commercial purpose for clause 6.2 on the narrower construction. The rule against double proof, and a pre-insolvency extension of it, did not adequately explain the clause's inclusion.

4. Defined labels in a contract may assist construction, consistently with Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38. Here, however, use of the label guarantor identified the entity restricted by the deed; it did not limit the general words any claim to claims arising under the guarantee. The clause was clear, so the contra proferentem rule described in Static Control Components (Europe) Ltd v Egan [2004] EWCA Civ 392 was unavailable.

5. Having resolved the appeal on construction, the court declined to decide the contingent issues recorded in declarations 2 to 4, including issues concerning Re SSSL Realisations (2002) Ltd. The order was: appeal dismissed.

• Court of Appeal (Civil Division) — Party A's appeal was dismissed: [2010] EWCA Civ 599 .
• High Court, Chancery Division — HHJ David Cooke held that clause 6.2 prevented Cattles from making a competing or prior claim against Welcome, including for the inter-company debt, until the bank had been paid in full: [2009] EWHC 3027 (Ch) .