Strategic Value Master Fund Ltd v Ideal Standard Interntional Acquisition SARL & Ors

In construing a detailed commercial finance agreement, the court must read the relevant provision in the context of the agreement as a whole and consider the commercial consequences of competing interpretations. An equity cure permitting additional subordinated debt may be effective even where the money is borrowed, used to replace existing intra-group liabilities and subsequently returned to the group’s cash pool. The agreement’s reference to insolvency concerned the law applicable to the relevant company, principally its law of incorporation and any law having jurisdiction to wind it up. Rights granted to majority lenders could be waived or withdrawn by them where the agreement treated those rights as separate and independent. A notice making loans payable on demand added a cumulative right and did not replace scheduled repayment obligations.

The claimant, a minority lender under a professionally drafted senior facilities agreement, sought declarations that financial covenant breaches had not been cured, that the borrower was insolvent, and that an acceleration notice and subsequent waivers were ineffective. The borrower had used a series of same-day intra-group transactions to replace existing liabilities with a larger loan from its parent, and had then returned the money to the group cash pool.

The court also considered whether the facility agent’s notice making the loans payable on demand displaced the contractual repayment timetable, whether the majority lenders could withdraw that notice, and whether they had in any event contracted not to demand payment.

1. Equity cure. The transactions constituted a valid equity cure. The facility agreement expressly permitted a cure by additional subordinated debt. The debt owed to the parent was additional because it did not exist before the relevant date and exceeded the company’s previous debt to that parent. The fact that the money was immediately lent onward and returned to the cash pool did not prevent it being additional debt. The agreement itself contemplated short-term revolving loans and immediate replacement of repaid loans.
2. The redemption of profit participation preferred equity certificates was not a dividend or distribution within the contractual prohibition. The round-tripping transactions also did not breach the restriction on the company’s activities, given the agreement’s contemplation of intra-group movement of revolving-credit funds.
3. Insolvency. The phrase “applicable law” referred to law applicable to the company, not merely the law governing the agreement. Insolvency was therefore to be determined under the law of the company’s place of incorporation and any other jurisdiction with power to wind it up or commence an equivalent insolvency process. The English balance-sheet test did not apply merely because the agreement was governed by English law.
4. Acceleration. A notice under the relevant clause making the loans payable on demand gave the majority lenders an additional right. It did not substitute repayment on demand for the scheduled repayment obligations.
5. Withdrawal and agreement not to demand. The majority lenders could withdraw the notice because they were exercising and abandoning their own separate contractual rights, rather than waiving a term of the finance documents for the purposes of the unanimity provisions. Alternatively, if withdrawal required the consent of all affected lenders, the subsequent letter was a binding contract under which the majority lenders agreed to treat the notice as withdrawn and not to make a demand based on it.
6. The declarations sought in paragraphs 1 to 11 of the claim for relief were refused.

First-instance decision. The judgment does not state any prior appellate decision.