Myers & Anor v Kestrel Acquisitions Ltd & Ors

A contractual power to modify loan-note rights may permit postponement of redemption and subordination to later indebtedness, provided the changes remain modifications of the existing rights. The court will not imply a general good-faith obligation into a carefully drafted commercial instrument merely because the power affects different groups of creditors. Nor will it impose a condition that a modification must improve the prospect of repayment unless the instrument, read in context, requires it. For balance-sheet insolvency under section 123(2) of the Insolvency Act 1986, an intended future restructuring cannot be relied upon where its form, terms and implementation remain materially uncertain.

The claimants, trustees holding vendor loan notes issued as part of the consideration for the sale of their sub-prime lending business, challenged amendments made by Kestrel Acquisitions Ltd. The amendments postponed redemption of the notes and subordinated them to further loan notes. They also sought declarations that Kestrel and its parent were unable to pay their debts within section 123 of the Insolvency Act 1986, constituting an event of default.

The claims were brought under Part 8. The central issues were whether the amendments were authorised, whether duties of good faith or a repayment-prospect threshold should be implied, whether the intercreditor agreement prevented subordination, and whether prospective restructuring avoided balance-sheet insolvency.

1. No good-faith term was implied into the loan-note instrument. The vendor loan notes and discounted loan notes were separate classes, and the relevant provisions required equivalent treatment only for specified purposes. The modification power was a binary contractual choice, not a discretion requiring a balancing of interests.
2. No requirement that a modification improve the prospect of repayment was implied. The instrument was carefully drafted, gave no workable method for assessing such a condition, and would create uncertainty.
3. Each postponement of redemption and each subordination to the further loan notes was within the scope of the modification power. The other rights and obligations remained substantially intact. The intercreditor agreement ranked only the specified categories of debt and did not prevent priority being given to later indebtedness.
4. Applying BNY Corporate Trustee Services Ltd v Eurosail-UK 2007-3BL plc [2013] UKSC 28, the claimants failed to establish cash-flow insolvency but established balance-sheet insolvency. Kestrel’s liabilities exceeded its assets, and the proposed restructuring was too uncertain to be taken into account.
5. A substantial write-down of the notes or their replacement by shares would itself exceed the modification power. Declarations reflecting the insolvency finding were granted. The disputed estoppel defence was unsuitable for determination under Part 8.

First-instance decision. No appellate history is stated in the judgment.