Myers & Anor v Kestrel Acquisitions Ltd & Ors

The claimants challenged a series of unilateral amendments made by Kestrel to Vendor Loan Notes (VLNs) issued in 2004, arguing that the company had no power to subordinate the VLNs to subsequent loan notes or to postpone their redemption dates without the claimants' consent, and that the amendments rendered the VLNs valueless. The claimants also sought declarations that Kestrel and its parent were insolvent within the meaning of section 123 of the Insolvency Act 1986, thereby constituting an event of default under the VLNs.

The court held that no term of good faith or objective “threshold” requirement could be implied into the VLN instrument (VLNI) to restrict Kestrel’s power under clause 9.1.2. The judge concluded that the DLNs (now Replacement Notes) and the VLNs did not form a single class for purposes of importing a majority-duty good faith constraint, and that clauses 2.3 and 2.4 of the VLNI obligated Kestrel to match amendments to those made to the DLNI rather than to submit to an implied duty owed to VLN holders by DLN holders. Each challenged postponement of redemption and each subordination to follow-on notes was held to be a "modification" within the scope of clause 9.1.2 and therefore valid. The intercreditor agreement did not prevent Kestrel from subordinating the VLNs to other debt. The court declined to determine disputed estoppel defences on Part 8 material. On insolvency, the court rejected a cash-flow finding against Kestrel but found on the balance-sheet test that Kestrel and Kestrel Holdings were insolvent under section 123(2), and granted declarations to that effect.

The claimants, Dennis and Patricia Myers (as trustees), issued two Part 8 claims arising from sale consideration in 2004 which included Vendor Loan Notes (VLNs). Kestrel had subsequently issued a series of further unsecured loan notes (Follow On Notes) and had, by deeds of variation, purported to subordinate the VLNs to those later issues and to postpone the VLNs' redemption dates on several occasions between 2007 and 2014. The Myers alleged those unilateral amendments were invalid and that the amendments, together with increasing indebtedness, had rendered the VLNs worthless. They also alleged that Kestrel and its parent were insolvent within section 123 of the Insolvency Act 1986, giving rise to events of default under clause 6.1.4 of the VLNI.

Issues framed by the court included (i) whether a term requiring good faith or a threshold test that a modification must improve the prospect of repayment should be implied into the VLNI or its intercreditor context; (ii) whether the amendments effecting subordination and postponement were within the scope of the power to "modify" in clause 9.1.2; (iii) whether the intercreditor agreement prevented subordination; (iv) whether the claimants were estopped from challenging amendments; and (v) whether Kestrel (and Kestrel Holdings) were insolvent under section 123.

The court explained applicable legal principles on implication of terms (Attorney General of Belize v Belize Telecom Ltd; Geys v Societe Generale), duties of majorities (Allen v Gold Reefs and related authorities), the scope of contractual discretion (Socimer line) and the cash-flow and balance-sheet bases of insolvency (Eurosail). The judge rejected implication of a good-faith term or a threshold requirement, reasoning that the documentation was detailed, the DLNs and VLNs were separate instruments and classes, clause 2.3 required Kestrel to "treat" the DLNs as if a single class for specific purposes rather than create a single class, and clause 9.1.2 operates as a contractual right to make matching modifications rather than a discretion subject to a broad equitable gloss. Applying historical and contemporary authorities, the court held each postponement and subordination was a permissible "modification" within clause 9.1.2 and that the ICA did not preclude subordinations to other debt. The estoppel defence was not determined on the Part 8 material. On insolvency, the court found no persuasive evidence of cash-flow insolvency but held the claimants had discharged the burden to show balance-sheet insolvency: Kestrel and Kestrel Holdings' liabilities exceeded assets and the evidence of a prospective restructuring was too tentative to displace that finding. The court therefore granted declarations reflecting balance-sheet insolvency but rejected the claimants' challenges to the validity of the amendments.

First instance: The claim was allowed in part. The court refused to imply a good faith term into the VLN instrument or to read a threshold requirement into clause 9.1.2, and held that each postponement of redemption and each subordination was a valid "modification" within clause 9.1.2; the intercreditor agreement did not prevent subordination. The court found that Kestrel and Kestrel Holdings are balance-sheet insolvent under section 123(2) of the Insolvency Act 1986 and granted declaratory relief on insolvency. The court did not grant the claimants' principal relief on invalidity of the amendments.