Deutsche Trustee Company Ltd v Duchess VI CLO B.V. & Ors

Contractual interpretation requires an objective reading of the transaction documents as a whole. The natural and ordinary language of the provisions remains central, particularly in traded instruments where certainty and predictability matter. Commercial common sense cannot be used retrospectively to improve a bargain. An iterative comparison of rival constructions against the other provisions and commercial consequences is appropriate. Where an incentive fee is defined as payable under specified payment waterfalls, a general clause referring to all payment dates and priorities cannot extend that definition to a different waterfall. An optional redemption is a one-off event. Later adjustments to liquidation proceeds do not create a further fee entitlement.

The claimant trustee sought the court’s determination under CPR Part 8 of five questions concerning the proper interpretation of the transaction documents governing a collateralised loan obligation. The dispute principally concerned whether the collateral manager was entitled to an Incentive Collateral Management Fee when Class F Noteholders exercised an optional redemption right.

The collateral manager relied on the general fee clause, the definition of Payment Date and the Condition 11 payment waterfall. The noteholders argued that the fee definition referred only to the Condition 3 waterfalls, and that the relevant thresholds could not operate coherently on an optional redemption. The court also considered whether any fee could be recalculated after the redemption date.

1. Issues A–C. The collateral manager was not entitled to an Incentive Collateral Management Fee when the Class F Noteholders exercised the optional redemption right under Condition 7(b)(i)(A). Clause 14.1 was general. It stated when payments, if otherwise due, were to be made, but did not itself establish that an Incentive Collateral Management Fee was payable on every Payment Date.

2. The definition of the Incentive Collateral Management Fee expressly referred to payment under the Condition 3(c)(i) and 3(c)(ii) waterfalls. It did not refer to the Condition 11 waterfall. That reference could not be introduced indirectly through the definition of Priorities of Payment or clause 14.1. The definitions of Cumulative Subordinated Income and the Class F Secured Income Threshold provided further support for that construction. In particular, the Condition 11 waterfall required payment of the fee before capital and interest were distributed to the Class F Noteholders, which was inconsistent with the threshold mechanism.

3. The expressions “accrued and unpaid” in the Conditions referred to unpaid fees due under clause 14.1 and the fee definition. They did not determine whether a fee accrued under the particular waterfall then being operated. Issues B and C therefore did not require decision. The court nevertheless indicated that the threshold calculation would include interest, but not capital, payable on the relevant Payment Date.

4. Issue D. This issue did not arise. Had it required determination, no calculation of Cumulative Subordinated Income would have been required on an optional redemption under Condition 7, because no new Incentive Collateral Management Fee was payable on that event.

5. Issue E. The Condition 11 waterfall could not run twice. An optional redemption had one Redemption Date. Subsequent receipt of further liquidation proceeds could require calculations to be adjusted, but could not create an additional fee unless the fee had already fallen due on an earlier Payment Date.

6. The Class F Noteholders were entitled to the monies held in escrow. The parties were directed to draft an appropriate order.