Barings (UK) Ltd v Deutsche Trustee Company Ltd & Ors (Rev 1)

A complex financial instrument must be interpreted from its express language and the transaction documents as a whole. A court cannot disregard specific cross-references or imply references to materially different payment regimes where that would rewrite the agreement.

General payment provisions operate in accordance with the instrument’s specific definitions and priorities. Business common sense does not justify departing from clear drafting merely because the resulting bargain appears commercially disadvantageous. Complex negotiated transactions may contain deliberate trade-offs.

Barings (UK) Ltd, the collateral manager, claimed an Incentive Collateral Management Fee following an optional redemption of Class F Notes. The redemption operated under Conditions 7 and 11, whereas the fee definition expressly referred to the payment waterfall in Condition 3.

Sir Geoffrey Vos CHC held in the High Court, [2019] EWHC 778 (Ch), that the fee was not payable. The collateral manager appealed. The central issue was whether the contractual definition could be interpreted as extending the fee to distributions made under Conditions 7 and 11 despite its express references to Condition 3.

1. Appeal dismissed. The collateral manager was not entitled to an Incentive Collateral Management Fee when the Class F Noteholders exercised the option to redeem under Condition 7(b)(i)(A). The court delivered a joint judgment and agreed with the Chancellor’s interpretation.
2. The fee definition expressly made payment subject to Condition 3. Its reference to interest paid on the payment date, mirrored in Condition 3(c)(ii)(II), restricted the distributions to be considered. It did not encompass capital distributed through Conditions 7 and 11. Treating references to Condition 3 as implicitly including those distinct regimes would rewrite the definition rather than interpret it. The material differences included the order of distribution and the role of the Secured Income Threshold.
3. The definition of Cumulative Subordinated Income did not support the wider construction. It expressly concerned the fee and referred only to Condition 3. The appellant’s construction would require references to particular Condition 3 liabilities to be treated as references to corresponding Condition 11 liabilities regardless of their different priorities. That was inconsistent with the express wording and amounted to comprehensive rewriting.
4. Clause 14 of the Collateral Management Agreement did not require a newly accruing fee on every redemption date. It required payment on a redemption date only where appropriate under the other provisions. The documents demonstrated deliberate choices between the Condition 3 and Condition 11 waterfalls. The definition nevertheless permitted payment on redemption of a fee which had accrued on an earlier payment date but remained unpaid and deferred.
5. The separate provisions governing the Collateral Manager Termination Amount and additional interest did not alter the fee definition. Nor did the acceleration provisions, hypothetical failed-redemption scenario or breadth of the Secured Income Threshold establish that the fee arose under the Condition 11 waterfall.
6. Characterising the fee as a performance fee did not make the respondents’ construction commercially irrational. The highly complex agreements contained negotiated trade-offs. The court could not conclude that the construction produced a result so inconsistent with business common sense that the clear textual analysis was undermined.

• Court of Appeal (Civil Division): In [2020] EWCA Civ 521, dismissed the collateral manager’s appeal and affirmed that no Incentive Collateral Management Fee was payable on the optional redemption.
• High Court, Business and Property Courts: Sir Geoffrey Vos CHC held in [2019] EWHC 778 (Ch) that the collateral manager was not entitled to the fee.