Matter of Arboretum Devon (RLH) Ltd, Re

An intercreditor agreement preventing a lender from challenging the validity or enforceability of security may extend beyond formal validity. It can prevent a challenge asserting that advances made under documented loan transactions give rise only to unsecured restitutionary or implied contractual obligations. The relevant question is the objective meaning of the agreement in its commercial and contractual context. A security may be formally valid yet secure nothing, but parties may agree that its effectiveness as security for acknowledged obligations cannot be challenged. Such a clause does not ordinarily prevent disputes about quantum, including the amount advanced or interest calculation.

Administrators held a fund realised from the sale of the business and assets of Arboretum Devon (RLH) Ltd. Saving Stream Security Holding Ltd claimed priority under security granted to it, while Shoby Investments Ltd held subordinated security.

The administrators sought directions concerning distribution of the fund. Shoby sought permission to challenge the validity or enforceability of the loans made through Lendy Ltd and the security held by Saving Stream Security Holding Ltd. The agreed preliminary issue was whether clause 2.9 of the intercreditor deed prevented that proposed challenge. The court also considered the construction of the security documents and a contractual-estoppel argument.

1. The court construed the Saving Stream security documents objectively. The expression “Secured Liabilities”, referring to liabilities arising pursuant to Finance Documents, was not confined to contractual claims enforcing the express terms of the written loan agreements. It extended to obligations arising from the transactions those documents provided for, including repayment obligations which might be characterised as restitutionary or arising under an implied contract.

2. The definition of “Finance Documents” referred to identifiable documents. It therefore did not naturally extend to purely oral or unwritten agreements. However, that issue did not alter the result because repayment obligations arising from advances made pursuant to the documented loan transactions were secured liabilities.

3. Clause 2.9 of the intercreditor deed prevented challenges to the “validity” of security which questioned whether it effectively secured the obligations arising from advances actually made or provided for by the loan agreements. In context, validity was not limited to compliance with execution and registration formalities. The wider construction was reinforced by the deed’s provisions concerning priority of senior debt, invalidity or unenforceability of obligations and security, application of recoveries, and refinancing.

4. The clause did not prevent a genuine dispute about quantum, such as the amount advanced or the calculation of interest. Shoby’s proposed claim was different: it sought to deny the priority or effectiveness of the senior security by recharacterising the repayment obligations. That was a prohibited challenge.

5. Separately, the recital acknowledging that advances had given rise to senior debt secured by the senior security amounted to a contractual estoppel. Shoby could not, in the context of the intercreditor deed, assert a state of affairs inconsistent with that agreed basis. The court expressed no view on Shoby’s standing to seek a declaration because that issue had not been fully argued.

6. The court concluded that clause 2.9 prevented Shoby from bringing the proposed challenge. The parties were invited to agree the resulting order.

The judgment was a first-instance determination. The preliminary issue had been identified by order of District Judge Rouine dated 23 November 2020, which directed that the three applications be heard together.