Galapagos Bidco S.A.R.L v Dr Frank Kebekus & Ors

Under an intercreditor agreement, conditions governing releases on a distressed disposal are construed by reference to the agreement’s language, structure and commercial purpose. A release of claims held in the capacity of Primary Creditor is not invalid merely because the same entities later provide new finance under different documents and in a different capacity. Payment in cash may be discharged by legal set-off where the underlying obligation is to pay a specified cash consideration and the proceeds are applied through the agreed waterfall. A court will not imply an exception removing the conditions merely because junior creditors are out of the money where the agreement provides a defined mechanism for addressing that issue.

The claimant sought declarations concerning the effectiveness of a restructuring of the Galapagos group’s financial indebtedness. A security agent sold shares and other secured assets to Mangrove IV under the distressed-disposal provisions of an English-law intercreditor agreement. The proceeds were applied through a contractual waterfall, and the security agent executed releases of the existing debt and security.

Signal, a holder of high-yield notes, contended that the releases were ineffective because the sale proceeds were not in cash or substantially in cash, because existing creditor claims had not been unconditionally released, and because the restructuring involved new financing by existing creditors. Bidco alternatively argued that the contractual conditions did not apply because the high-yield creditors were out of the money. The court therefore had to determine the construction and effect of the relevant provisions and, conditionally, the counterfactual economic position of the high-yield creditors.

1. Conditions governing release. The releases were subject to conditions (A), (B) and (C) in clause 17.4(c) of the intercreditor agreement. Condition (B) required the unconditional and concurrent release of claims of Primary Creditors against the relevant group entities. It did not prohibit Primary Creditors from providing new finance after the disposal.
2. The new notes, guarantee facilities and other financing arrangements created legally distinct liabilities under different documents. The creditors held those rights in a different capacity and were not Primary Creditors in respect of them. The existing claims were therefore released, and the release was unconditional notwithstanding that it formed part of a series of interdependent restructuring steps.
3. Cash consideration. Condition (A) concerned the consideration for the distressed disposal. The purchaser’s promise to pay a specified sum in cash constituted the relevant proceeds. A legal set-off discharging that cash obligation had the same effect as payment by transfer of money. The proceeds remained in cash because they were identifiable, valued in cash and applied through the contractual waterfall.
4. No implied out-of-the-money exception. The agreement did not contain, and did not require implication of, a term disapplying conditions (A), (B) and (C) whenever the high-yield creditors had no genuine economic interest. The express wording, the defined protection in condition (C), and the need for commercial certainty pointed against introducing a further disposal regime dependent on an open and potentially litigious valuation enquiry.
5. In any event, if such an exception had existed, the high-yield creditors were out of the money on 9 October 2019. The probable counterfactual was formal insolvency, or an accelerated fire-sale equivalent to a liquidation, rather than a further supported going-concern sale. The evidence showed that no return would have been available to the high-yield creditors.
6. The Financial Advisers’ Opinion was conclusive evidence only for the contractual purpose specified in Schedule 5 paragraph 9, namely that the Enforcement Objective had been met. The court did not determine whether the disposal in fact maximised recoveries for all secured parties beyond that contractual consequence.
7. Declarations were granted in the claimant’s favour. The declarations sought by Signal in its counterclaim were refused.

The judgment describes an earlier jurisdiction judgment in the same proceedings, in which Zacaroli J dismissed jurisdiction challenges: [2021] EWHC 68 (Ch). The present decision was a first-instance determination of the substantive contractual issues.