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

The court determined the proper construction of clause 17 of the intercreditor agreement (ICA) governing a Distressed Disposal and held that the Security Agent validly effected a debt-free sale and executed releases pursuant to clause 17.1 subject to the safeguards in clause 17.4. The judge held that (i) condition (A) (that proceeds be in cash or substantially in cash) is satisfied where the purchaser undertakes to pay a cash price and legal set-off discharges that cash obligation, (ii) condition (B) (unconditional and concurrent release of the Primary Creditors' claims and security) is satisfied where the released items are the Primary Creditors' claims in their capacity as such and where replacement lending by certain creditors after completion creates new, distinct creditor positions rather than preserving the original Primary Creditor claims, and (iii) condition (C) (Public Auction or Financial Advisers' Opinion) was satisfied by a Financial Advisers' Opinion from Grant Thornton which, pursuant to Schedule 5 paragraph 9, is conclusive for the Enforcement Objective.

As an alternative argument, the claimant relied on an implied qualification that the clause 17.4(c) conditions need not be satisfied where High Yield Noteholders were “out of the money”. The court rejected implying such a qualification into the ICA on construction and implication grounds, but proceeded to find on the facts that the High Yield Noteholders were indeed out of the money on 9 October 2019. The consequence was that the releases were effective and the claimant's declaratory relief was granted while the defendants' counterclaims were refused.

Background and parties: Bidco sought declaratory relief that a restructuring of the Group’s indebtedness (a Distressed Disposal and associated Global Deed of Release) effected on 9 October 2019 was effective under an English-law intercreditor agreement (ICA). Signal, a minority holder of High Yield Notes (HYNs), challenged the effectiveness of releases said to have been granted by the Security Agent under clause 17 of the ICA. The Security Agent and other GLAS entities supported Bidco. The first defendant (Dr Kebekus) was the German insolvency administrator of the former parent; German proceedings (the Claw Back Action) and other foreign litigation were relevant to the factual matrix.

Nature of the claim / relief sought: Declaratory relief that (among other things) the Security Agent validly sold the Key Secured Assets to Mangrove IV, applied proceeds via the ICA waterfall, executed valid releases (Global Deed of Release) of Primary Creditors’ claims and security in accordance with clause 17, and that the Enforcement Objective under Schedule 5 was satisfied. Signal counterclaimed for declarations that the Security Agent acted contrary to the ICA and that HYN liabilities and security were not validly released.

Issues framed:

• Construction of clause 17 generally and the meaning and interaction of clause 17.1 and the restrictions/conditions in clause 17.4, in particular clause 17.4(c) and its three sub-conditions (A) proceeds "in cash (or substantially in cash)"; (B) unconditional and concurrent release/discharge of Primary Creditors' claims and security; and (C) Public Auction or Financial Advisers’ Opinion (FAO) / Financial Advisers’ Opinion being conclusive under Schedule 5 paragraph 9.
• Whether the mechanics of the restructuring (including substantial set-off and contemporaneous new lending and re-subscriptions) meant that conditions (A) and (B) were not satisfied.
• Fallback: whether clause 17.4(c) is disapplied where High Yield Noteholders are "out of the money"; if so, whether the HYNs were out of the money on 9 October 2019.
• Whether the Security Agent acted beyond authority such as to constitute breach (Signal later did not press the breach declaration).

Court’s reasoning and findings:

• General approach: the court applied orthodox contractual interpretation principles (Wood v Capita), reading the ICA as a whole and giving weight to commercial common sense.
• Condition (A): the SPA provided an express cash purchase price. The court held that legal set-off which discharged the purchaser’s obligation to pay that cash price operated as payment "in cash" (or substantially so) for the purposes of clause 17.4(c)(A). Authorities and established principles treat set-off as equivalent to payment in cash in this context, and practicalities of circular cash movements supported this result.
• Condition (B): clause 17.4(c)(B) required unconditional, concurrent release of the Primary Creditors’ claims. The court read "Primary Creditor" as a capacity concept (claims in their capacity as Primary Creditors). Replacement lending and re-subscription created new creditor positions under new instruments, governed by different documents and not acceding as Primary Creditors under the ICA; accordingly those new financings did not mean the original Primary Creditor claims remained unconditionally unreleased. The wording and structure of clause 17 (and clause 17.1 powers) supported this construction; paragraph (I)/(II) proviso related to sales of claims (clause 17.1(d)/(e)).
• Condition (C): a Financial Advisers’ Opinion from Grant Thornton had been obtained and, under Schedule 5 paragraph 9, was conclusive evidence that the Enforcement Objective was met; the court therefore treated compliance with (C) as satisfied.
• Additional construction / implied term: the court rejected implying a term that clauses 17.4(A)-(C) do not apply where HYN holders are “out of the money”. The language, regime and commercial certainty of the ICA showed the drafter intended the distinct Schedule 5/FAO mechanism to deal with valuation and fairness rather than a free-standing implied exception.
• Factual "out of the money" question: having heard primary and expert evidence, the court nevertheless resolved the factual issue. The judge concluded that, on the balance of probabilities, had the Distressed Disposal not proceeded on 9 October 2019 the likely counterfactual was rapid destabilisation and insolvency (or at best an accelerated fire-sale), such that HYN holders would have received nothing. Factors included liquidity pressures, enforcement and acceleration events, the directors’ position in Germany, the practical absence of alternative bidders willing to provide required funding, and appropriate discounts for accelerated sale. The Financial Advisers’ Opinion was also relevant evidence corroborating that no return would have been obtained by HYN holders.

Decision / relief: The court granted Bidco’s declaratory relief in the key respects (including that the sale and the Global Deed of Release were effective, and that the FAO satisfied Schedule 5 paragraph 9 and the Enforcement Objective for the ICA’s purposes), and refused Signal’s counterclaim declarations. The judge limited one declaration about the Enforcement Objective to the contractual effect of Schedule 5 paragraph 9 and did not make certain other declarations as unnecessary or imprecise.

First instance: The court granted Bidco’s declaratory relief in the principal respects sought and dismissed Signal’s counterclaim. The judge held that the Security Agent validly implemented the Distressed Disposal and executed unconditional releases under clause 17 because (i) set-off discharging an express cash purchase obligation amounted to proceeds being "in cash or substantially in cash" for clause 17.4(c)(A), (ii) the releases in the Global Deed of Release constituted unconditional releases of Primary Creditors’ claims in their capacity as such and replacement financings created new creditor positions rather than preserving the original Primary Creditor claims for clause 17.4(c)(B), and (iii) a Financial Advisers’ Opinion satisfied condition (C) and was conclusive under Schedule 5 paragraph 9. The court also rejected implying a contractual carve-out that clause 17.4(c) did not apply where HYN holders were "out of the money", but found on the facts that the HYN holders were in any event out of the money on 9 October 2019.