Chelsea Midco 1 Ltd v Harwood Chelsea Investment LP

Where a contractual default independently entitles a secured creditor to enforce its rights, an injunction cannot be justified by alleged earlier assurances or negligent advice unless those matters arguably caused the relevant default or loss. A claimant must show a serious issue to be tried in relation to the default relied upon. If a later default would have occurred regardless of the alleged wrong, waiver, estoppel, causation and own-wrong arguments do not arise in relation to it. At the interlocutory stage, the court may consider the parties’ relative prospects when assessing the risk of injustice, although that assessment is unnecessary if no serious issue is shown.

The claimant issued secured loan notes to the defendant. Quarterly cash interest was not paid. The claimant alleged that representatives of the defendant had wrongly advised that upstream payments could be made only as dividends subject to a stringent covenant, and had assured it that delayed payment was acceptable.

The defendant later asserted events of default and demanded repayment, reserving its security rights. The claimant sought an injunction restraining enforcement pending trial, relying on waiver or promissory estoppel, negligence, set-off, the principle against relying on one’s own wrong, and an implied duty of good faith.

The central issue was whether there was a serious issue to be tried concerning the unpaid February 2023 instalment, which arose from an independent failure to satisfy a look-forward leverage covenant.

1. The application was dismissed. The claimant had failed to show a serious issue to be tried concerning the February 2023 interest instalment.
2. By mid-February 2023, the claimant knew that the earlier advice about the need to satisfy the Enhanced Gross Leverage Test for upstream payments was wrong. The February instalment could not be paid because Bidco could not satisfy the separate look-forward Gross Leverage requirement for the following 12 months.
3. That inability was independent of the earlier non-payments and the alleged advice or assurances. The February default would have occurred whether or not the earlier instalments had been paid and whether or not the alleged advice had been given. There was therefore no serious issue concerning waiver, promissory estoppel, negligence, causation, reliance on the defendant’s own wrong, or breach of an implied duty of good faith in respect of that instalment.
4. Since the February default alone entitled the defendant to accelerate the notes and exercise its security, it was unnecessary to determine the parties’ disputes concerning the earlier instalments.
5. Applying the interlocutory injunction framework in American Cyanamid v Ethicon [1975] AC 396, the judge nevertheless observed that damages would have been inadequate for either party. If the serious-issue threshold had been satisfied, the risk of injustice would have favoured the defendant decisively, given its stronger prospects of establishing entitlement to enforce in respect of the February default.