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Court of Appeal overturns first instance decision on Intercreditor Agreement release provision


16 November 2010

Barclays Bank Plc & ors v HHY Luxembourg SARL & anr [2010] EWCA Civ 1248, 22 October 2010  

The Court of Appeal has overturned a first instance judgment concerning a widely-used release on disposals provision in an Intercreditor Agreement.  The judgment puts the Senior Lenders firmly back in the driving seat of this restructuring as it allows them to sell assets in the Obligor's subsidiaries free from liabilities and transaction security without the need for consent from Junior Lenders. 

The disputed provision broadly provides for the release of the Obligors from liabilities and transaction security where all the shares in the "Obligor or a holding company of that Obligor" are sold or otherwise disposed of in an enforcement scenario.  The question before the Court was whether this clause allows the Security Trustee to release the Obligor subsidiary operating companies (where the value of the group lies) on the sale of a holding company (either direct or indirect) of such Obligors.  At first instance the Court applied an extremely narrow reading to the release provision, holding that it permitted only the release of an Obligor company (or a holding company of that Obligor) whose shares were being directly sold.  However, the Court of Appeal has applied a wider reading, holding that the clause does allow for the release of the Obligor subsidiary operating companies.  The Court held that there are a number of meanings that could be attributed to the release provision and that these meanings should be considered against the Intercreditor Agreement as a whole.  In a complex commercial financing in which parties had negotiated and agreed upon a pre-defined hierarchy, the clause should be given the more commercially sensible reading and a broader reading should therefore be applied.

Allen & Overy LLP represented the successful Security Trustee in this case.




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