UK: Recent Developments In Finance Litigation: Restriction On Sub-Participation

Last Updated: 18 September 2008
Article by Edward Davis and Sue Millar

The Court of Appeal has held in (1) British Energy Power & Trading Ltd (2) Eggborough Power (Holdings) Ltd (3) Eggborough Power Ltd v (1) Credit Suisse (2) Ampere Ltd (3) Ampere 1 Ltd [2008] EWCA Civ 53 that where a bank entered into option agreements in part as agent for other banks participating in a syndicated refinancing arrangement, it was a question of construction of the provisions of the option agreements whether "the Buyer" was that bank as security trustee, or the other financing banks, or both.

The proceedings concerned the Eggborough coal fired power station in North Yorkshire. The claimants were companies in the British Energy group. The third claimant was the owner of the business and assets of the power station. The power station was acquired by the British Energy group in March 2000 for £646 million. It was re-financed in July 2000 by a £550 million loan advanced to the third claimant by a consortium of banks on the terms of a credit agreement. From 2002 to 2004 the British Energy group encountered financial difficulty, resulting in a general restructuring of its finances. In relation to the power station, in September 2004 four agreements were executed: an amended and restated version of the July 2000 credit agreement, a share option agreement, an asset option agreement and an amended and restated intercreditor deed. The effect of the restructuring was that the banks agreed to compromise their claims under the July 2000 credit agreement by writing off about £340 million of principal debt due from the third claimant and agreeing to a new credit facility of £150 million. In return the British Energy group provided 76.6 million of new shares, £20 million of bonds and security of various kinds, and also granted both a share option and asset option. Two option agreements were entered into by Barclays Bank plc ("Barclays") as 'agent and security trustee' for the banks, including the first defendant bank, Credit Suisse, which was the successor of about 90% of the interests of the banks. The two option agreements were virtually identical and were known as the share option agreement (the "SOA") and the asset option agreement (the "AOA").

A dispute arose, which led to the proceedings, out of a proposed sub-participation agreement (the "Ampere Transaction") between Credit Suisse and the second third and third defendant companies. They had been incorporated for the purpose of consolidating various sub-participation rights in relation to the facilities granted under the agreements. The dispute between the parties concerned the extent to which sub-participation was permissible under the terms of the option agreements. The claimants sought a declaration as to the construction of clause 31 which provided, inter alia, as follows:


31.2 Subject to Clause 31.1.1, during the Close Period the Buyer may not enter into any agreement or other arrangement:

31.2.1 that relates to the exercise of any of its rights under this Agreement; or

31.2.2 to assign or transfer or declare a trust of the benefit of or in any other way dispose of all or any of the Option Shares after an Option Completion Date."

Credit Suisse argued that it was not party to the SOA or the AOA since Barclays had signed them as principal and not as agent. The judge at first instance, Langley J, held that Credit Suisse had entered into the option agreements through Barclays, that Credit Suisse was a party to the option agreements and was bound by the restrictions in, inter alia, clause 31 and that entry into the Ampere Transaction would be a breach by Credit Suisse of clause 31.2.1. The defendants appealed.

On appeal, the issue arose, inter alia, as to whether on the true construction of clause 31 of the SOA Credit Suisse was bound by the restrictions in clause 31.2 on the exercise of the option rights created by the SOA. The defendants submitted that they were not a party to, or bound by, the obligations in clause 31.2 and that the clause only bound Barclays as security trustee.

The Court of Appeal held that on the true construction of the relevant agreements, Barclays had entered into the SOA as both security trustee and as agent for the finance parties, which included the banks. It was a question of construction of each provision in the agreement as to whether Barclays was doing so in one or other, or both, capacities. In the circumstances of the case, it made no commercial sense for Barclays to have entered into the option agreements as, and only as, principal. The Court of Appeal endorsed the reasoning of Langley J:

"British Energy would have no commercial interest in restricting assignment by Barclays, or transfer of rights held by Barclays, but not, or not also, by the Banks. Clause 31 of the Share Option Agreement is plainly intended to provide protection for British Energy by restricting rights to dispose of the power station and the rights granted by the Options. The limits of the protection are of course to be found in the negotiated and agreed wording. But if the words are to be read as imposing only obligations and restrictions on Barclays leaving the Banks free to do as they please the protections are virtually illusory."

The Court of Appeal went on to state that a provision that entrusted Barclays with the exercise of the options as security trustee could be understood because all the shares were being sold and it was appropriate for Barclays as security trustee to hold the shares as legal owner on trust for the banks. The Court held that the same considerations did not, however, apply to the restrictions on the assignment or transfer of the options in clause 31. The obvious parties to restrain from assigning or transferring the options which the parties, and in particular British Energy, wished to restrain were the banks and not Barclays, or at any rate not Barclays alone. In looking at clause 31.2.2, the Court held that it was much more likely that the parties had intended to bind the banks than that they had not, if only because they were entitled to the benefit of the options, whereas Barclays were not. Accordingly, clause 31.2.1 was intended to bind both Barclays and the banks and, for the purposes of the restriction in the clause, both were the 'Buyer'.

This article was written for Stephenson Harwood's quarterly publication, Finance Litigation Legal Eye. If you would like to receive this publication, please contact Stephenson Harwood.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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