In Burdale Financial Ltd v Agilo Master Fund Ltd : Abbeycrest Plc v Agilo Master Fund Ltd [2008] EWHC 1103 (Ch), the Court considered the proper interpretation of a clause in an intercreditor deed which prevented the junior creditor from enforcing the junior debt unless specific procedural requirements were complied with.
A dispute arose between the parties to a facility arrangement, Burdale Financial Ltd (as Senior Creditor), Abbeycrest Plc (as Debtor) and Agilo Master Fund Ltd (as Junior Creditor). The relationship of the parties was governed by an intercreditor deed dated 16 June 2006 (the "Deed"). The Senior Creditor and the Debtor applied to the High Court for a declaration as to the proper interpretation of Clause 11 of the Deed.
Clause 11 was headed "Restriction of Enforcement" and provided that:
"Until the Senior Discharge Date the Junior Creditor will not, without the prior written consent of the Senior Creditor:
a) accelerate any of the Junior Debt or otherwise declare any of the Junior Debt prematurely due or payable;...
Unless
(i) the Junior Creditor has first given the Senior Creditor not less than 45 days' written notice of its intention to take such action and it commences the first step of such action during the months of January, February or March in any year;"
By letter dated 19 March 2008, the Junior Creditor sent a notice to the Senior Creditor purporting to be written notice of its intention to accelerate the Junior Debt not less than 45 days after the date of the letter. The Junior Creditor contended in the proceedings that this notice satisfied the first limb of Clause 11(i), it being written notice of an intention to take the action set out in Clause 11 (a), i.e. to accelerate the Junior Debt.
By further letter dated 19 March 2008, the Junior Creditor sent a Default Letter to the Debtor setting out certain Default Events which had occurred under the facility arrangements and stating that if these events were not remedied by 5 May 2008 then the Junior Creditor would accelerate the Junior Debt and enforce payment of the amount due to it by the Debtor. The Junior Creditor contended in the proceedings that this Default Letter satisfied the second limb of Clause 11 (i), it being the first step of its acceleration of the Junior Debt. The Junior Creditor's position was that the first and second limbs of Clause 11 (i) were capable of happening concurrently. In furtherance of this construction, the Junior Creditor asserted that the concept of "the first step of such action" (emphasis added) did not necessarily have to be part of the action of acceleration itself (which action could not begin until 45 days after the Notice to the Senior Creditor) but could be satisfied by a preliminary act such as the Junior Creditor sending out the Default Letter.
The Court held that the required notice of an "intention to take such action" referred to the action of accelerating the Junior Debt, which action would occur at a single point in time. The Court further held that commencing "the first step of such action" referred to the same action i.e. the acceleration of the Junior Debt, and that the first step must be the commencement of that action and not merely a preliminary step or a step towards that action. The Default Letter was not the first step of the acceleration of the Junior Debt but was rather an optional, preliminary step before such action. The Junior Creditor therefore had failed to take a "first step" in the period January to March 2008 and could not now take such a step until January 2009.
The Judge stated that, even on the assumption that the Default Letter was the "first step" in the action, it would be a step prohibited by Clause 11 of the Deed unless the required 45 day notice period had been given to the Senior Creditor. In the circumstances of the case, this notice would not have been given 45 days prior to the "first step" and the step would therefore remain prohibited under Clause 11.
In delivering its judgment, the Court acknowledged the "well-known principles governing the construction of commercial contracts" and duly considered the Deed in light of the factual and commercial background to the dispute. However, the Court was unimpressed by what it deemed to be an entirely artificial and strained construction adopted by the Junior Creditor which it saw as being an attempt to work backwards from the desired result rather than to identify the true construction of the clause. The Judge had no doubt that the true construction was the natural one; that 45 days' notice was to be given by the Junior Creditor of the acceleration of the Junior Debt which latter action must then occur within the window January to March of any year.
Practical implications
The attitude of the Court in this case demonstrates that the Courts are willing to take a commercial approach in construing the clauses of commercial contracts and will not seek to interpret such clauses in a vacuum. The Courts will be quick to identify and to quash any attempt by a party to strain clauses merely to produce a desired result. The case also serves as a reminder that, in the event that a party wishes to take action under security documents, careful consideration should be given, at an early stage, to the procedure to be followed under those documents.
This article was originally written for Stephenson Harwood's quarterly publication, Finance Litigation Legal Eye. If you would like to receive this publication, please contact Stephenson Harwood.
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