High Court Upholds Contractual Limits On Challenging Enforcement Action In Cross-border Finance Transaction

The High Court has recently considered the enforceability of contractual provisions that purport to limit a party's ability to challenge enforcement action following default, in the context of a cross-border financing arrangement: Catbalogan Holdings Sàrl v Unik Bond SA [2025] EWHC 2673 (Ch).

Following a bond issuer's payment default, the defendant (which provided security for the debt under the bonds) entered into various English-law governed agreements with the claimant bondholder. By these agreements the bondholder agreed not to demand repayment, bring any claim or take any enforcement action during a standstill period. This was to allow a limited period for the issuer to conclude a refinancing transaction and repay the bonds in full. However, following further repayment failures, the claimant instructed the security agent to take enforcement action. The defendant sought to challenge that enforcement action by bringing proceedings in Paris. The court held that the defendant was in breach of contract by seeking to challenge the enforcement action and granted a final injunction requiring the defendant to withdraw the Paris proceedings.

The decision will be of particular interest to financial institutions, as it underscores the importance of clear drafting when valuable rights are being relinquished, and the willingness of the English court to uphold such provisions where the contractual language is unambiguous and the parties are sophisticated.

The judgment serves as a timely reminder that:

• The court will generally respect the parties' commercial bargain, especially where the documentation is professionally drafted and the consequences of default are clearly set out.
• Provisions restricting the ability to challenge enforcement steps will be upheld, provided the language is sufficiently clear and there is no suggestion of fraud.
• Careful attention should be paid to the drafting of enforcement and standstill provisions in cross-border transactions, to ensure that the intended allocation of risk is achieved and that parties are fully aware of the rights they are giving up.

The Court of Appeal has granted the defendant permission to appeal.

We consider the decision in more detail below.

Background

The claimant company was the assignee of the interest and rights in bonds issued by a hospitality company (the Company) and its parent company (the Parent). As part of the original financing transaction, security for the debt under the bonds was provided by the Parent and by the defendant, who owned 50% of shares in the Parent. The security provided included Luxembourg-law governed share and receivables pledge agreements and a French-law governed fiducie agreement.

Following a payment default under the bonds, the bondholder entered into an English-law governed standstill agreement, additional agreement and intercreditor agreement with the Company, the Parent, the defendant and the security agent for the bonds. The agreements contained provisions under which the bondholder would not demand repayment, bring any claim or take any enforcement action during the standstill period. This was to allow a limited period for the Company to conclude a refinancing transaction to repay the bonds in full. In exchange, the Company, Parent and defendant acknowledged the event of default, agreed not to challenge enforcement of the security and released any rights or claims to challenge enforcement steps.

Following further repayment failures, the bondholder assigned its interest in the bonds to the claimant, which acceded to the terms of the relevant agreements. The security agent (acting on the claimant's instructions) then: (i) issued a notice of enforcement in respect of the share and receivables pledges and under the fiducie agreement; (ii) appropriated and sold the shares in the Parent (including all of the defendant's shares); and (iii) replaced the management of the Company.

The defendant issued proceedings in the Paris Commercial Court seeking to challenge the claimant's right to enforce its security and unwind the enforcement action, but the claimant obtained an interim injunction from the English court directing the defendant to adjourn the Paris proceedings. The claimant also sought a declaration from the English court that the defendant had acted in breach of contract, and a final injunction requiring the defendant to withdraw the Paris proceedings. The defendant disputed that the relevant agreements prevented it from challenging the enforcement of security.

Decision

The court held that the defendant was in breach of contract by obstructing the security agent's enforcement action. The key elements of the court's decision which are likely to be of broader interest to financial services firms are considered further below.

Approach to contractual interpretation where a party is giving up "valuable legal rights"

The court applied the well-established principles of contractual interpretation, noting that the agreements in issue were drafted by legal experts, and so this was not a case in which the express language used in the documents could be given less weight on the basis they were poorly drafted. There was no identified mistake in the documentation and no relevant factual matrix to take into account other than that which was obvious from the documents. On that basis, the starting point in construing the relevant provisions was the language of the agreements.

The court emphasised that a relevant question when considering the commercial sense of the rival constructions in this case, was whether the language of the agreements was sufficiently clear to find that the defendant gave up valuable legal rights, including recourse to the court. The court referred to the decision in Federal Republic of Nigeria v JP Morgan Chase Bank NA [2019] EWHC 347 (approved on appeal by the Court of Appeal – see our blog post), which articulated the following principle:

Did the defendant agree not to derogate from enforcement action?

The court then considered the key provisions in which the defendant allegedly agreed not to derogate from enforcement action, which appeared at clause 5 of the additional agreement and provided as follows:

Looking first at clause 5(a), the court agreed with the claimant that the obligation to "co-operate fully" included an obligation not to derogate from enforcement action in any way after it has been taken. It did not accept that any rights conferred on the bondholder and security agent were subject to them proving that the enforcement action taken was lawful (and therefore always liable to challenge by the defendant). The court noted the claimant's concession that this did not prevent the defendant from challenging conduct which was fraudulent/dishonest (or prevent something that was manifestly not enforcement action at all).

The court accepted that the claimant's construction meant that the Company and the Parent were giving up the right to challenge any action by the bondholder or security agent in the course of purported enforcement action – even if that action was invalid formally, or a breach of a term of the finance and security documents, or unlawful in some other respect. The court recognised that clear language was needed for such a conclusion, but found that this was the correct construction of the clause on the basis that this was the price paid by the Company and Parent for a final chance to redeem the bonds. It was also supported by the other terms of the additional agreement (particularly clause 5(d)).

Turning to clause 5(d), it was common ground that it was to be read in two parts: the first concerned with contesting or preventing the exercise of rights under finance or security documents, and the second with releasing certain rights or claims. In the court's judgment, the clause had (and was intended to have) a wide effect: excluding the right to challenge the exercise of rights under the finance documents in overseas jurisdictions.

In the court's view, despite the use of the words "agree and acknowledge", the first part of the clause did not have effect only as a contractual estoppel; it created a binding obligation that the Company and the Parent were to perform. The first part of the clause fitted the natural reading of the words in the second part; and the second part was not directed only to the other provisions of clause 5 specifically mentioned (see the emphasis added to clause 5(d) reproduced above). The court said this argument failed to give any weight to the words "including, without limitation", which made it clear that the rights mentioned were an example of a broader category that had gone before, namely the exercise of enforcement rights.

The court considered this to be the right interpretation of clause 5(d), on the basis (again) that this was the price of the last chance that the Company and Parent were being given to refinance and discharge the debt.

Accordingly, the court found that the defendant's conduct breached clauses 5(a) and (d) of the additional agreement and it granted a final injunction against the defendant requiring it to withdraw the proceedings in Paris.