Cattles Plc v Welcome Financial Services Ltd (1) The Royal Bank of Scotland Plc (2) and Another
| Jurisdiction | England & Wales |
| Judge | HHJ David Cooke |
| Judgment Date | 14 December 2009 |
| Neutral Citation | [2009] EWHC 3027 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: HC09C02719 |
| Date | 14 December 2009 |
[2009] EWHC 3027 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
HHJ David Cooke
Case No: HC09C02719
Robin Dicker QC and David Allison (instructed by Lawrence Graham LLP) for the Claimant
The First Defendant did not attend and was not represented
William Trower QC and Richard Fisher (instructed by Allen & Overy LLP) for the Second Defendant
Robin Knowles QC and Tom Smith (Instructed by Quinn Emanuel) for the Third Defendant
Hearing date: 29 October 2009
The claimant Cattles Plc ("Cattles") has brought this claim in order to determine a number of issues of construction and law in relation to the debts it owes to different classes of creditors, which are said to be presently a bar to achieving the financial restructuring it needs to survive. It is brought under Part 8, there being no dispute as to fact and the issues having been defined by agreement between the parties.
Cattles is a public company listed on the London Stock Exchange, though its listing is currently suspended pending finalisation of its accounts for the year ended 31 December 2008. It is the parent company of a group providing financial services to consumers and businesses, said to be typically those who may not have access to mainstream credit. The group operates by Cattles raising finance itself and lending on to the trading subsidiaries, of which the principal one is the first defendant ("Welcome"). Cattles is said to have financing liabilities of some £2.6Bn, which fall into three categories:
i) A number of syndicated and bilateral credit facilities ("the Facilities") totalling £1.625Bn, all made between Cattles as borrower and the second defendant ("RBS" or "the Bank") as lender and/or as facility agent for syndicated lending banks. For present purposes, the documentation in respect of all these facilities is in materially similar terms; where necessary I will refer to the terms of one of them, an £800m syndicated credit facility agreement dated 10 July 2006 which appears in Vol 2 Tab 1 of the hearing bundle ("the Facility Agreement"). RBS has the benefit of a group cross guarantee dated 3 April 1998 ("the Guarantee") by which Cattles, Welcome and other subsidiaries each guarantee the payment of all obligations owed by any of them to the Bank. It is common ground that these obligations include all amounts due under the Facilities.
ii) Several series of guaranteed senior unsecured loan notes ("the Notes") issued by Cattles, some denominated in currencies other than sterling. These notes have the benefit of guarantees by Welcome and certain other subsidiaries. I am told that the noteholders or their representatives are aware of these proceedings but have not sought to participate.
iii) Two sets of bonds ("the Bonds") issued by Cattles, £350m 7.875% bonds due 2014 and £400m 8.125% bonds due 2017, in respect of which HSBC Trustee (C.I.) Ltd acts as trustee. The bondholders do not have the benefit of any guarantee from Welcome or any other subsidiary and must therefore look only to Cattles to pay the principal and interest due on the Bonds.
None of these obligations is secured on the assets of any group company. Party A is a holder of certain Bonds, and by order of Norris J on 13 August 2009 is joined as representative of all the bondholders, and on terms that its identity is not to be disclosed unless the court so orders.
In the present financial position of the group, defaults are outstanding under the terms of all of the Facilities, Notes and Bonds. On 24 July 2009 the Trustee of the £400m Bond issue served a notice accelerating Cattles' liability to pay the principal due. As a result the Trustee may sue for payment, though it has not yet done so. No similar enforcement action has been taken in respect of the Notes or Facilities, though it could be at any time. The board of Cattles is required to consider whether there is a reasonable prospect of avoiding insolvent liquidation or administration, by means of an agreed restructuring or otherwise.
Cattles' principal assets are the amounts receivable by it from its trading subsidiaries, of which the largest is an amount of about £2.9Bn payable by Welcome to Cattles. The dispute arises because in the course of restructuring negotiations RBS has asserted that all or some of this upstream debt should not be paid, or claimable in a liquidation or administration of Welcome, until all amounts owed to RBS have been paid in full. The same points would no doubt apply to other subsidiaries.
The assertion is made on two bases:
i) First, that clause 6 of the Guarantee operates as a contractual prohibition on the claiming of any inter-company debt due between the companies party to it until all the guaranteed obligations to the Bank have been paid ("the Clause 6 point"), and
ii) Alternatively, that if Welcome were to enter into insolvent liquidation or administration and Cattles were to prove for the inter-company debt, Welcome's liquidator (or administrator) would be entitled to what was referred to as a right of quasi- retainer under the rule in Cherry v Boultbee (1839) 4 My & Cr 442 against Cattles, by virtue of which he would treat any dividend otherwise due to Cattles in respect of its inter-company debt as being initially satisfied by Cattles' own liability to counter-indemnify Welcome against Welcome's liability to the Bank under the Guarantee ("the Cherry v Boultbee point").
If correct, RBS's position has serious implications for the bondholders; they have no claim directly against Welcome or the other subsidiaries. Any recovery in an insolvency depends on assets flowing up to Cattles through claims for the inter-company debt, and if such claims are eliminated or restricted, the Bank will in practice achieve a significant priority for its claims over those of the bondholders. The Clause 6 point would have the effect that no upstream debt could be paid until the Bank had been paid in full, and accordingly the bondholders would receive nothing until the Bank had been paid. The Cherry v Boultbee point would not necessarily achieve such a complete subordination, depending on the amount of dividends due from Welcome to Cattles affected by the quasi retainer.
The bondholders' position is that:
i) Clause 6 of the Guarantee does not prohibit claims by Cattles against Welcome for any inter-company debt, but only such claims as arise from Cattles' capacity under the Guarantee as guarantor of obligations of Welcome. The £2.9Bn upstream debt does not arise in that capacity and so may be claimed in full.
ii) Welcome's right to exercise a quasi- retainer under Cherry v Boultbee has been excluded by contract in the provisions of clause 6 of the Guarantee and clause 15.7 of the Facility Agreement. RBS denies this as a matter of construction but in any event responds that it would be entitled to waive the application of the relevant part of clause 6, and has given a direction to disapply the corresponding provision of clause 15.7.
iii) If there is a right of quasi- retainer, it is for a lesser amount than the full potential counter- indemnity liability of Cattles.
The questions posed in the Part 8 claim form are these:
i) Whether, on the true construction of the Guarantee, Cattles is obliged:
a) not to make any claim against Welcome (including any claim against Welcome in respect of the inter-company loan made by Cattles to Welcome ("the Debt")); and/or
b) not to prove in a liquidation of Welcome in respect of any claim which Cattles has against Welcome (including any claim in respect of the Debt),
until such time as all Obligations (as defined in the Guarantee) to RBS of each of the Companies (as defined in the Guarantee) have been discharged in full, including all liabilities of each of the Companies under the Facilities.
ii) If the obligation imposed on Cattles by the Guarantee not to make claims against Welcome, and not to prove in a liquidation of Welcome, is not as described in (i) above,
a) whether, on the true construction of the Guarantee, Cattles is obliged:
i) not to make any claim against Welcome in respect of any payment made to RBS by Cattles pursuant to its guarantee of the indebtedness of Welcome to RBS ("the Indemnity Claim"); and/or
ii) not to prove in a liquidation of Welcome in respect of the Indemnity Claim,
until such time as all Obligations (as defined in the Guarantee) to RBS of each of the Companies (as defined in the Guarantee) have been discharged in full; and
b) if not as set out in (a), what, on the true construction of the Guarantee, the obligation is.
iii) If the answer to (i) is no, then, if Welcome and Cattles were both to enter into insolvent liquidation:
a) whether, subject to the terms of the documentation, the liquidators of Welcome would have a right of quasi-retainer pursuant to the rule in Cherry v Boultbee, exercisable against Cattles so as to entitle Welcome to retain dividends otherwise payable by Welcome to Cattles in respect of the Debt;
b) whether the right of quasi-retainer is excluded by the terms of the documentation including Clause 6 of the Guarantee and Clause 15.7 of the Facility Agreement;
c) if the liquidators of Welcome would have a right of quasi-retainer, whether the entitlement to retain is up to an amount equal to the full amount of Welcome's liability to RBS as surety of Cattles' obligations to RBS or some lesser amount and, if so, what amount.
iv) Would the answers to questions (i) to (iii) above in any way differ if Welcome were to enter into administration and a notice of intention to distribute pursuant to rule 2.95 of the Insolvency Rules 1986 were to be given by the administrator of Welcome.
Issues (i) and (ii) represent the...
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