Dennis Edward Myers and Another v Kestrel Acquisitions Ltd and Others
| Jurisdiction | England & Wales |
| Judge | Sir William Blackburne |
| Judgment Date | 31 March 2015 |
| Neutral Citation | [2015] EWHC 916 (Ch) |
| Docket Number | Case No: HC13D03475 |
| Court | Chancery Division |
| Date | 31 March 2015 |
[2015] EWHC 916 (Ch)
Sir William Blackburne
Case No: HC13D03475
Case No: HC14A01554
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Paul Downes QC and Stewart Chirnside (instructed by Bristows LLP) for the Claimants
Guy Morpuss QC and Patricia Edwards (instructed by Macfarlanes LLP) for the Defendants
Hearing dates: 2, 3, 4 and 5 December 2014
Introduction
This is the trial of two closely related Part 8 claims. The first was issued on 12 August 2013, the second on 9 April 2014. It is not necessary to distinguish between them. They arise out of the issue on 12 May 2004 to the claimants, Dennis and Patricia Myers, by the first defendant ("Kestrel") of £5,264,798 Fixed Rate Unsecured Loan Notes 2010 ("the Vendor Loan Notes" or, more simply, "the VLNs"). The VLNs were issued as part of the consideration for the sale by the Myers of their sub-prime lending business which they conducted through a company called Swift Advances plc ("Swift"). The Myers hold the VLNs as trustees of a family settlement. Claiming to exercise powers contained in the terms of the VLNs, Kestrel has purported to make unilateral amendments to those terms. The amendments are of two kinds. The first relates to amendments designed to subordinate the VLNs to further loan notes which Kestrel has issued. This has happened on 2 November 2007, 15 July 2008 and 6 July 2009. In all the VLNs have been subordinated to £102m of further loans, together with the interest that those further loans have earned and continue to earn. The second relates to amendments designed to postpone the redemption date of the VLNs. This has happened on 15 July 2008, 1 September 2010, 21 December 2011 and 26 March 2014. If the postponements are valid the VLNs now mature for payment, failing an earlier event of default, on 31 March 2018. The original maturity date was 12 May 2010. The subordinations and postponements were effected to enable Kestrel to raise the further funding it needed so that it could weather the global recession.
By these claims the Myers, who appear by Paul Downes QC and Stewart Chirnside, seek relief intended to establish the invalidity of the amendments. They contend that, without their consent (which was not forthcoming), Kestrel had no power to subordinate the VLNs to the further loans. They contend that all of the postponements were likewise invalid although they accept that the first of them (made on 15 July 2008 whereby redemption was postponed from 12 May 2010 to 30 September 2012) was arguably valid. I call this "the invalidity issue". They say that as a result of the subordinations and postponements the VLNs are now worthless. They seek declaratory relief to reflect these contentions. They also contend that in the events that have happened Kestrel and the second defendant ("Kestrel Holdings"), which is Kestrel's parent company, are unable to pay their debts within the meaning of section 123 of the Insolvency Act 1986 ("section 123") and that accordingly there has been an event of default under the terms of the VLNs. They seek a declaration to that effect. I call this "the insolvency issue".
The defendants, appearing by Guy Morpuss QC and Patricia Edwards, deny that Mr and Mrs Myers are entitled to any of the relief they seek. They contend that the amendments were validly made and that, in any event, the Myers are estopped from contending otherwise. They also contend that Kestrel and its parent are not insolvent within the meaning of section 123.
The Myers have also issued a Part 7 claim. It arises out of the same facts. Whether it proceeds to any extent will depend on the outcome of this hearing. It has been stayed by consent in the meantime.
I should add that one of the two issues raised by the later of the Part 8 claims (the so-called "lapse" issue) was abandoned by the Myers in late October by the service of a notice of discontinuance. I will mention it in more detail a little later.
The facts
Although these are Part 8 proceedings and therefore the Myers are obliged to assert, and do assert, that the resolution of the issues raised is unlikely to involve any substantial dispute of fact, to which end there was an agreed statements of facts, a great deal of evidence has been filed and neither side has quite been able to resist the temptation to refer to matters which do give rise to disputes of fact. That has been done either to describe the "wider picture" or in the hope that I will take the view that the factual position is so overwhelmingly in that side's favour on some issue that I should not hesitate to find accordingly. Or it has been to show that what at first sight looks to be unchallengeable factually, in truth conceals complex issues fit only for trial under Part 7. Nevertheless, both sides have been anxious that so far as possible I should determine the issues raised by the two Part 8 claims.
The agreed statement of facts and the undisputed evidence disclose that the Myers built up a highly successful business in the field of non-conforming sub-prime secured lending. They did so through the medium of Swift. Swift is the eighth defendant. All of the shares in Swift were held on Myers family trusts. Among them was the P Myers Interest in Possession Settlement. The Myers bring these proceedings as trustees of that settlement. Nothing turns on its provisions.
On 8 May 2004 the Myers entered into an agreement ("the Sale and Purchase Agreement") with Kestrel and Kestrel Holdings for the sale of the whole of Swift's issued share capital to Kestrel. That company had been specially incorporated for the purpose. The sale was effectively to a private equity firm called Alchemy Partners LLP. The purchase consideration amounted in the event to £85m. Of that sum £4,661,173 was paid on (but as to £1m within six months of) completion. The balance of £80,338,827 was satisfied by the issue by Kestrel to the Myers on completion of (i) guaranteed loan notes in the sum of £75m, (ii) 74,029 shares in Kestrel, and (iii) the Vendor Loan Notes in the sum of £5,264,79. Completion was on 12 May 2004. (There was also a provision whereby up to a further £5m would become payable in certain events but those events did not and cannot now occur.) Effectively, as I understood it, the Myers received £79.67m in cash, 74,000 odd shares in Kestrel Holdings and the VLNs. It is with the latter, and only with the latter, that this hearing is concerned.
The VLNs were created by an instrument dated 12 May 2004 ("the Vendor Loan Note Instrument" or, more simply, "the VLNI"). They carry interest at 12% compounded annually, with the interest so earned being paid on the loan redemption date, i.e. initially 12 May 2010 and, if they were validly extended, the postponed dates and not before. Kestrel has the right in defined circumstances to redeem all of the Notes prior to that date with interest accrued up to the date of redemption. It can also purchase any of the Notes at any time and there is provision for the holders of the Notes to call for earlier repayment (together with accrued interest) upon the occurrence of specified events of default.
The consideration for the shares in Swift was funded in large part by Kestrel issuing unsecured discounted loan notes ("the Discounted Loan Notes" or more simply "the DLNs") with a nominal value of £103,086,443 to the sixth defendant ("Alchemy") and the fifth defendant ("Indigo"). The DLNs were created by Kestrel by an instrument dated 12 May 2004 ("the Discounted Loan Note Instrument" or, more simply, "the DLNI"). The discounted price paid was £55,185,201. Of that amount Alchemy agreed to subscribe £52,226,800 and Indigo the £2,958,401 balance. In addition, Alchemy subscribed for 734,272 ordinary shares in Kestrel Holdings and Indigo for 41,599 further such shares. The shares were issued at par.
Those loan notes, like the VLNs, had the same maturity date (12 May 2010). They were issued at a discount but this, I was told, was on the footing that, once interest up to redemption is included, the amount repayable on redemption would be their nominal amount, namely £108,925,803. I understood, but have not done the calculation, that this was on the footing that interest was also at the rate of 12% compounded annually. The DLNs provided for earlier redemption at Kestrel's option and, for this purpose, set out how interest was to be calculated up to the date of such earlier redemption. It was also open to Kestrel to purchase any of the Notes and there was provision for earlier redemption in various defined circumstances.
It is convenient at this point to return to the abandoned lapse issue. It arose from the fact that on 31 March 2008 the DLNs were replaced by fresh notes ("the Replacement Notes") constituting £85,766,963 Fixed Rate Unsecured Loan Notes 2010. They were issued to Alchemy and Indigo in the sums of £81,169,116 and £4,597,847 respectively and were in all material respects the same as the DLNs which they replaced. (Rather than refer to them in what follows it is simpler to continue to refer to the DLNs as if they had continued in being.) The gist of the lapse issue (which was one of the two issues raised by the later of the two Part 8 claims) was that, as a matter of construction, after 31 March 2008 when the DLNs were replaced by Replacement Notes, Kestrel's right...
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