The well-publicised restructuring of the Galapagos group (the group) in 2019 spawned multiple challenges by stakeholders in the courts of a number of different jurisdictions. The latest decision of the English High Court considers the interpretation of the Distressed Disposal provision within an LMA-form intercreditor agreement (ICA) following a challenge by subordinated noteholders (the noteholders) to the validity of the release of their claims as part of the wider restructuring. The case is significant given that it is the first decision on this issue by the English courts for over a decade.
The full judgment can be read here.
As part of the restructuring of the financial indebtedness of the group, the senior secured lenders instructed the security agent to enforce security over the entire share capital of a holding company within the group (Holdco), eventually disposing of the shares in Holdco (the shares) to a third-party purchaser (Mangrove Luxco IV S.a.r.l. (Mangrove)). Mangrove was ultimately owned by the group’s original sponsor, Triton Investment Partners.
The proceeds of the disposal of the shares received by the security agent were applied towards the discharge of the original secured debt of the group in accordance with the payment waterfall set out within the ICA. Unsurprisingly, only the senior secured debt was repaid, with the Noteholders receiving no share of the proceeds given their subordinated status.
The security agent relied upon the Distressed Disposal provision within the ICA - which permitted the release of creditor claims and security in respect of the group subject to the satisfaction of certain conditions – in order to release the Noteholders’ claims against Holdco without their consent. This facilitated the sale of the Shares to Mangrove on a debt-free basis, free of all legacy liabilities.
Certain senior creditors and the sponsor of the group participated in the funding of the new group post-transfer of the Shares (the new group) and were issued with loan notes by Mangrove (the new notes). The subscription price for the new notes was partially satisfied by way of set-off against the amounts due to these senior creditors following the application of the sale proceeds of the Shares in accordance with the payment waterfall in the ICA.
Challenge by the noteholders
While all parties accepted that the transaction itself fell within the definition of Distressed Disposal under the ICA, the Noteholders’ contention was that the requisite conditions for the security agent’s use of the Distressed Disposal provision (considered further below) had not been satisfied, rendering the purported release of their claims invalid.
Cash consideration (Condition A)
This condition required that the consideration payable in relation to any Distressed Disposal should be “payable in cash, or substantially in cash”. The noteholders asserted that this condition had not been satisfied because the purchase price for the shares had been largely satisfied by way of set-off against the issue of the new notes by Mangrove to certain senior creditors of the group (around 65 percent of the purchase price was satisfied in this way). The noteholders’ view was that this meant that the consideration for the shares was not in cash, or substantially in cash.
Release of claims and security (Condition B)
This condition required that the release of existing creditor claims against the group should amount to an unconditional release and discharge and that such liabilities should not be assumed by any purchaser or an affiliated company. This condition further required that all related security should be simultaneously and unconditionally released at the time of the Distressed Disposal.
The noteholders argued that this condition was not satisfied because a number of senior creditors of the group participated in funding the new group - via their subscription for the new notes – and consequently the same creditors held debt and security interests in respect of the new group. The noteholders’ position was that the net result of this was that the claims and security of the existing creditors of the group had not been unconditionally released.
Implied term in Distressed Disposal provision
The court was also asked to consider whether a term should be implied into the ICA so that the conditions attached to the use of the Distressed Disposal provision (including Conditions A and B addressed above) need not be satisfied where the noteholders were effectively “out-of-the-money”.
The court held that Conditions A and B had both been satisfied, and accordingly the release of the Noteholders’ claims and security using the Distressed Disposal provision within the ICA was valid.
In relation to Condition A, the court held that the fact the purchase price had been largely satisfied by way of set-off was irrelevant. It was the promise to pay the consideration in cash (regardless of the manner in which this was ultimately settled) which was the determinative factor: the New Notes were not the consideration for the disposal of the Shares. The senior creditors of the group that chose to subscribe for the New Notes were free to use the “cash” proceeds they would otherwise have received under the ICA waterfall in whatever manner they chose – including by directing that these proceeds be set off against the subscription price for their New Notes.
Condition B did not preclude the senior lenders from choosing to provide debt finance to the new group, on new terms and in a different capacity. While the senior lenders’ release under the original debt and security documents and their subscription for the new notes were clearly related to the same wider restructuring process, the senior lenders had entered into entirely new financing arrangements with the new group and retained none of their historic creditor claims (all of which had been released).
Given its decision in relation to the satisfaction of Conditions A and B, the court considered it unnecessary to determine the question of whether a term should be implied into the ICA whereby conditions relating to the use of the Distressed Disposal provision would not need to be satisfied in circumstances where it could be demonstrated that the Noteholders were effectively “out-of-the-money”. However, as a finding of fact, the court held that the Noteholders were “out-of-the-money” at the time of the Distressed Disposal.
David Steinberg, co-head of the Restructuring and Insolvency group at Stevens & Bolton comments:
The commercial approach adopted by the court in this case will undoubtedly be welcomed by senior lenders operating in the leveraged finance market. The "common-sense" interpretation of the Distressed Disposal provision within the ICA (which is a key provision in many leveraged finance transactions) will provide certainty to all stakeholders and confirms that the court will seek to interpret such contractual provisions with an appreciation of the wider likely impact. In this case, the court was mindful of the effect its decision would have on the ability of existing senior lenders to continue to provide financing to a new group post-security enforcement, given that it is very often this particular “pool” of lenders which have the means and incentive to provide this ongoing financial support. Furthermore, the court’s conclusion that Condition A was satisfied in circumstances where most of the cash consideration was subject to a set-off follows the market orthodoxy that set-off is effectively "as if" cash. Again, this conclusion will be welcomed by lenders in the market.