The scope of the powers afforded to the security agent by the so called “release provisions” found in many intercreditor agreements employed in LBO deals has come under scrutiny recently. A number of restructurings have relied upon using the security agent’s powers to implement a restructuring and many others will have at least considered using them.
In circumstances where share security is being enforced, “release provisions” may empower the security agent to release and/or transfer liabilities owed to creditors (including junior creditors) by the borrowing group and transfer the entire borrowing group free of those liabilities to a new owner.
The drafting of the “release provisions” is not uniform across intercreditor agreements and, until now, has been largely untested. There is therefore room for debate as to precisely what the particular provisions in any given case permit the security agent to do.
European Directories case
The interpretation of the “release provisions” used in the European Directories intercreditor agreement is the subject of a Court of Appeal judgment handed down earlier today.
In the High Court Proudman J, held that the “release provisions” in the European Directories documentation ought to be given a narrow and literal interpretation. As a result the security agent would only be able to release/transfer the liabilities of a borrower company whose shares were being directly disposed of (meaning that its subsidiaries could not be released/transferred without the consent of those lenders whose rights were affected).
This would have meant that in order to deliver an entire group of companies to a purchaser free of encumbrance, multiple enforcements in multiple jurisdictions and therefore multiple releases/transfers of liabilities by the security agent would have been required. Attempting to co-ordinate disparate enforcement processes would make such a restructuring cumbersome, time consuming, costly and, in some cases, impractical.
In today’s judgment the Court of Appeal overturned that decision agreeing with the arguments of the Appellants that the release provisions ought to be interpreted purposively and more broadly so as to allow a release/transfer of liabilities of any company where shares in any of its direct or indirect holding companies are being sold as a result of the enforcement of security over those shares.
Immediate leave to appeal was refused on the grounds that the case was based on the construction of a particular contractual provision rather than a point of general principle. The losing parties are expected to seek permission from the Supreme Court for a further appeal.
Today’s decision will certainly provide for more flexibility in terms of ways in which the European Directories group (and others like it) can be restructured. In contrast to the interpretation taken by the High Court , this decision will mean that in situations where junior creditors are out of the money the senior creditors can implement a restructuring without junior creditor consent by transferring the borrowing group in its entirety to a new owner free of the junior creditor’s claims by enforcing security in a single jurisdiction.
As a result of the Court of Appeal’s decision (subject to the outcome of any appeal to the Supreme Court should it grant permission) we can expect that equivalent “release provisions” will continue to be used as an important restructuring tool (as they have been in other cases in the past) either as a means of implementing a non-consensual restructuring or as a credible threat to persuade dissentients to consent.
The LMA intercreditor agreement includes “release provisions” which seek to give the security agent broad powers of release/transfer. We would expect that the version used in that agreement will become more and more prevalent as market participants recognise the advantages of having clearly drafted “release provisions”. However today’s decision will mean that not having LMA style drafting will not necessarily mean that other versions of the “release provisions” cannot be used to good effect.