In a recent decision (Gemini (Eclipse 2006-3) Plc and The Bank of New York Mellon v Danske Bank and BNY Mellon Corporate Trustee Services (2012)), the Commercial Court has again construed a financial instrument in a way that is most consistent with business common sense – the judicial trend for which does not appear to be abating.  This case is an example of the court upholding a waterfall, or priority payment, clause.

The first claimant, Gemini, was the issuer of notes in a commercial mortgage-backed securitisation.  The second claimant, Bank of New York Mellon (BNYM), was the appointed cash manager for the securitisation.  The first defendant, Danske Bank, provided a liquidity facility to Gemini.  The second defendant, Bank of New York Mellon Corporate Trustee, was the trustee with whom Gemini entered into the trust deed.

Gemini issued a series of notes.  It entered into a Liquidity Facility Agreement (LFA) with Danske Bank for £64 million in respect of the securitisation.  Essentially, this was a loan from Danske Bank to Gemini for short term funds to allow Gemini to meet its imminent obligations to noteholders.

In May 2012 Danske Bank submitted an invoice to Gemini for payment under the LFA on the next payment date, being in July 2012.  The invoiced sum was for just under £2 million, which comprised interest due on the loan repayments and also costs that Danske Bank had incurred as a result of regulatory changes in its home country, Denmark.  It was not disputed that these costs were payable by Gemini.

The LFA contained a threshold for any amount due under it.  Anything in excess of this threshold would be classed as a Liquidity Subordinated Amount (LSA) which, according to a waterfall clause in the agreement, would be subordinated to amounts owed by Gemini to noteholders.  The payment due in July 2012 exceeded this threshold and the excess was therefore classed as an LSA. 

The LFA also contained a provision which allowed Gemini to draw further money if and when a debt fell due to certain secured creditors (an Expenses Drawing).  This meant that there was the possibility that Gemini could draw more money under the LFA in order to meet its payment obligations.

On the payment date in July 2012, Gemini did not have enough funds to pay all the noteholders, let alone anyone else. 

Issues and arguments

The court was required to consider two specific issues, namely:

  • whether the LSAs were due and payable on the payment date; and
  • whether an Expenses Drawing could be made under the LFA in order to fund payment.

The clause in the LFA which came under judicial scrutiny was one which provided that LSAs were only due and payable "if and to the extent that the Issuer has funds available to be applied…towards payment of the LSAs".

Gemini's interpretation was that no LSA could become payable unless it had sufficient cash to meet the obligation to pay it.  In a situation where Gemini did not even have sufficient funds to pay all noteholders, who were first in line to be paid, any LSA was not due and payable.  As regards making an Expenses Drawing in order to put it into sufficient funds, drawdown could only be activated when a debt fell due and, on Gemini's case, this had not happened with the LSAs.   (This meant that, in practice, an Expenses Drawing could never be applied to any amount due by Gemini to Danske Bank above the LFA threshold, as such an amount would be classed as an LSA, in respect of which the obligation to pay only arose if Gemini had funds to meet the obligation.  And if it did have funds, it followed that it did not need to make an Expenses Drawing.)

Danske Bank argued that in order to determine whether the LSAs were payable under the above clause, all funds available to Gemini had to be taken into account, and this included an Expenses Drawing.


Mr Justice Cooke agreed with Gemini's interpretation.  Whilst acknowledging the "obvious oddity" of the practical implications for an Expenses Drawing the judge was influenced by a clause in the LFA which expressly prohibited an Expenses Drawing to be applied against payments to noteholders.  In this case, any drawdown (assuming, for a minute, that it was allowed) would partly have been put to this use, as Gemini had insufficient funds for even this purpose.  In reaching his decision, Mr Justice Cooke, following the Supreme Court's decision in Rainy Sky v Kookmin Bank (2011), stated that where the language of the parties could be construed in two different ways, the aim was to adopt "the construction which was most consistent with business common sense, by an iterative process involving the checking of each of the rival meanings with the other provisions of the document and investigating the consequences.  The aim is to ascertain what the reasonable person would have understood the parties to have meant by the words that they used, with such reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract".


This decision follows a line of recent cases, in particular Rainy Sky v Kookmin Bank (2011), in seeking to adopt an interpretation of disputed wording that is most in line with business common sense.  In Rainy Sky, the court concluded that where the parties have used wholly unambiguous language, the court must give effect to it, however surprising or unreasonable the result might be but where there are two possible interpretations, the court is entitled to prefer the interpretation which is most consistent with business common sense.