Cases Analysis
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Cases Analysis
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The duties of a security trustee during a non
consensual restructuring
Saltri III Ltd v MD Mezzanine SA
Sicar
[2012] EWHC 3025 (Comm), Eder J
Summary
A security trustee did not breach contractual duties to act in
good faith for a proper purpose and/or to obtain the best price
reasonably available when it implemented a non-consensual
restructuring involving a sale of the group to the group’s senior
lenders without a full marketing process. The security trustee
had been entitled to rely on a valuation that showed the group to
be worth substantially less than the total senior debt. As a result,
the junior lenders were most likely “out of the money” and had no
valid complaint when the group was sold to the senior lenders for
nominal consideration.
Facts
This case arose out of the non-consensual restructuring of the
Stabilus Group (the Group) in April 2010. The Group carries on
business as a leading manufacturer of springs and hydraulic vibration
dampers. It was acquired in 2008 by a private equity fund as a result
of which the Group assumed substantial indebtedness to various
lenders under Senior and Mezzanine Facilities Agreements governed
by English law (the SFA and MFA respectively). The borrowing was
secured by guarantees and share pledges over the Group’s shares and
assets. The rights and duties of the various lenders were regulated
by an Intercreditor Agreement (the ICA) pursuant to which the
Mezzanine Lenders’ claims were subordinated to those of the Senior
Lenders and JP Morgan Europe Limited (JPMEL) was appointed
as Security Trustee, Senior Facility Agent and (for a period of time)
Mezzanine Facility Agent.
By April 2010, the Group owed approximately €409m to the Senior
Lenders and a further €83m to the Mezzanine Lenders. By this time,
the Group had been in financial difficulty for a considerable period of
time. In June 2009 it had appointed N M Rothschild (Rothschild) to
advise it on a possible sale of the Group. Pursuant to that appointment,
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Rothschild solicited bids for the Group from a limited number of
prospective buyers but none of them was accepted. Ultimately, in the
face of opposition from the Mezzanine Lenders, the Senior Lenders
decided to use the powers in the ICA to implement a Senior-led
restructuring (the Restructuring). Accordingly (acting through a
co-ordinating committee), the Senior Lenders instructed JPMEL (in
its capacities as Senior Facility Agent and Security Trustee) to use the
powers in the ICA to acquire control of the Group’s shares by enforcing
the relevant Security and then to sell the Group to a company owned
by some of the Senior Lenders for nominal consideration. The
Mezzanine Debt was then released pursuant to powers in the ICA. The
net effect of this was that the Senior Lenders received a return on their
Senior Debt (either in the form of shares in the new holding company
or by retaining their debt, which was transferred as part of the sale).
By contrast, the Mezzanine Lenders were left with nothing. Their debt
was released and they received no payment in return.
The Mezzanine Lenders indicated an intention to challenge
the Restructuring and a Senior Lender (Saltri III Ltd) responded
by seeking declaratory relief in the Commercial Court that the
Restructuring was valid. The Mezzanine Lenders responded by
asserting that the Restructuring was invalid and/or that they were
entitled to substantial damages for breaches of duty by JPMEL. By the
time of the trial, the Mezzanine Lenders put forward the following
arguments in support of their position:
The ICA could not be used to implement a restructuring, let
––
alone a non-consensual restructuring as occurred in this case.
The ICA required all realisations to be made in return for cash
––
considerations that could be put through the waterfall under
clause 16 of the ICA.
JPMEP breached its duties under clauses 14 and 15 of the
––
ICA by acting for an improper purpose and/or failing to take
reasonable care to secure the best price reasonably available.
JPMEP breached its fiduciary duties by virtue of the way it
––
handled the Restructuring.
Each of these claims failed.
––
An Intercreditor Agreement can be used to
implement a non-consensual restructuring
In support of their first argument, the Mezzanine Lenders said
that the ICA was not designed to enable the implementation of a
restructuring. The Judge summarised this argument as follows:
“[i]n effect, the argument was that the ICA cannot be used
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for the purposes of a restructuring at all, or at least a nonconsensual one and, in effect, that it is impossible to enforce
under the ICA as part of a restructuring without the consent of
all, including junior, creditors.” [121].
The Judge did not agree with this for three reasons. Firstly, the
relevant question was whether the ICA contained provisions that
would enable the Senior Lenders to implement a non-consensual
restructuring and it did. Secondly, the Mezzanine Lenders’
argument would mean that they had a veto over the exercise of
enforcement powers no matter how far out of the money. Finally,
in both HHY Luxembourg Sarl v Barclays Bank Plc [2010] EWCA
Civ 1248 and Re Bluebrook Ltd [2010] BCLC 338, ICA powers were
used to implement a restructuring and no-one suggested that there
was an insuperable barrier to doing so.
A non-consensual restructuring can be
implemented by exercising powers of sale and
release even if no cash is received in return
The Mezzanine Lenders’ second argument centred on the
Security Trustee’s powers to sell assets and release debt. They said
that such powers could only be exercised if the Security Trustee
received cash that could be distributed by the waterfall provisions
in the ICA and that the Restructuring was invalid because the
Security Trustee only received nominal consideration. Eder
J rejected this argument too. As he noted, the ICA did not
expressly prohibit a sale for nominal consideration. On the
contrary, it permitted a “disposal, collection or realisation” of assets,
which was sufficiently broad to enable the Security Trustee to
dispose of assets otherwise than for cash consideration. More
importantly, however, the Mezzanine Lenders’ argument was
uncommercial because it would often be difficult to obtain a
purely cash offer, especially in times where the market was short
of liquidity [122]. Accordingly, the Judge concluded that the
powers of sale or disposal could be exercised to implement a sale
of the Group for nominal consideration.
The Security Trustee’s duties to: (i) obtain
the best price reasonably available; and (ii)
exercise the power of sale bona fide for a
proper purpose
Overview of the Security Trustee’s duties
The majority of the evidence focused on the question whether the
Security Trustee had complied with its duties under clauses 14
and 15 of the ICA. Both clauses made it clear that the Security
Trustee’s duties were no greater than those which would be
imposed pursuant to the general law and the Judge therefore set
out the duties of a mortgagee in an enforcement scenario at [127]
to [128]. On the basis of that summary, the parties largely agreed
that the Security Trustee was obliged to obtain the best price
reasonably available upon exercising a power of sale and to exercise
such a power in good faith for a proper purpose. However, the
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parties disagreed about four aspects of these duties and how they
applied on the facts.
Legal aspects of the Security Trustee’s duties
Four aspects of the Security Trustee’s duties were debated at the
hearing:
Burden of proof: the Mezzanine Lenders argued that since
––
the sale of the Group was to an “affiliated or connected person”,
special principles applied and the burden of proof was
reversed. As a matter of law, this argument was based on the
decision in Australia and New Zealand Banking Group Ltd
v Bangadily Pastoral Co Pty Ltd (1978) 139 CLR 195. This
was said to apply because JP Morgan (through JPMCB) held
some senior debt and acquired an equity stake in the SPV
used to implement the Restructuring. The Judge considered
this argument at [132] to [134] but did not resolve it. Instead,
he proceeded on the basis most favourable to the Mezzanine
Lenders and assumed it was correct.
Scope of duty: the Mezzanine Lenders argued that the
––
duty to obtain the best price reasonably available meant
that the Security Trustee was obliged to take and act upon
independent expert evidence (at least where the sale was to a
connected party) [136]. Eder J disagreed with this submission
and held that the scope of the Security Trustee’s duty had to
be “looked at in the round” and “viewed in practical commercial
terms” [138]. The touchstone is whether the Security Trustee
“acted as no mortgagee of reasonable competence acting with
ordinary care and (where appropriate) acting on competent advice
would act” [138].
Proof of damage: the Mezzanine Lenders said that there was
––
no need for them to prove loss in order to succeed in a claim
for breach of duty against the Security Trustee. In practical
terms, this was a very important point because all the evidence
suggested that the Mezzanine Lenders were “out of the money”
(ie that their debt was worthless). If this was the case, they
would be unable to prove any loss and their claim would fail.
After considering the competing arguments, Eder J rejected
the Mezzanine Lenders’ arguments on this point and held “it
seems to me that absent proof of loss (and putting to one side the
question of burden of proof), there is and can be no actionable
breach of duty.” [141]
Proper purpose: under the general law, a mortgagee owes a
––
duty to act in good faith for a proper purpose but does not
breach this duty unless it was no part of the mortgagee’s
purpose to recover the debt (Meretz Investments v ACP
[2007] Ch 197). By contrast, a fiduciary’s duty to act in good
faith for a proper purpose can be breached if the fiduciary
has mixed motives provided that the predominant purpose
was improper. It appears the Mezzanine Lenders were
arguing that the power of sale in clause 14 fell within the
former category but that the powers in clause 15 fell within
the latter. It is unclear whether this was disputed but in any
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event, Eder J reached no concluded view on this issue or on
the question whether either duty could be breached without
dishonesty [143].
Application on the facts
In applying these legal principles to the facts, Eder J scrutinised
the process of the Restructuring in detail. The Mezzanine
Lenders’ main complaint was that the Security Trustee disposed
of the Group to the Senior Lenders without an adequate
marketing process, even though Rothschild had earlier told it
that a full marketing process ought to have been carried out.
JPMEL, on the other hand, said that it was entitled to exercise
the power of sale in this way because it acted on the basis of a
valuation from American Appraisal that showed the Group to be
worth substantially less than the outstanding Senior Debt.
Eder J rejected this allegation for the following reasons:
There was no absolute obligation to carry out a marketing
––
process or to act on the advice of Rothschild [149].
The underlying assets consisted of a complex global business
––
which had been in severe financial difficulty since early 2009
and was “on the brink of insolvency” [150]
Rothschild was retained by the Group to advise it on a potential
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sales process. Rothschild did not give advice to the Security
Trustee or to any of the Senior Lenders [151] to [152].
The American Appraisal valuation was “on its face”
––
“a substantial and impressive document that had been carefully
prepared” [153]. Eder J considered a number of detailed
criticisms of the report advanced by the Mezzanine Lenders
but rejected them [155] to [201]
A sales and marketing process would have been “wholly impractical
––
if not impossible as well as potentially damaging” [202] to [213].
There was therefore no need to carry out such a process.
The Security Trustee’s alleged fiduciary duties
Finally, the Mezzanine Lenders claimed that the Security Trustee
owed broader fiduciary duties by virtue of its position as trustee and
that these had been breached by the manner in which it carried out
the Restructuring. Eder J accepted that the Security Trustee had
acted inappropriately by failing to put in place Chinese walls [222].
However he found that this did not cause any loss. The remaining
allegations were dismissed because the ICA excluded any broader
duty to act in the best interests of the lenders as a whole or to avoid
conflicts of interest and/or not to favour the interests of other
persons over the interests of the Mezzanine Lenders.
Comment
This is a very important case for restructuring practitioners.
There has been much controversy about the nature of the duties
owed by security trustees and the extent to which they must act
independently of the wishes of those entitled to issue instructions
pursuant to intercreditor agreements (for the most part, senior
lenders). Four important points should be noted:
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The case proceeded on the basis that the Security Trustee
––
owed substantive duties to the Mezzanine Lenders akin to
those owed by a mortgagee. This followed from the fact that
the ICA expressly imposed such duties upon the Security
Trustee (an approach that is mirrored in the LMA standard
terms). However, the same result would not necessarily follow
if the ICA were silent on the duties owed by the Security
Trustee and it may be possible to argue that the relevant
duties were in fact owed by those with the power to issue
enforcement instructions under the ICA, rather than the
Security Trustee itself.
Either
way, the relevant duty was to act in good faith for a proper
––
purpose and to obtain the best price reasonably available when
exercising a power of sale. Arguably, the most important part of
Eder J’s decision on this issue was his finding that such duties
were not actionable in the absence of proof of loss. This means
that a junior creditor will have to show that it is “in the money” (ie
that the company is worth more than the senior debt) in order
to bring a claim for breach of duty against the security trustee.
This is likely to be a significant obstacle in many restructurings
where (as often happens) the mezzanine debt is considered to
be worthless. In order to mount a challenge, the relevant junior
creditor will need to obtain credible expert evidence to show that
the value breaks in the junior debt.
Eder
J’s decision that there was no absolute duty to market or
––
act on independent expert advice is also important. Given the
financial state of the Stabilus Group, this finding was perhaps
understandable. However, it does not follow that there will be
no duty to market or act on independent expert evidence in
all future restructurings. It is possible to imagine a situation
where the company requires a restructuring but there is an
active market for the company or value in the junior debt. In
such cases, a marketing process might be necessary. As Eder J
noted, the scope of the duty will depend on the facts.
The extent to which Eder J scrutinised the American Appraisal
––
valuation is also noteworthy. This demonstrates that the
security trustee will need to go some way to justifying its
decision and cannot simply rely on the existence of a valuation.
In future restructurings, a security trustee will need carefully to
consider whether a valuation is sufficiently robust to stand up to
the kind of scrutiny that was given to the valuation in this case.
In all, it might be tempting to think that this case is a significant
victory for senior lenders and security trustees. To a certain extent,
this is certainly true and junior creditors who are obviously out of
the money will gain little comfort from this decision. However, the
extent to which the process as a whole was scrutinised in this case
will give junior creditors some comfort in cases where the borrower
is not in such significant financial difficulty. Where that is the case,
senior lenders and security trustees will only be able to avoid the risk
of costly and potentially damaging litigation by running a robust
and fair process. n
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