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Published 16 April 2015
In the recent case of Myers & Myers v Kestrel Acquisitions Limited & others, the High Court considered whether loan note instruments included an implied term to the effect that any modifications must be made in good faith. The Court also considered the extent of the power to make modifications and addressed the question of whether, on the facts, the purported modifications were permitted.
In May 2004 Kestrel Acquisitions Limited ("Kestrel") issued Fixed Rate Unsecured Loan Notes in the sum of £5,264,798 (the "Vendor Loan Notes"/"VLNs") to the Claimants, Dennis and Patricia Myers. The VLNs were part of the consideration for the sale of the Myers' sub-prime lending business, which they had been conducting through a company called Swift Advances plc ("Swift"). As part of the same transaction, Kestrel also issued Unsecured Discounted Loan Notes (the "Discounted Loan Notes"/"DLNs") to its investors, in order to fund the cash consideration payable to the Claimants.
From November 2007 onwards, Kestrel purported to make a number of unilateral modifications to the terms of the VLNs. The changes were of two kinds: (i) amendments designed to subordinate the VLNs to another set of loan notes issued by Kestrel; and (ii) amendments designed to postpone the redemption date of the VLNs. Both sets of amendments were made so as to enable Kestrel to raise the further funding that it needed to survive the global recession.
If the amendments were valid, the effect of them was to subordinate the VLNs to £102 million of further loans and to postpone their redemption date from 2010 to 2018. The Claimants said that as a result of the subordinations and postponements the VLNs had been rendered worthless.
The Claimants argued that the amendments were invalid, because (i) the power to modify the terms of the VLNs was limited by an implied term to do so in good faith, and (ii) the types of amendments that Kestrel had purported to make went beyond the scope of permitted modifications. In particular, the Claimants asserted that no changes which modified the essential nature of the VLNs or diminished the prospect of them being repaid could be valid.
The Court was not willing to imply a duty of good faith into the terms of the VLNs. This conclusion was reached on the basis that the overall documentation entered into between the parties in relation to the sale of Swift was detailed and extensive. It included clauses protecting the Claimants' interests, and there was no indication that the parties intended to further protect the Claimants by requiring modifications to the VLNs to be carried out in good faith. The Court noted that the assumption which underlay implying such a term into the VLNs was that the DLNs and VLNs constituted a single class of instruments, which they did not. They had been created by different financial instruments and the DLN instrument made no mention of the VLN instrument. Further, the DLNs were freely transferable, subject to the terms of an intercreditor agreement. The intercreditor agreement did not require any transferee to take into account the interests of the VLN holders.
As to the scope of modifications, clause 9 of the VLN allowed Kestrel to "make any modification" if sanctioned by an Extraordinary Resolution of the noteholders, or unilaterally if it was consistent with any modifications to the DLNs. The Court held that each purported amendment fell within the scope of this clause, and was therefore valid. The Court noted that "all of the other detailed rights and obligations, set out in what was clearly a carefully worded instrument, have remained unchanged".
It is clear from the judgment in this case that the Courts will be loath to depart from a literal reading of commercial agreements, particularly where the terms of those agreements are detailed and extensive. This approach is to be welcomed in that it confirms that commercial parties, who have put thought into the terms of detailed and complex financial transactions, will be able to rely on the terms of those transactions as drafted, without the concern that further terms could be implied.
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