Claimant having stake in company, C Ltd, formed to purchase hotels - C and D, defendants in second action, seeking to gain control of C Ltd

McKillen v Misland (Cyprus) Investments Ltd and others and another case: Chancery Division (Mr Justice David Richards): 2 February 2012

Both sets of proceedings arose out of the same background facts. The claimant petitioner was the holder of a 36% equity interest in an English company, C Ltd, which had been formed in 2004 for the acquisition by a consortium of Irish investors of four hotels, and continued to own three of them. The first and second defendants in the second action (D and B) sought to gain complete control of C Ltd through companies and trusts they controlled.

The proceedings concerned, inter alia, the transfer of, on 27 September 2011, secured bank loan facilities to M Ltd, a company within B and D’s interests. Banking facilities for that transaction were provided by organisations owned by the Irish authorities (collectively, the bank). The instant preliminary issue concerned contractual provisions relevant to that transfer. The transfer was effected by an agreement dated 1 April 2011 (the agreement).

Clause 24 of the agreement made general provision for transfers, while clause 24.2 contained a restriction on the class of permitted transferee. Clause 24.3(a) contained conditions applicable to transfers, including a requirement of consultation with the borrower. The claimant alleged that the transfer of facilities breached clause 24.2 and 24.3 of the agreement. B and D denied that claim, and contended that the effect of clause 40 of the agreement was to no longer require clauses 24.2 and 24.3 to be applied to the transfer. In considering the issues, regard was given to clause 40 of the agreement, which dealt with the consequences of the beneficial acquisition of the facilities by the bank.

Clause 40(3) dealt with the legal transfer of rights and obligations under the facilities to the bank. Paragraph (1)(ii) dealt with the position pending such legal transfer regarding the exercise of rights, powers or discretions by the bank 'in place of’ any lender. The claimant brought two sets of proceedings, alleging that the methods used by D and B to gain control of C Ltd were unlawful and involved prejudicial conduct of the affairs of C Ltd.

In the instant application, two issues arose, namely whether, on a true construction of clause 40.3 of the agreement: (i) cl 40.3 applied to the transfer of C Ltd's loan facility to M Ltd; and (ii) the restrictions on transfer in clauses 24.2 and/or 24.3 would apply to the transfer of C Ltd's loan facility to M Ltd. The claimant contended, inter alia, that M Ltd was not within the class of permitted transferee in clause 24.2 and that there had been a breach of the requirement of consultation with the borrower under clause 24.3(a). He further submitted that, regarding the power of lenders, clause 40.3(b) was limited to dealing with the position following the bank’s equitable acquisition of the benefit of the bank facilities, acknowledged in clause 40.3(a), but before any legal transfer to the bank.

The court ruled: On the true construction of the agreement, the claimant’s submissions were to be preferred. The construction put forward by the claimant made sense of the words ‘in place of’. It appropriately reflected the same phrase as used elsewhere in the agreement. Secondly, while clause 40.3(b) of the agreement disapplied only clauses 24, 26.10 and 27.17, it did so in relation to the exercise of any rights, powers and discretions, not just those under those clauses. If the intention had been to disapply clause 24 to a transfer by the bank, paragraph (1)(ii) would not have referred to the exercise of any rights, powers or discretions, but would have been more specific. Those words were consistent with the claimant’s construction (see [93], [94] of the judgment).

Consequently, clause 40.3 did not apply to the transfer of the company's loan facility to M Ltd. The restrictions on transfer in clauses 24.2 and/or 24.3 had applied to the transfer of the company's loan facility to M Ltd (see [96] of the judgment).

Robert Miles QC and Gregory Denton-Cox (instructed by Herbert Smith LLP) for the claimant; Jeffery Onions QC, Sa’ad Hossain and Edmund Nourse (instructed by Weil Gotshal & Manges) for the third defendant; Robin Dicker QC and William Wilson (instructed by Hogan Lovells International LLP) for the eleventh defendant.