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	England and Wales High Court (Commercial Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Royal Bank of Scotland Plc v Highland Financial Partners LP & Ors [2010] EWHC 194 (Comm) (10 February 2010) URL: http://www.bailii.org/ew/cases/EWHC/Comm/2010/194.html Cite as: [2010] EWHC 194 (Comm)

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IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		10 February 2010

Mr Justice Burton :

1. The Claimant, the Royal Bank of Scotland plc, seeks summary judgment under Part 24 in respect of its claims that the Second and Third Defendants, two members of the Highland Group of Companies ("HCC" and "CDO Fund"), are liable to it under a series of agreements involving the advancing by the Claimant of some E240m in respect of a proposed CDO (Collaterised Debt Obligation) transaction involving the Highland Group, called "Highlander V". The liability is allocated by the Claimant, pursuant to those agreements, as to 92.5% to the Second Defendant and 7.5% to the Third Defendant. The claim against the First Defendant, in respect of which the Claimant also seeks summary judgment, is as guarantor of the liability of the Second Defendant. Issues of quantum are left over, and the Claimant effectively seeks judgment on liability, which will follow if it is successful on the issues now before me.
2. Highlander V involved the Highland companies borrowing from the Claimant via a Special Purpose Vehicle ("SPV"), in name a Highland company but because of its SPV status effectively a trust company (Highland Euro CDO V BV), known as the Issuer. Such advances were to be used to acquire a portfolio or "Warehouse" of loans, and the Issuer was to issue securities to the market using the loans as collateral. There was to be a Closing Date, by which the loans would be acquired and the securities issued, and the Claimant's advances would thus be repaid, at the latest by the agreed Termination Date, with interest. There were provisions, as will be seen, for termination in the event – in those heady days no doubt considered unlikely – that the securities were not snapped up prior to the Termination Date. The original longstop for the Termination Date, upon which the Warehouse arrangements would expire if Highlander V had not closed (and had not been earlier terminated), was 30 September 2007. That date was, as will be seen, twice extended, first to 28 February 2008, and then, subsequently, to 31 January 2009, but Highlander V was a casualty of the market collapse of 2008-2009, and, as will be seen, there never was a Closing Date, no securities were ever issued, and the Claimant now seeks repayment. Such assets as the SPV Issuer retained, either in respect of the loans that were purchased and repaid, or interest received on those loans, have been recouped by the Claimant, but there are very substantial sums, totalled in the Amended Claim Form as more than £30.5m, outstanding, claimed as to 92.5% against the Second Defendant (and the First Defendant as its guarantor) and as to 7.5% against the Third Defendant. There is no dispute between the parties that the various Agreements, which originally established, and subsequently amended, the relationship between the parties, interlock and, although they were entered into over a period of time, and between the Claimant and differing members of the Highland Group and/or the SPV, they must be read and construed together.
3. The first such agreement, in fact the originating document, is the Mandate Letter, dated 18 December 2006, by which Highland Capital Management Europe Ltd, described as the "Servicer", engaged the Claimant as "Advisor" in connection with the proposed Highlander V transaction. By Clause 3 of the Mandate Letter the Servicer agreed to act as servicer for the Issuer in accordance with an agreement to be entered into (later the Interim Servicing Deed ("ISD")) whereby "during the term of the Warehouse Facility, the Servicer will direct the investment of the Portfolio Investments in accordance with the Warehouse Documents" (the latter being defined as "a separate written agreement (or agreements) (collectively "the Warehouse Documents")"). Clause 3(b) of the Mandate Letter is central to the dispute before me. Clause 6 contains provisions for its termination, which will also be material to my determination.
4. As anticipated and provided by the Mandate Agreement, a further package of agreements were duly entered into, on 5 April 2007. They were as follows:

i) The E400,000,000 Variable Funding Note Purchase Agreement ("the Funding Agreement") between the Issuer and the Claimant (described as "Variable Funding Noteholder") – and another bank simply as holder of designated accounts. This provided for the payment of the advances by the Claimant, and for repayment to the Claimant from time to time of the proceeds of and from the loans to be acquired by way of a 'rolling repayment obligation' in accordance with Clause 5 of the Funding Agreement. The Funding Agreement contained, in Clause 14, as did the ISD, to which I shall refer, at Clause 15, an express provision of Limited Recourse against the SPV Issuer. The one thing that is quite clear is that the liability of the SPV was limited to its assets, and the Issuer would not be obliged to pay any shortfall between those assets (i.e. the value of the loans and any proceeds of or from such loans) and the amounts due to the Claimant.

ii) The ISD was also dated 5 April 2007. The parties were, apart from the Issuer and the Servicer, and the account bank, the Claimant and the Second and Third Defendants. This effectively provided for the running of the Portfolio and the Warehouse by the Servicer. Clause 4.2, which will be of importance, provided for what was to happen in the event that the Closing Date (i.e. the issuing of securities) had not occurred on or prior to the Termination Date of the ISD. Clause 5.6 headed "Termination Date" is central, together with Clause 3(b) of the Mandate Letter, to the Claimant's claim against the Second and Third Defendants (and the First Defendant as guarantor) on this application.

iii) The third document was a Debenture of the same date, whereby the Claimant took a fixed and floating charge over the assets of the Issuer.

5. As I have indicated, Highlander V did not take off, even in the months immediately prior to the market collapse, and on 31 October 2007 two agreements were entered into:

i) The 31 October Amendment Deed provided for the first extension of the longstop date for closing to 28 February 2008.

ii) The First Loss Deposit Facility Deed ("the First Loss Deed") of the same date provided two specific benefits to the Claimant. First, the First Defendant, which was for the first time a party to one of the agreements, agreed to give, by Clause 6 (which will be central to the determination of the First Defendant's liability on this application) the guarantee of the Second Defendant's liability to which I referred above. Additionally, the Second and Third Defendants agreed to make a "collateral advance" to the Claimant (in their agreed proportions) by Clause 2 of the Deed, upon which, in the circumstances provided by Clause 3 (which will be in issue before me) the Claimant would be entitled to draw down. The total of the collateral advance was E7.5m, and it is common ground that this arose as a result of the substantial fall in the market and hence in the value of the loans which the Servicer had been buying in.

6. Unfortunately things got no better, and, as described above, the parties agreed a further extension of the longstop date to 31 January 2009, and, as the market plummeted further, a substantial increase in the collateral advance provided by the Second and Third Defendants, to a total of E42.5m. The relevant contractual documentation was:

(i) An Amended and Restated Mandate Letter, now incorporating the various changes, including the new expiration date of 31 January 2009. Significantly, on the Claimant's case, there was no material change in Clause 3(b), which still contained the words upon which the Claimant relies:

"... the CDO Fund and HCC will participate in the risk of the Warehouse Facility. If the transaction does not close, the economics will be 7.5% for the account of CDO Fund and 92.5% for the account of HCC."

The material addition was the reference to the First Defendant's guaranteeing the obligations of the Second Defendant.

(ii) The Amendment Deed of 1 April 2008 ("the Second Loss Deed") provided inter alia for the increased collateral advance, to which I have referred above, and made clear, by paragraph 2.3(d) that the Claimant would make no further advances to the Issuer under the Funding Agreement.

7. Lehman Brothers collapsed on 12 September 2008. The Claimant terminated the Mandate Letter in accordance with the terms of Clause 6 of that Letter, and, by virtue of the termination of the Mandate Letter (one of the express events entitling termination of the ISD (subparagraph (a) of the definition of Termination Date in that Agreement)) also terminated the ISD, by notice dated 30 October 2008. After exercising, on the Claimant's case, its rights pursuant to Clauses 4.2 and 4.3 of the ISD to realise the value of the loans, the assets of the Issuer, and drawing down against the collateral advance, the Claimant claims against the Defendants the shortfall as at the Final Realisation Date – defined in Clause 1.1 of the ISD as "the date on which all amounts realisable in respect of the Charged Assets have been realised and paid into the applicable Account", in accordance, as the Claimant asserts, with its entitlement under Clause 5.6, in the event 16 March 2009. Various issues do or may arise as to quantum, with which, as I have said, I am not concerned.
8. There are five issues before me, which I am invited by the Claimant to resolve under Part 24. There was no issue between the parties as to the law in respect of summary judgment. Particularly where, as here, there is no or no material dispute of fact at all, and the issue is one wholly of construction, it was common ground that I may be able to resolve that question by way of summary judgment if I am left, notwithstanding vigorous argument, in no doubt that there is no arguable defence. Indeed, although there was no cross-summons by the Defendants, nor any submissions in that regard, on an issue of construction it might be the case that resolution of the issue of construction in favour of the Defendant could leave the Claimant without a claim. Although in his skeleton argument Mr Johnson, solicitor advocate from Messrs Herbert Smith, who appeared with his colleague Ms Kerry Stares, submitted that on Part 24 there was room for the making of a conditional order if I were to consider it "improbable" that the Defendant's case would succeed, I have in reality been addressed only on the basis that the defences put forward by the Defendants (including one matter – the fourth issue – by way of counterclaim) have no real prospect of success. In determining the issues of construction, again there has been common ground as to my approach. There is no dispute about the relevant factual matrix – in essence the agglomerate of the warehousing documentation – and the application of the guidance of the House of Lords in Investors Compensation Scheme v West Bromwich Building Society (No 1) [1998] 1 WLR 896. There has also been no disagreement as to the applicability of that rule of construction which entitles a judge construing a commercial contract to conclude that, where a construction being contended for by reference to what is suggested to be a strict or apparent reading of words leads to an absurd or uncommercial conclusion contrary to common sense, then the court will and can construe the document so as to avoid such absurdity, if necessary correcting an obvious mistake of language (The Antaios [1985] AC 191, Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101).
9. The five issues for resolution, which the Claimant contends can be decided in its favour on this Part 24 application are as follows:

i) What is payable by the Second and Third Defendants to the Claimant? Is their liability limited to the assets of the Issuer, in which case since the assets of the Issuer, such as they were, have now been paid over to the Claimant, they would thus have no liability in respect of repayment of the outstanding advances by the Claimant? This depends upon construction of Clause 5.6 of the ISD.

ii) Has the Termination Date, which triggers the liability of the Defendants (if any) to make payment to the Claimant, within Clause 5.6 of the ISD, occurred? This depends upon whether the Claimant has terminated, and was entitled to terminate, the ISD.

iii) Has the Final Realisation Date (as defined by the ISD set out in paragraph 7 above) occurred, when the payments (if any) by the Second and Third Defendants fall to be made? This depends upon a construction or assessment of the effect of Clauses 4.2 and 4.3 of the ISD and Clause 5.1 of the Funding Agreement.

iv) Do the Second and Third Defendants have a counterclaim for the return of the collateral advances made by them, which have been used by the Claimants to reduce the balance owed to it? This depends upon a construction of Clause 3 of the First Loss Deed.

v) Was the First Defendant's guarantee triggered (a question depending upon construction of Clause 6 of the First Loss Deed)?

The First Issue

10. As set out in paragraph 9(i) above, this depends on the construction of Clause 5.6 of the ISD, which reads as follows (as amended by using the definitions in this judgment for ease of reference):

"5.6 Termination Date.

If the Closing Date does not occur prior to the Termination Date, on the Final Realisation Date, all amounts standing to the credit of each of the Accounts shall be applied in payment of all amounts due and payable pursuant to the [Funding Agreement], including repayment of all Advances outstanding thereunder and payment of all unpaid interest accrued thereon ...

In the event that all amounts due and payable under the [Funding Agreement], including repayment of all Advances outstanding thereunder and payment of all unpaid interest accrued thereon are not paid in full on the Final Realisation Date (such amount a "VFN Payment Amount") [the Second and Third Defendants] will each unconditionally and promptly on demand pay the [Claimant] their Highland Share of such VFN payment Amount on the Final Realisation Date, and the parties hereto agree that such payment shall operate in full and final discharge of the Issuer's obligation to pay the [Claimant] such amounts. The obligations of [the Second and Third Defendants] to the [Claimant] pursuant hereto shall be subject to the provisions contained in Schedule 7 attached to this Deed.

[The Second and Third Defendants] each undertake as a direct and primary obligation to pay the [Claimant] their Highland Share of any VFN payment amount."

11. The reference to the "Highland Share", as defined in Clause 1.1 of the ISD, is to the 92.5% and 7.5% proportions referred to in Paragraphs 1 and 2 above: the reference to Schedule 7 of the ISD, headed up "Clause 5.6 Guarantee", is to provisions by which the Second and Third Defendants' obligations under Clause 5.6 are not affected by any waiver or compromise with, or security taken from, any other party.
12. The Claimant asserts that (i) the Closing Date did not occur prior to the Termination Date and (ii) all advances outstanding under the Funding Agreement have not been repaid. So, it is asserted, the Second and Third Defendants were obliged to pay their respective Highland Share on the Final Realisation Date, irrespective of the effect of their obligations by reference to Schedule 7, each having undertaken "as a direct and primary obligation to pay the [Claimant] their Highland Share" of the sum outstanding.
13. This, submitted Mr Johnson, is entirely in accordance with the terms of Clause 3(b) of the Mandate Letter, which was repeated in the Amended Mandate Letter without material difference. Clause 3(b) read (again adjusted for redefinition):

"The [Claimant] agrees that, subject to obtaining its internal approval, the [Second and Third Defendants] will participate in the risk of the Warehouse Facility. If the transaction does not close, the economics will be 7.5% for the account of [the Third Defendant] and 92.5% for the account of [the Second Defendant] ... It is acknowledged that the Warehouse Documents are expected to stipulate that (i) the [Claimant] will earn EURIBOR + 50bps on all funded amounts and have discretionary veto rights on any proposed purchase and (ii) HCC [probably a mistake for the Second Defendant] and [the Third Defendant] will earn all excess spread (above EURIBOR + 50bps) and be responsible for any losses incurred by the [Claimant] as provided above."

14. In the Amended Mandate Letter there were minor changes relating to the nature of the interest, the last words "as provided above" were changed to "in the Warehouse Documents", and there was an additional sentence at the end: "In addition, [the First Defendant] undertakes to provide a full and unconditional guarantee of the obligations of [the Second Defendant] as further provided in the Warehouse Documents".
15. The provision that the Second and Third Defendants would share the loss in their respective proportions and repay it to the Claimant, so that the Claimant was reimbursed and suffered no loss, was also entirely consistent with the allocation of risk and benefit in respect of the entirety of the transaction or series of transactions. The Highland Companies took the entirety of the profits and should, in the same proportions, bear the entirety of the loss. The Claimant Bank was to receive none of the profits and should bear none of the loss. This was described by Mr Johnson in his submissions as "the essential component of the factual matrix".
16. Mr Cox QC, who with Mr Strong has appeared on behalf of the Defendants, submits that the liability of the Defendants is limited to, and no greater than, the assets of the Issuer. But, submitted Mr Johnson:

i) The purpose of the Limited Recourse provided by Clause 14 of the ISD is to limit the liability of the trust company, the SPV, and can have no relation whatever to that of the commercial companies who were parties to the transaction for the purposes of making profits. There is no cross-reference, as there could have been, in Clause 5.6 to Clause 14.

ii) Insofar as Mr Cox points out that the parties agreed in Clause 5.6 that "such payments shall operate in full and final discharge of the Issuer's obligations", that was expressly preceded by the word "and", which was exactly as one would expect, namely that, as a result of any payment by the Second and Third Defendants, the Issuer must pro tanto be relieved.

iii) Similarly, the provision that "the obligation of [the Second and Third Defendants] to [the Claimant] pursuant hereto shall be subject to the provisions" of Schedule 7 neither added nor subtracted anything to the argument, unless some emphasis was to be placed upon the heading to Schedule 7 "Clause 5.6 Guarantee", but, if the obligation by reference to Schedule 7 was to be limited to being a guarantee to the liability of the Issuer, the fact that the Second and Third Defendants had a "direct and primary obligation" was made clear in the last sentence of Clause 5.6.

iv) Mr Johnson drew attention to the provision of collateral by the Second and Third Defendants under the two Amendment Deeds, as indicating a clear liability to provide funds for repayment to the Claimant over and above the assets of the Issuer; but (a) strictly speaking such matters, being events subsequent to the ISD, even though part of a course of amendment of it and the other Warehousing Documents, should not be seen as part of the factual matrix, and (b) in addition it could be said that the provision of the collateral was not part of the Defendants' obligations, but above and beyond the call of duty in order to stave off termination of the transaction by the Claimant. In any event, Mr Cox submits that what the Defendants were doing was adding to the assets of the Issuer, so as to increase those assets, to which alone any claim by the Claimant was limited. Mr Johnson's contention seems to me to be neutralised by those various arguments. However:

v) What remains a very powerful final plank in support of Mr Johnson's proposition that the liability of the Second and Third Defendants to repay the Advances to the Claimant is indeed unlimited, and not affected by the Limited Recourse to the assets of the Issuer, is the existence of the Debenture. Given that the Claimant had entire recourse to the assets of the Issuer by reference to a fixed and floating charge, and the right to appoint a receiver, they would gain nothing whatever by Clause 5.6 if the liabilities of the Second and Third Defendants (not to speak of the subsequent guarantee of the bulk of the liability by the First Defendant) were also so limited. Mr Cox, relying on submissions made in the witness statement of a Mr Braner on the Defendants' behalf, seeks to explain this as addressing what he calls a "moral risk", because "the Issuer was outside the management and control of both sides and thus it could never be discounted that the Issuer could act improperly". It seems to me wholly divorced from reality to suggest that this structure to ensure the safe keeping of the assets of the Issuer, with provisions for express accounts and, of course, the fixed and floating charge, was not all that was necessary in respect of a trust company. It is plain that the obligations of the Second and Third Defendants were not necessary to back up that obligation, but were necessary to ensure the repayment of any shortfall if the value of the loans plummeted, as it did.

17. However, Mr Cox carefully developed his case on construction in oral submissions by reference to the exact wording of Clause 5.6. He pointed out that all that the Second and Third Defendants were undertaking, as a direct and primary obligation, to pay to the Claimant, was their Highland Share of any "VFN Payment Amount", as defined. The "VFN Payment Amount" is defined as being "all amounts due and payable under the [Funding Agreement]". The only party to the Funding Agreement is the Issuer, and the Issuer's liability is limited by the Limited Recourse provision to its assets, and so "all amounts due and payable [sc. by the Issuer] under the Funding Agreement" simply constitute the assets left to the Issuer and no more. It is the "VFN Payment Amount" so defined and limited which is alone the subject matter of the obligation under Clause 5.6, both "guaranteed" by reference to Schedule 7, and "undertaken as a direct and primary obligation" by reference to the last sentence of Clause 5.6.
18. This, in my judgment, is simply not what was intended by Clause 5.6. It is quite plain from the originating agreement, the Mandate Letter, that the Second and Third Defendants should bear the losses, and not the Claimant, as set out above. If it were not in any event clear that the ISD was intended to put into effect the terms of the Mandate Letter, such is expressed by Recital (A) of the ISD, to which, of course, both of the parties to the Mandate Agreement, the Claimant and the Servicer, were also (among others) parties:

"(A) The [Claimant] and [the Servicer] have entered into the Mandate Letter, pursuant to which [the Claimant] has agreed that, following a request from time to time by [the Servicer], it shall provide funding in respect of the purchase by or on behalf of the Issuer of certain loans or participations in loans in accordance with the provisions set out in the Mandate Letter."

19. If Clause 5.6 were to be construed as not complying or corresponding with Clause 3(b) of the Letter of Mandate, then the express intent of the parties would not be achieved. Attached to the Funding Agreement in Schedule 3 are the various forms of funding notes, and, by the "E400,000,000 Variable Funding Note due 30 September 2007", the Issuer "unconditionally promises to pay to the order of [the Claimant] the aggregate unpaid amount of all advances". The construction contended for by Mr Cox is, in all the circumstances, in the light of the principles of construction applied by the Antaios, absurd and contrary to common sense. In fact, I do not consider it necessary to adopt the course permitted by those authorities (see e.g. Lord Hoffmann in Chartbrook in paragraph 21) namely to correct the syntax or wording. I am satisfied that the words "all amounts due and payable under the [Funding Agreement], including repayment of all advances outstanding thereunder and payment of all unpaid interest accrued thereon" was a clear reference to the sums outstanding under the Variable Funding Note, and clearly anticipates that the payments will include, i.e. be likely to be more than, but certainly not less than, the advances made by the Claimant. As it happens, there is a limitation, by Clause 15 of the Funding Agreement, upon the amount that can be recovered by recourse to the Issuer, but I construe, in all the circumstances set out above, the reference to "all amounts due and payable" under the Funding Agreement not to be limited by the specific lack of recourse against the Issuer itself. Indeed it is the very existence of that Limited Recourse which forms the foundation for Clause 5.6, which thus fulfils the purpose of Clause 3(b) of the Mandate Agreement, unaltered by its amendment. I accordingly have no doubt about deciding Issue 1 in favour of the Claimant, and conclude that the Second and Third Defendants (and consequently the guarantor of the Second Defendant, the First Defendant) have no defence in this regard.

The Second Issue

20. The Claimant's entitlement under Clause 5.6 depends upon the Closing Date not having occurred prior to the Termination Date (of the ISD), and in this case consequently upon the Closing Date not having occurred byn 30 October 2008, as set out in paragraph 7 above. I have there set out the simple proposition, relied upon at the time by the Claimant, that one of the events entitling termination of the ISD was the termination of the Mandate Letter, and that the Mandate Letter was terminated in accordance with its terms: see Clause 6(a) of the Mandate Letter, whereby (subject to immaterial conditions) "either party ... may terminate the [Claimant's] engagement hereunder at any time upon written notice to the other party without any liability or continuing obligation of either party". Mr Cox's submission is not an easy one. He accepts that the Claimant was entitled to terminate, and did terminate, the Mandate Letter. He submits however that in the following circumstances the Claimant was not entitled to terminate (and therefore did not terminate) the ISD.
21. Both the relevant definitions to which I shall now refer appear in Clause 1.1 of the ISD. The first is:

""Termination Date" means…. the earliest to occur of:

(a) the termination of the Mandate Letter pursuant to the terms thereof ...

(b) the Final Realisation Date

(c) the date on which the [Claimant] provides written notice to the [Servicer] following the occurrence of an Interim Servicer Event ...

(d) the Closing Date

(e) 30 September 2007 [the then Longstop Date] ..."

22. An Interim Servicer Event was defined by reference to a number of events set out in subclause (c) to (f) inclusive, and then:

"(g) at any time of determination, a market value decline of greater than 2.25 per cent on all the Acquired Loans since their purchase."

23. By the time of the First Loss Deed in October 2007, the market had indeed declined, as I described above, and the Second and Third Defendants supplied the first Collateral Advance referred to in paragraph 5 above. By the Amendment Deed of the same date, which extended the Longstop Date to 28 February 2008, there was, by Clause 2.1(a)(ii), a deletion of subparagraph (g) in the definition of Interim Servicer Event in the ISD and a substitution of a different such event, namely, instead of a "market value decline of greater than 2.25%" a "market value decline of greater than E2m", with a provision that the Servicer might post additional collateral in order to cure such market value decline prior to such event constituting an Interim Servicer Event. By the time of the Second Loss Deed of 1 April 2008 (which extended the Longstop further) the market had substantially further deteriorated, and the Second and Third Defendants provided the further collateral referred to in paragraph 6 above. There was by clause 2.1(a) a further amendment to the definition of Interim Servicer Event by the deletion of the amended subparagraph (g) and its substitution by an event by reference to breaches of obligation by the Servicer and/or the Second and/or the Third Defendants. Thus the right of the Claimant to terminate by reference to an Interim Servicer Event in this regard pursuant to subclause (g) as amended was removed. However at no time was subclause (a), dependent upon the termination of the Mandate Letter, amended or deleted.
24. Mr Cox submits that when the Claimant terminated on 30 October 2008 it was in fact terminating by reference to, and/or upon the ground of, the substantial market value decline. Mr Griffiths of the Claimant in his witness statement does not accept that this was his motive and certainly not his reason. He says as follows, in paragraph 74:

"[The Claimant] did not need a reason to terminate the Mandate Letter. Without prejudice to that position, [the Claimant] did so – as I have explained above – because it was concerned about the ability of [the Second and Third Defendants] to pay the anticipated shortfall (in excess of the cash sums they had paid as collateral security). The Defendants are wrong to say that [the Claimant] terminated the Mandate Letter because it considered that the drop in the market value of the loans left [the Claimant] with a loss. The risk of a loss on the underlying portfolio was allocated to [the Defendants] by Clause 5.6 of the [ISD]. The risk that [the Claimant] took was on [the Second and Third Defendants] and their ability and/or willingness to meet their obligations."

25. However, if it is necessary, or even possible, to probe behind the motivation of the Claimant, no doubt it could be said that that is not a matter that could be done on a Part 24 application. But that is not the issue for determination. The simple fact is that the Claimant did not, and did not need to, rely upon the (now deleted) right to rely upon the happening of an Interim Servicer Event. They relied simply upon the termination of the Mandate Letter. Mr Cox submitted, in paragraph 42(e) of his skeleton that:

"[The Claimant] cannot rely on [subclause] (a) to the extent that it was inconsistent with or in conflict with the Second Amendment Deed i.e. to the extent that the definition would, after April 2008, otherwise have provided that the ISD be terminated because of termination of the Mandate Letter because of the decline in the market value of the loans."

26. The very existence in this sentence of the two 'becauses' shows how difficult the proposition is. Mr Cox relies upon Clause 3.2 of the Second Loss Deed, which provides that, if any of the provisions of that Deed were inconsistent with or in conflict with any of the provisions of the ISD, the former would prevail. But the simple fact is that in the ISD both subclause (a) and subclause (g) coexisted, and that subclause (a) remained unaffected when subclause (g) was first of all amended and then deleted. Just as there was not a conflict between subclause (a) and the unamended subclause (g), so, in my judgment, was there not a conflict between subclause (a) and the amended/deleted subclause (g). In any event, the provisions of Clause 3.2 must be set against those of Clause 2.4 of the same Deed, which provided that "Save as varied by this Amendment Deed, the [ISD] ... shall ... remain in full force and effect upon the terms and conditions set out therein."
27. The entitlement to terminate the ISD upon the ground of decline in market value was removed. The entitlement of determining the ISD upon the ground of the prior determination of the mandate remained, and, even if one of the motives of terminating the mandate was a lack of confidence (justified in the event) on the part of the Claimant that it would be repaid, because of the fall in the market value, that was not the ground for termination of the Mandate Letter, nor did it need to be, and it was not the ground for termination of the ISD, nor did it need to be.
28. I am therefore satisfied in respect of the second issue that the Termination Date has occurred, such as to trigger the Claimant's entitlement under Clause 5.6. I was not addressed on what seems to me to have been an arguable fallback position for the Claimant, namely that, even if not entitled to terminate upon the basis of subclause (a), nevertheless it did so.

The Third Issue

29. The Claimant submits that it is entitled, given the triggering of Clause 5.6, to claim amounts payable on the Final Realisation Date, whose definition I have set out in paragraph 7 above, namely, on its case, 16 March, after the carrying out of the various accounting processes. Mr Cox submits that the Final Realisation Date never arose, indeed has never arisen, because there has never been a "date on which all amounts realisable in respect of the Charged assets have been realised and paid into the applicable Account."
30. This is because the Defendants do not accept that the Claimant has complied with the provisions of Clause 4.2 of the ISD, which reads (again as adjusted vis-a-vis my definitions, and in material part) as follows:

"4.2 No Closing Date

If the Closing Date does not occur on or prior to the Termination Date, the Acquired Loans shall be sold in accordance with the provisions set out below:

(a) the ... Servicer shall have the right to purchase all Acquired Loans from the Issuer ... provided that in respect of any Acquired Loans not sold or agreed to be sold by the Issuer to the ... Servicer within 3 Business Days of the Termination Date, the [Claimant] will have the option to direct the Issuer to sell one or more of the Acquired Loans remaining in the Portfolio in such manner as specified below and as [the Claimant] shall determine in a commercially reasonable manner, which (for the avoidance of doubt) may include a sale of any such Acquired Loans to the [Claimant] ... at a price equal to the sum of the market values for such Acquired Loans ...

(b) the acquisition by the ... [Claimant] of any Acquired Loan pursuant to this Clause 4.2 shall be effected by the relevant purchasing entity delivering immediate available funds in an amount equal to the purchase price payable into the Sale Proceeds Account of the Issuer ..."

31. I have not set out the proviso to 4.2(a), because it is not suggested that the relevant method was not followed by the Claimant. 4.2(c) is not relevant, but Clause 4.3 is:

"4.3 Set Off

The [Claimant] may set off any amounts owed by it under this Clause 4 against any amounts payable to it in respect of the Variable Funding Note."

32. Although the Defendants reserve their rights to argue matters as to quantum, for the purposes of resistance to liability, they rely only on two contentions in this regard:

i) After exercising its right to purchase the Acquired Loans, the Claimant did not pay for them by paying the proceeds in to the Sale Proceeds Account of the Issuer, but kept the sums in reduction of the outstanding debt (and have of course given credit in the course of the Final Realisation) – the 'set-off point'.

ii) In relation to one set of the loans (the Consolis Loans), the Claimant was unable to acquire the loan because of the objection of the debtor, but instead took an interest by way of sub-participation – but paying the full amount of the value of the loans – the 'Consolis point'.

33. In each case it is suggested that the Claimant did not comply strictly with the provisions of Clause 4.2, in the one case by not paying the proceeds in accordance with Clause 4.2(b) of the ISD, and in the other case by taking (as Mr Braner for the Defendants accepted to be the case, in paragraph 88 of his witness statement) "the ultimate economic interest in the debt", but otherwise than by purchasing it. The conclusion which Mr Cox seeks to draw is that, as the Claimant has not complied strictly with Clause 4.2, it is not entitled to say that there has been a Final Realisation Date.
34. As to the set-off point, the Claimant in general terms relies and relied on set-off. First of all it submits that it was entitled to set-off pursuant to Clause 4.3. However Mr Cox points out that, strictly, when the Claimant (properly) carried out the acquisition mechanisms under Clause 4.2 in December 2008, the entirety of the advance was not repayable to it prior to the Termination Date of the Funding Agreement (as amended), being 31 January 2009. Further or in the alternative, the Claimant makes the point that what it was doing (and properly in accordance with Clause 4.2) was realising the loans by purchasing them. When there were proceeds of the loans, the Issuer was required, by Clause 3.1 of the Funding Agreement, to "pay or procure the payment of" such sale proceeds into the Principal Account (as defined by the Funding Agreement), which I was informed was the same account as the Sale Proceeds Account specified in Clause 4.2(b) of the ISD – not surprisingly. Once such proceeds are paid into such account, the Issuer is obliged (by reference to the 'rolling repayment obligation' to which I referred in paragraph 4(i) above), to pay those proceeds over and back to the Claimant (unless there was some agreement that the monies could be used for a further advance, an option which by Clause 2.3 of the Second Amendment Deed of 1 April 2008 had been foreclosed). Once in such account therefore, the monies would have been repayable to the Claimant, with interest (although only on a Payment Date, as defined by Clause 4.4 of the Funding Agreement). In my judgment the provision for the securing of the proceeds of the loans by retaining such proceeds in an account in the name of the Issuer until paid over to the Claimant, was a provision (being an obligation imposed by it upon the Issuer) for the benefit of the Claimant, which the Claimant was entitled to waive. At worst the money, if paid in, would have remained there for a short time until the next payment date, and there was no evidence as to when that was. Mr Johnson described what would have happened had the monies been paid in and then come out again to the Claimant, as an unnecessary 'money-go-round'.
35. So far as the Consolis point is concerned, Mr Cox submits that Clause 4.2 was not complied with, because there was not a "sale" of the Consolis loans to the Claimant. This is thus said to be a non-compliance with Clause 4.2, such as to invalidate there having been a Final Realisation Date.
36. Mr Johnson submits that the reality is the requirement for a proper and arm's length realisation of the loans. He points to clause 3.7 of the ISD, whereby the original acquisition of the Acquired Loans by the Servicer on behalf of the Issuer did not have to be by purchase, for the "Transfer Certificate" showing the transfer of the acquired loan to the Issuer could amount to an "original executed assignment, transfer document or participation agreement (as applicable)". So, too, in Recital (A) to the Funding Agreement, there is specific reference to the agreement by the Claimant that "following a request from time to time by the ... Servicer, on behalf of the Issuer, it may arrange funding in respect of the purchase of certain loans or participations in loans on behalf of the Issuer in accordance with the provisions set out in such Mandate Letter". Plainly, Mr Johnson submits, if the original acquisition of a loan can be by way of a sub-participation, then so can a disposal.
37. Mr Cox relies on the reference to sale in clause 4.2, referred to above, but, on the particular facts of the case, he also points to the terms of the relevant sub-participation agreement under which the benefit of the loan was transferred from the Issuer to the Claimant, which provides that the transfer would not be legally binding if the buyer failed to pay the seller all funds due and payable on the settlement date, without set-off or counterclaim. He submits that, by virtue of the fact that the arrangement as between the Issuer and the Claimant took place by set-off, therefore the transfer of the sub-participation agreement could not be valid. Mr Cox conceded at this stage of his argument that this was a "technical point". Mr Johnson responded by emphasising that the term in question, with regard to set-offs, was a standard term in the sub-participation agreement between the Claimant and the Issuer, that the Defendants had never been a party to it, that it is plain that the standard terms must have been varied de facto by effecting a set-off, that there had never been any challenge to the validity of the transfer, and that the only party which could complain, namely the Issuer, could not now do so, because the Claimant holds a power of attorney over the Issuer.
38. These were indeed 'technical' arguments raised by Mr Cox, and ones which might well be described as clutching at straws. The subtext was that if there was something procedurally wrong with what occurred, either by way of a payment into a wrong account, or a failure to pay into the right account, or a slightly different mechanism of realisation of the asset, that rendered the entire process so non-compliant with Clause 4.2 that it could be said that there had not been a Final Realisation Date. I have concluded that there was not a material non-compliance with Clause 4.2(b), by reference to the variation of the provision for payment into and out of the Issuer's Sale Proceeds Account, and by virtue (due to the non-co-operation by the particular debtor) of the realisation of one particular loan by a different method than outright purchase, leaving the Issuer titularly as the creditor, but even if I were wrong in that regard, and there were technical breaches of Clause 4.2, that would not in my judgment begin to mean that there were not, by dint of the otherwise proper realisation of the loans and accounting for their proceeds, a Final Realisation, and consequently a Final Realisation Date.

The Fourth Issue

39. This depends upon a construction of Clause 3 of the First Loss Deed, which remained unaffected by the Second Loss Deed, which simply increased the amount of the collateral.

"3. Application Of Amounts Of Collateral

Following payment in full of all amounts set out in clause 5 of the [ISD], the [Claimant] shall on the Termination Date (as defined in [the ISD]) be entitled to use an amount up to an amount equal to the Collateral Advance (plus any interest accrued thereon) to meet any VFN Payment Amount, or any VFN Closing Date Shortfall Amount. Any part of the Collateral Advance (plus any interest accrued thereon) not used as aforesaid shall be paid back to [the Second and Third Defendants] in the same proportions as their respective shares of the Collateral Advance, on the Termination Date."

40. The Claimant used the full amount of the Collateral Advance in reduction of the outstanding balance owed to it, i.e. "to meet [the] VFN Payment Amount". The VFN Payment Amount of course only arises on the Final Realisation Date (see Clause 5.6 of the ISD, discussed at length above).
41. Mr Cox submits however that the last sentence of Clause 3 is clear. The Termination Date for the purpose of that sentence is as defined in Clause 1, the Definition section, of the First Loss Deed (as amended by the Second Loss Deed), namely 31 January 2009. The Collateral Advance therefore should have been returned to the Second and Third Defendants on 31 January 2009, at which stage it was still intact: and so ought to have been repaid before the Final Realisation Date (16 March 2009) and (though there does not seem to have been any claim for its return in January) when the Claimant off-set and appropriated it, on 16 March 2009, it was not entitled to do so.
42. This would, of course, have been of particular significance if I had concluded that the Claimant's claim against the Second and Third Defendants was limited to the assets of the Issuer, because, if the collateral had to be repaid, the Claimant could not then recover it back from the Second and Third Defendants. If, however, as I have concluded, the Claimant's claim against the Second and Third Defendants is not so limited, then the 'money-go-round' is circular, and even if the money were required to be repaid by the Claimant, it would immediately increase the Claimant's claim against the Defendants to the same amount, and would thus fall to be set-off against it. The only question that might arise would be the minimal amount of interest on such sum between 31 January 2009, when they should have repaid it, and 16 March 2009 when it should have been paid back to them. Both because of that potential, though in the context minimal, claim and because the issue has been argued before me, I nevertheless turn to resolve it.
43. Mr Cox's case is by reference to the strict construction of Clause 3. That clause contains, as set out above, in fact two different Termination Dates. The first, contained in the first sentence, is the "Termination Date (as defined in the [ISD])". This is (for our purposes) the earlier of the termination of the Mandate Letter (30 October 2008) and the Final Realisation Date (16 March 2009), i.e. the former. But the Termination Date in the second sentence of Clause 3, is, as explained in paragraph 41 above, 31 January 2009. So, in accordance with the wording of Clause 3, following payment in full of all payments available to the Claimant in accordance with Clause 5 of the ISD (which cannot arise until after 30 October 2008), the Claimant shall be (which must on that basis mean shall have been) entitled on (as from) 30 October 2008 to use some or all of the collateral to meet any shortfall, as calculated on 16 March 2009. Any part of the collateral advance "not used as aforesaid" is to be paid back to the Second and Third Defendants on 31 January 2009. This is plainly unworkable.
44. It was suggested that this could work if it happened that the Termination Date of the ISD had occurred earlier, so that the consequential working out of accounts and arrival at the final Realisation Date could be before 31 January 2009, but that is plainly not what was intended: it cannot have been the purpose of either party to create a system which drove the Claimant to early termination of the ISD in order to make use of the collateral: the whole purpose of the First Loss Deed (and the Second Loss Deed) was to seek, by the provision of the collateral, to achieve an extension of the arrangement, not a foreshortening of it.
45. Although it was not argued before me, I suppose it could be suggested that Clause 3 was intended to be some kind of incentive to the Claimant and the Issuer to get on with the accounting and realisation process, on the basis that, whenever the Termination Date took place, the Final Realisation Date (and crystallisation of the VFN Payment Amount) would be prior to 31 January 2009, but again I cannot conceive that this was the intention. It is quite clear that the intention of this clause was that, in the event of termination of the ISD, there would then be a period of time, in accordance with it, for realisation and settlement of accounts, ending on the Final Realisation Date, at which point, if there was any balance owing to the Claimant, the collateral would be, as it was always intended to be, used to reduce or eliminate it, and anything left would then be returned to the Second and Third Defendants.
46. I am entirely clear therefore that (applying paragraphs 14 and 15 of the speech of Lord Hoffmann in Chartbrook) something has "gone wrong with the language", and (paragraph 21 of his speech) the Court needs to express the meaning of the parties in different language from that used. This is not in fact the only place in this complex series of agreements in which there seems to have been a mistaken use of a defined term (e.g. the use in Clause 3(b)(ii) of the Mandate Letter of SOHC, when HCC was probably intended). The parties must have meant, in the second sentence of Clause 3, to use not "on the Termination Date" but "on the Final Realisation Date" – i.e. the date on which, after the termination of the arrangements, the accounting has been settled. This is also clear from the fact that it is only then that the VFN Payment Amount (as defined in Clause 5.6 of the ISD and expressly used in Clause 3) can be ascertained.
47. Accordingly, although for the reasons I have given it is of minimal significance to the parties, I resolve the fourth issue against the Defendant.

The Fifth Issue

48. The First Defendant denies that it is liable, pursuant to its guarantee contained in Clause 6 of the First Loss Deed, to pay the amount which I have concluded above to be payable by the Second Defendant, pursuant to Clause 5.6 of the ISD. Clause 6 (again adjusted as above) reads in material part as follows:

"6. Guarantee.

In the event that [the Second Defendant's 92.5%] Share of the VFN Payment Amount payable under Clause 5.6 of the [ISD] is not paid in full on the Final Realisation Date (the "HCC Outstanding Amount"), [the First Defendant] will unconditionally and promptly on demand pay the [Claimant] the HCC Outstanding Amount on the Final Realisation Date."

49. Mr Cox relies on the first words of Clause 6 above, and upon the provision for notices in Clause 18.1 of the ISD, which gives addresses and fax numbers for the various parties, including the Second Defendant, and reads (again as adjusted, and as material):

"18.1 ... any notice or demand sent by post as aforesaid shall be deemed to have been given, made or served three days in the case of inland post or seven days in the case of overseas post after dispatch and any notice of demand sent by electronic mail or facsimile transmission as aforesaid shall be deemed to have been given, made or served 24 hours after the time of dispatch."

50. He submits that the demand/notice sent to the Second Defendant (and admittedly received) on 16 March itself, i.e. the Final Realisation Date, is, by virtue of Clause 18.1, deemed to have been received or served only 24 hours later, namely on 17 March 2009, the day after the Final Realisation Date, and can thus not be claimed over against the First Defendant under its guarantee set out above. There are two answers to this wholly unmeritorious point:

i) It does not in my judgment matter whether notice was given to the Second Defendant on the Final Realisation Date. The obligation of the First Defendant is to guarantee any relevant sum payable under Clause 5.6 which is not paid in full on the Final Realisation Date. As a matter of fact the sums owed by the Second Defendant were not paid in full on the Final Realisation Date.

ii) In any event, insofar as it is necessary for there to have been notice given and received on the Final Realisation Date, it was. The deeming provision is, in my judgment, there to use in the event of any dispute about receipt. There is in this case no dispute that the fax was in fact received on 16 March.

51. Suffice it to say that, if either of the two arguments of the First Defendant were right, then it would mean that there was only a window of time on the 16 March itself in which it could be liable on the guarantee, and then only if a notice were served by hand on that day. That is plainly an absurd construction of Clause 6. I accordingly resolve the fifth issue in favour of the Claimant.
52. For all these reasons I give judgment for the Claimant on all five issues, and request Counsel to present an appropriate draft Order.