Case No: A3/2015/1470
Neutral Citation Number: [2016] EWCA Civ 1141
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION
MR JUSTICE BARLING
HC2015000148
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 22/11/2016
Before:

THE SENIOR PRESIDENT OF TRIBUNALS LORD JUSTICE RYDER
LORD JUSTICE CHRISTOPHER CLARKE
and
LORD JUSTICE HAMBLEN

- - - - - - - - - - - - - - - - - - - - -

Between:

	Fomento De Construcciones Y Contratas S.A.	Appellant	
	- and -		
	Black Diamond Offshore Ltd and Ors	Respondents	

- - - - - - - - - - - - - - - - - - - - -
- - - - - - - - - - - - - - - - - - - - -

Mr David Wolfson QC (instructed by Mishcon de Reya LLP) for the Appellant
Ms Felicity Toube QC (instructed by Boies, Schiller & Flexner (UK) LLP) for the Respondents

Hearing date: 8th November 2016

- - - - - - - - - - - - - - - - - - - - -

Judgment
Lord Justice Christopher Clarke: 
1.	The question at issue in this appeal is whether or not an Event of Default has occurred in respect of a € 450 million Loan Note. The sub clause at issue is not particularly well drafted, particularly when contrasted with the admirably concise and well-focused submissions that we have received from both counsel.

The background

2.	Fomento de Construcciones Y Contratas S.A. (“FCC”) is a leading publicly quoted Spanish company. It specialises in, inter alia, construction and city sanitation services such as waste removal and waste water treatment. For the year ended December 31 2008 58% of the revenues of the Group which it heads originated in Spain. Out of 2008 non-Spanish originated Revenues, 67% originated in Central and Eastern Europe (mainly in Austria and Germany), 14% in the United Kingdom, 7% in the rest of Europe, 6% in the USA and 6% in the rest of the world. The Group comprised 1,692 companies with nearly 94,000 employees based in over 50 countries. 
3.	FCC’s borrowing includes two major elements. First, on 27 October 2009 it offered for sale, and later issued, € 450 million 6.5% unsecured convertible notes. Subject to an immaterial exception the Notes are subject to English law and jurisdiction. The Notes were originally due for repayment in 2014, but that has now been extended to 2020. The Notes were subordinated to seven Senior Liabilities whose principal amounts amounted to some US $ 3.6 billion.
4.	Second, on 24 March 2014 FCC entered into a Syndicated Finance Agreement (“SFA”) in an amount of some € 4.5 billion. The SFA is subject to Spanish law and Jurisdiction.  It is divided into two Tranches. Tranche A is in the amount of some € 3.16 billion. Tranche B was convertible into shares in the initial amount of some € 1.35 billion.
5.	On 14 November 2014 FCC announced its intention to carry out a further restructuring under a New Framework Restructuring Agreement (“the Agreement”). The restructuring was to relate only to Tranche B. It would adversely impact the interests of the Tranche B debt holders in that € 900 million of debt was to be repurchased at a 15% discount and payment in kind interest, currently running at between 11 and 16%, was to be reduced to 5%. The proposed restructuring did not affect Tranche A, or the Notes, or any other relevant class of debt. 
6.	The proposal made clear (a) that if the restructuring could not be achieved by the unanimous consent of all affected creditors it would be implemented using the sanction of the court as provided for under the relevant Spanish legislation in what are called homologation proceedings; and (b) that FCC already had consents from a sufficient number of affected creditors to make this course of action possible. In the event, we were told, more than 85% of the of the Amortizable Debt (including Tranche B) consented to the restructuring. As part of the new restructuring proposal a further € 1 billion has been injected into FCC through a rights issue which was nine times oversubscribed. Since this fresh equity will rank behind the Notes this aspect of the restructuring improves the financial profile of the Notes.
7.	On 29 December 2014 FCC applied to the Commercial Court in Barcelona for judicial homologation of the Agreement. On 12 January 2015, the Spanish court approved the Agreement by way of a Homologation Order. There is a challenge to that order pending in respect of which judgment is awaited. 
8.	On 16 January 2015, the original claimants, some of whom held Tranche B debt only, issued the present proceedings in which they claim that there has been an Event of Default under the Note.  On 3 February 2015 Notices of Discontinuance were served by those of the original claimants who only held Tranche B debt. FCC challenged the jurisdiction of the English court. On 9 March 2015 Asplin J dismissed that challenge. On 16 April 2015 Barling J gave summary judgment in favour of the claimants holding that there had been an Event of Default under clause 10 (f) of the Note. Of the original claimants only one, the third respondent, still pursues a claim.

Events of default under the Note

9.	Clause 10 of the Note provides as follows:
“10 Events of Default
If any of the following events (each an Event of Default) shall have occurred and is continuing:
(a)     default is made in the payment on the due date of principal, premium or interest or any other amount in respect of any of the Notes and such failure continues for a period of 5 (five) days in the case of principal or premium and 7 (seven) days in the case of interest; or
(b)     the Issuer does not perform or comply with any one or more of its other obligations in respect of the Notes, which default is incapable of remedy or, is not remedied within 30 (thirty) days after written notice of such default shall have been given to the Fiscal agent at its specified office by any Noteholder; or
(c)
(i)  any other present or future indebtedness for or in respect of moneys borrowed or raised of the Issuer or any Material Subsidiary becomes, or is declared, due and payable prior to its stated maturity otherwise than at the option of the Issuer or the relevant Material Subsidiary; or 
(ii) any such indebtedness for or in respect of moneys borrowed or raised is not paid when due or, as the case may be, within any applicable grace period; or
(iii) the Issuer or any Material Subsidiary fails to pay when due amount payable by it under any present or future guarantee for, or indemnity in respect of, any indebtedness for or in respect of moneys borrowed or raised, provided that the aggregate amount of the indebtedness, guarantees or indemnities in respect of which one or more of the events mentioned above in this paragraph (c) have occurred equals or exceeds €100,000,000 or its equivalent; or
(d)     a distress, attachment, execution or other legal process is levied, enforced or sued out on or against any part of the property, assets or revenues of the Issuer or any Material Subsidiary and is not discharged or stayed within 30 (thirty) days provided that the aggregate amount of property, assets and/or revenues involved in any such distress, attachment, execution or legal process equals or exceeds €100,000,000 or its equivalent; or
(e)     any mortgage, charge, pledge, lien or other encumbrance, present or future, created or assumed by the Issuer or any Material Subsidiary in respect of an obligation the principal amount of which equals or exceeds €100,000,000 or its equivalent is enforced (including by the taking of possession or the appointment of a receiver, administrative receiver, administrator manager, or another similar person); or 
(f)     the Issuer or any Material Subsidiary is insolvent or bankrupt (concurso) or unable to pay its debts, or is declared or a voluntary request has been submitted to a relevant court for the declaration of insolvency or bankruptcy, stops, suspends or threatens to stop or suspend payment of all or a material part of its debts, proposes or makes any agreement for the deferral, rescheduling or other readjustment of all its debts, proposes or makes a general assignment or an arrangement or composition with or for the benefit of the relevant creditors in respect of any such debts or a moratorium is agreed or declared or comes into effect in respect of or affecting all or any part of the debts of the Issuer or any Material Subsidiary; or
(g)     an order is made or an effective resolution passed for the winding-up (liquidación) or dissolution (disolución) of any Material Subsidiary, or the Issuer or any Material Subsidiary ceases or threatens to cease to carry on all or substantially all of its business or operations, except for the purpose of and followed by a reconstruction, amalgamation, reorganisation, merger or consolidation (i) on terms approved by a resolution of the Syndicate of Noteholders; or (ii) in the case of a Material Subsidiary, whereby the undertaking and assets of the Material Subsidiary are transferred to or otherwise vested in the Issuer or another Material Subsidiary; or
(h)     any action, condition or thing (including the obtaining or effecting of any necessary consent, approval, authorisation, exemption, filing, license, order, recording or registration) at any time required to be taken, fulfilled or done in order (i) to enable the Issuer lawfully to enter into, exercise its rights and perform and comply with its obligations under the Notes; (ii) to ensure that those obligations are legally binding and enforceable; and (iii) to make the Notes admissible in evidence is note taken, fulfilled or done; or 
(i)     any event occurs which under the laws of any relevant jurisdiction has a similar effect to any of the events referred to in any of the foregoing paragraphs; or
(j)     it is or will become unlawful for the Issuer to perform or comply with any of its obligations under or in respect of the Notes, then (A), up to and including the Subordination End Date, any Note may, by notice in writing given to the Fiscal Agent at its specified office by (i) the Commissioner acting upon a resolution of the Syndicate of Noteholders, in respect of all Notes, or (ii) unless there has been a resolution to the contrary by the Syndicate of Noteholders, any Noteholder in respect of such Note, be placed on demand, whereupon, subject as provided for in Condition 1(c) (Status of the Notes and Subordination), they shall become immediately payable on demand by the Commissioner or Noteholders as the case may be and (B) following the Subordination End Date, any Note may, by notice in writing to the Fiscal Agent at its specified office by (i) the Commissioner acting upon the resolution of Noteholders, in respect of all Notes, or (ii) unless there has been a resolution to the contrary by the Syndicate of Noteholders, any Noteholder in respect of such Note, be declared immediately due and payable whereupon it shall become immediately due and payable at its principle amount together with accrued interest, without further formality.”
10.	A Material Subsidiary was defined as a subsidiary (with certain exceptions) whose total assets or net sales represented at least 5% of the total consolidated assets or net sales of the Issuer and its Subsidiaries. The Subsidiary of any person was defined so as to include “a company more than 50% of the Voting Rights of which is owned or controlled directly or indirectly, by such person or one or more other Subsidiaries of such person or by such person and one or more Subsidiaries thereof”.
11.	The basis upon which Barling J held that there had been an Event of Default was that there had been an arrangement or proposed arrangement with or for the benefit of the relevant creditors, namely the creditors under Tranche B in respect of the debts of FCC to them. Mr David Wolfson QC on behalf of the appellant submits that he was wrong to do so.

Principles of construction
 
12.	The relevant principles were not in dispute before us. They have been set out many times, including in Napier Park European Credit Opportunities Fund Ltd v Harbour Master Pro-Rata Clo 2 BV [2014] EWCA Civ 984 [31] – [37]; Wood v Sureterm Direct Ltd [2015] EWCA 839 [28] – [31]; Videocon Global Ltd v Goldman Sachs [2016] EWC Civ 130; [50] – [52]. Reduced to essentials, they are as follows. The quest is to determine what reasonable persons in the position of the parties, and with the knowledge available to them, would have understood the words used to mean. Whilst the primary guide to the meaning of the contract is to be discerned from the words that the parties used, since prima facie words mean what they say, it is necessary to avoid an unduly literal or semantic interpretation. A contract such as this must be considered as a whole in its context and in the light of its commercial purpose. Individual sentences or phrases must be looked at in the context of the contract’s overall scheme. The process of interpretation is an iterative one in which the court considers a number of possible meanings and their potential consequences with a view to determining whether any of them can properly, or more appropriately, be taken to reflect the intention of the parties. If any proposed construction produces an irrational result or one which offends common sense, it will probably be necessary to choose another one. If there are two possible interpretations of a commercial contract the court is entitled to favour the one that makes more commercial sense. At the same time parties do make unwise or improvident bargains for a number of different reasons. It is not the function of the court, by some process of construction, to improve the bargain in fact made or to substitute for what the parties agreed some bargain which the court thinks that it would be more reasonable for them to have agreed.
13.	Mr Wolfson does not submit that the judge mistook the principles. Rather he says that he misapplied them, taking an over literal approach to the relevant provisions. 

FCC’s submissions

14.	Clause 10 is divided into ten subparagraphs and subparagraph (c) is, itself, divided into three. Properly interpreted they represent a coherent set of events which you would expect to see in a Note of this size, subscribed to by an entity of the size of FCC and its Group. 
15.	Thus, Clauses 10 (a) and (b) are concerned with defaults under the Note either in respect of principal, premium or interest or any other amount or in respect of some other obligation. Since these defaults relate to the Note itself it is not surprising that they require pretty strict compliance with its obligations.  
16.	Clause 10 (c) then deals with other indebtedness of either the Issuer (FCC) or a Material Subsidiary which either becomes due prior to its maturity or is not paid when due, and, also, any failure to make payment when it is due under a guarantee or the like. In each case the amount of the indebtedness or guarantee must be at least € 100,000,000.
17.	Clause 10 (d) deals with various forms of execution against the Issuer or a Material Subsidiary and Clause 10 (e) deals with the enforcement of any charge against either of them. In the cases of Clause 10 (d) the property involved must be at least € 100,000,000 and in the case of Clause 10 (e) the principal for which the charge stands security must be at least that figure.
18.	The € 100,000,000 threshold is plainly appropriate in respect of defaults which are not defaults under or in respect of the Note itself. They serve to confine an Event of Default to circumstances of sufficient gravity in relation to other indebtedness to call into question the likelihood of full payment under the Note. So does sub Clause 10 (g) which deals with the winding up or dissolution of any Material Subsidiary or the Issuer, or with an actual or threatened cessation by either of those of all or substantially all of its business or operations. 
19.	Clause 10 (h) deals with the failure to do anything which is necessary to enable the Issuer lawfully to issue and perform its obligations under the Note and to ensure that they are legally binding and that the Note may be given in evidence. Clause 10 (i) deals with events having a similar effect to the events previously listed under the laws of any relevant jurisdiction. Clause 10 (j) then deals with anything which makes it unlawful for the Issuer to perform its obligations under or in respect of the Note. All of these provisions are entirely apposite since if the events specified occur the Note will or may become unenforceable. 
20.	In considering sub clause (f) it is necessary to recognize the need to ensure that its meaning is consistent with the rest of the clause and with the scheme of the contract as a whole. It can be broken down into five cases viz:

(1)	Insolvency or bankruptcy or inability to pay debts;

(2)	Stopping or suspending payment or threatening to do so;

(3)	Agreeing or proposing the deferral of all its debts;

(4)	The critical sub-clause: “proposes or makes a general assignment or an arrangement or composition with or for the benefit of the relevant creditors in respect of any such debts;

(5)	A moratorium is agreed or declared in respect of the Issuer or a Material Subsidiary. 

21.	It is common ground that the words “proposes or makes” in Clause 10 (f) apply both to “a general assignment” and to “or an arrangement or composition”. But the (or a) critical question is who are “the relevant creditors”. The judge held that “the relevant creditors” were those in respect of whom the arrangement or composition in question was made, as compared with all of the creditors who would, under English law be the subject of a general assignment, since a general assignment necessarily relates to all creditors. This Mr Wolfson submits was an error. It was inappropriate in any event to rely on the fact that, in English law, a general arrangement is of that character for two reasons. First the clause is not to be regarded as principally directed to English insolvency concepts, particularly when it refers to “concurso” and to a voluntary request which is a procedure under Spanish law (“concurso voluntario”): see Glen Maud v AABAR Block S.A.R.L. [2016] EWHC 2175 (Ch) [21], and when England is not the country of the Issuer and would be low down on the list of those countries which had most Material Subsidiaries incorporated in them. Second, a general assignment in English law only relates to individual debtors and not to corporate entities. 
22.	Rather, it is necessary to take the relevant words of the contract as a whole. These are:

“     the Issuer or any Material Subsidiary …. proposes or makes any agreement for the deferral, rescheduling or other readjustment of all its debts, proposes or makes a general assignment or an arrangement or composition with or for the benefit of the relevant creditors in respect of any such debts …”

23.	It is important to note (a) that the clause applies both to the Issuer or any Material Subsidiary and (b) that the earlier reference to debts before the words “any such debts” is to “all its debts”. In those circumstances the correct interpretation should be that “any such debts” refers to all the debts of the Issuer or the relevant Material Subsidiary and it is the creditors of the Issuer or of that Subsidiary which are the relevant creditors. Such an interpretation makes sense in that it confines an Event of Default to an actual or proposed assignment, arrangement or composition with all the creditors of the relevant entity. Such an Event is likely to impact significantly on the Noteholders ability to recover under the Notes. Thus interpreted, the clause imports a materiality threshold in like manner as the earlier clauses had done with their € 100,000,000 threshold. By contrast the interpretation adopted by the judge has the consequence, which the parties cannot be supposed to have intended, that a proposed arrangement in relation to a relatively modest debt (say € 50,000 in respect of some relatively minor Material Subsidiary) meant that the whole of the Note could be called in. 
24.	“Any of such debts” cannot sensibly be treated as meaning “any of all of such debts”. That phraseology would be very clumsy. There is no need to refer back to such debts if you mean “any of its debts”. When he meant “all or any” the draftsman used those words, as appears from the immediately succeeding phrase (“a moratorium is agreed or declared or comes into effect in respect of or affecting all or any part of the debts of the Issuer or any Material Subsidiary)”.  
25.	Mr Wolfson criticised the judge’s iterative approach. The judge held that “general assignment” referred to the totality of an individual’s debts whereas “an arrangement or composition” was not limited to an arrangement or compositor with all creditors. This splitting up of the relevant clause was not replicated elsewhere in Clause 10 and should not be done in this instance. I do not find this compelling not least because the phrase is “a general assignment or an arrangement or composition with or for the benefit of the relevant creditors”. The “an” seems to me not without importance since it has a disjunctive effect which serves to indicate that “general” is not, or not necessarily, applicable to “arrangement or composition”.
26.	At paragraphs 39ff of his judgment the judge rejected FCC’s argument that it would be commercially unreal to conclude that the Noteholders could call an Event of Default simply because it had entered into an arrangement with two or more creditors because (a) even a single creditor might well owe an enormous sum; (b) “arrangement or compositions” often imply at least a class of creditors; and (c) default under one debt under a particular contract was capable of amounting to a cross default under other contracts setting off a chain reaction. 

27.	As to (a), the single large creditor was catered for under Clauses 10 (c) – (e). As to (b) this was just a linguistic argument. “Arrangement or composition” is not limited to some scheme under the Companies Act or to some insolvency process but extends to any type of agreement whereby a creditor will take a sum less or later than is provided for by the contract or will receive a different interest rate. The phrase covers similar ground to the reference to “deferral” and “rescheduling” in the clause. As to (c) it would be extraordinary if proposing an arrangement in respect of one debt should be an Event of Default when non-payment would only be such an Event if the debt was at least € 100,000,000. The judge has, in effect, introduced another cross-default claim whereby even a proposed arrangement with at least two creditors produced a Default under the Note.

Conclusion

28.	These submissions were powerfully made. But I do not accept the conclusion to which they tend for a number of reasons. 
29.	First, if the draftsman had intended that only an assignment or an arrangement or composition made or proposed with all the creditors of the Issuer or a Material Subsidiary would amount to an Event of Default he could easily have said so e.g. by repeating the words “all of its debts” which he had used two lines before. I recognise that this is an argument that can often be invoked in cases where the meaning is unclear, and sometimes by each side. But in circumstances where it is said that the draftsmen meant “all” when he did not say “all” it appears to me apposite. Mr Wolfson observes that this draftsman has not shown himself a master of economy. Even so, to use the phraseology that he did if he meant “all” would be remarkably maladroit. 
30.	Second, his use of the words “all or any” in the next phrase shows that he well perceived the distinction between the two. Mr Wolfson submits that it is significant that he did not use those words in the preceding phrase, but I regard the significance as going in the opposite direction. If the draftsman meant “all” it would be odd to use “any” whereas “all or any” may just as well be regarded as “any” since, if any are included, so are all. The difference is between superfluity and contradiction.
31.	Third, if the construction argued for be correct, curious consequences would follow. If FCC sought to make an arrangement in relation to € 1 billion of its debts that would not count as an Event of Default. It is true that, if the respondent’s construction be correct, a proposed arrangement for € 50,000 would be an Event of Default. But the latter result seems to me less odd than the former. Arrangements and compositions usually relate to a set of debts of considerable size, and the fact that the Issuer or a Material Subsidiary came to propose such an arrangement (rather than pay the debt) could be thought to afford a justifiable reason for enabling Noteholders to treat that as Event of Default. Moreover, arrangements often do not relate to all the debts of a company: if the relevant phrase applies only to an arrangement in respect of all the debts of the Issuer or a Material Subsidiary, it is likely to be of pretty limited application. 
32.	It is also true that, on FCC’s construction, a composition or arrangement in respect of a single very large debt would not count as an Event of Default under this clause (although if there was non-payment there would be such an Event under clause 10 (c) and an inability to pay a single debt when it fell due could form the basis of a winding up petition and would, itself, be an Event of Default). But the clause is addressed to insolvency or insolvency type arrangements which are unlikely to be confined to a single debt, or to extend to every debt whether preferred or not. Clause 10 (f) is not confined to either Spanish or English proceedings or both. It extends to windings up, administration and similar processes under any relevant law. Nor is it limited to court proceedings: see the reference to “any agreement for the deferral…” The parties have, in effect agreed that a wide range of possible arrangements could justify sufficient apprehension as to the financial health of FCC and possible non-payment of the Notes in full as to entitle a Noteholder to rely on them as an Event of Default. 
33.	Further the drafting of the Events of Default has a certain draconian character. If payment of interest under the Notes is 8 days later there is an Event of Default under 10 (a); as there is if a debt of € 100,000,000 or more is not paid on the date when due under 10 (c).
34.	Fourth, I would accept that the words “in respect of any such debts” refers to some antecedent. But in context the antecedent appears to me to be “its debts”, meaning the debts of the Issuer or the relevant Material Subsidiary. The “relevant creditors” are those creditors in relation to whose debts the arrangement or composition is made. The need for an antecedent cannot convert “for the benefit of the relevant creditors in respect of any such debts” into “for the benefit of all its creditors in respect of all of its debts” unless there is compelling need to do so.  I see no such need. Further, if the clause is interpreted as FCC would have it, the two clauses beginning “proposes...” are almost identical.
35.	I do not regard the result as so unreasonable or lacking in business sense as to cast doubt on its validity or require a different interpretation. I bear in mind in this connection that the effect of an Event of Default is that a Noteholder can call for repayment of his Note unless there has been a resolution to the contrary of the Syndicate of Noteholders. Such resolutions can be passed by a majority provided that Noteholders representing at least two thirds of the entire amount of the Notes are present: see Article 12 of the Regulations of the Syndicate of Noteholders annexed to the Note. So, there is a potential check if an individual Noteholder, or a group of Noteholders, seek to rely on an Event of Default and sufficient other Noteholders object to this course of action.
36.	For these reasons, I would dismiss the appeal.

Lord Justice Hamblen

37.	I agree.

The Senior President of Tribunals

38.	I agree.