Case No: HC10C02331
Neutral Citation Number: [2011] EWHC 171 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 04/02/2011

Before :

THE HON MR JUSTICE LEWISON
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Between :

	STRATEGIC VALUE MASTER FUND LTD	Claimant	
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	IDEAL STANDARD INTERNTIONAL ACQUISITION S.A.R.L. & ORS	Defendants	

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Mr Ewan McQuater QC & Mr Edmund King (instructed by Messrs Bingham McCutcheon LLP) for the Claimant
Mr David Wolfson QC & Mr Matthew Cook (instructed by Messrs Mishcon de Reya) for the Defendants

Hearing dates: 27th & 28th January 2011
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Judgment
Mr Justice Lewison : 

Introduction
1.	The Ideal Standard group manufactures and sells bathroom furnishings, fixtures and shower enclosures for residential, commercial and institutional buildings. It employs some 12,000 people in over 20 countries worldwide. It is owned, through Ideal Standard International Acquisition SARL (“the Company”), by private equity funds that are advised by Bain Capital Ltd (“Bain Capital”) and its affiliates. The Company is incorporated in Luxembourg.
2.	In 2007, Bain Capital sponsored the acquisition of Ideal Standard by the Company which was newly incorporated for that purpose; and, as part of that transaction, the Company entered into the Senior Facilities Agreement (“SFA”) dated 3 October 2007. A number of companies within the Ideal Standard group were parties to it. They were incorporated in various jurisdictions; including Bulgaria, France, Japan, Korea, the USA, Egypt, Germany, Greece and Spain. Under the SFA, Bank of America NA and Banc of America Securities Ltd (collectively “Bank of America”) and Credit Suisse International (“Credit Suisse”) agreed to lend money to the Company and other members of the Ideal Standard group. Other lenders participated in the loan, among them Strategic Value Master Fund Ltd (“SVMF”). Between them Bank of America and Credit Suisse held two thirds of the loan. This made them “Majority Lenders” as defined by the SFA. SVMF holds interests in approximately 10 per cent of the loan. Following most of the events covered by the declarations sought in this litigation Bank of America and Credit Suisse sold their interests in the loan to two companies connected with Bain Capital. These two companies are the second and third defendants. Before the sale Bank of America and Credit Suisse had asserted that Events of Default had occurred under the SFA such as to entitle them to serve notice accelerating the loan. Following the sale the second and third defendants have purported to withdraw that notice and to have waived such Events of Default as might previously have occurred. The Company, however, denies that the alleged Events of Default occurred.
3.	SVMF seek declarations to the effect that the Events of Default did indeed occur and that the purported withdrawal of the notice and waiver of the Events of Default were ineffective. 
4.	Mr Ewan McQuater QC and Mr Edmund King presented the case for the claimant. Mr David Wolfson QC and Mr Matthew Cook presented the case for the defendants.
The SFA
5.	The SFA is clearly a professionally drawn instrument. Excluding its Schedules it runs to 161 single spaced pages. It begins with a number of pages of definitions and general provisions. I will refer to them as necessary. Clause 1.2 (e) says that “… headings in this Agreement do not affect its interpretation”.
6.	The amount of the loan was divided into a number of different categories:
i)	Facility A, amounting to $150,000,000;
ii)	Facility B, amounting to $910,000,000;
iii)	The Acquisition Facility, amounting to $75,000,000;
iv)	A Revolving Credit Facility, amounting to €79,000,000-odd.
7.	Clause 2.8 provides:
“Unless all the Finance Parties agree otherwise:
(a) the obligations of a Finance Party under the Finance Documents are several;
…
(d) the rights of a Finance Party under the Finance Documents are separate and independent rights;
(e) a Finance Party may, except as otherwise stated in the Finance Documents, separately enforce those rights…”
8.	Clause 3 of the SFA set out the purposes for which each category of loan could be used. Clause 10 set out how each of the loans was to be repaid. Facility A was to be repaid in six monthly instalments over a period which began six months after the acquisition of the Ideal Standard group and ended seven years after the acquisition. Facility B was to be repaid in two instalments: 50 per cent on the seventh anniversary of the acquisition; and the remainder on the eighth anniversary of the acquisition. The Acquisition Facility was to be repaid on the seventh anniversary of the acquisition. The Revolving Credit was to be repaid at dates determined in accordance with clause 13. Each loan carried interest at a margin above LIBOR; or, in the case of a loan in Euro, EURIBOR. The margin varied depending on the ratio of net debt to EBITDA. But margin applied at the highest rate specified in the SFA while an Event of Default was continuing.
9.	Clause 22 contained a number of financial covenants.  Clause 22.2 contained a covenant by the Company to ensure that the ratio of Total Net Debt (as defined) to EBITDA (as also defined) would not exceed the ratio shown in a table contained in that clause. That ratio decreased over time. It also contained a covenant by the Company that the ratio of EBITDA to interest costs would be or exceed the ratio shown in another table contained in that clause. That ratio increased over time. Thus these undertakings, if met, would ensure that the Company became progressively less leveraged over time; and that its interest cover progressively increased over time. 
10.	EBITDA is a common acronym standing for “earnings before interest, taxes, depreciation and amortisation”. It is itself the subject of an elaborate definition in the SFA which describes it as “the consolidated profits of the Group from ordinary activities” after various adjustments (both positive and negative).
11.	Whether these undertakings were met was to be tested at periodic intervals. If the Company was in breach of these undertakings, clause 22.5 enabled it to cure a breach by exercising what the SFA calls the Equity Cure Right. The clause begins as follows:
“if the requirements of any financial undertaking set out in clause 22.2 … are not met in respect of a Relevant Period, the cash proceeds (“Cure Amount”) received by the Company pursuant to any New Equity (“Cure Subscription”) or additional Subordinated Debt (“Cure Loan”) invested in the Company for the purpose of curing such breach shall be included in a recalculation of such financial undertaking by making a pro forma adjustment to EBITDA (solely for the purpose of ascertaining compliance with the financial undertaking and not for any other purpose) such that (x) EBITDA for such Relevant Period is increased by an amount equal to the Cure Amount and (y) the Cure Amount does not count as cash to be deducted in calculating Total Net Debt.”
12.	If the recalculation has the effect that the financial undertakings are met, then they are deemed to have been satisfied on the relevant test date. Clause 22.5 goes on to say:
“(c) the relevant Cure Amount shall be added to and considered to be part of EBITDA solely for the purpose of ascertaining compliance with the financial undertaking as at the end of the Relevant Period … and as at the end of the next three following Relevant Periods;
(d) not more than five Cure Subscriptions or Cure Amounts may be applied to increase EBITDA during the life of the Facilities and no Cure Subscriptions or Cure Amounts may be applied consecutively;
(e) Cure Subscriptions or Cure Amounts may not be made more than twice in any Financial Year”
13.	Clause 23 contains a number of general covenants. They include clause 23.13 which provides, so far as material:
“The Company shall not declare, make or pay dividends or pay any management, advisory or other fee to or to the order of any of the shareholders of the Company.”
14.	There are exceptions to this general prohibition, which are irrelevant for present purposes. Clause 23.18 provides, so far as material:
“The company shall not trade, undertake commercial activities, own any assets or incur any liabilities except for:
(a) business as a holding company;
(b) normal treasury and holding company activities …”
15.	Clause 24 defines Events of Default. These include non-payment of amounts due. They also include breaches of other obligations, defined as follows:
“An Obligor or (sic) does not comply with any term of the Finance Documents (other than … Non-payment), unless the non-compliance:
(a) is capable of remedy; and
(b) is remedied within 20 Business Days of the earlier of the Facility Agent giving notice of the breach to the Company and any Obligor becoming aware of the non-compliance,
in each case, without prejudice to the provisions of Clause 22.5 (Equity Cure).”
16.	Insolvency is also an Event of Default. This is dealt with by Clause 24.6 which so far as relevant reads:
“Any of the following occurs in respect of a Material Company:
(i) it is, or is deemed for the purposes of any applicable law to be, unable to pay its debts as they fall due or insolvent;
(ii) it is over-indebted; or
(iii) it admits its insolvency or its inability to pay its debts as they fall due …”
17.	Clause 24.18 deals with acceleration of the loans. It reads, so far as relevant:
“On and at any time after the occurrence of an Event of Default which is continuing the Facility Agent may, and shall if directed by the Majority Lenders by notice to the Company:
(a) cancel the Total Commitments …and/or
(b) declare that all parts of the Utilisations, together with accrued interest, and all other amounts accrued or outstanding under the Finance Documents be immediately due and payable, at which time they shall become immediately due and payable; and/or 
(c) declare that all or part of the Utilisations be payable on demand, at which time they shall immediately become payable on demand by the Facility Agent on the instructions of the Majority Lenders…”
18.	Some reference to the definitions is necessary at this point. A “Utilisation” is the principal amount of a loan (see definitions of “Utilisation” and “Loan” in clause 1). It does not include accrued interest. A Default is continuing if it has not been remedied or waived (see clause 1.2 (a) (xvii)). Clause 25.7 provides that the Facility Agent must act in accordance with instructions given to it by the Majority Lenders and, if so instructed by the Majority Lenders, must refrain from exercising any right, power, authority or discretion vested in it. In the absence of instructions it may act (or refrain from acting) as it considers to be in the best interest of lenders.
19.	Clause 30 deals with amendments and waivers. Clause 30.1 provides:
“(a) Except as provided in this Clause 30.1, any term of the Finance Documents may be amended or waived with the agreement of the Company and the Majority Lenders. The Facility Agent may effect, on behalf of any Finance Party, an amendment or waiver under this clause 30.1.
(b) The Facility Agent must promptly notify the other Parties of any amendment or waiver effected by it under paragraph (a) above. Any such amendment or waiver is binding on all parties.”
20.	Clause 30.2 sets out exceptions to this general provision. Clause 30.2 (a) specifies certain amendments or waivers which require the consent of all lenders. Clause 30.2 (b) specifies certain amendments or waivers which require the consent of each lender directly affected by the amendment or waiver. These include:
“… any extension of the availability period of, maturity of or redenomination into another currency [of] any commitment of any Lender”
21.	Clause 30.4 says:
“The rights and remedies of each Finance Party under the Finance Documents:
(a) may be exercised as often as necessary;
(b) are cumulative and not exclusive of its rights under the general law; and
(c) may be waived only in writing and specifically.”
22.	Clause 39 says that the SFA is governed by English law; and clause 40 gives the courts of England and Wales exclusive jurisdiction.
The alleged Events of Default
23.	It is common ground that, absent a valid Equity Cure, the Company was in breach of its financial obligations under clause 22.2 as regards interest cover as at 30 September 2009, 31 December 2009 and 30 March 2010. The issue is whether the actions it took amounted to a valid Equity Cure. What it did was as follows. Ideal Standard International Holding Sarl (“ISI Holding”) withdrew € 75 million from a cash pool held by Ideal Standard Financial Services BVBA (“ISFS”). The cash pool is a centralised treasury arrangement into which group companies put their excess cash and from which other group members may make withdrawals for operating and capital expenditure purposes. ISI Holding used some € 45 million-odd to prepay a loan which it had taken from the Company. It used the balance of just under € 30 million to redeem PPPECs which it had issued to the Company. A PPPEC (which stands for profit participation preferred equity certificate) is a type of financial instrument commonly used by Luxembourgeois companies. It has a capital and an income element. The capital is treated for accounting purposes as a debt of the issuer. The income element is in part a fixed element akin to interest; and in part a profit participation amount, which is linked to the profits of the issuer. The effect of these two transactions was that ISI Holding owed no money to the Company; and that the Company received the whole of the € 75 million. The Company used the money it received as follows. € 45 million-odd went to prepay a loan which it had taken from its parent company Ideal Standard International Topco SCA (“Topco”). The balance was used to redeem PPPECs which it had issued to Topco. The effect of these two transactions was that the Company owed no money to Topco; and Topco now received the whole of the € 75 million. Topco is a company which is outside the Ideal Standard group (as defined by the SFA). The € 75 million was at its free disposal. Topco now lent the whole of the € 75 million to the Company. The Company immediately lent that amount to ISI Holding. ISI Holding deposited the money in the cash pool. All these transactions took place on the same day: 29 October 2009. As Mr McQuater says, the money started in the cash pool and ended in the cash pool: all on the same day. It was, to use his expression, “round-tripped”. However, it is not alleged that any of these transactions was a sham. In his evidence served on behalf of SVMF Mr Carr says:
“As these transactions all happened in quick succession on or about 29 October 2009, the money drawn from the cash pool (which already constituted a Group asset) was only used as short term liquidity to enable the Company to engineer the redemption and repayment of existing debt and its immediate replacement with equivalent debt. The end result was that the Group had the same financial position after the Purported Equity Cure as before, and had not received any fresh injection of capital from its sponsor or anyone else.”
24.	Mr Carr thus acknowledges that the effect of the transactions was to give the Company “short term liquidity”; and his complaint seems to be that the Company did not have any “fresh injection of capital”.
25.	It is also common ground that the Company’s liabilities exceeded its assets as shown on its balance sheet. But it is equally common ground that an excess of liabilities over assets is not a ground upon which a corporation incorporated in Luxembourg can be wound up. There is no evidence that the Company traded in any other jurisdiction; and in view of its obligation in clause 23.18 not to undertake commercial activities, it is unlikely that it did.
The Notice of Acceleration
26.	On 2 February 2010 the Facility Agent, on the instructions of the then Majority Lenders, gave notice under clause 23.18. The notice alleged that the Equity Cure was ineffective to cure the Event of Default; and also asserted a further Event of Default; namely that the Company was insolvent. It will be recalled that one of the available options under clause 23.18 was to make the loan immediately repayable. However, that was not the chosen option. Instead the Majority Lenders exercised a different choice. The notice instead declared that all sums outstanding under the SFA “shall immediately become payable on demand”. In other words, the loans were not immediately repayable; but would become so if and when a demand was made.
27.	In the following months the Company’s solicitors complained bitterly that the service of the notice of acceleration was causing untold financial damage to the Company, which they spelled out in detail. But the Majority Lenders would not withdraw the notice. Ultimately the impasse was resolved by the buy-out of their interests.
The Waiver
28.	Following the change of identity of the Majority Lenders the new Majority Lenders gave instructions to the Facility Agent. These instructions were contained in a letter dated 30 June 2010. The Company was an addressee of the letter and was described by paragraph 4 as “a party to this letter in order … to have the benefit of and to be able to rely upon the provisions of paragraph 3.” Paragraph 3 of the letter contained the instructions to the Facility Agent. It instructed the Facility Agent to:
“(a) unconditionally, permanently and irrevocably waive the breach of Clause 22.2 (Financial Undertakings) and the failure to comply with the provisions of Clause 22.5 (Equity Cure) referred to in the letter from the Facility Agent to the Company dated 2nd February, 2010 (the “Default and Acceleration Letter”);
(b) unconditionally, permanently and irrevocably withdraw and waive the Events of Default (the “Declared Defaults”) described in the Default and Acceleration Letter;
(c) unconditionally, permanently and irrevocably revoke and withdraw the notice of acceleration set out in the Default and Acceleration Letter…”
29.	By paragraph 5 (c) of the letter the Company waived all claims against the Facility Agent; and by paragraph 6 it agreed to pay the costs of the Facility Agent in complying with the letter. 
30.	By letters dated 30 June 2010 and/or 8 October 2010 the Facility Agent complied with those instructions. 
The issues
31.	There are four main issues for me to decide:
i)	Was the Equity Cure effective?
ii)	Was the Company insolvent within the meaning of the SFA? and
iii)	If the answer to either of those questions is “yes” were the Majority Lenders entitled (a) to waive the breaches of the SFA and/or (b) to withdraw the Default and Acceleration Letter and/or (c) to enter into a binding agreement not to make a demand for payment based on the Events of Default specified in it?
iv)	Did the Majority Lenders in fact enter into an agreement not to make a demand based on those Events of Default?
Approach to construction
32.	Mr McQuater QC commended the recent decision of the Supreme Court in Re Sigma Finance Corp [2010] BCC 40. Having referred to a number of well-known authorities on the interpretation of commercial contracts Lord Mance said:
“In my opinion, the conclusion reached below attaches too much weight to what the courts perceived as the natural meaning of the words of the third sentence of cl.7.6, and too little weight to the context in which that sentence appears and to the scheme of the security trust deed as a whole. Lord Neuberger was right to observe that the resolution of an issue of interpretation in a case like the present is an iterative process, involving “checking each of the rival meanings against other provisions of the document and investigating its commercial consequences”…. Like him, I also think that caution is appropriate about the weight capable of being placed on the consideration that this was a long and carefully drafted document, containing sentences or phrases which it can, with hindsight, be seen could have been made clearer, had the meaning now sought to be attached to them been specifically in mind…. Even the most skilled drafters sometimes fail to see the wood for the trees, and the present document on any view contains certain infelicities, as those in the majority below acknowledged… Of much greater importance in my view, in the ascertainment of the meaning that the deed would convey to a reasonable person with the relevant background knowledge, is an understanding of its overall scheme and a reading of its individual sentences and phrases which places them in the context of that overall scheme.”
33.	Lord Collins said:
“In complex documents of the kind in issue there are bound to be ambiguities, infelicities and inconsistencies. An over-literal interpretation of one provision without regard to the whole may distort or frustrate the commercial purpose. This is one of those too frequent cases where a document has been subjected to the type of textual analysis more appropriate to the interpretation of tax legislation which has been the subject of detailed scrutiny at all committee stages than to an instrument securing commercial obligations.”
34.	It is, of course, well-known that a court should not adopt an interpretation of a contract that flouts commercial common sense. But the flouting of commercial common sense is not a pre-condition to a consideration of the commercial consequences of rival interpretations. In Barclays Bank plc v HHY Luxembourg SARL [2010] EWCA Civ 1248 Longmore LJ said:
“If a clause is capable of two meanings, as on any view this clause is, it is quite possible that neither meaning will flout common sense. In such circumstances, it is much more appropriate to adopt the more, rather than the less, commercial construction.”
35.	I entirely accept this as a principle of interpretation. Nevertheless I must also bear in mind the important warning of the Court of Appeal in Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd [1990] QB 818, 890:
“It is nonetheless important, in attributing a purpose to a commercial transaction, to be sure that it is the purpose of both parties and not just one. If the purpose of the transaction is seen through the eyes of one party only an unbalanced view of the transaction may result. Many contracts represent a compromise between what one party wishes to obtain and the other is willing to give.”
36.	Mr McQuater’s submissions on the commercial purpose of the clauses on which he relied concentrated on them entirely from the perspective of the lenders; and minority lenders at that.
The Equity Cure
37.	Mr McQuater stressed the commercial importance of the financial obligations. They were essential for the lenders to be able to monitor the financial health of the Company and the group. If the financial obligations were not met the Equity Cure gave the Company a chance to put things right; but to say that things were put right by “round-tripping” money would destroy the effectiveness of the test. As he said more than once the overall effect of what the group did was that there was no new money. And if there was no new money it could not be said that the commercial purpose of the financial obligations and the safety valve contained in the Equity Cure had been met. This submission corresponds with the complaint that Mr Carr made in his evidence. As a matter of generality, there is considerable force in this submission. However, the commercial purpose of the clause must be found in the SFA itself, interpreted with the help of any admissible background. There are a number of features of the Equity Cure that need to be examined.
38.	The first point to note is that a breach of the financial undertakings can be cured by borrowing more money. This is described in 22.5 as a Cure Loan. A company in financial trouble would not usually be regarded as improving its financial health by going further into debt, particularly where the new loan is a loan of capital used for the notional cover of interest. It would be like paying one’s mortgage interest by using a credit card. Second, the principal amount of the loan (referred to in the clause as the Cure Amount) is added to EBITDA. Money borrowed by a company would not normally be regarded as part of its earnings (or in the words of the definition in the SFA as contributing to the consolidated profits of the group). Third, although the amount of the loan is added to EBITDA, it is not included in Total Debt. Thus although the cash received is added to the Company’s earnings, the corresponding liability to repay the debt is not added to its liabilities. (I note also that if the cure takes the form of a new subscription for shares, the amount raised is also added to EBITDA and is not treated as part of the Company’s capital). Fourth, the recalculation is to be made “solely” for the purpose of ascertaining compliance with the financial undertaking. Fifth, the Cure Amount will be considered as part of EBITDA for four consecutive Relevant Periods. This applies whatever happens to the cash.
39.	For all these reasons the snapshot of the Company’s financial health following the operation of the Equity Cure, if effected by means of a loan, would give a very distorted image. These features make it very difficult, in my judgment, to approach the clause on the basis of some a priori notion of its commercial purpose. Although in his written submissions Mr McQuater said that the whole point of an Equity Cure was “to improve the Company’s financial strength”, he modified that in the course of his oral address by saying that an improvement in the Company’s liquidity or cashflow could also meet the commercial purpose of the clause. Mr McQuater’s original formulation of the commercial purpose of the clause cannot, in my judgment, live alongside the explicit recognition in the clause that an Equity Cure can be effected by borrowing more money. So far as the modified formulation is concerned, as I have said Mr Carr’s evidence acknowledges that the Company’s liquidity was improved by the transactions, albeit on a short-term basis. 
40.	Mr McQuater’s argument stresses the need for “new money”. However, that is not what the clause says. What it requires is “additional … Debt”. Moreover, it seems to me that the existence (or otherwise) of additional debt does not depend on what the Company does with the money it has borrowed. Nor does debt cease to be debt because the borrowed money is the subject of an onward loan. Suppose that the Company borrows money from a bank, which is debited to its loan account. That, as it seems to me, would satisfy the requirement of “additional … Debt”. Suppose it then transfers that money to its current account; and suppose that the current account is in credit. In point of legal analysis it has re-lent that money to the bank, with the result that there are two debts: one owed by the Company to the bank, and the other owed by the bank to the company. I cannot see that the original bank loan would cease to be additional debt because the cash was deposited in the Company’s current account, even if the loan and the deposit took place on the same day. Suppose now that the Company’s current account was overdrawn, and the loan was used in reduction of the overdraft. Does that make any difference? I cannot see why it should; although the amount of the loan came from the bank’s funds and immediately went back into the bank’s funds. It would be possible to depict these hypothetical examples as a circular and simultaneous flow of money from the bank, through the Company and back to the bank, but I do not think that this alters the analysis. Moreover, the SFA itself provides for revolving credit. Revolving credit will often entail the making of short term loans, where on repayment of one such loan it may be immediately replaced by another. This is recognised in clause 10.2 of the SFA. Thus the SFA itself contemplated that there could be a succession of loans repaid and re-lent immediately. In a sense this money would have been “round-tripped”; but the SFA treats it as entirely legitimate. Accordingly, I do not consider that Mr McQuater’s description of the money as having been “round-tripped” is an answer to the problem.
41.	In the present case after the Company had redeemed the PPPECs issued to Topco those PPPECs were not re-issued. Thus the Company was no longer bound to allow Topco to participate in its profits, in its capacity as holder of the PPPECs. The PPPECs were replaced with a loan. In place of owing Topco some € 45 million-odd, it owed Topco € 75 million. The financial position of the Company had indeed changed. In my judgment these transactions fell within the terms of the Equity Cure. The debt that the Company owed Topco was “additional” debt because:
i)	The debt did not exist before 29 October 2009; and
ii)	The amount of the Company’s debt to Topco was greater than its previous debt.
42.	Mr McQuater had two other subsidiary attacks on the Equity Cure. The first was that the redemption of the PPPECs was a breach of clause 23.13. The argument was that the PPPEC included an income element and any interest payable in respect of that element was treated as a dividend. Thus redemption of the PPPECs amounted to the payment of a dividend or the making of a distribution, both of which were prohibited. I do not accept this argument. The fact that income is (or may be) treated as a dividend when paid does not, in my judgment, alter the nature of the transaction of redemption. The buyer of shares traded on a stock exchange may buy the shares cum div where the transaction takes place near the time of declaration of a dividend. The dividend, when paid, will undoubtedly be a dividend; and will represent income in the hands of its recipient. But the price paid for the shares will be a capital sum. The capital value of the shares will reflect the entitlement to the dividend, but that is simply one of the bundle of rights that the buyer buys. In the present case the PPPECs were redeemed for a capital sum. The redemption is not, in my judgment, caught by clause 23.13.
43.	The second subsidiary attack was that the “round-tripping” of the money amounted to a breach of clause 23.18. This clause prohibited activities and incurring liabilities except for “business as a holding company” or “normal treasury and holding company activities”. The difficulty with this argument is two-fold. In the first place there is no evidence about what is comprised within the business of a holding company or what are “normal” treasury and holding company activities. Second, as Mr Wolfson pointed out, the SFA itself contemplates short term loans on a revolving credit basis. These loans would be drawn down by the Company. Since the Company is itself prohibited by the SFA from trading it must necessarily pass those monies round the group (or deposit them into the cash pool). The nature of the revolving credit means that short term loans are repaid and may be immediately replaced with fresh short term loans, which may be for the amounts repaid. For the purposes of the SFA this must have been regarded as a permitted activity of the Company. I do not therefore accept this argument either.
44.	It follows that the attacks on the Equity Cure fail.
Insolvency
45.	The question under this head is whether the English “balance sheet” test of solvency applies to the Company even though it is incorporated in Luxembourg and does not undertake any activities in England and Wales. Mr McQuater says that it does: Mr Wolfson says that it does not. I repeat, for convenience, the operative words of the clause:
“it is, or is deemed for the purposes of any applicable law to be, unable to pay its debts as they fall due or insolvent”
46.	Mr McQuater said that since the SFA was governed by English law, English law would always be an “applicable” law. It was the law that applied to the SFA. However, I do not consider that “applicable” means applicable to the contract. Rather, in my judgment, it means the law applicable to the company in question. The law that is applicable to a company will be, in the first place, the law of its place of incorporation; and, in addition, the law of any other jurisdiction which has the power to wind it up (or initiate any equivalent insolvency process). As far as the commercial purpose of the clause was concerned, Mr McQuater emphasised the need for the lenders to have certainty; and that since all the lenders at the inception of the SFA were English they would naturally have been concerned to apply the English test of insolvency, which included the balance sheet test. There are, in my judgment, two answers to this point. First, this appreciation of the commercial purpose of the clause looks at it only from the perspective of the lenders. As Mr Wolfson said, why should the board of directors of a group company incorporated and trading in, say, Bulgaria or Japan be looking over their shoulders at the English test of insolvency? Second, the lenders’ interests in the loans were transferable. There is nothing in the SFA to prevent those interests from being transferred to assignees with no connection to England and Wales, as has indeed happened. 
47.	In my judgment whether a company is, or is deemed to be, insolvent is to be determined according to the system or systems of law relevant to that company.
Notice under clause 24.18
48.	The first thing to note about the giving of a notice under clause 24.18 is that it can only be given by the Facility Agent. None of the lenders are entitled to give notice themselves. Second, the Facility Agent must comply with the instructions of the Majority Lenders. If they instruct him to serve notice under that clause, then the clause itself says that he “shall” serve it. But conversely under clause 25.7 if the Majority Lenders instruct him not to serve a notice, then he must not do so. Although clause 24.18 envisages that the Facility Agent “may” give notice under that clause, and clause 25.7 (d) envisages that in the absence of instructions he may act in the best interests of all the lenders, in practice it is the Majority Lenders alone who will decide whether or not to give notice. Third, as mentioned, clause 24.18 gives a range of options open to the Majority Lenders. Under clause 24.18 (b) they may declare that the whole of the loans, including accrued interest, is payable immediately. Under the same sub-clause they may exercise that right in relation to part of the loan only. Under clause 24.18 (c) they may declare that the whole of the loan becomes immediately payable on demand. Likewise they may exercise that power in relation to part of the loan only. Unlike clause 24.18 (b) the power under clause 24.18 (c) does not apply to interest. Fourth, once the power under clause 24.18 (c) has been exercised a demand triggering immediate liability to repay can only be made by the Facility Agent “on the instructions of the Majority Lenders”. Thus any discretion that the Facility Agent might have had to serve the notice is removed when it comes to making the demand itself.
49.	One point of contention between the parties was whether the service of notice under clause 24.18 (c) meant that the loan was payable on demand in substitution for the repayment timetable set out under clause 10; or whether it was payable on demand in addition to that timetable. If the former then the Company would have no liability to repay any part of the loan unless and until a demand was made. If the latter, then the Company would have to continue to make the scheduled repayments in the absence of a demand for more. The scheduled repayments for Facility A were due under clause 10.1 at six monthly intervals. In the case of Revolving Credit, each loan had to be repaid at the end of its Interest Period. This was defined by clause 13.2 as a period of one, two, three or six months; in each case selected by the borrower. It is not difficult to imagine that a minority lender would need some certainty about repayment of a loan. If the Majority Lenders were empowered, by the service of notice under clause 24.18 (c), to remove from him his entitlement to be repaid on a fixed date, and to make him wholly dependent on their discretionary decision whether or not to make a demand, I would have expected clear words to that effect in the SFA. There are none. On the contrary such clue as there is is given by clause 30.4 which says that the rights and remedies of each Finance Party “are cumulative”. In addition, Mr McQuater accepted that, with the consent of all affected lenders, the Majority Lenders could waive or withdraw a notice given under clause 24.18 (c). If the effect of such a notice was to remove all liability to comply with the scheduled repayments, the question would then arise: if such a notice were withdrawn, would the timetable for repayment be automatically reinstated; or could a minority lender refuse to consent to the waiver or withdrawal of a clause 24.18 (c) notice unless the timetable were varied? The SFA is silent on the point. It cannot have been intended that a minority lender could dictate terms about variation of the repayment schedule; and the need for making any implication about automatic reinstatement of the contractual timetable is avoided if the effect of service of a clause 24.18 notice is not to displace it but to add a cumulative right or remedy.
50.	In my judgment, therefore, the effect of service of notice under clause 24.18 (c) is not to substitute repayment on demand for liability to make the scheduled repayments; but to give the Majority Lenders an additional right to make demand.
Withdrawal of notice
51.	At one point in the argument Mr McQuater appeared to me to be aligning himself with Lady Macbeth: “what’s done is done” and “what’s done cannot be undone”. However, as I understood it he accepted that, with the consent of all affected lenders, notice given under clause 24.18 (c) could be withdrawn or waived. On that basis, the giving of such a notice is not irreversible. It can be withdrawn. The real question, then, is: is the consent of all affected lenders necessary before the Majority Lenders can withdraw a notice?
52.	Mr McQuater’s argument is that the withdrawal of a notice is an amendment or waiver of a “term of the Finance Documents” falling within clause 30.1 (a); and, moreover, is an amendment or waiver which relates to “any extension of the … maturity of …any commitment of and Lender”. Thus the amendment or waiver is ineffective without the consent of each affected lender. 
53.	Mr Wolfson points out that the SFA deals with waiver in a number of different places. Clause 1.2 (xvii) of the SFA refers to a Default being continuing “if it has not been remedied or waived”. This clearly contemplates that a Default may be waived. Clause 22.5 says that if the financial undertakings are not complied with on any Quarter Date, but are complied with on the next Quarter Date, then any previous breach and resulting Event of Default are “deemed to have been waived”. This clearly contemplates that both a breach and an Event of Default may be waived. Notice under clause 24.18 may only be given if an Event of Default “is continuing” (i.e. it has not been remedied or waived). Clause 30 itself distinguishes between two types of waiver. The first is a waiver of “any term” of the Finance Documents, which is referred to in clause 30.1. The second is a waiver of “rights and remedies” which is dealt with by clause 30.4. Thus for the purposes of the SFA there are at least four types of waiver:
i)	Waiver of a breach;
ii)	Waiver of an Event of Default;
iii)	Waiver of a right or remedy; and
iv)	Waiver of a term of the Finance Documents.
54.	What, asks Mr Wolfson, is the term of the Finance Documents that is said to have been waived? It cannot be clause 24.18 (c) since that term remains in being; and can be invoked by the Majority Lenders if there is an Event of Default in the future. The better analysis is to regard clause 24.18 as giving the Majority Lenders a series of rights. The invocation of that clause is the exercise by the Majority Lenders of a right which, for practical purposes, is given to them alone. Since clause 2.8 says in terms that the rights of each party is a separate right, and clause 30.4 says that a party can waive those rights which he alone has, it must follow that the Majority Lenders are empowered to withdraw a notice without the consent of other lenders. This conclusion, he says, gains added strength from a consideration of the shape of the SFA as a whole. In practice, only the Majority Lenders can decide to give notice under clause 24.18. They can waive a breach or an Event of Default which would preclude them from giving such a notice. If they do not waive a breach or an Event of Default, but decide to give notice under clause 24.18, it is they alone who can decide which of the various rights in clause 24.18 they choose to invoke. If they choose to invoke the right contained in clause 24.18 (c) it is they alone who can decide whether to make a demand for payment. The right to make a demand for payment is just that: a right. So it follows that the Majority Lenders can decide not to make a demand and, moreover, can agree with the Company that they will not do so, at all events in relation to past Events of Default. If the Majority Lenders have all these rights, it is illogical and makes no commercial sense to conclude that they do not have the right to withdraw a notice given under clause 24.18 on their instructions.
55.	Mr McQuater, on the other hand, says that the supposed dichotomy between waiver of a right and waiver of a term is a distinction without a difference. In support of this submission he relies on the decision of the House of Lords in Banning v Wright [1972] 1 WLR 972. In that case a tenant had sub-let without consent in breach of covenant. The lease contained an option to renew if the rent was paid and the covenants were observed.  The landlord started proceedings for forfeiture. The proceedings were compromised. As part of the compromise the tenant paid the landlord £3,000: £1,250 for continuance of the unauthorised sub-tenancies and £1,750 for allowing tenant to retain the option to renew despite the breach of covenant. The issue was whether the £1,750 was consideration “for the variation or waiver of any of the terms of the lease”. This phrase appeared in section 22 (4) of the Finance Act 1963. The issue was, therefore, one of statutory construction. The first question was to decide what the £1,750 was paid for. Lord Hailsham LC examined the correspondence and said:
“From this it is perfectly plain that the consideration for the additional £1,750 to make up the original £1,250 to £3,000 was for the restoration or retention, of the right to exercise the original option to renew the lease despite the breaches of covenant and for nothing else. It was not paid as a consideration for the landlords’ waiving their right to forfeit, or their right to sue for damages for breach of covenant, or for foregoing their right of re-entry. It was a payment for which the appellant secured that, notwithstanding his breaches of covenant, he was nevertheless entitled to exercise his original option to renew the lease for a further period of seven years.”
56.	He then turned to the second question which was whether the sum was properly described as consideration “for the variation or waiver of any of the terms of the lease”. As to that he said:
“In my view, the primary meaning of the word “waiver” in legal parlance is the abandonment of a right in such a way that the other party is entitled to plead the abandonment by way of confession and avoidance if the right is thereafter asserted. This appears to accord with the dictionary meaning of the term and with the two discussions of the subject, each to the same, or similar, effect in Halsbury's Laws of England …. In the former of these it is said: 
“Waiver is the abandonment of a right…. A person who is entitled to the benefit of a stipulation in a contract or of a statutory provision may waive it, and allow the contract or transaction to proceed as though the stipulation or provision did not exist …””
57.	Having thus defined the term “waiver” he applied it to the facts. He said:
“The consideration for the payment of £1,750, the balance of the sum of £3,000, was the abandonment by the landlords of their right to rely on the limiting words of clause 2 (12) of the lease which restricted the exercise by the appellant of his option to renew the lease to the case where he had “paid the rent and performed and observed the covenants” contained in the lease. At the time of the negotiation, the landlords were entitled to the benefit of this stipulation, and, as the result of the negotiation, they abandoned it. In my opinion, therefore, they waived it, at least to the extent that the negotiation, which was limited to settling the dispute arising from past and ascertained breaches of covenant, provided.”
58.	In the Court of Appeal, affirming the decision of Foster J, Russell LJ (with whom Sachs and Buckley LJJ had agreed) had distinguished between waiver of a breach and waiver of a term. Lord Hailsham was unimpressed with this distinction. He said:
“My Lords, I am not altogether able to follow Russell LJ in his distinction between waiver of a term, and waiver of a breach of a term. Waiver is the abandonment of a right. Viewed from one aspect of the matter, the right abandoned is conferred by the conduct of the appellant in breach. Viewed from another aspect the same right is conferred by the term of the contract which has been broken by the appellant. When a contract is broken the injured party in condoning the fault may be said either to waive the breach or to waive the term in relation to the breach. What in each case he waives is the right to rely on the term for the purpose of enforcing his remedy to the breach. I cannot construe “waiver” as only applicable to the total abandonment of any term in the lease both as regards ascertained and past breaches, and as regards unascertained or future breaches. I am equally unable to regard a compromise forgiving a past default as the same thing as a consent licensing in advance conduct for which a prior licence is required by the terms of a contract.”
59.	He then considered an alternative way of looking at the case. He said:
“There is possibly a simpler way of looking at the matter. Before the negotiation for settlement no exercise of the option to renew was open to the appellant. He had lost the option as the consequence of his breaches of covenant. This was because of the terms in which clause 2 (12) defined the right of option to renew. After the completion of the settlement there was a valid option to renew, notwithstanding the breaches, on the terms of the old clause 2 (12). This must either be because the contractual rights and obligations of the parties had been varied by agreement or because some part of them had been waived by the landlords. In the former case there was a variation. In the latter case the change was due to a waiver of one of the terms of the lease even though the waiver was limited to the breaches specified in the section 146 notice. I prefer the latter alternative, but in either case section 22 (4) of the Finance Act 1963 applied to the payment, since on either view the consideration for the change was the payment of £1,750. It would only not apply if either (a) “waiver” in the section means the total excision of one of the terms of the lease, or (b) “waiver of a breach” is something inherently different from “waiver of a term.” With each of these contentions I have already dealt.”
60.	Lord Reid also disagreed with Russell LJ’s distinction between waiver of a breach and waiver of a term. He said:
“But you cannot waive a breach: you can only waive a right. Russell LJ clearly meant that what was waived was the right to re-enter which resulted from the breach. But that right is a right given by a term of the lease and I am unable to see any difference between waiving a term and waiving a right given by that term unless the respondent's second contention is right.
That contention appears to me to place an unnatural limitation on the ordinary meaning of the word “waiver.” One party to a contract says to the other that he need not observe a contractual prohibition on this occasion but of course he must observe it on future occasions. That appears to me to be a clear case of waiver of that prohibition. I see no justification for restricting the use of the word to the case where the party says that the other need never observe the prohibition again.”
61.	Lord Morris of Borth-y-Gest dissented. He pointed out that after the compromise the tenant was still bound by the covenants in question, all of which remained in full force and effect. He continued:
“If a term of a lease has not been observed and if, because of this, discussions then take place between a lessor and a lessee, various results might follow. The lessor might insist upon exercising all such rights as he had. The lessor might agree to vary the term in question so that for the future it would be operative but in some altered form of words. The lessor might agree that the term need no longer be observed and that the lease should continue as though the term was deleted. The lessor might agree that the lease should continue and that the term in question should remain unaltered but that past breaches of it should (on terms) be forgiven. In my view, the settlement reached by the parties in the present case was on the latter basis.”
62.	He applied the same analysis to the option to renew. He said:
“The term (covenant 2 (12)) remained a term of the lease. It remained unaltered. It was not varied. It did not disappear. The condition precedent contained in it still existed. All that had happened was that certain past breaches of other terms of the lease (which as terms also remained unaltered) had been waived. The lessors would be estopped from asserting those past breaches. Stated otherwise the lessors in the present case while not waiving the condition precedent which was a part of the option clause (2 (12)) waived their right (in respect of the breaches which were the subject of the settlement) to assert that the condition precedent was not satisfied. In my view, there was no waiver of any term or of any part of any term of the lease. It is important to remember that the inquiry is not whether there was waiver of something but whether there was waiver “of any of the terms of a lease.””
63.	He concluded:
“In agreement with Russell LJ I consider that there was no waiver of any term of the lease but that there was a waiver of certain breaches of some terms. Furthermore, I think that there is an essential difference between the two. The notion which is implicit in a waiver is that of abandonment. Sometimes as between two possible but alternative courses or rights there has to be a choice or election. One is chosen and the other is abandoned. If there is only one right then it may be given up or abandoned. If there is a claim which could be made there may be a forbearance from making it in circumstances which involve that it cannot later be made. In most cases therefore, the word “waiver” means the abandonment of a legal right.
In the present case the question arises whether the sum of £1,750 which was a part of the settlement figure of £3,000 was paid as consideration for the variation or waiver of any of the terms of the lease. If a term of a lease is varied it should be possible to express clearly in words what the term as varied is. As to waiver let it be supposed that there is a term which provides definitely that a lessee is not during the period of a lease to carry on a certain activity on the premises. If the lessor gives consent to the carrying on of the activity for the full period of the lease then he has waived that term. The term will have gone. He will have abandoned his right to insist on compliance. If, on the other hand, the lessor finds that the activity has, without his knowledge, been carried on he may insist on future compliance while at the same time giving up or abandoning his right to redress or some particular form of redress for the past breach. He will not have waived the term but he will have waived the breach of the term. This distinction between waiving of a breach and waiving of a term has long been recognised.”
64.	Lord Simon of Glaisdale agreed with Lord Hailsham. He added:
“Both in ordinary and in legal usage “waive” originally meant “abandon” generally. Nowadays, in ordinary usage “waive” signifies the relinquishment of anything which one has the right to expect, as in “waive the formalities”; in legal usage “waive” and “waiver” signify the relinquishment of a legal right (which, of course, implies a correlative legal obligation). Such expressions as “waive the tort,” “waive the forfeiture” or “waive the term” are legal shorthand: they mean, respectively, “relinquish the rights accruing to the injured party in respect of a civil wrong committed against him by the tortfeasor,” “relinquish the right accruing to the landlord to re-enter the demised premises by reason of a breach of covenant of the lease” and “relinquish the rights accruing to the promisee by reason of the relevant term of the contract.” In the last instance the rights may be either the primary ones conferred by the contract (i.e. to performance of its promises) or the secondary ones conferred by law for breach of the contractual promises (i.e. to withhold performance of reciprocal promises…)… “Waive the term” is also apt to include relinquishment of the right to performance of a condition precedent …. Here, undoubtedly, the lessors relinquished their right to the performance of a condition precedent.”
65.	Lord Salmon agreed with Lord Hailsham.
66.	Mr McQuater argues with force that what has happened in the present case is indistinguishable from what happened in Banning v Wright; and which was held to amount to a waiver of a term of the lease. He says that there is no distinction to be drawn between waiver of a term and waiver of a breach of a term. He relied particularly on Lord Hailsham’s alternative (and simpler) analysis. Before the Notice of Acceleration was withdrawn (assuming it was validly withdrawn), the loans were repayable on demand; after the Notice was withdrawn they were not repayable on demand. This must be either because the contractual rights and obligations of the parties had been amended by agreement, or because some part of them had been waived. Lord Hailsham preferred the latter analysis, but on either view, the terms of the Finance Documents have been either “amended” or “waived”. 
67.	Mr Wolfson says that it is clear that clause 30.1 which deals with waiver of a “term” and clause 30.4 which deals with waiver of a “right or remedy” belonging to an individual lender are intended to deal with distinct matters. In order to make sense of the distinction being drawn by the SFA, the same wide interpretation given to the term “variation or waiver of any terms of the lease” in the Finance Act 1963 in Banning v Wright cannot be given to waiver of a “term” in clause 30.1, since that would mean that both clause 30.1 and clause 30.4 would overlap in relation to the waiver of a right arising from a term. Accordingly, he submits that the only construction that can be put upon waiver of a “term” in clause 30.1 which maintains the distinction that the parties have drawn between waiver of a “term” (30.1 and 30.2) and waiver of a “right or remedy” (30.4) is to construe clause 30.1 as applying where the waiver extends beyond the rights of the waiving party. Thus, if a lender (whether a Majority Lender or not) waives its own rights, then clause 30.4 applies. However, if the Majority Lenders wish to waive the rights of all relevant lenders on an issue, then clauses 30.1 and 30.2 apply. 
68.	In Banning v Wright the House of Lords were considering the meaning of the phrase “waiver of any of the terms” in the context of a particular statutory provision. I am construing the phrase in the context of the SFA. The contexts are different; and, as has frequently been said: in law context is all. In view of the fact that five judges (Foster J; Russell, Sachs and Buckley LJJ and Lord Morris) all preferred a construction which differed from that favoured by the four judges in the majority in the House of Lords it is, I think, impossible to say that the construction favoured by that majority is the only possible meaning that the phrase can bear. Moreover Lord Hailsham himself said that “When a contract is broken the injured party in condoning the fault may be said either to waive the breach or to waive the term in relation to the breach.”  Lord Hailsham cannot, therefore, have meant that it is a legal solecism to speak of waiving a breach. Lord Simon also emphasised that a waiver is the giving up of a right. So it cannot be a legal solecism either to speak of waiving a right.
69.	In the present case the draftsman of the SFA has drawn clear distinctions between waiving breaches, waiving Events of Default, waiving rights and remedies and waiving terms. I agree, therefore, with Mr Wolfson that the broad meaning adopted by the majority of the House of Lords in Banning v Wright cannot be directly transposed into the SFA. Which of the possible meanings should be adopted is, in my judgment, constrained by the commercial purpose of these provisions of the SFA. In my judgment the limiting factor proposed by Mr Wolfson is the one that makes the best commercial sense: viz. that a party may give up his own rights but not other people’s. This interpretation ties in with clause 2.8. In my judgment giving up the right to rely on a particular invocation of the rights afforded to the Majority Lenders by clause 24.18 is not a waiver of that term. That term remains in being and is available to be used on future occasions. I hold therefore that clause 30.1 is not engaged, with the result that the exceptions to it listed in clause 30.2 are not engaged either.
70.	It follows, therefore, that the notice was validly withdrawn.
Have the Majority Lenders agreed not to make a demand?
71.	I answer this question on the assumption that I am wrong in concluding that the notice given under clause 24.18 was validly withdrawn. I must assume that although the Majority Lenders purported to withdraw it, the withdrawal was ineffective because not all affected lenders consented to the withdrawal. The agreement not to make a demand must be found (if at all) in the letter of instruction of 30 June 2010. That letter does, in my judgment, amount to a contract. It was plainly intended to create enforceable obligations (hence paragraph 4 of the letter); and the Company gave consideration (see paragraphs 5 and 6 of the letter). The question is: what was the content of the agreement?
72.	The Majority Lenders agreed to instruct the Facilities Agent:
i)	To waive the breaches;
ii)	To waive the Events of Default;
iii)	To “revoke and withdraw” the notice of acceleration
iv)	To notify the Company of the waivers and withdrawal.
73.	On the assumption that I am making, the agreement would have been effective in so far as it related to the waiver of the breaches and the waiver of the Events of Default. However it would have been ineffective under the SFA in so far as it related to the withdrawal of the notice. It was clearly drafted on the assumption that the withdrawal would be effective; an assumption that in the event would have been falsified. How is the court to approach an agreement when the underlying assumption on which it is based is wrong?
74.	In Anglo Continental Educational Group (GB) Ltd v Capital Homes (Southern) Ltd [2009] CP Rep 30 Arden LJ said of an agreement for the sale of land with development value:
“The relevant provisions of the agreement are undoubtedly difficult to interpret in the events which have happened, but in my judgement neither party’s interpretation produces a satisfactory solution. The agreement is not well drafted. In that situation, a principle which has particular potency and resonance is that, if the agreement is susceptible of an interpretation which will make it enforceable and effective, the court will prefer that interpretation to any interpretation which would result in its being void. The court will also prefer an interpretation which produces a result which the parties are likely to have agreed over an improbable result.”
75.	In my judgment that principle applies here. I would therefore interpret the agreement on the basis that what it means is that as between the Company and the Majority Lenders the notice will be treated as if it had been withdrawn. If the agreement is interpreted in that way it must follow, as a matter of necessary implication, that the Majority Lenders would not make any demand for payment based on that notice. Such an interpretation would make that part of the agreement effective rather than ineffective; and produces a result that the parties are likely to have agreed over an improbable result. I hold therefore, that if I am wrong in deciding that the notice was validly withdrawn, the Majority Lenders have made a binding agreement not to make any demand under it.
Result
76.	It follows from my conclusions that I should refuse to make the declarations sought in paragraphs 1 to 11 of the claim for relief.