Bank subordination clauses upheld

In this case, Cattles Plc - the parent company - raised finance and lent it on to its trading subsidiaries including the defendant, Welcome Financial Services Limited, which was engaged in the provision of financial services to consumers and businesses.

Cattles defaulted on the facilities with RBS and to its bondholders.? In the course of negotiating a possible restructure of the debt (assisted by a standstill agreement), RBS asserted that it had a 'trump card' in the form of the subordination provisions in the cross guarantees, which provided that:

"Until all claims of the Bank in respect of all of the Obligations of each Debtor have been discharged in full... No Guarantor shall in competition with or in priority to the Bank make any claim against any Debtor or any co-guarantor... nor make any claim in the insolvency of any Debtor or any co-guarantor nor take or enforce any security from or against any Debtor or any co-guarantor."

RBS argued that this allowed the bank to prevent Cattles from recovering any intra-group debts until the subsidiaries had satisfied the liability to RBS under the group guarantee.

This would be disastrous for the bondholders (who only had a claim against Cattles) because the intra-group loans represented Cattles's only substantial asset. If RBS could prevent the repayment of those loans until the subsidiaries had satisfied their liabilities to RBS in full, Cattles would effectively be starved of assets and there was evidence that there would then be very little left in the pot for the bondholders.

The bondholders argued that the subordination provisions were restricted to claims relating to the group guarantee and did not extend to any claim that Cattles might have against its subsidiaries.

The court of first hearing and the CA found that the obvious purpose of the clause was to increase the bank's realisations from the assets of any particular group company and that the restricted interpretation sought by the bondholders would be contrary to that purpose.

Case: Cattles Plc v Welcome Financial Services Ltd

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