Background to the High Court’s decision
In October 2019 a restructuring of the group’s financial indebtedness took place, of which the Claimant, Galapagos Bidco S.A.R.L (Bidco) forms part. As part of the restructuring, Galapagos SA (GSA) transferred the shares it held in its wholly owned subsidiary, Bidco, to Mangrove IV Luxco SARL (Mangrove). A number of junior creditors (including Signal Credit Opportunities (Lux) Investco II SARL (Signal)) objected to the restructuring and legal proceedings were issued in a number of different jurisdictions, challenging the restructuring and seeking relief from various courts.
Focusing on the English proceedings, they were initially issued in September 2019 (i.e. before the restructuring was completed) and at that time Bidco sought various declarations that the restructuring complied with the terms of the Intercreditor Agreement (ICA). Once the restructuring had completed the English proceedings were then amended to seek declarations that, amongst other things, the Security Agent had effectively released the liabilities of GSA and its subsidiaries and the disposal was in accordance with the provisions of the ICA. Signal also sought declarations that the restructuring was not effective.
The ICA was governed by English law and contained a standard distressed disposal release provision. The sale of GSA’s shareholding in Bidco to Mangrove amounted to a distressed disposal and on the same day as such disposal occurred, the Security Agent executed a deed of release purporting to release the transaction security and all claims of the Primary Creditors. The main dispute was around whether certain conditions to the distressed disposal were satisfied:
Whether a material part of the proceeds being satisfied by way of set-off amounted to the proceeds being paid “in cash (or substantially in cash)”?
The SPA stated that the consideration was payable in cash, which was to be paid to the Security Agent for application in accordance with the ICA waterfall. The payment by way of set-off (being circa €275m out of the total circa €425m sale proceeds) occurred because some of the Primary Creditors who were entitled to receive a share of the sale proceeds of the distressed disposal agreed to provide new lending to Mangrove entities for the purpose of funding the purchaser group post sale. Mr Justice Trower was of the view that the fact that certain Primary Creditors chose to reinvest their share of the sale proceeds in providing new notes post completion to the restructured group did not mean that the new notes were consideration for the distressed disposal, the new notes were merely another aspect of the restructuring. The sale proceeds themselves constituted cash consideration, notwithstanding any subsequent reinvestment in new notes and notwithstanding set-off being applied to the sale proceeds.
In addition, following previous authorities that regarded set-off as payment in cash, it was held that the fact that set-off was applied did not mean that the sale proceeds were not in cash. Therefore there was no requirement for the completion payments to be structured so that the full amount of the sale proceeds were to be received by the Security Agent and then the Security Agent transferred back the amounts it was obliged to pay on behalf of the re-subscribing note holders. Parties can continue to use set-off as a practical and commercial way of settling various parties’ payment obligations.
Whether an unconditional release of the transaction security and Primary Creditors’ claims occurred given that a number of entities that qualified as Primary Creditors were also creditors of the purchaser group?
The deed of release released all claims of the Primary Creditors (in their capacity as Primary Creditors). Signal submitted that given that certain Primary Creditors entered into the new notes provided to the purchaser group, an unconditional release did not occur and that the commercial reality was that the claims of the Primary Creditors continued. It was held that the fact that new notes were documented (under new documents on new terms) and provided by certain Primary Creditors to the purchaser group did not limit the effect of the releases given pursuant to the deed of release and therefore the distressed disposal conditions were met and the disposal of Bidco’s shares to Mangrove was in accordance with the ICA. If Signal had been successful with its submission this would have created uncertainty as to whether (and the precise timing in which) an existing lender would have been able to provide new funding to the purchasing group. The Court felt that such uncertainty would be a “wholly uncommercial consequence” and “would remove from the potential pool of refinancing lenders those who are most likely to have an appetite to continue to support the Group with new finance” [at para 155]. Therefore existing lenders may continue to provide new funding to the purchasers of distressed disposals without prejudicing the effect of a previous security release.
Galapagos Bidco S.A.R.L V Dr Frank Kebekus and others  EWHC 1931 (Ch)