CATTLES PLC V WELCOME FINANCIAL SERVICES LTD

[2009] EWHC 3027 (Ch), High Court, Chancery Division, His Honour Justice David Cooke, 14 December 2009

Banking - Guarantee - Interpretation - Guarantee clause preventing guarantor from making "any claim" in liquidation - Whether prevented from making "any claim" or just claim under guarantee - Position of bondholders

The claimant was a public listed company and the parent of a group providing financial services. It obtained financing notably by issuing bonds and lent the money to trading subsidiaries. Its principal assets were amounts receivable from trading subsidiaries. Its finances were such that its board was required to consider whether there was a reasonable prospect of avoiding insolvent liquidation or administration. The first defendant, Welcome, was a trading subsidiary of Cattles and its debt of about £2.9 billion was at issue here. The second defendant, RBS, was a bank which had provided credit facilities in return for a cross-group guarantee. According to a clause in the guarantee, "no guarantor" was entitled to make "any claim" in "competition with or in priority to the Bank" until "all claims of the Bank" had been paid. The definition of guarantor included both Cattles and Welcome. The third defendant was the holder of a bond issued by Cattles. RBS had argued in the course of restructuring negotiations that some or all of Welcome's debt to Cattles should not be paid until all amounts owed to RBS had been paid in full. Two alternative grounds were advanced for this - first, a contractual interpretation of the guarantee; and second, an argument based on Welcome's right of right of quasi-retainer per Cherry v Boultbee (1839) 4 My & Cr 442.The judge answered the questions posed in favour of the bank in accordance with the plain language of the clause. The question was whether "any claim" included a claim not covered by the guarantee and whether Cattles was therefore precluded from proving in a liquidation of Welcome until such time as the liability to RBS under the guarantee had been satisfied. The bondholder's interpretation, that the clause in the guarantee referred only to the obligations under the guarantee itself, so that Cattles was bound thereby only qua guarantor, would achieve little. A claim was just as much in competition for the assets if it arose entirely separately from the guarantee arrangements. Protecting itself from such competition was a perfectly sensible and ordinary commercial arrangement for the bank to make with parties such as a group of companies. The fact that it appeared in the same clause as a claim that applied only to obligations qua guarantor changed nothing. The Cherry v Boultbee point was answered obiter. The point turned on whether the decision obiter of the Court of Appeal in Re SSSL Realisations (2002) Ltd [2006] EWCA Civ 7 was binding on the judge at first instance. The substantive questions were first whether, if Cattles were to prove in an insolvent liquidation of Welcome the liquidator of Welcome would have a right of quasi-retainer under the rule in Cherry v Boultbee, and second, if so whether this right would be in respect of the full amount of Welcome's liability to the bank as surety for Cattles. The judge held that the obiter decision in SSSL was binding authority in so far as it dealt with the Cherry v Boultbee issues and answered both questions in the affirmative.