Intercreditor deed prevents junior creditor challenging priority arrangements


11th June 2021

Our experts take a look at a High Court case where it was held that a junior lender was prevented from challenging the scope of a senior lender's security under an Intercreditor Deed.

The case

In Arboretum Devon (RLH) Ltd, Re [2021] EWHC 1047 (Ch), the High Court held that a junior lender was prevented from challenging the scope of a senior lender’s security under an Intercreditor Deed.

Legal issue

The Intercreditor Deed stated: Neither Lender shall challenge or question … the validity or enforceability of any Security constituted by a Security Document.

The junior lender claimed that the obligations under the senior lender’s loan agreement failed due to misrepresentations by the senior lender, and that therefore the senior lender’s right to repayment arose outside of the senior security documents, under an implied loan or a restitutionary claim. The junior lender argued that they weren’t questioning the validity or enforceability of the senior security documents, but rather that the senior security documents did not secure any obligations, therefore the senior debt was not within the scope of the Intercreditor Deed and consequentially ranked behind the junior lender in priority.

The senior lender’s security document stated:

  • i)  “Secured Liabilities” means “all present and future monies obligations and liabilities of the Borrower to the Beneficiaries whether actual or contingent and whether owed jointly or severally, as principal or surety or in any other capacity together with all interest (including without limitation default interest) accruing in respect of those monies obligations or liabilities pursuant to any Finance Document.”
  • ii)  “Finance Documents” means “the Loan Agreement the Security Documents and all other agreements entered into between …[the senior lender]…and [Arboretum].”

The junior lender argued that if the senior debt payment obligations arose outside of a written security document, then they did not come within the definition of Finance Documents and therefore did not constitute Secured Liabilities, and were therefore not secured by the senior lender’s security document and consequentially were not regulated by the Intercreditor Deed.

Court held

The Court held that the definition of Finance Documents was limited to written agreements as this logically followed from the wording in the definition. However, it also held that obligations or liabilities which are pursuant to a Finance Document (within the definition of Secured Liabilities) are not limited to express contractual obligations in the document itself, but also extend to obligations which arise as part of the transaction which the Finance Document describes and creates. It would not have been the parties’ intention when creating the security to limit claims to solely contractual claims, even where the remedy may be the same under some other legal basis.

The Court also held that in relation to the junior lender’s ability to question the ‘validity’ of a security document, ‘validity’ did not solely mean legal validity but also the effectiveness of the security documents in securing a borrower’s obligations. The priority ranking in the Intercreditor Deed would be undermined if the junior lender could argue that the senior lender’s security was actually unsecured and therefore ranked behind them, due to the ineffectiveness of the senior lender security documents. Therefore, the junior lender was held to be challenging the validity of the senior lender’s security documents, and was therefore prevent from bringing such a claim under the terms of the Intercreditor Deed. The Court noted however that the clause would not prevent the junior lender from challenging the quantum of the secured liabilities, such as how much had been advanced, or the calculation of interest.

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