Myers v Kestrel – The Limits Of The Doctrine Of Minority Oppression

​Financially stressed companies often seek to agree significant changes of the terms of their debts with their lenders outside of a formal insolvency process. It is not unusual for borrowers to be able to persuade a majority of creditors to agree to radical amendments, often in the teeth of objection from minority creditors.

This Client Alert highlights some recent key case law relating to the protection of dissenting creditors using the doctrine of minority oppression. It also discusses a more recent case, where a judge declined to use this doctrine.

Introduction

In the UK, market bonds or notes and even syndicated bank debts (which we will refer to collectively as "Notes") often include a threshold percentage which, assuming the relevant majority of noteholders have consented, enables the issuer of debt to amend the terms of Notes. In recent years there have been two cases - Assénagon Asset Management SA v IBRC and Azevedo v Imcopa - which we discuss below and which examine the rights of Noteholders who do not agree to the proposed changes.

More recently there has been another decision - Myers v Kestrel Acquisitions Limited - which addresses the limits on the ability of Note issuers to vary the rights attaching to the Notes they have issued. Unlike Assénagon and Azevedo, which focussed on arguments between the majority holders versus the minority holders, the key focus of Myers v Kestrel was whether issuers of debt have duties towards Noteholders when making amendments to Notes.

We have summarised the three recent key cases below and discuss the impact of these cases for borrowers seeking amendments to their debt terms.

What happened in Myers?

The Myers were the beneficial owners of Swift Advances PLC ("Swift"), a company involved in sub-prime lending. In 2004 they sold Swift to Kestrel Acquisitions Limited ("Kestrel"). Kestrel paid part of the price by issuing vendor loan notes ("VLNs") to the Myers.

Kestrel funded the acquisition largely by issuing unsecured discounted loan notes ("DLNs") to its indirect shareholders - Alchemy and Indigo.

The VLN instrument stated that the VLNs would rank equally with the DLNs and that Kestrel was required to amend the terms of the VLNs (without the VLN holders' consent) to ensure they remained consistent with the terms of the DLNs.

Swift suffered financial difficulties. In 2007, 2008 and 2009, Kestrel issued further "follow-on" loan notes ("FONs") to its indirect shareholders. Each time, Kestrel and...