Galapagos restructuring ends with an effective “Distressed Disposal” and a win for senior creditors

15 November 2023

Any restructuring where there are multiple tiers of debt and lenders with different interests and views can be tricky. Lenders will try to anticipate these difficulties by entering into an intercreditor agreement (an ICA) setting each lender’s ranking and rights to enforce. Typically, an ICA will allow the senior lenders at least the option of taking the lead on an enforcement or a restructuring. Senior lenders will be comforted by the judgment of Mr Justice Trower in Galapagos Bidco S.A.R.L v Dr Frank Kebekus [2023] WHC 13931 (Ch) (Galapagos) which upheld the effectiveness of a so-called “Distressed Disposal” under an ICA based on the widely used form of ICA recommended by the Loan Market Association. 

Galapagos concerned the €1,000,000,000 restructuring of a private equity-backed group of companies (the Group) that was originally financed by three tiers of creditors: a super senior revolving credit facility and guarantee facility, two series of senior structured notes (SSNs) and junior high-yield notes (HYNs). Their respective seniority was determined by an English law ICA. During the restructuring, the security agent used the Distressed Disposal provision of the ICA to release all existing security, including over the shares in one of the debtor companies which was being sold. This allows the buyer to acquire the assets without the incumbrance of any security. The buyer in this case was partially owned by some of the previous SSN holders. The price paid was enough to satisfy the super senior and SSN creditors, but the holders of the HYNs received nothing.

One of the holders of the HYNs challenged the transaction arguing that the release of security under the Distressed Disposal was ineffective because the security agent had not complied with certain requirements under the ICA. The Court ruled on three key issues and largely found in favour of the SSN holders and the buyer by upholding the Distressed Disposal.

Cash consideration

A Distressed Disposal required the offer for the Group to be “in cash or substantially in cash” and not alternative consideration. The challenging HYN holder argued that this was not satisfied because approximately 65% of the purchase price for the Group was settled by way of set-off, as some of the existing SSN holders had agreed to re-lend the money owed to them by the Group, to the buyer. The Court held that an obligation to pay in cash could be satisfied by way of set-off and that the SSN holders were free to re-lend any proceeds of sale to the buyer.

Unconditional release of security

A Distressed Disposal also required that security be “unconditionally released and discharged” and the business of the Group had to be sold on a debt-free basis. The challenging HYN holder argued that the security was not unconditionally released, because the SSN lenders who became lenders to the buyer were granted security in respect of their new loans which reflected a continuation of the debt. However, the Court found that the new lending to the buyer was distinct from the Group’s previous debts and that therefore there had been an unconditional release of security and a sale of the business on a debt-free basis. The Court noted that it would be uncommercial to prevent existing lenders from participating in any new debt as they were the ‘potential pool of refinancing lenders who are most likely to have an appetite to continue to support’ the restructured Group.

Implied term in the Distressed Disposal provision 

Although ultimately unnecessary as the Court upheld the effectiveness of the Distressed Disposal, the buyer had argued that there was an implied term that the conditions of the Distressed Disposal did not need to be satisfied when the HYN creditors were “out of the money”, meaning they had “no economic interest” in their Group and would receive no return if the Distressed Disposal did not occur. The buyer’s argument was that if the HYN creditors were out of the money, they had no legitimate interest in enforcing compliance with the conditions of the Distressed Disposal because it did not affect whether or not they would receive a return. The Court rejected this argument. The Court considered that the ICA was capable of operating ‘perfectly satisfactorily’ without the implied term and it was in the interests of ‘commercial certainty and predictability’ not to imply this term into the ICA.


The Galapagos ruling has provided clarity on the Distressed Disposal provision commonly contained in ICAs and reflects a commercially minded approach to such disposals which will comfort senior creditors and particularly those who wish to fund new loans to a buyer. The ruling is encouraging for the use of out-of-court proceedings in large and complex restructurings which may help lenders and borrowers save time and costs when compared to a restructuring using statutory processes such as a scheme of arrangement or restructuring plan under the Companies Act 2006.