An ad hoc group of hedge funds who were primed in an uptiering transaction orchestrated by Hunkemoller and its largest creditor Redwood Capital Management filed an English lawsuit against security agent TMF Trustee, according to court filings.

The group, which contains Cheyne Capital, Contrarian, and Man GLG, are suing TMF for a breach of its obligations under Hunkemoller’s debt documentation in two lawsuits filed on 10 October before the English court, which also name the Dutch lingerie company.

Through the English litigation, the ad hoc group hopes to overturn a March 2025 enforcement action and distressed disposal that put Redwood in control of Hunkemoller.

Litigation related to distressed disposal provisions in English intercreditor agreements are, for the most part, “untested”, and the ad hoc group’s challenge is expected be one of the “first cases in decades” to raise certain points, according to 9fin sources.

Whilst we are yet to see the court filings themselves, in a letter before action issued on 17 April by Pallas Partners — legal advisors to the Cheyne Group — to TMF, the grounds of argument set out were that:

1. The Instructing Group was not properly constituted and, as such, TMF ought not to have relied on any instructions;
2. TMF failed to comply with the security enforcement principles under the ICA due to its failure to obtain an appropriate value for the various transactions implemented under the ICA; and
3. TMF failed to notify the Cheyne Group of the transactions in accordance with the terms of the ICA.

Rare litigation

Litigation premised on the inappropriate use of distressed disposal provisions in an English intercreditor agreement is rare, with only two recent authorities on the matter.

Signal Capital Partners brought a challenge against German heat exchanger manufacturer Galapagos (now known as Mangrove) back in 2023, after the high yield notes it held were fully released by the security agent under distressed disposal provisions in the intercreditor agreement as part of an out-of-court restructuring.

In that case, the English High Court sided against Signal and found that Galapagos’s restructuring was validly effected under the distressed disposal provision and that, in any event, Signal’s high yield notes were out of the money. See Kirkland & Ellis’s note on the judgment here.

Prior to Galapagos, the most significant example of litigation of distressed disposal provisions dates back to 2012 and arises from the 2010 restructuring of German automotive parts manufacturer Stabilus Group. In that case, a group of mezzanine lenders challenged the validity of a non-consensual restructuring effected by distressed disposal provisions under the intercreditor agreement, but were ultimately unsuccessful. See Ropes & Gray’s memo on the decision here.

Those cases were not “directly relevant” to the Hunkemoller ad hoc group’s litigation, which will draw on legal arguments arising from the 2024 uptiering deal and Redwood’s abuse of its majority position in Hunkemoller’s debt, 9fin sources said.

Hunkemoller’s uptiering deal and subsequent distressed disposal are unique when compared to other out-of-court restructurings for the “aggressive” stance taken by Redwood and the lingerie company, the sources added.

Other proceedings

Meanwhile, the ad hoc group’s litigation against Hunkemoller in the Netherlands and New York have proceeded apace.

Following a hearing before the Amsterdam District Court regarding litigation against Hunkemoller’s holding company and directors over their role in the uptier and distressed disposal, a judgment is expected to be handed down by 13 November.

Last week in the US, a magistrate judge in the Southern District Court of New York recommended that the court grant a discovery order against Redwood in-aid of the ad hoc group’s foreign litigation while suggesting that the parties confer to avoid any discovery overlap with the foreign proceedings.

The recommendation could have served as a discovery order, but it was opposed by Redwood — who can still file an objection and request a stay before the end of the month.

The ad hoc group’s New York state litigation against Hunkemoller, Redwood and indenture trustee BNY Mellon survived a motion to dismiss. But the group’s claims against Redwood and BNY Mellon were dismissed.

Pallas Partners is representing the ad hoc group, while Hunkemoller is advised by A&O Shearman.

The ad hoc group, Hunkemoller, and TMF declined to comment. Redwood didn’t respond to a request for comments.