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November 2009
Business Restructuring
and Insolvency Quarterly
Legal update –
London
Court of Appeal Upholds CDO
Priority Provisions
On 6 November 2009 the English
Court of Appeal unanimously upheld
the first instance decision in Perpetual
Trustee Company Limited v BNY
Corporate Trustee Services Limited
and Another, confirming the validity of
priority provisions within a synthetic
CDO transaction which provided for
the credit default swap counterparty
to be subordinated to noteholders if it
had defaulted under the related credit
default swap (first instance decision:
[2009] EWHC 1912 (Ch); appellate
decision: [2009] EWCA Civ 1160).
The Court of Appeal’s judgment
also addresses Butters and others v
BBC Worldwide Limited and others,
an unrelated appeal which raised similar
legal issues and was heard alongside
Perpetual. See the later report on the
first instance decision in that case.
A fuller report on the CA judgment
will appear in the next edition of the
BRI Quarterly.
Contents The Context
The Perpetual case involved 12 separate
Legal update – London 1 issues of Notes, each issued pursuant
to the Dante Finance Multi‑Issuer
Secured Obligation Programme
Legal update – stop press! 15 established by Lehman Brothers in 2002.
In each case, the relevant issuer had
Legal update – New York 16 entered into a credit default swap with
Lehman Brothers Special Financing Inc
(the “Swap Counterparty”). The swap
“What, never? Well, hardly ever!” 19 agreements were in each case embodied
in (amongst other documents) ISDA
Master Agreements expressed to be
Germany: forum shopping in group insolvencies 23
governed by English law.
New tricks for an old dog: the recent use of schemes of 26 Each issue of Notes was constituted by,
arrangement in restructurings in the UK amongst other things, a Principal Trust
Deed and a Supplemental Trust Deed
2 Business Restructuring and Insolvency Quarterly November 2009
Legal update – London
(the “Trust Deeds”) which were also The Decision as far as possible, that [the noteholders
expressed to be governed by English Two substantive judgments on these are] repaid out of those assets all that
law. In essence, the Trust Deeds issues were delivered by the Court [they] provided… before the [Swap
provided that upon enforcement of Appeal, one by the Master of the Counterparty] receives any money from
(which had arisen), after defraying Rolls (Lord Neuberger) and one by Lord those assets pursuant to its charge.”
various fees, costs and expenses, Justice Patten. Both upheld the validity
the available collateral within the of the provisions as a matter of English Conclusion
transaction should go: law. Lord Justice Longmore agreed As with the decision at first-instance,
with the speech of the Master of the the result is to be welcomed as
●● first, to pay any close-out amounts Rolls, such that it represents the upholding the validity of provisions
due from the Issuer to the Swap majority view. which commonly feature in transaction
Counterparty under the swap, and documentation. However, the relevance
thereafter towards sums due to In Lord Justice Patten’s view, there attributed by the Master of the Rolls
noteholders; unless was simply no asset of the Swap to the fact that the noteholders had
●● a default had taken place under Counterparty which was being funded the purchase of the collateral
the relevant swap agreement removed upon its filing for bankruptcy: indicates that, in determining the
and the Swap Counterparty was “The only interest or property which vulnerability of similar provisions to
the “Defaulting Party” (as that the [Swap Counterparty] ever enjoyed legal challenge in other cases, a careful
term is used in the ISDA Master in the collateral was a charge [that is, analysis of the underlying structure of
Agreement), in which case the a security interest] granted by the the transaction may be required.
priority was to be reversed so that issuers of the Notes on the terms of the
the noteholders ranked ahead of the Supplemental Trust Deed. That security It should also be noted that, as at
Swap Counterparty for repayment. interest remains part of the property of first-instance, the Court of Appeal
the [Swap Counterparty] unchanged by recognised the lack of clarity
The Lehmans collapse involved, amongst the event of its bankruptcy. The reversal surrounding the scope of the British
other things, the Swap Counterparty of the order of priority… was always Eagle principle, and indeed the
filing for Chapter 11 bankruptcy a facet of the security designed to complexities are illustrated by the
protection on 3 October 2008. regulate the competing interests slightly different judicial approaches
This constituted a “Bankruptcy” event over the collateral… To say that its adopted within the Court of Appeal
of default under the applicable swap operation in the event of the [Swap itself. It therefore remains possible
agreement, with the Swap Counterparty Counterparty’s] bankruptcy constitutes that these issues will fall to be
being the “Defaulting Party.” the removal of an asset from the re‑visited at higher judicial level
liquidation is to confuse the security (that is, the Supreme Court) either
The Issue itself with the operation of its terms in in this case or in future cases. n
The key question for the Court of the events prescribed by the charge.”
Appeal, as it had been at first-instance,
was whether these provisions The Master of the Rolls expressed
were rendered unenforceable by considerable sympathy with Lord
what is commonly known as the Justice Patten’s reasoning, but also
British Eagle principle (also known felt that an additional element was at
as the “anti‑deprivation principle”). least arguably critical to the outcome,
This principle of public policy can render namely the fact that the collateral had
contractual provisions unenforceable originally been purchased either wholly
if their effect is improperly to divest or largely with the noteholders’ funds
a debtor of his assets upon or after rather than the Swap Counterparty’s
his insolvency such that those funds. Thus the Master of the Rolls
assets cease to become available to placed weight upon the fact that
his creditors within the insolvency “the assets over which the charge
proceedings. The Swap Counterparty exists were acquired with money
argued that the provisions altering its provided by the [noteholders] in whose
priority upon its filing for bankruptcy favour the ‘flip’ [that is, the change in
were unenforceable as falling foul of order of priority] operates, and… the
this principle. ‘flip’ was included merely to ensure,
Business Restructuring and Insolvency Quarterly November 2009 3
Legal update – London
The following case notes were written by Paula Moffatt, Senior Lecturer at Nottingham
Law School and member of Nottingham Trent University’s Insolvency and Corporate Law
Research Group led by Professor Adrian Walters.
CROSS-BORDER Six per cent of this money went to the In October 2006, the English court
Trustees to fund claims. Just over half made orders for the examination of
In the matter of the Consumers of the balance was paid to Eurofinance, the first and second respondents.
Trust, the Trustee Act 1925 and the which was owned by the second These were ignored and the
Cross-Border Insolvency Regulations respondent, Mr Roman. The remainder respondents were held to be in
2006 [2009] EWHC 2129 (Ch) went to the consumer promotion contempt of court in January 2007.
Executive summary companies and to meet the service
US bankruptcy proceedings against a costs of the scheme. In the later In October 2007, the US court
debtor which was an English law Trust stages it was paid to Mr Roman’s sons approved a Plan of Liquidation under
would be recognised as foreign main (the third and fourth respondents). Chapter 11 which provided for
proceedings under the Cross‑Border the prosecution of widely defined
Insolvency Regulations 2006. The system to claim cash under the “Causes of Action” against potential
voucher was so tortuous that very defendants, including the respondents.
The facts and decision few consumers bothered to complete On the same day, the Receivers
The Consumers Trust (“Trust”) the process, so that by the time the were appointed by the US court to
was created by Eurofinance S.A. scheme folded in 2005, the Trust act as foreign representatives for
(“Eurofinance”). Eurofinance was had nearly US$10 million in bank the purposes of an application to the
the first respondent and a British accounts in the US and Canada. English court under the Cross‑Border
Virgin Islands company. The trust was The Trust’s business failed when the Insolvency Regulations 2006 (the
administered by four Trustees based scheme came to the attention of “2006 Regulations”) for recognition
in London. the consumer protection agencies of the Chapter 11 proceedings.
in the US and proceedings were
The beneficiaries of the Trust were successfully brought against the Trust In December 2007, proceedings
consumers (effectively members by the Attorney‑General for the State were brought in the US court against
of the public) who had successfully of Missouri. Although the Trustees a number of parties including the
participated in sales promotions effected a settlement of $1.6 million respondents. They were not defended
operated by the Trust and others. in those proceedings, it became clear and in July 2008, default summary
The promotions took place in that further proceedings in other states judgment was given against them,
Canada and the US, although the were likely. jointly and severally, in the sum of
administration of the promotions was $160 million. The judgment was given
carried out by the Trustees in England. Eurofinance decided to begin both US on the basis that the respondents were
The promotions were governed by Chapter 11 proceedings and Canadian general partners in the Trust and so
contracts involving the Trustees, insolvency proceedings against the liable for its debts and on the basis of
two consumer promotion companies Trust as virtually all of the Trust’s breach of fiduciary duty and negligence.
(one in each of the US and Canada) and creditors and assets were in the US or
approximately a thousand participating Canada. The Chapter 11 proceedings Default judgment was also entered
merchants who had been trained by also enabled the Trust to be treated against the first and second respondents
the consumer promotion companies. as if it were a separate legal entity for $8.3 million and against the third and
as a matter of New York law since fourth respondents for lesser amounts
Under the scheme, a consumer would it could be classified as a “Business in respect of transfers of money made
buy a product and the merchant Trust.” This was significant, because, to them when the Trust was insolvent.
would give the consumer a voucher. as a matter of English law, the Trust
The voucher would have a face value had no separate legal personality. The Receivers then applied to the
equivalent to the price of the product High Court for:
sold and the consumer could then In November 2005, Eurofinance
exchange the voucher for cash, successfully applied to the English ●● recognition under Article 15 of
through the Trust. The consumer court to appoint the applicants as the 2006 Regulations of the US
would have to follow a series of joint receivers and managers (the bankruptcy proceedings as a
instructions to claim the amount due “Receivers”) of the Trust, and the foreign main proceeding along with
on the maturity date. Chapter 11 petition was issued in recognition of the applicants as
December 2005 in the US Bankruptcy foreign representatives; and
The merchants paid 15% of the face Court in the Southern District of ●● an order under Article 25 of the
value of the vouchers they issued. New York (the “US court”). 2006 Regulations enforcing the
4 Business Restructuring and Insolvency Quarterly November 2009
Legal update – London
decision of the US bankruptcy court and “foreign representative” in required to grant appropriate relief and
(holding the respondents liable for Article 2, only apply to debtors, co-operate with a foreign insolvency
the Trust’s $160 million debts) as they could not apply to the Trust. and the principle of universalism
a judgment of the English courts. applied. The judge rejected these
Counsel relied on the first instance arguments: a review of Dicey & Morris
Two issues of general importance judgment in HIH Casualty [2006] 2 All ER indicated that where the Model Law
arose. The first was whether the 2006 671 at para 143 where David Richards had been applied to enforce foreign
Regulations apply where the foreign J said that the Model Law was “not judgments, it had only been applied
bankruptcy proceedings relate to a a convention, but a set of provisions in accordance with the domestic
debtor which has no legal personality drafted to be enacted by individual rules of private international law.
as a matter of English law. states with such local variations as
may be necessary” (para 38). On this The Receivers had relied on
The second was whether a monetary analysis, it was argued, uniform the decisions in Cambridge Gas
judgment given in foreign bankruptcy interpretation was unnecessary. Transportation Corporation v Official
proceedings can be enforced under Committee of Unsecured Creditors
the Model Law when it could not have The judge considered this approach of Navigator Holdings plc [2007] 1
been enforced if it had been given in to be unrealistic for three reasons. AC 508 and HIH. The judge held that
the ordinary courts of the law of that First, the origins of the drafting were these cases did not assist them.
foreign state. This was on the basis that international and not domestic. Cambridge established the principle
it was common ground that, but for the Second, because the relevant definition that, at common law, an English
bankruptcy, the only way in which a in this case was “foreign proceeding.” court could not enforce a judgement
judgment obtained by the Trust against In his view, it was necessary to read in personam contrary to the rules of
the respondents could be enforced as the word “debtor” in the context private international law (para 59) and
a matter of English law, would be by an of the phrase in which it appeared. HIH established that “the principle of
action on the judgment. This outcome The phrase “in which proceeding the universalism is directed at ensuring
could only be achieved if the defendant assets and affairs of the debtor are so far as possible a uniform and fair
in the action was present in the foreign subject to control or supervision by system for distributing the assets
country at the time the proceedings a foreign court” should be read to of an insolvent estate with assets
were instituted, counterclaimed in the give the word “debtor” the meaning in more than one jurisdiction as
proceedings, appeared voluntarily or given to it by the foreign court in between those who have a claim to
agreed to submit to the jurisdiction. the foreign proceedings; any other them. It has nothing whatsoever to
meaning would be perverse (para 39). do with how or in what jurisdiction a
The judge held that the Trust was a possible asset of the insolvent estate
“debtor” for the purposes of the 2006 His third reason for rejecting counsel’s consisting of a claim against third
Regulations and therefore the court must approach was because it was parties is to be established” (para 62).
recognise the Chapter 11 proceedings necessary to promote uniformity in
as foreign main proceedings since the the application of the Model Law and The judge reviewed the Guide to
conditions for recognition had been met. any interpretation had to consider Enactment and found no suggestion
its international origins. Whilst the that the Model Law was intended to
He refused, however, to make the order Guide to Enactment does not deal replace the rules of private international
enforcing the monetary judgment of the with this point specifically, its general law in an enacting state. On the facts,
US court. thrust is to promote co-operation in Article 21 did not assist the Receivers
cross‑border insolvencies of any kind. and although Article 25 made
Comment A parochial interpretation of “debtor” co‑operation mandatory, enforcing a
One of the arguments raised by counsel would ignore these considerations. US court judgment in England did not
for the respondents against recognition constitute “co-operation” for the
was that words should be given their The Receivers had argued that the purposes of this provision.
ordinary meaning as a matter of English monetary judgment and order of
law. If the Trust was not a separate legal the US court should be recognised
entity as a matter of English law, then it by the English court on the basis
could not be a “debtor.” As Articles 15 that Articles 21 and 25 of the 2006
and 17, read together with the Regulations conferred jurisdiction on
definitions of “foreign proceeding” the English court: the English court was
Business Restructuring and Insolvency Quarterly November 2009 5
THE APPLICATION OF THE BRITISH Under the terms of the JVA, BBCW At an initial hearing of the amended
EAGLE PRINCIPLE was entitled to acquire Media’s shares application, the judge had been minded
in Entertain following the insolvency to decide that the MLA had been validly
Butters and others as Joint of Media and/or Group. The price terminated, or in any event, impliedly
Administrators of WW Realisation 8 for the shares would be determined terminated by Video’s unreserved entry
Limited and Woolworths Group Plc v in accordance with the valuation into the new licence. It was only after
(1) BBC Worldwide Ltd (2) 2 Entertain procedure set out in the JVA and this hearing that Video became alive to
(3) and BBC Video Ltd was linked to the MLA: clause 16.2.5 the possibility that the judgment might
[Note that this decision has been of the MLA provided that the MLA rule on the status of its licence. It was
reversed by the Court of Appeal – would terminate immediately after any therefore joined in proceedings and
see the Stop Press! Article later in company in the Woolworths Group sought to make representations at a
this Newsletter] suffered an Insolvency Event (as further hearing.
defined in the JVA) and BBCW served
Executive summary notice to acquire the Media shares in The day before the hearing, the judge
Provisions for the termination of a accordance with the terms of the JVA. was presented with the decision of
valuable licence on the insolvency of the Chancellor in Perpetual Trustee
the licensee were void as a matter Under the terms of the JVA, a valuation Co Ltd v BNY Corporate Trustee
of public policy as the licensor was by an independent investment bank Services and others [2009] EWHC 1912
required to give notice to the licensee (“IIB”) was required to determine (above) and granted BBCW permission
to effect the termination. the price of the Media shares. to reargue the voidness point.
The Administrators had first applied
The facts and decision to court in April 2009 for directions as The judge considered the contention
WW Realisation 8 Limited (formerly to the factors the IIB should take into that the MLA had not terminated
Woolworths Media Plc) (“Media”) account when making the valuation. because the Termination Clauses were
was an indirect subsidiary of However, the application was amended void. In his view, the new licence and
Woolworths Group PLC (“Group”). in May 2009 on the basis that the the MLA could not exist simultaneously:
Group went into administration clauses in the JVA and MLA which it was clear that Video had both
in January 2009 and Media went terminated the MLA on insolvency (the accepted the termination and agreed a
into administration in February “Termination Clauses”), were void. new licence which had by then been in
2009 and was subsequently place for five months. If the Termination
re‑registered as a private company. The issue arose as to the status of the Clauses were void and the MLA valid,
MLA in the event that the Termination then there had been implied surrender
Media had entered into a joint Clauses were void. Matters were of the MLA in exchange for the new
venture with BBC Worldwide complicated by the fact that the licence. Alternatively, if the Termination
Limited (“BBCW”) and owned Termination Clauses had already been Clauses were valid, then the MLA had
40% of the shares in 2 Entertain invoked by BBCW. On 2 February been terminated and Video was subject
Limited (“Entertain”). BBCW owned 2009, BBCW had served notice on to the new licence.
the remaining 60% of the shares Video informing it that the MLA was
in Entertain. One of Entertain’s terminated and offered it a new licence. He held that there were no grounds
subsidiaries was BBC Video Limited Under the new terms, the licence could for setting aside the new licence
(“Video”). A joint venture agreement be terminated by a month’s written for mistake.
(“JVA”) dated 9 July 2004 set out the notice. A letter from Entertain to BBCW
terms on which Media and BBCW indicated that the new offer had been The judge then considered whether
held their shares in Entertain. One of accepted by Entertain and Video. the effect of the Termination Clauses
the conditions for the completion of was to enable property to be alienated
the JVA had been the grant by BBCW The new licence would be far less so that it could not be distributed
to Video of a licence of intellectual valuable than the perpetual licence under the insolvency laws (the
property rights and continuing access granted under the MLA. It was therefore “deprivation principle”). He held that
to future BBC rights in accordance in the interests of Media for the MLA the Administrators owed a duty to the
with a Master Licence Agreement to remain in existence as Video would general body of creditors of Media to
(the “MLA”). The MLA was in agreed retain its perpetual intellectual property run the argument that the deprivation
form at the time of the JVA although rights which would in turn increase the principle would operate to prevent
not dated until 27 September 2004. value of Media’s shares in Entertain. BBCW from acquiring the shares on the
6 Business Restructuring and Insolvency Quarterly November 2009
Legal update – London
basis that the MLA had terminated; this Markets with the judgment in Perpetual arrangement between the Senior
was because the Administrators’ duty determining that the insolvency event Lenders and each of Bluebrook, IMO
was to maximise the return to creditors. did not fall foul of the deprivation and Spirecove.
principle and the judgment in Butters
In the judge’s view, the Termination determining that it did. As the judge Spirecove also owed the
Clauses created a classic situation where recognised in Butters, the situation Mezzanine Lenders £119 million.
the deprivation principle would apply. could have been rectified if the This debt was also secured.
It would have been different if the terms insolvency event had not been tied
of the MLA and JVA had not been linked: to the giving of notice: had the MLA The Mezzanine Lenders were
had the notice provisions been removed simply had a standard provision subordinated to the Senior Lenders
so that the clause became a general for termination on insolvency, then under an Intercreditor Agreement (the
insolvency clause, the deprivation according to the principles set out in “Intercreditor”) dated 8 February 2006.
principle would have had no application. Money Markets it would not have been Under the terms of the Intercreditor,
The MLA could only be terminated subject to the deprivation principle. the debt owed to the Senior Lenders
on an Insolvency Event and if BBCW ranked first and the debt to the
issued a notice that it wanted to acquire Significantly, he disagreed with a point Mezzanine Lenders ranked second.
the shares in Entertain. The automatic raised in Perpetual Trustee (para 44): The Mezzanine Lenders could not be
termination was solely for the purpose in his view, the fact that a significant repaid until the Senior Lenders had
of ascertaining the fair value under the number of commercial contracts had been paid in full.
JVA. It therefore provided a situation been drafted without considering
whereby, on insolvency, the shares the possible impact of British Eagle The Intercreditor included a provision
would be obtained by BBCW at a lower was not a reason for disapplying it. enabling the creditors to release
value than it would have to pay for them However, he recognised that this security and release liabilities in respect
under any other circumstances. It was was a policy issue and an area which of any enforcement action by any of the
self evident that Entertain would not needed clarification (para 135). creditors provided that the proceeds
have much of a business if the MLA were applied to pay the Senior Lenders
were to be terminated. SCHEMES out first.
He held that together, the Termination In the matter of Bluebrook Ltd, IMO The sanction for the scheme of
Clauses infringed the deprivation (UK) Ltd, Spirecove and in the matter arrangement would enable the group
principle and were void as a matter of the Companies Act 2006 [2009] to be restructured. Certain companies
of public policy. He reconsidered his EWHC 2114 (Ch) within the group would be placed into
decision in the light of the decision in Executive summary administration prior to transferring
the Perpetual Trustee case, but saw A company seeking sanction for a their assets to a restructured group.
no reason to change it. scheme of arrangement is not required Following the transfer, only £12 million
to consult a class of creditors that lacks of the debt owed to the Senior Lenders
Comment any economic interest in the outcome would remain in the existing group,
This was a tricky case which was of the scheme. the remaining debt having been
made more complicated as time went transferred to a Newco.
by. It seems likely from an early stage The facts and decision
that the Administrators were aware of Bluebrook was the holding company of a The scheme proposals only involved a
the argument that the clauses of the group of companies operating a carwash compromise with the Senior Lenders;
MLA and JVA read together could be business. IMO and Spirecove were its the Mezzanine Lenders were not
construed as being void, but thought it a indirect subsidiaries. Bluebrook owed involved in the discussion. This was
weak argument to run. When they finally £313 million to a consortium of lenders on the basis that the Mezzanine
did bring it up and Video was brought into (the “Senior Lenders”). The debt was Lenders lacked any economic interest
proceedings, the waters were muddied guaranteed by IMO and Spirecove in the group because the value of
by the fact that judgment in the Perpetual and secured against debentures the assets was significantly and
Trustee case had just been delivered. executed by the group companies. demonstrably less than the value of
the debt owed to the Senior Lenders.
Both these cases required consideration Following debt restructuring
of the British Eagle principle and negotiations, the court’s sanction The Mezzanine Lenders contended
Neuberger J’s judgment in Money was sought for three schemes of first, that the schemes should notBusiness Restructuring and Insolvency Quarterly November 2009 7
be sanctioned on the basis that they Finally, the judge had to consider by LBIE included executing securities
would have no prospect of benefiting whether this was a “compromise or and derivatives trades as well as
from the assets and second, that arrangement“ for the purposes of clearing and settling trades.
the valuation was too low. section 899 Companies Act 2006.
He concluded that it was. The Administrators had sought to
PricewaterhouseCoopers had been establish the net financial position as
instructed by the scheme companies He held that it was right to sanction between LBIE and its various clients at
and had valued the business at the schemes. the date it went into administration or
£265 million. The Mezzanine Lenders later in the case of financial contracts
had obtained a report from LEK Comment which were still open at that time.
Consulting which valued the business This judgment provides a useful This had involved making enquiries of
at £330 million. On this basis, the value reiteration of the principles relating almost two thousand account holders
of IMO “broke” in the Mezzanine to the approval of schemes of thought to have claims against LBIE.
tranches of IMO’s debt structure. arrangement. The Mezzanine Lenders
clearly wanted to force the Senior Although the Administrators held
The judge considered the principles Lenders to do a deal with them, but assets on trust for LBIE’s clients, it was
applicable to schemes of arrangement. the Senior Lenders’ legal position not clear how they should deal with
First, a company was free to choose was unassailable. those funds. Distributing the property
the creditors with whom it wished could result in claims being brought
to enter into an arrangement. It was Of significance in this case was the against LBIE for breach of trust and to
therefore appropriate for the company fact that the Intercreditor allowed the related claims being brought against
to enter into an arrangement with the security and guarantees to be released the Administrators. Any clients who
Senior Lenders to the exclusion of the in enforcement proceedings: without received assets could in turn face
Mezzanine Lenders. Second, it was not this release, the administration would proprietary claims from other clients in
necessary for a company to consult not have been able to get off the ground. respect of the assets they received.
any class of creditors which was not
affected either because its rights are In the matter of Lehman Brothers The Administrators’ mechanism for
not affected or because it has no International (Europe) (in dealing with claims was extremely
economic interest in the company. administration) and in the matter of cumbersome: amongst other things,
The Mezzanine Lenders were, however, the Insolvency Act 1986 and in the it required the Administrators to
entitled to object on the grounds of matter of the Companies Act 2006 determine how any shortfalls in
unfairness, if it could be shown that the [Note that this decision has been assets were to be shared between
schemes unfairly affected them in ways confirmed by the Court of Appeal – clients; to determine the terms of
other than altering their strict rights. see the Stop Press! Article later in a client’s contract in the absence of
this Newsletter] documentation; to terminate open
The judge had misgivings as to the contracts to finalise a client’s overall
soundness of the valuations provided Executive summary financial position; to apply set-off in
by LEK Consulting. He concluded The court did not have jurisdiction to each case; and to agree valuations
that the evidence was not sufficient bind dissentients under a scheme of for derivatives and other complex
to establish that the Senior Lenders arrangement where the administrators instruments. Once the Administrators
were obtaining an unfairly good deal. of an insolvent company sought to had decided to pay out assets to a
distribute trust property in a way that client, they then had to require the
The judge went on to consider would vary or possibly extinguish client to enter into a deed requiring
allegations made by the Mezzanine clients’ proprietary rights. the client to return the assets in the
Lenders that the directors were event that the assets should not,
somehow in breach of their duty to The facts and decision in fact, have been handed over to them.
creditors. He considered that these In September 2008 Lehman Brothers It was time consuming and costly
allegations were both vague and International (Europe) (“LBIE”) and did not meet clients’ needs.
unfounded: the boards of the companies went into administration. One of
had at all times had independent LBIE’s major business areas was The Administrators had therefore
professional advisers working with acting as prime broker to a number proposed a scheme of arrangement
them to ensure that any decisions they of institutional investors, including under Part 26 Companies Act 2006
made were unbiased and independent. hedge funds. The services supplied (“Part 26”) between LBIE and certain8 Business Restructuring and Insolvency Quarterly November 2009
Legal update – London
scheme creditors in order to speed up accepted) that the Scheme would entitled to expect his property to be
the return of assets to LBIE’s creditors. interfere with a client’s property rights dealt with in accordance with the terms
They applied to the court to determine in assets held for that client on a of the trust.
whether the scheme was one which fiduciary basis by LBIE. It was clear
the court had jurisdiction to sanction. that this could happen against the Although the existence of the creditors’
will of the client, as a Companies Act claims provided the basis for a scheme
The Administrators recognised that if scheme only required 75% in value of arrangement, it did not justify
the scheme could not be implemented, of the creditors or class of creditors interference with the underlying
then either another scheme would to approve it (subject to the correct property rights of the property owner.
have to be put together or they would identification of the class or classes
have to make numerous applications of creditor and the court’s sanction). Clearly this judgment must have been
to the court for directions. a blow for the Administrators who
The issue was whether a scheme to were hoping to achieve a quick and
The judge considered the outline distribute assets held by LBIE on trust certain resolution to some very difficult
terms of the proposed scheme. for clients and under which LBIE was problems. However, all may not be
It was intended to deal with “Scheme empowered to interfere with those lost: the judge questioned whether the
Creditors” being parties who had a claim clients’ property rights without their obstacles the Administrators faced were
against LBIE at the time it went into consent was within the scope of insuperable – there may be other ways
administration in respect of “Segregated Part 26. forward. As he pointed out “the court
Assets.” Segregated Assets were is well used to authorising a trustee
assets which were held separately from The judge considered that, in this to make distribution of a fund where
LBIE’s own securities. The Scheme case, the Scheme was concerned there can be no certainty that all of the
would only concern those with with LBIE discharging its obligations claimants to it have been identified and
proprietary claims, so unsecured to clients in respect of client property. the trustee desires the protection of a
creditors were excluded. The subject He therefore had no choice other than court order in the event that a further
matter of the Scheme was “Trust to hold that the extinction of property claimant should subsequently appear
Property” which included Segregated rights and their replacement with or matters subsequently come to light
Assets as well as assets which were rights under the Scheme was not a which question the basis on which
derived from the Segregated Assets and compromise or arrangement made with the distribution is made” (para 77).
assets which were delivered to LBIE by a client “in his capacity as a creditor” You never know, it might be cheaper too.
someone with an obligation to do so. and to that extent it fell outside the
jurisdiction of the court under Part 26. NORTHERN ROCK
The Scheme required a Scheme Creditor
to release all its claims against LBIE, Comment (1) SRM Global Master Fund LP (2)
the supervisors, the Administrators The judge was persuaded by the RAB Special Situations (Master) Fund
and other Scheme Creditors. In return, arguments of counsel for the London Ltd (3) Dennis Grainger and Others v
the Scheme Creditor would be given a Investment Banking Association, who Commissioners of Her Majesty’s
“New Claim”: essentially a summary of had challenged the proposed Scheme Treasury [2009] EWCA Civ 788
its net contractual position as against (para 58). As counsel identified, Part 26 Executive summary
LBIE. The Scheme Creditor then had a is concerned with the general estate of The basis for the valuation of the shares
right to a proportionate claim in the a company and cannot override trust in Northern Rock plc under the Northern
Trust Property. principles. Each creditor’s claim against Rock plc Compensation Scheme Order
the estate ranks pari passu with other 2008 was fair and did not breach article
A “Bar Date” would be set, after creditors’ claims and so it is logical for 1 of the First Protocol to the European
which a claim could still be lodged, Part 26 to enable creditors to agree with Convention on Human Rights.
but the claimant would not be able each other, by majority, to rearrange or
to participate in the Trust Property compromise their claims against the The facts and decision
until such time as all the other claims company, because all those claims will This was an appeal by the shareholders
submitted before the Bar Date had be satisfied by the company (para 52). of Northern Rock (the “Appellants”)
been satisfied. against a decision of the Divisional
The position of a person who has Court. The court had dismissed the
The judge concluded (and counsel placed his assets with a trustee is Appellants’ claims for judicial review of
for the Administrators had freely totally different: the beneficiary is the basis of valuation of the shares inBusiness Restructuring and Insolvency Quarterly November 2009 9
Northern Rock plc under the Northern The appeal was dismissed unanimously to conclude that the State’s judgment
Rock plc Compensation Scheme by the Court of Appeal. as to what was in the public interest
Order 2008. The statutory scheme was manifestly without reasonable
was made under the Banking (Special Laws LJ identified three principles of foundation. That was not the case here.
Provisions) Act 2008 (the “2008 Act”). jurisprudence that were relevant in
this case. These were: first, the need Comment
The court had held that the basis of for a fair balance to be struck between This is an unsurprising ruling. The most
assessment under the Compensation public interest and private right; second, compelling part of the Appellants’
Scheme was fair and did not the principle of proportionality; and argument was that Northern Rock had
breach article 1 of the First Protocol third, the doctrine of the margin of substantial assets. In the Appellants’
to the European Convention on appreciation. In his view, the need view, this meant that it was manifestly
Human Rights (“Article 1” and the to strike a balance between public disproportionate for the State to take
“ECHR”). (For further background interest and private right was the the benefit of Northern Rock’s value on
see the March 2009 Bulletin.) overarching principle. The other two nationalisation and then collect a profit
principles provided the means by which on re-sale whilst the shareholders
The Appellants’ contention was that, the balance was to be struck. In the got nothing.
under the Compensation Scheme, context of Article 1, proportionality
they would get nothing for their shares would ordinarily mean that where Counsel for the Appellants raised
when in fact they were valuable assets. property had been confiscated, the arguments of unjust enrichment and
They sought a declaration under person who had been deprived would drew parallels with the law of salvage.
section 4 of the Human Rights Act 1998 be paid an amount reasonably related Laws LJ was unconvinced. The purpose
(the “HRA”) that the material terms of to the value of the property. However, of the law of salvage was to confer a
the 2008 Act and the Compensation this would be qualified by the margin benefit on the owner of the salvaged
Scheme Order were incompatible of appreciation: it was necessary to property, whereas the purpose of the
with their rights under Article 1. acknowledge the claims of government government assistance to Northern Rock
policy on democratic grounds, albeit (by way of LOLR) and its nationalisation
The Appellants challenged both the within the frame of the ECHR. was purposely not intended to benefit
assumptions made under section 5(4) the shareholders of Northern Rock.
of the 2008 Act in determining the In his judgment, the Lender of Last Its purpose was intended to rescue
amount of compensation payable by Resort (“LOLR”) support given to the national economy.
the Treasury to the Northern Rock Northern Rock by the government
shareholders. The assumptions were: was given entirely for the protection The case sets out a useful summary
first, that all financial assistance of the banking system and the general of the principles of human rights
provided by the Bank of England and economy and was not at all in the jurisprudence applicable to this area.
the Treasury to Northern Rock had been interests of Northern Rock itself or
withdrawn; and second, that neither the its shareholders. The decision to MISCELLANEOUS
Treasury nor the Bank of England would nationalise the company was an
provide Northern Rock with any future exercise of government policy with (1) Gresham International Limited
financial assistance. The Appellants a view to preserving the national (in Liquidation (2) Louise Mary
contended that the consequence economy and minimising costs to the Brittain (as Liquidator) v William
of these assumptions was that the taxpayer. It was correct to say that the Thomas Moonie and others [2009]
shares would be valued on the basis purpose of the section 5(4) assumptions EWHC 1093 (Ch)
of a forced sale, and that the valuer was to put the shareholders in the Executive summary
appointed under the Compensation position they would have been in if no The court has a power under its
Scheme would be most likely to government support had been provided. supervisory role in a compulsory
conclude that the value of the shares winding up to grant retrospective
was nil. He held that, in this case, the margin of sanction to a liquidator in respect of
appreciation had to be a wide one. As proceedings under the Insolvency Act
Counsel for the Treasury argued that the in the cases of James and Others v UK 1986 even if the statutory requirements
test for ECHR compliance that should be [1986] 8 EHRR 123 and Lithgow and for a retrospective winding up have
applied to the section 5(4) assumptions Others v the United Kingdom judgment not been made out.
was whether they were manifestly of 8 July 1986, Series A no.102 the
without reasonable foundation. court would only interfere if it were10 Business Restructuring and Insolvency Quarterly November 2009
Legal update – London
The facts and decision the liquidation committee seeking a recoup her costs out of the company’s
Gresham International Limited sanction, she failed to ask for it to be assets under Rule 4.218(1)(A).
(“Gresham”) was a wholesale drinks retrospective. The sanction had not
distributor. Following the presentation of materialised before two members of Having reviewed the authorities,
a petition by HMRC (then HM Customs the liquidation committee resigned, the judge held that the Sanction was
and Excise) it was compulsorily wound rendering the Committee inquorate ineffective. In his view, the court had
up by the court on 22 May 2003. and incapable of acting. The functions power, under its supervisory role in
of the liquidation committee devolved a compulsory winding up, to make
The Applicants (Gresham and its to the Secretary of State in accordance orders the effect of which would
Liquidator) sought the following with section 141(5) of the 1986 Act. be to grant retrospective sanction,
declarations and orders. First, they The Secretary of State was then despite the requirements not being
sought a declaration that a sanction required to sanction the proceedings. made out. On this basis, he could
granted to the Liquidator by the grant a retrospective sanction under
Secretary of State on 13 August 2007 When the Liquidator applied to the the court’s supervisory powers.
(the “Sanction”) for the bringing of legal Secretary of State, the proceedings had
proceedings (as specified in the Sanction) been running for almost three months, The judge granted the Liquidator a
was valid and that the Liquidator was but the application did not mention prospective sanction for all claims she
entitled to an indemnity out of the this point. Despite this omission, the wished to bring, but refused to grant a
assets of Gresham in respect of costs preamble to the application nonetheless retrospective sanction for costs incurred
and adverse costs orders arising from stated that a “request for sanction up to that point. His refusal was on the
those claims. Alternatively, they sought should not be made retrospectively basis that the Liquidator’s failure to ask
an order that the Court would sanction except in emergency in which case no for a retrospective sanction in the
the claims in accordance with s167(1)(a) undue delay should occur in applying first place was not a mere matter
and Schedule 3 Insolvency Act 1986 for sanction.” (Section 314(4) of of inadvertence.
(the “1986 Act”) and grant the the 1986 Act and Rule 4.184(2).)
Liquidator an indemnity in respect of Comment
them. Finally, they sought an order The evidence indicated that the The judge was clear that the court
sanctioning prospective new claims Secretary of State thought that he had a supervisory role in managing
with an indemnity in respect of them. was considering an application for compulsory winding up orders and
proceedings to be commenced bankruptcies. He recognised the
The claims related to a series of prospectively and would not have argument that it could be said that this
property transfers made by Gresham granted a retrospective sanction on the gave a strong discretionary power to
to various of the Respondents. basis that the urgency requirement the court that might be used to override
The Applicants estimated that the had not been made out. statutory requirements. He did not
likely recovery would be £4 million consider this to be a problem as the
with costs at around £150,000. The Sanction was given for the court would always act appropriately in
commencement of specific legal the circumstances and there would be
The application had been brought as proceedings set out in the Liquidator’s no question of the power being invoked
a result of “accidental omissions” application and costs were capped every time there was non-compliance.
by the Liquidator in applying to the at £150,000. However, the Sanction
Secretary of State for the Sanction. did not include the full list of claims Alan Lovett, Geoffrey Lambert
brought by the Liquidator. Carton-Kelly v Carson Country
The power to bring legal proceedings Homes Ltd and Others [2009] EWHC
against the Respondents required The parties agreed that the failure 1143 (Ch)
the sanction of either the court or the to obtain a proper sanction did not Executive summary
liquidation committee under Schedule 4 affect the validity of the proceedings; Where a debenture in favour of a bank
Part 1 para 3A of the 1986 Act. it simply prevented the Liquidator from had been executed by two company
recovering costs out of the assets of directors and one of the signatures
However, the Liquidator began the company in the event that she had been forged, the debenture was
court proceedings against the failed to recover costs from a third nontheless deemed to be validly
Respondents before seeking the party (London Metallurgical Company executed as the bank was a purchaser
sanction of the liquidation committee. [1897] 2 Ch 262). Usually, a Liquidator for the purposes of section 44(5)
Although the Liquidator wrote to conducting litigation would be able to Companies Act 2006.Business Restructuring and Insolvency Quarterly November 2009 11
The facts and decision and that Mr Carter had not minded as context the innocent suffer: the
On 21 January 2009, joint long as he was aware of the general shareholders and the creditors on one
administrators (the “Administrators”) terms of the underlying transaction. hand if the transaction is held binding;
were appointed by Barclays Bank plc Mr Jewson did not deny that had the innocent third party purchaser on
(the “Bank”) over Carson Country signed the documents in question the other hand if it is not. To favour the
Homes Limited (“CCH”) under a in order to return the documents to latter, provided and crucially he acts
debenture dated 10 June 2008 and the Bank as quickly as possible. in good faith and is not put on inquiry
purportedly executed by CCH in favour as to wrongdoing, is not unprincipled.
of the Bank. CCH was a property The judge considered whether Indeed, it means that the company has
development company. Mr Jewson had “actual authority” from to take the consequence of employing
Mr Carter to execute the guarantee a dishonest director or servant and it
Following the appointment of the and debenture and whether he had is for the company to look for redress
Administrators, Mr Carter, a director agreed in principle that CCH should from the individual” (para 80).
and shareholder of CCH, claimed execute them. He concluded that
that a signature on the debenture Mr Carter had not been aware of In the matter of Bangla Television
purporting to be his, had been forged the existence of the guarantee and Limited (in liquidation) and in the
by a second director and shareholder debenture until November 2008 and matter of the Insolvency Act 1986
of CCH, Mr Jewson. It was common that as Mr Carter would have objected [2009] EWHC 1632
ground that Mr Jewson’s signature, to their execution, Mr Jewson did Executive summary
which also appeared on the debenture, not have his actual authority. The fact that an order of the District
was valid. Mr Carter contended that Judge failed to deal specifically with an
the debenture was a nullity and that, The judge then considered section 44(2) issue of wrongful trading raised at trial
consequently, the Administrators Companies Act 2006 which states that did not mean that the wrongful trading
had not been properly appointed. a document is validly executed by a issue was res judicata as the District
company if it is signed on behalf of the Judge had yet to try that aspect of
The debenture had been executed company by two authorised signatories. the case because further submissions
following a meeting between the Under section 44(3), a director is an and evidence were required.
Bank and Mr Jewson in June 2008, authorised signatory. Section 44(5)
when the Bank had raised concerns protects a purchaser: a document is The facts and decision
over the financial position of CCH. deemed to have been validly executed Bangla Television Limited (“Bangla”)
The executed debenture had been by a company if it purports to be signed was wound up voluntarily on
sent to the Bank by Mr Jewson along in accordance in with section 44(2). 23 December 2003, owing £5,600 to
with a guarantee which also bore preferential creditors and over £1 million
Mr Carter’s purported signature. The judge held that the Bank, which had to its unsecured creditors. Shortly
acted in good faith, was a purchaser before it was wound up, it entered
Around this time, the relationship for the purposes of section 44 and into a Business Sale Agreement (the
between Mr Jewson and Mr Carter the fact that the document had been “BSA”) which provided that, other
started to break down. During the forged did not affect this position. than some excluded assets, Bangla’s
next few months, their relationship The Administrators had therefore been assets, which were then worth £25,000,
deteriorated further. When the Bank validly appointed. would be transferred to a company
became aware of this in November 2008 (“BTVL”). Despite the terms of the
it called in its loans and when the parties Comment BSA, the assets were transferred for
failed to reach a compromise, it enforced This case provides helpful commentary no consideration, so that the BSA was
the debenture in January 2009. on the new Companies Act. The judge a transaction at an undervalue for the
noted that the wording would, at first purposes of section 238(4)(a) of the
As soon as Mr Carter’s concerns came sight seem to be capable of validating Insolvency Act 1986 (the “1986 Act”).
to light, the Administrators applied to the a document (in favour of a purchaser) BTVL subsequently went into liquidation.
court for a declaration as to the validity, where there had been fraud or forgery
or otherwise, of their appointment. if it purported to be signed accordance In 2004, Bangla’s liquidator (the
with section 44(2). “Nor would such “Liquidator”) applied to court for
The evidence indicated that Mr Jewson a conclusion be without purpose or a declaration that the BSA was a
had been in the habit of signing sense: for notoriously where fraud or transfer at an undervalue and sought
documents on behalf of Mr Carter forgery is concerned in a company declarations against Mr Khan and12 Business Restructuring and Insolvency Quarterly November 2009
Legal update – London
Mr Haque who were the directors Hardy v McLoughlin and another David Richards J made an order in
of Bangla that they were liable for [2009] EWHC 944 (Ch) respect of each of the three CVA
wrongful trading under section 214 Executive summary companies that the administration order
of the 1986 Act. The District Judge The court has jurisdiction to set aside be discharged under section 18 of the
resisted the Liquidator’s application an order for the discharge and release Insolvency Act 1986 (the “1986 Act”)
for summary judgment on the basis of Administrators under sections 18 and and that the Administrators be released
that further evidence was required 20 of the 1986 Act provided that the from liability under section 20 of the
to determine the form of order he application is brought by someone with 1986 Act.
should make. appropriate locus standi and who has
a strong case that the administration Newscreen went into members’
The trial took place in 2006. Although was conducted fraudulently or that the voluntary liquidation in May 2004 as
an order was drawn up on 8 February discharge orders were obtained by fraud. part of the reconstruction process, with
2007, it was never sealed. In deciding its assets and liabilities being hived off
on the form of the order, the District The facts and decision to Think Entertainment plc (“Think”).
Judge did not make an order in The respondents, who were both Mr Hardy claimed that he was
respect of the wrongful trading issue partners in KPMG LLP (“KPMG”) appointed to represent Think under a
on the basis that there had been little were appointed as administrators Power of Attorney. It became clear that
discussion of the issue before him. (the “Administrators”) of Newscreen Newscreen could not meet its liabilities
Media Group plc (“Newscreen”) and it went into creditors’ voluntary
The judge was invited to make the and the other companies within the liquidation in 2005.
order drafted by the District Judge Newscreen group (the “Group”).
and did so. The order contained The Group owed National Westminster Another company within the Group
a declaration that the BSA was a Bank plc (the “Bank”) £10.45 million, that had remained in administration
transaction at an undervalue and secured by debentures and unlimited (“EDI”) was left holding third party
provided, amongst other things, cross guarantees across the group. funds amounting to £506,130. This sum
that further directions as to the conduct was subject to competing claims from
of the case should be sought from In June 2002, the Administrators a number of parties including the
the Registrar. proposed a company voluntary liquidators of Newscreen. Mr Hardy
arrangement (“CVA”) in relation to claimed that this amount included
The Liquidator sought to pursue the three of the companies within the the £322,000 held in escrow for the
section 214 claim. Mr Khan pleaded Group with a view to enabling them three CVA companies under the
that the matter was res judicata and to continue to trade. They sent a CVA proposals.
that pursuing the matter further would conditional share offer to shareholders
be an abuse of the process of the court. inviting them to apply for shares in The EDI Administrators applied to court
Newscreen. The subscription funds for directions as to how the money
The judge held that it was clear that were held by Mishcon de Reya and should be applied. Mr Hardy purported
the Deputy Judge did not intend by were used to assist in securing the to represent Think under a Power of
his ruling or the order giving effect agreement of the creditors to the CVA. Attorney and argued that all the funds
to it that the Liquidator should be were trust monies which had been
precluded from pursing the claim Under the terms of the CVA, it was appropriated by the EDI Administrators.
against Mr Khan under section 214. stated that £322,000 raised by the
shareholders would be held in escrow The EDI application was heard by
On the facts, he held that both the pending the determination of the Mr Registrar Nicholls on 17 July 2007
directors were liable for wrongful validity of the Bank’s fixed charge over who made an order that, following
trading as they knew or ought to book debts. In the event that the charge payment of the Respondents’ costs,
have concluded that there was no was found to be valid and to the extent 60% of the balance should be paid
reasonable prospect that Bangla would that there was no remaining shortfall to HMRC and the remaining 40%
avoid going into insolvent liquidation. to the Bank, the funds would be to Newscreen.
They were jointly and severally returned to the three CVA companies,
liable to contribute to the assets of which Newscreen was one. Seven months later, Mr Hardy issued an
of Bangla in the sum of £250,000 application to set aside the judgment.
(the value of the assets transferred The CVA proposals were approved in He did not attend the hearing of this
under the BSA) plus interest. August 2002 and on 23 April 2004, application which was dismissed.You can also read
