Broker-dealer company MF Global UK Limited (MFGUK) entered special administration following an administration order in 2011 and by 2014 most of its debts had been paid at a rate of 90p to the pound. A company voluntary arrangement (CVA) was proposed as a means to reduce the operational costs of the administration.
The CVA terms were novel and innovative and created a mechanism for certain 'participating creditors', represented by Attestor Capital, to buy out the claims of the 'exiting creditors', represented by the Financial Services Compensation Scheme (FSCS), in return for an increased entitlement in the administration. MFGUK was potentially entitled to certain reclaims rebates which the participating creditors wished to be able to benefit from by remaining within the administration estate.
In January 2018 a new indemnity claim was submitted by Deutsche Bank (DB) and was disputed by the administrators. The claim was valued at up to €126m and if successful would wipe out any benefit to the participating creditors.
The CVA included a clause, a condition precedent, which said that any 'disputed claims' which remained following the end of the CVA challenge period would prevent the CVA from being implemented unless the administrators confirmed that such a claim 'should not preclude the CVA from becoming effective'. Under the CVA, disputed claims are those claims submitted on time which have not been accepted by the administrators nor dropped by the person making the claim. The parties agreed this included DB's indemnity claim.
The FSCS said that the administrators should give the confirmation that the CVA should become effective, whereas Attestor argued the opposite. The administrators were faced with creditors with opposing interests so, remaining neutral, applied for directions from the court.
The High Court found that the emergence of the claim did not preclude the CVA from being implemented. The court sided with the FSCS's interpretation of the relevant condition precedent. The FSCS said that that clause was intended only to deal with potential challenges of the CVA under section.6(3)(b) Insolvency Act 1986, which dealt with court challenge deadlines for people who had not been given notice of a creditors' meeting. There was no such challenge in this case so this was no bar to the CVA being implemented and the court directed the administrators accordingly.
The Court of Appeal overturned this decision and found in Attestor's favour. Taking into account the difficulties with both interpretations of the clause, the judge dismissed the argument put forward by the FSCS as being improbable. Had the intention been to address the problem of section 6(3)(b) challenges then this would have been made expressly clear and the relevant clause's language made no suggestion that was its intention.
Attestor's argument suited the commercial purpose of the CVA. The clause was intended to ensure that if the underlying economics of the CVA at the time of its approval were materially altered then the CVA could and should not proceed.
The condition precedent required the administrators to make a value judgment as to whether or not the disputed claims would preclude the CVA from taking effect. A material increase in claims could be regarded as changing the basis on which the creditors voted in favour of the CVA and the administrators would have to consider if it would be fair to continue with the CVA.
Ainslie Benzie is a restructuring expert at Pinsent Masons, the law firm behind Out-Law.com