Re Kaupthing Singer & Friedlander Ltd

For contractual subordination provisions, “winding up” may extend beyond formal voluntary or compulsory liquidation where the contract, objectively construed, shows that the parties intended subordination to operate during an equivalent statutory distribution process. The court must consider the commercial purpose of the instrument, but must not replace the parties’ objective intention with its own view of commercial sensibility. Where an administration has entered the distribution stage under paragraph 65(3) of Schedule B1 to the Insolvency Act 1986, and the administrator is distributing to unsecured creditors in a manner functionally equivalent to liquidation, subordinated debt ranks behind senior liabilities.

Kaupthing Singer & Friedlander Ltd was in administration. Its joint administrators sought directions concerning a £50 million subordinated bond claim submitted by Prudential Trustee Company Ltd on behalf of the bondholders.

The bonds provided that, in the event of the issuer’s “winding up”, bondholders’ claims were subordinated to the issuer’s Senior Liabilities. The administrators had obtained permission under paragraph 65(3) of Schedule B1 to the Insolvency Act 1986 to distribute to unsecured creditors and had begun making interim distributions. The central issue was whether that distribution-stage administration constituted a “winding up” for the purposes of the bond terms.

1. Construction. The expression “winding up” ordinarily has the technical meaning of voluntary or compulsory liquidation under the Insolvency Act 1986. That presumption may be displaced by the contractual context.
2. The bonds were expressly subordinated and intended to form part of KSF’s regulatory capital. Their purpose required bondholders to receive nothing until unsubordinated creditors had been paid in full. The regulatory context supported that construction.
3. The distribution process authorised under paragraph 65(3) of Schedule B1 was, in substance, equivalent to distribution by a liquidator in a winding up. The administrator was performing a function similar to that of a liquidator, using machinery modelled on liquidation rules.
4. Objectively construed, “winding-up” in Condition 2(a) therefore included an administration in which notice of a proposed distribution to creditors had been given under rule 2.95 of the Insolvency Rules 1986. It would be pointless to require conversion into liquidation merely to activate the agreed subordination.
5. The same interpretation applied to “winding up” in the definition of “Insolvency” and the related events of default. The court did not need to determine the alternative arguments on implied terms or valuation.

A declaration was made giving effect to that conclusion in relation to the Trustee’s claim.