Re Kaupthing Singer & Friedlander Ltd

The court was asked to decide whether the term "winding up" in the Terms and Conditions of £50,000,000 subordinated bonds referred only to voluntary or compulsory liquidation or also to an administration in which a notice of proposed distribution to unsecured creditors has been given under Schedule B1, paragraph 65, Insolvency Act 1986. The judge held that, on an objective construction, "winding up" in Condition 2(a) extends to an administration where a notice of a proposed distribution has been given (the paragraph 65(3) process). The decision relied on the express intention that the bonds were subordinated and designed to qualify as regulatory capital, and on the functional equivalence of the administrator's distribution machinery to a liquidator's distributions. The court therefore declared that the Trustee's claim dated 22 April 2009 is subordinated accordingly. The court did not determine submissions on implied terms or valuation as they became unnecessary.

Background and parties: Kaupthing Singer & Friedlander Ltd ("KSF"), an English-incorporated bank and subsidiary of an Icelandic bank, was placed in administration on 8 October 2008. The joint administrators sought directions under the Insolvency Act 1986, Schedule B1, paragraph 63, on how to treat a proof submitted by the Prudential Trustee Company Ltd as trustee for the holders of £50,000,000 7.5% subordinated bonds due 2019 constituted by a Trust Deed dated 13 November 2003.

Nature of application: The administrators applied for a declaration that, on the proper construction of the Trust Deed, the bondholders' claims are subordinated in any administration in which a notice of a proposed distribution to unsecured creditors has been given (the Schedule B1, paragraph 65(3) process), so that the Trustee's claim should not be admitted for dividend until senior liabilities are paid in full. Alternatively the administrators sought an implied term to that effect or, failing that, that the Trustee's claim should be given nil value pending conversion to liquidation.

Issues framed:

• Whether the word "winding up" in Condition 2(a) and the definition of "Insolvency" in the Trust Deed should be given a conventional technical meaning limited to voluntary or compulsory liquidation, or whether it also covers an administration after engagement of the paragraph 65(3) distribution process;
• Whether a term to that effect should be implied into the Trust Deed;
• If not, how the Trustee's claim should be valued for the purposes of distributions in the administration.

Court's reasoning and conclusion: The court accepted that "winding up" is a technical legal term but emphasised that construction is objective and must give effect to the parties' commercial intention. The Bonds were repeatedly described as subordinated and were issued to strengthen KSF's regulatory capital; accordingly it was essential that the subordination be effective in the process by which unsecured creditors receive distributions. The court agreed that the paragraph 65(3) distribution mechanism is functionally equivalent to a liquidator's distribution and that it would be pointless to require a formal liquidation to achieve the intended subordination. On that basis the judge concluded that "winding up" in Condition 2(a) covers an administration where a notice of proposed distribution to unsecured creditors has been given. A declaration to that effect was to be made in respect of the Trustee's 22 April 2009 claim. Because that conclusion resolved the dispute, the court did not decide the implied term or valuation arguments.

Wider context: The judgment recognises the changed insolvency landscape after the Enterprise Act 2002 and the practical importance of giving effect to subordination provisions so that instruments can serve as regulatory capital.

The court declared that the term "winding up" in Condition 2(a) of the Bonds (and the definition of "Insolvency") extends to an administration in which a notice of a proposed distribution to unsecured creditors has been given under rule 2.95/paragraph 65(3) IA 1986. Accordingly the Trustee's claim of 22 April 2009 is subordinated to the issuer's Senior Liabilities in that context. The judge relied on the objective commercial purpose of the subordination (including qualification as regulatory capital) and the functional equivalence of the paragraph 65(3) distribution process to a liquidation; implied terms and valuation were not decided.