Grant & Ors v WDW 3 Investments Ltd & Anor

A contractual reference to a financial institution may include a legally recognised entity whose business concerns commercial finance, even if it is newly incorporated, non-trading, lightly capitalised or unregulated. Under an ISDA Master Agreement, the parties’ status as defaulting or non-defaulting parties is assessed by reference to the particular Event of Default relied upon. A party may therefore terminate for a later default even though it previously committed an unexercised default. Security may secure an early termination amount owed to a hedging counterparty even where the entitlement to receive that amount and the security have been assigned to different entities, provided the chargee has a specifically enforceable right to appropriate the charged property towards the debt.

The joint administrators of Olympia Securities Commercial Plc sought directions under paragraph 63 of Schedule B1 to the Insolvency Act 1986. The application concerned whether WDW 3 Investments Ltd was a secured creditor for an early termination amount of £6,324,214.50 arising from interest rate swaps originally entered into with IBRC.

The court had to determine whether WDW qualified as a financial institution for the purposes of the facility agreement, whether IBRC could terminate the swaps after the company’s default despite IBRC’s earlier bankruptcy Event of Default, and whether the resulting liability was secured by the debenture.

1. Issue 1 — financial institution. The phrase was ambiguous and had to be construed using the contractual language, documentary and commercial context, and the principles stated in Wood v Capita Insurance Services Ltd [2017] UKSC 24, Arnold v Britton [2015] UKSC 36 and [2015] AC 1619, and Rainy Sky SA v Kookmin Bank [2011] UKSC 50 and [2011] 1 WLR 2900. Following the majority approach in Argo Fund Ltd v Essar Steel Ltd [2006] 1 CLC 546, a financial institution meant a legally recognised entity carrying on business in accordance with the laws of its place of creation whose business concerned commercial finance. It was unnecessary for the entity to conduct regulated finance, lend money, trade actively or possess a particular level of capital. WDW therefore fell within clause 23.2.
2. Issue 2 — early termination. The clause 6(a) power was permissive. The terms Defaulting Party and Non-defaulting Party referred to the particular Event of Default relied upon for termination. IBRC’s earlier bankruptcy Event of Default suspended the company’s payment obligations under the swaps, but did not itself terminate the agreement or prevent IBRC from later relying on the company’s failure to repay the facility. Applying Lomas v JFB Firth Rixson Inc [2013] 1 BCLC 27, and MHB-Bank AG v Shanpark Ltd [2015] EWHC 408 (Comm) and [2016] 1 BCLC 527, the notice was valid and the early termination amount became payable.
3. Issue 3 — security. The debenture secured liabilities owed to the lender and/or hedging counterparty. Applying the principle in Re Lehman Brothers International (Europe) (In Administration) [2012] EWHC 2997 (Ch), a chargee need only have a specifically enforceable right to appropriate the charged property towards the relevant debt; it need not itself be the creditor or trustee for the creditor. WDW could therefore enforce the debenture for the amount payable to MHB. Early termination replaced the primary swap obligations with a secondary obligation that remained a liability under the ISDA arrangements and within the security.
4. The court concluded that WDW was a financial institution, IBRC was entitled to terminate the swaps, the company was liable for the early termination amount, and that amount was secured by the debenture. Costs and any further directions were reserved for a later hearing.