Heis & Ors v Financial Services Compensation Scheme Ltd & Anor

The Court of Appeal interpreted paragraph 3.1(e) of the company voluntary arrangement (CVA) for MF Global UK Ltd as requiring the administrators to form a substantive value judgment before confirming that the continued existence of disputed claims after the CVA Challenge Period should not preclude the CVA from coming into effect. The court held that paragraph 3.1(e) was intended to allow the administrators to assess whether a material change in the state of disputed claims since creditor approval altered the basis of the bargain between creditor classes and thus could preclude implementation.

The court allowed the appeal and directed that, in light of the emergence of a substantial indemnity claim by Deutsche Bank (the DB Indemnity Claim), the administrators should confirm that the CVA is precluded from becoming effective because that claim materially changed the commercial assumptions on which participating creditors agreed to fund the exit payments.

Background and parties: This expedited appeal arises from an order of Hildyard J ([2018] EWHC 1372 (Ch)). The applicants (respondents to the appeal) were the joint special administrators and CVA supervisors of MF Global UK Limited; the principal competing respondents in the dispute were the Financial Services Compensation Scheme (FSCS) representing a large class of Exiting Creditors and Attestor Value Master Fund LP representing a small class of Participating Creditors. The CVA had been approved on 12 December 2017.

Nature of the application and procedural posture: The administrators sought directions whether, and if so how, to implement the CVA in light of substantial disputed claims that emerged after creditor approval but before the Implementation Date. Hildyard J directed the administrators to confirm that the CVA was not precluded from becoming effective under paragraph 3.1(e) of Section 2 of the CVA; Attestor appealed.

Relief sought: Directions under the CVA as to whether the administrators should confirm that disputed claims remaining after the Challenge Period did not preclude the CVA from becoming effective; whether supervisors should waive the relevant condition; and whether the supervisors should determine there was a material impediment to implementation under paragraph 27.1(c).

Key factual issues: Three late disputed claims had been submitted after creditor approval, the most significant being a €126m DB Indemnity Claim, a contingent indemnity claim by Deutsche Bank linked to possible tax liabilities arising from certain trades. The question was whether that claim, by altering the economic balance between creditor classes, should prevent the CVA coming into effect.

Issues framed by the court:

• How paragraph 3.1(e) of the CVA should be interpreted: is it limited to addressing late statutory challenges (a mechanical test) or does it require administrators to exercise a value judgment about whether post-approval disputed claims materially change the bargain underlying the CVA?
• If a value judgment is required, whether the DB Indemnity Claim meant the CVA should be precluded from becoming effective.

Court’s reasoning: Applying ordinary contractual interpretation principles, the Court rejected the FSCS’s narrow mechanical reading and held that paragraph 3.1(e) requires administrators to assess whether the continued existence of disputed claims after the Challenge Period materially alters the basis on which creditors voted such that it should preclude the CVA from coming into effect. That construction accords with the commercial context of this CVA, where participating creditors were required to invest new money on assumptions as to liabilities. The DB Indemnity Claim was a substantial, previously unforeseen contingent claim that could disastrously alter expected outcomes for Participating Creditors; on balance and in fairness to the parties the court directed that the administrators should confirm the CVA is precluded from becoming effective.

Procedural outcome: The Court of Appeal allowed Attestor’s appeal, set aside the relevant part of the judge’s order, and directed the administrators accordingly.

Appeal allowed. The Court of Appeal held that paragraph 3.1(e) of the CVA required the administrators to form a value judgment whether disputed claims continuing after the Challenge Period should preclude the CVA from coming into effect. Applying that test, and in light of the substantial and unforeseen DB Indemnity Claim, the court directed that the CVA is precluded from becoming effective because the claim materially altered the commercial assumptions on which participating creditors voted.

Appeal from the High Court (Business and Property Courts, Insolvency and Companies List), Hildyard J: [2018] EWHC 1372 (Ch). Hildyard J had directed administrators to confirm the CVA was not precluded from becoming effective; the Court of Appeal allowed the appeal and set aside that part of the order.