Heis v Financial Services Compensation Scheme Ltd

The Court was asked to direct the administrators/supervisors of MF Global UK Limited how to proceed with implementation of a company voluntary arrangement (the CVA) after substantial late/Disputed Claims emerged following creditor approval. The issues turned on the proper construction of clause 3.1(e) (a condition precedent requiring the administrators to confirm that any Disputed Claims after the challenge period should not preclude the CVA from becoming effective) and clause 27.1(c) (the supervisors' power to terminate the CVA where they determine a "material impediment" to implementation exists), and on whether the court should restrain implementation by reference to paragraph 74 of Schedule B1 to the Insolvency Act 1986 or the principle in Ex parte James.

The court held that clause 3.1(e) is to be given a limited and primarily mechanistic meaning: it addresses Disputed Claims persisting after the statutory challenge period (including the special case of late statutory challenges) and does not import a broad open-ended value judgment allowing administrators to decline confirmation on the ground that the commercial economics of the CVA have been materially altered by an unforeseen claim. Clause 27.1(c) gives the supervisors an express discretion to terminate the CVA where a "material impediment" to implementation exists, but that concept is related to practical impediment to implementing the operative steps of the CVA rather than a catch-all for altered commercial expectations. Applying those constructions, the court concluded the CVA was not precluded from becoming effective by the Disputed Claims, it was not appropriate to direct waiver by the supervisors, nor to direct termination under clause 27.1(c). The court also rejected the contention that paragraph 74 Schedule B1 or Ex parte James required preventing implementation in the circumstances described.

This first-instance application concerned directions sought by the joint special administrators (and joint supervisors) of MF Global UK Limited as to whether to implement a creditor-approved CVA in the light of substantial late Disputed Claims filed after approval. The CVA divided creditors into Exiting, Stay-in and Participating Creditors and contained a Final Claims Date (hard bar date), detailed governance and litigation protocols and various conditions precedent to implementation.

Parties and procedural posture:

• Applicants: the joint special administrators and joint supervisors (KPMG).
• Representative parties/adversaries appointed to argue the issues: Financial Services Compensation Scheme Limited (FSCS) and Attestor Value Master Fund LP (Attestor) acting by its investment manager.
• Relief sought: directions on three issues: (1) whether clause 3.1(e) precludes the CVA becoming effective in light of certain Disputed Claims (Issue 1); (2) whether the supervisors should waive clause 3.1(e) and notify implementation (Issue 2); and (3) whether the supervisors should determine that the Disputed Claims are a material impediment and terminate the CVA under clause 27.1(c) (Issue 3).

Key factual elements:

• Following long running special administration, the CVA was approved on 12 December 2017. A Final Claims Date of 15 January 2018 was fixed.
• The material late Disputed Claims included (i) the German Tax Authority's clawback claim in relation to cum/ex trades (disclosed pre-meeting), (ii) Deutsche Bank's mirror/indemnity claims including a client-trades based indemnity claim asserted by DB in proof for approximately EUR 126.7m received 12 January 2018 (the DB Indemnity Claim) — the primary source of dispute between the representative parties.

Issues framed by the court:

1. Construction and legal effect of clause 3.1(e) of the CVA (condition precedent and the meaning of the phrase "should not preclude").
2. Whether the supervisors should waive clause 3.1(e) and implementation should proceed.
3. Construction and application of clause 27.1(c) (supervisors' discretion to terminate for a "material impediment").

Court's reasoning (concise):

• The court applied ordinary principles of contractual interpretation (as discussed in authorities considered in the judgment) and addressed the admissible factual matrix known to the parties at the time the CVA was agreed.
• Clause 3.1(e) was given a limited, primarily mechanistic construction directed at the position of Disputed Claims persisting after the challenge period (including the special case of late statutory challenges). The phrase "should not preclude" was construed as addressing circumstances that would prevent the CVA coming into effect (i.e. make it impossible), rather than importing a broad evaluative or economic rebalancing exercise by the administrators comparing current reality with the commercial "bargain" described in section 1 of the CVA proposal.
• Clause 27.1(c) confers an express and broad discretion on the supervisors to determine whether a "material impediment" exists, but that phrase is most naturally read as referring to a practical impediment to taking the steps required for implementation (clauses 4–9 and 13) rather than as a licence to terminate whenever the economics of the CVA would be materially different from those forecast at approval.
• The court rejected submission that paragraph 74 Schedule B1 or the Ex parte James principle required the court to restrain implementation: those equitable/statutory powers must be exercised cautiously; they do not displace clear contractual allocations reached by creditors, particularly where the CVA had been approved by the requisite majorities and the statutory mechanisms (including the Final Claims Date) were central to its design.

Outcome: the court answered Issue 1 in the affirmative (the CVA is not precluded from becoming effective by the Disputed Claims), did not order the supervisors to waive clause 3.1(e) (Issue 2), and did not direct termination under clause 27.1(c) (Issue 3). The CVA was therefore permitted to proceed on the court's construction of the relevant clauses, subject to ongoing rights to contest the rejection or allowance of proofs under the statutory regime.

The application was determined in favour of allowing the CVA to proceed on its terms: the Court held that clause 3.1(e) does not preclude the CVA becoming effective because of the identified Disputed Claims (answer to Issue 1: Yes); it was not appropriate to direct the Supervisors to waive clause 3.1(e) (Issue 2: no such direction); and the Supervisors should not be directed to terminate the CVA under clause 27.1(c) (Issue 3: no). The court reached those conclusions after construing clause 3.1(e) as having a limited mechanistic purpose and clause 27.1(c) as directed at practical impediments to implementation, and after rejecting arguments based on paragraph 74 Schedule B1 or the Ex parte James principle that would override the contractual arrangement approved by creditors.