ABT Auto Investments Limited v Aapico Investment Pte Limited & Ors

Under the Financial Collateral Arrangements (No 2) Regulations 2003, appropriation of financial collateral is effective where the arrangement provides for that remedy and for valuation. Commercial reasonableness is principally an a posteriori control over the valuation, not a precondition to the validity of the appropriation.

The collateral-taker bears legal responsibility for the valuation, including work delegated to a third-party valuer. The valuation process must be objectively and fact-sensitively commercially reasonable. The result need not itself be the only, or necessarily an objectively reasonable, result. The collateral-taker is not subject to separate mortgage-law duties of good faith or other equitable duties, but cannot deliberately select an approach merely because it produces the lowest value.

ABT Auto granted a share charge over its shares in SGAH to secure loans made by Aapico. Following default, Aapico appropriated the charged shares and attributed a value of USD 27 million, based on a valuation prepared by FTI Consulting.

ABT Auto alleged that the share charge did not confer a valid power of appropriation, that the valuation method was not commercially reasonable, and that the valuation had not been conducted in a commercially reasonable manner. It also challenged reliance on a contractual estoppel. The central issues were the effect of Regulations 17 and 18 of the Financial Collateral Arrangements (No 2) Regulations 2003 and the proper standard for reviewing the valuation.

1. The claim was dismissed. Clause 9.3 of the Share Charge conferred a legally valid power of appropriation. It provided for appropriation and for a valuation mechanism, as required by the FCARs.

2. Regulation 18(1) imposed cumulative requirements: the valuation had to be made in accordance with the arrangement and, in any event, in a commercially reasonable manner. The arrangement therefore had to provide a method permitting a compliant valuation. It did not have to exclude every possible non-compliant valuation.

3. Regulation 17 concerned the validity and exercise of the power of appropriation. Regulation 18 supplied subsequent judicial control of the valuation. Failure to comply with Regulation 18(1) would not invalidate an appropriation. The court could instead set aside the non-compliant valuation, substitute a compliant valuation and make consequential orders.

4. The contractual estoppel in clause 9.3(d) did not prevent ABT Auto from challenging the commercial reasonableness of the valuation method. The protective requirements of Regulation 18(1) could not be waived directly or indirectly. The challenge nevertheless failed on its merits.

5. The duty of valuation rested on Aapico even though FTI performed the valuation. The relevant question was whether the manner of valuation was objectively commercially reasonable in the circumstances. The result could provide evidence about the manner of valuation, but the court was not required to substitute its own preferred methodology.

6. Commercial reasonableness was fact-sensitive. Several valuation approaches could be permissible. The collateral-taker’s subjective view was irrelevant, and it could not deliberately choose the approach producing the lowest value merely because that outcome suited it. There was no separate requirement of good faith and no implication of mortgage-law or equitable duties.

7. On the facts, Aapico supplied sufficient information, gave no improper constraints to FTI, and reasonably explained the operational relationship between SAGUSA and the Chinese subsidiaries. FTI’s decision to use a market-based approach rather than a discounted-cash-flow approach was commercially reasonable in light of unreliable forecasts. The USD 27 million result was explicable by the group’s distressed circumstances.

The claim failed in its entirety. Consequential matters and any application for permission to appeal were adjourned for determination after the parties attempted to agree the order.