Phoenix Group Foundation v Harbour Fund II LP & Ors.

The Court of Appeal dismissed Phoenix's appeal against Foxton J's declaration that future distributions payable to SMA Investment Holdings Limited (SMA) from the liquidations of the Arena companies would be held on the terms of the Harbour Trust. The central legal question was whether clauses 2.3, 2.4 and 2.6 of the Liquidation Inter-Creditor Settlement Agreement (LICSA) effected an immediate equitable assignment by SMA of any future rights to such distributions (arising under section 207(3) of the BVI Insolvency Act 2003). The court applied familiar equitable principles for the assignment of future property: (i) an outward expression of an immediate and irrevocable intention to divest, (ii) sufficiently certain description of the subject-matter, and (iii) consideration/value. The Court held that the LICSA, read with the Loan Note and the Notice to the liquidators, did not manifest an immediate irrevocable transfer by SMA but rather imposed personal procurement obligations on Dr Cochrane and a contingent obligation to give a future payment direction. The Loan Note was expressly unsecured and the LICSA did not contain language of security, proviso for reassignment or clear payment directions; combined with the uncertainty as to timing and amount of any future distributions, these factors supported the Judge's conclusion that no immediate equitable assignment arose.

The appellant, Phoenix Group Foundation, appealed against part of Foxton J's order ([2021] EWHC 1272 (Comm)). The dispute concerned allocation of potential future distributions from the liquidation of certain Arena holding companies. Those distributions would arise, if at all, under section 207(3) of the BVI Insolvency Act 2003. Under the Geneva Settlement of 29 April 2016 Phoenix received a Loan Note from Dr Cochrane and the LICSA was executed (parties included SMA, Dr Cochrane, Phoenix and Minardi). The LICSA contained clauses (notably 2.3, 2.4 and 2.6) referring to distributions and a Notice intended for the joint liquidators; clause 6.5 of the Loan Note anticipated prepayments by liquidator payments to Phoenix. Phoenix argued that those provisions effected an equitable assignment by SMA of any future rights to distributions, so that such rights would automatically be held on trust for Phoenix when they crystallised.

The Court framed the issues as: (i) whether the LICSA manifested an immediate and irrevocable intention by SMA to assign future rights; (ii) whether the subject-matter was identified with sufficient certainty; and (iii) whether the contractual text should be construed as an assignment by way of security, or as creating an assignment limited to so much of any distribution as was necessary to discharge the Loan Note.

• On the applicable law the court restated the tripartite requirements for equitable assignment of future property: objective intention to divest, ascertainable subject-matter, and value given (citing authorities such as Phelps v Spon-Smith and Tailby).
• On construction of the LICSA the court agreed with the judge below that clause 2.4 was framed as a personal procurement obligation by Dr Cochrane and did not contain an express undertaking by SMA to divest its future rights. Clauses 2.3 and 2.6, and the Notice, did not contain the requisite language of assignment; the Notice was informational and lacked the practical directional detail a liquidator would need.
• The court emphasised the commercial context: the Loan Note was expressly unsecured and contained a negative pledge rather than a security; the parties had turned their minds to security and decided against it. Given uncertainty as to timing and amount of future distributions and the outstanding Loan Note balance, the court concluded an immediate assignment would risk overpayment and would require express drafting (security, proviso for reassignment or clear directional notice) which was absent.

The court therefore dismissed the appeal. A separate Respondent's Notice raising priority and "no clean hands" issues was reserved and not decided in this judgment.

Appeal dismissed. The Court upheld Foxton J's construction that the LICSA did not effect an immediate equitable assignment by SMA of future rights to liquidation distributions; rather the documents imposed procurement obligations on Dr Cochrane and contemplated a future payment direction. The absence of express assignment language, the Loan Note's unsecured character, the form of the Notice, and uncertainty as to timing and amount of distributions supported that conclusion.

Appeal from the High Court (Commercial Court, KBD), Foxton J: [2021] EWHC 1272 (Comm). This Court (Court of Appeal Civil Division) delivered judgment at [2023] EWCA Civ 36 on 20 January 2023.