Raiffeisen Zentralbank Österreich AG v Royal Bank of Scotland Plc
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE CHRISTOPHER CLARKE |
| Judgment Date | 11 June 2010 |
| Neutral Citation | [2010] EWHC 1392 (Comm) |
| Docket Number | Case No: 2006 FOLIO 1202 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 11 June 2010 |
Before: Mr Justice Christopher Clarke
IN THE HIGH COURT OF JUSTICE
Mr Jeffrey Gruder, QC, Mr Christopher Harrison, and Ms Nicola Timmins (instructed by Memery Crystal) for the Claimant
Mr Antony Zacaroli, QC, Mr Ben Valentin and Mr Jeremy Goldring (instructed by Travers Smith) for the Defendant
Hearing dates: 13 th, 14 th, 18 th, 19 th, 20 th, 21 st, 25 th, 26 th, 27 th, 28 th January; 1 st, 2 nd, 3 rd, 8 th, 9 th, 10 th, 11 th February; 2 nd, 3 rd, and 4 th March 2010
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
MR JUSTICE CHRISTOPHER CLARKE:
| INDEX | |
| Para | Subject matter |
| 1–16 | Overview |
| The history | |
| Misrepresentation – the law | |
| The representations relied on | |
| The context | |
| Pleading issue in respect of the first and second representation | |
| 104–111 | The first representation – was it made? |
| 112 | The second representation – was it made? |
| 113–121 | Mr Stuart-Prince's understanding of what was represented |
| 122–128 | The fourth representation – was it made? |
| 129–136 | The third representation – was it made? |
| 137–138 | Alleged falsity of the first two representations |
| 139–146 | Were the assurances legally binding? |
| 147–151 | The first representation – falsity? |
| 152 | The second representation – falsity? |
| 153–162 | Inducement: The Law |
| 163–173 | “But for” causation |
| 174–194 | But for what? |
| 195–199 | Is “might have” made a difference enough? |
| 200–219 | Was RZB induced by the first two representations |
| 220–227 | Intention to induce |
| 228–229 | The Relevant Provisions |
| 230–249 | The authorities on their effect |
| 250–256 | Discussion |
| 257–270 | Construction of the Relevant Provisions |
| 271–303 | The Misrepresentation Act 1967 s 3 and the authorities thereon |
| 304–315 | Discussion |
| 316–318 | Do the Relevant Provisions purport to exclude liability so as to fall within section 3? |
| 319–327 | Reasonableness |
| 328–333 | The section 2 (1) defence to the first two representations |
| 334–336 | The third and fourth representations – falsity? |
| 337–341 | Fraud – the law |
| 342–347 | Fraud – conclusions |
| 348–385 | Considerations leading to conclusions on fraud |
| 386–388 | Damages |
| 389 | Finale |
| App 1 | Evidence of Mr Stuart-Prince as to his understanding of the effect of the Relevant Provisions |
| App 2 | Tax Treatment of the Transaction from RBS' perspective |
| App 3 | US GAAP |
Overview
The transaction at the heart of the present claim struck the Group Credit Committee of the Royal Bank of Scotland Plc (“RBS”) at its meeting on 22 nd September 2000 as “21st Century Alchemy”. The alchemist's stone was reputed to turn base metal into gold. Its 21 st Century equivalent, if it worked, realised a profit in the accounts of Enron Corp (“Enron”) by the use of £138,500,000 borrowed from RBS, against what was in economic substance a guarantee by Enron, without the borrowing featuring in Enron's accounts. The relevant US Accounting Standard which was said to permit this treatment was FAS 125.
RBS lent the money itself. It then syndicated the loan to other banks. One of those banks was Raiffeisen Zentralbank Osterreich AG (“RZB”), the claimant, which lent £10,000,000. It claims to have been induced to lend the money by several misrepresentations by RBS. In this action it seeks to recover that part of the loan which it has lost (plus interest) as a result of Enron's collapse.
The initial corporate structure, omitting intervening subsidiaries, was as follows:
ENRON CORP
EEL
[Enron Europe Ltd]
TOH4L
[Teesside Operations (Holdings) 4 Ltd]
ETOL
[Enron Teesside Operations Ltd]
In order to put the proposed transaction into effect RBS formed a new Special Purpose Entity (“SPE”) —RBS Financial Trading Company Ltd (“RBSFT”). On 1 st November 2000 a series of transactions were effected as follows:
i) TOH4L issued to Enron Sutton Bridge Funding Ltd (“ESBFL”), a wholly owned subsidiary of EEL, 141.6 million Class “B”£1 cumulative preference shares (“the preference shares”) carrying the right to a 13.5% dividend. The dividend stream was funded by TOH4L's right to receive dividends from ETOL.
ii) RBSFT was capitalised with (a) £4.9 million equity provided by RBS pursuant to a Subscription Agreement between RBS and RBSFT and (b) a £138.5 million Senior Credit Facility (“SCF”) also provided by RBS. The equity/debt ratio was therefore approximately 3.55%/96.45%. The SCF was repayable on 10 th January 2004.
iii) ESBFL sold the preference shares in TOH4L to RBSFT for £141.6 million provided as to £70.8million in cash; and as to £70.8million in 2001 Loan Notes, maturing on 26 th October 2001, but callable at any time before then, issued by RBSFT. RBSFT could make drawdowns under the SCF in order to finance the redemption of the Notes,
iv) Enron entered into a Total Return Swap with RBSFT the effect of which was to guarantee the SCF.
The result may be represented diagrammatically as follows, the arrows representing the flow of monies:
| EEL | RBS |
| Equity £ 4.9 m | |
| SCF £ 138.5 m | |
| ESBFL | RBSFT |
| (Sale by ESBFL of the preference shares in TOH4L for £141.6 m) | |
| TOH4L | |
| Dividends | |
| ETOL |
In the result:
a) TOH4L received dividends (indirectly) from ETOL and paid the dividends on the preference shares to RBSFT;
b) 96.45% of the dividends received by RBSFT was retained within an account charged with repaying the SCF/Loan Notes;
c) 3.55 % of the dividends was paid to RBS;
d) Any shortfall between the 96.45% of dividends received by RBSFT and the amount due under the SCF/Loan Notes was to be paid by Enron to RBSFT under the Total Return Swap and any surplus was to be paid by RBSFT to Enron;
e) Interest, principal and other amounts payable under the SCF and interest payable under the Loan Notes were paid to the lenders and the holders of the Loan Notes.
The reason for RBSFT being capitalised with 3.5% equity capital was that, in order for the scheme to work, US GAAP (Generally Accepted Accounting Principles) required the SPE to have at least 3% of substantive equity and for such equity to be “at risk”.
The Articles of RBSFT provided that RBSFT might sell its interest in the preference shares to any third party other than a competitor or ESBFL or a subsidiary (otherwise than pursuant to the Put Option referred to below), in any manner it elected, including doing so in accordance with certain Auction Procedures. Under those Procedures there was to be a sale of the preference shares in TOH4L over a period of 100 days beginning 70 days before 10 th January 2004. Enron as Auction Agent was bound to solicit cash bids for the shares from purchasers (which could include itself and its affiliates other than ESBFL) and was bound to accept the highest cash bid provided that it was at least equal to the lower of the Fair Market Value (as defined) as at the start of the Sale Period and the Book Value Amount, which was defined as the aggregate subscription price and all accrued and unpaid dividends, and provided for payment by the Relevant Payment Date.
A Put Option agreement was entered into between RBSFT and ESBFL under which RBSFT had the right to require ESBFL to purchase the preference shares in the event that no bid for the shares was accepted by Enron under the Auction Procedures by the 40 th day before 10 th January 2004 at a price which was to be the lower of the Fair Market Value calculated in accordance with a schedule or the Book Value of the shares. Enron guaranteed the performance of that agreement.
Under the Total Return Swap (“TRS”) entered into between Enron and RBSFT the Floating Amount with respect to any Interest Payment Date included the Interest Payable on any outstanding principal under the loans made pursuant to the SCF and on any outstanding principal of the Loan Notes. The Total Return Amount meant 96.45% of all monies actually received by RBSFT by way of dividend or distribution with respect to the preference shares. On each Interest Payment Date Enron was obliged to pay RBSFT if the Floating Amount exceeded the Total Return Amount. The TRS also provided that on 10 th January 2004 Enron would pay RBSFT the amount by which aggregate outstanding principal on the monies advanced under the SCF and on the Loan Notes, together, in each case, with unpaid interest, exceeded 96.45% of the proceeds of sale of the preference shares pursuant to the auction procedure laid down in the Articles or the Put Option or, if there were no sale proceeds, 96.45% of the Fair Market Value of the preference shares, as defined.
The effect of the above was that, at the maturity of the transaction, there would be an auction of the preference shares or the exercise of a Fair Market Value Put Option guaranteed by Enron, which would bring in funds to RBSFT. If such funds were insufficient to repay the debt of £138million, the shortfall would be covered under the TRS. So the SCF was an Enron risk.
The TRS did not, however, apply to the equity. If such funds were insufficient to repay the equity in RBSFT of £4.9million, then on the face of the transaction RBS would lose the equity.
However, Enron gave oral assurances to RBS to the effect that it would see that RBS would recover the full amount of its equity as well as a return on the equity of 13.5% p.a. This was expected to be achieved by Enron making a bid in the auction of the preference...
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