Re Agrimarche Ltd (in Creditors' Voluntary Liquidation)
| Jurisdiction | England & Wales |
| Judge | Mr Justice Lewison |
| Judgment Date | 05 July 2010 |
| Neutral Citation | [2010] EWHC 1655 (Ch) |
| Court | Chancery Division |
| Date | 05 July 2010 |
| Docket Number | Case No: 633 OF 2010 |
[2010] EWHC 1655 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Before: The Hon Mr Justice Lewison
Case No: 633 OF 2010
Sharif A Shivji (instructed by Carrick Read Insolvency) for the Liquidator
Hearing date: 29 th June 2010
Mr Justice Lewison:
Agrimarche Ltd (“the Company”) was incorporated on 9 June 2003. It is a private limited company. It is now in liquidation, following a period during which it was in administration. It entered administration on 24 August 2007; and that administration was converted into a creditors' voluntary liquidation on 25 January 2008. Its main business, before it entered administration, was the wholesale buying and selling of physical commodities, in particular cereal grain and soya beans, on its own account. However, it also had a side-line. This consisted of the making of commodity option contracts (for oil seed rape or wheat) with farmers in return for a premium set by the Company. The cash generated by the option business supplemented the Company's income from its main business. The last of the option contracts expired on 9 October 2008.
The Company dealt with farmers either directly or through a broker called Jeremy Cole who traded under the name Agricole. There were two main types of option:
i) “call” options under which the grantee of the option was entitled to buy a particular commodity or instrument from the Company at a specified price, known as the “Strike Price” and
ii) “put” options under which the grantee of the option was entitled to sell a particular commodity or instrument to the Company at a specified Strike Price.
The liquidator asks for directions about how the call options are to be valued. The liquidator has explained what is known about how this part of the business operated. The idea behind it was that a farmer could sell his crop immediately after harvest; but protect himself against subsequent fluctuations in the price of whatever commodity it was that he had harvested. In practice the two commodities were wheat and oil seed rape. If the farmer sold his crop immediately, he would not have to incur the expense of storing it; but on the other hand the price he received from his buyer might be less than the subsequent price for his crop, if commodity prices rose. So he would buy a call option from the Company for a fixed price. Once the price of the physical commodity has exceeded the strike price, the option has a value. It is then said to be “in the money”. On exercise of the option, the farmer's profit would be the difference between the price of the commodity and the strike price, less the price he paid for the option. The documentation recording these deals is sparse to say the least. It consists of a single sheet of paper written on the company's headed paper. A typical call option takes this form:
i) It is headed “Sale Contract”.
ii) Particulars of the option are set out under the following headings:
a) Date: this appears to have been the date of execution of the option agreement.
b) Contract No: this appears to be a code set by the Company for its internal purposes.
c) Seller: this category identifies the grantor of the option. This is the Company.
d) Buyer: this identifies the grantee of the option. This is the farmer.
e) Goods: this describes the subject-matter of the option; and causes the first of the problems.
f) Quantity: this sets out the size of the option position, measured in metric tonnes (“MT”)
g) Position: this specifies a year and month (e.g. “JANUARY 2008”)
h) Price: this sets out the strike price and premium payable. For wheat options, the prices were quoted in GB pounds; and for oil seed rape options, the strike price was quoted in euros but the premium was quoted in GP pounds.
i) Payment: this is said to be 7 days from date of invoice.
j) Terms: the only specified terms are “THIS OPTION IS VALID UNTIL EXPIRY ON [DATE] AT 16.45 HRS”.
The vast majority of the wheat option contracts described “the Goods” as: “Call option Referenced to LIFFE Wheat Futures”. The remainder of the contracts describe “the Goods” as “Call Option Basis Liffe – Feed Wheat”. All of the oil seed rape option contracts describe “the Goods” as “Call Option Referenced to MATIF OSR Futures”.
The reference in the wheat option contracts to LIFFE is a reference to the London International Financial Futures Exchange, now part of the NYSE Euronext group. Throughout the relevant period, LIFFE operated its own feed wheat futures and option contracts. These were sterling denominated contracts. In essence, the LIFFE feed wheat futures contract gave the buyer the right to a specified quantity of a minimum quality of feed wheat at a specified price for delivery on a specified date in the future. The LIFFE feed wheat option gave the buyer the right, on exercise, to a feed wheat future contract with a delivery date specified in the option contract. It is important to note that exercise of a LIFFE option only gave the grantee of the option the right to a futures contract. It did not give the grantee of the option the immediate right to delivery of the underlying commodity.
The reference in the oil seed rape contracts to MATIF is a reference to the Marchéà Terme International de France, which was the Paris futures exchange and is now called Euronext Paris (now also part of the NYSE Euronext group). Throughout the relevant period, MATIF operated its own OSR futures and options. These were euro denominated contracts. In essence, the MATIF oil seed rape futures contract gave the buyer the right to a specified quantity of a minimum quality of oil seed rape at a specified price for delivery on a specified date in the future. The MATIF oil seed rape option contract gave the buyer the right, on exercise, to an oil seed rape futures contract with a delivery date specified in the option contract. Again, it is important to note that exercise of a MATIF option only gave the grantee of the option the right to a futures contract. It did not give the grantee of the option the immediate right to delivery of the underlying commodity.
Trading on LIFFE and MATIF can only take place through members of the exchange and the exchange requires margin on open futures positions. For the Company to have delivered futures positions on these exchanges to its customers, the Company's futures broker would effectively have had to take these customers on as its own clients and would have required margin from those customers.
According to the company's employees physical delivery of the underlying commodity did not take place, even where a farmer exercised a call option. In answer to questions posed by the liquidator Mr Cole said:
“There was never any possibility or thought that anyone would ever actually deliver anything up; it was all a paper exercise. There was never any indication of any physical commodity being involved.”
Indeed, the Company did not store physical grain to back up its potential liability under option contracts; although from time to time it hedged its obligations by buying derivatives on the Euronext exchanges. Instead, where a farmer exercised a call option (which would only happen if the price of the physical commodity exceeded the strike price) a cash settlement would be reached. In such circumstances the farmer and the Company would usually agree to close out the option by the payment of a cash settlement by the Company to the farmer. In practice the Company calculated the cash settlement by reference to the price of the equivalent future on LIFFE or MATIF, as the case may be.
The first question on which the liquidator seeks the assistance of the court is whether the call options, if exercised contractually required the Company to deliver the commodity itself (wheat or oil seed rape as the case might be); or simply to make a cash payment calculated by reference to the difference between the strike price and the relevant LIFFE or MATIF future at the point of exercise. In attempting to answer this question the following principles are relevant:
i) The question is what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean: Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101§ 14.
ii) The background includes anything reasonably available to the parties (apart from evidence of subjective intention) which would have affected the way in which the language of the document would have been understood by a reasonable person: Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896.
iii) Evidence of the subsequent conduct of the parties is admissible to show what they thought they had agreed. Where a contract is made partly in writing and partly by other means (e.g. oral exchanges or conduct) this evidence may be significant. Even where the contract is wholly in writing, such evidence may show that a written contract has been varied, or may give rise to an estoppel: Carmichael v National Power plc [1999] 1 WLR 2042; Chartbrook Ltd v Persimmon Homes Ltd§ 64.
As noted, there is no evidence that the Company ever made a physical delivery of the underlying commodity on an option contract in the present form; or that anyone expected it to; and the Company did not maintain physical stores of any commodity, matched against its anticipated option obligations. The liquidator also points out that the Company's customers were farmers who were net sellers of wheat and oil seed rape. Accordingly it seems unlikely that they would have wanted physical delivery and the associated costs that this would have entailed; including the costs of storage and of...
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