Richard Heis and Others v Mf Global, Inc. (a company incorporated under the Laws of the State of Delaware)
| Jurisdiction | England & Wales |
| Judge | Mr Justice David Richards |
| Judgment Date | 01 November 2012 |
| Neutral Citation | [2012] EWHC 3068 (Ch) |
| Docket Number | Case No: 9527 of 2011 |
| Court | Chancery Division |
| Date | 01 November 2012 |
[2012] EWHC 3068 (Ch)
IN THE HIGH COURT OF JUSTICE CHANCERY DIVISION
COMPANIES COURT
Royal Courts of Justice
Rolls Building
7 Rolls Building London EC4A 1NL
The Honourable Mr Justice David Richards
Case No: 9527 of 2011
In The Matter Of Mf Global Uk Limited (In Special Administration)
and
In The Matter Of The Investment Bank Special Administration Regulations 2011
Antony Zacaroli QC and Daniel Bayfield (instructed by Weil, Gotshal & Manges) for the Applicants
Robert Miles QC and Andreas Gledhill (instructed by Slaughter and May) for the Respondent
Hearing date: 23 October 2012
This is an application for directions by the investment bank administrators (the administrators) of MF Global UK Limited (MFG UK). They seek directions on an issue arising under the terms of a Global Master Repurchase Agreement (the GMRA) made between MFG UK and MF Global Inc (Inc). Inc is the respondent to the application.
The issue in short is whether the appointment of the administrators constituted an immediate and complete event of default under the GMRA, without the need for service of a notice by Inc declaring it an event of default. This requires consideration of the terms of the GMRA and the regime for special administration created by the Investment Bank Special Administration Regulations 2011 (the Regulations) under which the administrators were appointed.
MFG UK and Inc form part of the MF Global group of companies (the Group). Companies in the Group acted as broker-dealers in commodities, fixed income securities, equities, foreign exchange, futures and options and also provided client financing and securities lending.
The holding company of the Group is MF Global Holdings Limited (Holdings), incorporated in Delaware. Its shares were traded on the New York Stock Exchange.
MFG UK handled the European business of the Group, acting as an intermediary broker providing agency services, matched-principal execution and clearing services for exchange-traded and over-the-counter derivative products as well as for non-derivative foreign exchange products and securities in the money market. MFG UK was and remains an entity regulated by the Financial Services Authority.
Inc was the main US trading entity of the Group, acting as a broker-dealer on behalf of US and overseas customers and affiliates. It was principally regulated by the US Securities and Exchange Commission and the Commodity Futures Trading Commission.
In response to losses incurred by the Group in 2009/2010, the Group embarked on a policy of accumulating a portfolio of European sovereign debt securities. These principally comprised bonds issued by European states experiencing severe financial pressures, particularly Ireland, Italy, Portugal and Spain. Its investment in securities of this type peaked at nearly US $7 billion in October 2011, equating to 4.5 times its total equity. This exposure, coupled with additional capital adequacy requirements imposed on the Group by the US regulatory authorities to reflect the risk associated with the portfolio, contributed significantly to the collapse of the Group in October 2011.
The steps by which the principal companies within the Group entered formal insolvency proceedings occurred on 31 October 2011. The sequence of events was as follows. In the morning (Eastern Standard Time), Holdings filed for bankruptcy protection under Chapter 11 of the US Bankruptcy Code with the US Bankruptcy Court for the Southern District of New York. At about 17:00 hrs (GMT) (13:00 hrs EST) Morgan J appointed the administrators on the application of the directors of MFG UK, supported by the FSA. At approximately 16:00 hrs (EST), the Securities Investor Protection Corporation filed a petition with the US District Court for the Southern District of New York for the appointment of a trustee under the Securities Investor Protection Act 1970. At 16:50 (EST), Mr James Giddens was appointed as trustee of Inc (the SIPA Trustee).
The Group's policy of investing in European sovereign debt, referred to above, involved both MFG UK and Inc. MFG UK purchased the securities in the market. MFG UK and Inc entered into repurchase transactions (repos) with each other, whereby the securities were sold at fixed prices on terms that equivalent securities would be repurchased at a later date at pre-agreed prices. The repurchase dates under the repos broadly matched the maturity dates of the underlying securities, which were generally between 12 to 18 months from the inception of the transactions.
The repurchase transactions made between MFG UK and Inc were governed by the GMRA, which had been entered into by them in February 2005, but dated as of 19 July 2004. The GMRA uses a standard form agreement, produced by The Bond Market Association and the International Securities Market Association, in its 2000 version. The standard form agreement contains a number of elections which the parties may make, which are then set out in Annex 1 to the agreement.
The purpose of the GMRA is to set out the terms for all repurchase and buy/sell back transactions relating to securities between MFG UK and Inc, save only for the particulars of individual transactions, such as prices and repurchase or buy back dates.
Paragraph 17 of the GMRA provides that the agreement is to be governed by and construed in accordance with English Law and that the parties irrevocably submit for all purposes of or in connection with the agreement and each transaction made under it to the jurisdiction of the English courts. The scope of the GMRA is set out in paragraph 1 which provides, so far as material:
"1. Applicability
(a) From time to time the parties hereto may enter into transactions in which one party, acting through a Designated Office, ("Seller") agrees to sell to the other, acting through a Designated Office, ("Buyer") securities and financial instruments ("Securities") (subject to paragraph 1(c), other than equities and Net Paying Securities) against the payment of the purchase price by Buyer to Seller, with a simultaneous agreement by Buyer to sell to Seller Securities equivalent to such Securities at a date certain or on demand against the payment of the repurchase price by Seller to Buyer.
(b) Each such transaction (which may be a repurchase transaction ("Repurchase Transaction") or a buy and sell back transaction ("Buy/Sell Back Transaction") shall be referred to herein as a "Transaction" and shall be governed by this Agreement, including any supplemental terms or conditions contained in Annex I hereto, unless otherwise agreed in writing."
Paragraph 3 deals with the initiation, confirmation and termination of transactions.
Paragraph 4 provides for the maintenance of margin by reference to each party's net exposure in respect of all transactions entered into and outstanding under the GMRA.
Paragraph 10 defines events of default and sets out the consequences of the occurrence of an event of default. The events of default are defined by paragraph 10(a) which I set out in full (save for sub-paragraph (ii) which was excluded by the parties):
" 10. Events of Default
(a) If any of the following events (each an "Event of Default") occurs in relation to either party (the "Defaulting Party", the other party being the "non-Defaulting Party") whether acting as Seller or Buyer:
(i) Buyer fails to pay the Purchase Price upon the applicable Purchase Date or Seller fails to pay the Repurchase Price upon the applicable Repurchase Date, and the non-Defaulting Party serves a Default Notice on the Defaulting Party; or
(ii) ….
(iii) Seller or Buyer fails to pay when due any sum payable under sub-paragraph (g) or (h) below, and the non-Defaulting Party serves a Default Notice on the Defaulting Party; or
(iv) Seller or Buyer fails to comply with paragraph 4 and the non-Defaulting Party serves a Default Notice on the Defaulting Party; or
(v) Seller or Buyer fails to comply with paragraph 5 and the non-Defaulting Party serves a Default Notice on the Defaulting Party; or
(vi) an Act of Insolvency occurs with respect to Seller or Buyer and (except in the case of an Act of Insolvency which is the presentation of a petition for winding-up or any analogous proceeding or the appointment of a liquidator or analogous officer of the Defaulting Party in which case no such notice shall be required) the non-Defaulting Party serves a Default Notice on the Defaulting Party; or
(vii) any representations made by Seller or Buyer are incorrect or untrue in any material respect when made or repeated or deemed to have been made or repeated, and the non-Defaulting Party serves a Default Notice on the Defaulting Party; or
(viii) Seller or Buyer admits to the other that it is unable to, or intends not to, perform any of its obligations hereunder and/or in respect of any Transaction and the non-Defaulting Party serves a Default Notice on the Defaulting Party; or
(ix) Seller or Buyer is suspended or expelled from membership of or participation in any securities exchange or association or other self regulating organisation, or suspended from dealing in securities by any government agency, or any of the assets of either Seller or Buyer or the assets of investors held by, or to the order of, Seller or Buyer are transferred or ordered to be transferred to a trustee by a regulatory authority pursuant to any securities regulating legislation and the non-Defaulting Party serves a Default Notice on the Defaulting Party; or
(x) Seller or Buyer fails to perform any other of its obligations hereunder and does not...
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