Richard Heis v Financial Services Compensation Scheme Ltd

JurisdictionEngland & Wales
JudgeMr Justice Hildyard
Judgment Date25 May 2018
Neutral Citation[2018] EWHC 1372 (Ch)
CourtChancery Division
Docket NumberCase No: [20110-13738]
Date25 May 2018
Between:
(1) Richard Heis
(2) Michael Robert Pink
(3) Edward George Boyle (as the joint special administrators of the MF Global UK Limited (in special administration), and as joint supervisors of the company voluntary arrangement approved on 12 December 2017)
Applicants
and
(1) Financial Services Compensation Scheme Limited
(2) Attestor Value Master Fund LP
Respondents

[2018] EWHC 1372 (Ch)

Before:

The Honourable Mr Justice Hildyard

Case No: [20110-13738]

IN THE HIGH COURT OF JUSTICE

BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES

INSOLVENCY AND COMPANIES LIST (Chd)

Royal Courts of Justice

Strand, London, WC2A 2LL

Mr. Daniel Bayfield QC and Mr. Adam Al-Attar (instructed by Weil, Gotshal & Manges (London) LLP) for the Administrators and Supervisors

Mr. Mark Arnold QC and Mr. Marcus Haywood (instructed by Burges Salmon LLP) for Financial Services Compensation Scheme Limited

Mr. David Allison QC and Mr. Alex Barden (instructed by Allen & Overy LLP) for Attestor Value Master Fund LP

Hearing dates: 15 – 17 May 2018

Judgment Approved

Mr Justice Hildyard

Introduction

1

The Applicants, namely, Mr Richard Heis, Mr Michael Robert Pink and Mr Edward George Boyle, each of KPMG, are (a) the joint special administrators of MF Global UK Limited (“MFGUK”) and (b) the joint supervisors of a company voluntary arrangement approved on 12 December 2017 (the “CVA”) (the “Administrators” or “Supervisors”). By this application, issued on 23 March 2018 (the “Application”), they seek directions from the Court as to whether and, if so, how, to proceed to implementation of the CVA in the light of the unexpected emergence of substantial claims which have been filed since its approval by creditors and the sole member of MFGUK on 12 December 2017.

2

The application is brought because the issues arising, which concern the interpretation of the CVA, are far from straightforward, and the interests of two groups of MFGUK's creditors are potentially in conflict. In such circumstances, the Applicants have formulated three issues as to the proper interpretation and application of the CVA and the approach that should be taken by them; and they have sought and obtained the approval of the Court for these issues to be argued between court-appointed representatives of the two groups of creditors, whilst themselves remaining largely neutral.

3

The representative parties are:

(1) Financial Services Compensation Scheme Limited (the “FSCS”); and

(2) Attestor Value Master Fund LP (“Attestor”), acting by its investment manager Attestor Capital LLP.

4

The Applicants appeared by Mr Daniel Bayfield QC, leading Mr Adam Al-Attar; the FSCS appeared by Mr Mark Arnold QC, leading Mr Marcus Haywood; and Attestor appeared by Mr David Allison QC, leading Mr Alex Barden. Their assistance has been exemplary.

5

The three issues identified and proposed for determination are as follows:

(1) Should the Administrators confirm that the CVA is not precluded from becoming effective in accordance with the condition precedent at clause 3.1(e) of Section 2 of the CVA (“clause 3.1(e)”) in the light of certain Disputed Claims, as such term is defined in Section 2 to the CVA? (“Issue 1”).

(2) Should the Supervisors waive clause 3.1(e) and notify the creditors of MFGUK of the occurrence of the implementation date of the CVA pursuant to clause 3.2 of Section 2 of the CVA? (“Issue 2”).

(3) Should the Supervisors determine that the Disputed Claims are a material impediment to the implementation of the CVA and terminate the CVA pursuant to clause 27.1(c) of Section 2 of the CVA? (“Issue 3”).

6

Put summarily, the FSCS seeks (for itself and those it represents) implementation of the CVA and contends that the answer to the first two questions is “Yes”, and to the third,

“No”; whereas Attestor contends that the CVA should not now proceed to implementation and that the answer to the first two questions is “No”, and to the third it is “Yes”.

7

The Applicants not only have adopted a neutral stance: they are seeking to surrender any discretion they may have in determining the Issues to the Court.

8

The hearing of this application has been expedited in circumstances of considerable urgency: the CVA will terminate in accordance with its terms if it is not implemented by 12 June 2018 (“the Lapse Date”).

9

Perhaps in light of this urgency, the Application has been confined by agreement between the parties to exclude from its scope any consideration of various complaints earlier aired by Attestor in relation to the Administrators and potential non-disclosure of material information surrounding the CVA. It is now common ground that the resolution of the three identified issues does not entail any criticism of, let alone allegation of misconduct, by the Applicants. Any allegations about the conduct of the Applicants would need to be considered, if at all, in separate proceedings brought at a later time. That confinement of the issues has enabled the matter to proceed without cross-examination, and has also sidelined some earlier complaints about the adequacy of disclosure. Even as so confined, the application has occupied three hearing days, and some 14 lever-arched files of evidence and two of authorities have been put before the Court.

10

One other preliminary matter to note is this. The Application refers, and the issues have been framed by reference to three late claims, being:

(1) a claim by the German Tax Authority (“the GTA”) to claw back certain withholding tax reclaims of EUR c.52m received by MFGUK (“the GTA Clawback Claim”) in relation to “cum/ ex” trades in German equities carried out by MFGUK on its own account (“the Principal Trades”);

(2) a claim by Deutsche Bank (“DB”), which was MFGUK's custodian and paying agent, for an indemnity in the event that the GTA seeks to recover directly from DB the same amounts (“the DB Mirror Claim”); and

(3) a claim by DB for an indemnity in relation to potential liabilities arising from “cum/ ex” trades carried out by MFGUK on behalf of clients (“the Client Trades”), in the amount of EUR 126m (“the DB Indemnity Claim”).

However, it is only the last which is the real cause of contention, because it relates to a liability which was not anticipated at the time the CVA was approved, whereas the others had been disclosed prior to the meeting (albeit only very shortly before then).

Background

11

MFGUK is a wholly-owned subsidiary of MF Global Holdings Ltd (“MFGH”), a company incorporated in Delaware. Companies in the MF Global group carried on business as broker-dealers in financial markets throughout the world. The group's principal operations were in New York and London, carried on by MF Global Inc and MFGUK respectively. These and other companies in the MF Global group entered formal insolvency proceedings in the United States and England on 31 October 2011. The Administrators of MFGUK were appointed under the Investment Bank Special Administration Regulations 2011.

12

The Administration of MFGUK has proceeded to the point where (a) after the conclusion of various pieces of litigation by the end of 2013, 99.9% of client assets had been distributed by January 2014, and (b) following a distribution out of the administration estate in August 2016 almost all creditors have received 90p/£ on their claims.

13

Proposals for a CVA have been under consideration since 2016. In their Progress Report of May 2016, when the Applicants as Administrators announced the August 2016 distribution to creditors, they also put forward a narrowing range of potential outcomes for creditors, and explained that they were “evaluating exit options”. In late April or early May 2017, the Applicants approached Attestor about a proposal for a CVA, and such proposal was worked up in an iterative process with Attestor and MFGH (MFGUK's largest creditor) over the ensuing months.

Objectives and key choices provided by the CVA

14

The main objectives of the CVA were described in the proposal (and elaborated in section 1 of the CVA Proposal) as being to:

(1) give unsecured creditors the option to exit the Administration now in exchange for a certain final cash payment shortly upon implementation of the CVA;

(2) agree a streamlined process for making final distributions to the remaining creditors, once the key issues regarding the remaining liabilities are resolved; and

(3) save substantial administrative and operational costs going forward as a result of reducing the number of creditors of the estate.

15

The means whereby these objectives are proposed to be fulfilled is, in essence, to divide the creditors into those who wish to exit for a sum certain and immediate from those who wish to continue to participate, to a greater or lesser extent, in the administration with a view to an enhanced but inevitably deferred return.

16

More particularly, the CVA gives creditors the option of becoming “Exiting Creditors”, “Stay-in Creditors”, or “ Participating Creditors”, the latter category including the “Underwriting Creditor” (in the event, Attestor). The key points distinguishing each of these classes are that upon implementation of the CVA:

(1) Exiting Creditors would be entitled to a further final cash payment of 9.75p/£ on Allowed Claims (as defined in the CVA) to provide a total return for them of 99.75p/£. Exiting Creditors would have no further interest in the outcome of the special administration and, in particular, would receive no further dividend payment, no share in any further (including any unanticipated) asset realisations and would not receive statutory interest if payable.

(2) Stay-in Creditors would not be entitled to the fixed cash distribution of 9.75p/£. Instead, they would retain their interest in the outcome of the special administration, and benefit from further asset recoveries and reduction of liabilities, except that they would not benefit...

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