The Royal Bank of Scotland v Highland Finacial Partners LP and Others
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE BURTON,Mr Justice Burton |
| Judgment Date | 10 February 2010 |
| Neutral Citation | [2010] EWHC 194 (Comm) |
| Date | 10 February 2010 |
| Court | Queen's Bench Division (Commercial Court) |
| Docket Number | Case No: 2009 Folio 605 |
[2010] EWHC 194 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Before: Mr Justice Burton
Case No: 2009 Folio 605
Mr A Johnson and Ms K Stares Solicitor Advocates (instructed by Herbert Smith LLP) for the Claimant
Mr R Cox QC and Mr B Strong (instructed by Cooke, Young & Keidan) for the Defendants
Hearing dates: 21 & 22 January 2010
Approved Judgment
Mr Justice Burton:
The Claimant, the Royal Bank of Scotland plc, seeks summary judgment under Part 24 in respect of its claims that the Second and Third Defendants, two members of the Highland Group of Companies (“HCC” and “CDO Fund”), are liable to it under a series of agreements involving the advancing by the Claimant of some E240m in respect of a proposed CDO (Collaterised Debt Obligation) transaction involving the Highland Group, called “Highlander V”. The liability is allocated by the Claimant, pursuant to those agreements, as to 92.5% to the Second Defendant and 7.5% to the Third Defendant. The claim against the First Defendant, in respect of which the Claimant also seeks summary judgment, is as guarantor of the liability of the Second Defendant. Issues of quantum are left over, and the Claimant effectively seeks judgment on liability, which will follow if it is successful on the issues now before me.
Highlander V involved the Highland companies borrowing from the Claimant via a Special Purpose Vehicle (“SPV”), in name a Highland company but because of its SPV status effectively a trust company (Highland Euro CDO V BV), known as the Issuer. Such advances were to be used to acquire a portfolio or “Warehouse” of loans, and the Issuer was to issue securities to the market using the loans as collateral. There was to be a Closing Date, by which the loans would be acquired and the securities issued, and the Claimant's advances would thus be repaid, at the latest by the agreed Termination Date, with interest. There were provisions, as will be seen, for termination in the event – in those heady days no doubt considered unlikely – that the securities were not snapped up prior to the Termination Date. The original longstop for the Termination Date, upon which the Warehouse arrangements would expire if Highlander V had not closed (and had not been earlier terminated), was 30 September 2007. That date was, as will be seen, twice extended, first to 28 February 2008, and then, subsequently, to 31 January 2009, but Highlander V was a casualty of the market collapse of 2008–2009, and, as will be seen, there never was a Closing Date, no securities were ever issued, and the Claimant now seeks repayment. Such assets as the SPV Issuer retained, either in respect of the loans that were purchased and repaid, or interest received on those loans, have been recouped by the Claimant, but there are very substantial sums, totalled in the Amended Claim Form as more than £30.5m, outstanding, claimed as to 92.5% against the Second Defendant (and the First Defendant as its guarantor) and as to 7.5% against the Third Defendant. There is no dispute between the parties that the various Agreements, which originally established, and subsequently amended, the relationship between the parties, interlock and, although they were entered into over a period of time, and between the Claimant and differing members of the Highland Group and/or the SPV, they must be read and construed together.
The first such agreement, in fact the originating document, is the Mandate Letter, dated 18 December 2006, by which Highland Capital Management Europe Ltd, described as the “Servicer”, engaged the Claimant as “Advisor” in connection with the proposed Highlander V transaction. By Clause 3 of the Mandate Letter the Servicer agreed to act as servicer for the Issuer in accordance with an agreement to be entered into (later the Interim Servicing Deed (“ISD”)) whereby “during the term of the Warehouse Facility, the Servicer will direct the investment of the Portfolio Investments in accordance with the Warehouse Documents” (the latter being defined as “a separate written agreement (or agreements) (collectively “the Warehouse Documents”)”). Clause 3(b) of the Mandate Letter is central to the dispute before me. Clause 6 contains provisions for its termination, which will also be material to my determination.
As anticipated and provided by the Mandate Agreement, a further package of agreements were duly entered into, on 5 April 2007. They were as follows:
i) The E400,000,000 Variable Funding Note Purchase Agreement (“the Funding Agreement”) between the Issuer and the Claimant (described as “Variable Funding Noteholder”) – and another bank simply as holder of designated accounts. This provided for the payment of the advances by the Claimant, and for repayment to the Claimant from time to time of the proceeds of and from the loans to be acquired by way of a 'rolling repayment obligation' in accordance with Clause 5 of the Funding Agreement. The Funding Agreement contained, in Clause 14, as did the ISD, to which I shall refer, at Clause 15, an express provision of Limited Recourse against the SPV Issuer. The one thing that is quite clear is that the liability of the SPV was limited to its assets, and the Issuer would not be obliged to pay any shortfall between those assets (i.e. the value of the loans and any proceeds of or from such loans) and the amounts due to the Claimant.
ii) The ISD was also dated 5 April 2007. The parties were, apart from the Issuer and the Servicer, and the account bank, the Claimant and the Second and Third Defendants. This effectively provided for the running of the Portfolio and the Warehouse by the Servicer. Clause 4.2, which will be of importance, provided for what was to happen in the event that the Closing Date (i.e. the issuing of securities) had not occurred on or prior to the Termination Date of the ISD. Clause 5.6 headed “Termination Date” is central, together with Clause 3(b) of the Mandate Letter, to the Claimant's claim against the Second and Third Defendants (and the First Defendant as guarantor) on this application.
iii) The third document was a Debenture of the same date, whereby the Claimant took a fixed and floating charge over the assets of the Issuer.
As I have indicated, Highlander V did not take off, even in the months immediately prior to the market collapse, and on 31 October 2007 two agreements were entered into:
i) The 31 October Amendment Deed provided for the first extension of the longstop date for closing to 28 February 2008.
ii) The First Loss Deposit Facility Deed (“the First Loss Deed”) of the same date provided two specific benefits to the Claimant. First, the First Defendant, which was for the first time a party to one of the agreements, agreed to give, by Clause 6 (which will be central to the determination of the First Defendant's liability on this application) the guarantee of the Second Defendant's liability to which I referred above. Additionally, the Second and Third Defendants agreed to make a “collateral advance” to the Claimant (in their agreed proportions) by Clause 2 of the Deed, upon which, in the circumstances provided by Clause 3 (which will be in issue before me) the Claimant would be entitled to draw down. The total of the collateral advance was E7.5m, and it is common ground that this arose as a result of the substantial fall in the market and hence in the value of the loans which the Servicer had been buying in.
Unfortunately things got no better, and, as described above, the parties agreed a further extension of the longstop date to 31 January 2009, and, as the market plummeted further, a substantial increase in the collateral advance provided by the Second and Third Defendants, to a total of E42.5m. The relevant contractual documentation was:
(i) An Amended and Restated Mandate Letter, now incorporating the various changes, including the new expiration date of 31 January 2009. Significantly, on the Claimant's case, there was no material change in Clause 3(b), which still contained the words upon which the Claimant relies:
“…the CDO Fund and HCC will participate in the risk of the Warehouse Facility. If the transaction does not close, the economics will be 7.5% for the account of CDO Fund and 92.5% for the account of HCC.”
The material addition was the reference to the First Defendant's guaranteeing the obligations of the Second Defendant.
(ii) The Amendment Deed of 1 April 2008 (“the Second Loss Deed”) provided inter alia for the increased collateral advance, to which I have referred above, and made clear, by paragraph 2.3(d) that the Claimant would make no further advances to the Issuer under the Funding Agreement.
Lehman Brothers collapsed on 12 September 2008. The Claimant terminated the Mandate Letter in accordance with the terms of Clause 6 of that Letter, and, by virtue of the termination of the Mandate Letter (one of the express events entitling termination of the ISD (subparagraph (a) of the definition of Termination Date in that Agreement)) also terminated the ISD, by notice dated 30 October 2008. After exercising, on the Claimant's case, its rights pursuant to Clauses 4.2 and 4.3 of the ISD to realise the value of the loans, the assets of the Issuer, and drawing down against the collateral advance, the Claimant claims against the Defendants the shortfall as at the Final Realisation Date– defined in Clause 1.1 of the ISD as “the date on which all...
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