The Royal Bank of Scotland v Highland Finacial Partners LP and Others
| Jurisdiction | England & Wales |
| Judge | Lord Justice Thomas,Lord Justice Richards,Lord Justice Ward |
| Judgment Date | 14 July 2010 |
| Neutral Citation | [2010] EWCA Civ 809 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2010/0641 |
| Date | 14 July 2010 |
[2010] EWCA Civ 809
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION COMMERCIAL COURT
Mr Justice Burton
Before: Lord Justice Ward
Lord Justice Thomas
and
Lord Justice Richards
Case No: A3/2010/0641
Mr Raymond Cox QC and Mr Ben Strong (instructed by Cooke, Young & Keidan LLP) for the Appellant
Mr Adam Johnson and Ms Kerry Stares of Herbert Smith LLP for the Respondent
Hearing date: 21 June 2010
Lord Justice Thomas:
This application raises two short one-off points of construction on agreements entered into in respect of a proposed collateralised debt obligation (CDO) which did not close by the issue of securities because of the collapse of the financial markets in the latter part of 2008. The claimants who are the respondents in the appeal (RBS) claim from a group of companies, the appellants in the appeal (Highland), a shortfall of approximately €40m between the realised value of the portfolio of loans acquired for the CDO and the outstanding amount of the financing made by RBS for the acquisition of those loans. RBS's entitlement turns on the construction of the agreements. The exact quantum of the recovery, if RBS is right on the points of construction, is due to be heard at a trial in the Commercial Court in September 2010.
The agreements
The transaction originated in 2006. Between December 2006 and April 2007, RBS entered into three agreements with companies in the Highland Group, a US financial group, under which it agreed it (1) would act as adviser to Highland for the issue of securities by a Special Purpose Vehicle (SPV) to be managed by the Highland Group in respect of a CDO transaction of €400–500m and (2) would arrange financing to enable the SPV to buy the loans which would form the basis of the CDO when the issue of securities was offered. For the purposes of this application, it is not necessary to distinguish between the various companies within the Highland Group or to describe the role of another bank that was party to the agreements as that role is immaterial to the dispute.
It was common ground that the three agreements, which were subsequently varied in October 2007 and March and April 2008 as I shall explain, should be read and construed together:
i) The Mandate Letter. This was made between RBS and a Highland company and dated 18 December 2006. It set out an outline of the overall scheme, including the arrangement of financing for the purchase of the portfolio of loans under what was described as a warehouse facility. The financing was provided by RBS through the €400m Variable Funding Note Purchase Agreement described in the next sub-paragraph. The loans would be held in the warehouse until closing which would occur on the issue of the securities. The commercial significance of the Mandate Letter to the points of construction in this appeal was that it appointed RBS to act as “adviser” for the transaction and placement agent for the offering on issue; as placement agent RBS would earn significant fees. The agreement provided that a Highland company would act as the “servicer”, in effect the manager of the loans that were to be acquired. The Mandate Letter is central to the dispute as clause 6 not only provided for termination of the agreement contained in the Mandate Letter on closing of the offer of securities with a long stop automatic termination date of 30 September 2007, but gave both RBS and the Highland company the right to terminate the agreement by notice at any time.
ii) The €400m Variable Funding Note Purchase Agreement. This was entered into between the Highland SPV (which was to be the Issuer of the securities on closing) and RBS on 5 April 2007 to provide finance during the warehousing period. Under this agreement RBS agreed to provide a facility of up to €400m to the SPV Issuer under a note so the SPV Issuer could buy loans to be warehoused pending the issue. The agreement contained detailed provisions as to the terms of the note which could be sold or transferred by RBS. Clause 5 provided for the SPV's obligation to repay in the ordinary course of anticipated events primarily from the proceeds of the issue; there was a final date for repayment on the day prior to the long stop date of 30 September 2007. Apart from the provisions for repayment in the ordinary course of anticipated events in Clause 5, the significance of this agreement is that RBS (or a note holder to whom the note had been assigned) could only demand repayment earlier if there was a specified “event of default” under Clause 9 of that agreement (which included by Clause 9(n) of that agreement an “Interim Servicer Event of Default” under the agreement referred to in the next sub-paragraph – the Interim Servicing Deed). It is also important to note that the obligation to repay was limited to the assets of the SPV Issuer, RBS having its security by various charges over the assets acquired by the Issuer.
iii) The Interim Servicing Deed. This was also made on 5 April 2007 between various Highland companies and RBS and set out the role of the Interim Servicer. The Interim Servicer was another Highland company appointed by the SPV Issuer to perform a number of duties, but primarily to select the loans to be acquired during the warehouse period. RBS agreed to make advances for the acquisition of loans subject to various conditions, including compliance with eligibility criteria and a veto by RBS over any proposed loan. The importance of this agreement to the points of construction is the provision in Clause 1 (the definition clause) which set out the definition of “Termination Date” and the provisions in Clause 5 as to the obligations of Highland companies consequent upon the occurrence of the Termination Date. If the Termination Date occurred prior to the closing, the clauses of the agreements operated so that (1) RBS could call for the repayment of the advances made under the Variable Funding Note Purchase Agreement, (2) the loans in the warehouse facility were realised and (3) under clause 5.6 the Highland companies were obliged to pay RBS any shortfall between the sums obtained from the realisation of the loans and the outstanding amount of the financing advanced by RBS. The definition of the “Termination Date” provided that the long stop termination date was the same as in the other agreements, namely 30 September 2007 but there were provisions for the Termination Date to occur on other events including:
“(a) the termination of the Mandate Letter pursuant to the terms thereof and which of such termination is provided in writing by the Variable Funding Noteholder [RBS] or the Interim Servicer [Highland], as the case may be, to the Variable Funding Noteholder [RBS] or the Interim Servicer [Highland], as the case may be”.
As is apparent from this sub-clause of the definition of the Termination Date, there is an error in it as, read literally, it is not grammatical. Other events that could bring about a Termination Date included the service of notice of an Interim Servicer Event of Default and in that category of events was a decline of more than 2.25% in the value of the acquired loans.
After the making of these agreements, RBS advanced €240m to the SPV Issuer to purchase loans. However, during 2007 the financial markets deteriorated. It became clear that the issue could not be closed by the long stop date of 30 September 2007, but there remained an expectation that the issue would still proceed. Therefore two amending agreements were made by agreements dated 31 October 2007.
i) The First Loss Deposit Facility Deed. This was made between RBS and various Highland companies. The Highland companies agreed to pay RBS €7.5m as cash collateral to secure their obligations under the Interim Servicing Deed and another Highland company agreed to guarantee the liabilities of other Highland companies under clause 5.6 of the Interim Servicing Deed.
ii) A First Amendment Deed. This was made between RBS, the SPV Issuer and various Highland companies. It extended the long stop date of the Interim Servicing Deed and the Variable Funding Note Purchase Agreement to 28 February 2008. Among other amendments, it also amended the definition of an Interim Servicer Event of Default to which I referred at sub-paragraph 3.iii) so that in place of an overall decline of 2.25% in market value of the loans that particular event would occur only if the difference between the purchase price of the loans and their market value plus the collateral was greater than €2m, subject to the right of Highland to post...
To continue reading
Request your trial
-
Secretary of State for Business, Innovation and Skills and Another v Rangos
...Johnson himself misled the court in this submission. RBS had not informed HS of the full history of events by the Liability hearing. 3 [2010] EWCA Civ 809 4 See: Cuckmere Brick Co Ltd v Mutual Finance Co Ltd [1971 ] 1 Ch 949. As Salmon LJ said at 966C "In addition to the duty of acting in g......
-
Royal Bank of Scotland Plc v Highland Financial Partners LP [QBD (Comm)]
...obtained summary judgment on its claim (see [2010] EWHC 194 (Comm)), with quantum to be assessed. That decision was upheld on appeal: [2010] EWCA Civ 809. At the quantum hearing the defendants took issue with the method by which RBS had realised the acquired loans, namely an informal quasi-......
-
The Royal Bank of Scotland Plc v Highland Financial Partners LP and Others
...The Highland Defendants appealed my judgment, which appeal was dismissed by the Court of Appeal, by judgment dated 14 July 2010 [2010] EWCA Civ 809. It is apparent from paragraph 10 of the Court of Appeal's judgment that only two grounds of appeal were pursued before them, and neither of t......
-
Royal Bank of Scotland Plc v Highland Financial Partners LP and Others
...(“RBS”) on 10 February 2010 ( [2010] EWHC 194 (Comm)) (the “Liability Judgment”), as upheld by the Court of Appeal on 14 July 2010 ( [2010] EWCA Civ 809), against the Second and Third Defendants (“Highland”) as borrowers and the First Defendant as guarantor. I do not propose to rehearse th......
-
Construction Of A Series Of Agreements
...Royal Bank of Scotland PLC v Highland Financial Partners LP & Ors [2010] EWCA Civ 809, the Court of Appeal considered points of construction of agreements entered into in respect of a proposed collateralised debt obligation. The Court subsequently considered issues of During the course ......