Westlb Ag v Nomura Bank International Plc and Another
| Jurisdiction | England & Wales |
| Judge | MR. JUSTICE TEARE,Mr. Justice Teare |
| Judgment Date | 11 November 2010 |
| Neutral Citation | [2010] EWHC 2863 (Comm) |
| Date | 11 November 2010 |
| Court | Queen's Bench Division (Commercial Court) |
| Docket Number | Case No: 2009 FOLIO 497 |
[2010] EWHC 2863 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Before: Mr. Justice Teare
Case No: 2009 FOLIO 497
Jonathan Nash QC and Ian Wilson (instructed by Macfarlanes LLP) for the Claimant
Richard Handyside QC and Edward Levey (instructed by Ashurst LLP) for the Defendants
Hearing dates: 11–14 and 18–19 October 2010
APPROVED JUDGMENT
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
………………………..
Mr. Justice Teare :
This case concerns the valuation of an investment fund at an inauspicious time, namely, shortly after the collapse of Lehman Brothers in September 2008. The shares in the fund had been “repackaged” and were represented by financial instruments described as Variable Redemption Notes. Those Notes matured on 28 October 2008 on which date the Claimant said the First Defendant was obliged to pay a sum which represented the value of the shares. The Second Defendant was obliged to value the shares and valued them at nil and so the First Defendant paid nothing to the Claimant. The Claimant says the value of the shares was in excess of $20m.
The nature of the transaction in which the Claimant and the Defendants were engaged is complex. In order to resolve the issues between the parties it is not necessary to set out the entirety of that transaction but it is necessary to understand its nature so that those issues may be placed in their proper context.
In summary the Notes were issued as part of a “repackaging transaction” whereby (1) 195,000 redeemable preference shares in an investment fund (“the Shares”) were repackaged into the Notes, and (2) the Notes were themselves “repackaged” into certain Certificates of Deposit (or CD). An investor who purchased the CD would thereby become exposed to (i.e. take risk in) the Shares. Upon maturity of the CD, the investor was entitled to delivery of the Notes; and, broadly speaking, upon the subsequent maturity of the Notes, the investor was entitled either to an amount equal to the value of the Shares (less certain deductions), determined by the Second Defendant as Calculation Agent in its sole and absolute discretion, or to the Shares themselves (again, subject to certain deductions for certain items).
The transaction can be explained in a little more detail as follows. In about late September 2003 the Claimant and the Defendants participated in a transaction which “repackaged” the Shares in the Global Opportunities Fund (“the Fund”). The Fund was a sub-fund within Chinkara Global Funds Limited (now known as First Global Funds Limited PCC (“the First Global Fund”)), an open ended umbrella investment fund structured as a Mauritian protected cell company. The First Global Fund had an Information Memorandum and a Memorandum and Articles of Association.
The Fund's investment manager was at all material times a Mauritian company, First Capital Management Limited, formerly known as Chinkara Capital Management (Mauritius) Limited (“First Capital”). First Capital was the immediate parent company of the First Global Fund, and was itself a subsidiary of First Gulf Asia Holdings Ltd, previously known as Chinkara Capital Limited (“First Gulf”). The Fund's administrator was originally Morgan Stanley Dean Witter Asia (Singapore) Pte, but by the time of the events relevant to these proceedings it had been replaced by Mauritius International Trust Company Limited (“MITCO”). The Fund's custodian was Standard Chartered Bank, Hong Kong (“Standard Chartered”).
The Shares in the Fund were redeemable interests. The rights of redemption and the procedures for exercising those rights (as provided for in the Memorandum and Articles of Association) were explained in Section 13 of the Information Memorandum. The right to redeem the Shares was subject to a number of caveats and qualifications, such as the right of the directors of the Fund to suspend redemptions. Moreover, although the amount payable upon redemption was prima facie the NAV per Share as determined by MITCO, the directors of the fund had a right to suspend the determination of the NAV per Share or to pay the redemption proceeds in kind rather than in cash.
A Fund Services Report dated 31 January 2009 and obtained by the Defendants in June 2010 revealed that many of the assets held in the Fund were shares and debt securities in companies which, as at September and October 2008, were not traded on the Indonesian stock exchange or any other established markets for shares or bonds. Those companies were variously domiciled in Indonesia, the Bahamas, British Virgin Islands, Jersey or Singapore and appeared to be private companies about which there was limited publicly available information. There were in addition shares in three companies listed on the Indonesian stock exchange. Of these one, PT Bank Century, was taken over by the Indonesian authorities in November 2008.
The transaction giving rise to the present dispute was one of a number of fund repackaging transactions in which the Defendants, at the request of its then client, Mr Rafat Rizvi, had been involved since 2003. As well as being a director of the First Global Fund, Mr Rizvi was also the managing director of First Capital and is understood to have controlled First Gulf.
The “repackaging” transaction giving rise to this dispute proceeded as follows:
i) The Second Defendant and First Gulf entered into a share purchase agreement dated 30 September 2003 (“the Share Purchase Agreement”) pursuant to which the Second Defendant acquired the Shares on behalf of the First Defendant. The Share Purchase Agreement provided (by clause 4.2) for a forward sale of the Shares by the Second Defendant back to First Gulf on the Maturity Date of the CD issued by the Claimant as described below (“the Forward Sale”).
ii) The First Defendant as Issuer issued the Series 4 Step-Down Notes (“the Series 4 Notes”) to the Second Defendant in an aggregate nominal amount of US$26 million. The Second Defendant transferred the Series 4 Notes to the Claimant. In consideration of the Series 4 Notes, the Claimant issued Variable Redemption Portfolio Linked Certificates of Deposit (“the WestLB CD”) in the principal amount of US$26 million to the Second Defendant.
iii) The Second Defendant transferred the WestLB CD to First Gulf pursuant to the Share Purchase Agreement in consideration for the Shares.
iv) Under the terms of the WestLB CD, the Reference Portfolio was initially the Series 4 Notes. However, the terms provided for an option (the “Holder Contingent Portfolio Option”) whereby the holder could opt to substitute the Series 5 Variable Redemption Notes (i.e. the Notes) for the Series 4 Notes as the Reference Portfolio. That option was exercised on 10 October 2003 and the Notes were accordingly issued by the First Defendant to the Claimant in exchange for the Series 4 Notes.
v) The terms of the Notes are set out in a Pricing Supplement dated 3 October 2003 (“the Pricing Supplement”) issued in conjunction with an Offering Circular dated 26 July 2002.
vi) The result of the above transactions was that:
a) the Second Defendant held the Shares (on behalf of the First Defendant);
b) the Claimant held the Notes; and
c) First Gulf (or any subsequent transferee) held the WestLB CD.
The reason why the First Defendant, an affiliate of the Second Defendant, was the Issuer of the Series 4 Notes and the Notes was because it had an established note issuance programme which was capable of accommodating the desired terms of the notes, unlike the Second Defendant whose programmes at the time were mostly short term commercial paper programmes. The Second Defendant (rather than the First Defendant) was Calculation Agent because of the Second Defendant's status as broker-dealer within the Nomura group. The First Defendant had no employees beyond its statutory directors.
It was common ground that, apart from the Defendants' fees, the repackaging transaction was structured in such a way that neither the Claimant nor the Defendants was intended to be exposed to the Shares. The person who was intended to be exposed to the Shares was the end investor (i.e First Gulf or any subsequent transferee of the WestLB CD). That was because:
i) The terms of the WestLB CD provided that upon maturity the holders of the certificates were entitled to delivery of the Notes. The maturity date of the WestLB CD occurred before the maturity date of the Notes.
ii) Upon maturity of the Notes the First Defendant could either make physical delivery of the Shares or pay an amount which represented their value.
Thus, if the Claimant delivered the Notes to the holder of the WestLB CD (the end investor) on maturity of the WestLB CD and the First Defendant delivered the Shares to the end investor on maturity of the Notes only the end investor would be exposed the Shares. However, both the Claimant and the First Defendant made a mistake in operating this complex transaction which resulted in both being exposed to the Shares. The Claimant, instead of delivering the Notes to the end investor, paid US$26m. to the end investor and so retained the Notes. The First Defendant, whilst intending to make physical delivery of the Shares, missed the date for such delivery by wrongly calculating it and so had to pay an amount which represented their value to the Claimant on maturity of the Notes. The Second Defendant valued the Notes at nil and so the First Defendant paid nothing to the Claimant. Thus it is that as a result of these mistakes and the valuation of the Notes at nil that...
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