Reed Smith recently released a client alert regarding a decision this week, in which the English High Court has clarified the extent of a third party secured creditor’s duties, when put on notice of a freezing order, and suggested a more limited duty than that previously articulated by the court. Notwithstanding this, the position remains that when a third party is put on notice of a freezing order of the English High Court, it is not something that it should take lightly. To read the full client alert on our website, click here.
The UK Court of Appeal recently considered the liability of issuers to secondary market investors under the Misrepresentation Act 1967 (the “1967 Act”) in the case of Taberna Europe CDO II Plc v Selskabet (formerly Roskilde Bank A/S) (In bankruptcy)  EWCA Civ 1262. The Court found that primary and secondary investors could potentially be entitled to rely on online content, such as product presentations, which have been published in a deliberate manner, particularly if the issuer directs investors to the content. However, liability for misrepresentation in these documents could be limited, or even excluded, with an appropriate disclaimer or by limiting third-party access to the materials.
In this case, Taberna alleged that it relied on an investor presentation produced by Roskilde, as issuer, which misrepresented its holdings of non-performing loans. The presentation was available on Roskilde’s website and contained a series of disclaimers which sought to restrict or limit liability for any errors or misstatements. The core disagreements focused on the scope of potential liability of Roskilde, as the producers of information under the 1967 Act, and the use of disclaimers to restrict any subsequent liability.
Prior case law such as Peek v Gurney (1873) LR 6 HL 377 already clarified placing material on a website alone does not create a relationship necessary to give rise to liability. In this case, however, the Court found that Roskilde was liable to the secondary investors because it actively encouraged investors to rely on the information in the presentation. Nevertheless, the relationship was mitigated with appropriate disclaimers.
Liability for inducing a party into a contract by a misrepresentation may only be mitigated by an agreement. As there was no formal agreement in this case, the page long disclaimer in the presentation could only act as a notice that the bank would not accept liability for the statements in the presentation. The lower court found that absent an agreement, the disclaimer was insufficient to reject liability for misrepresentation. However the Court of Appeals looked to the Unfair Contract Terms Act 1977 to find that, absent fraud and given a reasonableness test, Roskilde was entitled to give notice in the disclaimer that it would not accept liability for the statements in the presentation, even without a contract between the parties.
This case highlighted some considerations and potential pitfalls for both issuers and secondary market investors. Issuers could look to reduce their liability to primary and secondary investors by placing clear and prominent disclaimers within the face of documents stating that any such issuer makes no representations and accepts no responsibility for the accuracy of the document’s contents. Issuers could also reduce their risk by password protecting presentations and documents, and then removing the content from its website after the issuance is made. This case has also clarified that investors must be cautious and carefully read the fine print when looking to rely upon information produced by an issuer. Further, investors without a contract with the issuer cannot be certain that information provided by the issuer is reliable, particularly when disclaimers are used.
On 6 April 2017, together with the new Insolvency Rules (England and Wales) 2016, the Investment Bank (Amendment of Definition) and Special Administration (Amendment) Regulations 2017 (the “Regulations”) will come into force.
These regulations follow an independent review of the special administration regime, undertaken by Peter Bloxham during 2013, assessing the success of the special administration regime and making recommendations of possible changes that may improve the operation and robustness of the regime.
The amendments made pursuant to the Regulations aim to extend and strengthen the existing regime, while also simplifying processes, in the following ways:
- extending the definition of “investment bank” (as set out in the Banking Act 2009) to include institutions which are regulated to manage alternative investment funds (AIFs) or undertakings for collective investments in transferable securities (UCITS) and those acting as trustee or depository of an AIF or UCITS;
- including provisions for dealing with client money (not just client assets as previously enacted);
- introducing an additional duty for the administrator to co-operate with the scheme manager of the FSCS;
- making it easier for an administrator to transfer client assets;
- introducing a soft bar date mechanism which allows the administrators to distribute client assets and client monies without court approval and a hard bar date after which any client money claim received is to be treated as an unsecured claim;
- removing the right of client money claimants to claim interest from the general estate (except in respect of any shortfall which they would have had if they had made a claim on the client money pool);
- providing for contracts for services relating to the safe custody of client assets to continue despite the administration; and
- giving administrators the power to move client money between accounts on a final reconciliation of the amount of client money which the bank is required to hold in accordance with rules with the amount of client money it holds in client money accounts.
It is worth noting that the ability to challenge the conduct of special administrators has been extended under paragraph 74 of Schedule B1 of the Insolvency Act 1986 to include challenges by the FSCS, the regulators and parties affected by a transfer of the client business. Further, in cases where costs have been incurred as a consequence of the investment bank’s failure to comply with client money rules, the administrator now has to obtain the agreement of the creditors or the court on the level of costs, which are to be met out of the investment bank’s own assets.
Finally, in addition to the Regulations, on 23 January 2017, the FCA published a consultation paper on Client Asset Source Book (CASS) Rule 7A and the special administration regime. The consultation seeks feedback on proposed changes to the CASS rules affecting the return of client assets in light of the Regulations.
The full Regulations can be found here.
The recent case of South Coast Construction provides a helpful insight into the court’s treatment of applications for permission to continue proceedings during the administration moratorium.
Mr Justice Coulson heard the matter whilst acknowledging that, by the time judgment was handed down, the interim moratorium (which had arisen following the filing of a notice of intention to appoint an administrator (“NOI”)) would have expired. He did so on the basis that (i) his decision would be desirable, given its wide ramifications for other cases and (ii) it was relevant as to costs.
South Coast Construction, as claimant, made two applications. The first application was for summary judgment to enforce the decision of the construction adjudicator in other proceedings, and the second application was for permission to proceed with a related enforcement hearing despite the 10 day interim moratorium.
Mr Justice Coulson’s judgment outlined the factors relevant to the court when considering whether to grant permission to continue proceedings during a moratorium in the context of administration.
Under new regulations to be made under section 3 of the Small Business, Enterprise and Employment Act 2015 (the Payment Reporting Regulations), large UK companies will be required on a half-yearly basis to prepare and publish a report on their payment practices, policies and performance for financial years beginning on or after 6 April 2017. There will be a corresponding obligation on UK LLPs under the Limited Liability Partnerships Act 2000.
Read the full client alert.
Case law on wrongful trading has developed significantly over the past two years, with the cases of Ralls Builders and Brooks increasing judicial consideration of the conduct of directors in the period preceding an insolvency.
The judgment of the appeal and cross-appeal in Brooks was handed down in late 2016. It provides an essential update on the factors a court must assess in determining the basis on which directors may be compelled to personally contribute to the company for their own wrongful trading actions. It also serves as a warning to liquidators to ensure the basis of the compensation sought is very clearly and correctly prepared.
Read the full client alert.
Restructuring lawyers and distressed companies alike were granted welcome relief by the US Second Circuit Court of Appeals when it overturned the decision of the District Court in the case of Marblegate Asset Management, LLC v Education Management Finance Corp.
In 2014, Education Management Finance Corp. (“EDMC”) sought to restructure its debts outside of a formal bankruptcy process, through creditor consultation and cooperation, reducing the company’s debt burden by approximately $1.1 billion. EDMC put two options to its creditors, settling on the second, as a result of failure to obtain unanimous creditor consent to option one, which would constitute an “Intercompany Sale” of foreclosed assets to a newly incorporated subsidiary of EDMC, releasing EDMC from a guarantee it had provided in favour of the company’s unsecured noteholders. After the Intercompany Sale had taken place, the new EDMC subsidiary would distribute debt and equity only to those consenting creditors. While no term of the noteholders indenture had changed, non-consenting noteholders would not receive anything from the new company.
As a non-consenting noteholder, Marblegate brought proceedings against EDMC to block the Intercompany Sale on the grounds that it violated Section 316(b) of the US Trust Indenture Act 1939 (“TIA”). Marblegate argued that, while the contractual terms of the note had not changed, the foreclosure on substantially all of EDMC’s assets and subsequent sale back to its newly formed subsidiary stripped non-consenting noteholders of their practicable ability to receive payment on the notes.
The core disagreement in the case was whether the phrase “right…to receive payment” forecloses more than formal amendments to payment terms that eliminate the right to sue for payment. Marblegate argued that the right to receive payment is impaired “when the source of assets for that payment is deliberately place beyond the reach of non-consenting noteholders”, an argument the Court of Appeals rejected. After analysis into the legislative text and its history, the Court of Appeals found in favour of EDMC, ruling that the TIA only prohibits amendments to core payment terms without the consent of all noteholders. As the restructure did not formally amend the payment terms of the indenture that governed the notes, no such violation of the TIA had occurred – absent changes to the Indenture’s core payment terms…Marblegate cannot invoke Section 316(b) to retain an “absolute and unconditional” right to payment of its notes.
The 2014 decision of the District Court chilled out-of-court restructurings. However, the Court of Appeals affirmation of the ability of entities to carry out an out-of-court restructuring without unanimous consent of its creditors will allow the market to regain some stability and give distressed companies an alternative option to instigating formal, expensive and time consuming court–ordered bankruptcy proceedings. The decision may still be subject to an appeal.
 Marblegate Asset Management, LLC, Marblegate Special Opportunities Master Fund, LP., v. Education Management Finance Corp., Education Management, LLC (Docket No. 15-2124-cv(L), 15.2141-cv(CON))
In a watershed decision concerning the scope of maritime liens under the U.S. Commercial Instruments and Maritime Lien Act (“CIMLA”), the District Court for the Southern District of New York recently held that OW Bunker entities did not have valid maritime liens for the supply of bunkers to vessels. In the first decision by a U.S. court to hold that the OW Bunker entities do not have maritime liens under U.S. law, the Court underscored that maritime liens are an extraordinary remedy for suppliers of necessaries to vessels and cannot be assumed to apply in all circumstances. This ruling, together with previous rulings by other courts holding physical suppliers did not have valid maritime liens, may leave no party with a valid maritime lien arising from the OW Bunker collapse and bankruptcies. Without a maritime lien, suppliers of necessaries to vessels do not have a right to arrest. Read more about the new ruling.
Starting on October 1st , 2016 the French law on receivable acquisition has changed to become simpler. Before, a formal bailiff’s notification was required in order to render a receivable acquisition enforceable towards the debtor of such receivable.
Now a mere notification will achieve the same result. If no special form is imposed upon such notification, we would nonetheless recommend to use a registered letter in order to obtain a proof of delivery. In addition, any party may make the notification, so an agent under a loan agreement or similar arrangement may provide such assignment notification to the debtor, although we would recommend that parties only rely on the agent to make the notification when the agent has agreed to do so under a contract, so that evidence of the notification can be obtained if so required.
The degree to which certain elements of a recovery right under a contract, including a debt instrument, are assignable or transferable to a third party has been questionable under English law for some time. “Litigation rights” are one example. Many English legal practitioners regard litigation rights as personal rights, and personal rights are by their nature not capable of assignment or transfer. However, given the economic importance many assignees attach to “litigation rights” as a recovery right, such rights are commonly assigned or transferred to assignees “to the extent that they are capable of being or permitted to be assigned or transferred.” In this manner, the effectiveness of the assignment of any such any right is reserved. In the latest Waterfall IIC litigation, another element of a recovery right, default interest, may now be added to the list of items the ability of which to assign or transfer is questionable under English law.
On 5 October 2016, Mr Justice Hildyard handed down the judgment in the latest Waterfall IIC litigation. This case considered the entitlement of counterparties to default interest, as described in the 1992 and 2002 ISDA Master Agreement (ISDA), in particular covering the interpretation of the phrase ‘cost (without proof or evidence of any actual cost) to the relevant payee (as certified by it) if it were to fund or of funding the relevant amount’.
Of particular note is the ruling on the meaning of ‘relevant payee’. It is a common occurrence, and indeed was for numerous claims against LBIE, that counterparties to an ISDA assign their claims to default interest pursuant to the express right set out in clause 7 of the ISDA to third party purchasers. Thus, it would typically be considered to be the third party purchaser that has the interest in the claim against the defaulting party. However, Mr Justice Hildyard ruled that it was the original contractual counterparty, and not the third party purchaser, that was the ‘relevant payee’ for the purpose of assessing the cost of funding the relevant amount. This restriction on the right of transfer is to protect against unknown credit risks and that purpose is undermined if the ‘relevant payee’ is an unknown assignee of the original counterparty. Further, following the principles set down in Snell’s Equity 33rd ed. at 3-027, ‘an assignee cannot recover more from the debtor than the assignor would have. The purpose of the principle is to prevent the assignment from prejudicing the debtor. This would happen if, for example, he had to pay damages to the assignee that he would not have had to pay to the assignor if the assignment had not taken place’. To rule otherwise would pose a foreseeable risk of the third party assignee claiming a greater amount than the original counterparty would have claimed.
In light of this ruling, consideration must now be given by third party purchasers that have purchased, or had assigned to them, default interest claims pursuant to the rights set out in clause 7 of an ISDA. Further, it is unclear how this ruling will affect equivalent rights of assignment that arise under similar agreements – such application will likely only become clear when new cases are brought before the courts.
While this decision should be borne in mind when counterparties are considering the use of clause 7 of an ISDA, it is subject to appeal which may reinforce or overrule the application of all or some of Mr Justice Hildyard’s decision.