Heis & Ors v Financial Services Compensation Scheme Ltd & Anor

This expedited appeal is against Hildyard J’s order of 25 May 2018 made in the Business and Property Courts of England and Wales (Insolvency and Companies List). The hearing before him was also expedited, the application having been issued on 23 March and heard over 15 to 17 May. Hildyard J gave permission to appeal and we heard the appeal on 6 June, with the demands of the case requiring our judgments to be delivered during the morning of 11 June. The appeal asks a question as to the interpretation of paragraph 3.1(e) in Section 2 of a company voluntary arrangement approved on 12 December 2017 (‘the CVA’) by the creditors and sole member of MF Global UK Limited (‘MFGUK’). In explaining the background I have gratefully drawn on the judge’s full and careful judgment: [2018] EWHC 1372 (Ch).

The applicants, respondents to the appeal, are Richard Heis, Michael Pink and Edward Boyle. They are the joint special administrators of MFGUK and the joint supervisors of the CVA. They sought directions as to whether, and if so how, to proceed to the implementation of the CVA in light of what the judge called ‘the unexpected emergence of substantial claims’ filed since its approval. The need for such directions arose because the interpretation of the relevant provisions of the CVA were, the judge said, far from straightforward and the interests of two groups of CVA creditors were potentially in conflict. The applicants were neutral in the application; and they also expressed themselves as content to surrender to the court any discretion they may have in relation to the issues raised. They have adopted the same position on this appeal.

The main debate was argued by the respondent court-appointed representatives of the two groups of creditors: (i) the Financial Services Compensation Scheme (‘the FSCS’), representing a large class of ‘Exiting Creditors’; and (ii) Attestor Value Master Fund LP (‘Attestor’), acting by its investment manager, Attestor Capital LLP, representing a small class of ‘Participating Creditors’.

Paragraph 3 of Section 2 of the CVA imposed five conditions precedent to the coming into effect of the CVA, each of which had to be satisfied for it to do so. The critical condition is that in paragraph 3.1(e): the other four conditions have all been met. The questions for the judge were: (1) whether, in light of the emergence, and continuing existence, after a defined ‘Challenge Period’ of the disputed claims, the administrators should confirm ‘that this should not preclude the CVA from becoming effective’ (the relevant words in paragraph 3.1(e)); (2) whether the supervisors should waive the need for satisfaction of the paragraph 3.1(e) condition (as they were empowered to do by the opening words of paragraph 3.1); and (3) whether the supervisors should determine that the disputed claims were a material impediment to the implementation of the CVA (a question arising under paragraph 27.1(c) of Section 2).

The FSCS’s case, in support of ensuring that the CVA should come into effect, was that questions (1) and (2) should be answered ‘yes’ and that question (3) should be answered ‘no’. Attestor’s case, in support of ensuring that the CVA should not come into effect in light of the emergence of the disputed claims, was that questions (1) and (2) should be answered ‘no’ and question (3) ‘yes’. The urgency in relation to the application was that the CVA was destined to terminate automatically in accordance with its terms if the paragraph 3 conditions precedent were not satisfied (or, so far as permitted, waived) by 12 June 2018, which is tomorrow. That is because the effect of paragraph 27.1(b) of Section 2 of the CVA is that if by then those conditions precedent have not been satisfied or waived, the CVA will automatically terminate on that day (‘the lapse date’).

The judge accepted the FSCS’s submissions and, in answer to question (1), directed the administrators to ‘confirm that the CVA is notprecluded from becoming effective in accordance with the condition precedent at clause 3(1)(e) … in light of the [three] Disputed Claims …’, which his order then summarised. His answers to questions (2) and (3) were ‘no’ to both. By agreement following the making of the order, and pending the disposal of this appeal, the administrators have not given the confirmation referred to in question 1, and so the paragraph 3.1(e) condition precedent still remains unsatisfied.

Attestor’s argument on its appeal is that the judge was wrong in his interpretation of paragraph 3.1(e) and wrong, therefore, in answer to question (1), to direct the administrators as he did. It submits that this court should give the administrators a contrary direction, one which when complied with will mean that the CVA will not become effective.

The three late, disputed claims referred to in the application are as follows:

MFGUK is a wholly-owned subsidiary of MF Global Holdings Ltd (‘MF Holdings’), a Delaware company. Its sole shareholder is MF Global Holdings Europe Ltd. The MF Global group carried on a worldwide business as broker-dealers in financial markets. Its principal operations were in New York and London, carried on by MF Global Inc and MFGUK respectively. Both companies entered into formal insolvency proceedings in the USA and England on 31 October 2011. MFGUK entered into administration by an order of the court and its administrators were appointed under the Investment Bank Special Administration Regulations 2011. The administrators published their proposals for achieving the purpose of administration on 16 December 2011.

MFGUK’s administration has reached the point at which, by January 2014, 99.9% of client assets had been distributed and, following a sixth interim distribution out of the administration estate in August 2016, almost all creditors whose claims had been admitted have received dividends of 90p/£ on their claims. In early 2017, the administrators approached Attestor about a proposal for a CVA, which was then worked on by Attestor and MF Holdings (MFGUK’s largest creditors) over the following months.

The main objectives of the CVA were described in the proposal for it as being to:

These objectives were proposed to be achieved by dividing the creditors into two main classes: (i) those wishing to exit early in exchange for the payment of a sum certain and immediate, and (ii) those wishing to continue to participate, to a greater or lesser extent, in the administration, with a view to an enhanced, albeit deferred, return. To that end the CVA offered creditors the option of becoming members of one of three classes:

The DTT Reclaims had an estimated value of €49m, but there was also a corresponding risk that the German authorities might pursue a counterclaim against MFGUK for €49m which had already been paid out by the GTA to MFGUK, defined in the CVA as the ‘Potential GTA Claw Back Claim’. These two claims were explained at paragraphs 12.8 to 12.21 of Section 1 of the CVA. The claw back claim has since been made, but it was foreseen when the CVA was approved.

By reference to a witness statement made by Anke Heydenreich in support of Attestor’s case, the judge summarised, at [17] to [23], the essential economic effect of the CVA, if implemented. The key to it was that the Participating Creditors (with Attestor bearing the lion’s share) would be putting up new money to buy out the claims of the Exiting Creditors for 9.75p/£. Whether a creditor should elect to be an Exiting, Stay-in or Participating Creditor depended on its own appetite for risk. One permutation explained in the Estimated Outcome Statement in the CVA was a ‘low case’ return, in which the Participating Creditors might achieve an overall recovery of some 4% less than the Exiting Creditors. This permutation assumed, inter alia, the success of the Potential GTA Claw Back Claim. In contrast, a ‘high case’ return envisaged an overall recovery by Participating Creditors of some 6% more than the Exiting Creditors. This permutation envisaged either the non-making or the rejection of the claw back claim. The value of the recovery in both cases would, however, be diminished by the delay in receiving it. For Stay-in Creditors, the estimated outcomes were even more circumscribed. The CVA made it expressly clear that all projections were estimates only, and no assurance was given that they would prove correct.

The judge concluded his overview of the options open to the creditors by saying:

These are contained in Section 2 of the CVA. Of central importance is paragraph 3, ‘Conditions Precedent’, which I shall set out, but shall first set out paragraph 2, to which it refers:

‘Disputed Claim’ is defined as ‘any claim in respect of which proof has been submitted to the Administrators by the Final Claims Date (i) which has not been accepted, or not accepted for the full amount, by the Administrators as an ‘Allowed Claim’ and (ii) the holder of the claim has not confirmed its agreement with the Administrator’s decision not to accept the claim as an Allowed Claim for its full value.’ ‘Final Claims Date’ is defined as 5pm on 15 January 2018’, a date the judge said was important in that it functioned as a ‘hard Bar Date’: the effect of that was that any CVA Claims against MFGUK not submitted by the Final Claims Date were to be extinguished under the CVA. The condition in paragraph 3.1(e) is the only condition which, by the time of the hearing before the judge, had not been satisfied. He recorded, at [73], that it was common ground that the DB Indemnity Claim is a ‘Disputed Claim after the Challenge Period’.

Paragraph 5 deals with ‘Governance and Litigation Protocols’. It is stated as being for the benefit of the Participating Creditors only. The only assets and liabilities addressed by the Protocol are those under the claw back claim and reclaims in respect of principal trades. This feature is relied upon by Attestor as reflecting the common understanding that there was a limited, and known, universe of actual and potential claims against MFGUK, which did not include the DB Indemnity Claim.

Paragraphs 7 to 9 deal with the rights of the three classes of CVA creditors. Paragraph 7.2 provides for the calculation of the payments to be made to the Exiting Creditors (only to be made if the CVA has not been terminated). In consideration of this, by paragraph 7.9, the Participating Creditors receive, prorata, interests in the CVA Trust Assets, the creation of which trust is provided for in paragraph 6. There is no need to detail the intended operations of the trust.

Paragraph 27 makes provision for the termination of the CVA. It featured in question (3) for the court below and I should set out paragraph 27.1:

That is an important provision and I referred to the effect of paragraph 27.1(b) at [5] above. As to that sub-paragraph, the Relevant Date is defined as the date of the later of the Creditors’ Meeting and the Members’ Meeting, which both took place on 12 December 2017. The Implementation Date is the date on which each of the conditions precedent in paragraph 3 are satisfied or (where permitted) waived. The effect of sub-paragraph (b) is, therefore, that if the Implementation Date has not arrived by 12 June 2018 so as to bring the CVA into effect, the CVA will automatically terminate on 12 June. Paragraph 27.1(c) prompted the third question upon which the judge was required to give a direction. Taking on the supervisors’ task for them, he directed that there was no impediment of the nature referred to.

At [42] to [47] the judge explained that the CVA has, by statute, contractual effect and that the ordinary principles of interpretation applying to contracts apply also to the interpretation of a CVA. This is not in dispute. As to the general principles of interpretation applying to contracts, the judge referred to the summary by Lord Hodge JSC in Wood v. Capita Insurance Services Ltd [2017] UKSC 24, and he cited [10] to [14]; to a statement of principle by Sir Thomas Bingham MR in Arbuthnot v. Fagan [1995] CLC 1396; and to Arnold v. Britton [2015] AC 1619, per Lord Neuberger at [15], which I shall repeat as containing a succinct summary of the principles:

There was no dispute about these principles before the judge or this court.

The judge focussed, at [48] to [56] on the nature and effect of the DB Indemnity Claim and the administrators’ response to it. DB submitted its proof of debt on Friday 12 January 2018, three days before (i) the end of the period within which creditors were entitled to make a statutory challenge to the CVA under section 6(1)(a) of the Insolvency Act (a period corresponding with what is called the ‘Challenge Period’ in the CVA, although we were not shown any provision in the CVA expressly explaining the nature of any challenges that might be made: perhaps paragraph 3.1(d) comes closest to providing a clue); and (ii) the Final Claims Date. The proof was in respect of a debt of €126,724,993.95. It arose out of DB’s role as custodian bank for certain trades entered into by MFGUK in 2011. DB claims it may be liable to pay to the GTA taxes in respect of those trades, although it disputes that it should be.

The judge noted that Attestor had tended to describe the claim as in the full nominal value of over €126m and thus as:

Like the other Disputed Claims, the administrators rejected the DB Indemnity Claim. Appeals against such rejections have been made, but have not yet been resolved. The judge, whilst again noting the administrators’ position of studied neutrality, summarised Mr Pink’s evidence to the effect that they did not regard the DB Indemnity Claim as meaning that the CVA should be terminated. Its essence was that the Participating Creditors, including Attestor, are sophisticated commercial operators and that creditors such as them who were prepared to ‘take a view’ on the merits of other Disputed Claims might reasonably be expected to take a similar view on the DB Indemnity Claim. The risk of unanticipated claims was always present in the formulation of the CVA. Furthermore, the value attributable to the DB Indemnity Claim may bear little relation to its face value. Mr Pink’s approach was adopted by the FSCS, which:

The judge, at [59] and [60], summarised Attestor’s rather different approach to the impact of the DB Indemnity Claim. Its position was that it represented a risk that had radically altered the economics and that, were it to be allowed, (a) the entirety of the remaining administration estate would likely be eaten up by it, (b) Participating Creditors would receive no further distribution, would lose the entirety of their £64m investment, with an effective recovery of just 67.8% (and, for Attestor, a mere 53.3%), whilst the Exiting Creditors would still exit with the benefit of the whole of the £64m payment, giving them a recovery of 99.75%. Such an outcome would be at odds with expectations of all parties at the time of the proposal and approval of the CVA and would falsify the commercial calculations and bargain which underlies it.

Between [80] and [98] the judge explained Attestor’s and the FSCS’s respective arguments as to the interpretation of paragraph 3.1(e). Attestor’s case was that its purpose is to deal with the unanticipated emergence of a claim such as the DB Indemnity Claim which alters the assumptions and bargain underlying the CVA. In such a case, the administrators should not give the confirmation prescribed by paragraph 3.1(e) because that would be inconsistent with the commercial purpose of the CVA. The paragraph required the administrators to make a value judgment (not to exercise a discretion), which was to be struck according to whether the Disputed Claim was such as to ‘materially alter the effect or economic substance of the CVA’ (words taken from paragraph 26.4, which empower the supervisors to modify the CVA after the Implementation Date ‘provided such modifications are in the best interests of the CVA Creditors and do not materially alter the effect or economic substance of the CVA…’). Paragraph 3.1(e) must, it was said, obviously be engaged by a claim, albeit disputed, for €126m. Attestor rejected as ‘empty’ the FSCS’s revised submission that the function of paragraph 3.1(e) was to plug a gap left unfilled by paragraph 3.1(d), which, whilst referring to various potential claims under sections 4(A)(3), 6(1)(a) and 6(1)(b) of the Insolvency Act, failed also to include the particular case of a potential challenge under section 6(3)(b) of the Insolvency Act, which enables challenges to be brought by ‘a person who was not given notice of the creditors’ meeting, after the end of the period of 28 days beginning with the day on which he became aware that the meeting had taken place’.

The FSCS’s case on paragraph 3.1(e) was that Attestor’s argument placed too much discretion on the administrators, being a discretion that was anyway of a nature whose ambit was unclear and also inconsistent with the mechanical focus of the rest of paragraph 3.1 and which provided no parameters for the exercise of the discretion. Absent express words, paragraph 3.1(e) could not be read as conferring upon the administrators the power Attestor asserted. The FSCS submitted that to terminate the CVA by reason of the emergence of the DB Indemnity Claim would undermine, indeed negate, the purpose of the Final Claims Date/hard bar date and would amount to a re-writing of the bargain between the creditors. If paragraph 3.1(e) carried the weight that Attestor derived from it, why, asked the FSCS, did it not also refer to the likely larger impact of large Allowed Claims on the economic balance of the CVA?

The judge said that the FSCS’s argument itself ‘asked remarkably little of’ paragraph 3.1(e). Although originally the FSCS had suggested that paragraph 3.1(e) was applicable ‘only in the event of the CVA being “practically incapable of implementation”, thus substantially duplicating clause 27.1(c)’, the FSCS advanced (apparently with ‘some diffidence’) a revised interpretation at the hearing, namely that paragraph 3.1(e) was ‘concerned with a potential challenge to the CVA made outside the CVA Challenge Period as defined, but within the statutory challenge period under section 6 of the Insolvency Act 1986. There is no such challenge here.’ The judge explained the argument at [95](2) and (3):

The judge discussed this in conspicuous and meticulous detail at [99] to [126]. It is difficult to do justice to his careful reasoning by a summary but I shall try.

The judge said that the fact that Attestor’s argument invested so much substance in the words of paragraph 3.1(e) and the FSCS’s arguments so little, reflected their diametrically opposed interests. It also demonstrated the polarities of approach where, as here, the circumstances that had arisen were ‘unknown unknowns’ and were simply not contemplated. He said:

In these circumstances, the judge said the starting point was ‘the words of the disputed clause and the provisions of the contract read as a whole.’ To that end, he considered what the parties should be taken to have had in mind in envisaging a post-Challenge Period Disputed Claim that might preclude the CVA from becoming effective. In adoption of the way Attestor put it, what was the paragraph getting at?

At [103], the judge expressed agreement with Attestor that it was directed at the potential effect of Disputed Claims remaining on foot after the Challenge Period has ended. The concern of paragraph 3.1(e) was with a Disputed Claim:

The judge then did so. He construed ‘becoming effective’ as meaning ‘come into effect’. I understand him to have decided, at [105], that the reference to the ‘CVA’ in context showed that the stipulated confirmation related to something that ‘precludes’ the coming into effect of the binding terms of Section 2 of the CVA rather than some circumstance assessed to be such as to ‘preclude’ the achievement of the ‘bargain’ in terms of the economic balance or the commercial objectives of the Proposal as described in Section 1. As to ‘preclude’, he interpreted this as meaning ‘prevent from happening’ or ‘make impossible’. He said it did not, at least as a matter of semantics, extend to mere impediment or unfairness of outcome. As to the sense of ‘Disputed Claims’ in the paragraph, the judge said that the special risk that is represented by it is not the mere fact of the claims but the fact of their continued existence after the Challenge Period. He continued:

The judge turned to the sense of (b) and (c) in his examination of paragraph 3.1(e). They posed the question whether the ‘should not’ in it called for (i) a prediction by the administrators that the continuing existence of Disputed Claims after the Challenge Period (in particular the DB Indemnity Claim) will as a practical matter or reality prevent the terms of the CVA coming into effect (for example, pursuant to a late but successful statutory challenge to the CVA), or (ii) a value judgment as to whether they can be satisfied that such continuing existence does not give rise to a liability or risk such as to prevent or make it impossible for the terms of the CVA to come into existence in a manner consistent with the commercial bargain put before the creditors.

The judge then gave reasons against the latter interpretation, at [109] to [111], including (i) that it involved reading into the language more than would be semantically natural, (ii) the need to identify a commercial ‘bargain’ beyond the terms set out in Section 2, and (iii) the interpolation of both a mandate for a value judgment based ‘not on any likely impossibility of giving effect to the terms of the CVA but rather based on their inconsistency with the identified “commercial bargain”, and also a standard of comparison and criteria for that value judgment which are not expressed.’ It would also require the interpolation of restrictions, or some other gloss, on the power given to the supervisors to waive either or both of the conditions in paragraphs 3.1(d) and (e). The judge said that:

After further discussion of the perceived difficulties of the Attestor interpretation, the judge concluded by saying:

The judge then said, that had he favoured Attestor’s interpretation, he would not have accepted that the mere fact of a large nominal risk was sufficient to warrant declining confirmation. Nor would he have taken on the task of the value judgment asserted to be required. It was a task for which the administrators were better equipped.

Attestor, represented, as below, by David Allison QC and Alex Barden, confined its appeal to a challenge to the judge’s interpretation of the paragraph 3.1(e) condition precedent. Was the judge right that, as the FSCS contended, all that paragraph 3.1(e) is concerned with is a potential challenge to the CVA, made outside the CVA Challenge Period, but within the extended challenge period permitted under section 6 of the Insolvency Act? Or, as Attestor asserts, in a case where there are outstanding Disputed Claims at the end of the Challenge Period differing materially from those at the time of the earlier approval of the CVA, does it instead require the administrators to make a value judgement as to whether the CVA should proceed having regard to the effect of those claims on the basis on which the creditors entered into the CVA?

The FSCS, represented, as below, by Mark Arnold QC and Marcus Haywood, submitted that the judge was right in his interpretation of paragraph 3.1(e), for the reasons he gave. The essence of that interpretation is that all that the sub-paragraph is directed at is filling a gap said to have been left by paragraph 3.1(d), namely to include as another condition precedent that there should be no pending application by any creditor to challenge the CVA in reliance on the extended period for bringing such claims under section 6(3)(b) of the Insolvency Act. Paragraph 3.1(d) deals with the case of creditors who had notice of the December creditors’ meeting and who were required to bring any challenge to the CVA within the period prescribed by section 6(3)(a), which corresponds with the 28-day ‘Challenge Period’. It does not, however, cover the different case of a creditor who (i) did not have notice of the meeting, but (ii) later learned of the CVA, (iii) submits his claim by the Final Claims Date and then, as he would be entitled to, makes a challenge to the CVA under the extended period provided by section 6(3)(b).

The FSCS’s submission is that the sole purpose of paragraph 3.1(e) is to fill that supposed gap. All it is concerned with is the actual or potential existence of court challenges of this nature. If any such claim is pending after the end of the Challenge Period, the paragraph 3.1(e) condition precedent will not have been satisfied and will (unless the condition is waived by the supervisors) mean that the administrators will be unable to confirm that the CVA can become effective. If there are no such pending claims, but there is a creditor who might be able to make one, the administrators must wait to see whether, within the extended limitation period applicable to him, he does bring a claim. If he does, the like consequence will follow.

Mr Allison and Mr Arnold each devoted a material part of their respective submissions to attacking the other’s suggested interpretation. It is fair to say that each had a reasonable supply of ammunition. There are difficulties with both interpretations.

First, the FSCS’s interpretation faces a serious linguistic problem. Paragraph 3.1(e) is said to be designed, and intended by the CVA, to fill a gap left by paragraph 3.1(d) so as to extend the range of the latter paragraph to what, in short, I shall call ‘late challenges’ under the Insolvency Act. There is, however, perhaps a degree of near absurdity in the suggestion that was in fact the purpose of paragraph 3.1(e) because its language does not disclose even the slightest clue that that was what it was in fact about.

The CVA was obviously drafted by skilful lawyers, who knew what they were doing when they drafted paragraph 3.1(d), and used language to make the CVA’s intentions unambiguously clear. If, as is the premise of the FSCS’s case, it was at some point perceived that paragraph 3 also needed to cover the case of late challenges, one might think it obvious that the drafters would simply have added an appropriate provision to the end of paragraph 3.1(d), spelling out expressly what they were providing for. That, however, was not done. Instead, so it is said, paragraph 3.1(e) was expressly designed for the purpose of doing the job. Remarkably, however, it makes no reference, to the type of challenge to which it is said to have been directed; and although it does use the words ‘Challenge Period’, which Mr Arnold appeared to regard as lending his argument assistance, that is of course a different period from that applying to the late challenges. The wording of paragraph 3.1(e) could not, it seems to me, have been more inapt to do what the FSCS says it was intended to do; and the notion that it was intended to fill the supposed gap is one I regard as improbable.

Second, the structure of paragraph 3.1(e) is fundamentally different from that of paragraph 3.1(d). The latter provides a clear mechanical test as to the circumstances in which the condition precedent is not satisfied. It does not require any judgment or confirmation from anyone. Not so, however, with paragraph 3.1(e). One might think that, were it intended merely to supplement paragraph 3.1(d), it would provide a like mechanical test as to the circumstances in which the condition precedent was not satisfied. It does not. It instead imposes a task upon the administrators in the nature of the formation of some sort of judgment. Mr Allison emphasised its ‘should not’.

Third, the paragraph 3.1(e) interpretation that the judge favoured is not consistent with his view that ‘preclude’ meant ‘prevent from happening’ or ‘make impossible’. It is not impossible, or uncommon, for CVAs to come into force whilst subject to a pending challenge, nor for CVAs that are already in force to be subject to such challenges.

Fourth, if the purpose of paragraph 3.1(e) is intended to fill the claimed gap, the gap is a very small one: it is confined to the probably unusual case of a creditor who had no notice of the CVA proposal and meeting, but learns of it within the 28-day Challenge Period, files his proof in time, one which was not admitted (so that it becomes a paragraph 3.1(e) ‘Disputed Claim’), and then has the benefit of an extended time in which to bring a late challenge. The odd thing about the claimed interpretation is, however, that the gap that it is said was intended to be filled was such a narrow one. Why, when engaged in such gap-filling, did the drafters of paragraph 3.1(e) not also fill wider gaps, for example the case of a late challenge by someone with an admitted claim and who wished to challenge the CVA as unfair?

Attestor’s interpretation of paragraph 3.1(e) also had its share of criticism. First, if, as is claimed, the function of the sub-paragraph is to confer on the administrators the function of deciding whether, in light of the change in the state of the Disputed Claims at the end of the Challenge Period as compared with at the date of the earlier creditors’ meeting, the CVA should or should not come into effect, it is surprising that it includes no criteria by reference to which the judgement was to be exercised. Mr Arnold compared it with paragraph 4.3 of Section 1 of the CVA, which provides that:

Second, it is said that if an assessment of the circumstances of the estate at the Final Claims Date is what paragraph 3.1(e) is directed to, why does it not include a reference to claims that have been allowed since the date of the CVA meetings, or to any additional assets available to the creditors?

Third, why is it to be supposed that the creditors, who had already agreed to the CVA at the meetings, would be agreeing to a further layer of decision making as to whether the CVA should become effective?

Fourth, it is said that there is difficulty with regard to the intended operational relationship between the supervisors and the administrators in relation to paragraph 3.1(e). The administrators are said to have imposed on them the burden of making a judgement in the light of any changes in the Disputed Claims by the time of the Final Claims Date, yet clause 3.1 gives the supervisors the power to waive the conditions precedent in paragraphs 3.1(d) and (e). There was much discussion in the argument about the supervisors’ power of waiver, which I have to say I did not ultimately regard as casting any material illumination on the question. Since the December 2017 meetings, the administrators and supervisors have, however, been the same insolvency practitioners and so the likelihood of any sort of conflict arising was and is remote.

Other criticisms of each suggested interpretation were advanced but at the end of the argument I was and am in no doubt that, with respect to the judge, he was wrong to favour the interpretation of paragraph 3.1(e) advanced by the FSCS and that the correct interpretation is that advanced by Attestor. It is in my view inconceivable that the drafting of the paragraph was influenced by the intention to fill the supposed gap. Its language makes no suggestion that that was its intention and I consider it obvious that it was not. More importantly, I consider that the reasonable person presented with all the material necessary to enable him to make a judgment on the meaning of paragraph 3.1(e) would not come up with the view that it was intended to fill the gap said to have been left by paragraph 3.1(d). He would be likely to be surprised at any suggestion to such effect. I consider he would have little doubt that Attestor’s interpretation was the right one.

Once the FSCS interpretation is put aside, no interpretation of paragraph 3.1(e) other than Attestor’s is advanced and in my view that interpretation is the right one. I accept that the language of paragraph 3.1(e) does not spell out expressly the sense that Attestor attributes to it, although Attestor has rather more linguistic support for it than the FSCS does for its interpretation. In the context of this CVA, Attestor’s interpretation also makes commercial sense. The critical feature of the CVA is that there was a gap between the date of the meetings approving it and the later Final Claims Date; and there was every prospect, indeed likelihood, given the hard bar date, that further claims would emerge by the latter date and, as at such date, become ‘Disputed Claims’ within the meaning of the CVA. Mr Arnold emphasised that the CVA made no promises to the Participating Creditors as to the outcome of the CVA upon which the creditors voted in December 2017, and Mr Allison does not suggest otherwise. But what is important is that the basis upon which the creditors, in particular the Participating Creditors, were making their decision about the potential advantages and risks in the CVA is that the Proposal was very precise about MFGUK’s assumed liabilities, with paragraph 13 setting the position out with care. The level of assumed liabilities was crucial to the commercial decision as to how to respond to the CVA Proposal; and the Participating Creditors’ decision to elect for such status was centrally founded upon it. If, as was likely, further claims were to emerge by the Final Claims Date, that would be likely to have an impact upon the basis of the creditors’ earlier decision although not necessarily a material one.

Paragraph 3.1(e) may not do it very elegantly, but its apparent substance is that the administrators are required to make a judgment as to whether the existence of Disputed Claims after the Challenge Period is a factor that should, or should not, preclude the CVA from becoming effective. If the Disputed Claims still in existence are essentially the same as those in existence at the date of the CVA meeting, it would be surprising if the administrators’ judgement could be other than to the effect that they should not preclude the CVA from becoming effective. But as the function of paragraph 3.1(e) is to enable the administrators to assess whether the state of the Disputed Claims in existence following the Challenge Period presents any reason why the CVA should not become effective, the paragraph must be focussing on a consideration by the administrators as to whether a material change in the state of the Disputed Claims after the Challenge Period, in particular a material increase in such Claims, could be regarded as changing the basis upon which the creditors had voted in favour of the CVA. It is important to note that clause 3.1 operates at a time before the material parts of the CVA have come into force. The Exiting Creditors have not yet become entitled to, let alone received, their 9.75p/£ and the Participating Creditors have not yet been required to provide the £64m to buy them out. Clause 3 imposes conditions precedent which must be satisfied if the CVA is to come into force. Indeed, the starting position of paragraph 3.1(e) is that the existence of any Disputed Claims after the Challenge Period is a feature that, without more, will serve to prevent the CVA from coming into effect – unless only ‘the Administrators have confirmed that this should not preclude the CVA from becoming effective.’

It is, I consider, obvious that this means that the administrators have to exercise a value judgment as to whether, in the light of any changed circumstances in the state of the Disputed Claims, it would be fair for the CVA to come into effect. The emergence of the DB Indemnity Claim, with a nominal value of just under €127m was obviously a game changer. The judge set out how, on a worst case scenario, the consequential outcome of the CVA for the Participating Creditors, and for Attestor in particular, could be disastrous. It would be an outcome that would bear no relation to that which they might reasonably expect (although without of course any certainty) had the liabilities remained as they were at the time of the CVA meetings. The judge was in my view wrong to regard the virtue of the FSCS’s interpretation as one that would ‘save’ the CVA and preserve its other advantages (see his [117](2)). The central purpose of paragraph 3.1(e) was to enable consideration to be given to whether, in materially changed circumstances since the CVA meetings, the proposed bargain between the creditors was one to which they should be held.

In my judgment, therefore, Attestor’s interpretation of paragraph 3.1(e) is the correct one. In the context of this particular CVA the task required to be performed under it by the administrators was an important, indeed essential, one.

We had succinct oral arguments from Mr Allison and Mr Arnold as to the consequences of an upholding of Attestor’s interpretation. The administrators have indicated a wish to surrender their discretion to the court, if the court is prepared to accept it, and Mr Allison supports that course. Mr Arnold also agreed to that course if the court felt able to perform the task. We had some discussion during the argument with Mr Bayfield QC, for the administrators, as to whether we might instead simply endeavour to give guidance to the administrators as to how they might go about the task of exercising the judgement required by paragraph 3.1(e). In the event, the court has decided to accept the offered surrender. The exercise that is required is not one of commercial judgement. It is rather a case of the court being required to identify the nature of the judgement that requires to be exercised, and exercising it fairly by reference to its scope, purpose and the relevant facts. Mr Allison and Mr Arnold are of course not agreed as to what direction the court should give to the administrators.

I have identified the nature of the judgement required by paragraph 3.1(e). The critical question is whether, in light of the emergence of the DB Indemnity Claim, the CVA should nevertheless become effective. Mr Allison submitted in his skeleton argument, upon which I have gratefully drawn for this part of my judgment, that the answer is a foregone conclusion by reference to three particular considerations: (i) the size and potential ultimate impact of the DB Indemnity Claim; (ii) the fact that the claim is a seriously arguable one and, in accordance with the practice in relation to all claims, will be reserved for by the administrators; and (iii) the fact that the claim was not contemplated at the time of the CVA meetings, nor did it, or could it, play any part in the commercial judgments applied by the Participating Creditors in assessing the bargain proposed with the Exiting Creditors.

As to point (i), the administrators have produced a document showing the effect of the claim on the various groups of CVA creditors if it is ultimately allowed. The estate would be unable to meet the claim. DB and GTA would recover only 64.1p/£. The Exiting Creditors would still of course have their 9.75p/£, which will have been paid out by the Participating Creditors at a total cost of £64m, and so they will have received a recovery of 99.75%. Stay-in Creditors, who had been anticipated to receive between an additional 6p/£ and 11.8p/£, would receive no further distribution at all, and so, unlike the Exiting Creditors, would stay at 90%. Participating Creditors would also receive no further distribution, and so would remain nominally at 90%. However, they would lose the entirety of their £64m new money investment, giving them a total effective recovery of just 67.8%. As I have earlier noted (at [25], quoting [53] of the judge’s judgment), Mr Pink’s assessment was that ‘if the appeal against the rejection of the DB €126M Proof were to be allowed, the “economics” behind the CVA will be dramatically different from those envisaged in the CVA document.’

As to point (ii), the DB Indemnity Claim is clearly a serious substantive claim and no party is suggesting that it has no prospect of success. It is foreseen that the appeal against the rejection of its proof will involve substantial contested proceedings, probably not before 2019. The fact that the administrators intend to reserve for the claim underlines that it is regarded as serious and credible.

As to point (iii), the DB Indemnity Claim was, as the judge observed at [69](9), a ‘wholly unknown unknown’ and ‘was not envisaged or contemplated, and it was not specifically priced in.’ It is wholly different from, for example, the GTA Claw Back Claim, which was known about, reserved for and included in the estimates in the CVA Proposal. Mr Pink has acknowledged that, had the claim been lodged during the CVA process, it would have needed to be taken into account in the analysis of the potential outcomes in the CVA Proposal.

Overall, it is urged by Attestor that the DB Indemnity Claim is precisely the kind of claim that paragraph 3.1(e) was intended to deal with.

Mr Arnold submitted that despite all these considerations the court should direct the administrators to confirm that the CVA should become effective. It remains capable of achievement and there is no practical impediment to its implementation. He reminded the court that the judge had correctly concluded that the claim is a contingent one. Even if DB’s appeal against the rejection of its proof succeeds, the claim would still be a contingent one which may never materialise. It would still depend on the GTA making a claim against DB (which it has not indicated that it will) and which succeeds (DB having indicated it will resist any such claim).

Mr Arnold recognises that the ultimate effect of the DB Indemnity Claim may be that the low estimated outcomes for Participating Creditors and Stay-in Creditors will be less than they anticipated but that is not necessarily so. In any event, the CVA expressly warned all creditors that the outcomes may be ‘greater than the high case’ and ‘lower than the low case’ and that none of the statements in the Proposal as to the estimated outcomes could be relied upon as a guidance as to the actual outcomes. If DB’s appeal against the rejection of its proof were to fail, or the claim does not materialise, or the value attributed to it by the administrators is low, the CVA will still be capable of delivering to the Participating and Stay-in Creditors a result consistent with what they hoped and bargained for.

As to Attestor’s point that the DB Indemnity Claim was an ‘unknown unknown’ at the time the CVA Proposal was approved, Mr Arnold submitted that the appropriate course is to consider the incidence of risk more generally. This was a CVA in which risks were taken by all creditors, taking their own advice, following their own investigations and by reference to their own interests. It is said it was not a one way bet and that the judgement that needs to be made should not now be exercised so as to give effect to a one way bet when none was intended. The Exiting Creditors will, if the CVA is not implemented, lose all the benefits they hoped to obtain from it: they may not receive their expected dividend of 9.75p/£ and will face uncertainty as to when they might expect to receive any further dividend. These were risks they chose to avoid by voting in favour of the CVA.

I do not find this exercise of judgement as straightforward as Mr Allison suggests it is and I accept Mr Arnold’s submission that the judgement has to be exercised so as to achieve fairness, so far as possible, to all classes of creditors. There are a good many hurdles that need to be surmounted before the DB Indemnity Claim will amount to an actual claim and it may never do so. In the meantime, however, the administrators will be reserving for it and I am satisfied that it will in practice have a dramatic effect upon the expected operation of the CVA, if implemented, and may ultimately visit a particularly damaging effect upon the outcome of the CVA as regards, in particular, the Participating Creditors. I accept that if the CVA does not become effective the Exiting Creditors will lose the immediate benefits they were expecting and may in the longer term not achieve comparable ones. That consideration must, however, be balanced against the fact that their expected benefits were the hoped-for fruit of a proposed bargain with the Participating Creditors, being one that was entered by the Participating Creditors on the basis of commercial assumptions as to MFGUK’s assumed liabilities. Those assumptions have now been substantially falsified by the DB Indemnity Claim and it appears to me to be entirely reasonable for the Participating Creditors to assert that the bargain the FSCS is now seeking to hold them to is not the bargain that they entered into.

I have come to the conclusion that the fairest judgment to make in answer to the paragraph 3.1(e) question is that, in light of the emergence of the DB Indemnity Claim, the administrators should be directed to confirm that the CVA is precluded from becoming effective. I would so direct.

I would therefore allow Attestor’s appeal, set aside paragraph 1 of the judge’s order of 25 May 2018 and make a direction to the administrators of the nature just indicated.

I agree.

I also agree.