Agrimarche Ltd, Re

Agrimarche Ltd (“the Company”) was incorporated on 9 June 2003. It is a private limited company. It is now in liquidation, following a period during which it was in administration. It entered administration on 24 August 2007; and that administration was converted into a creditors’ voluntary liquidation on 25 January 2008. Its main business, before it entered administration, was the wholesale buying and selling of physical commodities, in particular cereal grain and soya beans, on its own account. However, it also had a side-line. This consisted of the making of commodity option contracts (for oil seed rape or wheat) with farmers in return for a premium set by the Company. The cash generated by the option business supplemented the Company’s income from its main business. The last of the option contracts expired on 9 October 2008.

The Company dealt with farmers either directly or through a broker called Jeremy Cole who traded under the name Agricole. There were two main types of option:

The liquidator asks for directions about how the call options are to be valued. The liquidator has explained what is known about how this part of the business operated. The idea behind it was that a farmer could sell his crop immediately after harvest; but protect himself against subsequent fluctuations in the price of whatever commodity it was that he had harvested. In practice the two commodities were wheat and oil seed rape. If the farmer sold his crop immediately, he would not have to incur the expense of storing it; but on the other hand the price he received from his buyer might be less than the subsequent price for his crop, if commodity prices rose. So he would buy a call option from the Company for a fixed price. Once the price of the physical commodity has exceeded the strike price, the option has a value. It is then said to be “in the money”. On exercise of the option, the farmer’s profit would be the difference between the price of the commodity and the strike price, less the price he paid for the option. The documentation recording these deals is sparse to say the least. It consists of a single sheet of paper written on the company’s headed paper. A typical call option takes this form:

The vast majority of the wheat option contracts described “the Goods” as: “Call option Referenced to LIFFE Wheat Futures”. The remainder of the contracts describe “the Goods” as “Call Option Basis Liffe – Feed Wheat”.All of the oil seed rape option contracts describe “the Goods” as “Call Option Referenced to MATIF OSR Futures”.

The reference in the wheat option contracts to LIFFE is a reference to the London International Financial Futures Exchange, now part of the NYSE Euronext group. Throughout the relevant period, LIFFE operated its own feed wheat futures and option contracts.These were sterling denominated contracts. In essence, the LIFFE feed wheat futures contract gave the buyer the right to a specified quantity of a minimum quality of feed wheat at a specified price for delivery on a specified date in the future. The LIFFE feed wheat option gave the buyer the right, on exercise, to a feed wheat future contract with a delivery date specified in the option contract. It is important to note that exercise of a LIFFE option only gave the grantee of the option the right to a futures contract. It did not give the grantee of the option the immediate right to delivery of the underlying commodity.

The reference in the oil seed rape contracts to MATIF is a reference to the Marché à Terme International de France, which was the Paris futures exchange and is now called Euronext Paris (now also part of the NYSE Euronext group). Throughout the relevant period, MATIF operated its own OSR futures and options. These were euro denominated contracts. In essence, the MATIF oil seed rape futures contract gave the buyer the right to a specified quantity of a minimum quality of oil seed rape at a specified price for delivery on a specified date in the future. The MATIF oil seed rape option contract gave the buyer the right, on exercise, to an oil seed rape futures contract with a delivery date specified in the option contract.Again, it is important to note that exercise of a MATIF option only gave the grantee of the option the right to a futures contract. It did not give the grantee of the option the immediate right to delivery of the underlying commodity.

Trading on LIFFE and MATIF can only take place through members of the exchange and the exchange requires margin on open futures positions. For the Company to have delivered futures positions on these exchanges to its customers, the Company’s futures broker would effectively have had to take these customers on as its own clients and would have required margin from those customers.

According to the company’s employees physical delivery of the underlying commodity did not take place, even where a farmer exercised a call option. In answer to questions posed by the liquidator Mr Cole said:

“There was never any possibility or thought that anyone would ever actually deliver anything up; it was all a paper exercise. There was never any indication of any physical commodity being involved.”

Indeed, the Company did not store physical grain to back up its potential liability under option contracts; although from time to time it hedged its obligations by buying derivatives on the Euronext exchanges. Instead, where a farmer exercised a call option (which would only happen if the price of the physical commodity exceeded the strike price) a cash settlement would be reached. In such circumstances the farmer and the Company would usually agree to close out the option by the payment of a cash settlement by the Company to the farmer. In practice the Company calculated the cash settlement by reference to the price of the equivalent future on LIFFE or MATIF, as the case may be.

The first question on which the liquidator seeks the assistance of the court is whether the call options, if exercised contractually required the Company to deliver the commodity itself (wheat or oil seed rape as the case might be); or simply to make a cash payment calculated by reference to the difference between the strike price and the relevant LIFFE or MATIF future at the point of exercise. In attempting to answer this question the following principles are relevant:

As noted, there is no evidence that the Company ever made a physical delivery of the underlying commodity on an option contract in the present form; or that anyone expected it to; and the Company did not maintain physical stores of any commodity, matched against its anticipated option obligations. The liquidator also points out that the Company’s customers were farmers who were net sellers of wheat and oil seed rape. Accordingly it seems unlikely that they would have wanted physical delivery and the associated costs that this would have entailed; including the costs of storage and of selling the grain again in the future. Since the underlying purpose of the options was to protect the farmers against movement in the price of the relevant commodity, it is far more likely that the reasonable person would understand the option contract as being no more than a financial instrument.

Such linguistic clues as there are in the contracts support this interpretation. First the description of the goods says that they are “referenced to” the relevant LIFFE or MATIF futures contract. Because of the restrictions on actually trading on either LIFFE or MATIF, the Company could not actually have delivered LIFFE or MATIF futures contracts. The use of the phrase “referenced to” shows that the relevant LIFFE or MATIF futures contract was no more than a benchmark or mechanism for calculating the Company’s financial liability in the event that the option was exercised. Second, the reference is to LIFFE or MATIF futures contracts, rather than to the underlying commodity itself (whose price may differ from the price of a futures contract).Third, the option contract contains no express terms about the quality of the underlying commodity that would have to be delivered. No doubt a term would be implied to the effect that the underlying commodity would be of satisfactory quality (Sale of Goods Act 1979, s. 14). But the precise characteristics of feed wheat may be very important; and if delivery of the underlying commodity had been contemplated it is probable that a detailed description would have been agreed.

In my judgment therefore the Company’s obligation under the call options, if exercised, was not to deliver the underlying commodity, but to pay a cash sum calculated by reference to the relevant LIFFE or MATIF futures contract.

The second question as posed is whether the grantee of the option (i.e. the farmer) was entitled to exercise the option at some time before the expiry of the option. If an option contains time limits on its exercise, those time limits must be strictly complied with; otherwise the exercise of an option is invalid. It is a highly unlikely construction that an option of the type under consideration in the present case must be exercised (if at all) at precisely 16.45 on the last day of the period for which it is valid. It is in my judgment clear that the option may be exercised at any time during the period for which it is valid. However, during the course of the hearing it became clear that this was not the real question. The real question is whether exercise of the option entitles the grantee of the option to an immediate cash payment or only to a cash payment calculated at the end of the option period. If the exercise of the option were to entitle the grantee of the option to no more than a cash payment calculated by reference to values prevailing at the end of the option period, there would be no point in exercising the option before that time. Moreover, exercise of the option entitles the grantee of the option to a payment calculated by reference to a LIFFE or MATIF futures contract. Much of the value of a futures contract lies in the ability to trade it well before the delivery date of the underlying commodity. In my judgment exercise of the option entitled the grantee of the option to an immediate cash payment based on the value of an equivalent LIFFE or MATIF futures contract.

The third question is whether options that were “in the money” at the expiry of the option period were deemed to be automatically exercised. There is no reference in the option contract itself to deemed or automatic exercise. However, the corresponding LIFFE and MATIF options contracts did contain provisions which deemed options that were “in the money” at the end of the option period (both put options and call options) to have been exercised. The Company’s contracts do not incorporate, or even refer to, the corresponding LIFFE and MATIF options contracts. They refer to the relevant LIFFE and MATIF futures contracts. It is the former, rather than the latter, that contain the deemed exercise provisions. In my judgment it is not possible to conclude that these terms of the LIFFE and MATIF options contracts are expressly incorporated into the Company’s contracts. Mr Shivji has, however, put forward an argument in support of the proposition that deemed exercise of an option “in the money” at the end of the option period is an implied term of the contract. The modern approach to the implication of terms is laid down by A-G of Belize v Belize Telecom Ltd [2009] 1 W.L.R. 1988. That case establishes the following propositions:

In some cases courts are able to say that terms which do not appear on the face of the instrument in question are necessarily incorporated into it because of some previous course of dealing between the parties; or because the parties are operating in a market or milieu in which those terms are notoriously part of every contract. Neither of those situations applies here; and there was no suggestion that they do.

The argument in favour of a deemed exercise of an option “in the money” runs thus. The contract contains no express terms about how the exercise of the option is to be effected. Accordingly, there are no formalities to be observed. Since the contract contains no formal mechanism for exercise of the option during its currency, there is no reason to suppose that the parties intended that formal exercise should take place on the expiry of the option period if the option was then “in the money”. On the contrary, since the purpose of the option was to act as a hedge against movements in the underlying price of the commodity in question, it would be unfair if the grantee of the option lost the value of that hedge merely because of a technical failure to exercise the option at the expiry of the option period.

I can see that, from the perspective of the grantee of the option, the incorporation of such a term would make the contract fairer or more reasonable. But that is not the question. The question is whether that is the only meaning that can reasonably be given to the contract, read against its background. The general nature of an option (as its name suggests) is that it give the option holder the right to choose. It is not, at least usually, a contract in which a choice is made for him. I do not consider that the subject matter of this particular series of option contracts is such that it displaces the general position; or, indeed, the general inference that if the contract does not say that something is to happen, then nothing is to happen. In my judgment the suggested term is not to be implied.

In the alternative the liquidator suggested that he should treat option holders whose options expired after the Company’s entry into administration but before it went into liquidation and which were “in the money” at the date of expiry as if they had exercised their options on the expiry date. This was based, at least in part, on an e-mail that one of the company’s employees, Mr Hughes, is thought to have sent to creditors at about the time that the company entered administration. The e-mail was dated 24 August 2007, addressed to Mr Cole and said:

“As per our conversation, I am sorry to say that Agrimarche Ltd will be going into administration. I believe that all open contracts will be valued as at close of play 20^th Aug 07, but I will have to confirm with the official administrator.”

The liquidator’s concern is that this e-mail would have given creditors the impression that nothing needed to be done to crystallise their claims under current option contracts, and that it would be unfair to deprive them of potentially valuable claims merely because they let their options lapse without having given notice of exercise. The principle relied on is that in Ex p James Re Condon (1874) LR 9 Ch App 609. That was a case in which money had been paid to a trustee under a mistake of law, and the trustee was ordered to repay it. James LJ said:

“I am of opinion that a trustee in bankruptcy is an officer of the Court. He has inquisitorial powers given him by the Court, and the Court regards him as its officer, and he is to hold money in his hands upon trust for its equitable distribution among the creditors. The Court, then, finding that he has in his hands money which in equity belongs to some one else, ought to set an example to the world by paying it to the person really entitled to it. In my opinion the Court of Bankruptcy ought to be as honest as other people.”

In Re Multi Guarantee Co Ltd [1987] BCLC 257 Nourse LJ said of that case and those that followed it:

“The principle of cases such as those is that the court will direct a trustee in bankruptcy not to insist on his full legal rights if it would be unacceptable for him to do so. The principle is subject to qualifications, of which the most important is that the court will only take that course in a case where it would be dishonest or shabby or the like for the trustee to insist on his full legal rights.”

In the same case Lawton LJ said:

“Various words have been used in the cases to indicate the kind of conduct to which the principle of Ex p James, Re Condon(1874) LR 9 Ch App 609 may apply, such as “a point of moral justice”, “dishonest”, “dishonourable”, “unworthy”, “unfair” and “shabby”. Those words are not words of art at all. They are words of ordinary English usage and the concept behind them is, as I understand the cases, that an officer of the court, such as a trustee in bankruptcy or a liquidator, should not behave in a way which a reasonable member of the public, knowing all the facts, would regard as either dishonest, unfair or dishonourable.”

Thus an officer of the court has been compelled to honour a promise he made even if the promise was not legally binding: Re Wyvern Developments Ltd [1974] 1 WLR 1097.

In the present case I do not consider that the principle compels the liquidator to treat option holders as if they had exercised their “in the money” options at the date of expiry of the option period for the following reasons:

I have not needed to embark on the question whether the principle in Ex p James Re Condon is excluded anyway on the ground that the liquidation is a creditors’ voluntary liquidation. The Court of Appeal has decided that the principle does not apply to a liquidator in a creditors’ voluntary liquidation on the ground that he is not an officer of the court: Re TH Knitwear (Wholesale) Ltd [1988] 1 Ch 275. The liquidation in the present case is such a liquidation. On the other hand the events which, at least potentially, bring the principle into play took place during the currency of the administration; and the administrators were officers of the court: Insolvency Act 1986 Sched B1 para 5. In Re TH Knitwear (Wholesale) Ltd Slade LJ said that in view of the uncertainty inherent in the principle, it should not be extended. Nevertheless, it would be odd if moving from administration to creditors’ voluntary liquidation radically altered the standard of conduct to be expected of the office holder, particularly where there is no change in the identity of the office holder. But whether that is so can be left to a case in which it matters.

The final question is whether the claims of option holders should be valued at the date of entry into liquidation or entry into administration. In Re Global Traders Europe Ltd (No 2) [2009] Bus LR 1327 David Richards J held that claims were to be valued at the date when the company went into liquidation; and that the fact that the company had previously been in administration made no difference. What, then, could justify valuing the claims at the earlier date on which the company entered administration? The suggested answer is that the option contracts contained an implied term that the options would be deemed to be exercised if the company entered administration.

In Re Lehman Brothers International Europe [2009] EWHC 2545 the claimants had proprietary interests, in the shape of equities of redemption, in Treasury notes held as security by Lehman Brothers which, on maturity, were converted into cash. However, the terms of the agreement between them and Lehman Brothers said that any cash belonged to Lehman Brothers. Thus the effect of the agreement was, inevitably, that as the notes matured, the claimants’ property was eroded. Briggs J held that the clause relating to the ownership of the cash ceased to apply once Lehman Brothers went out of business. As Mr Shivji recognised, that was a very different case to this one.

In this case, in my judgment, the short answer to the suggested implied term is that it is unnecessary. If any of the option holders wished to exercise their options once the company went into administration, they were free to do so. There is therefore no need to deem the options to have been exercised. Moreover, one of the purposes of administration (some might say the primary purpose) is to rescue the company as a going concern. If the market were rising when the company entered administration, some option holders might have preferred to hang on and wait to see whether the company made a successful exit from administration. Those who wanted to crystallise their claims and seek an alternative hedge elsewhere had only to exercise their options. Accordingly, in my judgment there is no justification for advancing the valuation date. Claims must be valued as at the commencement of the liquidation.

I will ask counsel to draw up a minute of order to give effect to my decision. The costs of the application will be payable as an expense of the liquidation.