On 1 November 2012, the High Court gave judgment in favour of the Special Administrators (“SAs”) of MF Global UK Ltd (“MFGUK”), in relation to a claim by MF Global Inc (“MFGI”) arising from certain repo-to-maturity transactions (the “RTM Application”). These transactions concerned the repo of European debt securities by MFGI to MFGUK, which were governed by a Global Master Repurchase Agreement (“GMRA”). The GMRA provided for the net amount payable by one party upon termination to be determined by the non-defaulting party. The High Court decided that MFGUK was the non-defaulting party, which the SAs estimate should provide a substantial benefit to the MFGUK estate.
A number of “events of default” were defined in the GMRA. All but one of those events of default required the occurrence of an event and the service by the non-defaulting party of a default notice on the other party. The only exception was where an "act of insolvency" occurred, involving "the presentation of a petition for winding-up or any analogous proceeding or the appointment of a liquidator or analogous officer of the defaulting party". This was automatically an event of default and did not require the service of a default notice.
At 17:00 hours GMT on 31 October 2011, the Court appointed the SAs pursuant to the Investment Bank Special Administration Regulations 2011 (the “Regulations”). A few hours later on the same day, the US District Court appointed a trustee to MFGI under the Securities Investor Protection Act 1970 (“SIPA”). No default notices were served by either party on that day.
The SAs applied to the Court for directions as to whether their appointment constituted an immediate and complete event of default under the GMRA, without the need for service of a default notice.
MFGI conceded that the appointment of the SIPA trustee was an appointment of an officer analogous to a liquidator, so that appointment would be an event of default, with MFGUK the non-defaulting party, unless MFGI could show that the earlier appointment of the SAs was also an event of default, in which case MFGI would be the non-defaulting party. MFGI submitted that the appointment of the SAs was an event of default since administrators were analogous officers to a liquidator. Although, unlike a liquidation, the objectives of a special administration included a rescue of the company, MFGI argued that the rescue of an investment bank would only rarely, if at all, be possible. As a result, the appointment of the SAs should be treated as analogous to the appointment of a liquidator.
- The SAs were not officers analogous to a liquidator and their appointment did not constitute an event of default under the GMRA.
- The essential characteristic of a liquidation and the appointment of a liquidator, which distinguished them from other insolvency proceedings and the appointment of other officers, was that the sole purpose of a liquidation was the realisation of assets and the distribution of assets amongst creditors. An administration might result in the realisation of a company's assets and a distribution to creditors, but the objectives of the administration could also include a rescue of the company as a going concern.
- MFGI’s approach would undermine the need for the maximum level of certainty in the definition of "acts of insolvency" and the occurrence of events of default. That uncertainty would be eliminated if the event of default had to include the appointment of a liquidator. In deciding whether an event of default had occurred, parties could not be expected to investigate whether the purpose of a specific administration might include a rescue of the company.
The effect of the Court’s ruling is that, since the event of default occurred on the appointment of the SIPA trustee rather than that of the SAs, MFGUK was the non-defaulting party under the GMRA.
The decision is likely to have a significant impact on the MFGUK administration because whoever is the non-defaulting party may:
- decide whether or not to trigger the event of default by serving a default notice on the defaulting party;
- determine the valuation of the net sums due between the parties (MFGUK’s estimate is that it owes MFGI £37 million compared with MFGI’s own estimate of £286.7 million); and
- require the defaulting party to pay the non-defaulting party its reasonable costs and expenses incurred as a result of the event of default.
In a wider context, the decision is important for its confirmation that for the purposes of contractual interpretation of English-law governed documents, an administrator should not be regarded as analogous to a liquidator, because an administrator has the option to seek to rescue the company and not to liquidate its assets.