The ‘Golden Belt’ litigation has been followed closely by the securitisation, structured debt and capital markets communities.

The funds which held certificates were seeking to hold the arranger of the Sukuk liable for their losses as a result of an invalidly executed transaction document. In a recent decision of the High Court, Mr Justice Males has held that the arranger did owe the funds a duty to take reasonable care to ensure that a Promissory Note was properly executed and that it breached that duty. At the same time, Mr Justice Males held that the arranger did not owe an equivalent duty to Golden Belt, the SPV issuer of the certificates.

Background to the Sukuk

A Sukuk is a form of Islamic financing that operates in the same way as a conventional Eurobond issuance but complies with the principles of Sharia law.

The Sukuk in question here was to raise $650m for the Saad Group, a Saudi Arabian conglomerate. The funds were to be raised by investors purchasing the Golden Belt certificates and Saad appointed an arranger, sole bookrunner and lead manager of the Sukuk. The certificateholders were to receive a return on their investment by way of rental payments made by Saad relating to some land parcels in Saudi Arabia. The Sukuk was asset based, rather than asset backed, meaning that Saad’s obligations were unsecured but a failure to make a rental payment by Saad would be a termination event leading to the dissolution of the Sukuk and the repayment of a Termination Sum of $650m to the certificateholders. In support of the obligation to pay the Termination Sum, Saad issued to Golden Belt a Saudi law Promissory Note in the sum of $650m. The Promissory Note was to be signed by Mr Maan Al Sanea, the principal of the Saad Group and, in 2007, one of the richest men in the world. In order to be valid and binding it required to be witnessed in accordance with Saudi law.

In May 2007 Golden Belt, a Bahraini SPV that acted as issuer of certificates and trustee of certificateholders’ rights under the Sukuk’s transaction documents, issued certificates totalling $650m. The Offering Circular for the Sukuk contained all the usual disclaimers that are common in these types of transaction, expressly disclaiming any contractual liability of the arranger and making no representations or warranties as to the accuracy or completeness of the Offering Circular.

Default of the Sukuk and Enforcement

In June 2009 Saad defaulted on a rental payment. The Sukuk was terminated in October 2010 meaning the $650m was due to certificateholders.

In March 2011 Golden Belt commenced proceedings in Saudi Arabia to enforce the Promissory Note. In May 2012 Saad defended these proceedings on a number of grounds, one of which was that the signature of Mr Al Sanea on the Promissory Note was not genuine. In 2014, Golden Belt received expert evidence that the signature on the Promissory Note was signed by colour laser printing and not in ink by hand. This was only visible under microscopic examination.

The practical effect of this was that enforcement proceedings against Saad in Saudi Arabia were highly unlikely ever to succeed as a result of the Promissory Note not being properly witnessed and not having a genuine, wet-ink signature from Mr Al Sanea.

The Funds

The claimant funds were specialists in distressed debt and purchased their certificates in the secondary market after Saad had defaulted on the rental payments for the Sukuk and the Saad Group had become involved in significant restructurings and litigation that raised serious allegations of fraud against the group and Mr Al Sanea. Importantly, at the time that the funds purchased their certificates, the information about the validity of Mr Al Sanea’s signature on the Promissory Note was not known to certificateholders or the market.

In evidence, the funds demonstrated their rationale for the investment in the Sukuk. The funds considered that the Saad Group and Mr Al Sanea had assets that exceeded their liabilities, allegations of fraud were common in these sorts of situations and it was felt that the Saudi Arabian government would be reluctant to prejudice the ability of other Saudi companies to raise funds on the international markets as a result of the Saad situation. The funds all felt that the risks were outweighed by the potential benefits, including the existence of the Promissory Note and the ability to take direct enforcement action in Saudi Arabia against Saad under the terms of the Promissory Note.

When asked about the risk that the Promissory Note could be unenforceable a witness for the funds “was adamant in drawing a distinction between on the one hand the risk that an instrument creating an obligation might prove to be unenforceable for a variety of reasons and on the other hand the risk that an instrument forming part of a transaction arranged by a major international bank was worthless from the outset because it had not been properly executed.

The Duty

By the time of trial, the scope of the funds’ case had narrowed significantly and the only duty the funds and Golden Belt argued for was that the arranger owed the funds and Golden Belt a duty to take reasonable care that the Promissory Note was properly executed.

In the context of tortious duties owed to investors, the Courts have been very slow to impose duties on banks or institutions arranging financial transactions. This is usually because the transactions will be the subject of complex, well-negotiated and carefully drafted contractual documentation that governs the allocation of risk between the parties. Additionally, the investors will often not be clients of the institution.

However, Mr Justice Males recognised that this approach did not mean that the Court should never consider whether a duty exists on the particular facts of the case, even if an arranging bank has tried to disclaim responsibility for its role.

Here, Mr Justice Males considered that the duty was one that related to the arranger’s own function in the transaction. The function of arranging signature and execution of the transaction documents is one that is typically undertaken by the arranging bank. Mr Justice Males considered that there was a distinction between the bank accepting responsibility for actions and statements of its clients (such as those in the Offering Circular) versus accepting responsibility for the proper performance of its own function.

Mr Justice Males also considered that the function that the Promissory Note played in the Sukuk was critical. It would only ever be necessary to rely on the Promissory Note in the event that Saad had defaulted. In such circumstances, it would be highly likely that Saad would be trying to avoid enforcement action.

Mr Justice Males felt that investors would reasonably have relied on the arranger to ensure that the Promissory Note was properly executed so that should it ever be necessary to rely on the Promissory Note, the investors could do so. Here, he found that a duty of care was owed by the arranger to the funds and that the arranger had breached that duty of care.

Golden Belt’s position

Mr Justice Males distinguished Golden Belt’s position. He felt that Golden Belt was a shell with no economic interest in the Promissory Note and that there could not be a concurrent duty owed to both the funds and Golden Belt otherwise there would be a risk of double recovery.

Significance for the market

This judgment will inevitably lead to discussion in the market and some nervousness on the part of arranging banks. It does appear to have established a new tortious liability for arranging banks. Undoubtedly, it will prompt more care over future execution arrangements or a new disclaimer in future offering circulars.

However, the duty is one that is relatively easy for arrangers to discharge in practice and the decision appears particularly fact specific. The Promissory Note was a Saudi law document that needed to be executed in accordance with Sharia principles in order to have any useful purpose. It was well-known in the market at the time that Saudi counterparts often tried to avoid liability using a forgery defence and it was reasonable for investors to assume that the arranger would have taken appropriate steps to mitigate this risk. The funds were able to demonstrate with cogent evidence that the existence of the Promissory Note had been a critical factor in their decision to purchase the certificates. Whether other certificate holders in Golden Belt or investors in other transactions can demonstrate similar reliance so as to impose this duty on their arranging bank will need to wait to be seen.