SMP Trustees Ltd, Re [2012] EWHC 1728 (Ch)

Case No HC12C01016[2012] EWHC 1728 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Venue Royal Courts of Justice, Rolls BuildingDate 25/06/2012
London EC4A 1 NL
Before
MR JUSTICE HENDERSON
Between
IN THE MATTER OF SMP TRUSTEES LTDClaimant
Mr Paul Wright (instructed by Dechert LLP) for ClaimantHearing Hearing date: 20 June 2012
Judgment

Introduction

[1]On 20 June 2012 I heard argument on behalf of the claimant, SMP Trustees Limited (“SMP”), in relation to three issues which arise in connection with the winding up in Luxembourg of Lifemark SA (“Lifemark”). Lifemark is a Luxembourg special purpose company which between 2006 and 2009 made 25 separate issues of a total of 248 series of unrated bonds denominated in six different currencies (“the Note Programme”). The matter has already been before the English court in March of this year, when Norris J granted urgent relief designed to facilitate a controlled liquidation of Lifemark which would avoid a forced sale of the underlying assets upon which the bonds are secured, namely a portfolio of so-called “senior” US life insurance policies. Norris J adjourned further consideration of the other questions raised in the proceedings, and reserved the case to himself. For reasons which do not matter, the further hearing has in fact taken place before myself.[2]The background to the case, and Norris J’s reasons for granting the relief which he did, are set out in the judgment which he delivered on 27 March 2012 (“the March judgment”), following a hearing on 21 March: see Re SMP Trustees Limited [2012] EWHC 772 (Ch). I will not repeat most of that material, and the present judgment should be read as a sequel to the March judgment. Procedurally, the matter comes before the court pursuant to a Part 8 claim form which was issued on 15 March 2012, without naming any defendants (by permission granted by Master Bragge), and an application notice of the same date, which in effect sought final relief in the same terms and was optimistically made returnable in the Chancery Applications Court with a two hour time estimate.[3]At the time of the March hearing, the Luxembourg regulator had recently withdrawn authority for Lifemark to operate as a regulated securitisation undertaking, and a judicial liquidation in Luxembourg was thought to be imminent. In general terms, the purpose of the urgent relief granted by Norris J was to place SMP, as trustee of the Note Programme, in a position to negotiate a protocol with the Luxembourg liquidator, when appointed, which would lead to a controlled liquidation, and to make appropriate amendments to the Trust Deed. These proposals had been explained to the bondholders in a detailed memorandum dated 2 December 2011 (“the Explanatory Memorandum”), and an overwhelming majority in value of the bondholders had voted in favour of them at a plenary meeting of all the bondholders held on 13 February 2012: see paragraphs 15 to 17 of the March judgment.[4]As Norris J explained, it was also considered necessary to convene 25 separate meetings for the bondholders of each issue (“the “issue” meetings”), because of a problem in the interpretation of the provisions relating to meetings in the Trust Deed and related documentation. Unfortunately, two of the “issue” meetings (those for issues 5 and 24) remained inquorate even after adjourned meetings had been held, with the consequence that SMP could not safely proceed on the basis that the proposals for a controlled liquidation had the support of the bondholders of those two issues, even though overwhelming majorities in favour had been obtained for the other 23 issues.[5]Norris J was able to give SMP authority to proceed in the way I have indicated, without first resolving the question of interpretation, because he held that the power of amendment in clause 13.1 of the Trust Deed was both available and wide enough for that purpose. Under the jurisdiction identified in Public Trustee v Cooper [2001] WTLR 901, he gave the blessing of the court to SMP’s intended exercise of this power, describing it as “a lawful and proper exercise of the power”: see paragraph 32 of the March judgment.[6]Of the other matters upon which the bondholders were asked to vote at the February meetings, two remain material. They formed the subject matter of the second and third resolutions for which support was solicited in the Explanatory Memorandum. In outline, resolution 2 sought approval of a proposal (“the KIS proposal”) to pay the administrators of Keydata Investment Services Limited (“KIS”), the company which had originally marketed and mis-sold most of the bonds, in connection with the distribution of realisations to bondholders who had invested in Lifemark through KIS; while resolution 3 sought approval of a proposal to redenominate into US dollars all bonds not originally so denominated at a specified rate of exchange.[7]As paragraph 18 of the March judgment records, the voting on the second and third resolutions was more varied than on the first, and they too were affected by the fact that some “issue” meetings were inquorate. In a little more detail, the plenary meeting voted overwhelmingly in favour of resolution 2, but against resolution 3. 85.75% by value of the bond holders voted at the plenary meeting. Of the 23 quorate “issue” meetings, all but one (the issue 12 meeting) followed the same pattern, returning an overwhelming vote in favour of resolution 2 but against resolution 3. The bondholders of issue 12, however, voted against resolution 2 (by a margin of 62% to 37%), and in favour of resolution 3 by a similar margin.[8]There is a peculiarity about the voting of the adjourned issue 12 meeting against resolution 2, which is explained by Mr Peck in his second witness statement dated 13 June 2012. Issue 12 comprises four series of bonds, namely series 48, 62, 63 and 64. The only bondholders in issue 12 who voted against resolution 2 were the bondholders of series 63. According to information supplied by the administrators of KIS, however, there are no KIS bondholders in series 63. Accordingly, the proposal does not affect them, and it is difficult to see why they voted against it. By contrast, in the other three series within issue 12, no votes were cast against resolution 2, and the great majority of KIS bondholders voted in its favour. Furthermore, in relation to the two inquorate “issue” meetings, there are no KIS bondholders in issue 24, and fewer than 5% in issue 5. It is therefore apparent that an overwhelming majority of the KIS bondholders voted in favour of resolution 2, and the vote against it in relation to issue 12 depended wholly on the votes of non-KIS bondholders.

Developments since March 2012

[9]On 11 May 2012 the Luxembourg District Court, second chamber, ordered the liquidation of Lifemark, appointing a judge of the court as official receiver and Maître Alain Rukavina, an attorney to the court, as liquidator. In its judgment, the court expressed some scepticism about the proposals for a controlled liquidation, apparently because of a perceived lack of liquidity to finance it, and said that “the liquidator should not enter into a memorandum of understanding unless significant guarantees and benefits for the purpose of his mission were to derive from this”.[10]Until very recently, SMP remained hopeful that it would still be possible to reach agreement on the terms of a protocol with the Luxembourg liquidator, and negotiations to that end continued. At a meeting on 19 June, however, the liquidator indicated that for various reasons he did not intend to agree a protocol to implement a controlled liquidation, and said that an official decision to that effect was likely to follow within a few days. In those circumstances, there no longer appears to be any realistic prospect of reaching agreement on a controlled liquidation, and barring an unexpected change of mind by the liquidator SMP now expects to receive in due course a direction from the FSCS (which together with the Yorkshire Building Society holds about 80% of the bonds) for enforcement action to be taken under clause 5.7 of the Trust Deed.[11]Clause 5.7 of the Trust Deed provides as follows:
“At any time after any Security shall have become enforceable, (i) if directed by a Holder Request, … or (iii) if directed by an Extraordinary Resolution Direction the Trustee shall, and otherwise in its discretion may (in each case subject to it having been indemnified to its satisfaction …), take possession of all or part of the Secured Property over which the Security shall have become enforceable or exercising any other rights available to it with respect to the liquidation of the Secured Property and may in its discretion and in accordance with applicable laws sell, call in, collect and convert into money all or any part of the Secured Property in such manner and on such terms as it shall think fit.”
[12]Against this background, the first (and main) question on which SMP seeks the assistance of the court concerns the impending enforcement of the security. Understandably, SMP would prefer to proceed under clause 5.7 in response to a direction, rather than pursuant to an exercise of its own discretion under the alternative limb in the sub-clause. But this raises again the question of interpretation which Norris J adjourned for further consideration. In short, the question in the present context is whether the requirements of a “Holder Request” and an “Extraordinary Resolution Direction” in clause 5.7 can be satisfied by reference to the wishes of all the bondholders collectively, or whether they have to be satisfied separately in respect of each of the 25 issues. On behalf of SMP, Mr Paul Wright invites the court to entertain and decide the question of interpretation, even though no defendants have been joined to assist the court with adversarial argument upon it. If the court were to decide the question in the former sense, SMP would then be able to proceed safely on the basis of an instruction from the FSCS under clause 5.7, and (for the same reason) the second and third questions referred to below would not arise.[13]If, however, the court is unwilling to entertain the question of interpretation, or if it decides it in the second sense, the second and third questions will need to be resolved. The second question is whether SMP should approve and adopt the KIS proposal on behalf of all the relevant bondholders, or only those who voted in favour of it. The third question is whether SMP should redenominate the currency of the bonds for issue 12, as desired by the issue 12 bondholders, even though the vote in all the other quorate “issue” meetings was overwhelmingly against redenomination.[14]With some hesitation, and contrary to my initial inclination, I have decided that I should entertain the question of interpretation. In general, the court is reluctant to decide a disputed question of construction without hearing adversarial argument, and it will be particularly slow to do so when no defendants have been joined in the proceedings. It was essentially for these reasons, as I understand it, that David Richards J declined to give directions on a similar question raised in an earlier application for directions relating to the Note Programme in 2010. I also have in mind paragraph 22 of the March judgment, where Norris J explained why he had not decided the question of interpretation. However, the rule is not an absolute one, and as matters now stand there are a number of reasons which persuade me, on reflection, that I can and should decide the question.[15]First, appearing as he does for a trustee, Mr Wright has been properly conscious of the need to ensure that both sides of the argument are fairly presented to the court. Secondly, it is desirable to avoid the extra expense and delay which would be involved in joining defendants at this stage. Thirdly, there is no evidence that any interested persons (including, in particular, any issue 12 bondholders) actually wish to argue in favour of the issue-by-issue interpretation, with all the practical inconvenience it would entail. Mr Wright informed me in this connection of the steps which have been taken to bring the present proceedings to the attention of potentially interested parties, including the posting of the claim form and Mr Peck’s first witness statement on Lifemark’s website, and the service of Mr Wright’s skeleton argument for the present hearing on solicitors acting for the Yorkshire Building Society and the FSCS. Fourthly, the question arises in a context which is essentially procedural, and it has no impact, so far as I can see, on the beneficial entitlement of bondholders. Finally, I do not think it would be satisfactory to require SMP to go down the alternative discretionary route in clause 5.7 without first deciding whether a valid Holder Request or Extraordinary Resolution Direction can be given.[16]For similar reasons, I propose to deal with the question fairly briefly, without extensive citation of potentially relevant passages in the densely drafted documentation of the Note Programme, and without a full review of all the arguments.

The question of interpretation

[17]The nature of the question was succinctly identified by Norris J in paragraph 14 of the March judgment:
“There are 25 Trust Deeds in materially the same form, each creating identical securities over the single pool of assets in compartment 1, which is itself the product of all 25 issues (and all 248 series of those 25 issues). The terms of Condition 17 (read together with the definitions in the Trust Deed) would appear to contemplate the holding of 25 separate meetings (each of which must be quorate). But there are other indications in the Trust Deed which contemplate the “Bondholders” being all those to whom Lifemark owes obligations which are secured on the assets in “compartment 1” (irrespective of the Trust Deed under which those obligations arise).”
Condition 17 forms part of the Terms and Conditions of the Bonds, set out in Part 2 of Schedule 1 to the Trust Deed, and deals with meetings of bondholders; but the question is essentially the same as that which arises under clause 5.7, and in a number of other contexts in the documentation.[18]I have referred to the Trust Deed, but strictly speaking that is not accurate. There is in fact a separate amended and restated Trust Deed, in materially identical form, for each bond issue, the first (for issue 1) dated 17 March 2006, and the last (for issue 25) dated 24 April 2009. As I shall explain, it is the fact that the definitions of “Bonds” and “Bondholder” are in identical form in each Trust Deed which lies at the heart of the problem.[19]Clause 1.1 of the Trust Deed defines “Bonds” as meaning “the bonds identified in the recitals hereto [i.e. the bonds comprised in the relevant issue] and being substantially in the form set out in Schedule 1 constituted by this Trust Deed and, where the context admits, includes any Further Bonds constituted by a deed supplemental to this Trust Deed.”[20]“Bondholder” has the meaning given to it in the Conditions, and means (in short) the holders of the bonds comprised in the relevant issue.[21]“Further Bonds” has the meaning given by clause 16, which empowers Lifemark from time to time and without the consent of Bondholders to issue further Bonds, on such terms as it may determine. All of the Trust Deeds after the first were expressly entered into in accordance with clause 16, on the footing that the bonds of the relevant issue would be Further Bonds, and that the Trust Deed was supplemental to the Existing Trust Deeds (defined, as one would expect, as the Trust Deeds in relation to all the prior bond issues (“Existing Bonds”)). Accordingly, the definition of “Bonds” in the first Trust Deed includes (where the context admits) all of the bonds in the subsequent 24 issues. However, the definition in the second Trust Deed includes only the bonds in the subsequent 23 issues, and so on, down to the final Trust Deed, where there are no subsequent bonds to be included.[22]It is difficult to think of any good reason why the scope of the definition of “Bonds” should have been intended to diminish in this way, and in my view there must be, at the very least, a strong suspicion that a mistake has been made in the drafting. In a context where further issues of bonds were clearly contemplated, with the same trustee and with the same global security (see clause 16.2), one expects to find a definition which, if the context admits, includes not only any Further Bonds, but also any Existing Bonds. In the first Trust Deed this oversight did not matter, because there were no Existing Bonds; but with each subsequent issue the problem increased. Furthermore, if the omission was a mistake, it is easy to see how it was made; the definition in the first Trust Deed was simply repeated, without thought being given to its consequences where there were Existing Bonds.[23]I move on now to the provisions relating to enforcement of the security. Clause 5.6 of the Trust Deed provides that:
“The Security of the Secured Bondholders and holders of Further Bonds over the Secured Property shall become enforceable if there is any failure to pay the principal and/or the interest in respect of the Secured Bonds or Further Bonds.”
Two points about this provision are worth noting. First, in clause 1.1 “Secured Bonds” is defined as meaning the Bonds, the Existing Bonds and any Further Bonds, and “Secured Bondholders” is defined as meaning holders of Secured Bonds. It can be seen, therefore, that Existing Bonds are expressly included in the definition of “Secured Bonds”, which accordingly extends to all 25 issues. Secondly, there is a degree of redundancy in the drafting of clause 5.6, because it makes express provision in relation to Further Bonds and their holders, even though they are included in the references to Secured Bonds and Secured Bondholders.[24]I have already set out the relevant wording of clause 5.7: see paragraph 11 above. “Holder Request” is defined as meaning “a request in writing by the holders of at least one-fifth in aggregate principal amount of the Bonds then outstanding”. An “Extraordinary Resolution Direction” means “a direction by Extraordinary Resolution of the Bondholders”, and “Extraordinary Resolution” has the meaning set out in Schedule 3. Schedule 3 contains provisions for meetings of bondholders, in language which appears to be specific to the particular bond issue (there are, for example, repeated references to “this Trust Deed”). Thus, an “Extraordinary Resolution” is defined as meaning “a resolution passed at a meeting duly convened and held in accordance with this Trust Deed by a majority of at least 75 per cent of the votes cast”.[25]For present purposes, it is enough to concentrate on the concept of a Holder Request. The language of the definition strongly suggests to me that its reach was intended to be global rather than issue-specific. But if it was intended to be global, the reference to “the Bonds” must clearly be read as including Existing Bonds as well as Further Bonds in order to avoid the anomaly discussed above. Another possibility, of course, is that this is a context which requires the reference to “the Bonds” to be read as issue-specific; and some support for this view may be found in the apparently issue-specific alternative of an Extraordinary Resolution Direction. Nevertheless, I do not consider this to be an intention which can sensibly be imputed to the draftsman. As Mr Wright submits, if clause 5.7 is construed so that a Holder Request is a request made by 20% of the bondholders of a particular issue, what is SMP required to do if some, but not all, of the issues request enforcement? There appear to be three possibilities, to each of which there are cogent objections. First, SMP might be required to enforce for the benefit only of those issues which made a Holder Request. But that cannot in practice be done, where the security is global and held for the benefit of all. Secondly, SMP might be required to enforce the security for the benefit of all, but that too leads to unattractive consequences. Why should one issue of bondholders, who may represent only a very small proportion of the total bonds in issue, be able to require enforcement if the other bondholders do not want it to take place? Thirdly, the language might be construed as preventing enforcement unless 20% of the bondholders of all the issues require enforcement. But this would be unduly restrictive, and in the present case would probably prevent a valid Holder Request being given because it is likely to remain impossible to ascertain the views of the requisite number of the bondholders of at least the two inquorate issues. The only sensible construction, submits Mr Wright, is one that applies across all issues, and requires a request made by 20% of the total population of bondholders.[26]Mr Wright reinforced his submissions by reference to the further enforcement provisions contained in clause 19 of the Trust Deed. This clause provides that no enforcement action is to be taken except by the Trustee, and that the Trustee need not take any such proceedings:
“unless (a) it shall have been so directed by a Holder Request … or an Extraordinary Resolution Direction of the Bondholders or holders of Existing Bonds or Further Bonds and (b) it shall have been indemnified to its satisfaction.”
Mr Wright submits, and I agree, that a Holder Request must have the same meaning here as it does in clause 5.7. I would also observe that the draftsman of this clause, which was added by amendment in 2009, appears to have noted the apparently issue-specific scope of an Extraordinary Resolution Direction, and attempted to deal with it by adding a reference to holders of Existing or Further Bonds. Read as a whole, I consider that clause 19 provides some extra support for the view that a Holder Request is a global concept.[27]Mr Wright also referred me to clause 14.2, which provides that, subject to certain conditions, “the Bondholders may by Extraordinary Resolution remove any Trustee”. The definition of “Extraordinary Resolution”, as I have already explained, is set out in Schedule 3 and is apparently issue-specific. However, in the context of clause 14.2 this makes little sense, as what appears to be contemplated is a single resolution of all the bondholders. There is no suggestion anywhere that there may be separate trustees for different issues within the Note Programme, and in view of the global nature of the security it is hard to see how such an arrangement could work in practice.[28]So far as the law is concerned, Mr Wright referred me to the principles stated by Lord Hoffmann in his speech in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101, at [14] to [25], and in particular to his summary in [25] of the principles upon which the court may correct mistakes by construction:
“What is clear from these cases is that there is not, so to speak, a limit to the amount of red ink or verbal rearrangement or correction which the court is allowed. All that is required is that it should be clear that something has gone wrong with the language and that it should be clear what a reasonable person would have understood the parties to have meant.”
Mr Wright also accepted, as Lord Hoffmann said at [15], that it “clearly requires a strong case to persuade the court that something must have gone wrong with the language”. He did not shrink from submitting that the present case satisfies that test.[29]At least for the purposes of clause 5.7, I find Mr Wright’s submissions persuasive. Here, at any rate, the definition of “Bonds”, and thus of “Holder Request”, in clause 1.1 should in my judgment be interpreted as including any Existing Bonds as well as any Further Bonds, with the result that a Holder Request is a global, not an issue-specific, concept. I am also satisfied, for similar reasons, that the provisions relating to meetings of bondholders in Schedule 3 should be construed as if all the bondholders formed a single class, at any rate in relation to matters which affect all the bondholders as a class. This means that only a single meeting is needed to consider such matters, and that the votes at the plenary meeting in February 2012 were therefore valid (there being no suggestion that any of the five resolutions were issue-specific).

Conclusion

[30]The conclusion which I have reached makes it unnecessary for me to give separate consideration to the second and third questions. All of the bondholders are bound by the relevant votes at the plenary meeting. It also follows that it is now too late to question the merits of the KIS proposal. I mention this point because an independent financial adviser who represents various investors in the bonds, Mr Paul Storrie, has sent three submissions to SMP’s solicitors questioning the cost-effectiveness of the KIS proposal, and asking the court to request the liquidator of Lifemark to obtain an alternative tender. In my view this proposal comes too late, whether or not it has any intrinsic merit (as to which I express no opinion), because Mr Storrie’s clients are bondholders of issues that have already voted overwhelmingly in favour of the KIS proposal.