Early Redemption of ‘Cocos’: Win for LBG in Supreme Court

26 06 2016

BNY Mellon Corporate Trustee Services Ltd v LBG Capital No 1 Plc & Anor [2016] UKSC 29 (16 June 2016)

Almost like the British public on Brexit, the Supreme Court remained closely divided on the issue of whether the Court of Appeal erred in its construction of the terms of enhanced capital notes (ECNs) by relying on technical and specialist information as part of the factual matrix. Formally described as ECNs, the loan notes were contingent convertible securities (or “Cocos”). Lord Neuberger (with whom Lord Mance and Lord Toulson agreed) dismissed BNY Mellon’s appeal whereas Lord Sumption (with whom Lord Clarke agreed) would have done otherwise. As Lord Sumption said in his brief note of dissent, the case was “of considerable financial importance to the parties” but it raised “no questions of wider legal significance”. The outcome in the case is a major blow for investors (receiving up to 16pc interest) who had hoped that the court would not have held that the terms of the bonds (or ECNs) allowed Lloyds Banking Group (LBG) to redeem them early at face value. The High Court found in favour of the bondholders but the Court of Appeal reversed that decision, one that the Supreme Court has upheld: albeit not without doubts and dissent. Led by Mark Taber, the bondholders disputed that the ECNs had been disqualified as capital and resorted to litigation. A disgruntled Taber said that the division between the justices “raises massive issues over the role of the regulators”.

He is particularly aggrieved that the court’s judgment does not engage with the arguments aired about statutory requirements that bond prospectuses must be accurate and provide crystal clear information to investors so that they may make informed choices and decisions. Worse still Taber also complains that he lobbied the FCA’s new boss Andrew Bailey to make germane information – about the exact scope of the regulator and LBG’s knowledge about impending changes to capital requirements when the ECNs were issued – available to the court. But since his request was not granted, he argues that because the courts are not willing to intervene it must be the City regulator’s job to interpret the prospectuses. “I believe the changes they knew about, which were not disclosed in the ECN prospectus, meant that a capital disqualification event was a certainty at the time the ECNs were issued. If the court had been told this I think it would have made a difference,” is how Taber expressed his frustration with the situation. However, his claim appears to directly contradict even Lord Sumption’s dissenting judgment that despite its financial importance the appeal contained no legally significant questions of wider importance. Read the rest of this entry »





“Land Banks” and Collective Investment Schemes: Supreme Court on s.235, FSMA

6 05 2016

news-release-120514Asset Land Investment Plc & Anor v The Financial Conduct Authority [2016] UKSC 17 (20 April 2016)

The Financial Conduct Authority is in the news a lot these days. Andrew Bailey has been handpicked to head the agency but the chancellor George Osborne has come under fire for making the appointment without conducting a formal interview, thereby sidestepping the two candidates (Tracey McDermott and Greg Medcraft from Down Under) formally on the shortlist. However, the beleaguered FCA chairman John Griffith-Jones agreed with outgoing chief executive McDermott and both of them were “happy” with the chancellor’s appointment of Bailey – a beefy looking BoE insider who impressively holds a doctorate in economic history. As seen in the last post, Panama has been in the news a lot. The FCA had originally given 20 banks until 15 April 2016 to report on the extent, if any, of their involvement and links with Mossack Fonseca or firms serviced by them. But now it warns that prosecutions over the Panama Papers are not clear-cut. According to Mark Steward, head of enforcement, the media frenzy is “quite different from prosecutions – the two don’t necessarily go together”. This case involved a Panamanian corporation called Asset LI Inc trading as Asset Land Investment plc against which the FCA brought proceedings for carrying on “regulated activities” without authorisation contrary to the general prohibition in section 19 of the Financial Services and Markets Act 2000. Schemes for investing in land with development potential are commonly known as “land banks” and the operation of such initiatives first came into the regulatory perimeter under section 11 of the PERG Manual of the FCA Handbook.  

In Financial Services Authority v Fradley [2005] EWCA Civ 1183, the Court of Appeal had described the drafting of section 235 (collective investment schemes) of FSMA as “open-textured” by virtue of which words such as “arrangements” and “property of any description” are to be given “a wide meaning”. Arden LJ found in Fradley that section 235 must not be construed so as to include matters which are not fairly within it because contravening section 19 may result in the commission of criminal offences, subject to section 23(3) of FSMA. Lord Carnwath of Notting Hill found her Ladyship’s approach to be “helpful guidance”. On the other hand, he remained cautious of drawing analogies from comparative Commonwealth legislation presented to the court – such as the Australian Corporations Act 2001 – on the ground that differences in drafting warranted keeping the discussion strictly within the boundaries of UK statutes and authorities. Like the first instance judge, the Supreme Court referred to the English and the Panamanian company indiscriminately as “Asset Land”. Read the rest of this entry »





Supreme Court on the ‘Houdini Taxpayer’

24 04 2016

UBS AG & Deutsche Bank v Revenue and Customs [2016] UKSC 13 (9 March 2016)

As infamously explained by jailed fraudster Tom Hayes, UBS must be credited with issuing a “handbook” on rigging LIBOR. Doubling Hayes up, in the ongoing LIBOR trial, Jonathan Mathew, one of five charged Barclays traders, says that he was merely following orders and just did what his boss taught/told him to do. The five men say everyone in the big banks “knew LIBOR was rigged”. As seen in an earlier post, along with Barclays traders, Deutsche Bank traders are facing criminal charges for EURIBOR manipulation and proceedings are ongoing in the case of R v Christian Bittar & Ors – first appearances were made at Westminster Magistrates’ Court on 11 January 2016 and a mention hearing was held on 18 March 2016. Former Deutsche trader Martyn Dodgson has also been convicted for insider trading in Operation Tabernula. In the instant case, echoing Templeman LJ in W T Ramsay Ltd v Inland Revenue Comrs [1979] 1 WLR 974, Lord Reed described UBS and Deutsche Bank’s behaviour as “the most sophisticated attempts of the Houdini taxpayer to escape from the manacles of tax.” The banks, which Lord King calls “the Achilles heel of capitalism”, may be disappointed with the Supreme Court’s ruling but most people will only be too delighted that top executives should become acquainted with some degree of retributive justice. The dry issue of tax is a hot political topic these days and the Panama Papers (see here) culminated in calls for the prime minister to resign for being a hypocrite.

Though this post is about the Supreme Court’s judgment, I use the opportunity to discursively expose other important tax issues reported in the media. Of course, Deutsche Bank announced last October that it would axe 9,000 full-time jobs and it has just recent lost its global position as a top-three investment bank. Research from Coalition, that ranks global investment banks by total revenue from fees and trading, shows that Citigroup and Bank of America are ahead of Deutsche Bank. JPMorgan Chase and Goldman Sachs retained their positions in first and second place respectively. Tim Wallace writes in today’s The Sunday Telegraph that once a cash cow, investment banking is now is serious crisis and jobs and pay across the sector has declined. It is a vicious cycle and the following insightful analogy is invoked “shrinking an investment bank is hard. It is like unravelling a jumper – once you start pulling on the thread it is hard to stop … then all of a sudden, you haven’t got a jumper at all.” Read the rest of this entry »





Catalyst for Change: Towards a Model of Conduct Costs in Pakistan

24 04 2016

Reposted from the Conduct Costs Pakistan Blog which I have recently started. As measured by the CCP Research Foundation, in the aftermath of the collapse of Lehman Brothers seven years ago, global “conduct costs” are approaching stratospheric levels and are presently estimated to be $300 billion. But none of the data reflected in the final sum can be traced to Pakistan – a market economy whose legal system closely resembles the English legal system, despite the politically retrograde Islamisation of the 1980s – in clear and unambiguous terms. This blog is written with the ambition of articulating a conduct costs’ model in Pakistan, a developing country which is in need of such analysis so that its 192 million people are put in a position to make informed choices about banking and financial services.

In constitutional terms, a sound basis for the study of conduct costs can be found in Articles 37 and 38 of the Constitution of Pakistan 1973. Laid down in Part II: Fundamental Rights and Principles of Policy, Chapter 2: Principles of Policy of the Constitution, Article 37 requires the state to promote social justice and Article 38 imposes on the state a duty to promote the people’s social and economic well-being. On an alternative level, in The End of Alchemy, Professor Mervyn King relies on all his experience as a central banker to explain the wider dynamics of the global economy. He invites us to embrace the underlying theoretical argument that banks are “the Achilles heel of capitalism”. This attractive proposition is as advantageous a place to begin a study of the banks in Pakistan as it is in the west. Read the rest of this entry »





Supreme Court: Corporate Raids and the Proper Purpose Rule

17 01 2016

Eclairs Group Ltd and Glengary Overseas Ltd v JKX Oil & Gas plc [2015] UKSC 71 (2 December 2015)

In a judgment which may at first blush appear to be unremarkable, Lord Neuberger, Lord Mance, Lord Clarke, Lord Sumption and Lord Hodge held that the proper purpose rule applied to the exercise of the power conferred on the board – allowing it to issue a “restriction notice” whenever a statutory disclosure notice had been issued and had not been complied with – under article 42 of JKX’s articles of association and that the company’s directors acted for an improper purpose. Notably, section 793 of the Companies Act 2006 provides a public company the power to issue a statutory disclosure notice to any person whom it knows or reasonably believes to be interested in its shares. According to the Supreme Court, in circumstances where a company’s board of directors was entitled under the company’s articles of association to issue a disclosure notice against a shareholder and where the board was further entitled – in the event that they knew or had reasonable cause to believe that the statements given in response were incorrect – to restrict the shareholder’s right to attend or vote at any general meeting of the company, any such restriction would be invalid if the board’s purpose in making the restriction had been to prevent the shareholder voting at the meeting.

Lord Sumption gave the main judgment and Lord Hodge agreed with him. Lord Mance and Lord Neuberger agreed that the appeals should be allowed, but they preferred to not to express a view on aspects of the reasoning. Moreover, Lord Clarke agreed, but expressed a preference to defer a final conclusion on those aspects until they arise for decision and have been fully argued. Prior to this decision, the case had been reported in the Court of Appeal as [2014] Bus LR 835 and in the High Court as [2014] Bus LR 18. JKX Oil & Gas Plc, an English company listed on the London Stock Exchange, was the parent company of a group involved the development and exploitation of oil and gas reserves, primarily in Russia and the Ukraine. From that perspective, Lord Sumption used the opportunity to apply his unrivalled expertise on both company law and Russia to the present case. The exercise of a discretionary power by directors tends to be challenged on the ground that it does not promote the success of the company, a subjective question as regards the company’s business interests. Read the rest of this entry »





Raytheon Systems: e-Borders Arbitration Set Aside for ‘Serious Irregularity’

20 04 2015

See my article  Failure to Deal with the Issues: The e-Borders Award and ‘Serious Irregularity’ under the Arbitration Act 1996. These judgments given by Akenhead J relate to the e-Borders controversy. The e-Borders passenger information system was marketed as a one-stop solution to the UK’s immigration and security problems. Under e-Borders the Home Office sought to create an electronic system to examine everyone entering and exiting the UK by verifying their details against immigration, police and security related watch lists. In Raytheon Systems Ltd [2014] EWHC 4375 (TCC), Akenhead J set aside an arbitral award (in e-Borders contractor Raytheon’s favour) because of “serious irregularity” within the meaning of section 68(2)(d) of the Arbitration Act 1996 (“the 1996 Act”). In December 2014, the court held that the arbitration tribunal failed to deal with all the issues (of fault and responsibility attributable to Raytheon which were highly relevant to quantum) put to it. Subsequently, in Raytheon Systems Ltd [2015] EWHC 311 (TCC), in February 2015, Akenhead J set the arbitration award (£200+ million) aside in its entirety for serious irregularity and ordered a fresh hearing.

The arbitrators’ identities remain undisclosed to the public and the rulings did not intend to reflect on their integrity or general competence. Despite successfully challenging the award in court, the government continued to negotiate and the Home Secretary announced on 27 March 2015 that the settlement with Raytheon was “a full and final payment of £150m.” The earlier judgments, in the Home Office’s favour, were made publicly available in February 2015 and are perhaps the only authoritative documents in the public domain that shed light on the dispute. The award was set aside for serious irregularity because of the arbitrators’ failure to address issues, highly relevant to quantum, of fault and responsibility attributable to Raytheon. Signed in 2007, the e-Borders contract was worth around £750 million in total. The government terminated it in 2010 because of delays and key milestones being missed. Read the rest of this entry »





Roger McCormick: We can’t have big, unruly banks that are out of control

26 10 2014

Ever-larger fines for bank misconduct have made headlines around the world, leading the London School of Economics and Political Science‘s Conduct Costs Project to estimate total costs between 2009 and 2013 for 10 major global banks at nearly £100 billion, plus a further £58 billion put aside in provisions at 2013-end. Roger McCormick of the LSE led the project, and he set up and now runs the CCP Research Foundation to build on its efforts. A former partner at law firm Freshfields Bruckhaus Deringer, he spoke with SNL Financial on the sidelines of the British Bankers’ Association annual conference in London about the purpose of fines.

This interview was published on the Conduct Costs Project Research Foundation website and has been republished here with permission and thanks.

By Christian Wuestner

SNL Financial: New U.K. regulations aim to increase accountability of senior managers at banks for failures, including introducing a new criminal offense. Is this a good idea?

Roger McCormick: I am pretty much on exactly the same ground as [Bank of England Governor] Mark Carney on that. I am sympathetic to the concerns it raises for people who are not used to the new regime, but you have to put it in context. Twenty-five years ago, there was a famous legal case in England called the Hammersmith and Fulham Case, sometimes called the Swaps Case, where a lot of banks entered into swaps contracts with English local authorities. The auditors of those authorities challenged the contracts, took it to the courts and won because the contracts were invalid. So the banks could not enforce those contracts. And they all complained to the Bank of England and other people: “We didn’t know about the legal risks involved in these contracts.” Read the rest of this entry »