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MF Global [2018] EWCA Civ 1327

In an urgent application, the Court of Appeal held that a CVA should be precluded from becoming effective where an unanticipated claim of €126.7m was submitted after the CVA was approved but before the statutory bar on new claims had lapsed.

The Special Administrators of MF Global UK Limited proposed a CVA which was approved by creditors in December 2017. Almost all creditors had already recovered 90% of debts due to them. This case was argued by two groups of creditors, the "Exiting Creditors" and the "Participating Creditors". Under the terms of the CVA, the Exiting Creditors would be entitled to a final cash payment of 9.75/£ and would have no further interest in the special administration. This payment would be funded by the Participating Creditors who would provide £64 million to buy out the Exiting Creditors, and in return would have a larger share in the remaining Administration. The Participating Creditors were said to have a higher "appetite for risk" with the potential to receive anywhere from 6% more than the Exiting Creditors to 4% less than them.

After the CVA was approved, three days before the statutory bar on new claims, Deutsche Bank ("DB") submitted a contingent claim for €126.7 million which had not been anticipated by the Administrators. The claim was not immediately admitted. DB appealed this, but due to the complexity of the claim, a decision could not be reached before the automatic deadline for the CVA to lapse if not implemented.

Clause 3.1(e) of the CVA conditions stated "if there are Disputed Claims after the Challenge Period has ended, the Administrators have confirmed that this should not preclude the CVA from becoming effective."

The Administrators sought urgent directions from the court on the interpretation of clause 3.1(e), how they should exercise their discretion under it, and whether the CVA should be implemented before it automatically lapsed. In seeking directions, the Administrators surrendered their discretion to the court.      

The Exiting Creditors argued that the CVA should be implemented whilst the Participating Creditors argued that the CVA should be precluded from coming into effect, on the basis that their position had been changed by the impact of the claim.  

The High Court held that the condition did not give the Administrators discretion and the CVA should be implemented. The Court of Appeal disagreed with this and held that a reasonable person would have little doubt that the intention behind clause 3.1(e) was to give the Administrators discretion to not implement the CVA if a disputed claim were to materially change the commercial landscape.

If the disputed claim were to be allowed in full, it would reduce some creditors' recoveries down to 67.8%. In trying to achieve fairness so far as possible to all classes of creditors, the Court of Appeal held that the fairest judgment was that the Administrators should be directed to confirm that the CVA was precluded from becoming effective. DB's claim was a considerable claim which was seriously arguable and the Administrators were reserving for it, suggesting that it was "serious and credible". Further, the Exiting Creditors had not yet received their final dividend and the Participating Creditors had not yet provided the funds to buy them out. 

The Court of Appeal stated that the High Court judge was wrong to favour the interpretation advanced by the Exiting Creditors. DB's claim was a "game changer" and if successful, would result in an outcome that would bear no relation to that which the Participating Creditors would have expected when they made the decision to be Participating Creditors. It would have a dramatic effect on the expected operation of the CVA, if implemented, for the Participating Creditors. However, if the CVA did not become effective, the Exiting Creditors would lose the immediate benefits they were expecting and, long term, may not achieve a comparable benefit. Overall, having balanced the expectations of the Exiting Creditors against the potential significant change to the position of the Participating Creditors, the Court considered that it was reasonable for the Participating Creditors to assert that the bargain the Exiting Creditors were seeking to hold them to was not the bargain they entered into.

The Court of Appeal handed down their judgment that the CVA should be precluded from becoming effective the day before the automatic lapse date