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From: Insolvency Lawyers Association <ila@ilauk.com>
To: Andrew Cawkwell
Sent: Wed Jul 28 17:50:59 2010
Subject: ILA Technical Bulletin: Trust assets and insolvency: Re Kaupthing Singer & Friedlander Ltd
if this email displays incorrectly or you can not see it please click here |  | Trust assets and insolvency: Re Kaupthing Singer & Friedlander Ltd Bulletin No 283 | |
Case:
Margaret Elizabeth Mills, Alan Robert Bloom, Patrick Joseph Brazzill and Thomas Merchant Burton (Joint Administrators of Kaupthing Singer and Friedlander Ltd) v Sportsdirect.com Retail Ltd (formerly Sports World International Ltd) [2010] EWHC 1072 (Ch)(13 May 2010, Lewison) | Synopsis:
A further case in the context of the Icelandic bank failure, which considers whether a counterparty to a repurchase agreement was the beneficial owner of shares before Kaupthing Singer and Friedlander went into administration. | Topics Covered: Trust assets and insolvency | |
The Facts This is another case arising out of the Icelandic bank failure. It concerns the English subsidiary of an Icelandic bank, namely Kaupthing Singer and Friedlander Ltd ("KSF"). KSF and Sportsdirect ("SD") entered into a master agreement to govern the sales and purchases of shares (including SD's shareholdings in 2 companies) (the "Repo"). In anticipation of the Repo, SD opened an account in its own name with Singer & Friedlander Investment Management Ltd ("SFIM"), a wholly-owned subsidiary of KSF (the "SD Account"). Under the Repo, SD sold the shares to KSF and KSF was obliged to transfer equivalent shares to SD on the repurchase date against payment of the repurchase price by SD. The effect of the transactions was such that SD did not retain any legal or beneficial interest in the shares. Instead, KSF acquired the beneficial title and passed the legal title to a nominee company which held the shares in a CREST account on its behalf. In October 2008, KSF asked SD to refinance its positions under the Repo, which meant a final repurchase of the shares. Charles Stanley ("CS"), a firm of brokers, acted for SD. Discussions (mostly over the telephone) took place between KSF, SD and CS regarding the mechanics of the delivery of the shares to SD and payment to KSF. After multiple phone calls, KSF eventually transferred the shares to the SD Account and confirmed that on receipt of the funds in question, it would transfer the shares to CS in CREST. SD agreed to this approach. KSF went into administration a few hours after the shares had been transferred to the SD Account and never received the money.
The court was asked to decide (i) whether SD had acquired the beneficial ownership of the shares before KSF entered administration and, if so (ii) whether anything had happened since to divest it of that beneficial ownership.
SD argued that there was a trust in relation to the shares or alternatively, that there had been a specifically enforceable agreement for the sale of the shares. | The Decision The judge observed that the creation of a trust (which necessarily involved the passing of beneficial ownership in property) required certainty of intention, certainty of subject matter and certainty of object. Here, there was certainty of subject matter (the shares) and SD was the beneficiary of the alleged trust. Relying on various telephone conversations between the parties during which KSF referred to the SD Account being ring-fenced and segregated, and on the fact that it transferred the shares to the SD Account before payment had been made, the judge concluded that beneficial ownership of the shares had passed to SD before KSF entered into administration on the understanding that the necessary payment would be made. It should be noted that although usually a disposition of an equitable interest in shares would require to be signed in writing pursuant to s.53 of the Law of Property Act 1925, in this case however, it was common ground between the parties that s.53 was disapplied by regulation 4 of the Financial Collateral Arrangements (No 2) Regulations 2003 ("FCRs"). In addition it was argued that since the shares were in a dematerialised form the formalities of transfer were also disapplied by virtue of regulation 38 of the Uncertified Securities Regulations 2001, although the judge declined to make a ruling on this point.
The judge also ruled that the discussions between SD and KSF constituted a binding contract under which KSF was to cause legal title to be transferred via CREST upon payment. As the shares were not readily available in the market, the contract was of a character that could be specifically enforceable. However, it was made under the umbrella of the Repo which expressly excluded specific performance as a remedy for the transactions carried out under it. In this respect the court held that if the matter had to be decided solely upon the basis of the Repo, he would have held that it would not have been specifically enforceable, and no beneficial or proprietary interest passed to SD as a result of the Repo itself. Given the finding that there was already a trust in SD's favour, this entitled SD to a declaration that beneficial ownership had passed to it on the same day as the appointment of the administrators, but before KSF actually entered into administration. | Comment Although the case is very fact specific, and in particular, the creation of the trust very much dependent upon the evidence of the parties in the period immediately preceding the administration, it serves as a further example of how an effective trust can protect counterparties in the context of an insolvency. In such cases, the trust beneficiaries (in this case SD) have recourse to the trust assets, and therefore are not reliant upon simply receiving a distribution from the insolvent estate as an unsecured creditor. It is also a useful example of how the FCRs assist in disapplying the usual formalities/restrictions on activities that are carried out under financial collateral arrangements. | | | If you wish to be removed from the ILA mailing list and not receive any further updates please click here | |
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