UK High Court Confirms Broad Definition of a “Financial Institution” – (Re Olympia Securities Commercial Plc (in administration) [2017] EWHC 2807 (Ch))

The High Court has confirmed it will adopt a broad definition of a “financial institution” for the purposes of the transferability provisions in a loan agreement including: (i) a newly incorporated company with a share capital of £1, (ii) an entity that has not traded and (iii) a special purpose vehicle established for the purpose of acquiring debt.

Facts

'I can't be responsible for every single thing that goes on at Sports Direct. I can't be. I can't be!'

Mike Ashley founder and Executive Deputy Chairman Sports Direct appearing before the Business Innovation and Skills Select Committee (June 2016)

The High Court has found that two directors and one former director of a company were in breach of their duties by causing the company to implement a reorganisation and a capital reduction when they were aware there was a risk it would lose its source of income.

In addition, the statutory statement of solvency supporting the capital reduction was invalid because the director had not formed the opinion set out in it. As a result, the capital reduction and a subsequent dividend were unlawful, and the directors were liable to repay the dividend.

What happened?

As if business leaders did not have enough to contend with in the current economic and geopolitical climate, the trend towards increased personal accountability for company directors is continuing and can be expected to increase further. How can directors protect themselves? As a start it is important for both executive and non-executive directors to understand the overarching principles involved and how they link together.

The basic duties set out in the Companies Act 2006

In Banca Turco Romana S.A. (in liquidation) v Cortuk and Others, the Commercial Court in London has underlined the need for applicants to give full and frank disclosure when seeking relief at ex parte (without notice) hearings.

As a result of substantial and serious failings, some apparently deliberate, Mr Justice Popplewell set aside an earlier freezing order he had made in favour of a liquidator and declined to continue it.

Background

Conviviality, the company that owns Bargain Booze, Wine Rack and acts as supplier to Wetherspoons, Slug & Lettuce and many others, entered Administration on 4 April. The company's collapse was sudden and unexpected - as late as 8 March its stock market value was over £550 million, but its share price fell from 301p to 123p in less than 24 hours. This wiped £300 million off the company's value, a drop from which it never recovered.

Do controlled goods agreements (“CGA”s) create security which a creditor can rely on against an insolvent debtor?

CGAs are relatively new instruments which have replaced the practice of walking possession agreements.  A CGA is defined under paragraph 13(4) of Schedule 12 of The Taking Control of Goods Regulations 2013 as “an agreement under which the debtor -:

(a)     is permitted to retain custody of the goods,

Directors of a company in financial distress will often turn to their professional advisors to assist in making decisions about the company’s future; whether that be their lawyers, accountants, bank, tax advisors or insolvency professionals.

In Citibank NA v Oceanwood Opportunities Master Fund(1) the High Court confirmed the validity of a senior noteholder's directions under a note structure governed by the laws of multiple jurisdictions. In doing so, it highlighted the common ground between the London and New York markets with regard to the common law principles of contractual construction and demonstrated the efficiency of the speedy trial procedure in the Financial List.

A recent UK Supreme Court decision establishes that where a director unlawfully transfers property to a company he controls, a subsequent breach of duty claim will not be subject to a limitation period.

The provision in question under the UK Limitation Act is mirrored in the Hong Kong Limitation Ordinance (Cap 347), so it will be interesting to see whether this decision will be applied by the Hong Kong Courts.