The English High Court1 has permitted special administrators (JSAs) appointed in respect of an FCA authorised and regulated broker (the company) to transfer a portfolio of the company’s Russian securities to one of its largest unsecured creditors (the creditor) in return for that creditor waiving its admitted claims against the company2. As a result of UK/US/EU sanctions and Russian government imposed countermeasures (the Sanctions Regime), the JSAs were unable to realise the securities by normal means.
Credit bidding by secured creditors is commonplace but this was, in substance, a successful "credit bid" by an unsecured creditor. The legal mechanism by which it was achieved (the transfer of the securities in return for the waiver of the creditor's admitted claim) was novel and on which there was no existing English authority.
The key characteristic of the transfer of the securities (which was central to the Court’s approval) was that it was properly characterised as a sale or disposal, rather than as a distribution to a creditor, although the explanation of how the Court arrived at this characterisation was relatively brief. This characterisation enabled the Court to conclude that the pari passu principle and the statutory restrictions on distributions in specie were not engaged and the statutory scheme for the distribution of assets was not infringed.
The Court concluded that the JSAs' power to sell or otherwise dispose of the company's property3 was broad enough to cover a transaction whereby a creditor waives its claim against the company (subject to proper value being obtained). The Court saw no reason to read the power down to exclude such a transaction. Whilst this case was concerned with the realisation of assets (Russian securities) which was affected by the Sanctions Regime, the Court's comments on this point suggest that this unsecured credit bid structure may be of wider application, in appropriate cases, subject to the administrators properly concluding that it represents the best price reasonably obtainable for the assets in question.
The High Court's decision
The JSAs sought directions that they be at liberty to enter into the transfer. Their application was opposed by another creditor which was part of a consortium which wished to acquire the same securities. The High Court gave the directions sought by the JSAs. It was satisfied (among other things) that:
- As noted above, the JSAs’ power of sale was broad enough to cover a transfer whereby a creditor waives its claim against the company.In exercising this power, an administrator is required to act reasonably to obtain the best price in the circumstances.An administrator cannot transfer assets to a creditor in return for the claim of that creditor where this may be at the expense of the estate.It is only if the administrator genuinely and rationally believes that proper value is being obtained, that the power is exercisable.
- The transfer was properly characterised as a sale or other disposal, rather than a distribution.There was a distinction between the creditor's position as creditor and its position as buyer.It would receive the securities as buyer and would cease to be a creditor.Therefore it would not receive anything as creditor and thus would not receive a distribution.
- Whilst not binding authority on this point, the pari passu principle4 had no application to sales (as opposed to distributions).The transfer did not infringe the statutory scheme and the statutory restrictions on distributions in specie were not engaged5.
- There was no realistic risk of the transactions infringing UK/US/EU sanctions.
Comments on valuation
The JSAs calculated the value of the transfer to the estate by reference to its "cash equivalent value" (CEV). In essence, the CEV was the amount which would have to be contributed to the insolvent estate to make good the difference between: the projected dividend payable to creditors if the transactions (including waiver of the creditor's claims) went ahead; and the projected dividend payable to creditors in the event that it did not take place. The JSAs calculated projected dividends on the basis of high, mid and low cases.
In each case, the CEV was lower than the JSAs' estimate of the value of the securities to those able to trade in them unimpeded by the Sanctions Regime (the nominal value). However, it was common ground that the JSAs were seriously affected by the Sanctions Regime and realisable value of the securities was far lower.
The JSAs could only be interested in the realisable value of the securities by the company. Whilst there was a sharp asymmetry between the value of the securities to the estate and to any Russian buyer (including the creditor), the Court was satisfied that this arose from the various legal restrictions and not from any action or choice of the JSAs. It was simply unreal to suggest that the company would be able to realise anything like the nominal value of the securities.
1 Re Sova Capital Limited (in special administration)  EWHC 452 (Ch).
2 The JSAs were appointed under the Investment Bank Special Administration Regulations 2011.
3 Part 2, Schedule 1 Insolvency Act 1986, as applicable in the special administration pursuant to reg 15(4) and Table 1 of the Investment Bank Special Administration Regulations 2011.
4 Rule 149 Investment Bank Special Administration (England and Wales) Rules 2011.
5 Rule 151(1) Investment Bank Special Administration (England and Wales) Rules 2011.