Discretion is the better part of valour? Condition precedent halts MF Global CVA.
13 June 2018
In Heis v FSCS, the Court of Appeal stepped in to prevent an innovative Company Voluntary Arrangement, in which a small number of MF Global UK creditors had agreed to buy out the majority for £64m, from coming into effect.
The case turned on the meaning of a condition precedent. If there were a "Disputed Claim", the CVA would not be implemented unless the Administrators of the company "confirmed that this should not preclude the CVA from becoming effective". The Administrators sought directions whether to give the confirmation and proceed with the CVA. This was controversial given the emergence of a €126m "Disputed Claim" shortly before the hard bar date. The claim had been completely unknown to creditors when approving the CVA.
The relevant clause was not explicit as to whether it gave a discretion to the Administrators or how that discretion should be exercised. The Court of Appeal (overturning Hildyard J) nevertheless considered it "obvious" that the condition precedent required a "value judgement" as to whether the CVA ought to proceed. Given the unexpected new claim, the "fairest judgement" was to stop the CVA.
The court's starting point is to read the words used – not to speculate why a clause was not drafted differently. That said, the stark contrast between the first instance and appeal judgments is a reminder that judges can have radically differing views when interpreting a contract. One person's "obvious" construction is another's "absurdity".
The case highlights the critical importance of conditions precedent – by definition they make or break the deal. The condition precedent was a "safety valve" to address the risk that a new claim might emerge between the approval of the CVA and the hard bar date. This could upset the assumptions on which the deal had been agreed. You could not argue that not-fulfilling the condition precedent would undo the purpose of the deal. The condition precedent was an "essential" part of the bargain.
The Court showed it could move at lightning speed to resolve the case before a "drop dead date" of 12 June 2018. The appeal was decided just 17 days after the first instance judgment, and only 11 weeks after the litigation started.
Allen & Overy represented the successful Appellant. The A&O team comprised Marc Florent, Katrina Buckley, Oliver Rule, Victoria Williams, Jon Turnbull and Ben Brooks. Counsel for the Appellant were David Allison QC and Alex Barden.