RE THE GRANDE HOLDINGS LTD

HCCW 177/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 177 OF 2011

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D E C I S I O N

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Introduction

1. On 25 April 2014 McVitie Group Holdings Limited (“McVitie”) issued a summons seeking, amongst other things, a declaration that ASM Hudson River Fund (“ASM”) was not entitled to vote at the first meeting of creditors of the Company and that the votes cast by it were invalid and for an order that the Provisional Liquidators’ decision to admit its proof of debt should be reversed. 

2. ASM is a hedge fund which specialises in distressed assets and special situations investment. On 5March 2014, ASM entered into a debt transfer agreement (the “Debt Transfer Agreement”) with Deutsche Bank AG (“DB”) to acquire all outstanding debts owed to DB by the Company.  ASM submitted a Proof of Debt on 6 March 2014 claiming a balance of US$14,410,190.41 (“Debt”) previously owed to DB.  DB’s original claim against Grande arose from an early termination of the swap transactions executed under the terms of an agreement made in 2002 on IDSA’s [1] standard terms (the “Master Agreement”).  The Master Agreement is a standardised service agreement for transactions involving financial derivative instruments and similar products.

3. The early termination amount initially owed by Grande to DB (the “Early Termination Amount”) was calculated by a formula set out in clause 6(e)(i) of the Master Agreement, which provides that:-

“If the Early Termination Date results from an Event of Default, the Early Termination Amount will be an amount equal to (1) the sum of (A) the Termination Currency Equivalent of the Close-out Amount or Close‑out Amounts (whether positive or negative) determined by the Non-defaulting Party for each Terminated Transaction or group of Terminated Transactions, as the case may be, and (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-defaulting party less (2) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party…”

4. The Close-out Amount to be determined by DB, the non-defaulting party, and the Unpaid Amount were purportedly calculated by DB in accordance with the provisions in section 14 of the Master Agreement.

5. On 4 March 2010, DB issued a “notice of the amount payable” to Grande setting out its calculation of the Early Termination Amount of US$19,690,366.91 – being a combination of the Close Out and Unpaid Amounts.  Grande did not dispute at that time its obligation to pay the Early Termination Amount or DB’s calculation.

6. From March 2010 to April 2011, DB received a total of approximately US$5,352,563.59 in part payment of the Early Termination Amount on behalf of Grande from various sources.  At the time when the Provisional Liquidators were appointed on 31 May 2011, the amount claimed by DB was US$14,337,803.32. 

7. After their appointment, the Provisional Liquidators procured Grande to make further payments to DB.  On 5 March 2014 when ASM entered into the Debt Transfer Agreement, the outstanding balance claimed by DB was US$14,410,190.41.

8. McVitie challenges the admission of ASM’s proof on the grounds that it is an unliquidated debt and rule 125 of the Companies Winding-up Rules prohibits a creditor in respect of such a debt voting at a meeting of creditors. Rule 125 provides:

“125. Cases in which creditors may not vote

  A creditor shall not vote in respect of any unliquidated or contingent debt, or any debt the value of which is not ascertained, nor shall a creditor vote in respect of any debt on or secured by a current bill of exchange or promissory note held by him unless he is willing to treat the liability to him thereon of every person who is liable thereon antecedently to the company, and against whom a bankruptcy order has not been made, as a security in his hands, and to estimate the value thereof, and for the purposes of voting, but not for the purposes of dividend, to deduct it from his proof.”

9. In paragraphs 7 and 8 of my judgment in Pan Sino International Holding Limited [2] I considered what, in the context of Rule 125, constitutes a liquidated debt:

“7.  Neither the Ordinance nor the Rules define “unliquidated”. In paragraph 6/2/4 of volume 1 of the Hong Kong Civil Procedure 2010 the distinction between liquidated and unliquidated is explained in the following terms:

“A liquidated demand is in the nature of the debt, i.e., a specific sum of money due and payable under or by virtue of a contract.  Its amount must either be already ascertained or capable of being ascertained as a mere matter of arithmetic.  If the ascertainment of a sum of money, even though it be specified or named as a definite figure, requires investigation beyond mere calculation, then the sum is not a “debt or liquidated demand, but constitutes damages”.”

8.  Mr. Wong who appeared for Lawrence accepted this distinction.  He argued that the claim was for a liquidated sum because its assessment was merely a matter of arithmetic. His client had demonstrated, so he argued, the time that it had recorded for the work it had carried out and no evidence had been filed to show the records were false or inaccurate and therefore assessing the claim was simply a matter of multiplying time by charging rates.  I disagree.  Lawrence has failed to appreciate the following.  The assessment of the proof for the purpose of voting at a meeting convened in accordance with Rule 124 of the Rules is not the same as the examination of the proof under Rule 94 for the purposes of admitting or rejecting the proof for the purposes of determining distribution of assets.  The latter is likely only to take place if sufficient assets have been realised to justify the process.  It is presumably because the liquidator is not expected to undertake a definitive assessment of the proof that Rule 125 provides that a creditor shall not vote any unliquidated or contingent debt, the determination of which might require considerable work.  Assessing whether or not Lawrence is entitled to proof for the amount it claims by way of professional fees for the services that it has provided involves a consideration of the work it has done and whether or not the number of hours claimed are justified.  This goes beyond an arithmetical exercise and is not the kind of task that a liquidator is to be expected to undertake in order to determine whether or not to admit a proof for voting purposes.  In my view Lawrence’s claim was correctly treated as an unliquidated claim.”

10. Mr. Zimmern and Ms. Ismail have referred me to decisions[3], dealing with the meaning of “debt or other liquidated pecuniary claim” in section 23(3) of the Limitation Ordinance, Cap 347. However, it does not seem to me that they are of much assistance.  Rule 125 refers to an “unliquidated or contingent debt ” and the purpose of the rule is to prohibit the admission for voting purposes of a debt which cannot be determined simply by arithmetical calculation.  The Limitation Ordinance uses broader language and extends to claims other than debts which suggests that it is intended to include a pecuniary claim which can be calculated with precision although its final determination involves more than just arithmetic.  The obvious example would be a quantum meruit, which is the type of claim considered by His Honour Judge John Davies QC in Amantilla Ltd v Telefusion Plc. [4]  As the Court of Appeal’s decision in Turner & Co. v O. Palomo S.A.[5]explains in the insolvency context a quantum meruit is not properly characterised as a liquidated debt.

11. The issue of whether or not the Debt is liquidated or unliquidated requires a consideration of how the amount originally claimed was calculated.  The ISDA Master Agreement contains general conditions produced under the auspices of ISDA.  The relevant provisions are as follows:

“6. Early Termination; Close-Out Netting

(a) Right to Terminate Following Event of Default. If at any time an Event of Default with respect to a party (the “Defaulting Party”) has occurred and is then continuing, the other party (the “Non‑defaulting Party”) may, by not more than 20 days notice to the Defaulting Party specifying the relevant Event of Default, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all outstanding Transactions. If, however, “Automatic Early Termination” is specified in the Schedule as applying to a party, then an Early Termination Date in respect of all outstanding Transactions will occur immediately upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(1), (3), (5), (6) or, to the extent analogous thereto, (8), and as of the time immediately preceding the institution of the relevant proceeding or the presentation of the relevant petition upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(4) or, to the extent analogous thereto, (8).

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(c) Effect of Designation.

(i) If notice designating an Early Termination Date is given under Section 6(a) or 6(b), the Early Termination Date will occur on the date so designated, whether or not the relevant Event of Default or Termination Event is then continuing.

(ii) Upon the occurrence or effective designation of an Early Termination Date, no further payments or deliveries under Section 2(a)(i) or 9(h)(i) in respect of the Terminated Transactions will be required to be made, but without prejudice to the other provisions of this Agreement. The amount, if any, payable in respect of an Early Termination Date will be determined pursuant to Sections 6(e) and 9(h)(ii).

(d) Calculations; Payment Date.

(i) Statement. On or as soon as reasonably practicable following the occurrence of an Early Termination Date, each party will make the calculations on its part, if any, contemplated by Section 6(e) and will provide to the other party a statement (1) showing, in reasonable detail, such calculations (including any quotations, market data or information from internal sources used in making such calculations), (2) specifying (except where there are two Affected Parties) any Early Termination Amount payable and (3) giving details of the relevant account to which any amount payable to it is to be paid. In the absence of written confirmation from the source of a quotation or market data obtained in determining a Close-out Amount, the records of the party obtaining such quotation or market data will be conclusive evidence of the existence and accuracy of such quotation or market data.

(ii) Payment Date. An Early Termination Amount due in respect of any Early Termination Date will, together with any amount of interest payable pursuant to Section 9(h)(ii)(2), be payable (1) on the day on which notice of the amount payable is effective in the case of an Early Termination Date which is designated or occurs as a result of an Event of Default and (2) on the day which is two Local Business Days after the day on which notice of the amount payable is effective (or, if there are two Affected Parties, after the day on which the statement provided pursuant to clause (i) above by the second party to provide such a statement is effective) in the case of an Early Termination Date which is designated as a result of a Termination Event.

(e) Payments on Early Termination. If an Early Termination Date occurs, the amount, if any, payable in respect of that Early Termination Date (the “Early Termination Amount”) will be determined pursuant to this Section 6(e) and will be subject to Section 6(f).

(i) Events of Default. If the Early Termination Date results from an Event of Default, the Early Termination Amount will be an amount equal to (1) the sum of (A) the Termination Currency Equivalent of the Close-out Amount or Close-out Amounts (whether positive or negative) determined by the Non‑defaulting Party for each Terminated Transaction or group of Terminated Transactions, as the case may be, and (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Non‑defaulting Party less (2) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party. If the Early Termination Amount is a positive number, the Defaulting party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of the Early Termination Amount to the Defaulting Party.

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(v)  Pre-Estimate. The parties agree that an amount recoverable under this Section 6(e) is a reasonable pre-estimate of loss and not a penalty. Such amount is payable for the loss of bargain and the loss of protection against future risks, and except as otherwise provided in this Agreement, neither party will be entitled to recover any additional damages as a consequence of the termination of the Terminated Transactions.”

12. It is clear from clause 6(d)(i) that the calculation of the Early Payment Amount involved identifying quotations and market data and a calculation that was potentially complicated.  McVitie has filed an affidavit made by Mr. Fiachra O’Driscoll containing opinion evidence concerning the characteristics of the swaps and the difficulties in valuing them.  Mr. O’Driscoll describes the swaps in paragraphs 15 and 16 of his affidavit.  His description was not contested by the Provisional Liquidators or ASM.

“15.  ASM Hudson River Fund’s creditor claims arise from the Termination Amounts calculated by Deutsche. These were calculated after Grande’s default on two swaps traded between Deutsche and Grande pursuant to an ISDA Master Agreement between them dated 18 September 2007. The two swaps are (a) a spread-dual range accrual Swap with trade dated 15 August 2007 (the “Range Accrual Swap”) and (b) a United States Dollar (“USD”) Interest Rate Swap linked to the Deutsche Bank FRB Basket Quanto Index traded on 31 Jan 2008 (the “FRB Basket Swap”).

16.  These interest rate swaps are a form of derivative instrument and are known as “exotic” derivatives. While certain derivatives have so‑called “closed form” solutions to their values, meaning that one can use a mathematical formula (such as the “Black-Scholes” formula referred to below) to derive the price, “exotic” derivatives have no such formulas because they require “stochastic calculus” – that is, integration and differentiation of processes involving random movements, such as currency exchange rates. This distinction and classification of derivatives is important for calculating and valuating Close-out Amounts as explained in more detail below.”

13. As I understand it stochastic calculus is used to determine values of instruments that contain variables the value of which change randomly, for example, future floating interest rates.  The calculation of the Early Termination Amount does not involve a calculation that is a matter of mere arithmetic.  The mere fact that what is being determined is a “value” indicates this. Assessing the nature of what DB calculated is not helped by the fact that it has not produced a calculation of the sort required by clause 6(d)(i).  This is absent, as I understand, it because it probably contains some commercially valuable information used to calculate the Early Termination Amount, which itself tends to suggest that we are not dealing with a simple arithmetical calculation.

14. Ms. Ismail sought to argue that whether or not the calculation involved identifying what value to input into a complex mathematical model was not determinative.  She argued that the authorities show that where the parties to a contract agree a mechanism for determining a payment then even if it involves a process which is in the nature of a valuation, rather than simply adding up figures, the result is binding. Ms. Ismail relied on Socimer International Bank Ltd. (in liquidation) v Standard Bank Lond Ltd [6] and Peregrine Fixed Income Ltd v Robinson Department Stor1e Public Co Ltd [7].  As I understand the argument, the Provisional Liquidators contend that if one party’s valuation is binding then it follows that the valuation is a liquidated debt.  The authorities to which Ms. Ismail referred do not address the issue, which was not relevant to their determination, of whether or not a valuation carried out under such a contractual mechanism produced a figure that was properly treated as a “liquidated debt ”.  What those cases do illustrate, particularly Socimer where there was a lengthy trial before Gloster J which involved a consideration of the valuation itself, is that provisions purporting to give one party the right to value the consequences of the termination of futures contracts and swaps do not prevent an argument about the valuation.

15. As I have already explained in my view the purpose of Rule 125 is to avoid a liquidator having to assess a claim which involves little more than checking arithmetic in order to determine its veracity.  ASM’s claim in my view does involve more than that and thus is a claim for an unliquidated debt for the purpose of Rule 125 and should, therefore, not be admitted for voting purposes.