PART 36 APPLIED TO COMPLEX OFFER: PART 36 WAS ENGAGED AND THE NORMAL CONSEQUENCES FOLLOWED

In  Grant & Ors v FR Acquisitions Corporation (Europe) Ltd & Anor [2022] EWHC 3366 (Ch) Mr Justice Hildyard considered whether Part 36 applied to a complex offer made by the applicants.  This post looks at the judgment relating to the construction of the offer and whether it had been “beaten”. A subsequent post will look at the judge’s determination of whether it was “unjust” for the Part 36 consequences to apply.

“I do not accept Firth Rixson’s argument that these proceedings were not “about money”. Plainly they are and always have been so”

THE CASE

The administrators of a company, Lehman Brothers International (Europe) sought a declaration that when their appointment ended a suspensory condition in an agreement, which meant that the defendant’s did not have to pay interest, would fall away and the defendants would be liable to make payment of interest. The administrators succeeded in the their application.  During the course of the proceedings the administrators had made Part 36 offers to settle.  There were issues as to whether Part 36 was engaged and, if so, what the consequences should be.

THE  FIRST ISSUE – WAS PART 36 ENGAGED

This was, on the face of it, an application for a declaration.  However the blunt reality was that it was about money (a lot of money). The judge considered the question of whether Part 36 was engaged.

1. 1. The Administrators were the successful parties, and it is not in dispute that Firth Rixson should pay the Administrators’ costs of the Application. As stated above, Firth Rixson have accepted that they should make a payment on account of those costs. The issue is not as to the incidence of costs but as to the application of CPR Part 36 and its consequences.

1. 1. It was not disputed either that CPR Part 36 applies in principle to the Application: CPR 12.1(1) of the Insolvency Rules 2016 provides that “the provisions of the CPR (including any related Practice Directions) apply for the purposes of proceedings under Parts 1 to 11 of the Act with any necessary modifications, except so far as disapplied by or inconsistent with these Rules“. CPR Part 36 is not disapplied by or inconsistent with the Insolvency Rules 2016, and no relevant modifications to CPR Part 36 are required.

1. 1. There are, in essence, three questions in dispute:

(1) The first is whether CPR Part 36 is engaged at all. Firth Rixson submitted that it was not, essentially because there was such a “disconnect” between the offer and the claims as to disqualify the offer in terms of Part 36. This was referred to in argument as the “disconnect point”.

(2) The second question, if CPR Part 36 is engaged and the Administrators’ Offer is to be treated as compliant, is what test should be adopted in determining whether the declaratory judgment to which I have held the Administrators are entitled “is at least as advantageous to the claimant as the proposals contained in [the Administrators’ Offer]“. In particular, the question arises whether the claim in this case falls within CPR 36.17(2).

(3) The third question arises if the relief to which I have held the Administrators are entitled “is at least as advantageous to the claimant as the proposals contained in [the Administrators’ Offer]” is whether, and if so to what extent, the Administrators should be entitled to consequential orders enhancing their recovery as set out in CPR 36.17(4).

THE OFFER

1. 1. The starting point is the terms of the Administrators’ Offer. The key part of the Administrators’ Offer read as follows:

“3.1 As set out above, it is not in dispute that the principal sums due to LBIE are £8,149,086.21 (in respect of the Sterling Swap) and US$53,629,230.05 (in respect of the Dollar Swap). Moreover, interest has been accruing (and continues to accrue) on the Dollar Swap in accordance with Section 9(h)(i)(3)(A) of the 2002 ISDA Master Agreement. That interest entitlement will be significant in light of the time for which it has accrued.

3.2 Notwithstanding the strength of our clients’ position, in order to avoid unnecessary court proceedings, we are authorised to make your clients an offer to settle under Part 36 of the Civil Procedure Rules (the “CPR”) (the “Offer”). The Offer relates to the entirety of the proposed application and is intended to be a claimant’s Part 36 offer with the consequences prescribed by that Part. The Offer may only be accepted in full.

3.3 The terms of the Offer are as follows:

3.3.1 Firth Rixson will pay a sum of US$53,535,379 in full and final settlement of the outstanding sums in relation to the Dollar Swap.

3.3.2 FR Acquisitions will pay a sum of £7,334,117 in full and final settlement of the outstanding sums in relation to the Sterling Swap.

3.3.3 The sums referred to at paragraphs 3.3.1 and 3.3.2 above are inclusive of all applicable interest.

3.3.4 Payment shall be made within 14 days of acceptance of the Offer to the following bank accounts …”

1. The Administrators’ Offer was open for acceptance for 21 days from the date when it was made. This period expired on 8 May 2020 (the “Relevant Date”).

DID THIS OFFER RELATE TO THE CLAIM?

The judge held that it did.

1. 1. I am satisfied that the Administrators’ offer did “relate to” the claim as already advanced for the purpose of CPR 36.5. After inviting further submissions on the point, I have concluded that (a) the test (in CPR 36.5) that the offer must “relate” to the claim/part/issue is less exacting and does not require the exact correlation suggested by Firth Rixson: it means simply that the offer must be made by reference to identified claims and offer proposals in respect of it/them; and (b) provided of course that the offer is genuine, and clear in nature (see paragraph 20 above) the comparison required can reasonably be undertaken by identifying whether the relief obtained in the proceedings was in broad terms more advantageous to the claimant than its offer.

1. 1. However, other aspects of the disconnect argument have certainly given me pause for thought. In particular, I have been troubled by the fact that it is difficult to weigh and translate into an acceptable discount the more innominate or uncertain advantages that Firth Rixson may legitimately have perceived the continuation of a period of suspension might afford (including, for example, cash flow, exchange rate concerns or investment plans amongst others, as well as the possibility of some supervening new Event of Default). Further, during the contractually agreed period of suspension there is always the possibility, however theoretical, that a new Event of Default will arise which may be of a “continuing” nature such as not to bring the suspensory condition to an end upon cessation of the Administration. The Administrators’ Offer to that extent may be said to have re-written the contract rather than to have offered a beneficial variation in the way it was performed.

1. 1. I have concluded, however, that neither the fact that the offer includes a term which could not, in the particular form in which it was put forward, have been achieved by the claim, nor the fact that the value of a contractual right to defer payment may not easily be calculated to determine whether its foreclosure is more or less advantageous than the price offered (by way of discount on the payment obligation), makes inapplicable or unreasonable the comparison directed by CPR 36.17.

1. 1. Of course, where (as here) the offer included terms which, if accepted, would have accelerated the due date for payment and foreclosed the contractual right to a suspensory condition and thus to rely on any new Event of Default, the comparison cannot be purely mathematical. In claims, like the claim here, which cannot be said to be exclusively money claims, and must take into account more innominate considerations, the assessment is necessarily a broader one. Thus, in Carver v BAA plc [2008] EWCA Civ 412 at [30] Ward LJ quoted Rix LJ’s observation, in the course of argument in that case, that the test must be more “open textured”; and in his judgment he stated that it “permits a more wide-ranging review of all the facts and circumstances of the case in deciding whether the judgment, which is the fruit of the litigation, was worth the fight.”

1. 1. That requires identification of what was really the crux of the dispute. Here the crux of the dispute was whether the suspensory condition would survive the termination of the administration; the possibility of a supervening Event of Default was not in reality canvassed or germane. Firth Rixson fought on a point of principle and lost, and in all realistic likelihood, once the Relevant Steps have been accomplished, have to pay substantially more than they would have had to pay had they accepted the Administrators’ Offer.

1. 1. In that context the reality, after nearly 15 years of administration, is that the possibility of some supervening Event of Default is much more theoretical than real: it is, in my view, approaching the fanciful to suppose that a new Event of Default will arise between now and the time of cessation of the administration. As appears from my judgment to explain the grant of a three-year extension of LBIE’s administration (see [2022] EWHC 2995 (Ch)), the only substantial outstanding matters relate to litigation in the USA for which full provision has been made.

1. 1. I have taken into account also that the Part 36 rules themselves envisage, and absent contrary agreement between the parties require, payment within 14 days of any offer to pay or accept a single sum of money, subject to express agreement between the parties to the contrary. CPR 36.14(6)(a) provides as follows:

“Unless the parties agree otherwise in writing, where a Part 36 offer that is or includes an offer to pay or accept a single sum of money is accepted that sum must be paid to the claimant within 14 days of the date of –

(a) acceptance…”

As it seems to me, that both explains (as being a necessary ingredient) the term for payment within 14 days which the Administrators’ Offer contained and gives some support to the argument that notwithstanding a contractual provision for later payment, a compliant offer may be made which will automatically require payment within 14 days.

1. 1. I consider that I am also reinforced in my conclusion by the fact (as I perceive it) that the real gist of the dispute was a point of principle whether the Events of Default would continue after the cessation of Administration: and it would be odd if there was no way for the Administrators to have made a compliant Part 36 offer by proposing some financial discount on what would be the result if they succeeded on that point of principle. Put another way, the real point in dispute was whether Firth Rixson should be required to pay upon cessation of the administration; and it would be odd if a genuine and clear offer to settle a dispute which in the end would be about the payment of money could not be brought within CPR Part 36 by including a monetary discount in respect of the various uncertainties and foreclosure of the suspensory condition.

1. 1. I also have borne in mind that if the only objection to the offer had been the provision for payment within 14 days, it was open to Firth Rixson to seek agreement for later payment and/or to make a counter-offer to take into account of the matter. As it was, Firth Rixson offered a payment of only $2 million, illustrating that the real dispute was whether they would ever have to pay at all, even at the end of the administration of LBIE.

1. In the circumstances, in my judgment, the fact that in this case the Administrators’ Offer included a term for accelerated payment of a debt not yet due, which acceleration could never have been part of or obtained by the claim (or prospective claim) but for which a discount for early payment was offered, did not prevent it being compliant with CPR 36.5. In my judgment, the Administrators’ Offer complied with Part 36.

THE SECOND TEST – DID CPR 36.17(2) APPLY?

The judge then considered whether the applicants had, in fact, beaten their own offer. He had that they had.

The second issue: the relevant test and whether CPR 36.17(2) applies

1. 1. The second issue thus arises (see paragraph 4 above), which is what test should be adopted in determining whether the declaratory relief to which I have held the Administrators are entitled “is at least as advantageous to [them] as the proposals contained in [their] Part 36 offer”, and more particularly, whether the arithmetic test prescribed in CPR 36.17(2)(b) applies.

1. 1. CPR 36.17(2) provides that for the purposes of determining the issue:

“…in relation to any money claim or money element of a claim, ‘more advantageous’ means better in money terms by any amount, however small, and ‘at least as advantageous’ shall be construed accordingly.”

1. 1. I do not accept Firth Rixson’s argument that these proceedings were not “about money”. Plainly they are and always have been so: the question being whether the sums specified in the Swaps will become due on termination of the Administrators’ appointment. The Declarations sought and obtained in terms now agreed require payment of money as soon as the Relevant Steps are accomplished, subject to the theoretical possibility of a supervening Event of Default, as Mr Bayfield submitted.

1. 1. However, whether the proceedings constitute a “money claim” for the purposes of CPR 36.17(2) is a different question, as is the post-threshold question (insofar as it arises) whether Declarations constitute an “award” of “any sum of money” for the more particular purposes of CPR 36.17(4).

1. 1. As to the former question, in my judgment, the proceedings were not framed as a “money claim”. That is so even though if the Administrators were successful (as they have been) the consequence of the Declarations would and will be that Firth Rixson would and will become, after accomplishment of the Relevant Steps and in the absence of any Event of Default in the meantime, obliged to pay a settled and liquidated sum of money, as the proposed and agreed draft order accurately records. Accordingly, it is not sufficient to compare arithmetically what was offered with what ultimately will be received. Further, the fact that the suspensory condition remains in place must be taken into account. The extent of that benefit to Firth Rixson and concomitant disadvantage to the Administrators depends on the extent of that duration: presently the duration envisaged is three years from 30 November 2022, being the extension granted for the Administrators’ appointment by my Order dated 25 November 2022. But that cannot be entirely certain, just as, although very unlikely, it cannot in theory at least be entirely certain whether any Event of Default may arise in the same period. In my judgment, these matters in combination mean that the mechanistic or mathematical test prescribed by CPR Part 36.17(2) is not applicable.

1. 1. It is nevertheless appropriate first to consider whether, assuming continuation of the suspensory condition, the discount offered was real and substantial in mathematical terms. The mathematics are that the Administrators will obtain under the declarations more in money terms than they would have obtained under their offer, even allowing for the fact that they would have received earlier payment under the latter.

1. 1. In that connection, after the oral hearing I asked the Administrators for:

(a) an estimate of the aggregate interest which would have reasonably been expected to be earned by LBIE on the principal sum of £7,334,117 (being the amount proposed in the Part 36 offer to be payable in respect of the Sterling Swap within 14 days of acceptance) between the last date for acceptance of the offer and the present date for the termination of the Administrators’ appointments; and

(b) Clarification whether it was/is the practice of the Administrators to retain moneys collected in the currency in which they were paid or to exchange monies collected into Sterling; and if the latter, (a) what at the dollar/sterling exchange rate applicable on the last date for acceptance of the offer the Sterling equivalent of $53,535,379 would have been and (b) what the Sterling equivalent of that US dollar sum would be at present rates of exchange.

1. 1. My purpose was to double-check that in mathematical terms the payments required by the declaratory relief will exceed the amounts of the offer, even allowing for the fact that the Sterling Swaps imposed no interest during the period of suspension, whereas payment within 14 days if the Administrators’ Offer had been accepted would have resulted in the Administrators earning interest or other return on the money paid. I also wished to consider the possibility of exchange rate benefit.

1. 1. The answer provided as to (a) in paragraph 37 above was that

(i) the actual interest rate that has been paid on LBIE’s principal sterling deposit account with HSBC for the relevant period, and from this they can calculate the sum of interest that would have been earned on the sum of GBP £7,334,117 from 9 May 2020 to the end of December 2022 – that sum is GBP £118.577.99.

(ii) The Administrators could not know what rate they will receive from 1 January 2023 to the current anticipated date for the termination of the Administrators’ appointments in November 2025, and have therefore presented two alternative illustrative scenarios. One assumed that the interest that would be paid from 1 January 2023 to 30 November 2025 would continue to be the same as the rate that is paid on that account today, and that it would continue to be paid at that rate until the end of November 2025, which would result in additional interest of £554,277.16 (which when added to the £118,577.99 above, gives a total interest figure for the period of £672,855.15). The other took an illustrative forecast of the Bank of England’s base rate for 2023 – 2025, and estimated the future rate that might be earned by reference to those base rates (i.e. by applying the same percentage discount as is currently applied to the HSBC account, and applying that same percentage to forecasted rates). This rate results in an alternative interest calculation of £793,566.94 accruing from 1 January 2023 (which when added to the £118,577.99 interest calculated above, gives a total interest figure for the period of £912,144.93)

(iii) Based on these illustrations, the Administrators’ answer to my first question above is therefore that their estimated range of interest for the period would be between £672,855.15 and £912,144.93.

1. 1. By way of comparison, the Administrators’ Offer proposed discounts of approximately £815,000 in respect of the Sterling Swaps and US $3.35 million in respect of the Dollar Swaps, so that the payments required by the declarations will comfortably exceed what the Administrators would have received under their Offer, even allowing for interest.

1. 1. As to (b) in paragraph 37 above, both on and after 9 May 2020, the Administrators clarified that their usual practice has been to retain sums collected in dollars in that same currency, rather than to exchange them for any other currency – that remains the Administrators’ usual practice at the time of writing. The Administrators would have retained the sums in dollars in part because there is a substantial potential liability of the LBIE estate denominated in dollars. For completeness: (i) the Administrators have (at earlier stages in the course of LBIE’s administration) on occasion exchanged dollar sums for other currencies where they considered it appropriate to do so (ii) the Administrators’ general practice has historically varied with the currency in question (for example, the Administrators have generally exchanged Euros for Sterling, as at one time during the course of LBIE’s administration, Euro balances attracted negative interest rates).

1. 1. Next must be brought into account the theoretical possibility of there arising in the future some further Event of Default. As it seems to me, the discount offered, though relatively small, can fairly be considered to be more than adequate recompense for this possibility which, as previously explained I think very unlikely indeed to arise.

1. In my judgment, CPR 36.17(1) applies. CPR 36.17(2) does not; but the relief to which they are entitled is “at least as advantageous” to the Administrators as their Offer, so as to trigger the consequences set out in CPR 36.17(4), unless I am persuaded that any is “unjust”.