High Court Considers Enforcement Of Security By Way Of Appropriation Under The Financial Collateral Arrangements (No 2) Regulations 2003 (FCARs)

• Jurisdiction: European Union
• Law Firm: Herbert Smith Freehills
• Subject Matter: Finance and Banking, Financial Services
• Author: Mr Nick May, Ceri Morgan, Emily Barry and Nihar Lovell
• Published date: 09 February 2023

The High Court has dismissed a claim made by a borrower that a lender's appropriation of certain shares secured by a charge, upon default in a loan arrangement, was invalid and that the valuation of the appropriated shares was commercially unreasonable: ABT Auto Investments Ltd v Aapico Investment PTE Ltd & Ors [2022] EWHC 2839 (Comm).

The decision is interesting for two reasons:

• It considers the validity of the appropriation of shares in a private company under the Financial Collateral Arrangements (No 2) Regulations 2003 (the FCARs) and their valuation and
• It is an addition to the growing body of case law considering the threshold to be satisfied when exercising contractual discretions in the context of a borrower's default. You can find our previous blog posts considering similar issues here.

The FCARs introduced the concept of a "security financial collateral arrangement" into UK law, which in the context of security arrangements disapplies various formalities and provisions of UK insolvency law in relation to the taking and enforcing of security over cash, financial instruments and credit claims, where such arrangements are made between entities other than individuals. They also provide for remedies on security enforcement which are different from those usually seen in UK law, including, most notably, the enforcement technique of appropriation. They are most frequently used in the financial markets, and there are relatively few cases on their application. There is some long-running academic debate on various aspects of the FCARs, including their scope of application to certain categories of parties and assets.

In the present case, the court considered the validity of the appropriation of the shares by the lender (which is a relatively novel self-help remedy in UK law), and their valuation in a "commercially reasonable manner" as required by Regulations 17 and 18 (respectively) of the FCARs. The court was satisfied both that the appropriation was valid, and that the valuation of the appropriated shares had been made in accordance with the FCARs.

The court underlined that the FCARs imported an objective standard in valuing the shares. In the current context, the word "commercially" indicated that the standard to be applied was that of reasonable participants in the relevant financial market. In other contexts, the manner of valuation must be one which conforms in that context to "the reasonable expectations of sensible businessmen". However, it specifically did not have to consider the effect of the special value that the shares in a joint venture (JV) company would have to one of the JV partners as part of the overall valuation.

We consider the decision in more detail below.

Background

In 2017, the claimant company (ABT), through one of its subsidiaries, set up a JV with the defendant companies (Aapico). The JV was funded by Aapico and the arrangements between the parties were set out in a suite of documents which included loan agreements made in 2017 and 2018 (the Loan Agreements). As security for the loans, ABT gave guarantees...