Neutral Citation Number: [2012] EWHC 772 (Ch)
Case No: HC12C01016
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
The Rolls Building
Fetter Lane 
EC4A 1NL

Date: 27/03/2012

Before :

MR JUSTICE NORRIS
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In the Matter of :

	SMP Trustees Limited		

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Mark Hapgood QC & Paul Wright (instructed by Dechert LLP) 

Hearing dates: 21 March 2012
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Judgment

MR JUSTICE NORRIS:

1.	Lifemark SA (a Luxembourg special purpose vehicle) (“Lifemark”) issued a series of bonds. There are 25 separate issues (divided into 248 series) of bonds denominated in six currencies repayable on various dates and with a range of coupons (“the Note Programme”).
 
2.	The bonds were originally issued to Keydata Nominees Limited.  That company marketed the bonds to retail investors through Keydata Investment Services Limited (“KIS”), which missold them. In the events which have happened about 80% of those bonds are now held by the Financial Services Compensation Scheme (“FSCS”) and the Yorkshire Building Society. The remaining 20% of the bonds in issue are held by a range of UK and foreign retail investors. In dollar terms there is about US$606 million dollars of principal outstanding on the bonds. 

3.	The money raised by the bonds was used to purchase a portfolio of US life insurance policies where the assured is aged more than 65 and had a limited life expectancy. The policies  are owned by Lifemark and, under Luxembourg law, form a pool of assets known as “compartment 1”. The object was that on maturity or (more rarely) on the sale of the individual policies Lifemark would receive funds which it could use to repay the bonds at the relevant maturity date and pay the coupon in the meanwhile. Lifemark bought 364 policies of which (by December 2011) 53 had matured and 28 had been sold. The remaining 283 life policies have a face value of US$1033.9 million The premiums due on those remaining policies are running at the rate of US$4.5 million per month. Because the policy premiums to be paid and policy proceeds to be received are sums expressed in US dollars, but Lifemark’s obligations to bondholders are expressed in six different currencies, the currency risk is hedged under a swap arrangement.

4.	However, the business model did not work. The mortality rate of the lives assured had been misjudged. The policies matured more slowly than anticipated. This reduced receipts and increased expenses (because of higher ongoing premium payments to maintain the policies). The resulting pressure on cash flow meant that Lifemark faced difficulties in paying the premiums to maintain policies, in repaying bonds at maturity and interest in the meanwhile, and in paying the running expenses of the fund. The cashflow short fall was from a time met by some short term loans. But on the 18 November 2009 the Luxembourg District Court appointed KPMG personnel as Provisional Administrators with the object of exploring whether there could be a structuring of the Note Programme. The appointment of the Provisional Administrators was from time to time extended: and there is now in place a final extension until 23 May 2012, after which date a liquidation will be put in place.
 
5.	The possibility of liquidation is in fact even more imminent because on the 12 March 2012 the Luxembourg regulator withdrew authority from Lifemark to operate as a regulated securitisation undertaking. A judicial liquidation may be put in place at any time.
 
6.	The consequence of a judicial liquidation would be the implementation of a programme for the immediate sale of the policies (or at least such of them as had not lapsed by failure to maintain the premiums). Putting the entire portfolio on the market as such will simply achieve distress prices. Offering the all the policies individually will simply depress prices and enable purchasers to select the best policies and leave the worst. The anticipated return to bondholders in a judicial liquidation lies within the range of 8%-28%. 

7.	There is, however, an alternative: that would be a “controlled liquidation” conducted under a protocol agreed with the Luxembourg liquidator. Under such a protocol the liquidator could be authorised to seek funding to maintain the premiums until the maturity of the policies or to conduct a managed and orderly sale of the portfolio, probably in small parcels bundling up the desirable with the less desirable policies, and offered to the market over a period of time. This would substantially enhance the return to bondholders to something of the order of 43%. Since this would involve running Lifemark as an investment vehicle in insolvency arrangements would have to be made for the payment of the expenses of the liquidators, and some sort of agreement would have to be reached with the counterparties under the currency swap arrangements to ensure that they did not crystallise liabilities upon the liquidation of Lifemark. 

8.	Some funding is in place to sustain a controlled liquidation. Because of its very significant interest in maximising realisations FSCS provided a facility of US$10 million (recently enlarged to £9.639 million). A draft protocol is in existence which (if it could be rendered effective in England and Wales) could be put to the Luxembourg Court immediately a judicial liquidation was initiated.

9.	The draft protocol recites that its purpose is to regulate the terms and conditions on which the liquidator may sell policies so that an orderly wind down of the portfolio can be effected for (a) preserving and maximising the value and all marketability of the policies for the benefit of the creditors of Lifemark: or (b) facilitating the generation and preservation of liquidity. It proposes the establishment of a creditors’ committee to provide guidance to the liquidators and to provide a co-ordinated source of views from representatives of the bondholders and others, with the object that the creditors’ committee should supervise the correct implementation of the protocol by the liquidators. The protocol is to be implemented by the creditors’ committee identifying policies within the portfolio which might be put up for immediate sale and those which ought to be maintained out of an intended reserve fund (utilising the facility provided by FSCS). With that assistance the liquidators are to select a sample of policies (such that the selection does not materially impact upon the overall maturity profile) and then offer them through a well-managed, professional and competitive process to key potential bidders within the life settlement industry. 

10.	The question to be addressed is: How can these sensible arrangements be put into effect in England and Wales so that the Judge in Luxembourg can be invited to consider them as a substitute for an ordinary judicial liquidation?

11.	SMP Trustees limited (“SMP”) is the trustee in relation to the Note Programme. Each of the 25 bond issues has its own separate Trust Deed (though they are in substantially the same form). In the Trust Deed Lifemark covenants with SMP unconditionally to pay to SMP as trustee the principal amount due on a bond at redemption (and in the meanwhile unconditionally promises to pay interest in accordance with the terms of the bond): and SMP holds the benefit of those covenants on trust for itself and the Bondholders according to their respective interests. As security for its covenant obligations to SMP and the obligations created by the bonds Lifemark charges (amongst other things) the portfolio of policies. Until any security becomes enforceable Lifemark is permitted to deal with (amongst other things) the portfolio of policies: but if there is any failure to pay the principal or interest in respect of the bonds then SMP can enforce its security. Once the security is enforceable SMP must (if it receives a direction from the Bondholders in a specified form, and otherwise may) take possession of the policy portfolio and exercise any available rights with respect to the realisation of that portfolio as it thinks fit. The Trust Deed contains provisions (“the waterfall provisions”) relating to the receipt by SMP of monies from Lifemark in the ordinary course of the operation of the bond issue (“pre-enforcement”) and separate provisions relating to the receipt by SMP of monies in the course of enforcing the security which it is given (“post-enforcement”). The waterfall provisions differ in the pre-enforcement and the post-enforcement scenarios. It is of course a matter of Luxembourg law how these security rights would rank in a judicial liquidation: it appears that they would be preserved. But there is the added complication that each of the 25 trust deeds is secured upon the whole of the assets in compartment 1 (not simply upon the policies purchased with that issue of the Note Programme). 

12.	Under the Trust Deed SMP has an absolute and uncontrolled discretion as to the exercise of its functions; although it is directed to have regard to the interests of the Bondholders as a class (and not to have regard to the consequences for individual bondholders). But the form of the Trust Deed suggests that the “functions” of SMP relate to the application of monies under the waterfall provisions, and to the exercise of security rights. SMP has no express power to enter into an agreement such as the draft protocol, nor any wider rights in relation to the administration of the charged property than are conferred by the Law of Property Act 1925 (as supplemented by the express terms of the Trust Deed). SMP cannot therefore enter into the draft protocol or itself deal with the policy portfolio in the way envisaged by the draft protocol. 

13.	Of course, those beneficially entitled to the property which is the subject of the trusts do have some rights as such beneficial owners to direct SMP as trustee how to deal with the trust property. In the Trust Deed this is recognised by clause 9.3, which says that SMP shall not be responsible for having acted in good faith on a resolution purporting to have been passed at a meeting of the Bondholders. Such meetings are provided for in the “Terms and Conditions of the Bonds” set out in a schedule to the Trust Deed. Condition 17 of the Terms and Conditions is not at all well drafted; but it does contemplate the holding of a Bondholders meeting for the purpose of considering an extraordinary resolution which, if duly passed, would be binding on the Bondholders (whether or not they were present at the meeting of which such a resolution was passed). The quorum for any such meeting is two or more persons together representing a clear majority in the principal amount outstanding on the bonds for the time being (or for particular alterations in the terms of the bond, representing not less than 75% of that principal amount). If the original meeting is inquorate, then there is a reduced quorum at the adjourned meeting. 

14.	There is, however, a problem in the interpretation of this provision. There are 25 Trust Deeds in materially the same form, each creating identical securities over the single pool of assets in compartment 1, which is itself the product of all 25 issues (and all 248 series of those 25 issues). The terms of Condition 17 (read together with the definitions in the Trust Deed) would appear to contemplate the holding of 25 separate meetings (each of which must be quorate). But there are other indications in the Trust Deed which contemplate the “Bondholders” being all those to whom Lifemark owes obligations which are secured on the assets in “compartment 1” (irrespective of the Trust Deed under which those obligations arise).

15.	Because of the great importance of avoiding a judicial liquidation (which is so manifestly disadvantageous to the interests of all bondholders) SMP convened both a plenary meeting of all bondholders and 25 separate meetings of Bondholders by issue. It put to those meetings five resolutions of which three remain material.

16.	The first related to the controlled liquidation proposal. The relevant constituency was invited to vote in favour of that proposal and to accept certain amendments to the Trust Deed; and also to resolve that SMP should have no liability for acting upon the resolution (even if it might be subsequently be found but there was a defect in its passing or that it was otherwise not valid). In a detailed Memorandum, circulated to all Bondholders, soliciting support for the resolution SMP stated:-
“It is expected that under the Controlled Liquidation Proposal the terms and conditions of the Trust Deeds would be amended as follows:
-	payments will be made to Bondholders of all Issues on a pari passu basis irrespective of the original security dates for each bond. This means that all Bondholders will share equally in any amounts to be distributed in respect of the Bonds, irrespective of the original security dates for each bond. The amounts to be distributed in respect of each Bond will be calculated based on the nominal amount of that Bond as a proportion of the aggregate nominal amount of all Bonds;
-	the votes of Bondholders will not be counted or determined on an Issue-by-Issue basis but will be counted and determined on an aggregated basis across all Issues. This means that amendments will be made so that, in the event of any future Bondholder meetings, only one meeting shall be held, the results of which will bind Bondholders of all Issues. The votes of Bondholders at any such meeting will be counted and determined on an aggregated basis across all Issues of Bonds, rather than on an Issue-by-Issue basis, and the voting entitlements of Bondholders will be determined and calculated in accordance with the applicable exchange rates at the time of such meeting;
-	Payments to the liquidators for liquidation costs and expenses will rank above all other payments;”

17.	The plenary meeting was quorate and this resolution was passed with 99.79% support. Four of the “issue” meetings (issues 5, 12, 21 & 24) were inquorate. At adjourned meetings issues 12 and 21 were quorate and voted overwhelmingly in favour of the controlled liquidation proposal. Issues 5 and 24 remained inquorate. (These results came about because although the FSCS and Yorkshire Bank own 80% of the bonds in issue, they do not own 80% of each issue.) All of the originally quorate “issue” meetings voted almost unanimously for the resolution.
 
18.	The second resolution dealt with the approval for paying the administrators of KIS to distribute realisations to bondholders (since KIS already has the appropriate systems and records to deal with those bondholders who invested in Lifemark through its marketing). The third resolution proposed the redenomination of bonds from their original currency of denomination into US dollars at a specified exchange rate. There was more varied voting on the second and third resolutions than on the first; but they also were affected by the fact that some “issue meetings” were inquorate. 

19.	Because the outcome of the plenary meeting differs from the outcome of some of the separate “issue meetings” SMP considers (rightly in my view) that it cannot safely rely on Condition 17 in Schedule 2 and clause 9.3 of the Trust Deed to enter into the protocol so that it affects the rights of all Bondholders in compartment 1: and SMP considers (again rightly in my view) that it is not practicable to have a judicial liquidation (necessitated in relation to issues 5 and 24) and also a controlled liquidation. It needs the assistance of the Court. 

20.	SMP was granted permission to issue a claim form without naming a Defendant seeking directions as to how it should act following the meeting. In particular it sought directions whether it should
	
a)	Act on the basis that on the proper construction of the Trust Deed it could accept the result of the plenary meeting:
b)	Proceed with the controlled liquidation proposal (entering into the protocol and amending each Trust Deed accordingly):
c)	Enter into the proposed costs arrangements relating to KIS: or 
d)	Re-denominate the currency of the bond issues.

21.	At the same time as issuing the claim form SMP issued an Application Notice returnable in the ordinary Applications List seeking (what is in effect) final relief in the action. The constraints of that list (the matter must not exceed 2 hours, to include pre-reading, argument and judgment) meant that it was impossible to deal with the 5 level arch files of material. I decided that I would not address any of the issues raised by the second or third resolutions. These stand adjourned to come on as a Part 8 claim before me in the ordinary course. (When they do my intention would be to treat those resolutions as continuing to form part of a package of proposals to amend the original Trust Deed, and not as freestanding proposals to effect further amendments. To do otherwise would mean that the listing of the case would distort the reality of the proposals.)

22.	The hearing focused on the really urgent question of entering the draft protocol and making any appropriate amendments to the Trust Deed. Because the claim form was issued without naming any Defendant and the expressions “Bondholder” and “Bond” are central to so many provisions of the Trust Deed and the Terms and Conditions and ought not to be looked at through the single lens of Condition 17 I indicated that I would not decide any question as to the true interpretation of those words. I indicated at the conclusion of argument that I intended to authorise SMP to enter into the draft protocol and make such amendments to the Trust Deed as were necessary to give effect to it: and that I would give my reasons later.

23.	This judgment contains those reasons.

24.	I was at first inclined to the view that section 57 of the Trustee Act 1925 provided the answer to SMP’s problem. SMP has the benefit of 25 covenants for payment from Lifemark (which is insolvent): it also has 25 charges over the single pool of assets comprised in Lifemark’s compartment 1 entitling it to take possession of the policy portfolio: that is the trust property. But its rights as holder of the security would not enable it to borrow and to administer the portfolio so as to realise it in the most advantageous fashion: its powers of management or administration are insufficient to enable it to enter the relevant agreements.  

25.	Section 57 provides that where in the management or administration of any property vested in trustees any release or other transaction is in the opinion of the Court expedient (but the same cannot be effected by reason of the absence of any power for that purpose vested in the trustee by the trust instrument) the Court may confer upon the trustee the necessary power. It is settled that the words “in management or administration” are confined to the managerial supervision and control of trust property on behalf of beneficiaries: see Re Downshire Settled Estates [1953] Ch 218: but it is precisely because SMP cannot manage and control property comprised in its security to best advantage (and in particular because it has no power to undertake a form of realisation which is neither judicial liquidation nor enforcement of its security in accordance with the rights conferred by the Trust Deed) that the problem arises. 

26.	Section 57 is potentially a very useful power for a trustee in the position of SMP.  The section envisages that the trustee itself will make the necessary application to the Court: and it envisages that the trustee will do so precisely because it does not have the consent of all the beneficiaries to the proposed course of action, and by reference to the interests of the beneficiaries as a whole (and not the interest of every beneficiary individually). 

27.	So far as the conditions for the exercise of the section 57 power are concerned: (a) the transaction is plainly expedient and (b) the Trust Deed contains no power to effect the transaction. But the Trust Deed does contain a power to amend the Trust Deed: and that power of amendment might be exercised so as to confer the necessary transactional power. If available that would render reliance on s.57 unnecessary (and indeed not applicable).

28.	Clause 13.1 of the Trust Deed provides:-

“The Trustee may agree without the consent of the Bondholders, to any modification to this Trust Deed… which is, in the opinion of Trustee of a formal, minor or technical nature or to correct a manifest error. The Trustee may also agree to any modification to this Trust Deed… that is in its opinion not materially prejudicial to the interest of the Bondholders”.

29.	A amendment to confer an power to enter into the protocol and to adjust the waterfall provisions to provide for the payment of liquidation expenses and for the repayment of any facility made available to fund the operation of Lifemark in liquidation would plainly not be of a “formal, minor or technical nature”. The question is whether such an amendment falls within the second limb of the power. 

30.	The power could not be more widely drawn. It empowers the trustee to effect “any modification to this Trust Deed”. Before exercising the power SMP must be of the opinion that the modification “is… not materially prejudicial to the interest of the Bondholders”. For the purposes of the present analysis (and without prejudging any arguments that might be advanced as to the proper meaning of that word) I will take the term “Bondholders” to refer to the holders of bonds issued under each individual Trust Deed. SMP is of opinion that amendment of each relevant Deed to authorise entering the protocol (and making consequential amendments to the waterfall provisions) is not materially prejudicial to that class of Bondholder: indeed it is for the significant benefit of that class. It is sufficient for SMP to hold that opinion. But the opinion is in fact entirely reasonable: and it is the overwhelming view of all those bondholders who have voted upon the issue. It is not to be assumed that the bondholders of issues 5 and 24 are indifferent to the issue, simply because they failed to summon a quorum. But in my view no rational bondholder acting in his own interest would wish to vote against a controlled liquidation (and thereby compel a judicial liquidation) where adopting such a course dramatically reduces the level of likely recovery on his bond. So the power of amendment is available and properly exercisable. 

31.	The one possible limitation is that SMP is empowered to “agree” to any modification, which might suggest that the initiative for the modification should lie otherwise than with SMP. Having regard to the purpose for which this power of amendment exists (which I consider to be the power to effect such changes as are desirable in any changed circumstance to preserve the interests of the bondholders as a class) I would not read the power of amendment in such a restrictive way. The word “agree” is there simply because the Trust Deed is a bi-partite document between Lifemark and SMP, so that any amendment is likely to involve some agreement between those two parties. The power was conferred to provide flexibility in fulfilling the fundamental purposes for which the trust exists by responding to changed commercial circumstances. As Millett J said of such a power in a pension trust deed:

“ It is important to avoid unduly fettering the power to amend the provisions of the scheme, thereby preventing the parties from making those changes which may be required by the exigencies of commercial life” ( Re Courage Group’s Pension Scheme [1987] 1 WLR 495 at 505-506) 

32.	I do not understand SMP to have surrendered its discretionary power of amendment to the Court. Because the proposed amendments are momentous and because it will be necessary to satisfy the Luxembourg District Court that the power has been properly exercised I understand SMP to seek the blessing of the Court under the jurisdiction identified in Public Trustee v Cooper [2001] WTLR 901. I find and hold that an exercise of the power of amendment in the manner intended would be a lawful and proper exercise of the power and would effectively amend each of the Trust Deeds so as to confer upon SMP authority to enter into the intended protocol and to deal with the proceeds of realisations in accordance with the intended revised waterfall provisions (which allow for the payment of the expenses of the liquidation and the repayment of the reserve fund) in accordance with the first resolution and the explanation of it contained in the Memorandum.

33.	Because this judgment may be relied upon by a foreign court I annex the form of order which I approve.

Approved Order

CLAIM NO HC12CO1016    	
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Mr Justice Norris
21 March 2012

BETWEEN:		

	SMP TRUSTEES LIMITED		
		Claimant	

	 ORDER 		

Upon the application of the Claimant (the “Trustee”) by its Application Notice dated 15 March 2012 (the “Application Notice”)

And upon reading the witness statement of Oliver Francis Peck dated 15 March 2012. 

And upon hearing Leading Counsel for the Trustee.

IT IS ORDERED THAT: 
 
1.	Pursuant to clause 13.1 of the trust deeds governing each of issues 1 to 25 of the  Lifemark Note Programme (the “Trust Deeds”) the Trustee may: 
a.	Amend the Trust Deeds to authorise the Trustee to enter into a Protocol with the liquidators of Lifemark to facilitate and govern the controlled liquidation of Lifemark (as described in the Explanatory Memorandum to the Bondholders dated 2 December 2011).
b.	Thereafter enter into a Protocol with the liquidators of Lifemark on such terms as the Trustee considers appropriate. 
c.	Subject to the required consent of Société Européenne de Banque S.A in its capacity as the Swap Counterparty, amend clauses 6.1 and 6.2 of the Trust Deeds to allow for the liquidators of Lifemark and a Reserve Fund, which is to be set up under the Protocol, to rank ahead of the Bondholders in the hierarchy of payees.  
d.	Amend clauses 6.1 and 6.2 of the Trust Deeds to provide that payments are to be made to the Bondholders on a pro-rated basis according to the principal entitlement of their Bonds irrespective of the original maturity dates of the Bonds.
e.	Amend the Trust Deeds to make clear that the quorum and voting requirements are henceforth to be calculated by reference to all the Bondholders of the 25 bond issues of the Lifemark Note Programme.  
f.	Replace the Trust Deeds with one composite trust deed that applies to all 25 bond issues of the Lifemark Note Programme. 

2.	For the purpose of this Order the term “Bondholders” includes those persons who beneficially own the nominal amounts represented by the global bonds registered in the name of the common depositary, BNP Paribas Securities Services Luxembourg.

3.	Consideration of paragraphs 5(1), (3) and (4) of the Application Notice be adjourned, to be reserved to Norris J with a time estimate of 1 day.  

4.	The Trustee is at liberty to raise and pay out of the property subject to the trusts of the Trust Deeds in due course of administration its costs of the hearing on 21 March 2012 (to be the subject of assessment on the indemnity basis in default of agreement by a simple majority of Note Progamme Bondholders).  The remainder of the costs relating to the Application Notice are reserved to the adjourned hearing. 

21 March 2012