England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		11/11/2010

Mr. Justice Teare :

1. This case concerns the valuation of an investment fund at an inauspicious time, namely, shortly after the collapse of Lehman Brothers in September 2008. The shares in the fund had been "repackaged" and were represented by financial instruments described as Variable Redemption Notes. Those Notes matured on 28 October 2008 on which date the Claimant said the First Defendant was obliged to pay a sum which represented the value of the shares. The Second Defendant was obliged to value the shares and valued them at nil and so the First Defendant paid nothing to the Claimant. The Claimant says the value of the shares was in excess of $20m.
2. The nature of the transaction in which the Claimant and the Defendants were engaged is complex. In order to resolve the issues between the parties it is not necessary to set out the entirety of that transaction but it is necessary to understand its nature so that those issues may be placed in their proper context.
3. In summary the Notes were issued as part of a "repackaging transaction" whereby (1) 195,000 redeemable preference shares in an investment fund ("the Shares") were repackaged into the Notes, and (2) the Notes were themselves "repackaged" into certain Certificates of Deposit (or CD). An investor who purchased the CD would thereby become exposed to (i.e. take risk in) the Shares. Upon maturity of the CD, the investor was entitled to delivery of the Notes; and, broadly speaking, upon the subsequent maturity of the Notes, the investor was entitled either to an amount equal to the value of the Shares (less certain deductions), determined by the Second Defendant as Calculation Agent in its sole and absolute discretion, or to the Shares themselves (again, subject to certain deductions for certain items).
4. The transaction can be explained in a little more detail as follows. In about late September 2003 the Claimant and the Defendants participated in a transaction which "repackaged" the Shares in the Global Opportunities Fund ("the Fund"). The Fund was a sub-fund within Chinkara Global Funds Limited (now known as First Global Funds Limited PCC ("the First Global Fund")), an open ended umbrella investment fund structured as a Mauritian protected cell company. The First Global Fund had an Information Memorandum and a Memorandum and Articles of Association.
5. The Fund's investment manager was at all material times a Mauritian company, First Capital Management Limited, formerly known as Chinkara Capital Management (Mauritius) Limited ("First Capital"). First Capital was the immediate parent company of the First Global Fund, and was itself a subsidiary of First Gulf Asia Holdings Ltd, previously known as Chinkara Capital Limited ("First Gulf"). The Fund's administrator was originally Morgan Stanley Dean Witter Asia (Singapore) Pte, but by the time of the events relevant to these proceedings it had been replaced by Mauritius International Trust Company Limited ("MITCO"). The Fund's custodian was Standard Chartered Bank, Hong Kong ("Standard Chartered").
6. The Shares in the Fund were redeemable interests. The rights of redemption and the procedures for exercising those rights (as provided for in the Memorandum and Articles of Association) were explained in Section 13 of the Information Memorandum. The right to redeem the Shares was subject to a number of caveats and qualifications, such as the right of the directors of the Fund to suspend redemptions. Moreover, although the amount payable upon redemption was prima facie the NAV per Share as determined by MITCO, the directors of the fund had a right to suspend the determination of the NAV per Share or to pay the redemption proceeds in kind rather than in cash.
7. A Fund Services Report dated 31 January 2009 and obtained by the Defendants in June 2010 revealed that many of the assets held in the Fund were shares and debt securities in companies which, as at September and October 2008, were not traded on the Indonesian stock exchange or any other established markets for shares or bonds. Those companies were variously domiciled in Indonesia, the Bahamas, British Virgin Islands, Jersey or Singapore and appeared to be private companies about which there was limited publicly available information. There were in addition shares in three companies listed on the Indonesian stock exchange. Of these one, PT Bank Century, was taken over by the Indonesian authorities in November 2008.
8. The transaction giving rise to the present dispute was one of a number of fund repackaging transactions in which the Defendants, at the request of its then client, Mr Rafat Rizvi, had been involved since 2003. As well as being a director of the First Global Fund, Mr Rizvi was also the managing director of First Capital and is understood to have controlled First Gulf.
9. The "repackaging" transaction giving rise to this dispute proceeded as follows:

i) The Second Defendant and First Gulf entered into a share purchase agreement dated 30 September 2003 ("the Share Purchase Agreement") pursuant to which the Second Defendant acquired the Shares on behalf of the First Defendant. The Share Purchase Agreement provided (by clause 4.2) for a forward sale of the Shares by the Second Defendant back to First Gulf on the Maturity Date of the CD issued by the Claimant as described below ("the Forward Sale").

ii) The First Defendant as Issuer issued the Series 4 Step-Down Notes ("the Series 4 Notes") to the Second Defendant in an aggregate nominal amount of US$26 million. The Second Defendant transferred the Series 4 Notes to the Claimant. In consideration of the Series 4 Notes, the Claimant issued Variable Redemption Portfolio Linked Certificates of Deposit ("the WestLB CD") in the principal amount of US$26 million to the Second Defendant.

iii) The Second Defendant transferred the WestLB CD to First Gulf pursuant to the Share Purchase Agreement in consideration for the Shares.

iv) Under the terms of the WestLB CD, the Reference Portfolio was initially the Series 4 Notes. However, the terms provided for an option (the "Holder Contingent Portfolio Option") whereby the holder could opt to substitute the Series 5 Variable Redemption Notes (i.e. the Notes) for the Series 4 Notes as the Reference Portfolio. That option was exercised on 10 October 2003 and the Notes were accordingly issued by the First Defendant to the Claimant in exchange for the Series 4 Notes.

v) The terms of the Notes are set out in a Pricing Supplement dated 3 October 2003 ("the Pricing Supplement") issued in conjunction with an Offering Circular dated 26 July 2002.

vi) The result of the above transactions was that:

a) the Second Defendant held the Shares (on behalf of the First Defendant);

b) the Claimant held the Notes; and

c) First Gulf (or any subsequent transferee) held the WestLB CD.

10. The reason why the First Defendant, an affiliate of the Second Defendant, was the Issuer of the Series 4 Notes and the Notes was because it had an established note issuance programme which was capable of accommodating the desired terms of the notes, unlike the Second Defendant whose programmes at the time were mostly short term commercial paper programmes. The Second Defendant (rather than the First Defendant) was Calculation Agent because of the Second Defendant's status as broker-dealer within the Nomura group. The First Defendant had no employees beyond its statutory directors.
11. It was common ground that, apart from the Defendants' fees, the repackaging transaction was structured in such a way that neither the Claimant nor the Defendants was intended to be exposed to the Shares. The person who was intended to be exposed to the Shares was the end investor (i.e First Gulf or any subsequent transferee of the WestLB CD). That was because:

i) The terms of the WestLB CD provided that upon maturity the holders of the certificates were entitled to delivery of the Notes. The maturity date of the WestLB CD occurred before the maturity date of the Notes.

ii) Upon maturity of the Notes the First Defendant could either make physical delivery of the Shares or pay an amount which represented their value.

12. Thus, if the Claimant delivered the Notes to the holder of the WestLB CD (the end investor) on maturity of the WestLB CD and the First Defendant delivered the Shares to the end investor on maturity of the Notes only the end investor would be exposed the Shares. However, both the Claimant and the First Defendant made a mistake in operating this complex transaction which resulted in both being exposed to the Shares. The Claimant, instead of delivering the Notes to the end investor, paid US$26m. to the end investor and so retained the Notes. The First Defendant, whilst intending to make physical delivery of the Shares, missed the date for such delivery by wrongly calculating it and so had to pay an amount which represented their value to the Claimant on maturity of the Notes. The Second Defendant valued the Notes at nil and so the First Defendant paid nothing to the Claimant. Thus it is that as a result of these mistakes and the valuation of the Notes at nil that the Claimant and the Defendants find themselves in this court.
13. Having explained in broad terms how the dispute between the parties has arisen it is necessary to set out the material terms of the Notes. They were set out in a "Pricing Supplement" and described as Special Conditions.

"1. Redemption Amount

Subject to Special Condition 3 (Issuer's Physical Delivery Option), [t]he Noteholder shall receive, on the Maturity Date a pro rata share (determined on the date falling 20 Business Days prior to the Maturity Date by reference to the percentage which the Principal Amount represents of the Aggregate Principal Amount) (the 'Pro Rata Share') of the NAV of the Reference Fund minus the Funding (the 'Redemption Amount'), as determined by the Calculation Agent in its sole and absolute discretion.

2. Determinations in respect of the Reference Fund

The determination of the NAV of the Reference Fund by the Calculation Agent shall (in the absence of manifest error or fraud) be final and binding upon all parties. A certificate of the Calculation Agent as to the NAV of the Reference Fund shall be conclusive and binding as between the Issuer and the bearer hereof.

If the Calculation Agent fails at any time for any reason to establish the NAV of the Reference Fund or to make any other determination or calculation required pursuant to these Conditions, the Issuer shall do so and such determination or calculation shall be deemed to have been made by the Calculation Agent. In doing so, the Issuer shall apply the provisions of these Special Conditions, with any necessary consequential amendments, to the extent that, in its opinion, it can do so, and, in all other respects, it shall do so in such manner as it shall deem fair and reasonable in all the circumstances.

None of the Issuer or the Calculation Agent shall have any liability to the Noteholder, and the Noteholder shall not have any recourse to the Issuer or the Calculation Agent, in respect or on the basis of the performance in respect of the Reference Fund, or any assets or instruments to which the Reference Fund is linked, or [...] any determination of the NAV of the Reference Fund.

3. Issuer's Physical Delivery Option

Physical Delivery Option: If at any time a Redemption Amount becomes payable to the Noteholder, the Issuer shall have the option (the "Issuer's Physical Delivery Option"), instead of paying such amount, to deliver to the Noteholder on the Maturity Date a Pro Rata Share of either (i) the underlying assets representing the Reference Fund; or such lesser amount of underlying assets representing the Reference Fund as the Issuer shall determine in its sole discretion together with an amount in U.S.$ which in aggregate equals the value of the Redemption Amount to which the Noteholder would otherwise be entitled, or (ii) the shares of the Reference Fund; or such lesser amount of the shares of the Reference Fund as the Issuer shall determine in its sole discretion together with an amount in U.S.$ which in aggregate equals the value of the Redemption Amount to which the Noteholder would otherwise be entitled (the "Deliverable Property").

Exercise of Issuer's Physical Delivery Option. In order to exercise the Issuer's Physical Delivery Option the Issuer will notify the Noteholder at least [15] Business Days prior to the Maturity Date by delivery of a "Physical Settlement Notice". The Physical Settlement Notice will specify (i) the Physical Settlement Date; (ii) the Deliverable Property; (iii) the manner in which legal and beneficial title to the Deliverable Property will be transferred to or to the order of the Noteholder and any information required to be provided to the Issuer by the Noteholder necessary to effect such transfer. Within the period commencing on and including the date of delivery of the Physical Settlement Notice and ending on and including the date which falls 5 Business Days thereafter, the Noteholder shall give to the Issuer (i) details of the information required to be provided by it as specified in the Physical Settlement Notice; (ii) all necessary consents and/or authorisations (if any) that the Issuer may request; and (iii) all other relevant information or details reasonably requested by the Issuer in connection with delivery of the Deliverable Property (the "Physical Settlement Details")…".

14. Some of the terms used in the Special Conditions are defined as follows:

The "NAV of the Reference Fund" was defined as meaning:

"an amount equal to the value of the assets in the Reference Fund net of all and any expenses, costs, taxes, deductions, imposts and/or duties, including but not limited to the Unwind Amount, in each case, determined by the Calculation Agent, based on such assumptions and information, including but not limited to prices, derived from such sources as the Calculation Agent deems appropriate in its sole and absolute discretion."

"Calculation Agent" was defined as meaning:

"Nomura International plc. The determination by the Calculation Agent of any amount or of any state of affairs, circumstance, event or other matter, or the formation of any opinion or the exercise of any discretion required or permitted to be determined, formed or exercised by the Calculation Agent pursuant to the Notes shall (in the absence of manifest error) be final and binding on the Bank and the Noteholders.

In performing its duties pursuant to the Notes, the Calculation Agent shall act in its sole and absolute discretion.

Any delay, deferral or forbearance by the Calculation Agent in the performance or exercise of any of its obligations or its discretion pursuant to the Notes including, without limitation, the giving of any notice by it to any person, shall not affect the validity or binding nature of any later performance or exercise of such obligation or discretion, and the Calculation Agent shall bear no liability in respect of, or consequent upon, any such delay, deferral or forbearance."

"Maturity Date" was defined as meaning

"if the CD Holder Contingent Portfolio Option is not exercised under the Reference CDs: (a) 25 Business Days after the Expiry Date of the Contingent Portfolio Option in the Reference CDs; or otherwise (b) the earlier of (i) the Scheduled Maturity Date; (ii) 20 Business Days after the Maturity Date of the Reference CDs; and (iii) the Early Redemption Date".

"Reference Fund" was defined as meaning

"a portfolio of 195,000 participating redeemable preference shares of a nominal value of US$100^[1] each in the capital of the sub-fund designated the Global Opportunities Fund managed by Chinkara Global Funds Limited PCC".

15. The Claimant puts its case in two ways. Firstly, it contends that the First Defendant in fact valued the Notes pursuant to Special Condition 2 in the sum of US$22,307,715 and that therefore is the sum which the First Defendant ought to have paid on 28 October 2008. Secondly, it contends that the valuation of the shares by the Second Defendant at nil was invalid (on the grounds that it was too late, made irrationally or made in bad faith) and that the value was in fact US$20,229,015. The Defendants deny both claims and claim that that valuation by the Second Defendant is binding on the parties.

The facts

16. The Fund Administrator MITCO sent monthly reports of the NAV per share of the Fund to the Defendants. On receipt the Second Defendant provided "interpreted values" for the certificates of deposit to the holders of the same, many of which were addressed to "to whom it may concern". Thus on 29 September 2008 MITCO reported that the NAV per share was US$107.44 as at 31 August 2008 and on 30 September 2008 the Second Defendant provided interpreted values for the certificates of deposit based on those values. The interpreted values were subject to a disclaimer that they were "indicative" only. They were based on sources which the Second Defendant believed to be reliable but they did not represent them to be accurate or complete.
17. The WestLB CD matured on 30 September 2008 and on that date the Claimant mistakenly paid their nominal value of US$26m. to the holder of the WestLB CD.
18. 7 October 2008 was the deadline for issuing a Physical Settlement Notice under the terms of the Notes. This deadline was not appreciated by the First Defendant.
19. On 17 October 2008 MITCO issued a revised NAV per share of US$123.23 as at 31 August 2008.
20. The Notes matured on 28 October 2008. At the time the Defendants mistakenly thought that they matured on 4 November 2008. Mr. McKenzie-Smith, who was an employee of the Second Defendant in the Structured Credit Group, was in discussions with Mr. Rizvi concerning the maturity of the notes, how they would be redeemed and how the Defendants would secure their fee (described as the funding). By an e-mail dated 29 October (which both parties submitted was of great importance) he said as follows:

"As you know, the USD 26m NBI 08 with ISIN XS0177751541 is due on 4 Nov 08.

The Redemption Amount would equal (i) the NAV of 195,000 shares in Global Opps sub-fund minus (ii) any loss incurred by NBI in selling the shares minus (iii) the funding charge of USD 1,722,135 (note that out of this, NBI would then need to pay 765,393 to First Gulf).

Assuming NBI can sell shares at their current NAV of 123.23, then the Redemption Amount would be USD 22.31m (i.e. 195,000 x 123.23 minus 1,722,135). If NBI cannot sell the shares at their current NAV then the Redemption Amount would be materially lower.

NBI shall have the option to pay the Redemption Amount in one of 3 ways:

1. Payment of USD 22.31m in cash - this assumes that NBI has pre-sold all of the Global Opps shares at their implied NAV of USD 24,029,850.

2. Delivery of 181,025 shares in Global Opps (i.e. shares with a NAV of USD 22.31m) - this assumes that NBI has pre-sold 13,975 shares at their implied NAV of USD 1,722,135. As explained above, if NBI cannot pre-sell at that price then NBI would deliver a much lower amount of shares in order to ensure that NBI retained enough shares to cover the funding charge of USD 1,722,135.

3. Delivery of the correct amount of underlying assets in the Global Opps fund - which I assume is not an option.

In order to effect any of the share sales and/or deliveries under options 1 or 2, then I understand that various transfer forms, and sign-offs from the Fund directors are required - given that we now have only 3 good business days between today and Nov 4^th (i.e. Thursday, Friday and Monday) then we need to begin this process ASAP. This means we need to agree today who will buy the shares from NBI and at what price.

Please Advise."

21. It is apparent from that e-mail that so far as Mr. McKenzie-Smith was concerned on 29 October 2008 the Redemption Value depended upon the price at which the shares could be sold and that he envisaged selling either all of the shares or such number of them as enabled the funding (the Defendants' fee) to be recovered. That does not appear to me to be either a sinister or an impermissible approach. Nor does his appreciation that the shares may not sell at their "current NAV" appear to me to be sinister or impermissible.
22. On 4 November 2008 the First Defendant issued a notice purporting to exercise its physical delivery option. It stated as follows:

"………The Issuer [the First Defendant] hereby exercises its Physical Delivery Option in accordance with the terms of the Notes

……………

The Physical Settlement Date for the purposes of the Notes will be Tuesday 11 November 2008,or such later date by which the transfer of the Deliverable Property to the Noteholders has been approved by the fund manager and the MITCO of the Reference Fund.

Accordingly, on the Physical Settlement Date the Issuer shall cause to be delivered pro-rata to the Noteholders 6,962 shares in the Reference Fund per USD 1,000,000 Specified Denomination of the Notes, which equates to a Redemption Amount for all of the Notes of an amount equal to USD 22,307,715 calculated in accordance with the terms of the Notes."

23. Mr. McKenzie-Smith gave evidence that the number of shares to be sold to pay the Defendants' fee (the "funding") was fixed between 29 October and 4 November "by reference to the NAV of the Shares as recorded in the most recently available MITCO report". However, he does not appear to have been a party to the conversation which gave rise to that agreement, which was between Mr. Rizvi and Mr. Manners who was Co-Head of Sales within the Fixed Income Group until December 2008 and was the point of contact with Mr. Rizvi. It is apparent from an internal Defendants' e-mail of the same date that the number of shares, 6,962, to be delivered per USD 1m. was arrived at by calculating the Redemption Amount by reference to the MITCO valuation of USD 123.23 per share.
24. In November and December 2008 PT Bank Century was taken over by the Indonesian government and Mr. Rizvi was named as a suspect by the Indonesian police in relation to the collapse of that bank. During this same period Mr. McKenzie-Smith failed to obtain effective payment from Mr. Rizvi or his controlled affiliates of the sums due in respect of the Defendants' fees and so the shares intended to be sold pursuant to the Trade Confirmation continue to be held by the Defendants.
25. On 9 January 2009 Mr. Edwards, a member of the Claimant's Capital Markets Business Management Unit with management responsibility, asked Mr. McKenzie-Smith for the calculations which determined the number of shares to be delivered by the First Defendant to the Claimant. On 12 January 2009 Mr. McKenzie-Smith replied. He stated that the funding was USD 1,722,135 and that the deliverable property was 181,025 shares. He added that no representation was made as to the market or realisable value of the shares. On 15 January Mr. Edwards asked for further details, a copy of the NAV from the Fund and information as to how the Fund operates including the redemption process. On 16 January 2009 Mr. McKenzie-Smith replied as follows:

"The amount of shares delivered to the Noteholders in relation to the maturity of the NBI Notes was calculated by the Calculation Agent at the time and using its discretion as it is entitled to under the Pricing Supplement. The amount of shares delivered was calculated as the total number of shares in the Reference Fund minus the number of shares which we calculated had an equivalent value to the USD amount of the Funding. Such value was calculated as the lower of any bid received for such amount of shares and the most recent NAV of the shares provided by the MITCO.

As previously explained, we are not a market-maker in the shares and nor have we nor do we make any representation as to the market or realisation value of the shares being delivered. In addition, as stated in the terms of the Notes, neither the Issuer nor the Calculation Agent has any liability in relation to the shares delivered pursuant to the Notes.

For further information regarding the NAV of the fund, including the prospectus or any details of the Reference Fund, please liaise directly with the MITCO (Mauritius International Trust Co) - whose contact details are below".

26. Mr. McKenzie-Smith was asked to explain why reference was made in this e-mail to the amount of shares having been calculated by the "calculation agent" when that had not happened and to "the lower of any bid received for such amount of shares and the most recent NAV of the shares provided by the MITCO" when all that happened was that Mr. Rizvi had agreed to buy shares at the NAV declared by MITCO. He was not able to give a satisfactory answer. Having thought about the matter overnight he said that the e-mail had probably been drafted by the "legal team" and that he had had no intention to mislead. He accepted that the e-mail "may appear misleading."
27. I accept his evidence that he did not personally draft this e-mail. However, there remains no explanation as to why he and the Defendants' "legal team" were prepared to say that a calculation had been made by the calculation agent when it does not appear to have been made by the calculation agent. In the absence of any other explanation I consider it likely that the draftsman of the e-mail was seeking to support the calculation which had been made as to the number of shares by saying that it had been made by the calculation agent. This was not true. The reference to a "value calculated as the lower of any bid received for such amount of shares and the most recent NAV of the shares provided by the MITCO" suggested that bids had been sought for the shares and a comparison made between the bids and the NAV declared by MITCO. Whether this misrepresented the truth depends on what precisely was said between Mr. Rizvi and Mr. Manners in their conversation between 29 October and 4 November. Mr. Rizvi may have been asked what he was prepared to bid for the shares or he may simply have agreed to buy at the MITCO valuation. There was no evidence from either Mr. Rizvi or Mr. Manners.
28. Mr. Edwards did not regard Mr. McKenzie-Smith's response as adequate and asked for "transparent calculations". Later, still on 16 January 2009, Mr. Mckenzie-Smith replied as follows:

"(i) We have explained to you the process of how we determined the Deliverable Property (in e-mail below of today) and have confirmed the USD amount of the Funding (in e-mail below of 12 Jan), and so the detail you are now asking is how did we determine how many shares to equate to the Funding deduction, and in particular for details of either the NAV of the Reference Fund and/or any bid we received. In terms of the NAV of the fund, the fund is a private fund and as such the NAV provided to share holders of the fund (in this case, Nomura) is confidential. We are of course willing to provide assistance as we value the relationship between our institutions, however you will appreciate that the requested information is confidential. We are happy for you to approach the MITCO directly, copying ourselves, to request the relevant information (details in previous e-mail) and we will assist where possible to obtain the information you have requested. In terms of details of any bid, for this deal we were able to secure a bid for enough shares to cover the funding at a price per share of USD 123.23 - however the bidder has asked to remain confidential."

29. It was suggested to Mr. McKenzie-Smith that this e-mail continued to disguise what in fact had happened and that he was not being frank with the Claimant. He replied that he could not explain the e-mail save that he was relaying what he understood to be the position. I am not persuaded that Mr. McKenzie-Smith was seeking to disguise what had happened. He had not been party to the conversation between Mr. Rizvi and Mr. Manners between 29 October and 4 November and he probably thought it fair to describe Mr. Rizvi's agreement to buy at the MITCO valuation as "a bid". He used the same language in an internal e-mail on 20 January 2009 (see below).
30. On 19 January Mr. McKenzie-Smith sent an internal e-mail concerning transactions of the same type as the one involved in this action. Reliance has been placed on it by the Claimant. The material part is as follows:

"2. Selling USD 2m worth of Fund units by 2 March (to cover fees on a trade maturing on 26 March) - we need to notify noteholders by 2 March in terms of how many units we will be delivering - noteholder entitlement is determined by Nomura in its sole discretion as the total amount of underlying units less the number of units that we determine equates to the fees - we will look to pre-settle a 2m sale of units with the client, failing which we will calculate the noteholder entitlement either (i) as low as is legally possible or (ii) at zero, together with a commitment to deliver any excess units once we have covered the fees. TL is considering both options, but option (i) is more likely as option (ii) would probably require a change to the terms of the notes. Option (i) will require us to demonstrate we have used reasonable efforts to sell units.

3. Covering fees on all remaining trades (which mature between 2013 - 2018) - total exposure of USD 80m (gross fees of USD 94m with reserves of USD 14m) - in order to cover these fees, we will need to sell enough of the underlying units before the relevant Nomura note redeems - the total current NAV of the units held is USD 700m - however, the units are illiquid and so we will look at ways of ensuring we can redeem/liquidate the units in exchange for the underlying assets - in addition, we will look to restructure the notes to allow option (ii) above, with option (i) as the fall-back position. In addition, we will push hard to engage with the custodian (Standard Chartered) in terms of verifying the NAVs of the underlying assets (which have historically been sent to us by the MITCO)."

31. In this e-mail Mr. McKenzie-Smith was considering how to ensure that the Defendants' fees in relation to these types of transactions would be covered. He envisaged selling sufficient units to meet the fees either by "pre-selling" with the client or by making reasonable efforts to sell the units. In the latter case such efforts had to be demonstrated. Such intention to sell is consistent with his e-mail of 29 October. He also appreciated that the units were illiquid which gave rise to a need to ensure that "we can redeem/liquidate the units" and also for possible restructuring of the notes. The reference to "verifying the NAVs of the underlying assets" with Standard Chartered as custodian of the Fund evinces a recognition that those NAVs may not be reliable. I do not regard this e-mail as sinister. The Claimant suggested that the reference to calculating the noteholder's entitlement to receive delivery of units "as low as legally possible" disclosed an impermissible approach to the Second Defendant's obligations. I consider that the Claimant sought to read too much into this phrase. Mr. McKenzie-Smith wanted to ensure that the number of shares delivered to the Claimant did not prejudice the Defendants' ability to recover its fees. That is unsurprising. He was not describing his approach to valuing the Shares. In any event, it would not be right to interpret the phrase in a sinister manner because the phrase was, as Mr. McKenzie-Smith pointed out, not as low as possible but as low as legally possible.
32. On 20 January 2009 Mr. McKenzie-Smith sent an internal e-mail to Mr. Marshall, the head of the credit trading desk of the Second Defendant in the Structured Credit Group. With particular reference to the shares which are the subject of the present dispute he said:

"Whilst Redacted investor has challenged the physical settlement, if they do then we will have to cash settle - and our cash settlement amount is likely to be quite low, due to the illiquidity of the shares, meaning that we should be prepared for some noise on our calculation - particularly, as (i) the end investor is aware through the physical settlement discussions that we have received a bid for some of the shares and may expect us to use that level for all of the shares (although the end investor also knows that the bid was only in respect of around 6% of the deal and that the shares are highly illiquid) and (ii) the cash settlement amount needs to be valid as of 30 Sep 08 (although market conditions on 30 Sep 08 were not materially better than they are now and in any case these shares are illiquid in most markets).

The nominal value Redacted -- is USD 26m and the end investor is WestLB London Redacted Redacted West LB will be particularly keen to challenge our cash settlement calculation, as it transpires that they have mistakenly cash settled at par their repack of the Nomura note, whereas they should have settled by physically delivering the Nomura note - and so WestLB have been left holding the Nomura note and are looking at all angles to recover it (although their main option is to get their cash back from the end investor in exchange for passing on the redemption proceeds for the Nomura note).

Ultimately, however, whilst there may be noise, the risk of dispute is mitigated by the terms of the notes, which provide that the Calc Agent's determination shall "be in its sole and absolute discretion" and that such determination "shall (in the absence of manifest error or fraud) be final and binding on all parties". Of course, we must be reasonable in our valuation of the shares - and we would be - but the wording is clearly helpful.

I have attached the deal docs Redacted the terms of the Nomura note are set out in Appendix 2 Redacted

TL is fully involved in all this and I'll keep you updated. In the meantime, our main focus should be to establish a cash settlement amount - lets discuss that in the morning".

33. This e-mail shows that Mr. McKenzie-Smith was expecting that the amount of any cash settlement by the First Defendant was likely to be low because of the illiquidity of the Shares and that that might be unwelcome news to the Claimant who had mistakenly paid the par value of the notes instead of physically delivering them. The reference to illiquidity is consistent with a belief that the value of the shares would be determined by seeking bids for the shares. This approach is consistent with his e-mail of 29 October 2008. I do not consider this sinister. The e-mail recognises that the valuation must be reasonable, notwithstanding that the valuation was to be conducted by the Calculation Agent in its sole and absolute discretion.
34. Mr. Marshall and Mr. McKenzie-Smith discussed how a valuation of the shares should be conducted on 21 January. They discussed the MITCO reports and Mr. McKenzie-Smith explained that the Defendants had no information as to the assets of the fund or what methodology MITCO had used when making their determinations. He said the shares were very illiquid. Mr. Marshall said that he considered a dealer poll would be the most appropriate method for determining the NAV of the fund.
35. Mr. Marshall explained the basis of his advice in his witness statement. In the absence of information as to the assets in the fund or as to MITCO's methodology he did not regard the MITCO reports as sufficient evidence of value, "particularly if [the First Defendant] were required to cash settle the Notes and keep the Shares on its books." He took the view that "any valuation should focus on the realisable value of the Shares and should be based upon a firm bid from a third party to buy some or all of the available shares." Since shares were to be valued rather than fixed income instruments he advised Mr. McKenzie-Smith to check with the Defendants' equity fund derivatives desk.
36. On 26 January 2009 the Claimant informed the Defendants by letter, signed by Mr. Edwards, that the maturity date of the Notes had in fact been 28 October 2008 and that the Physical Settlement Notice ought therefore to have been served 15 days prior to that date, that is, no later than 7 October 2008. The notice served on 4 November was therefore invalid. Mr. Edwards sought redemption of the Notes in cash.
37. On 2 February 2009 Mr. Ahmed, who worked on the Defendants' equity derivatives desk, spoke by telephone with Mr. McKenzie-Smith and confirmed the advice of Mr. Marshall that a dealer poll would be a standard method to determine the value of shares which he assumed were illiquid or distressed. He understood that the shares were illiquid because he was being asked for a valuation method. He was not however told about the redemption rights or the MITCO valuations. He was not advised that the valuation was required because the Defendants were required to make a payment to the Claimant.
38. On 3 February 2009 Mr. Ahmed sent an e-mail to Mr. McKenzie-Smith in which he referred to "distressed assets" and asked for information as to the underlying investments. He added:

"If the portfolio information is available then the brokers should give you info after they have done their work. Otherwise, they should be able to tell you within the hour (if not sooner) that they would bid only zero for this."

39. On 3 February 2009 the First Defendant replied to the Claimant's letter of 26 January 2009. It was accepted that the maturity date of the notes was 28 October 2008 but not that the notice of physical delivery was defective. The First Defendant remained willing to effect physical delivery but added that the Second Defendant had been requested to provide a certificate as to the NAV of the Fund.
40. The conduct of the dealer poll, and in particular which dealers should be invited to participate, was discussed by telephone by Mr. McKenzie-Smith and Mr. Ahmed on 4 February 2009.
41. Between 6 and 10 February 2010 a dealer poll was conducted by Mr. Marshall. Initially Mr. Marshall had telephone calls with the dealers in which he emphasised that he was seeking a genuine bid rather than a valuation. He described the exercise as "tricky" and "a bit of an awkward one" and the shares as "pretty illiquid, pretty messy" and "pretty black box-y". Whilst these phrases suggest that Mr. Marshall was perhaps not doing his best to "sell" the shares I accept his evidence that he was seeking to give an honest assessment of the task he had set the dealers. He was warning them of the nature of the task so that they did not say immediately that they could not be bothered to spend time on it. He then sent the bid requests to five market dealers (JP Morgan, Goldman Sachs, Credit Suisse, Standard Chartered Bank and Deutsche Bank), chosen on the basis that - with the exception of Standard Chartered - they were institutions with whom he enjoyed a good working relationship and were likely to give genuine consideration to whether or not to bid for the Shares, and on the basis that they all had good experience in emerging markets. Standard Chartered was included in the dealer poll because of its good coverage in Asia and because it was the custodian for the Fund.
42. Mr. McKenzie-Smith said in cross-examination that some enquiries had been made of Standard Chartered and that when those enquiries yielded no results "we decided to include Standard Chartered within the dealer poll". However, he had not mentioned these enquiries in his witness statement which stood as his evidence in chief. There were no documents evidencing such enquiries being made in January 2009 though Mr. Thirsk gave unchallenged evidence that such enquiries were made from February onwards. Mr. Marshall said that he decided to include Standard Chartered in the dealer poll "in view of its good coverage and the fact that it was the custodian for the Fund." I am therefore unable to accept Mr. McKenzie-Smith's evidence in cross-examination that Standard Chartered were included in the dealer poll because enquiries of them had yielded no results. It seems likely that such enquiries as were made of Standard Chartered were made rather later. If such enquiries had been made in January or in February before the dealer poll was conducted between 6 and 10 February it is likely that they would have been mentioned in his witness statement.
43. The bid requests were e-mailed on 6 February and requested a response by 5.00pm on 10 February 2009. The e-mail described the fund as "long-only…with no leverage and invests in illiquid/distressed assets in South East Asia and Africa." Mr. Marshall doubted that these materials were useful because they did not provide any information as to the assets of the fund but he felt it was appropriate to send them out and let the dealers decide for themselves whether they wished to rely on them. On 9 February Mr Marshall followed up the e-mails by telephoning the individuals concerned. Having been informed by Goldman Sachs and JP Morgan that neither of them would be making a positive bid for any of the Shares, Mr Marshall subsequently decided to include two further institutions in the dealer poll, namely Barclays Capital and Merrill Lynch. However, all the dealers informed him by telephone on 9 and 10 February that they would not be bidding for the shares. E-mails confirming those responses were sent on 10 and 11 February
44. It was suggested to Mr. Marshall that he understood that it was likely that the result of the dealer poll was that nobody would bid for the shares. He did not accept that suggestion. He said he honestly believed that one or two dealers would come back with some sort of bid. Although he had no reason to believe that any of the dealers had any familiarity or prior dealings with the Shares he had had experience of dealer polls where he had had insufficient information to value an asset himself but which had returned bids. I accept that evidence. The inclusion of Standard Chartered, the custodian of the Fund, amongst the dealers supports it. It would however appear that he did not expect every dealer to bid or that he would receive any substantial bid in circumstances where the only information he could provide about the underlying assets was that they were "illiquid/distressed assets".
45. Mr. Marshall stated in his evidence in chief that taking into account all of the responses received from the dealers he concluded on or about 13 February 2009 that the value of the Shares was zero. In his cross-examination he initially sought to distance himself from the conclusion that the Shares had a nil value but ultimately accepted that he had taken that decision in conjunction with others. He referred to "a meeting with lawyers". He accepted that there might be many reasons why a dealer might not wish to bid which had nothing to do with the inherent value of the asset. However, it seems that based on the absence of any bid at all he and the lawyers concluded that the Shares had no value. Notwithstanding the striking difference between that valuation and the most recent MITCO valuation no attempt appears to have been made to contact MITCO and to enquire whether redemption at a price approximate to the most recent valuation was likely.
46. By letter dated 13 February 2009 the Second Defendant, as Calculation Agent, certified that as at 30 September 2008 the NAV of the Reference Fund was US$0.00.

Issues of construction

47. The parties disagreed as to two matters of construction as to the terms of the notes.
48. The first dispute is whether the terms of the Note require that the determination of the NAV by the Calculation Agent must take place on or shortly before the Maturity Date, 28 October 2008. The Claimant says that it must and that it cannot validly be determined after the maturity date. The Defendants say that a determination made after the maturity date is not invalid on that account.
49. Special Condition 1 contemplates that the determination shall be made on or before the maturity date because it requires the Redemption Amount to be paid on that date. However, the definition of Calculation Agent makes express reference to delay by the Calculation Agent in performing its obligations and provides that any such delay "shall not affect the validity or binding nature of any later performance or exercise of such obligation or discretion." The Defendants say that those words answer the issue of construction.
50. The Claimant, however, submitted that Special Condition 2 resolved the issue by providing that "if the Calculation Agent fails at any time for any reason to establish the NAV of the Reference Fund or to make any other determination or calculation required pursuant to these Conditions, the Issuer shall do so and such determination or calculation shall be deemed to have been made by the Calculation Agent." Thus, if the valuation of the NAV were not made by the maturity date then the contract provided for the First Defendant to make the valuation.
51. Special Condition 2 and the provision for delay in the definition of Calculation Agent form part of the same contractual document and must therefore be read together. One cannot be given effect to the exclusion of the other. In my judgment effect can be given to Special Condition 2 by construing it as applicable when the Calculation Agent fails to assess the NAV at all and effect can be given to the provision for delay by construing it as applicable when the Calculation Agent has assessed the NAV but has not done so before the maturity date.
52. The Claimant said that it cannot have been the parties' intention that the Second Defendant would be entitled to make a binding valuation long after the Maturity Date by which time market conditions and other circumstances might render a meaningful valuation impossible. Further, until such valuation was made the First Defendant would not be able to pay the Redemption Amount or effect a physical settlement and so would be in breach of contract for reasons beyond its control or, alternatively, the Noteholders would be left without a remedy because, without the calculation, the First Defendant's obligation had not yet arisen.
53. I was not impressed by these considerations. A delayed valuation may be more difficult because of changed market or other conditions but the reference to delay shows that such a valuation was plainly within the parties' intentions. The suggested problems of the First Defendant being in breach or, alternatively, of the Claimant having no remedy are not unique to the Defendants' construction. They may also arise on the Claimant's construction because in the event that a valuation is not made by the maturity date there may be a delay before the First Defendant makes the valuation and until such valuation is made either the First Defendant is in breach or the Claimant has no remedy.
54. I have therefore concluded that I prefer the Defendants' construction of the terms of the Notes. It gives effect to both Special Condition 2 and the delay provision and is the meaning which I consider the words would convey to a reasonable person.
55. The second issue of construction is whether the valuation must be as at 28 October 2008, the maturity date, or as at 30 September 2008, 20 business days prior to the maturity date. This issue arises from the terms of Special Condition 1 which provides:

"Subject to Special Condition 3 (Issuer's Physical Delivery Option), [t]he Noteholder shall receive, on the Maturity Date a pro rata share (determined on the date falling 20 Business Days prior to the Maturity Date by reference to the percentage which the Principal Amount represents of the Aggregate Principal Amount) (the 'Pro Rata Share') of the NAV of the Reference Fund minus the Funding (the 'Redemption Amount'), as determined by the Calculation Agent in its sole and absolute discretion."

56. The Claimant submits that what must be determined 20 business days before the maturity date is the percentage which the principal amount represents of the aggregate principal amount. The Defendants submit that what must be thus determined is the pro rata share of the NAV of the Reference Fund.
57. In circumstances where the phrase in parentheses, "determined on the date falling 20 Business Days prior to the Maturity Date by reference to the percentage which the Principal Amount represents of the Aggregate Principal Amount", follows the words "pro rata share" it is arguable that Special Condition 1 should be construed in the manner suggested by the Claimant. However, the condition is also capable of meaning that the pro rata share of the NAV of the reference fund is to be calculated on the date specified in parentheses. That is because the share must be of something and the clause provides it is to be a share of the NAV of the Reference Fund.
58. I have to give to the words that meaning which a reasonable person would understand them to have. The following considerations suggest that a reasonable person would understand the words to have the meaning suggested by the Defendants:

i) It would be rational to expect the determination of each component of the redemption amount to be made at the same time. Conversely, it is difficult to suggest a rational reason for determining the percentage which the principal amount represents of the aggregate principal amount 20 business days before the maturity date whilst determining the NAV of the Reference Fund on a different date.

ii) The option to give physical delivery pursuant to Special Condition 3 must be exercised 15 business days before the maturity date. Since that option requires knowledge of the redemption amount it makes sense that that is determined 20 business days before the maturity date.

59. I therefore accept the Defendants construction of Special Condition 1 and hold that all components of the redemption amount had to be determined 20 days before the maturity date, namely, on 30 September 2008.

The Claimant's first case

60. The essence of this case is that the Second Defendant failed to determine the redemption amount by the maturity date (or by 30 September 2008), that in those circumstances the First Defendant was obliged to determine the redemption amount pursuant to Special Condition 2 and that the First Defendant did so in its physical delivery notice of 4 November 2008.
61. I am not persuaded that this is an accurate or realistic analysis of what in fact happened. It is correct that the Second Defendant failed to determine, in the sense that it had not determined, the NAV of the Reference Fund or the redemption amount either on 30 September 2008 or by the maturity date of 28 October 2008. However, it had not refused to do so. It had not been asked to do so. In early November 2008, believing that the maturity date was 4 November 2008, the First Defendant wished to make a physical delivery pursuant to Special Condition 3 and to ensure that its fee (the "funding") was paid. The mechanism for ensuring payment of its fee was to sell an appropriate number of shares to Mr. Rizvi at the NAV which had been declared by MITCO. The remaining shares were to be delivered to the Claimant. The Second Defendant, as Calculation Agent, was not asked to determine the NAV of the Reference Fund or the redemption amount. Nor did the First Defendant purport to value the Shares in circumstances where the Second Defendant had failed to do so. This is not surprising given that the First Defendant had not appreciated that the determination of the NAV had to be made before 4 November 2008.
62. The First Defendant issued a physical delivery notice on 4 November 2008. That was too late because such a notice had to be issued by 7 October 2008. The First Defendant's notice was therefore ineffective. However, the First Defendant stated in the invalid notice dated 4 November 2008 that the shares to be delivered "equate[d] to a Redemption Amount for all of the Notes of an amount equal to USD 22,307,715 calculated in accordance with the terms of the Notes." The notice did not identify a determination of the NAV of the Reference Fund, although an internal e-mail of the same date showed that the MITCO declaration of NAV had been used to determine the NAV. In circumstances where the terms of the (invalid) notice of 4 November 2008 did not purport to be a determination pursuant to Special Condition 2 I am unable to accept the Claimant's submission that, objectively assessed, the (invalid) notice of 4 November 2008 is to be regarded as a determination by the First Defendant pursuant to Special Condition 2. I do not consider that reference either to later e-mails to the Claimant or to internal e-mails on the Defendants' side improves the Claimant's argument.
63. When it was appreciated by the First Defendant on 3 February 2009 that the notice of 4 November 2008 had been issued too late the Second Defendant was instructed to determine the NAV of the Reference Fund. The Second Defendant did so on 13 February 2009. That determination was made over 4 months after the date when it ought to have been made but pursuant to the express terms of the Notes such delay did not affect the validity of the determination. It is therefore necessary to consider whether the determination was otherwise valid.

The Claimant's Second Case

64. There is no dispute that in determining the NAV of the Reference Fund and the Redemption Amount the Second Defendant as the Calculation Agent was bound to act in good faith and not to exercise its discretion in a manner which was irrational, that is, capricious, arbitrary, unreasonable (in the public law sense) or perverse. It was further common ground that its determination would not be binding in the event of manifest error which meant an oversight or blunder so obvious as to admit of no difference of opinion.
65. The Claimant alleged that the Second Defendant in determining the NAV of the Reference Fund and Redemption Amount in February 2009 by means of a dealer poll had acted both irrationally and in bad faith.
66. It is sensible to deal with the allegation of irrationality first, as did Mr. Nash QC, in his closing submissions on behalf of the Claimant. Mr. Nash summarised his case on irrationality in this way:

i) The Second Defendant asked Mr. Marshall to value the NAV of the Reference when he had no relevant experience of valuing assets such as the Reference Fund.

ii) Having regard to the illiquid nature of the asset a dealer poll was not an appropriate method of valuation. Nil bids were to be expected.

iii) The Second Defendant had regard to the circumstance that the valuation was needed for a cash settlement when this was an irrelevant consideration.

iv) The Second Defendant failed to have proper regard to other evidence of value both before embarking on the dealer poll and in concluding from the absence of bids that the asset should be valued at zero.

67. Both parties adduced expert evidence. Mr. McGuinness gave evidence on behalf of the Claimant. He is a partner in and managing director of HedgeSupport which provides consultancy services to the financial services community. He accepted that dealer polls are often used as a means of valuing illiquid securities. But in his opinion a dealer poll was not a rational method for valuing the NAV of the Reference Fund. He said that there was generally no secondary market for shares in such a fund. In the present case where the underlying assets were unknown a meaningful dealer poll will always be difficult. Even if a dealer poll were used, the method of valuation should have been readdressed when the dealer poll produced no bids because dealers may make no bid for reasons which do not reflect the value of the asset. The manner in which the poll was conducted was unlikely to generate a fair value for the shares because no information about the underlying assets was available or as to whether MITCO was meeting redemption requests. Further, the market appetite for illiquid assets in September 2008 was poor. Lehman Brothers had collapsed and institutions were seeking to reduce their exposure in general and illiquid exposures in particular. In his opinion market practice would be to value the NAV of the reference Fund by reference to the most recently published MITCO valuations since the shares were redeemable interests. There was no evidence that redemptions had been suspended in September 2008. This view was supported by the fact that the Defendants themselves used the MITCO reports to send valuations to holders of the certificates of deposits.
68. Mr. Malik gave expert evidence on behalf of the Defendants. He is a Managing Director with Navigant Consulting (Europe) Limited which provides independent valuation and consulting support to clients. In his opinion the use of a dealer poll to determine the NAV of the Reference Fund was consistent with market practice. He did not consider that the NAV of the Reference Fund could be determined by reference to the MITCO reports without access to details of the how those values were assessed and without information as to the underlying assets. The right to redeem was not unqualified and so it would have been inappropriate to rely upon it as a means of valuing the shares. NAV reports by administrators of funds which contain traded securities are straightforward and reliable. Where the fund contains illiquid securities or where there is little information available about the assets the market price will be at a discount to the NAV reported by MITCO. He agreed that the lack of information about the Shares and the underlying assets was likely to result in low or nil bids. However, he considered that such lack of information was an inherent feature of the Shares likely to impact adversely on their value. He agreed that there is generally no secondary market for such Shares. He accepted that the Defendants could have sought to obtain more information about the Fund and its assets but that did not render the choice of dealer poll irrational or inconsistent with market practice. He did not agree that it was unreasonable to ascribe a nil value to the shares given the lack of available information and that the valuation was being conducted for the purposes of a cash settlement. In September 2008, following the collapse of Lehman Brothers on 15 September and the bailout of AIG on 16 September, the demand for risk assets plummeted. Given that liquid and highly rated assets experienced significant decreases in value he would have expected little or no interest for illiquid shares in a fund for which no information about its assets was available.
69. I did not find either expert wholly reliable. Each, when cross-examined, appeared to give way on opinions expressed in his report. In addition, Mr. McGuinness' reliance on the MITCO reports notwithstanding the dramatic events in the financial world in September 2008 had an air of unreality. He clung to the MITCO declarations without appearing to acknowledge any risk that they might in the dramatic circumstances of that month be unreliable evidence that redemption in cash at the declared NAV was likely.
70. My approach to the question of valuation, assisted by such parts of the expert evidence as is common ground, is as follows. Both experts agreed that the value of an asset is what someone is prepared to pay for it. There were, in the main, two types of buyers for the Shares canvassed in evidence; firstly, financial institutions who might wish to buy the asset for themselves or for a client, and secondly, MITCO who was obliged, subject to the terms of the governing documents, to redeem the shares. That circumstance suggests that a rational valuation of the Shares would have regard to both classes of buyer. The calculation agent or valuer could investigate what financial institutions were prepared to pay by conducting a dealer poll. He could investigate whether and at what price MITCO was prepared to redeem the Shares by having regard to the NAV per share declared by the MITCO. However, in drawing his conclusions the valuer would have to exercise caution.

i) Although it was common ground between the expert witnesses that a dealer poll is a commonly used method to value illiquid securities it was also common ground that there was no secondary market for the shares represented by the Notes. This was because there was little information as to the assets represented by the Shares. In those circumstances it was unlikely that a dealer poll would produce any bids. Indeed, the experts called by both parties agreed that it was unlikely that a dealer poll would have produced any bids. If a dealer declines to bid because he has no information about the asset for which he is asked to bid there must be a doubt as to whether his refusal to bid is evidence that the asset has no value. It may have a value but the dealer did not know what that value was and therefore did not bid.

ii) Although the Shares were, in principle and subject to the terms of the governing documents, redeemable by MITCO and the declared NAV per share was some evidence of value, the reliability of that declared value depended upon whether in fact MITCO was willing and able to redeem at that price in cash in the prevailing market conditions. There was a risk that the conditions might have caused it to exercise its right to suspend redemptions in cash. The valuer would therefore have to make additional enquiries.

71. It was accepted by Mr. Handyside QC that there was no evidence that the Second Defendant contacted MITCO to enquire as to whether the shares would be redeemed and, if so, at what price. Mr. McKenzie-Smith sought advice from Mr. Marshall. Neither Mr. McKenzie-Smith nor Mr. Marshall made enquiries of the MITCO even though they decided that the MITCO valuations could not be relied upon. I must therefore find that the Second Defendant made no enquiries of MITCO as to whether the shares would be redeemed and if so at what price.
72. This appears to me to be irrational in circumstances where a dealer poll was unlikely to produce any bids and a fortiori when the dealer poll in fact produced no bids. It was said by Mr. Handyside that those dealers invited to bid would be expected to make their own enquiries as to the prospects of redemption and so there was no rational requirement for such enquiries to be made by the Second Defendant. This might be so in some circumstances but I have difficulty accepting that there was no such rational requirement in circumstances where there was no secondary market and where it was unlikely that any bids would be forthcoming and where, in the event, none came.
73. Mr. Nash submitted that the rational calculation agent would have regard to the MITCO reports which declared a substantial NAV for the Reference Fund. I agree that he would but that would only be the start of his enquiries. The mere fact that MITCO has declared a substantial NAV per share does not mean that MITCO would in fact redeem the shares at that price. In the light of the market conditions and the provisions regarding redemption (which enabled MITCO to suspend the NAV per share, to redeem in specie rather in cash, to suspend redemptions and to extend the period for paying redemption proceeds) it would be irrational not to make such enquiries. This was particularly so in the aftermath of the collapse of Lehman Brothers when, as described by Mr. McKenzie-Smith "every single asset…was being questioned in terms of its worth. Even Triple A Gold Standard assets were being marked down, priced down significantly." Mr. McGuinness accepted that they were "truly extraordinary times". He suggested at one stage in his evidence that the MITCO reports evidenced a "firm price" of the shares. If that was his view it was, in my judgment, unrealistic. Indeed, he accepted that in the aftermath of the collapse of Lehman Brothers many funds imposed "redemption gates". In those circumstances it would be irrational to assume that the Shares were readily redeemable in cash at the declared NAV per share.
74. I have therefore concluded that the Second Defendant acted irrationally in limiting its investigation of value to a dealer poll.
75. Mr. Nash also submitted that the Second Defendant, in having regard to the circumstance that the First Defendant had to make a cash settlement, had regard to an irrelevant consideration because the Second Defendant was required to determine the NAV of the Reference Fund and the Redemption Amount whether the First Defendant was to make a cash payment or a physical delivery of the shares. It is unnecessary to decide this matter in the light of the conclusion which I have already reached that it was irrational to values the Shares without enquiring of MITCO whether the Shares would be redeemed and if so at what price. I will therefore deal with this further submission briefly.
76. I agree that the nature of the First Defendant's obligation to the Claimant is an irrelevant matter when valuing the shares. It can have no bearing on the values of the Shares. Thus, if the Second Defendant allowed the circumstance that the First Defendant had to make a cash settlement to drive its decision as to how to the value the shares by favouring a method which created an immediately available cash sum which the First Defendant could then use to discharge its obligation, as opposed to a method which would produce a cash sum on the next redemption date which might be after the date on which the First Defendant must pay the Claimant, that would be to take into account an irrelevant matter. However, if all the Second Defendant did was to note the undoubted fact that the First Defendant was required to make a cash settlement but then went on to determine the value of the Shares by taking a dealer poll and making enquiries of the MITCO as to whether the shares were being redeemed and at what price then it would not have taken into account an irrelevant matter.
77. Mr. Marshall's evidence certainly suggests that the circumstance that the First Defendant was required to settle in cash particularly motivated his advice to Mr. McKenzie-Smith. In this regard I have in mind his evidence in chief as to his reasons for focussing on the "realisable value" of the shares and his acceptance in cross-examination that he was "determined that Nomura would have a firm bid for those shares to make sure cash in to Nomura was going to match cash out". That such circumstance was a motivating factor probably explains why no enquiries were made of the MITCO. I therefore conclude that the Second Defendant took into account an irrelevant factor when determining the NAV of the Reference Fund and the Redemption Fund. However, this is only another way of saying that it was irrational to limit the valuation of the shares to a dealer poll. An asset is only worth what someone is prepared to pay for it but it is necessary to approach all possible buyers. In the case of the Shares in question, in respect of which there was no secondary market because of a lack of information about the underlying assets, it was necessary to approach MITCO as well as dealers.
78. It is also unnecessary to decide whether the Second Defendant acted in bad faith. However, this was a serious allegation directed personally at Mr. McKenzie-Smith and Mr. Marshall and it is appropriate that I decide it. The case advanced by the Claimant was that the Second Defendant "adopted a valuation method which favoured one party (the payer) over the other (the payee)". In closing submissions it was summarised in this way. The Second Defendant did not have regard to the need to be impartial between the paying party and the receiving party but acted in a way which was designed to protect the First Defendant's interest even if that prejudiced the Claimant. In cross-examination of Mr. McKenzie-Smith and Mr. Marshall it was suggested to them that the dealer poll was a charade conducted in bad faith with a view to giving the impression that a serious attempt had been made to value the shares.
79. It was common ground that what had to be shown was a dishonest abuse of the Second Defendant's position as Calculation Agent and that that required the Claimant to prove that what Mr. Marshall and Mr. McKenzie-Smith did was contrary to normally acceptable standards of honest conduct.
80. The matters relied upon by the Claimant in support of this allegation were, firstly, the e-mails sent by McKenzie-Smith to Mr. Marshall on the eve of their meeting on 21 January 2009. I have already commented on these. I do not see anything sinister in them. The second probably contemplates that Mr. McKenzie-Smith envisaged selling the shares, or at least, seeking bids for them. But I do not consider that this was a dishonest approach since the value of an asset is what a person is prepared to pay for it. Secondly, reliance was placed on the selection of the dealer poll method. Again, I do not consider this to be dishonest. A dealer poll is a method of ascertaining what people in the market are willing to pay for the asset. The mistake was not in selecting the dealer poll method but in limiting the valuation exercise to that method and not also investigating whether and if so at what price MITCO would have redeemed the shares. This was an irrational error but I was not persuaded that it was made dishonestly. Thirdly, reliance was placed on the manner in which the dealer poll was conducted, with particular reference to the comments made to dealers by Mr. Marshall on the telephone. I have already mentioned these comments and accepted Mr. Marshall's explanation of them. Fourthly, it was said that Mr. Marshall's determination to obtain bids rather than a valuation was very telling. I did not regard this as very telling. An asset can be valued without inviting actual bids but I am not persuaded that the insistence on bids being invited is in any way sinister. Since the value of an asset is that which a person is prepared to pay for it, it is surely not objectionable that a person seeking to value an asset seeks bids for it.
81. I do not regard either Mr. McKenzie-Smith or Mr. Marshall as having conducted the dealer poll as a charade in order to protect the First Defendant at the expense of the Claimant. They no doubt thought that conducting a dealer poll might produce only a modest value ("quite low" as Mr. McKenzie-Smith put it in his e-mail to Mr. Marshall on 20 January) and that this was likely to give rise to a dispute ("noise" as he described it in his e-mail) in circumstances where the Claimant had paid out the par value of the notes, USD26m. But I was not persuaded that either of them chose to value the Shares by means of a dealer poll in order to enable the First Defendant to pay to the Claimant a sum which was less than the value of the Shares. That would have been contrary to normally acceptable standards of honest conduct. Mr. McKenzie-Smith recognised that the shares had to be valued and said expressly in his e-mail to Mr. Marshall of 20 January that such valuation had to be "reasonable". But his responsibilities did not include valuations and so he sought advice from Mr. Marshall who headed the credit trading team within the Structured Credit Group and also from Mr. Ahmed who was a trader in equities. Whilst they may not have had experience of valuing redeemable shares Mr. McKenzie-Smith did not act dishonestly in going to them or in deciding on the basis of their advice to value the Shares by means of a dealer poll. There was a valuations department which at first sight might be thought to be the appropriate department to approach but this department was not the subject of detailed evidence at the trial. He did not seek information from MITCO as to whether shares in the fund were being redeemed and at what price. This is perhaps surprising in view of his recognition in his e-mail of 20 January that enquiries of Standard Chartered as custodian were necessary to verify the declarations of NAV per share made by MITCO. But I was not persuaded that his failure to seek such information was dishonest in the sense of an attempt to protect the First Defendant at the expense of the Claimant. Similarly, Mr. Marshall advised a dealer poll. He had had no experience of valuing redeemable shares and I do not regard his failure to seek information from MITCO as dishonest. The reason why neither Mr. McKenzie-Smith nor Mr. Marshall made enquiries of MITCO is probably that they took into account that the First Defendant had to make a cash payment to the Claimant and for that purpose wished to procure a cash sum for them to pay over to the Claimant. Redemption of the shares would not procure an immediate payment. Until the shares were redeemed the First Defendant would be at risk in respect of them. This was, as I have already said, an irrelevant matter to take into account when valuing the Shares but I am not persuaded that in taking it into account they were dishonestly seeking to benefit the First Defendant at the expense of the Claimant. They irrationally canvassed only the dealers in the market and failed to canvass the other possible buyer, MITCO. This was an irrational mistake but I do not consider that it was made dishonestly.

The value of the Shares represented by the Notes as at 30 September 2008

82. Since the valuation by the Second Defendant was irrational in not seeking to investigate with MITCO whether the Shares would be redeemed and if so at what price it is necessary for the Court to make a finding as to what value the Second Defendant would have put on the Shares had it acted rationally and made those enquiries in addition to conducting a dealer poll.
83. I have already said that such enquiries had to go further than noting the latest MITCO determination of the NAV per share. They would have to have extended to enquiring whether, having regard to the state of financial markets in September 2008, MITCO was able to redeem shares promptly and at what price.
84. It is a notable feature of the Claimant's case that, until Mr. McGuinness looked at the Fund Service Report, it went no further than saying that there was no evidence that redemptions had been stopped. Having regard to market conditions in September 2008 that was, in my judgment, insufficient to prove on the balance of probabilities that the Second Defendant would have concluded that redemptions would be made promptly.
85. Mr. McGuinness then noted that the Fund Services Report for 31 January 2009 contained evidence that there had been redemptions. It is now common ground that what is shown by the Fund Services Report is that over the life of the fund there have been redemptions of almost USD48m. and that in January 2009 there were redemptions of USD20m. However, whether these were cash or in specie is not known. Since there were only two holders of shares in the fund, the Defendants and First Gulf, such redemptions must have been made by First Gulf (because the Defendants have not said they made such redemptions and they would have informed the court if they had done so). The Claimant did not seek to mount any particular case on this evidence. That is not surprising. It does not enable the Claimant to show that redemptions were being made in cash in September and October 2008.
86. Had the Second Defendant's notional enquiries revealed that many of the assets in the Fund were shares in private unlisted companies that would, at the very least, have raised doubts as to the likelihood of prompt redemptions in cash. However, having regard to the apparent failure of the Defendants to obtain information about the Fund's investments from MITCO between February 2009 and July 2009 and the fortuitous circumstances which led to them obtaining a copy of the Fund Services Reports in June 2010 the probabilities are that enquiries of MITCO in September and October 2008 or before 10 February 2009 would not have revealed information as to the Fund's assets.
87. Had the Second Defendant learnt that other funds were imposing redemption gates that would have led to uncertainty as to whether prompt redemptions in cash were likely.
88. But if one puts those matters to one side on the grounds that it cannot be established that they would have been discovered by the Second Defendant in the course of his investigations, the circumstances prevailing in the financial markets in September or October 2008 would surely have caused the Second Defendant to doubt that MITCO would have been able to reply, if asked, that prompt redemptions in cash were likely.
89. There was no evidence before the Court that prompt redemptions in cash were likely. Mr. McGuinness did not give evidence that MITCO was likely to have so reported if asked. He agreed with the suggestion put to him that if in August, September or October 2008 MITCO had been asked whether the fund could redeem 195,000 shares for cash it was very difficult, based upon the information in the Fund Services Report, to see how MITCO could honestly have said yes.
90. Mr. Nash submitted that the Second Defendant's duty was to reach a valuation on the basis of the available evidence. That evidence was the MITCO valuations, that the terms regulating redemptions were market standard and that it could be assumed that redemptions had not been suspended because if that had been the case it is likely that the shareholders would have been informed. In those circumstances the MITCO valuation was a dealing price. Mr. Nash submitted that the Second Defendant would not be entitled to say that because "things [in the market] looked pretty black" it would not give weight to the MITCO valuations. It could only ignore or discount the MITCO valuation if the Second Defendant could justify doing so by reference to evidence. It could not rationally rely on "gut feel or general questions about the market". The Second Defendant must value the Shares on the basis of the available evidence and not pay regard to the risk that if and when the First Defendant sought to redeem the shares a gate may come down and prevent redemption. That would be to err in having regard to the First Defendant's position.
91. I do not accept those submissions. The extreme market conditions in September 2008 were an unfortunate fact which the Second Defendant could not ignore. The risk that a redemption gate might be lowered was a risk which existed in September 2008. It affected the value of the Shares. It was a relevant and legitimate matter to consider.
92. The value of an asset is what someone is prepared to pay for it. It is common ground that a dealer poll conducted in September or October 2008 would not have produced any bids. The only other possible buyer of the Shares at that time was MITCO, through the redemption process. The Calculation Agent, acting rationally, would have to decide at what price MITCO was likely to redeem the shares. He would, acting rationally, doubt that historic valuations, even those as at 31 August 2008, represented reality.
93. I agree that the MITCO valuation of NAV per share would be some evidence of value. But it does not follow that it must be accepted by the rational Calculation Agent as reliable evidence of value. The Second Defendant would have to decide whether MITCO really would have been a buyer at that price when the market conditions were such that a redemption gate may come down. If a gate did come down then MITCO would not pay at the declared NAV per share and that price could not be regarded as reliable evidence of value because it would not be a price that anyone was prepared to pay for the Shares.
94. The Claimant has the burden of proving that the Second Defendant acting rationally would use the MITCO NAV per share as reliable evidence of what MITCO would be prepared to pay for the Shares. Yet it has adduced no evidence that in September or October 2008 MITCO was prepared to redeem the Shares at the declared NAV per share. In times of stable market conditions it may be that that could be safely inferred from the declared NAV per share. But these were not stable conditions. They were exceptionally turbulent. Other fund administrators, though not all, had lowered redemption gates. In those circumstances I do not consider that it can safely be inferred from the declared NAV per share that there would be a buyer, namely MITCO, at that price. Further evidence is required to enable the court to infer on the balance of probabilities that the Second Defendant would have concluded that MITCO was, notwithstanding the turbulent conditions, willing to redeem the Shares at the declared NAV per share. I do not consider that the interpreted values issued by the Second Defendant for the certificates of deposit assist the Claimant's case. Although the standard wording stated that they were believed to be reliable I do not consider that they would in fact have been regarded as such in the turbulent market conditions following the collapse of Lehman Brothers.
95. Both counsel argued the case on the basis that anything which happened after 28 October 2008 had to be disregarded. I am not sure that this is right in circumstances where a valid determination could be made thereafter. I have held that the Second Defendant was able to make a valid determination in February 2009 of the value of the Shares as at 30 September 2008. It seems to me that in principle events occurring after 30 September 2008 could be considered in so far as they shed light on what the value was as at 30 September 2008.
96. The Claimant's case was that the Second Defendant would value the Shares at the MITCO NAV per share for 30 September 2008 (which was certified on 12 November 2008 to be USD121.84 and amended on 9 December 2008 to USD 112.57). Mr. Nash said that regard could be had to these valuations because they probably could have been obtained before 28 October 2008. I am not satisfied that that was likely. But I shall consider what assistance they would have given had the Second Defendant sought to value the Shares in February 2009 as at 30 September 2008.
97. The question would have been whether the Second Defendant would have concluded that MITCO, notwithstanding the turbulent conditions, would have been willing to redeem the Shares at the declared NAV per share as at 30 September 2008 from the fact that MITCO published an NAV per share for 30 September 2008 on 12 November 2008 and amended it on 9 December 2008. By February 2009 Mr. Rizvi's relationship with the Defendants had deteriorated by reason of his not having paid for the shares in the Fund he or companies controlled by him had agreed to buy. This would have been a relevant matter for the Second Defendant to bear in mind in February 2009 when valuing the Shares as at 30 September 2008 since Mr. Rizvi was a director of the Fund. It seems to me that this may have caused the Second Defendant to have had real doubts about MITCO's ability to redeem the shares at the declared NAV per share for 30 September 2008. The burden of proof is on the Claimant and no further evidence was adduced to show that such doubts were likely to have been dispelled.
98. Mr. Nash placed reliance on the physical delivery notice of 4 November 2008 even though that was issued after 28 October. Again, I shall assume that a calculation agent in February 2009 could have had regard to it for what guidance it gave as to the value of the Shares on 30 September 2008. Mr. Rizvi had agreed to buy, at the MITCO NAV per share of USD123.23 (for 31 August 2008), that number of shares which, at that price, covered the Defendants' fee. That price was then used to calculate the Redemption Amount referred to in the notice and it was therefore suggested that it should have been used to calculate the value of the Shares as at 30 September 2008.
99. Mr. McKenzie-Smith said in his e-mail of 20 January 2009 that Mr. Rizvi's purchase was only in respect of 6% of the Shares and the Shares were highly illiquid. Although this was said in response to a fear that the First Defendant might have to "cash settle" rather than "physically settle", there seems to me to force in the point. To conclude from Mr. Rizvi's purchase of 6% of the shares at the declared NAV, for the purpose of paying the First Defendant's fee, that all the Shares were worth the declared NAV per share would be unsafe. Mr. McGuiness accepted this in cross-examination. I was not persuaded that Mr. McKenzie-Smith valued the shares in that way in serving the notice. He simply calculated the number of shares to be delivered to the Claimant having deducted the number of shares sold to cover the Defendants' fees. He then applied the MITCO price which Mr. Rizvi had agreed to pay to that number of shares without considering whether that price was a realistic price for that number of shares having regard to the prevailing market conditions. It seems to me most unlikely that the Second Defendant, valuing the shares in February 2009, would have regarded the physical delivery notice as reliable evidence of value.
100. I have concluded that the Claimant has not persuaded me on the balance of probabilities that the Second Defendant, had it sought to value the Shares rationally in September 2008, or in February 2009 as at 30 September 2008, would have valued them at the NAV per share declared by MITCO for 30 September 2008.
101. Mr. Nash submitted that in those circumstances the court should not conclude that the Second Defendant would have determined that the Shares had no value but that the Second Defendant would have determined that the shares had a value. He submitted that such value would have been closer to the declared NAV per share than to 50% of that figure. The method of valuing the shares would have been, as it was put in additional written submissions served after the hearing, using the MITCO valuations "as a starting point and then applying a discount to reflect the uncertainties debated during the trial." The difficulty with this submission is that the expert evidence did not seek to quantify the effect of the turbulent market conditions in September 2008 on the value of the Shares as declared by MITCO. That is not by itself a bar to the court embarking on the suggested exercise if other evidence enables the court to reach a view on the percentage discount likely to have been applied by the Second Defendant as Calculation Agent. However, so turbulent were those conditions that the likely discount could have been anywhere from very substantial to substantial. The court is in truth being invited to speculate. Mr. McGuinness suggested that the Shares would have had a "hope value" of, say, 5% of the declared NAV which would be about USD1m. I agree that they might have had a "hope value" assessed by reference to a very substantial discount on the declared NAV but the result of the dealer poll coupled with the extreme market conditions suggests that even this may be optimistic. But even if a "hope value" were realistic the Claimant adduced no evidence to enable the court to find that it was more likely than not that the Calculation Agent, acting rationally, would have concluded that such value would have been in excess of the Defendant's fee of about USD1.7m., so as to give rise to a damages claim against the Defendants.

Conclusion

102. The Second Defendant acted irrationally in valuing the Shares only by reference to a dealer poll. Its determination of value is therefore not binding on the Claimant and the First Defendant. However, the Claimant has failed to prove on the balance of probabilities that the Shares had a value in excess of the Defendants' fee and so has failed to prove that it has suffered any damage. The claim must therefore be dismissed.

Note 1   It is common ground that the nominal value of each of the Shares was in fact US$1.00.     [Back]