BNY Mellon Corporate Trustee Services Ltd v LBG Capital No.1 Plc
Citations:  UKSC 29;  1 All ER 497;  2 All ER (Comm) 851;  Bus LR 725;  2 Lloyd’s Rep 119;  2 BCLC 163;  CLY 140.
In March 2009, a regulatory authority carried out a stress test of a banking group. The test indicated that the group had a capital shortage. The defendants were two wholly-owned subsidiaries of the group. They issued contingent convertible securities to deal with this. These securities carried a high rate of interest but were not redeemable until specific dates between 2019 and 2032. However, they could be converted into shares any time certain events occurred.
One of these events was whenever the regulatory authority stress tests of the groups’ ‘consolidated CT1 ratio’ (a measure of financial strength) stopped taking the securities into account. Regulatory changes in 2013 meant that the authority stopped measuring CT1 ratio. Instead, they used a more restrictive alternative – CETI1. In 2014, they carried out a stress test which did not take into account the securities. Accordingly, the group announced that it was redeeming the securities.
The claimant was a trustee acting on behalf the holders of the securities. They sought a declaration that the group were not entitled to redeem the securities. They argued that the parties’ trust deed defined the relevant triggering event as a ‘CT1 ratio’ stress test. What had actually happened was a CET1 ratio stress test.
- Could the relevant clause of the deed be interpreted to include CET1 ratio stress tests?
The Supreme Court held that the defendants could redeem the securities. In interpreting the relevant clause, the court noted that:
- It was well-known that the regulatory authority’s standards were soon to change. It was therefore well-known that phrases like ‘CT1 capital’ could change meaning or that the labels used for certain events could change. The terms of the deed itself envisaged this;
- One of the securities’ essential features was that they could be converted into core capital if necessary, however core capital is defined at the time of redemption. In combination with the fact that the securities’ had maturity dates in the far future, it made no sense to limit the clause to CT1 capital stress tests once this had been replaced with a regulatory equivalent.
This Case is Authority For…
Normally, ‘very considerable circumspection’ is required before extraneous documents are used to help interpret a deed or contract governing the holding terms of a negotiable instrument like the securities in this case. However, this deed could not properly be understood without knowledge of the regulatory policy in force at the time it was made. As such, regulatory material was admissible to help interpret the deed. Other documents, such as an exchange offer memorandum, were not admissible.
One of the secondary arguments on appeal was that the relevant clause should be interpreted contra proferentem – against the party seeking to enforce it. Lord Neuberger responded that ‘the contra proferentem rule is very much a last refuge, almost an admission of defeat, when it comes to construing a document’ and so should not be applied in this case.