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Cite as: [2012] EWHC 244 (Ch)

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Neutral Citation Number: [2012] EWHC 244 (Ch)
Case No: 6583 & 6576 of 2010


The Rolls Building,
Royal Courts of Justice,
7 Rolls Buildings
London, EC4A 1NL
1 February 2012

B e f o r e :


In the matter of
And in the matter of
And in the matter of
the Cross-Border Insolvency Regulations 2006


(Joint Liquidators of Chesterfield United Inc and Partridge Management Group SA)

- and -



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(Official Shorthand Writers to the Court) 50 Folios 3565 Words


MR MARK PHILLIPS QC and MR SHARIF SHIVJI appeared on behalf of the Applicants
MISS SONIA TOLANEY QC and MR TOM SMITH appeared on behalf of the Respondent



Crown Copyright ©


  1. I have before me applications for the respondent, Deutsche Bank AG, to be required to produce various documents. The applications are made pursuant to Article 21 of the UNCITRAL Model Law on Cross-Border Insolvency, as incorporated into British law by the Cross-Border Insolvency Regulations 2006.
  2. The applicants are the joint liquidators of two companies incorporated in the British Virgin Islands, Chesterfield United Inc ("Chesterfield") and Partridge Management Group SA ("Partridge"). Both companies were, I am told, owned by offshore vehicles which were in turn owned by high net-worth individuals associated with the Icelandic bank Kaupthing hf. Chesterfield and Partridge were incorporated as special purpose vehicles on, respectively, 2 January 2008 and 18 July 2008. The applicants were appointed as the liquidators of the companies by the Eastern Caribbean Supreme Court on 10 May 2010. On 4 November 2010 their appointment was recognised by the English High Court under the Cross-Border Insolvency Regulations.
  3. The applications now before me arise from transactions which Chesterfield and Partridge entered into between August and October 2008. Between them, the companies paid some 450 million for "credit-linked notes" (or "CLNs") issued by Deutsche Bank. The CLNs provided for the companies to receive interest payments and ultimately to have the sums invested returned to them. Deutsche Bank's obligations were, however, contingent on the financial performance of Kaupthing. In the event of a "credit event" occurring in relation to Kaupthing, the companies could lose both the principal and the right to further interest payments. In return for exposing themselves to this risk, the companies were to receive higher interest payments. The coupon on the CLNs was EURIBOR plus 11.224% in one case and EURIBOR plus 13.02% in the other.
  4. Partridge also entered into a credit default swap (or "CDS") with Deutsche Bank. Partridge paid 50 million to Deutsche Bank at the outset. If a credit event did not occur in relation to Kaupthing, Deutsche Bank was to pay 50 million to Partridge on maturity. The transaction was, I gather, structured in this way to enable the 50 million to be applied in the payment of an additional amount under Partridge's CLN.
  5. In the event, Kaupthing's English subsidiary, Kaupthing, Singer & Friedlander Limited, went into administration on 8 October 2008. On the following day, a Resolution Committee was appointed in respect of Kaupthing itself. This constituted a credit event for the purposes of the CLNs. As a result, Chesterfield and Partridge lost all the money invested.
  6. The applications before me are supported by an affidavit sworn by one of the liquidators, Mr Steven Akers of Grant Thornton. Mr Akers says this in paragraphs 44 to 46 of his affidavit about why the applications are being made:
  7. "44. It is very difficult to see how the transactions made commercial sense for the Companies. This request for information is in part to explore how the Companies might have expected to benefit from the transactions, to identify what the Companies' purposes and objectives in entering into the transactions were and how the Companies were expected to repay the loans from Kaupthing if there was movement in the market in the 'wrong' direction (as transpired). Unless and until the Joint Liquidators are fully appraised of the relevant facts, it will be difficult if not impossible for us to discharge our statutory functions effectively.
    45. The Joint Liquidators are keen to understand, through requests for information and documents from key parties, why these particular transactions were entered into by these particular companies.
    46. From the information that the Joint Liquidators have been able to gather about the transactions , it seems possible that the Companies were involved in a wider package or scheme, although it is too early to comment definitively on the purpose of such scheme, contemporaneous reports and documents suggest that the purpose might have been to manipulate the credit market for Kaupthing"

  8. With regard to the possibility of market manipulation, I was taken to part of a report prepared by a special investigation committee established by the Icelandic Parliament. The report contains reference to the transactions which Chesterfield and Partridge entered into. The relevant section of the report states in its English translation that Kaupthing was "an intermediary in selling CDS protection on itself". The report goes on to say the following:
  9. "At the beginning of 2008, Kaupthing sought advice from Deutsche Bank as to how it could influence its CDS spreads. In a presentation in early February, Deutsche Bank advised Kaupthlng, for instance, to spend all liquid funds it received to buy back its own short-term bonds in an attempt to normalise the CDS curve. In the summer the idea of a credit-linked note transaction appeared in an email communication from an employee of Deutsche Bank. It states that this would mean a direct impact on the CDS spreads rather than an indirect one, as in the case of buy backs of own notes. It also states that this transaction will be financed. The message concludes by stating that the issue has to be timed right to get the 'most "bang" for the buck'. In e-mail messages exchanged by Sigurdur Einarsson and Hreidar Mar Sigurdsson following this, the two agree that they do not need to involve pension funds, but that there is 'no question' that they should do this.
    Sigurdur Einarsson said that the initiative for the transaction had come from Deutsche Bank. 'It involved getting parties to write CDSs against those who wanted to buy them. This was to create a supply of CDSs, of which there were none. Because what we saw was happening on the market, or what we thought we saw, was that the screen price was always rising and there were certain parties, certain funds that put in a specific bid, no transaction, raised the bid, no transaction, raised it, raised it, raised it, raised and raised.'"

    A little later, the report concludes that the CLN agreements "can be assumed to have actually made an impact on the CDS spreads on Kaupthing".

  10. Deutsche Bank strongly denies any suggestion that it entered into the CLN transactions in order to manipulate the market. In other respects, too, it takes issue with the picture painted in the Icelandic report. Among other things, it says that the CLNs were not in any way unusual or commercially unreasonable transactions; that it was not aware that Kaupthing was itself financing the purchase of the CLNs, if that is what happened; and that it did not act as adviser to Chesterfield, Partridge or Kaupthing. Its position is supported by a witness statement from Mr Venkatesh Vishwanathan, the author of the "most 'bang' for the buck" email quoted in the Icelandic report. Of that email, Mr Vishwanathan says this: "I say the way to proceed would involve 'hitting the right moment in the market to get the most bang for the buck' because an investor investing in a CLN product would want the best return and the coupon available over the term of the CLN, should it run to maturity, is set when the CLN is issued. That was why market timing was important. I was not suggesting, as Mr Akers says, that Kaupthing would get 'bang for its buck' by Deutsche selling CDS protection." [quotation unchecked]
  11. As already mentioned, the present applications are made under Article 21 of the UNCITRAL Model Law. So far as relevant, Article 21(1) is in the following terms:
  12. "Upon recognition of a foreign proceeding, whether main or non-main, where necessary to protect the assets of the debtor or the interests of the creditors, the court may, at the request of the foreign representative, grant any appropriate relief; including:...
    (d) providing for the examination of witnesses, the taking of evidence or the delivery of information concerning the debtor's assets, affairs, rights, obligations or liabilities;
    ... and
    (g) granting any additional relief that may be available to a British insolvency officeholder under the law of Great Britain, including any relief provided under paragraph 43 of Schedule B1 to the Insolvency Act 1986."

    The liquidators rely on both (d) and (g).
  13. With regard to (d), it is common ground between the parties that the relief available to a "British insolvency officeholder" can potentially include an order under section 236 of the Insolvency Act 1986 for the production of books, papers or other records relating to the relevant company or "the promotion, formation, business, dealings, affairs or property of the company". The liquidators argue that Article 21(1)(g) allows foreign representatives to take advantage of section 236. In contrast, Deutsche Bank contends that, where what is sought is the provision of information, Article 21(1)(d) must prevail. If the position were otherwise, it is said, there would have been no reason to make express provision in Article 21(1)(d) for the delivery of information.
  14. I prefer the submissions of the liquidators on this point. It seems to me that Article 21(1)(d) was intended to set a common minimum standard. A foreign representative is to be able to seek relief under Article 21(1)(d) regardless of whether an officeholder would be entitled to such relief under the local law. If the local law in fact provides for "additional" relief, a foreign representative can seek that under Article 21(1)(g). As Norris J noted in Larsen v Atlas Bulk Shipping A/S [2011] EWHC (Ch) 878, at paragraph 23(f):
  15. "The recognition of the foreign insolvency proceedings appears to have been intended to have in the recognising state the same effect as if the insolvency proceedings had been opened in the recognising state (subject to identified exceptions)."

    In similar vein, the Guide to Enactment of the UNCITRAL Model Law, reference to which is provided for by Regulation 2(2) of the Cross-Border Insolvency Regulations, states (in paragraph 154) that the list of types of relief to be found in Article 21(1) is "not exhaustive" and the court "is not restricted unnecessarily in its ability to grant any type of relief that is available under the law of the enacting State and needed in the circumstances of the case".

  16. The result is that the precise scope of Article 21(1)(d) is unimportant for present purposes. The liquidators can, via Article 21(1)(g), rely on section 236 of the Insolvency Act. I agree with the liquidators that, if Article 21(1)(d) is narrower than section 236, that is of no consequence.
  17. As was pointed out on behalf of Deutsche Bank, Article 21(1) provides for the court to have power to grant relief "where necessary to protect the assets of the debtor or the interests of the creditors". I do not think, however, that the words I have quoted significantly curtail the court's ability to grant relief under section 236 in cases such as the present one. A proper case in which to grant relief under section 236 is one where an officeholder "reasonably requires" to see documents to carry out his functions: see British & Commonwealth Holdings plc v Spicer & Oppenheim [1993] AC 426 at 439. If a foreign representative "reasonably requires" material with a view to establishing whether a company has a valuable course of action, relief is likely to be "necessary to protect the assets of the debtor or the interests of the creditors".
  18. I was taken during submissions to a number of authorities bearing on section 236. The most important is the decision of the House of Lords in the British & Commonwealth case. Lord Slynn of Hadley there observed (at 439) that section 236 confers an "extraordinary power" and that "the discretion must be exercised after a careful balancing of the factors involved on the one hand the reasonable requirements of the administrator to carry out his task, on the other hand the need to avoid making an order which is wholly unreasonable, unnecessary or 'oppressive' to the person concerned". Lord Slynn went on to say this (at 439 to 440):
  19. "The protection for the person called upon to produce documents lies, thus, not in a limitation by category of documents ('reconstituting the company's state of knowledge') but in the fact that the applicant must satisfy the court that, after balancing all the relevant factors, there is a proper case for such an order to be made. The proper case is one where the administrator reasonably requires to see the documents to carry out his functions and the production does not impose an unnecessary and unreasonable burden on the person required to produce them in the light of the administrator's requirements. An application is not necessarily unreasonable because it is inconvenient for the addressee of the application or causes him a lot of work or may make him vulnerable to future claims, or is addressed to a person who is not an officer or employee of or a contractor with the company in administration, but all these will be relevant factors, together no doubt with many others. "
  20. In the present case, Deutsche Bank has, I understand, already made some documents available to the liquidators. It is willing, moreover, to provide various further documents subject to certain conditions in respect of costs and confidentiality to which I shall come shortly. In other respects, the bank resists any order for disclosure. It objects in particular to an order extending to internal Deutsche Bank documents; to documents relating to any "underlying credit default transactions which are connected to" the CLNs; to documents concerning how the bank dealt with any relevant conflicts of interest; to documents "underpinning" the bank's decision to categorise Chesterfield and Partridge as "professional" clients for regulatory purposes; and to documents showing in what capacity the bank gave any advice to the companies or Kaupthing.
  21. Subject to points of detail, I am satisfied that it is appropriate for disclosure to extend to the disputed categories of document. Mr Akers has confirmed that he regards disclosure of the disputed categories as necessary (see in particular paragraph 10 of his second affidavit), and his views are entitled to weight: see Sasea Finance Ltd v KPMG [1998] BCC 216 at 220. I can, moreover, understand why the liquidators wish disclosure to encompass the disputed categories. It is true that the documents sought go beyond those which would be needed to reconstitute the companies' knowledge, but orders under section 236 need not be so confined: see the British & Commonwealth case at 439. I bear in mind too that Deutsche Bank was not an officer or employee of Chesterfield or Partridge, but that again is not necessarily a bar for relief under section 236: see the British & Commonwealth case at 439 to 440. Nor is it a bar that the liquidators have in mind the possibility of litigation: an officeholder can legitimately seek relief under section 236 with a view to establishing whether a claim exists. It is doubtless fair to say that the liquidators do not need the disputed categories to understand the terms of the CLNs, but their concerns extend to the reasons for the transactions being entered into and whether they formed part of a larger scheme. It was suggested that the liquidators are "fishing", but, within limits, section 236 can properly be used for what might be termed "fishing": an officeholder can invoke the section because he wishes to investigate. It is inevitable that an order will put Deutsche Bank to some inconvenience and expense, but I have not been persuaded that it will place an unreasonable burden on the bank. In fact, there is relatively little evidence as to the cost of complying with an order.
  22. In all the circumstances, it seems to me that, as I have already indicated, the balance comes down in favour of ordering disclosure of the disputed categories. I further consider that an order is, in the words of Article 21(1), "necessary to protect the assets of the debtor or the interests of the creditors".
  23. The following points of detail arise, however, in relation to the draft order put forward by the liquidators in relation to Chesterfield:
  24. (i) paragraph 1 should be restricted to materials dating from 1 February to 9 October 2008;
    (ii) the CDS transactions mentioned in the fourth line should be limited to transactions relating to Kaupthing and entered into between 7 August and 9 October 2008;
    (iii) Deutsche Bank expressed concerns that the words "connected to" were insufficiently clear. I would be happy to give the bank a brief opportunity to devise a better wording;
    (iv) the words "if any" should be added after "conflicts of interest" in paragraph 3;
    (v) paragraph 5 should be revised to make clear that the advice must relate to CLN transactions and have been given since 1 February 2008. The words "if any" should also be added after "advice";
    (vi) the order should allow for the redaction of the names of counterparties to the extent proposed by Mr Mark Phillips QC, who appeared with Mr Sharif Shivji on behalf of the liquidators;
    (vii) it may be as well to include express liberty to apply.

    Similar points arise in relation to the draft order in respect of Partridge.

  25. There remain to be considered the conditions which Deutsche Bank proposes should be imposed as to costs and confidentiality. Taking costs first, the bank asks that provision should be made at this stage for the costs of complying with the order. In contrast, the liquidators argue that the appropriate time to consider such costs is "after [the party] has complied fully with the order" (adapting what was said by Hoffmann J in In re Aveling Barford [1989] 1 WLR 360). The liquidators point out, furthermore, that while there is little money in hand, Kaupthing has given an undertaking as to funding. The bank drew my attention to limitations contained in the funding agreement, but I nonetheless take the view that in this case, as in Aveling Barford, the costs of compliance should be addressed after the order has been complied with. It is noteworthy in this context that, as already mentioned, the evidence does not show that the costs of compliance are likely to be exceptionally large.
  26. As for confidentiality, Deutsche Bank proposes that the liquidators should be required to give an express undertaking to keep disclosed documents confidential. It has, it says, a particular concern that documents and information in them should not be passed on to Kaupthing without a court order to that effect. The need for an undertaking is, the bank argues, the greater because teams within Grant Thornton act for Kaupthing as well as for the liquidators, as do the liquidators' solicitors. In the course of submissions, Miss Sonia Tolaney QC, who appeared with Mr Tom Smith for the bank, made clear that it is accepted both that the court should have power to vary or discharge any restrictions and that the court should apply ordinary principles when deciding whether the restrictions should be varied or discharged.
  27. Mr Phillips urged me not to require the liquidators to give any express undertaking. He pointed out that there would be an implied duty of confidence in any event, and reminded me that his clients are professionals who can be expected to take such duties seriously. He also expressed concern that an express undertaking could produce satellite litigation.
  28. On balance, however, I have concluded that it is appropriate to require the liquidators to give undertakings along the lines proposed. I entirely accept that the liquidators would take the implied duty of confidence seriously, but, having regard in particular to the links with Kaupthing, it is reasonable, I think, for the bank to ask for an explicit undertaking. I agree with the bank that such a undertaking should help to ensure that there is a clear understanding as to who should have access to the documents. It will reinforce the Chinese walls which will anyway exist.
  29. In all the circumstances, I shall grant the liquidators relief to the effect I have indicated, but subject to an undertaking being given. It may be that the liquidators will wish to propose amendments to the terms of the undertaking which Deutsche Bank has put forward.

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