BNY Mellon Corporate Trustee Services Ltd v LBG Capital (No 1) Plc [2016]
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In BNY Mellon Corporate Trustee Services Ltd v LBG Capital (No 1) Plc [2016] UKSC 29, heard by the Supreme Court, the dispute centred around contingent convertible securities issued by two wholly-owned subsidiaries of a banking group. These securities carried a high rate of interest and were not redeemable until specific dates between 2019 and 2032, but they could be converted into shares upon the occurrence of certain events, one of which was a stress test of the group's consolidated CT1 ratio – a measure of financial strength.
However, regulatory changes in 2013 led to the replacement of the CT1 ratio with a more restrictive alternative, CET1 ratio. In 2014, a stress test was conducted that did not take the contingent convertible securities into account, prompting the group to announce their intention to redeem the securities. The trustee, acting on behalf of the securities holders, sought a declaration that the group was not entitled to redeem the securities, arguing that the triggering event specified in the trust deed was a CT1 ratio stress test, not a CET1 ratio test.
The key issue before the Supreme Court was whether the relevant clause in the trust deed could be interpreted to include CET1 ratio stress tests. The court, in its decision, held that the defendants were entitled to redeem the securities. The interpretation was based on several factors, including the anticipation of regulatory changes, the understanding that phrases like CT1 capital could change meaning, and the essential feature of the securities allowing conversion into core capital, which is defined at the time of redemption.
The case established that while normally, very considerable circumspection is required before extraneous documents are used to interpret a deed or contract governing the holding terms of negotiable instruments, in this case, regulatory material was deemed admissible to interpret the deed. The court considered the regulatory policy in force at the time the deed was made to properly understand its terms.
Additionally, the case addressed the secondary argument that the relevant clause should be interpreted contra proferentem – against the party seeking to enforce it. Lord Neuberger rejected this argument, stating that the contra proferentem rule is a last refuge and should not be applied in this case, emphasising the importance of interpreting the document based on its terms and surrounding context rather than resorting to the rule as a default position.
However, regulatory changes in 2013 led to the replacement of the CT1 ratio with a more restrictive alternative, CET1 ratio. In 2014, a stress test was conducted that did not take the contingent convertible securities into account, prompting the group to announce their intention to redeem the securities. The trustee, acting on behalf of the securities holders, sought a declaration that the group was not entitled to redeem the securities, arguing that the triggering event specified in the trust deed was a CT1 ratio stress test, not a CET1 ratio test.
The key issue before the Supreme Court was whether the relevant clause in the trust deed could be interpreted to include CET1 ratio stress tests. The court, in its decision, held that the defendants were entitled to redeem the securities. The interpretation was based on several factors, including the anticipation of regulatory changes, the understanding that phrases like CT1 capital could change meaning, and the essential feature of the securities allowing conversion into core capital, which is defined at the time of redemption.
The case established that while normally, very considerable circumspection is required before extraneous documents are used to interpret a deed or contract governing the holding terms of negotiable instruments, in this case, regulatory material was deemed admissible to interpret the deed. The court considered the regulatory policy in force at the time the deed was made to properly understand its terms.
Additionally, the case addressed the secondary argument that the relevant clause should be interpreted contra proferentem – against the party seeking to enforce it. Lord Neuberger rejected this argument, stating that the contra proferentem rule is a last refuge and should not be applied in this case, emphasising the importance of interpreting the document based on its terms and surrounding context rather than resorting to the rule as a default position.
