Abstract

Company – Winding up. The Chancery Division gave directions in respect of the liquidation of a company dealing in, inter alia, options contracts where the underlying commodities were wheat and oil seed rape.

Citation [2010] All ER (D) 39 (Jul)

Alternative Citations [2010] EWHC 1655 (Ch)

Hearing Date 5 July 2010

Court Chancery Division

Judge Lewison J

Representation Sharif A Shivji (instructed by Carrick Read Insolvency) for the liquidator. 

Catchwords 

Company – Winding up – Liquidator – Directions – Company trading in commodity 'call' and 'put' option contracts – Underlying commodities wheat and oil seed rape – Company not storing physical underlying commodities – Company entering into administration and creditors' voluntary liquidation – Liquidator seeking directions concerning valuation of call options – Whether exercise of call options obliging company to deliver underlying commodity or to make cash payment – Whether exercise of option entitling option holder to immediate cash payment – Whether options that had exceeded strike price being deemed to have been exercised – Whether claims of option holders to be valued at date of company's entry into liquidation or entry into administration.

Summary 

The judgment is available at: [2010] EWHC 1655 (Ch)

Agrimarche Ltd (the company) was a wholesale purchaser and vendor of physical commodities but had a sideline in the making of commodity option contracts for oil seed rape (OSR) or wheat with farmers, in return for a premium set by the company. There were two main types of option, namely, 'call' options, under which the grantee was entitled to buy a particular commodity or instrument from the company at a specified price (the strike price), and 'put' options, under which the grantee was entitled to sell a commodity or instrument to the company at a specified strike price. Once the price of the underlying commodity had exceeded the strike price, the option had a value and was said to be 'in the money'. On exercise of the option, the farmer's profit would be the difference between the price of the commodity and the strike price, less the sum paid for the option. The company did not store the physical commodities themselves; when a farmer exercised a call option, a cash settlement was reached. The company's wheat option contracts described the subject matter as: 'Call option referenced to LIFFE Wheat Futures' or 'Call option basis Liffe – Feed Wheat'. LIFFE was an international futures exchange which operated its own feed wheat futures and option contracts. The LIFFE feed wheat option gave the buyer the right, on exercise, to a feed wheat future contract with a delivery date specified in the option contract, but not the immediate right to delivery of the underlying commodity. All of the company's OSR option contracts described the subject matter as 'Call option referenced to MATIF OSR Futures'. MATIF was the Paris futures exchange and operated its own OSR futures and options contracts. As with the LIFFE options, the exercise of a MATIF option only gave the grantee the right to a futures contract, not the immediate right to delivery of the underlying commodity. In August 2007, the company went into administration and, in January 2008, entered creditors' voluntary liquidation. In the instant proceedings, the liquidator sought directions as to how the call options were to be valued. The last option contracthad expired in October 2008.

The issues which arose for consideration were: (i) whether the call options, if exercised, contractually required the company to deliver the relevant commodity, or simply to make a cash payment calculated by reference to the difference between the strike price and the relevant LIFFE or MATIF future at the point of exercise; (ii) whether exercise of the option entitled the grantee to an immediate cash payment or only to a cash payment calculated at the end of the option period; (iii) whether options that were 'in the money' at the expiry of the option period were deemed to be automatically exercised; and (iv) whether the claims of option holders should be valued at the date of entry into liquidation or entry into administration. In respect of the third issue, consideration was given to, inter alia, the liquidator's submission that it was an implied term of the options contracts that options that were 'in the money' at the expiry of the option period were deemed to have been exercised. In the alternative, and relying in part on the terms of a particular email which had been sent to creditors by an employee of the company at around the time of the company's entry into administration (see [19] of the judgment), the liquidator submitted that option holders whose options had expired after the company's entry into administration but before its entry into liquidation and which were 'in the money' at the date of expiry were to be treated as if they had exercised their options on the expiry date. In respect of the fourth issue, the liquidator submitted that the appropriate date for valuation purposes was the date of entry into administration, on the basis that the option contracts contained an implied term that the options would be deemed to be exercised if the company went into administration.

The court ruled:(1) There was no evidence that the company had ever made a physical delivery of the underlying commodity on an option contract, or that anyone had expected it to. The company's customers were net sellers of the commodities. Since the underlying purpose of the options was to protect the farmers against movement in the price of the relevant commodity, it was far more likely that the reasonable person would understand the option contract as no more than a financial instrument. Such linguistic clues as there were in the options contract supported that interpretation. In all the circumstances, therefore, and applying settled principles, the company's obligation under the call options, if exercised, was not to deliver the underlying commodity, but to pay a cash sum calculated by reference to the relevant LIFFE or MATIF futures contract (see [11]-[13] of the judgment).

Investors' Compensation Scheme Ltd v West Bromwich Building Society, Investors' Compensation Scheme Ltd v Hopkin & Sons (a firm), Alford v West Bromwich Building Society, Armitage v West Bromwich Building Society [1998] 1 All ER 98 applied; Carmichael v National Power plc [1999] 4 All ER 897 applied; Chartbrook Ltd v Persimmon Homes Ltd [2009] All ER (D) 12 (Jul) applied.

(2) If the exercise of the option were to entitle the grantee to no more than a cash payment calculated by reference to values prevailing at the end of the option period, there would be no point in exercising the option before that time. Moreover, exercise of the option entitled the grantee of the option to a payment calculated by reference to a LIFFE or MATIF futures contract. Much of the value of a futures contract lay in the ability to trade it well before the delivery date of the underlying commodity. In those circumstances, exercise of the option entitled the grantee to an immediate cash payment based on the value of an equivalent LIFFE or MATIF futures contract (see [14] of the judgment).

(3) The subject matter of the contracts in the instant case was not such that it displaced the general position or general inference that if the contract did not say that something was to happen, then nothing was to happen. The suggested term should not be implied. Moreover, on the facts, the liquidator was not compelled to treat option holders as if they had exercised their options at the date of the expiry of the option period, but should proceed on the basis of giving effect to creditors' legal rights (see [18], [24] of the judgment)

A-G of Belize v Belize Telecom Ltd [2009] All ER (D) 150 (Apr) applied; Condon, Re, ex p James [1874-80] All ER Rep 388 considered.

(4) There was no justification for advancing the valuation date. If any of the option holders had wanted to exercise their options once the company went into administration, they had been free to do so. There was therefore no need to deem the options to have been exercised. Moreover, one of the purposes of administration was to rescue the company as a going concern. If the market were rising when the company entered administration, some option holders might have preferred to hang on and wait and see whether the company made a successful exit from administration. Those who had wanted to crystallise their claims and seek an alternative hedge elsewhere had only to exercise their options. Accordingly, claims had to be valued at the commencement of the liquidation (see [28] of the judgment).

In re Global Trader Europe Ltd (in liq) (No 2); Milner v Crawford-Brunt [2009 Bus LR 1327 considered.

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