Neutral Citation Number: [2012] EWHC 3068 (Ch)
Case No: 9527 of 2011
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

IN THE MATTER OF MF GLOBAL UK LIMITED (IN SPECIAL ADMINISTRATION)

AND 

IN THE MATTER OF THE INVESTMENT BANK SPECIAL ADMINISTRATION REGULATIONS 2011
Royal Courts of Justice
Rolls Building
7 Rolls Building London EC4A 1NL

Date: 01/11/2012

Before :

THE HONOURABLE MR JUSTICE DAVID RICHARDS
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Between :

	(1) RICHARD HEIS
(2) MICHAEL ROBERT PINK
(3) RICHARD DIXON FLEMING
(the joint administrators of MF Global UK Limited)
	Applicants	
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MF GLOBAL, INC.
(a company incorporated under the laws of the State of Delaware)	

Respondent	

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Antony Zacaroli QC and Daniel Bayfield (instructed by Weil, Gotshal & Manges) for the Applicants
Robert Miles QC and Andreas Gledhill (instructed by Slaughter and May) for the Respondent

Hearing date: 23 October 2012
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Judgment

Mr Justice David Richards : 
1.	This is an application for directions by the investment bank administrators (the administrators) of MF Global UK Limited (MFG UK). They seek directions on an issue arising under the terms of a Global Master Repurchase Agreement (the GMRA) made between MFG UK and MF Global Inc (Inc).  Inc is the respondent to the application.
2.	The issue in short is whether the appointment of the administrators constituted an immediate and complete event of default under the GMRA, without the need for service of a notice by Inc declaring it an event of default.  This requires consideration of the terms of the GMRA and the regime for special administration created by the Investment Bank Special Administration Regulations 2011 (the Regulations) under which the administrators were appointed.
3.	MFG UK and Inc form part of the MF Global group of companies (the Group). Companies in the Group acted as broker-dealers in commodities, fixed income securities, equities, foreign exchange, futures and options and also provided client financing and securities lending.
4.	The holding company of the Group is MF Global Holdings Limited (Holdings), incorporated in Delaware.  Its shares were traded on the New York Stock Exchange.
5.	MFG UK handled the European business of the Group, acting as an intermediary broker providing agency services, matched-principal execution and clearing services for exchange-traded and over-the-counter derivative products as well as for non-derivative foreign exchange products and securities in the money market. MFG UK was and remains an entity regulated by the Financial Services Authority.
6.	Inc was the main US trading entity of the Group, acting as a broker-dealer on behalf of US and overseas customers and affiliates.  It was principally regulated by the US Securities and Exchange Commission and the Commodity Futures Trading Commission. 
7.	In response to losses incurred by the Group in 2009/2010, the Group embarked on a policy of accumulating a portfolio of European sovereign debt securities. These principally comprised bonds issued by European states experiencing severe financial pressures, particularly Ireland, Italy, Portugal and Spain. Its investment in securities of this type peaked at nearly US $7 billion in October 2011, equating to 4.5 times its total equity. This exposure, coupled with additional capital adequacy requirements imposed on the Group by the US regulatory authorities to reflect the risk associated with the portfolio, contributed significantly to the collapse of the Group in October 2011.
8.	The steps by which the principal companies within the Group entered formal insolvency proceedings occurred on 31 October 2011. The sequence of events was as follows. In the morning (Eastern Standard Time), Holdings filed for bankruptcy protection under Chapter 11 of the US Bankruptcy Code with the US Bankruptcy Court for the Southern District of New York. At about 17:00 hrs (GMT) (13:00 hrs EST) Morgan J appointed the administrators on the application of the directors of MFG UK, supported by the FSA. At approximately 16:00 hrs (EST), the Securities Investor Protection Corporation filed a petition with the US District Court for the Southern District of New York for the appointment of a trustee under the Securities Investor Protection Act 1970. At 16:50 (EST), Mr James Giddens was appointed as trustee of Inc (the SIPA Trustee).
9.	The Group’s policy of investing in European sovereign debt, referred to above, involved both MFG UK and Inc.  MFG UK purchased the securities in the market.  MFG UK and Inc entered into repurchase transactions (repos) with each other, whereby the securities were sold at fixed prices on terms that equivalent securities would be repurchased at a later date at pre-agreed prices. The repurchase dates under the repos broadly matched the maturity dates of the underlying securities, which were generally between 12 to 18 months from the inception of the transactions.
10.	The repurchase transactions made between MFG UK and Inc were governed by the GMRA, which had been entered into by them in February 2005, but dated as of 19 July 2004.  The GMRA uses a standard form agreement, produced by The Bond Market Association and the International Securities Market Association, in its 2000 version. The standard form agreement contains a number of elections which the parties may make, which are then set out in Annex 1 to the agreement.
11.	The purpose of the GMRA is to set out the terms for all repurchase and buy/sell back transactions relating to securities between MFG UK and Inc, save only for the particulars of individual transactions, such as prices and repurchase or buy back dates.
12.	Paragraph 17 of the GMRA provides that the agreement is to be governed by and construed in accordance with English Law and that the parties irrevocably submit for all purposes of or in connection with the agreement and each transaction made under it to the jurisdiction of the English courts. The scope of the GMRA is set out in paragraph 1 which provides, so far as material:
“1. Applicability
(a)	From time to time the parties hereto may enter into transactions in which one party, acting through a Designated Office, (“Seller”) agrees to sell to the other, acting through a Designated Office, (“Buyer”) securities and financial instruments (“Securities”) (subject to paragraph 1(c), other than equities and Net Paying Securities) against the payment of the purchase price by Buyer to Seller, with a simultaneous agreement by Buyer to sell to Seller Securities equivalent to such Securities at a date certain or on demand against the payment of the repurchase price by Seller to Buyer.
(b)	Each such transaction (which may be a repurchase transaction (“Repurchase Transaction”) or a buy and sell back transaction (“Buy/Sell Back Transaction”) shall be referred to herein as a “Transaction” and shall be governed by this Agreement, including any supplemental terms or conditions contained in Annex I hereto, unless otherwise agreed in writing.”
13.	Paragraph 3 deals with the initiation, confirmation and termination of transactions. 
14.	Paragraph 4 provides for the maintenance of margin by reference to each party’s net exposure in respect of all transactions entered into and outstanding under the GMRA.
15.	Paragraph 10 defines events of default and sets out the consequences of the occurrence of an event of default. The events of default are defined by paragraph 10(a) which I set out in full (save for sub-paragraph (ii) which was excluded by the parties): 
“10. Events of Default 
(a)  If any of the following events (each an “Event of Default”) occurs in relation to either party (the “Defaulting Party”, the other party being the “non-Defaulting Party”) whether acting as Seller or Buyer:

(i) Buyer fails to pay the Purchase Price upon the applicable Purchase Date or Seller fails to pay the Repurchase Price upon the applicable Repurchase Date, and the non-Defaulting Party serves a Default Notice on the Defaulting Party; or

(ii) ….

(iii) Seller or Buyer fails to pay when due any sum payable under sub-paragraph (g) or (h) below, and the non-Defaulting Party serves a Default Notice on the Defaulting Party; or

(iv) Seller or Buyer fails to comply with paragraph 4 and the non-Defaulting Party serves a Default Notice on the Defaulting Party; or 

(v) Seller or Buyer fails to comply with paragraph 5 and the non-Defaulting Party serves a Default Notice on the Defaulting Party; or 

(vi) an Act of Insolvency occurs with respect to Seller or Buyer and (except in the case of an Act of Insolvency which is the presentation of a petition for winding-up or any analogous proceeding or the appointment of a liquidator or analogous officer of the Defaulting Party in which case no such notice shall be required) the non-Defaulting Party serves a Default Notice on the Defaulting Party; or 

(vii) any representations made by Seller or Buyer are incorrect or untrue in any material respect when made or repeated or deemed to have been made or repeated, and the non-Defaulting Party serves a Default Notice on the Defaulting Party; or

(viii) Seller or Buyer admits to the other that it is unable to, or intends not to, perform any of its obligations hereunder and/or in respect of any Transaction and the non-Defaulting Party serves a Default Notice on the Defaulting Party; or

(ix) Seller or Buyer is suspended or expelled from membership of or participation in any securities exchange or association or other self regulating organisation, or suspended from dealing in securities by any government agency, or any of the assets of either Seller or Buyer or the assets of investors held by, or to the order of, Seller or Buyer are transferred or ordered to be transferred to a trustee by a regulatory authority pursuant to any securities regulating legislation and the non-Defaulting Party serves a Default Notice on the Defaulting Party; or 

(x) Seller or Buyer fails to perform any other of its obligations hereunder and does not remedy such failure within 30 days after notice is given by the non-Defaulting Party requiring it to do so, and the non-Defaulting Party serves a Default Notice on the Defaulting Party;

then sub-paragraph (b) to (f) below shall apply.”

16.	With one exception, all the events require the occurrence of an event and the service by the non-Defaulting Party of a Default Notice on the Defaulting Party.  This is true also of the occurrence of an Act of Insolvency, which is defined in paragraph 2(a) of the GMRA, set out below.   The only exception is where the Act of Insolvency comprises “the presentation of a petition for winding-up or any analogous proceeding or the appointment of a liquidator or analogous officer of the Defaulting Party.”  
17.	The consequences of an event of default are set out in sub-paragraphs (b)-(f). Paragraph 10(d) accelerates the repurchase date for each transaction entered into under the GMRA and provides for the immediate repayment of all cash margin and the immediate delivery of equivalent margin securities, in accordance with the provisions of paragraph 10(c).
18.	Paragraph 10(c) provides that the Default Market Values of equivalent securities, the amount of any cash margin (including interest) and the repurchase prices to be paid “shall be established by the non-Defaulting Party” for all transactions as at the repurchase date. Having established those figures, an account is taken and the net sum is payable between the parties. This will result in a net sum payable either by or to the non-Defaulting Party, but on the basis of figures determined by that party.
19.	Under paragraph 10(f), the Defaulting Party is liable to the non-Defaulting Party for the amount of all reasonable legal and other professional expenses incurred in connection with or in consequence of an event of default.  Paragraph 10(k) provides that if the non-Defaulting Party incurs any loss or expense entering into replacement transactions, the other party shall be required to pay the amount of such loss or expense, as determined by the non-Defaulting Party.
20.	It is clear that, although the effect of paragraph 10 may be that an amount becomes payable by the non-Defaulting Party to the Defaulting Party, it is nonetheless a substantial commercial advantage to be the non-Defaulting Party. First, in all but the exceptional case of a liquidation or other analogous proceeding, it is for the non-Defaulting Party to elect whether and, if so, when to serve a Default Notice, with the consequences under paragraph 10(b)-(f).  Secondly, the right to determine the relevant figures is a considerable advantage.  This is rather starkly illustrated in the present case. It appears to be common ground that a sum will become payable by MFG UK to Inc. On the basis that Inc is the non-Defaulting Party, it estimates that its claim amounts to over £286.7 million whereas, on the basis that MFG UK is the non-Defaulting Party, the administrators have provisionally suggested that Inc’s claim is in the region of £37 million. These estimates have yet to be subjected to any real analysis, but it is apparent that the identity of the non-Defaulting Party is capable of resulting in very different claims.
21.	The event of default identified in paragraph 10(a)(vi) involves “an Act of Insolvency …… with respect to Seller or Buyer”. “Act of Insolvency” is defined in paragraph 2(a) as follows:
“Act of Insolvency’ shall occur with respect to any party hereto upon –
(i)	  its making a general assignment for the benefit of, entering into a reorganisation, arrangement, or composition with creditors; or
(ii)	its admitting in writing that it is unable to pay its debts as they become due; or
(iii)	 its seeking, consenting to or acquiescing in the appointment of any trustee, administrator, receiver or liquidator or analogous officer of it or any material part of its property; or
(iv)	the presentation or filing of a petition in respect of it (other than by the counterparty to this Agreement in respect of any obligation under this Agreement) in any court or before any agency alleging or for the bankruptcy, winding-up or insolvency of such party (or any analogous proceeding) or seeking any reorganisation, arrangement, composition, re-adjustment, administration, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such petition (except in the case of a petition for winding-up or any analogous proceeding, in respect of which no such 30 day period shall apply) not having been stayed or dismissed within 30 days of its filing; or
(v)	the appointment of a receiver, administrator, liquidator or trustee or analogous officer of such party or over all or any material part of such party’s property; or
(vi)	the convening of any meeting of its creditors for the purposes of considering a voluntary arrangement as referred to in section 3 of the Insolvency Act 1986 (or any analogous proceeding);”

22.	Sub-paragraphs (iii) and (v) of the definition refer to “any trustee, administrator, receiver or liquidator or analogous officer”.  As earlier noted, under paragraph 10(a)(vi) an event of default occurs where, first, there is an Act of Insolvency and secondly, the non-Defaulting Party serves a Default Notice on the Defaulting Party, except where the Act of Insolvency is “the presentation of a petition for winding-up or any analogous proceeding or the appointment of a liquidator or analogous officer of the Defaulting Party”. 
23.	The issue on this application is whether the administrators are analogous officers to a liquidator. The second and related issue is whether the application made by the directors of MFG UK for an investment bank special administration order was analogous to a petition for winding up.
24.	It is conceded by Inc that the appointment of the SIPA Trustee was an appointment of an officer analogous to a liquidator. It follows that unless there was a prior event of default, that appointment constituted an event of default in which MFG UK was the non-Defaulting Party. It is Inc’s submission that the earlier appointment of the administrators under the Regulations also constituted the appointment of officers analogous to a liquidator with the result that an event of default occurred at that time, with Inc as the non-Defaulting Party for the appointment of the administrators.  The urgency of the application was such that no application notice had been issued before the hearing before Morgan J. In the usual way the applicants by counsel undertook to the court to issue the application notice. In those circumstances, for the purposes of the relevant provisions of the GMRA, the application should be taken to have been made or filed at the start of the hearing. It makes no practical difference in this case because, as the parties agree, the hearing and the appointment were made before the application had been filed in New York for the appointment of the SIPA Trustee.
25.	Before coming to the detail of the issue, it is appropriate to recapitulate a number of points at this stage. 
26.	First, save for the provisions with which the application is concerned, each event of default requires both an occurrence of an event and a giving of notice by the non-Defaulting Party.  In all such cases, therefore, the non-Defaulting Party is given a choice as to whether and, if so, when to declare an event of default.  
27.	Secondly, the availability of that choice would appear to be a valuable benefit to the non-Defaulting Party. Given the acceleration and netting out provisions contained in paragraph 10(b)–(f), the precise timing of the event of default could have a significant impact on the result for the parties. A non-Defaulting Party might well choose to delay giving notice in the light of changing market conditions.  Moreover, by reason of paragraph 6(j), which the parties incorporated into the GMRA, the obligations of the non-Defaulting Party under the agreement are suspended, pending the giving of notice, for so long as the event entitling the non-Defaulting Party to give notice continues. In many circumstances, therefore, the non-Defaulting Party will be able to wait and see without significant commercial disadvantage to itself. 
28.	Thirdly, the only event of default which is complete without the giving of notice by the non-Defaulting Party is the limited class of Act of Insolvency with which this case is concerned, that is to say the appointment of a liquidator or analogous officer or the presentation of a winding-up petition or analogous proceedings. All other Acts of Insolvency, including an inability to pay debts as they become due, the appointment of an administrator or receiver or analogous officer, the presentation of other insolvency proceedings and any steps with a view to the promotion of arrangements or compositions with creditors, require the non-Defaulting Party to give notice. It is clear therefore that the framers of the standard form GMRA have identified some feature or features of liquidation or analogous proceedings as requiring an immediate closing out of the transactions governed by the GMRA, without the non-Defaulting Party having any choice in the matter.
29.	As it seems to me this third point has a bearing on the way in which the court should approach the issue as to whether any particular proceedings are for the purposes of the agreement analogous to liquidation. This is not a question to be answered as a matter of abstract theory but a question to be answered in the context and for the purpose of this agreement. Further, the context of the agreement provides in my judgment an answer to a difference which appeared from the written submissions of counsel for the parties in this case. It was submitted for Inc that the sole question for the court was whether the proceedings in question were or were not analogous to liquidation. The court should not, it was submitted, have regard to such questions as whether the relevant proceeding had more in common with and were more closely analogous to one of the other proceedings specified in the definition of Act of Insolvency, such as administration. In the course of his oral submissions, Mr Miles QC for Inc agreed that analogies were a matter of degree and that if the better analogy for a particular proceeding was administration, it would be an odd result if it was nonetheless held to be for the purposes of paragraph 10 analogous to liquidation.
30.	The parties are agreed that the reason for including the references to analogous proceedings and officers is to provide for both foreign legal systems and changes to domestic law.
31.	MFG UK submits that the purposes of a special administration order under the Regulations and the powers of the administrators to be exercised for those purposes are such that the appointment of the administrators cannot be said to be analogous to the appointment of a liquidator. 
32.	The sole purpose of a liquidation is to realise the assets of the company and to distribute the proceeds to the company’s creditors. The liquidator is under a statutory duty to ensure the company’s assets are got in, realised and proceeds distributed to the creditors: see the Insolvency Act 1986, section 143(1) (compulsory winding-up) and section 107 (voluntary winding-up). The liquidator may carry on the business of the company only “so far as may be necessary for its beneficial winding up”: para. 5, schedule 4, Insolvency Act 1986.  Any such continuation of the business must therefore be with a view to the winding-up of the company, not with a view to its continuance: In re Wreck Recovery and Salvage Company (1880) 15 ChD 353 (CA). It follows that, unless necessary to the beneficial winding-up of the company, the company will not be able to perform outstanding contractual obligations once a liquidator is appointed. Moreover, unless the court orders otherwise, all dispositions of the company’s property made after the commencement of the winding-up (the date of presentation of the petition) are void. This does not apply to disposals made by the liquidator in exercise of his statutory powers. The effect of the statutory scheme of a liquidation,  for the realisation of assets and the distribution of their proceeds among the unsecured creditors on a pari passu basis, is that the assets of the company are held on a statutory trust, such that they cease to belong beneficially to the company and the beneficial interest in them is in suspense pending realisation and distribution: Ayerst v C&K (Construction) Ltd [1976] AC 167 and the authorities there cited. The commencement of a liquidation and the statutory scheme for pari passu distribution brings into play the pari passu rule, which invalidates contractual provisions inconsistent with the requirement that the proceeds of the company’s assets be distributed pari passu among its unsecured creditors. It is a feature of English liquidation law, which exists in other but not all systems, that a broad rule of set-off is to be applied to liabilities as at the date of winding-up between the company and each of its creditors/debtors, so as to arrive at the net amount for which a creditor may prove or which a debtor is liable to pay to the company in liquidation.
33.	The features identified in the preceding paragraph, including but not limited to insolvency set-off, are particular features of liquidation under UK insolvency law. Different legal systems will differ on some of these features, but the basic characteristics of liquidation of bringing the business of the company to an end, realising its assets and distributing the proceeds amongst creditors are likely to be present in all legal systems and, if they are not, it would in my judgment be impossible to say that the procedure was “analogous to” liquidation as contemplated by the GMRA.
34.	MFG UK relies on the different purposes of a special administration order under the Regulations and on the different powers of investment bank administrators as contrasted with the purpose of a liquidation and the powers of liquidators  to achieve that purpose. 
35.	The Regulations were made on 7 February 2011 in exercise of powers conferred by sections 233, 234 and 259(1) of the Banking Act 2009. The 2009 Act was passed in the wake of the international financial crisis which started in 2008 and included, for the first time, special procedures to deal with insolvent banks. Since that crisis had in part been triggered by the collapse of Lehman Brothers in September 2008, it was appreciated that special insolvency procedures would be needed for investment banks.  However, they presented particular problems and the enactment of more general banking legislation could not be delayed while those problems were addressed and resolved. In particular, investment banks hold client assets, often on a very large scale, and existing insolvency procedures as well as the new procedures introduced for banks do not contain provisions to deal adequately with the complex problems which can arise in the event of the insolvency of an investment bank. Accordingly, the Banking Act 2009 made provision in general terms for Regulations to be made dealing with investment banks, such Regulations to be made within a period of two years from the date when the Act was passed. 
36.	Regulation 3 sets out an overview: 
“(1) These Regulations provide for a procedure to be known as investment bank special administration (“special administration”). 
(2) The main features of special administration are that— 
(a) an investment bank enters the procedure by court order; 
(b) the order appoints an administrator; 
(c) the administrator is to pursue the special administration objectives in accordance with the statement of proposals approved by the meeting of creditors and clients and, in certain circumstances, the FSA; and 
(d) in other respects the procedure is the same as for Schedule B1 administration under the Insolvency Act, subject to specific modifications, and the inclusion of certain liquidation provisions of the Insolvency Act.”
Paragraphs (3) and (4) of Regulation 3 provide an overview of the procedures in circumstances where the investment bank is a deposit taking bank, which are not relevant to MFG UK.
37.	Regulation 4 provides:
“(1) An investment bank special administration order (“special administration order”) is an order appointing a person as the investment bank administrator (“administrator”) of an investment bank. 
(2) A person is eligible for appointment as administrator under a special administration order if qualified to act as an insolvency practitioner. 
(3) An appointment may be made only if the person has consented to act. 
(4) For the purpose of these Regulations— 
(a) an investment bank is “in special administration” while the appointment of the administrator has effect; 
(b) an investment bank “enters special administration” when the appointment of the administrator takes effect; 
(c) an investment bank ceases to be in special administration when the appointment of the administrator ceases to have effect in accordance with these Regulations; and 
(d) an investment bank does not cease to be in special administration merely because an administrator vacates office (by reason of resignation, death or otherwise) or is removed from office.”
38.	Regulation 5 makes provision for an application to the court for a special administration order, to be made by the investment bank, its directors, creditors or others including the Secretary of State or the FSA.
39.	Regulation 6 sets out the grounds for applying for a special administration order:
“(1) In this regulation— 
(a) Ground A is that the investment bank is, or is likely to become, unable to pay its debts; 
(b) Ground B is that it would be fair to put the investment bank into special administration; and 
(c) Ground C is that it is expedient in the public interest to put the investment bank into special administration. 
(2) The FSA or the persons listed in regulation 5(1)(a) to (e) may apply for a special administration order only if they consider that Ground A or Ground B is met. 
(3) The Secretary of State may apply for a special administration order only if it appears to the Secretary of State that Grounds B and C are met.”
40.	Regulation 7 empowers the court to make a special administration order or to make other orders on the hearing of the application.
41.	Regulation 10 is headed “Special Administration Objectives” and provides as follows:
“(1) The administrator has three special administration objectives (“the special administration objectives”) — 
(a) Objective 1 is to ensure the return of client assets as soon as is reasonably practicable; 
(b) Objective 2 is to ensure timely engagement with market infrastructure bodies and the Authorities pursuant to regulation 13; and 
(c) Objective 3 is to either— 
(i) rescue the investment bank as a going concern, or 
(ii) wind it up in the best interests of the creditors. 
(2) In relation to sub-paragraph (1)(a), the administrator is entitled to deal with and return client assets in whatever order the administrator thinks best achieves Objective 1. 
(3) The order in which the special administration objectives are listed in this regulation is not significant: subject to regulation 16, the administrator must— 
(a) commence work on each objective immediately after appointment, prioritising the order of work on each objective as the administrator thinks fit, in order to achieve the best result overall for clients and creditors; and 
(b) set out, in the statement of proposals made under paragraph 49 of Schedule B1 (as applied by regulation 15), the order in which the administrator intends to pursue the objectives once the statement has been approved. 
(4) The administrator must work to achieve each objective, in accordance with the priority afforded to the objective as provided in paragraph (3), as quickly and efficiently as is reasonably practicable.”
42.	Regulations 11 and 12 make further provision in respect of Objective 1, dealing with advertising for claims, setting a bar date for claims and dealing with shortfalls in client assets.
43.	Regulation 13 relates to Objective 2 and includes the following provisions:
“(1) The administrator shall work with— 
(a) a market infrastructure body to— 
(i) facilitate the operation of that body’s default rules or default arrangements, 
(ii) resolve issues arising from the operation of those rules or arrangements, and 
(iii) facilitate the settlement or prompt cancellation of non-settled market contracts or, as the case may be, of unsettled settlement instructions; and 
(b) the Authorities, to facilitate any actions the Authorities propose to take to minimise the disruption of businesses and the markets as a consequence of a special administration order being made in respect of the investment bank. 
(2) In paragraph (1), “work with” means to— 
(a) comply, as soon as reasonably practicable, with a written request from such a body or from any of the Authorities for the provision of information or the production of documents (in hard copy or in electronic format) relating to the investment bank; 
(b) allow that body or any of the Authorities, on reasonable request, access to the facilities, staff and premises of the investment bank for the purposes set out in paragraph (1), 
but no action need be taken in accordance with this paragraph to the extent that, in the opinion of the administrator, such action would lead to a material reduction in the value of the property of the investment bank.”
44.	Regulation 15 entitled “General Powers, Duties and Effect” contains the following provisions:
“(1) Without prejudice to any specific powers conferred on an administrator by these Regulations, an administrator may do anything necessary or expedient for the pursuit of the special administration objectives. 
(2) The administrator is an officer of the court. 
(3) The following provisions of this regulation provide for — 
(a) general powers and duties of administrators (by application of provisions about administrators in Schedule B1 administration); and 
(b) the general process and effect of special administration (by application of provisions about Schedule B1 administration). 
(4) The provisions of Schedule B1 and other provisions of the Insolvency Act set out in the Tables apply in relation to special administration as in relation to other insolvency proceedings with the modifications set out— 
(a) in paragraph (5) (in respect of the provisions listed in Table 1); 
(b) in paragraph (6) (in respect of the provisions listed in Table 2), 
and any other modification specified in the Tables.”

45.	Table 1 sets out a large number of paragraphs in schedule B1 to the Insolvency Act 1986 which are applied with some modification to investment bank special administrations. Schedule B1, together with part 2 of the Insolvency Rules 1986, contains the regime for administrations under the Insolvency Act, including their purposes and the powers of administrators.  Table 1 includes virtually all of the  provisions in schedule B1 from paragraph 40 onwards. The earlier provisions of schedule B1 concern the purposes of an administration and the various means by which administrators may be appointed, such provisions clearly not being applicable to a special administration under the Regulations. 
46.	All or most of the powers of an administrator are applied to a special administration. These include the power under paragraph 59(1) of schedule B1 for an administrator to “do anything necessary or expedient for the management of the affairs, business and property of the company”.  They also include the powers set out in schedule 1 to the Insolvency Act.  Whilst some of those powers are similar or identical to equivalent powers conferred on liquidators by schedule 4, there are nonetheless some significant differences. In particular, paragraph 14 of schedule 1 confers an unqualified power “to carry on the business of the company” on an administrator, in contrast to the more restricted power to which I have earlier referred in the case of a liquidation. In addition, an administrator but not a liquidator has power to establish subsidiaries of the company and to transfer to subsidiaries the whole or any part of the business or property of the company.  An administrator has an unqualified power to raise or borrow money, unlike the liquidator’s power which is restricted to raising “on the security of the assets of the company any money requisite”. While an administrator has power “to do all other things incidental to the exercise of the foregoing powers” (para. 23 of schedule 1), the equivalent power of a liquidator is limited to doing “all such other things as may be necessary for winding up the company’s affairs and distributing its assets” (para. 13 of schedule 4). The latter power is applied to special administrators but with the substitution of the words “pursuing the special administration objectives” for the words “winding-up the company’s affairs and distributing its assets”. 
47.	Table 2 in Regulation 15 sets out a large number of provisions from the Insolvency Act applicable to liquidations. Some of them in any event by their terms apply to administrations under the Insolvency Act, such as the powers of the court in relation to transactions at an undervalue and unfair preferences contained in sections 238-241 and the avoidance of floating charges in section 245. Claims for fraudulent and wrongful and trading under sections 213 and 214, which are available in a liquidation but not in an administration under schedule B1, are applied to a special administration but I think nothing can turn on that. Mr Miles drew particular attention to the application of section 178, conferring upon the liquidator the power to disclaim unprofitable contracts and onerous property.  Inc develops a substantial submission on the basis of the inclusion of this provision, to which I shall later return.
48.	Mr Zacaroli QC, on behalf of MFG UK, lays particular stress on the differences in the purposes of a special administration and a liquidation. Objectives 1 and 2 set out in Regulation 10 reflect the particular nature of the business of investment banks and their holdings of client assets. Objective 3 contains two alternative objectives, either the rescue of the investment bank as a going concern or its winding-up in the best interest of its creditors. If a rescue of the investment bank were possible and would provide creditors with at least as good a return as a winding-up, one might expect the rescue to be pursued as an objective in preference to a winding-up. Regulation 10(3) makes clear that the three objectives do not have priority one over the other and the administrators are required to commence work immediately on each of the objectives. 
49.	It is useful to compare these objectives with the purposes of an administration under schedule B1. Paragraph 3 of schedule B1 provides as follows:
“(1) The administrator of a company must perform his functions with the objective of— 
(a) rescuing the company as a going concern, or 
(b) achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration), or 
(c) realising property in order to make a distribution to one or more secured or preferential creditors. 
(2) Subject to sub-paragraph (4), the administrator of a company must perform his functions in the interests of the company’s creditors as a whole. 
(3) The administrator must perform his functions with the objective specified in sub-paragraph (1)(a) unless he thinks either— 
(a) that it is not reasonably practicable to achieve that objective, or 
(b) that the objective specified in sub-paragraph (1)(b) would achieve a better result for the company’s creditors as a whole. 
(4) The administrator may perform his functions with the objective specified in sub-paragraph (1)(c) only if— 
(a) he thinks that it is not reasonably practicable to achieve either of the objectives specified in sub-paragraph (1)(a) and (b), and 
(b) he does not unnecessarily harm the interests of the creditors of the company as a whole.”
50.	Although the three purposes specified in paragraph 3(1) are ranked in that order of priority, in contrast to the Objectives of an investment bank special administration, there is nonetheless a substantial parallel between these purposes and Objective 3. The rescue of the investment bank or company as a going concern is the first alternative under Objective 3 and is the primary purpose of an administration. The purposes of an administration set out in sub-paragraphs (b) and (c) of paragraph 3(1) both involve the company ceasing to be a going concern and a realisation of its assets, including as it may be the sale of its business. That is equivalent to the second alternative under Objective 3. Given the wide powers conferred on special administrators by the Regulations, they will be able to do in pursuit of the Objectives all that administrators can do in the pursuit of the purposes set out in paragraph 3 of schedule B1.
51.	The existence of the rescue of the investment bank as a going concern as one of the Objectives, and as being similar to the primary purpose of an administration, is reflected in the similar treatment of distributions. In neither case is a distribution of available assets an automatic feature. Paragraph 65(1) of schedule B1 empowers the administrator to make distributions to creditors and this power is applied to special administrations under the Regulations. The only difference is that the requirement in paragraph 65(3) of schedule B1 for the administrator to obtain the permission of the court to make a distribution other than to secured or preferential creditors is not applied to a special administration. The detailed provisions applicable to distributions to creditors contained in the Investment Bank Special Administration (England and Wales) Rules 2011 parallel the provisions in the Insolvency Rules applicable to a distribution by an administrator. In particular, the investment bank administrator must give notice to the creditors of his intention to declare and distribute a dividend and the provision for set-off contained in rule 164 requires the account to be taken as at the date of such notice. These provisions are a contrast to those applicable to a liquidation, where from the start a distribution to creditors is the sole objective of the liquidation and the set-off rule applies as at the date of the winding-up order or resolution to wind-up the company. While the pari passu rule, avoiding inconsistent contractual provisions, applies in a liquidation from its commencement, I held in HMRC v The Football League Ltd [2012] EWHC 1372 (Ch), [2012] BusLR 1539 that in an administration it applies only from the time at which the administrator gives notice of his intention to make a distribution. If that is correct, it must apply also to an investment bank special administration.
52.	In my judgment, Mr Zacaroli is correct in his submission that the essential characteristic of a liquidation and the appointment of a liquidator, which distinguishes them from other insolvency proceedings and the appointment of other officers, is that the sole purpose of a liquidation is the realisation of assets and the distribution of assets amongst creditors. Save in limited circumstances and then only for a limited time, the business of the company will cease upon the appointment of a liquidator. This distinguishes liquidation from the numerous other insolvency proceedings listed in the definition of Act of Insolvency in the GMRA, including in particular administration. An administration and other insolvency proceedings may result in the realisation of a company’s assets and a distribution of the proceeds among creditors, but the alternative of a rescue of the company as a going concern is at least one of the purposes or objectives of those proceedings. In those cases it is understandable that the non-Defaulting Party under the GMRA would wish to have an opportunity to wait and see how the proceedings develop before deciding whether to exercise its right to serve a notice declaring an event of default and thereby close out all outstanding transactions under the GMRA, particularly where the protection provided by paragraph 6(j) has been incorporated into the agreement.  
53.	Equally, where the insolvency proceeding is a liquidation which necessarily requires that the company will have ceased to carry on business, it is understandable that it constitutes an automatic event of default. Further, there are particular concerns as to the impact of insolvency set-off on obligations to deliver securities or other assets as opposed to monetary obligations.  By constituting the appointment of a liquidator as an automatic event of default, the immediate closing-out of all outstanding transactions and the netting-off of all sums due, for which paragraph 10 of the GMRA provides, may meet those concerns.  They may also meet the opposite concern which arises in those systems which do not permit set-off even between monetary claims in an insolvency: for an example, see In re BCCI SA (No. 10) [1997] Ch 213.  Concerns as to the validity of arrangements such as those in paragraph 10 of the GMRA have been met as regards EU states by the Directive on Financial Collateral Arrangements (2002/47/EC), implemented in the UK by the Financial Collateral Arrangements (No. 2) Regulations 2003 (SI 2003/3226).  There are similar provisions in US law.  All these post-date the 2000 version of the GMRA and, in any event, parties from all parts of the world may use the standard form GMRA and problems may well remain in some legal systems.
54.	Mr Miles on behalf of Inc accepts that the distinguishing feature of a liquidation or analogous proceedings, triggering an automatic event of default, is the company ceasing to carry on business with the resulting realisation of its assets and distribution of proceeds among creditors. He submits, however, that this is not to be judged simply by reference to the legislative purposes or objectives of any particular insolvency proceedings but should be judged “in the real world” by reference to what is almost inevitably going to happen. He did not submit that the appointment of an administrator under schedule B1 was analogous to the appointment of a liquidator, and it would be difficult to do so in light of the separate reference to the appointment of an administrator in the definition of Act of Insolvency. 
55.	The appointment of an administrator under the Regulations was, Mr Miles submitted, different because only very rarely, if at all, would the rescue of an investment bank which had gone into special administration be possible. He submitted that once an investment bank had to return all client assets (Objective 1) and co-operate with market authorities in the operation of their default and close-out rules (Objective 2), there would only very exceptionally be any possibility that the investment bank could survive. He pointed out that the original proposals for investment bank insolvency proceedings published in December 2009 envisaged only a winding-up of the investment bank following the achievement so far as possible of Objectives 1 and 2. No mention at that stage was made of rescue. The alternative in Objective 3 of rescue was introduced by a further paper published by HM Treasury in September 2010, but it added “the Government would expect this only to be possible in the rarest of cases”. In these circumstances, where rescue would be only an exceptional outcome, the appointment of administrators to an investment bank should be treated as analogous to the appointment of a liquidator. Mr Miles made the point that if there was any realistic prospect of a rescue, it would almost certainly occur before an investment bank went into special administration rather than after it. 
56.	Mr Zacaroli submitted, and I agree, that Inc’s approach would undermine the need for the maximum level of certainty in the definition of Acts of Insolvency and the occurrence of events of default.  The consequences of an event of default are profound for both parties and there must be certainty so far as possible, in the interests of both parties, as to whether an automatic event of default has occurred.  The relevant provisions of the GMRA are drafted in a way which focuses attention on the incidents or features of the relevant proceedings or appointments, rather than on their likely practical outcome.  Sub-paragraph (v) of the definition of Act of Insolvency refers to the appointment of “a receiver, administrator, liquidator or trustee or analogous officer”.  Likewise, sub-paragraph (iv) refers to the presentation or filing of a petition “alleging or for the bankruptcy, winding-up or insolvency of such party (or any analogous proceeding) or seeking any re-organisation, arrangement, composition, re-adjustment, administration, liquidation, dissolution or similar relief under any present or future statute, law or regulation”.  These provisions are directed to the relevant proceedings, or the relevant officers and as it seems to me their respective legal characteristics. In reaching a view as to whether any particular proceedings, not expressly contemplated by the terms of the GMRA, are “analogous to” the appointment of a liquidator, there is of course an element of judgment and therefore an element of uncertainty. That uncertainty is however largely eliminated if the question is whether the appointment or proceedings must involve a winding-up of the company. 
57.	The element of uncertainty is greatly increased if a judgment has to be made as to whether any other result is sufficiently rare to be for these purposes discounted. Quite apart from deciding how “rare” it must be, the parties would have to embark on an essentially factual investigation before knowing whether an automatic event of default had occurred.  The enquiry would have to be directed to either (i) the generic chances of a rescue resulting from the type of appointment in question or (ii) the chances of a rescue in the particular circumstances of the case.  I find it difficult to see how the first enquiry is to be satisfactorily answered where the relevant legislation has spelt out rescue as an objective and made provision for it, as in Regulations 10, 15 and 20 in the present case.  As to the second enquiry, it may well be impossible to answer for some time.  It is not in my judgment plausible that the drafters of the GMRA intended to introduce this element of uncertainty into these arrangements.
58.	It may also be noted that, while I have not seen statistics on this, there is a general view that administrations under schedule B1 result in the rescue of the company in a relatively small number of cases: see, for example Goode: Principles of Corporate Insolvency Law (4th ed.) para. 11-29.
59.	Mr Miles’ second, alternative submission centred on the inclusion of a liquidator’s power to disclaim onerous property in the powers conferred on administrators by Regulation 15. This is not a power available to administrators appointed under schedule B1. The power of disclaimer given to a liquidator is conferred for the purpose of enabling a liquidation to be completed within a reasonable time. It means that unprofitable contracts and onerous property interests can be brought to an end and the liability of the company in liquidation crystallised into a claim for loss for which the other party can then prove. Given that the second alternative under Objective 3 is a winding-up of the investment bank, its inclusion in the Regulations is not surprising. The Regulations envisage that the special administrators will complete the winding-up of the investment bank, leading to its dissolution: see Regulation 21. 
60.	The existence of a power of disclaimer undoubtedly can create real problems for the type of transactions to be governed by the GMRA, although it is no longer applicable to arrangements covered by the Financial Collateral Arrangements (No. 2) Regulations 2003. The particular danger is that a liquidator or other officer having a power to disclaim would cherry-pick amongst the transactions into which the parties have entered. He would seek to disclaim those transactions which showed a loss but enforce other transactions which were actually or potentially profitable. 
61.	It is not in doubt that the drafters of the standard form GMRA were alive to this problem, nor that they sought to provide protection against it by the inclusion of paragraph 13, headed “Single Agreement” which provides:
“Each party acknowledges that, and has entered into this Agreement and will enter into each Transaction hereunder in consideration of and on reliance upon the fact that all Transactions hereunder constitute a single business and contractual relationship and are made in consideration of each other. Accordingly, each party agrees (i) to perform all of its obligations in respect of each Transaction hereunder, and that a default in the performance of any such obligations shall constitute a default by it in respect of all Transactions hereunder, and (ii) that payments, deliveries and other transfers made by either of them in respect of any Transaction shall be deemed to have been made in consideration of payments, deliveries and other transfers in respect of any other Transactions hereunder.”
A disclaimer of one transaction would therefore involve a default in respect of all transactions, entitling the other party to terminate all transactions and bringing the netting provisions of paragraph 10 into effect:  see Lomas v JFB Firth Rixson Inc [2012] EWCA Civ 419 at [118] as regards a similar provision.
62.	It does not of course follow from the inclusion of paragraph 13 that the drafters would not have thought it worthwhile to provide additional protection against the possibility of an exercise of a power of disclaimer. The commencement of an insolvency proceeding in which a power of disclaimer was exercisable might provide a reason for treating the commencement of such proceeding as an automatic event of default. 
63.	That cannot, however, in my judgment, justify treating as analogous to a liquidation any insolvency proceedings in which the office holder or the court has a power to disclaim. There are a number of reasons for this. First, if that had been the drafters’ intention, they would surely have spelt it out.  Secondly, and this is important for the first ground, while a power of disclaimer exists as an incident of liquidators under UK insolvency law, there is no necessary reason why it should exist in other systems of law as part of a liquidation process.  Thirdly, and equally relevant to the first point, there is no reason why a power of disclaimer should not be included in particular types of insolvency proceedings which have nothing else in common with a liquidation. For example, it might well be thought to be conducive to the rescue of a company that it should be able to disclaim unprofitable contracts or onerous property. The words “the appointment of the liquidator or analogous officer” would be particularly inapposite words to include rescue proceedings even where that power existed. Such a power does exist, with the permission of the court, in proceedings under Chapter 11 of the US Bankruptcy Code, where it is called a power of rejection; see sections 365 and 1107 of the code. In short, there is no necessary correlation between a liquidation process and the existence of a power of disclaimer.
64.	I asked Mr Miles the grounds for the concession that the SIPA Trustee is an officer analogous to a liquidator.  He told me, on instructions, that it was because the proceeding under Securities Investor Protection Act leads to a winding-up of Inc.  It was not based on the presence of a power of disclaimer, and he was not able to say whether such power existed in the relevant proceeding.
65.	Just as in my view special administrators appointed under the Regulations are not officers analogous to a liquidator, so an application under the Regulations for a special administration order is not analogous to a petition for a winding-up, for the purposes of paragraph 10(a)(iv) of the GMRA.  On the facts of the present case, it is unnecessary to dwell on this issue, but, as it seems to me, Mr Zacaroli’s submission as to the reason for the inclusion of the presentation of a winding-up petition or analogous proceeding as constituting an automatic event of default is correct. Section 127 of the Insolvency Act avoids all dispositions of the company’s property made after the presentation of a winding-up petition in the event that an order is subsequently made, unless the court otherwise orders. Parties dealing under the GMRA would clearly not want performance of their transactions to be put at risk in this way.
66.	I should mention Lindholm, In re Opes Prime Stockbroking Ltd [2008] FCA 1425, a decision of Finkelstein J in the Federal Court of Australia. So far as counsel in the present case are aware, this and an earlier decision of the same judge in Beconwood Securities Pty Ltd v. Australia and New Zealand Banking Group Pty Ltd (2008) 66 ACSR 116 are the only decisions on the appointment of officers analogous to a liquidator, for the purposes of an agreement similar to the GMRA.  The judge held that administrators appointed under the relevant Australian legislation and receivers appointed by secured creditors were not officers analogous to a liquidator.  He said in Lindholm at [61]:
“The function of a liquidator – whether called a liquidator, a trustee, a receiver, a curator or a syndic – is to preside over the death of a company.  An administrator appointed in rescue proceedings strives for the opposite result (even though the company may yet in the end die).  A receiver appointed by a secured creditor does neither of those things, being largely unconcerned about the fate of the company.  From any perspective, the offices are poles apart.
67.	For the reasons given in this judgment, I hold that the administrators appointed under the Regulations are not officers analogous to a liquidator for the purposes of the GMRA and that accordingly their appointment on 31 October 2011 did not constitute an event of default under the GMRA.