MF Global UK High Court Judgment Limits Potential Recovery for U.S. Investors (with Lofchie Comment)

The High Court in London has ruled that the appointment of administrators to oversee MF Global’s U.K. operations did not automatically trigger an event of default under a repurchase agreement entered into with U.S. affiliate, MF Global Inc., as it was not equivalent to the appointment of a liquidator for the purposes of the agreement. The effect of the ruling would allow MF Global UK, rather than MF Global U.S., to be the non-defaulting party under the GMRA between the parties and, thus, to be the party which has the right under the GMRA to determine how much it owes or is owed by its affiliate. Since the sides are apart by a considerable sum in their valuations under the agreement (MF Global Inc. has suggested that it is owed more than £286 million under the arrangements, whereas the U.K. administrators maintain that the sum outstanding should only amount to around £37 million), the ability to value the claim under the GMRA appears to have considerable worth.

Lofchie Comment: As if the unwind of Lehman were not proof enough, this case is indicative of how much potential benefit there would be to the U.S. and the U.K. devising some common approach, in the case of an insolvent financial institution, to the liquidation of affiliates in the two jurisdictions. Beyond that, it seems rather remarkable, and not in a good way, that the right to determine valuations under the GMRA in a transaction between two affiliates, both of whom were going to fail regardless of who failed first, should be worth approximately £250 million to the winning party.