In ABT Auto Investments Ltd. v. Aapico Investment Ptd Ltd. and others, the English High Court set out guidance for conducting a valuation of financial collateral (i.e., shares and bonds) when enforcing security via an appropriation.

Enforcement of security over financial collateral (primarily, shares and bonds) can be done (inter alia) by appropriation of those shares or bonds. Unlike foreclosure, it can be done without a court order, if the security document expressly allows appropriation. It is a self-help remedy, which allows the collateral-taker to take possession and ownership of the shares or bonds. The collateral-taker must account to the chargor for the value of the shares or bonds, with a valuation being undertaken in a “commercially reasonable manner.”

The English High Court in ABT Auto Investments Ltd. v. Aapico Investment Ptd Ltd. and others [2022] EWHC 2839 (Comm) has set out guidance on how a valuation can be undertaken in a “commercially reasonable manner.”

Enforcement of security over shares and bonds, via appropriation, is allowed under the Financial Collateral Arrangements (No. 2) Regulations 2003 (FCAR).

FACTS OF THE CASE

ABT Auto Investments Ltd. (ABT) brought the claim against Aapico Investment Pte Ltd. and Aapico Hitech Public Company Ltd. (together, Aapico), along with Sakthi Global Auto Holdings Limited, a joint venture between ABT and Aapico (Sakthi). Following loan payment defaults by Sakthi, Aapico enforced a share charge (constituting a security financial collateral arrangement) granted by ABT by appropriating the shares in Sakthi. Aapico ascribed a value of $27 million to the charged shares based on a valuation dated 31 July 2019 carried out at Aapico’s request by a third-party valuer. ABT contended that the shares were worth $90 million.

‘COMMERCIALLY REASONABLE MANNER’

The court in the ABT case equated a “commercially reasonable manner” with the valuation having been carried out “fairly,” and set out the following guide:

• Standard: “Commercially reasonable manner” is an objective standard which looks at the behaviour of a reasonable market participant in the relevant financial market. The valuation must not have been conducted arbitrarily or unreasonably.
• Who is responsible? The collateral-taker is responsible for the valuation, even if it uses a third-party valuer. A third-party valuer must also act in a commercially reasonable manner.
• Agreed methodology: A collateral-provider is not prevented from bringing a claim that the method of valuation was not commercially reasonable, even if the security agreement sets out a method of valuation which the collateral-provider agreed is commercially reasonable.
• Process vs outcome: The resultant valuation need not be commercially reasonable. But if the result is less than would be reasonably expected, that might point to the valuation method not having been conducted in a commercially reasonable manner. Commercial reasonableness has to do with the process and method of valuation, and not the outcome.
• Fact sensitive: What is a commercially reasonable manner is fact sensitive. For example, if the shares or bonds are publicly listed, the commercially reasonable approach will usually be to reference the publicly quoted price on the relevant exchange.
• Good faith: There is no requirement for the collateral-taker to act in good faith.

PRACTICAL IMPLICATIONS

The court in the ABT case also provided the following practical insights to conducting a valuation for the purposes of enforcing security by means of appropriation:

• Third-party valuer independence: The collateral-taker communicating to the third-party valuer that it desired a low valuation did not mean that it acted in a commercially unreasonable manner. However, the collateral-taker cannot try to persuade the third-party valuer to act other than in an independent and professional way.
• Information access: The third-party valuer must be given the relevant information. This need not include other valuations.
• Third-party valuer methodology: The third-party valuer relied on multiples analysis when conducting the valuation and not a discounted cash flow method, which it highlighted was because it doubted the underlying forecasts. The High Court accepted this scepticism about the forecasts given that the company was falling further into financial difficulties. Moreover, using only one valuation method (multiples analysis), while having considered using another (discounted cash flow), was found to have been sufficient to meet the International Valuation Standards 105 which requires considering multiple valuation methods. The High Court implicitly held that it was commercially reasonable to use only one valuer.

WHAT IF THE VALUATION WAS NOT CONDUCTED IN A COMMERCIALLY REASONABLE MANNER?

If the valuation is found not to have been conducted in a commercially reasonable manner, then the appropriation is not invalid.

Instead, the court would set aside the valuation, substitute it with a compliant one, and make any necessary consequential orders (including, for example, for breach of contract).

CONCLUSION

The ABT case is helpful for setting out practical guidelines for enforcement of security over shares and bonds by appropriation.

The Retained EU Law (Revocation and Reform) Bill (if passed by UK Parliament in its present form) will revoke FCAR (and the right to enforce security by appropriation) at the end of 2023, unless the UK government extends the revocation date, or restates FCAR.

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