Court declines relief in Greensill–SoftBank undervalue case

One of the first major rulings in the numerous pieces of litigation arising out of the Greensill Group’s collapse, this judgment of Lord Justice Miles in Credit Suisse Virtuoso v SoftBank Group Corp & Ors raises serious questions for potential claimants seeking recourse under England and Wales’ insolvency legislation. 

Section 423 of the Insolvency Act 1986 is one of the most powerful tools for a victim of fraudulent transactions in the context of insolvency. Yet, in this rare case, though all the requirements for a Section 423 claim were satisfied, the court declined to grant any relief.

Greensill Limited (Greensill), a special purpose vehicle within the Greensill Group which focused on supply chain financing, entered into a Receivables Purchase Agreement ("RPA") with Katerra, a construction focused company. The financing provided to Katerra under the RPA was funded by the issue of notes under the Fairymead Note Programme, under which the SCF Subfund (managed by Credit Suisse) held beneficial interests in notes worth $440 million. Greensill’s rights under the RPA were part of the securitisation structure which supported the Fairymead Note Programme. 

By late 2020, Katerra faced severe financial difficulties and was on the brink of bankruptcy. Greensill Group also faced liquidity issues, exacerbated by regulatory demands to reduce exposure to certain clients. In November 2020, SoftBank Vision Funds, significant investors in both Greensill and Katerra, injected $440 million into Greensill via convertible loan notes, and participated in Katerra’s recapitalisation. Mr Greensill, the ultimate controlling party of Greensill, had represented to SoftBank that the $440 million would be used to repay or repurchase the Fairymead Notes.

The Impugned Transactions

On 30 December 2020, Greensill released Katerra from its $440 million debt under the RPA in exchange for shares in a Katerra Cayman entity. On the same date, Greensill immediately transferred the Katerra shares (at that time being worth around $11.3 million) to SVF II Adobe, a SoftBank entity.

The transactions were part of a broader restructuring of Katerra in order to stave off its bankruptcy. However, the release of the RPA effectively removed the security backing the Fairymead Notes, leaving Credit Suisse as an unsecured creditor of Greensill, which was left with effectively no assets. The Fairymead Notes subsequently defaulted in March 2021, upon the Greensill Group’s collapse. 

The Claim

Credit Suisse alleged that the Impugned Transactions were transactions at an undervalue, entered into by Greensill with the improper purpose of prejudicing creditors. ​They sought relief under section 423 of the Insolvency Act 1986 to restore the position and remedy their losses.

The court found that the Impugned Transactions were transactions at an undervalue as Greensill released its rights under the RPA, and did not obtain anything of like value in return, with the Katerra shares being immediately transferred to SVF II Abode. ​

Moreover, the court concluded that Greensill entered the transactions with the improper purpose of prejudicing the claimants by removing the security backing the Fairymead Notes. Lord Justice Miles further found that SoftBank was not complicit in or aware of that improper purpose.  

Finally, despite finding a transaction at an undervalue, the court declined to grant relief against the SoftBank entities. 

Key Factors in the Court’s Decision Not to Award Relief

Key to Lord Justice Miles’ decision not to award relief was his finding that SoftBank was not aware that Greensill intended to prejudice Credit Suisse, and had reasonably believed its cash injection in November 2020 had been used to repay the Fairymead Notes. This was notwithstanding there being no requirement of bad faith for liability to arise under s.423, underlining the discretionary nature of the Court’s power to grant relief. 

The court further underlined that though SoftBank was acting to protect its own commercial interests in the Impugned Transactions as creditors to both Greensill and Katerra, that did not, without more, constitute bad faith.

Secondly, SoftBank’s Katerra shares had become worthless and were cancelled following Katerra’s bankruptcy in June 2021. Lord Justice Miles held that when considering the question of appropriate relief under s.423 and s.425, the court should consider events subsequent to the offending transaction at an undervalue. 

Though he noted it would be an unusual case where the value of an asset transferred as part of a transaction at an undervalue falls to nothing through no fault or action of the transferee, a transferee without knowledge of a debtor’s wrongful purpose should not be required to protect victims from fluctuations in the value of the assets thereafter.

Implications of the Decision

Claimants should carefully consider the present-day position of target defendants when considering a s.423 claim

Victims of fraudulent transactions at an undervalue may consider more carefully the practical benefits of bringing claims pursuant to s423 of the Insolvency Act 1986 in circumstances where the benefit of the offending transaction has subsequently diminished or become effectively worthless in the hands of the intended defendant. 

Though this High Court judgment will not bind future judges, it was found here that relief should not be awarded against a defendant acting in good faith in circumstances where the shares received in the offending transaction had been cancelled. Though the court was keen not to hold SoftBank hostage to subsequent (mis)fortune in this case, it seems unlikely that a court would similarly use its discretion to spare a defendant who was a bad actor with knowledge of the true purpose of the transaction to defraud other creditors. 

Creditors can be reassured that acting to protect their own interests will not necessarily defeat a finding of good faith 

Finding that a defendant acted to protect their own interests will not be enough for a court to find that a defendant did not act in good faith when considering whether to award relief in s423 claims. Here, Lord Justice Miles accepted SoftBank was acting in its own interests whilst confirming that they did not act to prejudice other creditors. 

That being said, this conclusion may have been reached on the unusual fact of this case where the defendant SoftBank had specifically injected cash to enable Greensill to repay the Credit Suisse claimants, and the court found that they had understood this repayment to have been completed when they entered into the Impugned Transactions. 

Recording the purpose of transactions may be good practice in the context of an out-of-court restructuring

Accordingly, this judgment may encourage parties transacting in the context of an out of court restructuring to make contemporaneous record of its understanding of the purpose of transactions by which it is set to benefit. 

Though it wasn’t deemed necessary in SoftBank, and good faith was found without it, there may be some merit in reflecting the parties’ understanding of the purpose of the transaction in the transaction documents themselves, or else in separate written communications. The court will however not likely take the asserted purpose of transaction documents as a complete answer to the question of good faith, without further assessment of all factors and communications between the parties at the time it entered into the transaction.

No contributory negligence defence in s.423 claims

Though SoftBank ultimately avoided orders for relief by other means, it had unsuccessfully sought to argue that Credit Suisse was contributorily negligent in its own loss and had failed to protect its own position in the context of transactions prior to the collapse of the Greensill Group. Lord Justice Miles clarified in his judgment that a claim pursuant to s.423 requires no fault or negligence on the part of the defendant, and that the defence of contributory negligence has no place in the statutory framework.

The Court of Appeal’s guidance may be welcomed by practitioners

Though Credit Suisse’s route to appeal may not be straightforward in circumstances where s.423 remedies are squarely within the discretion of the judge deciding the case, some further guidance from the Court of Appeal may be welcomed by practitioners, claimants and defendants alike. A prior High Court judgment by Rose J in Sequana [2017] EWHC 211 (Ch), suggested that it is likely to be an “exceptional case” where relief will not be ordered, despite it being found that there has been a transaction at an undervalue. 

Further guidance on where such an exceptional case will be found would be welcomed from appellant courts, though, as Lord Justice Miles stated, the issue of appropriate relief in s.423 claims will necessarily be fact specific.  

Despite this decision in SoftBank, s.423 remains a key tool for defrauded creditors in an insolvency context.

Potential claimants should not be alarmed by the fact that a successful s.423 claim did not bear any fruit for Credit Suisse. Though SoftBank were found to be good faith actors, Justice Miles nevertheless suggested that it might have been appropriate to make an order to transfer the monetary value or the shares in Katerra themselves if they had continued to hold any value.