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The Supreme Court holds that Lloyds £1bn Cocos have popped


On 16th June 2016 the Supreme Court gave judgment in the case of BNY Mellon Corporate Trustee Services Limited v LBG Capital No 1 Plc. The case had achieved a high profile owing to the apparent involvement of a large number of individual investors in the contingent convertible securities or “Cocos” the subject of the dispute. The issue in dispute was whether Lloyds was entitled to redeem some £3.3 billion worth of Cocos which carried a relatively high rate of interest, averaging over 10% pa, and some of which ran until as late as 2030. In other words the value of the potential rights/liabilities to receive/pay interest was very significant.

The Cocos had been issued in the wake of the financial crisis and the need to raise further regulatory capital. The Cocos converted into the highest form of regulatory capital at a pre-defined trigger point. As a result, having converted, the Cocos would then count as regulatory capital. Under the regulatory regime following the crisis, Lloyds, in common with other banks, was required to demonstrate that it possessed a sufficient amount of regulatory capital after the imposition of a stress test i.e. a hypothetical scenario assuming a deep recession. Because the Cocos would be assumed to convert at their trigger point, they would thereby provide additional regulatory capital at that point, if reached, and so potentially provide additional regulatory capital for the purposes of the stress test.

The dispute concerned whether Lloyds was entitled to redeem the Cocos in the light of regulatory changes in the nature and application of the stress test. In summary, the right to redeem depended upon whether a “Capital Disqualification Event” had occurred, which depended upon whether as a result of any changes to the Regulatory Capital Requirements…the [Cocos] shall cease to be taken into account…for the purposes of any “stress test” applied by the FSA in respect of the Consolidated Core Ratio”.

When the Cocos were issued the trigger point at which they were notionally converted was above the minimum amount of regulatory capital required to be maintained by Lloyds in the stress scenario with the result that they assisted Lloyds to pass the stress test. Following changes in the regulatory requirements, and the need to maintain a higher level of the highest type of regulatory capital, the Cocos could only convert after the trigger point had been breached. Accordingly, they ceased to assist Lloyds to pass the test although they might still be relevant in relation to an overall assessment of the capital position. The issue in dispute as helpfully defined by Briggs LJ in the Court of Appeal was whether it was sufficient that the Cocos could be taken into account for some purpose in the stress test or whether they must play a part in enabling Lloyds to pass the test.

Although the issue was simply one of construction of the terms of the Cocos, it has generated considerable judicial disagreement as to the meaning of those terms. The Chancellor found that a Capital Disqualification Event had not occurred. The Court of Appeal (Gloster, Briggs and Sales LJJ) unanimously disagreed and found that it had thereby entitling Lloyds to redeem the Cocos. The Majority of the Supreme Court (Lord Neuberger, President, Lords Mance and Toulson) agreed with the Court of Appeal, whilst Lords Sumption and Clarke dissented, preferring the view of the Chancellor.

Notwithstanding this judicial disagreement, the case did not really concern any issue of law of general public importance. In delivering his dissent Lord Sumption remarked that [t]his case is of considerable financial importance to the parties but raises no questions of wider legal significance. Of course, once the Supreme Court has seen fit to grant permission to appeal, the issue of whether the case is a one-off or has some wider significance is water under the bridge as the Court then has to go on to consider its views of the merits. In the event, of course, it dismissed the appeal.

The judgment is here.

Mark Howard QC was instructed on behalf of Lloyds to lead the case in the Supreme Court, not having appeared below.