Capital Markets | Arrangers – beware potential tortuous liability owed to investors
A recent English High Court judgment (Golden Belt 1 Sukuk Company B.S.C.(c) v BNP Paribas  EWHC 3182 (Comm)) will be of interest to the capital markets community.
Though it may be a decision on its particular facts, it does establish the possibility of a duty of care being owed to investors by arrangers in structured finance transactions. The case emphasises the importance of arrangers ensuring that they fulfil obligations which industry practice would recognise as being inherent to the transactional functions they fulfil, including establishing proper execution of transaction documents.
The court case centred around a USD650m “sukuk” (a Sharia compliant certificate comparable to a Eurobond) issued by Golden Belt, a Bahraini SPV that acted as issuer and trustee of certificate holders’ rights under the sukuk.
The ultimate economic borrower was a Saudi entity, Saad Trading, Contracting & Financial Services Company (“Saad”). The certificate holders’ return on their investment was to be by way of rental payments made by Saad relating to land in Saudi Arabia.
The claimants in the High Court proceedings were Golden Belt, and certain holders of the certificates (New York private equity funds specialising in distressed debt) who had acquired their certificates in the secondary market after Saad had defaulted in making payments.
The defendant was BNP Paribas (BNP), involved as arranger / sole bookrunner, lead manager and part underwriter. Its role included coordinating execution of the transaction documents for the sukuk.
Saad had issued a Saudi law governed promissory note to Golden Belt in support of its obligations under the sukuk. Due to the uncertainty of successfully enforcing the English law governed certificates in the Saudi courts (applying Sharia law) the promissory note was a vital component to protect certificate holders in the event of a default by Saad and to enhance materially their prospects of a recovery.
Evidence submitted to the High Court established the likelihood that the promissory note was unenforceable as a matter of Saudi law as a result of it not having been executed effectively (a laser-printer signature having been used despite an original handwritten signature having been required under Saudi law).
As a consequence, Golden Belt had ceased to pursue proceedings before the Saudi Arabian Committee for the Settlement of Negotiable Instrument Disputes (CSNID) which it had commenced against Saad on the promissory note.
Consequently, the claimants asserted that they had suffered loss due to the promissory note being unenforceable and that BNP should be made liable, having failed in its duty to exercise reasonable care and skill to ensure that the promissory note had been properly executed.
BNP sought to exclude liability on the basis of the standard disclaimers in the offering circular (by which it excluded any representation or warranty and any responsibility as to the accuracy or completeness of the information in the offering circular). The offering circular also included a warning to the effect that the existence of a secondary market for the certificates could not be guaranteed.
In his judgment, Mr Justice Males identified that responsibility for the contents of the Circular should not be conflated with responsibility for ensuring proper execution of the relevant transaction documents. A broad disclaimer of responsibility for actions and statements of its clients, such as those made by way of an offering circular, did not necessarily mean that an arranger was also disclaiming any responsibility for the performance of its own functions.
He accepted that the certificate holders’ decision to invest through the secondary market was based in part on the assurance that, with BNP as arranger, appropriate steps would have been taken to ensure the validity of the transaction.
He held that overseeing and ensuring that the transaction documents had been properly executed was an integral part of arranging the issue. As such, BNP did owe the funds a duty to take reasonable care to ensure that the promissory note had been properly executed, and it had breached that duty.
Further, that while Saad was BNP’s client, for all practical purposes, ensuring that the promissory note was properly executed was a service carried out entirely for the benefit of certificate holders. In this respect there was no difference between immediate purchasers of certificates and those who purchased subsequently in a secondary market after issue.
Conversely he ruled that BNP, as arranger, did not owe an equivalent duty to Golden Belt. He concluded that Golden Belt was merely a special purpose vehicle (a “shell”, “conduit” or “brass plate”) with no economic interest of its own in the validity of the promissory note. It had suffered no loss as a result of the invalidity of the note.
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