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On appeal from: [2015] EWCA Civ 1257

The Supreme Court dismissed an appeal by a majority of 3:2 concerning whether the Court of Appeal erred in law in its construction of the terms of enhanced capital notes (ECN) by relying on technical and specialist information as part of the factual matrix.

The respondent, Lloyd’s Banking Group, issued £8.3 billion in ECN’s in December 2009 to raise some of its capital requirements as laid out in the CRD I Directive. In June 2013 the new CRD IV Directive came into force which replaced Core Tier 1 capital requirements with a more restrictive category.

In March-April 2014, the respondent’s exchanged £5 billion of ECNs for instruments which satisfied the new requirements. They now want to redeem the remaining £3.3 billion claiming a Capital Disqualification Event (CDE) had occurred under clause 19(2). The trustees of the ECNs, the appellant, issued proceedings challenging the fact that a CDE had occurred. The High Court allowed their appeal at first instance but the Court of Appeal found in favour of Lloyd’s Banking Group that a CDE had occurred.

In giving the lead judgment for the majority, Lord Neuberger stated the terms in clause 19(2) which outline the stress test to identify if a CDE has occurred, had to be treated as a reference to the new CRD IV Directive requirements instead of only being applicable to the old requirements under CRD I Directive.

In relation to the appellant’s argument that the ECN’s had not been taken into account when the Prudential Regulatory Authority reported that the Common Equity Tier 1 Capital had fallen below 5%, Lord Neuberger stated Under the Regulations passed in 2013, the ECNs cannot be taken into account so as to do the very job for which their convertibility was designed, namely to enable them to be converted before the regulatory minimum Tier 1 ratio is reached. As a result of the ratio dropping below 5%, a CDE had arisen under clause 19(2).

Lord Sumption dissents on this point and considers that the ECNs are not redeemable because they would be treated by the regulator as top-tier capital in the hypothetical event that the respondent’s affairs deteriorated to the point where the conversion trigger was attained.

For judgment, please download: [2016] UKSC 29
For Court’s press summary, please download: Court’s Press Summary
For a non-PDF version of the judgment, please visit: BAILII

To watch the hearing please visit: Supreme Court website