English Court gives guidance on carrying out a valuation in a "commercially reasonable manner" when exercising a right of appropriation

In ABT Auto Investments Ltd v AAPICO Investment Pte Ltd and others [2022], the Court considered the duty to carry out a valuation "in a commercially reasonable manner" in the context of appropriation: an enforcement remedy that allows a lender to take (or appropriate) a secured asset (financial collateral) at a price determined by an agreed valuation process, in reduction of the secured debt.

Background

ABT gave Aapico guarantees and a charge over shares ABT held in a joint venture company as security for monies loaned by Aapico. Following non-payment by ABT, Aapico appropriated ABT's shares at a valuation of USD 27 million.

The dispute

ABT claimed that the appropriation was invalid because the valuation was not carried out in a "commercially reasonable manner" as required by the Financial Collateral Arrangements (No 2) Regulations 2003.

The Court's findings

Aapico and the valuers acted in accordance with the "terms of the arrangement" and "in any event, in a commercially reasonable manner": the valuers were provided with the necessary information to carry out the valuation, no constraints were placed upon the information they could request, and they were instructed to produce a valuation that was sufficiently well evidenced and reasoned.
While the valuation must be carried out in a commercially reasonable manner, it does not follow that the valuation itself must be a commercially reasonable one.
The valuation was lower due to the financial distress of the group and not undertaking a discounted cash flow analysis due to concerns about the reliability of management forecasts was not unreasonable.

Key takeaways

A right of appropriation may be an advantageous form of security, providing for a quicker and simpler enforcement route than others. The appropriation will not necessarily be void even if the valuation is successfully challenged. The factors considered by the Court here could apply to Part 26A restructuring plan valuations too.