Court of Appeal resolves redemption dispute concerning £3.3bn "CoCo" notes by reference to their commercial purpose

In a recent decision on contractual interpretation relating to contingent convertible (or "CoCo") capital notes, the Court of Appeal has overturned the High Court's decision and held that a series of such notes issued by members of Lloyds Banking Group could be redeemed because they no longer assisted the bank in passing its core regulatory capital stress tests: LBG Capital No. 1 plc & Anor v BNY Mellon Corporate Trustee Services Limited [2015] EWCA Civ 1257.

The case provides a useful example of the court's ability to take account of the commercial objectives of complex financial instruments such as CoCos as an aid to their construction. The court appears to have been sensitive to the fact that regulated entities have been (and continue to be) subject to an environment of ongoing change, and that where documents have been drafted with the intention of (a) helping them to meet their regulatory obligations and (b) being responsive to changes in the regulatory environment, those intentions should be respected.

The decision is also likely to be a useful authority for parties seeking to argue that there has been a mistake in the wording of contractual documents, even where such documents have been drafted with the benefit of legal advice. The court demonstrated a willingness to accept that even in a high value transaction where the documents were drafted by highly skilled legal teams, there was always the possibility of an "infelicity" in the wording which, if obviously incompatible with the commercial purpose of the transaction, could be corrected.

The Supreme Court has granted an application for permission to appeal against the decision. Please click here to read our banking litigation team's ebulletin on the decision.

Note: This decision has been upheld by the Supreme Court: BNY Mellon Corporate Trustee Services Limited v LBG Capital No 1 Plc and another [2016] UKSC 29.