High Court implies term that reasonable alternative rate can be used following cessation of LIBOR

In October 2024, the High Court in Standard Chartered plc v Guaranty Nominees Ltd and others [2024] EWHC 2605 (Comm) ruled on the appropriate rate to be used to calculate dividends which were linked to LIBOR, by implying a term into a contract that a reasonable alternative rate should be used following the discontinuance of the LIBOR benchmark. The case was heard under the Financial Markets Test Case Scheme which is aimed at hearing cases of general market importance where immediate relevant authoritative English law guidance is needed.

Background of Standard Chartered plc v Guaranty Nominees Ltd and others

Standard Chartered plc (the Bank) issued perpetual preference shares in 2006 for regulatory capital purposes (the Shares). Initially, dividends on the Shares were to be paid at a fixed rate, but after 2017 this converted to a floating rate of 1.51% plus three-month USD LIBOR. The documentation contained a waterfall of three fallback provisions to determine the rate if LIBOR was not available.

With both the discontinuation of LIBOR and the cessation of the publication of synthetic USD LIBOR in September 2024, these fallback provisions no longer worked, and the Bank sought declarations from the court as to what would be a suitable replacement/alternative rate for calculating dividends on the Shares.

Decision: implied term by the court

The key issue was whether the terms governing the Shares (Terms) allowed for the use of a reasonable alternative rate to USD LIBOR following its cessation. It was clear that a term needed to be implied into the Terms to calculate the dividend rate, but the parties were not in agreement as to what this term should be. 

The court held that to give ‘business efficacy’ to the arrangements, it must imply a term into the Terms that allowed dividends to be calculated using a ‘reasonable alternative rate’, and that an implied term was so obvious that it went without saying that it would be implied. It reached this conclusion for various reasons, including that the Shares were long-term instruments with no maturity date and LIBOR is a mechanism to measure changing costs of unsecured bank borrowing over time. In addition, there were various mechanisms in the definition of Three Month USD LIBOR in the Terms which suggested a common intention that the Shares should continue to operate in the absence of LIBOR. The way LIBOR was defined in the Terms and the inclusion of fallback provisions provided evidence that the parties had clearly intended for the Terms and the arrangement to survive in the context of changing circumstances.

In this case, the “reasonable alternative rate” of Term CME SOFR (a forward-looking term rate linked to the Secured Overnight Funds Rate and published by the Chicago Mercantile Exchange Group Benchmark Administration) plus a fixed adjustment spread published by ISDA proposed by the Bank was accepted by the court. The court agreed that Term CME SOFR is a well-established rate which is widely used in the financial markets for a variety of financial products as an alternative to USD LIBOR.

The underlying investors in the Shares (those who had the economic interest in the Shares and received the dividend payments) argued that a term should be implied which required the automatic redemption of the Shares upon the cessation of LIBOR, but the court rejected this argument as “wholly untenable” and stated that it did not meet any of the criteria necessary to imply a term.

Key takeaways from the case

This case may bring some comfort to lenders, especially in respect of existing debt/financial products where interest is still linked to LIBOR and that do not expressly provide for a suitable alternative rate following LIBOR’s discontinuance. Although it was heard in the context of dividends on the Shares, the court did make it clear that the same principles would likely apply to other debt instruments/financial products and stated in its judgment that the arguments in this case were likely to be "similarly persuasive when considering the effect of the cessation of LIBOR on debt instruments which use LIBOR as a reference rate but do not expressly provide for what is to happen if publication of LIBOR ceases". 

Although this judgment provides some clarity on what approach the court may take in cases such as these, it is important to remember that this decision was in respect of perpetual preference shares issued for regulatory capital purposes with no stated maturity, therefore the court could potentially take a different approach when looking at a shorter term investment or other debt products and finance documents with different terms or maturities. 

It is also helpful to remember that the “reasonable alternative rate” implied in this case might not be the reasonable alternative rate implied in another. The judgment set out that it is the court that will identify the reasonable alternative at the time, not the parties. In short, this is a helpful, albeit not completely conclusive judgment which anyone issuing or holding LIBOR linked financial instruments should keep in mind.

Many thanks to trainee Zoe Hare for their help in writing this article.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, December 2024