High Court interprets apparently broad close out rights narrowly

The High Court has held that broadly framed “protection of interests” provisions did not permit a firm in special administration to close out its foreign exchange positions.

Directions to close out sought

Argentex entered special administration with a book of forward and option contracts, many on a “zero margin” basis. Unhedged and exposed to market moves, the joint special administrators of Argentex sought directions from the court whether it could close out these contracts that made up its trading book.  

The terms Argentex wanted to rely on were general in nature, for example to close out:

• if “Argentex reasonably considers it necessary for its own protection”
• if Argentex considers “in Argentex’s absolute discretion, that such action is necessary to protect Argentex’s interests”.

The court held those terms did not authorise close out to address Argentex’s own insolvency or hedging loss, and refused the administrators’ requested directions.

Right to close out denied

The court interpreted the wording narrowly, reasoning as follows:

• The contracts specified the termination triggers for breach, non-payment, adverse credit events, regulatory directions, and broad protection/absolute discretion language, but no right to terminate for Argentex’s insolvency, hedge loss, or market volatility. The court emphasised that while customer insolvency was an express trigger, no equivalent existed for Argentex’s insolvency, and the general protection/discretion clauses could not fill that gap without improperly varying the parties’ terms.
• The market volatility and hedging risk lay with Argentex. Customers agreed fixed settlement dates and did not accept a unilateral right for Argentex to exit because performance became unattractive, or hedges failed.
• Allowing early close out to crystallise a favourable position would undermine the commercial purpose of the contracts and the parties’ choices on margin, especially in zero margin trades.

A reminder about contractual interpretation

While ultimately a finding on a particular set of facts, this case serves as a reminder that even where the so-called natural meaning suggests broad termination-type rights, the court may interpret those rights more narrowly based on the context and the document as a whole.

Judgment: Re Argentex LLP (In Special Administration) aka Conway v Plass