A victory by trade financier Kimura in the London Court of Appeal “restores the orthodox view” on a mechanism used widely to invest in trade finance assets, a lawyer acting for the company says.

A June 18 ruling overturned a lower court’s decision last year that the Kimura Commodity Trade Finance Fund must pay US$5mn to US asset manager Yieldpoint under a sub-participation risk agreement that came unstuck when the underlying borrower, Chilean copper miner MTV, defaulted.

In the first ruling, the judge found the insertion of a one-year maturity date meant the deal was not a standard risk participation agreement, even though it was created using the “standard” Master Participation Agreement (MPA) template created by the Bankers Association for Finance and Trade (Baft).

But the appellate court said the lower court judge made a series of errors when he ruled that Kimura owed the sum, and that the deal between Kimura and Yieldpoint Stable Value Fund was a standard risk sub-participation agreement in which Yieldpoint also bore part of the risk of default.

“I am firmly of the view that the MTV Participation was a conventional sub-participation,” ruled Lord Justice Phillips, on behalf the Court of Appeal. “As MTV had defaulted prior to the maturity date, Yieldpoint was not entitled to be repaid its US$5m investment.”

The original decision, by Stephen Houseman KC sitting as a High Court judge, generated legal interest because of its interpretation of the Baft MPA, which trade finance providers frequently use when seeking investments in trade loans they have originated.

The template was designed to make investors more comfortable investing in trade assets.

“The Court of Appeal’s decision restores the orthodox view that where parties in a sub-participation relationship contract on the basis of a standard form, the correct construction is one which gives effect to the conventional features inherent in such a relationship,” says Ben Valentin KC, Kimura’s barrister.

“Most notably, these include that the sub-participant’s capital is at risk because it shares in the risk of default of the underlying borrower.”

The original decision “generated interest in the London secondary debt market because it had, in effect, overridden the core features of a sub-participation conducted on the (much-used) Baft standard form,” Valentin said in a note following the appeal.

Kimura chief executive Kristofer Tremaine tells GTR: “We are pleased that the Court of Appeal was able to reach a comprehensive judgement on the correct legal representation of a risk participation agreement.

“This was important, not only for Kimura, but for the sanctity of doing business in this manner across the whole industry for all participants.”

A spokesperson for Yieldpoint says the company “will vigorously pursue our legal rights as this matter continues to evolve”.

The Court of Appeal refused Yieldpoint permission to appeal to the Supreme Court, according to an order seen by GTR, but it has the option of directly asking the top court for England and Wales to hear the case.


“Highly uncommercial” interpretation

In the first judgment, Houseman found that the inclusion of a maturity date and renewal notice period in the sub-participation deal meant that the agreement differed from a conventional scenario where the sub-participant would also share the default risk.

But Justice Phillips found that the maturity date and renewal option  – which are not in the standard Baft MPA  – did not mean the structure no longer represented a sub-participation risk agreement.

If Houseman had adopted the correct approach, Justice Phillips wrote, “it is difficult to see that the MTV participation, in the context of the MPA, would be read as anything other than a conventional sub-participation agreement with early redemption”.

Phillips found Houseman was also wrong to discount the “highly uncommercial” nature of the interpretation of the deal that Yieldpoint argued in court.

“In this case it is a strong factor, in my view, that Yieldpoint’s interpretation undermines the commercial sense of the structure set out in the MPA,” he wrote, because it made no sense for Kimura to offer a participation in which Yieldpoint bore no default risk.

After receiving a draft version of the judgment, Yieldpoint sought a court order allowing it to keep a portion of the US$5mn that Kimura had paid it after the lower court’s judgment, arguing “it was entitled to be paid a sum to reflect the market value of its investment” on March 31, 2022.

The court rejected the application, finding that Yieldpoint’s case rested on an argument that it was entitled to the sum in full, and had not provided any evidence that it was entitled to payment at market value.

Yieldpoint was ordered to repay Kimura the US$5mn principal amount – which Kimura had paid to Yieldpoint after the original judgment – as well as interests and costs, totaling almost US$6.1mn.