Sigma Finance Corp, Re

A commercial security trust deed must be construed as a whole, having regard to its commercial context. The court must give effect to the bargain actually made, even where its operation produces an unexpected or unequal result. A provision requiring a security trustee during a realisation period to discharge short-term liabilities falling due during that period, so far as possible, required payment in the order in which liabilities fell due. It did not impose pari passu distribution among those liabilities or across all secured creditors, and did not defer payment until asset pools had been constituted.

Sigma Finance Corporation, a structured investment vehicle, entered administrative receivership after an enforcement event under an English-law Security Trust Deed. Its available assets were substantially insufficient to meet its secured liabilities. The dispute concerned the third sentence of clause 7.6, which required the Security Trustee during the 60-day Realisation Period to discharge, so far as possible, short-term liabilities falling due during that period.

Sales J accepted Party A’s construction that liabilities falling due during the Realisation Period were payable on a first-in-time, pay-as-you-go basis. Parties B, C and D appealed. Party B argued for pari passu payment among Realisation Period liabilities. Parties C and D argued for pari passu treatment through the short-term and long-term pools, or payment only to the extent ultimately supportable from those pools. The central issue was the meaning and effect of so far as possible.

1. Disposition. Lloyd LJ and Rimer LJ dismissed all three appeals and upheld Sales J’s order. Lord Neuberger dissented in relation to the appeals by Parties C and D. He would have allowed those appeals, subject to amendment of their notices, and dismissed Party B’s appeal.
2. Construction. The Security Trust Deed was a commercial document which also declared trusts and governed the rights of numerous creditors. It was to be construed by starting with the words used and reading them in the context of the deed as a whole and the relevant commercial circumstances. The court could not rewrite the bargain because its consequences appeared unfair or commercially surprising.
3. Under the majority view, clause 7.6 required the Trustee during the Realisation Period to discharge short-term liabilities falling due during that period, in the order in which they fell due, using available cash or other realisable or maturing assets. The words so far as possible qualified the obligation only to a limited extent, including where punctual payment was delayed by practical difficulties in realisation. They did not introduce a pari passu regime or require payment only where all secured liabilities could be met.
4. The majority rejected Party B’s argument for pari passu treatment within the special class of Realisation Period liabilities. The wording on the due dates therefor supported first-in-time priority. The majority also rejected the wider arguments of Parties C and D. The detailed pro rata provisions in clauses 7.9, 7.11.2 and 7.12.2 showed that a pro rata regime was not to be inferred from the less precise words so far as possible.
5. Unpaid pre-enforcement short-term liabilities were treated as implicitly included in the clause 7.6 obligation, effectively as if they had fallen due on the first day of the Realisation Period. The Trustee’s remuneration and enforcement expenses retained the priority recognised by the judge, and that aspect of the order was not challenged.
6. Lord Neuberger considered that the provision required payment on account of each Realisation Period liability to the extent the Trustee could safely be confident would ultimately be payable from the Short Term Pool under clause 7.11.2 and its proviso. That construction sought to avoid fire sales, arbitrary priority and the subversion of the pooling arrangements, but it did not command the majority.

• Court of Appeal (Civil Division) [2008] EWCA Civ 1303: Lloyd LJ and Rimer LJ dismissed the appeals and upheld Sales J’s order. Lord Neuberger would have allowed the appeals of Parties C and D, subject to amendment, and dismissed Party B’s appeal.
• High Court of Justice, Chancery Division, Companies Court: Sales J made the order on 7 November 2008, accepting Party A’s construction of clause 7.6. No citation for the judgment below was stated in the judgment.