Sigma Finance Corporation, Re Insolvency Act 1986

Contractual rights under a security trust deed are determined by ordinary principles of construction. There is no general presumption that insolvent assets must be distributed pari passu where the parties have agreed a different regime.

Where a deed creates a distinct realisation period followed by pool arrangements, the court should respect that structure. A provision requiring liabilities to be discharged during the realisation period, so far as possible, using available realisable or maturing assets may establish a pay as you go regime. Commercial unfairness or an apparently adventitious result does not justify rewriting clear contractual language unless the construction would flout business common sense.

The receivers of Sigma Finance Corporation applied under section 35 of the Insolvency Act 1986 for directions concerning the management and distribution of Sigma’s assets.

Sigma was massively insolvent. Its security trust deed created a 60-day Realisation Period, during which assets were to be realised and allocated into a Short Term Pool, Long Term Pools and a Residual Equity Pool. The dispute concerned the final sentence of clause 7.6, requiring the Security Trustee, during the Realisation Period, so far as possible to discharge Short Term Liabilities falling due for payment during that period.

The central issue was whether clause 7.6 required payment as liabilities fell due, pari passu distribution among liabilities maturing during the period, or a general pari passu distribution among all secured creditors.

1. Construction and outcome. The court held that the final sentence of clause 7.6 created a pay as you go regime. During the Realisation Period, the Security Trustee was required, so far as possible, to discharge Short Term Liabilities on their due dates using cash or other realisable or maturing assets then practically available. Directions to the receivers were to be formulated on that basis.
2. Contractual structure. The Realisation Period was a distinct phase, separate from the later Pool regime. The pari passu provisions in clauses 7.11 and 7.12 operated only once the Pools had been established. Clause 7.9 concerned allocation of assets to the Pools at that later stage and did not qualify the payment obligation in clause 7.6.
3. No general pari passu presumption. The parties’ rights depended on the words used in the Security Trust Deed. The fact that the pay-as-you-go construction could favour creditors whose liabilities matured earlier, and disadvantage others, did not justify a different construction. The result did not flout business common sense. The court would not rewrite the agreement to produce what it considered a fairer insolvency outcome.
4. Scope of the obligation. The phrase “so far as possible” referred to the practical availability of Sigma’s realisable or maturing assets. It did not require the Security Trustee to anticipate later liabilities and distribute assets pari passu among them. Unpaid liabilities whose maturity dates had passed before the Realisation Period remained due and were covered by the clause.
5. Remuneration and expenses. Any apparent difficulty concerning the priority of the Security Trustee’s or receivers’ remuneration and expenses was addressed by clauses 13.2, 14.3.4 and 14.3.6, which enabled appropriate protection from Sigma’s assets. Any drafting infelicity did not outweigh the strong textual indicators supporting the construction adopted.