In Re Sigma Finance Corporation (in administrative receivership) and In Re The Insolvency Act 1986

A commercial instrument must be construed as a whole, in the light of the commercial purpose disclosed by its terms and the nature of the relevant business. A subsidiary provision should not be given an over-literal meaning which conflicts with the instrument’s basic scheme or fundamentally alters the parties’ financial relationship.

Under a security trust deed providing for proportionate allocation between short-term and long-term pools following an asset shortfall, an interim direction to discharge liabilities falling due during a realisation period, so far as possible, did not confer priority on those liabilities. They remained part of the short-term pool and ranked with all other short-term liabilities.

Sigma Finance Corporation was a structured investment vehicle whose assets secured liabilities of approximately US$6.2 billion under a Security Trust Deed. Following an Enforcement Event, receivers were appointed and a 60-day Realisation Period began. Sigma’s remaining assets were insufficient to meet even the liabilities falling due during that period.

Sales J and, by a majority, the Court of Appeal in [2008] EWCA Civ 1303 held that the final sentence of clause 7.6 required liabilities falling due during the Realisation Period to be paid in priority, in the order of their due dates. Lord Neuberger dissented in the Court of Appeal.

In conjoined appeals, interested party B contended for pari passu distribution among liabilities due within the Realisation Period. Interested parties C and D contended that the assets should instead be allocated proportionately between the Short and Long Term Pools. The central issue was whether clause 7.6 conferred priority on Short Term Liabilities falling due during the Realisation Period.

1. By a majority, the appeals of interested parties C and D were allowed and interested party B’s appeal was dismissed. Lord Mance delivered the leading judgment, with which Lord Hope, Lord Scott and Lord Collins agreed. The decisions below were set aside.

2. The meaning of clause 7.6 had to be determined from the Security Trust Deed as a whole. Interpretation required an iterative comparison of the rival meanings against the other provisions and their commercial consequences. Excessive weight should not be placed on the apparent natural meaning of one sentence in a long and complex commercial instrument.

3. The Deed’s basic scheme required the creation of Short and Long Term Pools. Where assets were insufficient, clause 7.9 required the deficit to be reflected proportionately in the assets allocated to every pool. The final sentence of clause 7.6 was an ancillary provision for interim payments. It was drafted in a context which assumed that all secured liabilities could be covered and did not create a separate class of Realisation Period creditors.

4. Giving Realisation Period liabilities priority would remove them from the Short Term Pool, prejudice other short-term creditors, distort the relationship between the Short and Long Term Pools, and make priority depend fortuitously on maturity dates or accelerated payment demands. It would also conflict with the express priority given to the Trustee’s and Receiver’s fees and expenses from the pools.

5. In circumstances engaging clause 7.9, the expression “so far as possible” permitted the Trustee to determine that further payments during the Realisation Period were inappropriate. The Trustee might make safe payments on account by reference to the anticipated proportionate recovery, although the Court did not finally decide that point.

6. Lord Collins added that, where a security instrument governed creditors advancing funds at different times, factual circumstances unknown to all creditors should not influence its interpretation. The wording was paramount, read as a whole in light of the commercial intention apparent from the instrument and the debtor’s business.

7. Lord Walker dissented. He considered that clause 7.6 continued to require payment of liabilities as they fell due during the Realisation Period. The unexpected deficiency of assets did not justify remaking the agreement reached by sophisticated commercial parties.

8. The Court declared that the Receivers were not obliged to pay liabilities falling due after 6 October 2008 during the Realisation Period, whether chronologically or pari passu among themselves. Those liabilities were to rank with all other Short Term Liabilities for payment from the Short Term Pool under clause 7.11.

1. United Kingdom Supreme Court: By a majority, allowed the appeals of interested parties C and D, dismissed interested party B’s appeal, and set aside the decisions below: [2009] UKSC 2.
2. Court of Appeal: By a majority, accepted interested party A’s construction that liabilities falling due during the Realisation Period were payable in priority according to their due dates. Lord Neuberger dissented: [2008] EWCA Civ 1303.
3. High Court: Sales J accepted interested party A’s construction. No citation is stated in the judgment.