Fons HF v Corporal Ltd & Anor

Contractual construction begins with the language used, read as a whole and in its factual and commercial context. Commercial common sense may assist where the wording permits more than one construction, but it is not an overriding criterion. A court must first decide whether the words, in context, have a clear meaning. A security document listing shares, stocks, bonds, warrants, coupons and debentures may use “other securities” to mean instruments with comparable formality, transmissibility or qualities making an underlying right more readily enforceable. An unsecured shareholder loan agreement is not thereby a debenture or security merely because it records indebtedness, contains certification provisions or is commercially valuable to the secured creditor.

Fons HF granted Kaupthing Bank Luxembourg S.A. a legal charge over its investment in Corporal Ltd. The charge covered “all shares” specified in a schedule and “all other stocks, shares, debentures, bonds, warrants, coupons or other securities” owned by Fons in Corporal or in which it had an interest. Kaupthing’s rights under the charge later vested in Pillar Securitisation S.à.r.l.

The dispute concerned whether the definition extended to Fons’s rights under two unsecured shareholder loan agreements with Corporal. Pillar argued that those rights were “other securities” or “debentures”. Fons argued that the wording referred to instruments possessing the recognised qualities of securities or debentures and did not include simple unsecured loan agreements.

1. The claim succeeded. The court held that the definition of “Shares” in clause 1.1 did not include Fons’s rights under the two shareholder loan agreements. Those rights were therefore outside the charge created by clause 3.1.1.
2. Construction is a unitary exercise directed to ascertaining objectively what the parties meant by the language used. The document must be read as a whole, against the relevant background reasonably available to the parties. The court should begin with the words chosen and should not use commercial common sense to impose a solution which the language cannot bear. This approach was consistent with Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896, BCCI v Ali [2002] 1 AC 251, Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900 and BMA Special Opportunity Hub Finance Ltd v African Minerals Finance Ltd [2013] EWCA Civ 416.
3. The extended definition and clause 1.2.2 indicated that the listed instruments were examples of “securities”. The meaning could not therefore be confined to the separate definition of “Security” in clause 1.2.1.7, since shares, stocks, bonds and warrants did not all fall within that definition.
4. Nevertheless, the listed instruments shared qualities of formality, transmissibility, bearer character or facility of enforcement. Although “debenture” can have a wide meaning in an appropriate context, an ordinary businessman or company lawyer would not ordinarily describe a simple unsecured loan agreement as a debenture without further indicia. The loan agreements contained no such additional characteristics.
5. The surrounding commercial circumstances did not justify extending the wording. Kaupthing was not shown to have known of the loan agreements, to have investigated their value, or to have specifically sought them as security. The fact that including them would have benefited Kaupthing was insufficient. Commercial common sense could not override the language actually used.

Costs and any outstanding matters were left for agreement or further directions. Time for applying for permission to appeal was extended.