Fons HF v Corporal Ltd & Anor

The court was asked to determine whether Clause 3.1.1 of a Legal Charge over "the Shares" included the claimant's rights under two shareholder loan agreements (SLAs). The key issue was the proper construction of the Definition of "Shares", specifically whether the expressions "other securities" and "debentures" were wide enough to include unsecured loan agreements. The court applied the established principles of contractual construction (Investors Compensation Scheme; Rainy Sky and related authorities), examined the Definition in its context and background, and concluded that the ordinary meaning of the terms used in the Definition did not extend to the SLAs. The judge therefore held that the SLAs were not caught by the first legal mortgage of "the Shares" in Clause 3.1.1.

Background and procedural posture:

• Fons HF (in liquidation) had granted a Legal Charge over its shares in Corporal Limited to Kaupthing Bank Luxembourg S.A.; Kaupthing and Fons were later in liquidation and the benefit of the Charge vested in Pillar Securitisation S.A.R.L. Pillar contended that the Charge extended to rights under two shareholder loan agreements made by Fons to Corporal; Fons contended it did not.

Nature of the claim:

• The claimant sought a determination of the true construction of Clause 3.1.1 of the Legal Charge and the definition of "Shares" in Clause 1.1, to determine whether the charge extended to Fons' rights under the two SLAs dated 17 October 2007 and 15 February 2008.

Issues framed by the court:

• Whether the words "other securities" and/or "debentures" in the Definition were sufficiently wide to include unsecured loan agreements such as the SLAs;
• What meaning a reasonable person having the relevant background would attribute to the Definition, having regard to established principles of contractual construction; and
• Whether commercial common sense or other background factors required preferring Pillar's wider construction.

Key factual and contextual matters:

• The Charge described itself as a "Legal Charge over shares" and contained an extended Definition of "Shares" including "all other stocks, shares, debentures, bonds, warrants, coupons or other securities" owned by the chargor in Corporal. Kaupthing was not, on the evidence, aware of the SLAs when the Charge was taken. Earlier draft documents and a contemporaneous Release Letter formed part of the factual matrix.

Court's reasoning:

• The court applied orthodox principles of construction, including the approach in Investors Compensation Scheme and Rainy Sky: ascertain what a reasonable person with the background known to the parties would understand the language to mean.
• The judge held that Clause 1.2.2 made the listed items examples rather than an exhaustive list, but that the specific examples (shares, stocks, bonds, warrants, coupons) point to instruments that are transmissible, formal or otherwise carry indicia of marketability or enhanced enforceability.
• Although "debenture" can bear a wide meaning at common law, a simple unsecured loan agreement without further indicia would not, in the commercial context of this bespoke charge over shares, ordinarily be described as a "debenture" or as an "other security" of the kind intended by the parties.
• The judge was not persuaded that the definition was ambiguous in the relevant sense or that commercial common sense required a wider construction in favour of Pillar, particularly given the absence of evidence that Kaupthing knew of the SLAs or had sought security over them.

Conclusion:

• The court concluded that the charge did not extend to Fons' rights under the SLAs and therefore those rights were not caught by Clause 3.1.1.

This was a first instance determination. The court held that the definition of "Shares" in Clause 1.1 of the Legal Charge did not extend to Fons' rights under the two shareholder loan agreements. The judge gave effect to the ordinary meaning of the Definition read in context and concluded that unsecured loan agreements of the kind in the SLAs were not intended to be caught by the expressions "other securities" or "debentures" used in the Charge.