Fons Hf v Corporal Ltd & Anor

The Court of Appeal interpreted the defined term "Shares" in a charge dated 29 September 2008 and held that two shareholder loan agreements (SLAs) were included within that definition. The court applied objective contractual construction principles (including the approach in Investors Compensation Scheme Ltd v West Bromwich Building Society and Rainy Sky SA v Kookmin Bank) and concluded that the phrase in clause 1.1 referring to "debentures, bonds, warrants, coupons or other securities" could, in ordinary meaning, include written loan agreements which create or acknowledge indebtedness. Relying on authorities such as Edmonds v Blaina Furnaces and Lemon v Austin Friars Investment Trust Ltd, the court held that a "debenture" may be any document which creates or acknowledges a debt and that the SLAs fell within that meaning and therefore within the Charge.

Background and parties.

The appellant, Pillar Securitisation S.à.r.l, appealed against a decision of Deputy Judge Mark Cawson QC in the Chancery Division, Manchester, concerning the scope of security granted to Kaupthing Bank Luxembourg under a legal charge dated 29 September 2008. The first respondent, Fons HF (in liquidation), was the chargor and owner of ordinary and preference shares in Corporal Limited and the provider of two unsecured shareholder loans to Corporal under agreements dated 17 October 2007 and 15 February 2008.

Nature of the application.

• The issue on appeal was whether the definition of "Shares" in clause 1.1 of the Charge (read with clause 3.1) extended to the rights of Fons under the two SLAs, as "debentures" or "other securities", thereby bringing those loans within the security.

Issues framed by the court.

• How to construe the defined term "Shares" and the meaning of the words "debentures" and "other securities" in clause 1.1;
• whether clause 6.7 and other contextual provisions required a narrower meaning confined to certificated or registered share-type assets;
• whether the SLAs, being unsecured loan agreements (one jointly held), were excluded from the definition.

Court’s reasoning.

The court emphasised objective construction and background matters admissible on interpretation. It noted that the definition plainly sought to cover a range of investments beyond ordinary and preference shares and that "distribution rights" indicated inclusion of income-producing rights. Drawing on authorities (including Edmonds v Blaina Furnaces, Levy v Abercorris, Lemon v Austin Friars and Knightsbridge Estates Trust v Byrne) the court accepted that "debenture" can, in ordinary usage, mean any document which creates or acknowledges indebtedness and need not carry a formal charge or be one of a series. The court rejected the narrower reading contended for by Fons (that the words required transmissibility, bearer form or the particular features of certificated shares) and saw nothing in clause 6.7 or the admissible background that compelled a restricted meaning. On that basis the SLAs were within the ordinary meaning of "debentures" (and thus within "Shares") and the Charge accordingly covered the rights under those agreements.

Procedure and disposition.

The judge below had rejected Kaupthing's argument; the Court of Appeal allowed the appeal and declared that the rights of Fons under the two SLAs are included within the Charge.

Appeal allowed. The Court of Appeal declared that the two shareholder loan agreements fell within the definition of "Shares" in the Charge because the word "debenture" (and the phrase "other securities") can, in ordinary meaning and on contextual construction, include written instruments which create or acknowledge debts; nothing in the Charge or admissible background required a narrower meaning that would exclude the SLAs.

Appeal from the High Court of Justice, Chancery Division, Manchester District Registry (Deputy Judge Mark Cawson QC, 1MA30294). The judge below rejected Kaupthing's contention that the SLAs were charged as "debentures" or "other securities"; Kaupthing obtained permission to appeal and the Court of Appeal allowed the appeal ([2014] EWCA Civ 304).