Fons Hf v Corporal Ltd & Anor

In construing a contractual charge over shares and related assets, the court must give the words their natural and ordinary meaning in their commercial and factual context. Business common sense is not an overriding criterion. The term “debenture” has no precise technical meaning. It may include a written instrument that creates or acknowledges a debt, even if unsecured, issued singly and not transferable. A reference to “other securities” does not narrow “debentures” to instruments carrying proprietary security or marketability where the charge, read as a whole, indicates broad asset coverage. Shareholder loan agreements may therefore constitute debentures within a contractual charge.

Fons HF granted a legal charge to Kaupthing Bank Luxembourg S.A. securing its obligations. The charge covered shares and specified other assets, including debentures and other securities. Fons had entered into two unsecured shareholder loan agreements with Corporal Ltd.

Pillar Securitisation, the second defendant, appealed after the High Court, Deputy Judge Mark Cawson QC, rejected the argument that Fons’s rights under the loan agreements fell within the charge. The central issue was whether the loan agreements were debentures or other securities within the contractual definition of “Shares”.

Lord Justice Patten gave the leading judgment. Lady Justice Sharp agreed, and Lady Justice Gloster agreed with the result and added limited concurring reasoning. The appeal was allowed and a declaration was made that Fons’s rights under both shareholder loan agreements were included within the Charge.

1. Construction of the Charge. Construction was an objective exercise directed to identifying the meaning conveyed by the language used to a reasonable person with the relevant background reasonably available when the contract was made. The words were to receive their natural and ordinary meaning in context. Negotiations and subjective intention were excluded. The approach reflected Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, together with the interpretive approach in Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 and Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101.
2. Commercial common sense. Where language admits two possible constructions, the court may prefer the construction consistent with business common sense. That principle is not an overriding criterion and cannot be replaced by the judge’s own view of a sensible bargain or by one party’s perspective. The guidance in Rainy Sky SA v Kookmin Bank [2011] UKSC 50 and BMA Special Opportunity Hub Finance Ltd and others v African Minerals Finance Ltd [2013] EWCA Civ 416 was applied.
3. Meaning of debenture. The authorities showed that “debenture” has no precise definition. In its ordinary meaning it may include a written document creating or acknowledging a debt. A charge, transferability, bearer form or issue as one of a series is not essential. The statutory contexts of the earlier authorities did not require a narrower meaning in this contractual context.
4. Application. The two shareholder loan agreements were specific written instruments creating or acknowledging Corporal’s debts. Their unsecured nature did not prevent them from being debentures. The reference to “other securities” did not restrict the ordinary meaning of “debentures”. The court did not need to decide the separate obiter question concerning general credit agreements securing unquantified present and future debts under s.17 of the Bills of Sale Act 1882.
5. Concurring qualification. Lady Justice Gloster considered that the obligation to repay under the later loan agreement arose on execution, although repayment was contingent on drawdown. Treating the agreement as incapable of acknowledging a debt until disbursement would be unnecessarily technical.

• Court of Appeal (Civil Division): Appeal allowed. Declaration made that Fons’s rights under the two shareholder loan agreements were included within the Charge.
• High Court of Justice, Chancery Division, Manchester District Registry: Deputy Judge Mark Cawson QC rejected the argument that the loan agreements were debentures or other securities within the Charge and granted permission to appeal.