JUDGMENT
In Re Sigma Finance Corporation (in
administrative receivership) and
In Re The Insolvency Act 1986
(Conjoined Appeals)
before
Lord Hope, Deputy President
Lord Scott
Lord Walker
Lord Mance
Lord Collins
JUDGMENT GIVEN ON
29 October 2009
Heard on 1 and 2 July 2009
Appellant: B Respondent: A
Richard Sheldon QC Mark Howard QC
Felicity Toube Jonathan Dawid
(Instructed by Dechert
LLP)
(Instructed by Mayer
Brown (International)
LLP)
Appellant: C
Simon Mortimore QC Security Trustee
Daniel Bayfield James Potts
(Instructed by Jones Day
LLP)
(Instructed by Allen &
Overy LLP)
Appellant: D Administrative Receiver
Sue Prevezer QC Gabriel Moss QC
Edmund King Barry Isaacs
(Instructed by Quinn
Emanuel Urquhart Oliver
and Hedges LLP)
(Instructed by Lovells
LLP)
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LORD MANCE (with whom Lords Hope, Scott and Collins concur)
Introduction
1. Sigma Finance Corporation (“Sigma”) and those who invested in
it are victims of the current financial crisis. Sigma is a structured
investment vehicle, whose business involved acquiring asset-backed
securities and other instruments, using funds raised by issuing or
guaranteeing US dollar and Euro medium term notes (MTNs) as well as
liquidity from other sources, such as facilities, derivatives, repurchase
(or “repo”) contracts and capital notes (the last two categories
representing its unsecured creditors). All of Sigma’s assets are secured
in favour of its secured creditors upon the terms of a Security Trust
Deed (STD), dated 27 March 2003, made between Sigma as issuer and
Deutsche Trustee Company Limited (“Deutsche Trustee”) as security
trustee and governed by English law.
2. The financial crisis affected the value and liquidity of Sigma’s
assets, as well as its ability to issue notes and raise funds to cover its
obligations under previously issued notes and instruments as they
matured from time to time. As a result, it began to resort to selling
assets, either outright or under repo agreements. The latter involved
Sigma in further potential liability to meet margin calls, if and when the
value of the assets sold and agreed to be repurchased at some future date
fell below a certain level. In September 2008, Sigma received margin
calls which it did not honour. On 30 September 2008, its board resolved
that it could no longer continue in business, and on 1 October 2008
Sigma wrote informing Deutsche Trustee as security trustee that it had
resolved that there was “no reasonable likelihood of Sigma avoiding an
insolvent liquidation” and that there had been non-payment of interest
due on 30 September 2008 constituting a “Potential Enforcement Event”
for the purposes of the Security Trust Deed. On 2 October 2008 one of
Sigma’s liquidity providers gave notice of an event of default under its
facility agreement. In consequence, an actual “Enforcement Event”
occurred and the floating charge created under clause 4.1 of the Security
Trust Deed crystallised on that date, and the liquidity facility was also
cancelled. On 6 October 2008 the Security Trustee appointed Receivers
under clause 14.1 of the Deed, and directed them to comply with clauses
7.6 to 7.9 of the Deed as if references in those clauses to the Security
Trustee were references to the Receivers.
3. Under the Security Trust Deed, the occurrence of an Enforcement
Event started a 60-day “Realisation Period”, and triggered an obligation
on the Trustee to use its reasonable endeavours to establish by the end of
that period a Short Term Pool (for Short Term Liabilities, defined by
clause 1 to cover “outstanding payment obligations … which are due
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and payable or which have scheduled maturity or payment dates falling
less than 365 days from the Enforcement Date”), as well as a number of
Long Term Pools (for “any liabilities …. which are not Short Term
Liabilities”) and a Residual Equity Pool. Following realisation of its
remaining portfolio in December 2008 after the Court of Appeal had
given judgment and refused a further stay, Sigma’s assets consist of cash
of no more than around US$450m.
4. Sigma’s unpaid secured liabilities are estimated to total around
US$6.2bn. They include (a) about US$900,000, representing coupon
payments on notes which fell due on 30 September and 1 October 2008,
(b) about US$1.350bn, representing principal and coupon payments on
notes which fell due during the Realisation Period, (c) about
US$3.134bn, representing principal on notes constituting Short Term
Liabilities falling due between 30 November (i.e. after the end of the
Realisation Period) and 1 October 2009 and (d) about US$1.511bn,
representing principal on notes constituting Long Term Liabilities
falling due after 2 October 2009. As is evident, Sigma’s remaining
assets fall far short of the liabilities included in (a) and (b), or in (b)
alone.
5. The issue on these appeals is how Sigma’s remaining assets are
to be distributed. This is an issue of construction of the Security Trust
Deed. Secured creditors are under the terms of their notes precluded
from seeking to wind up Sigma, and the Security Trust Deed defines
their contractual rights against Sigma and in respect of its assets. Four
interested creditors have advanced various possibilities. Interested
parties A and B submit that the assets fall to be distributed preferentially
to the creditors in respect of the debts identified in (b), or in (a) and (b).
Assuming that to be right, they differ between themselves as to priority.
Mr Howard QC representing interested party A submits that the assets
are to be distributed according to the dates when the relevant debts
became due, while Mr Sheldon QC representing interested party B
submits that all debts falling due in (or prior to) the Realisation Period
are part of a single pool, within which Sigma’s remaining assets fall to
be distributed pari passu. Mr Mortimore QC representing interested
party C and Miss Prevezer QC representing interested party D maintain,
first, that Sigma’s remaining assets fall to be allocated equitably as
between Short and Long Term Liabilities, and, secondly, that, having
been so allocated, its Short Term Liabilities identified in (a), (b) and (c)
fall in effect to be distributed pari passu in relation to each other, and
that its Long Term Liabilities identified in (d) fall to be treated likewise
in relation to each other.
6. Sales J and, by a majority, the Court of Appeal accepted the case
advanced by Mr Howard for interested party A. Lord Neuberger
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dissented, concluding that the case advanced by interested parties C and
D was generally correct, but with the refinement that creditors with
debts falling due in the Realisation Period were entitled to be paid
within that period such amount as the Trustee was confident would
ultimately be paid to them out of the Short Term Pool, with any balance
due being paid later from that Pool. Against the decision of the majority,
these appeals are brought by leave of the House of Lords.
The Security Trust Deed
7. The appeals turn ultimately on the meaning given to the final
sentence of clause 7.6 of the Deed. But this needs to be set in its context.
Clause 7 is long and detailed, and provides inter alia:
“7. ENFORCEMENT
7.1 The Security Trustee shall be entitled to enforce the
Security on and from the Enforcement Date only in accordance
with this Clause notwithstanding any contrary instruction or
direction from any Beneficiary or any other person. The
Security Trustee shall not exercise any of its powers under this
Clause until the Enforcement Date.
7.2 Without prejudice to any rule of law which may have a
similar effect, the floating charge constituted by Clause 4.1.2
shall on the Enforcement Date automatically be converted with
immediate effect into a fixed charge as regards the assets
subject to such floating charge and without notice from the
Security Trustee to the Issuer.
7.3 On the Enforcement Date or as soon thereafter as can
practicably be arranged the Security Trustee shall (to the extent
that the relevant Liquidity Facility has not been cancelled by
the relevant Liquidity Provider) on behalf of, and as attorney
for, the Issuer draw Advances under each Liquidity Facility up
to the Available Amount and shall specify repayment dates
(except in the case of Swing-line Advances) for such Advances
falling after the Realisation Period. If the Issuer has
Committed Liquidity (as defined in the IMC) and more than
one Liquidity Facility, the Security Trustee shall ensure that, as
between Liquidity Facilities, any drawings are made pro rata to
the aggregate available commitments under such Liquidity
Facilities. Advances drawn shall be used in order (i) to
discharge the Issuer’s obligations to pay sums due and owing to
Beneficiaries in accordance with the relevant Beneficiaries’
Documents and (ii) to effect replaying of any Advance made
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under a Liquidity Facility. If and to the extent that all or any
part of the Advances drawn down are not immediately required
by the Security Trustee for the purposes of (i) or (ii) above, the
Security Trustee shall deposit the unutilised portion(s) of such
Advances on a call basis with any bank or financial institution
whose short-term unsecured, unguaranteed and unsubordinated
debt is rated A-1 by S&P, P-1 by Moody’s and F1 by Fitch or
shall invest such portion(s) in certificates of deposit, United
States or United Kingdom government securities or commercial
paper rated A-1 + by S&P and P-1 by Moody’s.
7.4 If the Security Trustee applies an Advance (or part
thereof) to discharge any of the Issuer’s Short Term Liabilities
because of the default, late payment or non-performance of any
Asset in the Short Term Pool (a “non-performing asset”) any
monies subsequently recovered or received in respect of such
non-performing asset shall be applied by the Security Trustee
in repayment (or part payment) of such Advance before being
applied pursuant to the trust declared in Clause 7.11.2.
….
7.6 The Security Trustee shall use its reasonable
endeavours (and in doing so may rely upon the advice of any
investment or other advisers as it shall in its absolute discretion
consider appropriate and shall not be responsible for any loss
which results from such reliance) to establish by the end of the
Realisation Period a Short Term Pool, a number of Long Term
Pools (one in relation to each Series of EMTNs each Series of
ADMTNs and each Series of USMTNs, and one in relation to
each other group of Long Term Liabilities having the same
payment and/or maturity dates), and a Residual Equity Pool. In
order to establish such Pools, the Security Trustee shall during
Realisation Period (but not thereafter) realise, dispose of or
otherwise deal with the Assets in such manner as, in its
absolute discretion, it deems appropriate. During the
Realisation Period the Security Trustee shall so far as possible
discharge on the due dates therefor any Short Term Liabilities
falling due for payment during such period, using cash or other
realisable or maturing Assets of the Issuer.
7.7 The Security Trustee shall use its reasonable
endeavours (and in doing so may rely upon the advice of any
investment or other advisers as it shall in its absolute discretion
consider appropriate and shall not be responsible for any loss
which results from such reliance) to ensure that at the time the
Short Term Pool and each Long Term Pool is established (1)
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the aggregate principal amount of the Assets allocated to each
such Pool is equal to the aggregate principal amount of the
liabilities to which such Pool has been allocated, (2) the Assets
allocated to each such Pool have maturity and payment dates
corresponding to the relevant liabilities and (3) payments,
recoveries and receipts in respect of the Assets allocated to
each such Pool are scheduled to be made or received in the
currency in which the relevant liabilities are denominated and
(4) the aggregate principal value of Assets rated AA/Aa or
lower (or if the Asset has a short-term rating, A-1 + or lower)
issued or guaranteed by any one single body corporate or
sovereign or by separate bodies corporate which are members
of the same group does not exceed an amount equal to 50% of
the Residual Equity Pool Stake attributable to such Short Term
Pool or, as the case may be, Long Term Pool and (5) the
aggregate principal value of Assets rated A (or if the Asset has
a short term rating, A-1/P-1) issued or guaranteed by any one
single body corporate or sovereign or by separate bodies
corporate which are members of the same group does not
exceed an amount equal to 50% of the Residual Equity Pool
Stake attributable to the Issuer’s Short Term Liabilities or, as
the case may be, those of its Long Term Liabilities in relation
to which a Long Term Pool is established. The Security
Trustee shall also use its reasonable endeavours to ensure that
the credit quality by rating category and percentage of Assets
comprising the Short Term Pool and each Long Term Pool is
the same or better than the following:
Long Term Rating Short Term Rating Percentage by
Principal
Value of Short
Term/
Long Term Pool
AAA (S&P)/Aaa – Minimum 20%
AA (S&P)/Aa A-1 + (S&P) Minimum 50%
A A-1/P-1 Maximum 30%
7.8 Subject to Clause 7.7, it is a matter for the Security
Trustee’s absolute discretion which Assets are allocated to
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which Pool and no liability shall attach to the Security Trustee
if its allocation of Assets between Pools proves to be
unfavourable or disadvantageous to any person. Provided that
the Security Trustee uses its reasonable endeavours as provided
in Clause 7.7, no liability shall attach to the Security Trustee if
the purpose for which such endeavours were to be made fails to
be realised and the Security Trustee shall be under no liability
to any Beneficiary if the Assets allocated to any Pool are
insufficient to meet the liabilities of the Issuer to which such
Pool related in full or in a timely manner, notwithstanding that
the claim of any other Beneficiary shall have been discharged
in full. For the avoidance of doubt, the Security Trustee shall
not be obliged to ensure that each Pool complies with the
criteria set out in the Second Schedule to the IMC. Subject to
the above and to Clause 7.7, the Security Trustee (i) shall have
no regard to the credit quality of each Asset when establishing
the Short Term and Long Term Pools and when determining
which Assets should be allocated to which Pool and (ii) shall
not be concerned with the ultimate composition of each of the
Short Term Pool and Long Term Pools with regard to the
concentration of assets by rating category nor to the spread
across the Pools of Assets of any given rating category.
7.9 If the principal amount of the Assets is less than the
principal amount of the Issuer’s Total Indebtedness, the
Security Trustee shall calculate the proportion borne by the
deficit to the Issuer’s Total Indebtedness and shall reduce the
principal amount of the Assets allocable to the Short Term Pool
and each Long Term Pool accordingly.
….
7.11 Subject to Clause 7.4, all payments, recoveries or
receipts in respect of Assets in the Short Term Pool shall be
held by the Security Trustee on trust and shall be applied in
accordance with the following priority of payments:
7.11.1 first, to pay the Relevant Proportion of the
remuneration payable to the Security Trustee pursuant to this
Deed and of any amount due in respect of costs, charges,
liabilities and expenses incurred by the Security Trustee or a
Receiver appointed by it
(and for the purposes of this sub-clause the “Relevant
Proportion” shall be the principal amount of the Issuer’s Short
Term Liabilities divided by the Issuer’s Total Indebtedness,
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both such amounts to be determined on the last day of the
Realisation Period);
7.11.2 second, to pay when due or as soon thereafter as can
practicably be arranged all principal, interest or other amounts
in respect of the Issuer’s Short Term Liabilities to
Beneficiaries (pro rata to the respective amounts of the Short
Term Liabilities due, owing or incurred to each Beneficiary);
and
7.11.3 third, in accordance with the provisions of
Clause 7.13
Provided that (in respect of 7.11.2 above):
(a) if at any time after the Realisation Period the
Security Trustee reasonably believes that payments,
recoveries and receipts in respect of Assets allocated
to the Short Term Pool will be insufficient to meet the
Issuer’s Short Term Liabilities, the Security Trustee
shall calculate the proportion of the Short Term
Liabilities which, in its reasonable opinion, can be met
and shall pay only that proportion of any amounts due
in respect of the Issuer’s Short Term Liabilities to any
Beneficiary; and
(b) if at the time a payment is proposed to be made
to a Beneficiary pursuant to this Clause such
Beneficiary is in default under any of its obligations
to make a payment to the Issuer pursuant to any
Beneficiaries’ Document (the “defaulted payment”)
the amount of the payment which shall be made to
such Beneficiary shall be reduced by an amount equal
to the amount of the defaulted payment. Any amount
so withheld shall be paid to the relevant Beneficiary
as and when (and pro rata to the extent that) the
defaulted payment is duly paid by that Beneficiary.
7.12 Subject to Clause 7.5, all payments, recoveries
or receipts in respect of Assets in the Long Term Pool
shall be held by the Security Trustee on trust and shall
be applied in accordance with the following priority of
payments: [There follow provisions largely similar to
those of clause 7.11, relating to the Short Term Pool]
Clause 17 further provides:
…..
17 GENERAL SECURITY TRUSTEE
PROVISIONS.
…
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17.3 The Security Trustee (save as expressly provided
otherwise herein) as regards all the trusts, powers,
authorities and discretions vested in it by these presents
or by operation of law, have absolute and uncontrolled
discretion as to the exercise or non-exercise thereof
…..
…..
17.5 The Security Trustee as between itself and the
other Beneficiaries shall have full power to determine
all questions and doubts arising in relation to any of the
provisions of these presents and every such
determination, whether made upon a question actually
raised or implied in the acts or proceedings of the
Security Trustee, shall be conclusive and shall bind the
Security Trustee and the other Beneficiaries.”
8. The scheme of the Security Trust Deed is thus that, upon the
occurrence of an Enforcement Event, there will be a Realisation Period
of up to 60 days, to enable the Security Trustee to establish the relevant
Pools using Sigma’s Assets. “Assets” are defined in clause 1 in the
widest possible terms, including, in a final sub-clause, “all other rights,
benefits, property, assets and undertaking … whatsoever and
wheresoever situate”. The Short and Long Term Pools are under clauses
7.7 and 7.8 to be structured with a view to matching the principal
amount of Sigma’s short and long term liabilities with high quality rated
assets in corresponding principal amounts and with corresponding
maturity and payment dates. If that is not possible, because the principal
amount of Sigma’s Assets is less than that of its Total Indebtedness,
then, under clause 7.9, the Trustee is to calculate the proportionate
deficit, and reduce the principal amount of Assets allocable to each Pool
accordingly. Once the Pools have been set up, then, under clauses 7.11
and 7.12, each Pool is to operate separately, but within each Pool, if it
later appears that the Assets allocated to that Pool will be insufficient to
meet the Pool’s liabilities, the Trustee is to calculate and pay to any
creditor only that proportion which can, in its reasonable opinion, be
met. Under clause 17.3 and 17.5, the Trustee is given the broadest
discretion and powers. It is in the context of this scheme that it is
necessary to read and understand the provision in the third and last
sentence of clause 7.6, that
“During the Realisation Period the Security
Trustee shall so far as possible discharge on the
due dates therefor any Short Term Liabilities
falling due for payment during such period,
using cash or other realisable or maturing Assets
of the Issuer.”
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The Law
9. The principles upon which a court should interpret a document
such as the present are not in doubt. They have been reviewed and
restated by the House of Lords in a series of cases: Charter Reinsurance
Co. Ltd. v Fagan [1997] AC 313, Mannai Investment Co. Ltd. v Eagle
Star Life Assurance Co. Ltd. [1997] AC 749, Investors Compensation
Scheme Ltd. v West Bromwich Building Society [1998] 1 WLR 896 and
Chartbrook Ltd. v Persimmon Homes Ltd. [2009] UKHL 38. In Charter
Reinsurance Lord Mustill underlined the danger of focusing too
narrowly on a critical phrase (in that case, a phrase defining the term
“net loss” as meaning “the sum actually paid by the Reinsured in
settlement of claims”), saying (at p.384G-H) that:
“This is …. an occasion when a first impression
and simple answer no longer seem the best, for I
recognise that the focus of the argument is too
narrow. The words must be set in the landscape
of the instrument as a whole. Once this is done
the shape of the policy and the purpose of the
terms … become quite clear”
Adopting that approach, the House concluded that the words “actually
paid” were in context intended not to introduce a pre-condition of prepayment by the insurer to the original insured, but to ensure that the
reinsurers’ liability was measured precisely by reference to any
settlement of liability as between the insurer and insured. Later (at
p.387D) Lord Mustill said that the principle that the liability of a
reinsurer is wholly unaffected by whether the insurer has in fact satisfied
the claim under the inward insurance is one which
“can undoubtedly be changed by express
provision, but clear words would be required;
and it would to my mind be strange if a term
changing so fundamentally the financial
structure of the relationship were to be buried in
a provision such as clause 2, concerned
essentially with the measure of indemnity, rather
than being given a prominent position on its
own”
10. In Investors Compensation Scheme at pp.912G-913F, Lord
Hoffmann summarised the development of the principles of contractual
interpretation in this well-known passage:
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“The result has been, subject to one important
exception, to assimilate the way in which such
documents are interpreted by judges to the
common sense principles by which any serious
utterance would be interpreted in ordinary life.
Almost all the old intellectual baggage of “legal”
interpretation has been discarded. The principles
may be summarised as follows:
(1) Interpretation is the ascertainment of the
meaning which the document would convey to a
reasonable person having all the background
knowledge which would reasonably have been
available to the parties in the situation in which
they were at the time of the contract.
(2) The background was famously referred to
by Lord Wilberforce as the “matrix of fact,” but
this phrase is, if anything, an understated
description of what the background may include.
Subject to the requirement that it should have
been reasonably available to the parties and to
the exception to be mentioned next, it includes
absolutely anything which would have affected
the way in which the language of the document
would have been understood by a reasonable
man.
(3) The law excludes from the admissible
background the previous negotiations of the
parties and their declarations of subjective
intent. They are admissible only in an action for
rectification. The law makes this distinction for
reasons of practical policy and, in this respect
only, legal interpretation differs from the way
we would interpret utterances in ordinary life.
The boundaries of this exception are in some
respects unclear. But this is not the occasion on
which to explore them.
(4) The meaning which a document (or any
other utterance) would convey to a reasonable
man is not the same thing as the meaning of its
words. The meaning of words is a matter of
dictionaries and grammars; the meaning of the
document is what the parties using those words
against the relevant background would
reasonably have been understood to mean. The
background may not merely enable the
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reasonable man to choose between the possible
meanings of words which are ambiguous but
even (as occasionally happens in ordinary life)
to conclude that the parties must, for whatever
reason, have used the wrong words or syntax.
(see Mannai Investments Co. Ltd. v. Eagle Star
Life Assurance Co. Ltd. [1997] AC 749).
(5) The “rule” that words should be given
their “natural and ordinary meaning” reflects the
common sense proposition that we do not easily
accept that people have made linguistic
mistakes, particularly in formal documents. On
the other hand, if one would nevertheless
conclude from the background that something
must have gone wrong with the language, the
law does not require judges to attribute to the
parties an intention which they plainly could not
have had. Lord Diplock made this point more
vigorously when he said in The Antaios
Compania Neviera S.A. v. Salen Rederierna A.B.
[1985] A.C. 191, 201:
“ . . . if detailed semantic and syntactical
analysis of words in a commercial contract is
going to lead to a conclusion that flouts business
commonsense, it must be made to yield to
business commonsense.”
In the present case the focus is on the general nature of the business
involved – apparent from the document itself – and upon the scheme and
wording of the Security Trust Deed read as a whole. As in Miramar
Maritime Corporation v Holborn Oil Trading Ltd [1984] 1 AC 676 (per
Lord Diplock at p 682A-F), so here the document is one which would be
expected to have a consistent meaning as between all parties to whom it
applied. I therefore also agree with Lord Collins’ supplementary
remarks on the approach to interpretation.
11. I pay tribute to the speed with which the courts below have
addressed the issue, and the meticulous attention which they have given
it. Ultimately, Sales J and the majority in the Court of Appeal were
persuaded in favour of interested party A’s case by the consideration
that the last sentence of clause 7.6 had a clear natural meaning, and that
there was nothing in its language (particularly in the phrase “so far as
possible”) to affect the operation of that meaning in the circumstances
which arose. The Trustee’s obligation during the Realisation Period was
to continue to discharge Sigma’s debts as and when they fell due, so
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long and so far as such payment was possible using cash or other
realisable or maturing Assets; and the reference to such debts being
discharged “on the due dates therefor” was inconsistent with party B’s
argument in favour of pari passu distribution of available assets between
creditors whose debts fell due during the Realisation Period.
Analysis
12. In my opinion, the conclusion reached below attaches too much
weight to what the courts perceived as the natural meaning of the words
of the third sentence of clause 7.6, and too little weight to the context in
which that sentence appears and to the scheme of the Security Trust
Deed as a whole. Lord Neuberger was right to observe that the
resolution of an issue of interpretation in a case like the present is an
iterative process, involving “checking each of the rival meanings against
other provisions of the document and investigating its commercial
consequences” (para. 98, and also 115 and 131). Like him, I also think
that caution is appropriate about the weight capable of being placed on
the consideration that this was a long and carefully drafted document,
containing sentences or phrases which it can, with hindsight, be seen
could have been made clearer, had the meaning now sought to be
attached to them been specifically in mind (paras. 100-1). Even the
most skilled drafters sometimes fail to see the wood for the trees, and
the present document on any view contains certain infelicities, as those
in the majority below acknowledged (Sales J, paras. 37-40, Lloyd LJ,
paras. 44, 49-52 and 53, and Rimer LJ para. 90). Of much greater
importance in my view, in the ascertainment of the meaning that the
Deed would convey to a reasonable person with the relevant background
knowledge, is an understanding of its overall scheme and a reading of its
individual sentences and phrases which places them in the context of
that overall scheme. Ultimately, that is where I differ from the
conclusion reached by the courts below. In my opinion, their conclusion
elevates a subsidiary provision for the interim discharge of debts “so far
as possible” to a level of pre-dominance which it was not designed to
have in a context where, if given that pre-dominance, it conflicts with
the basic scheme of the Deed.
13. The starting point is that the occurrence of an Enforcement Event
is not necessarily to be equated with insolvency, still less insufficiency
of assets to meet all secured liabilities. On the contrary, and this is I
think a point with a relevance which does not emerge from the
judgments below, clauses 7.3 to 7.8 are all drafted on the assumption of
a situation in which Sigma has enough assets to cover at least its secured
creditors. The detailed provisions in clause 7.3 and 7.4 for drawing
down on any relevant Liquidity Facility can have little or very limited
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application in any situation where Sigma lacked funds to cover such
creditors, since in such a situation any liquidity provider would be
expected to cancel any relevant facility (as happened in this case: see
para. 12 above). The provisions of clauses 7.7 and 7.8 contemplate that
there will be sufficient assets to create matching Pools of assets of high
rating quality and liabilities. Only in clause 7.9 does the Deed turn to
and address the possibility of a shortfall in the principal amount of the
Assets needed to cover Sigma’s liabilities.
14. The provision by clause 7.6 for discharge of Short Term
Liabilities as they fall due thus appears in a context where the
underlying assumption is that all secured liabilities can be covered and
no issue of priority can arise. To treat it, in the different context of
insolvency, as creating effective priority for such Short Term Liabilities
as may happen to fall due during the Realisation Period may, therefore,
involve a similar risk to that identified by Lord Mustill in Charter Re –
that of giving to a sentence, buried in a provision like clause 7.6
concerned essentially with a different situation, the effect of changing
fundamentally the apparent financial structure of the relationship.
15. A second point is that the Short and Long Term Pools were under
clauses 7.6, 7.9, 7.11 and 7.12 to be established to meet Sigma’s total
indebtedness, with the Short Term Pool covering all its Short Term
Liabilities and the Long Term Pool covering all its Long Term
Liabilities as defined by clause 1. Any suggestion that the final sentence
of clause 7.6 was intended to extract, from the Short Term Liabilities,
any which happened to fall due during the Realisation Period and to
constitute them a separate pool or class with effective priority over other
Short Term Liabilities is questionable on its face. Yet, the conclusion
accepted in the courts below means that Realisation Period debts will
not (or only in very rare circumstances) form part of the Short Term
Liabilities to be met out of the Short Term Pool.
16. Sigma’s assets could normally be expected to consist of cash or
other maturing or realisable Assets – even if, in the case of some
“realisable” assets, their realisation prior to maturity would come at
some cost, because of the element of “fire-sale” involved. Accordingly,
on the approach taken by the courts below, Realisation Period debts will
either have been paid during the Realisation Period before any Pools are
established at all, or their payment will exhaust all the Assets with the
result that there will never be any Pools at all.
17. In any case where there is an overall shortfall of Assets, the
priority given by the courts below to Realisation Period debts would
also skew the relationship of any Short and Long Term Pools which
were created. Clause 7.9 requires an overall comparison of Total
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Indebtedness and Assets, and a pro rata reduction of the amount of
Assets allocated to each Pool. Realisation Period debts fall within the
definition of Short Term Liabilities. However, they would on the
approach of the courts below have been paid in full. This would further
reduce the amount available for payment to other Short Term Liabilities,
which would accordingly receive a lesser pro rata payment than Long
Term Liabilities. The only alternative, to treat Realisation Period debts
as an entirely separate pool, conflicts with the definition of Short Term
Liabilities in clause 1 and with the express recognition of such debts as
Short Term Liabilities in the third sentence of clause 7.6 itself, and gives
the third sentence a significance which seems in context improbable.
18. There are further conceptual difficulties about drawing any clearcut distinction between Realisation Period debts and other Short Term
Liabilities. Three subsidiary points arise. First, the last sentence of
clause 7.6 contemplates on any view that it may not always be possible
to pay Realisation Period debts on their due dates during the Realisation
Period. Some might as a result not even be paid within that Period. They
would then fall within the general body of Short Term Liabilities where
they would have no especial priority. That raises the question why
Realisation Period debts should be given priority according to the
happenstance that their payment was possible within the Realisation
Period.
19. The second subsidiary point is that Pools were to be established
“by the end of the Realisation Period”. The processes of making
realisations and establishing matching Assets envisaged by clauses 7.6
and 7.7 and of calculating whether any and if so what deficit adjustment
was necessary under clause 7.9 were bound to take time and to be
potentially complex. In a fully solvent situation, there would be little
problem about continuing to discharge Realisation Period debts as they
fell due. But, in an insolvent situation, with the risk that further
indebtedness might arise during that Period from margin calls or the
acceleration of other debts and a shortage of Assets overall, the Trustee
would, on the approach accepted by the courts below, face conflicting
pressures which it would be difficult to reconcile: on the one hand, the
short-term duty to meet Realisation Period debts as they arose, if
necessary by fire-sales; on the other the long-term duty to ensure
balanced and equitable Pools for the benefit of Short and Long Term
creditors.
20. The third subsidiary point is that the language of clause 7.6
indicates on its face that Pools might be established before the end of the
Realisation Period, as Rimer LJ accepted (para. 89), though Sales J, as I
read his judgment, did not (para. 28). It is true that clauses 7.11.1,
7.11.3(a) and 7.12.1 all operate by reference to the last day of the
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Realisation Period, in a way which might be said to assume that the
Pools will not have been established until then. This may well be no
more than a drafting infelicity, since it would seem strange, if it were
not open, as clause 7.6 suggests it is, to the Trustee to establish the Pools
on a day prior to the 60th day after the Enforcement Event. Assuming
this to be so, then, in a situation where clause 7.9 came into operation,
the setting up of the Pools would be expected to exhaust Sigma’s assets.
Yet, on the approach of the courts below, clause 7.6 would, read
literally, require the Trustee to continue to discharge Realisation Period
debts in full, after the setting up of the Pools, in circumstances where
Sigma’s assets were now held on the express trusts established by
clauses 7.11 and 7.12. The only alternative would be to treat the
obligation under clause 7.6 as coming to an end, despite its terms, before
the end of the Realisation Period. However, this third subsidiary point is
a small one.
21. A third main point is the fortuitous effect of the interpretation
placed on clause 7.6 by the courts below. Depending upon when an
Enforcement Event occurred, those whose debts happened to fall due
during the ensuing Realisation Period would gain priority. Creditors
might be able to procure priority for themselves by making a margin call
or giving notice advancing the payment date of their debts. Sales J
treated this as representing a normal assumption of risk, under which
every lender to Sigma “took a chance …. that it might be in the
advantageous position in which Party A now finds itself” (para. 26).
Rimer LJ was also influenced by the fact that the Deed was a
“commercial bargain”, intended to operate in insolvent and solvent
situations, although he thought it improbable that the parties had
foreseen “the possibility of the extraordinary, probably unprecedented,
market events” that had actually unfolded (para. 92). Accepting what
Rimer LJ says, it remains in my view improbable that commercial
parties would contemplate that, after so important an occurrence as an
Enforcement Event, priority would be conferred even to a modest extent
and in the short-term on a particular group of creditors on the basis of
the chance of their indebtedness falling due, or being capable of being
made to fall due, during the Realisation Period.
22. The basic aim of clause 7.6 is to provide for the establishment of
the Pools and the realisation of Assets, in such manner as the Trustee
may in its absolute discretion deem appropriate, for that purpose. The
Pools are under clauses 7.7 to 7.9 to contain Assets matching, or
corresponding pro rata with, the payment and maturity dates of Sigma’s
Short and Long Term Liabilities. The third sentence of clause 7.6 has in
this context the flavour of an ancillary provision designed to achieve a
similar interim position during the Realisation Period. To my mind, it is
unlikely that the Trustee’s obligation under the third sentence was
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intended to override the absolute discretion given to it under the second
sentence. This may be part of the explanation for the use of the phrase
“so far as possible”. Whether that is so or not, the third sentence
appears in a context and form which makes it, to my mind, an
improbable vehicle for a duty to pay Realisation Period debts, regardless
of any conclusion by the Trustee that clause 7.9 applies or will apply
and that such payment will accordingly diminish the Assets capable of
allocation to the Short Term Pool (or to the Short and Long Term
Pools).
23. The fourth point is that, if the final sentence of clause 7.6 is
intended to operate even in circumstances where this would give
Realisation Period creditors priority over other Short and Long Term
creditors, it fails notably to address the position of creditors whose
unpaid debts fell due for payment prior to the Realisation Period, i.e. in
this case the US$900,000 of debts representing coupon payments on
notes which fell due on 30 September and 1 October 2008 (para. 4
above). Sales J thought that there was “no difficulty” about reading the
words “falling due” as embracing debts already due, once it was borne
in mind that a debt remains due on each day until it is satisfied (para.
36). Lloyd LJ (para. 51) and Rimer LJ (para. 90) thought that no specific
thought can have been given to such liabilities when clause 7 was
drafted (although they fall within the definition of Short Term Liabilities
and so naturally within clause 7.11.2). Both thought that it would not be
a “major qualification” to read the final sentence of clause 7.6 as if it
referred to Short Term Liabilities “already due or falling due” (paras. 52
and 90). Elsewhere, Lloyd LJ laid some weight upon the Deed being “a
commercial document prepared by skilled and specialist lawyers for use
in relation to sophisticated financial transactions” (para. 67), and Rimer
LJ upon it being “a 45-page document reflecting the considered input of
(probably) a team of commercial lawyers” (para. 86). But it contains, as
their judgments also accept (paras. 51-52 and 90) infelicities, which
indicate, at the lowest, the importance of keeping an eye on and making
sense of the overall picture.
24. I add that, on the view I take of the third sentence of clause 7.6, it
is not surprising that it makes no reference to unpaid pre-enforcement
debts; the sentence appears, as I have said, in a context where the
assumption is one of solvency, in which context one would not expect
any unpaid pre-enforcement debts. However, when the sentence is
transposed and applied to a situation of insolvency, pre-enforcement
debts are more easily and naturally catered for as part of the general
body of Short Term Liabilities, on the construction advanced by parties
C and D, with or without Lord Neuberger’s refinement, for reasons
pointed out by Lord Neuberger (para. 107).
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25. A fifth point relates to the provisions for payment of the fees and
expenses of the Security Trustee and any Receiver. Under clauses 7.11.1
and 7.12.1, these are, as one would expect, express prior charges on the
relevant Pool Assets. In a solvent situation, there would be no problem
about payment of such fees and expenses out of Sigma’s Assets during
the Realisation Period before any Pools or Pool Assets were established.
But, if the final sentence of clause 7.6 applies to require payment out in
insolvent situations, although discharge in full of the Realisation Period
debts might (as here) exhaust the whole of the available Assets, there is
nothing in clause 7.6 to give the Security Trustee or Receiver any
priority or protection. Sales J (paras. 37-40), with whom Lloyd LJ
agreed on the point (para. 53), regarded this as no more than infelicity of
drafting. Sales J suggested that, in practice, the Receiver could be
covered if the Trustee fixed his remuneration and directed that it be paid
out of the Assets under clause 14.3.4 and if the Receiver, with the
Trustee’s permission, then, in order to cover his fees and expenses,
borrowed money on the security of Sigma’s Assets in priority to any
secured creditor, as expressly permitted by clause 14.3.6. As to the
Trustee, he thought the position “slightly less clear”, but that the Trustee
could cover itself in one or two ways. First, it could appoint a Receiver
to act on its behalf, in which case the Receiver’s fees and expenses
would be recoverable as above. Second, clause 13.2 allowed the Trustee,
out of the profits and income of the Assets and monies received by it in
the exercise of any of its powers, to “pay and discharge all expenses and
outgoings incurred in and about the exercise of any such powers”, and
the word “expenses” could be read as including “remuneration”. These
ingenious solutions do not overcome the basic problem, that, if the last
sentence of clause 7.6 was ever envisaged as creating a continuing “pay
as you go” regime, which would give effective priority to Realisation
Period creditors, even though nothing would then remain for other
creditors, it is remarkable that no special provision was made for the
Trustee’s or Receiver’s fees and expenses. However remote the risk of
non-payment, such priority would normally be standard form. The
inference is that the Trustee’s and Receiver’s prior right under clauses
7.11.1 and 7.12.1 was thought to be all that could ever be required, and
that it was never contemplated that payments could or would be made
under clause 7.6 in circumstances which could conceivably affect their
entitlement to such fees and expenses. That argues for considerable
caution before concluding that it must nevertheless be interpreted and so
taken to have been intended to have that effect.
26. Most if not all of the above points were identified by both Sales J
and by the majority in the Court of Appeal and are summarised clearly
and cogently, for example by Lloyd LJ (paras. 57 and 58) and Rimer LJ
(para. 80). At the end of the day, other considerations persuaded them
that the last sentence of clause 7.6 must be regarded as applying so as to
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require payment in full of Realisation Period debts as they fell due,
regardless of the effect on the creation of the Pools in general or on
other Short Term creditors in particular.
27. In support of this approach, Mr Howard and Mr Sheldon submit
that an important key to understanding the last sentence of clause 7.6 is
to see it as no more than the agreed continuation for a short period of the
“pay as you go” regime prevailing prior to the occurrence of the
Enforcement Event. While realisations were being made, they submit, it
would have been thought convenient to continue this regime and to be
unlikely to have much if any effect on non-Realisation Period creditors.
However, that in my opinion fails to give proper weight to the major
significance attaching under the scheme of the Deed to an Enforcement
Event. It may be (although the House understood it to be contentious)
that Sigma was free to continue with a “pay as you go” system after it
had become clear that this could affect later creditors, by realising assets
and entering into repo agreements for the purpose. But the purpose of
clause 7 is evidently to draw a line at a certain point. The crystallisation
of powers and of the floating charge under clauses 7.1 and 7.2 and the
definitions in clause 1 of Short and Long Term Liabilities and of the
Pools to be established under clauses 7.6 to 7.9 strongly support a
conclusion that that point was the Enforcement Date.
28. The argument remains, nevertheless, that the third sentence of
clause 7.6 is an unequivocal short-term provision, and that nothing in its
language or in the Deed as a whole limits, or entitles the court to limit,
its application in a situation like the present. The majority in the Court
of Appeal in rejecting the arguments advanced for parties C and D
attached importance to the fact that the sentence used the words “so far
as”, rather than “if”. Further, in rejecting Lord Neuberger’s refinement
of the argument, they noted the absence of any definition of the state of
mind which the Trustee would have to have or of what it would have to
do, as well as the absence of any definition of the scope of the Trustee’s
discretion, or judgment, if it was in whatever was the relevant state of
mind as regards the prospects for payment in full, or only on account, of
Sigma’s various secured liabilities (paras.62-72, per Lloyd LJ). I think
that a similar objection could however be made in relation to clause 7.9.
Its operation must involve a substantial and time-consuming process of
evaluation and judgment during the Realisation Period. Whether and
how it applies must be potentially complex matters for the Trustee’s
judgment, having regard to the provisions of clause 7.7 regarding
maturity and rating quality.
29. Ultimately, in Lloyd LJ’s view, the position was that “the
sentence is on the face of it, clear and unequivocal as to the Trustee’s
obligation to discharge the Short-Term Liabilities falling due during the
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Realisation Period” (para. 63), in a commercial document prepared by
skilled and specialist lawyers, “the clear and natural meaning of the
words should prevail” (para. 67) and, especially bearing in mind the
“elaborate and careful” provisos to clauses 7.11 and 7.12 whereby an
obligation to pay pro rata was introduced, “the argument for pari passu
distribution involves placing on the words “so far as possible” a weight
and significance that they cannot bear” (para. 69). Rimer LJ adopted
similar reasoning, considering that, if the approaches advanced by
parties C and D or adopted by Lord Neuberger had been intended, that
could and would have been said (paras. 86-88).
30. Both Lloyd and Rimer LJJ recognised that the parties would,
when subscribing to notes on the terms of the Deed, not have had in
contemplation the extraordinary market events which have occurred, or
what, they recognised, might be regarded on their approach as leading to
an “unfair result” (paras. 69 and 92). But they noted (paras.30-31, 85
and 92) that the Deed foresaw that an Enforcement Event might result
from insolvency as from solvency. In those circumstances, and in the
absence of any appropriate limitation, they saw the last sentence of
clause 7.6 as equally applicable in both situations. At one point in his
judgment (para. 59), Lloyd LJ also said that “The sentence does not say
“if possible”, but “so far as possible”; the latter phrase seems clearly to
indicate that partial payment may be possible”. However, if he was here
suggesting that the sentence was expressly addressing a situation of
insolvency in which Realisation Period debts would exhaust all Sigma’s
assets, the suggestion is in conflict with what was said elsewhere about
the improbability of the parties foreseeing any such situation, and with
the probable reality.
31. I return to my starting point. The last sentence of clause 7.6
appears in and was drafted in contemplation of the situation where no
question of insolvency arose. It is not until clause 7.9 that any such
possibility is addressed. In practice, no doubt, an Enforcement Event
would be more likely than not to result from some financial difficulty on
Sigma’s part. But that is not the situation which clauses 7.6 to 7.8 are
drafted to address. The last sentence of clause 7.6 has therefore now to
be interpreted in a quite different context to that in which it appears and
for which it was designed. This is not an unusual phenomenon, as Sales
J and the majority in the Court of Appeal recognised, when they found it
necessary to expand or to qualify or read words into certain of the
Deed’s provisions in the light of the “infelicities” of drafting which on
their approach emerged.
32. In the present situation, the reasonable man’s task in
understanding the meaning and application of the last sentence of clause
7.6 is in my opinion greatly facilitated by the existence of a clear basic
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scheme, from which it is improbable that the parties would have wished
to depart. That basic scheme involved the creation of a Short and of
Long Term Pools, each with sufficient nominal assets of sufficient
rating quality to meet, or meet pro rata, the Pool’s liabilities as and when
they matured. The basic purpose of the Realisation Period was to give
time for the creation of such Pools. Realisation Period debts were to be
part of the Short Term Pool. Seen in the context in which the third
sentence of clause 7.6 appears, its aim was to put Realisation Period
debts in the same position as other Short Term Liabilities. They were to
be paid so far as possible on their maturity and payment dates. Seen in a
context where the Trustee concludes that clause 7.9 applies, the
approach of the courts below achieves the opposite result. It elevates
Realisation Period creditors to a special status, extracts them from the
Pool to which the Deed assigns them, distorts the apparent aim to
achieve equity between all creditors by the creation of Short and Long
Term Pools, and probably also distorts the relationship between the
Short and the Long Term Pools. These considerations are sufficient to
persuade me, as they persuaded Lord Neuberger, that the parties to the
Deed cannot have contemplated the approach adopted by the courts
below, even in a less extreme situation of insolvency than the present,
such as they might have foreseen.
33. The phrase “so far as possible” was used in a context where what
were in mind were no doubt relatively minor discrepancies (during the
Realisation Period when the Trustee’s main concern would be the
creation of appropriate Pools) between available cash or other realisable
or maturing Assets and liabilities, which could delay or prevent payment
of all or some Realisation Period debts. That alone would explain why
the word “if” was not used instead of “so far as”. But, when the sentence
is transposed and applied to a situation in which clause 7.9 applies, those
words are apposite to enable the Trustee to determine that no further
payments can appropriately be made, having regard to the overall aim of
achieving equitable Pools and an equitable allocation of Assets between
the two (or more) main Pools. I would, in this context and so far as
necessary, be prepared to read the words “so far as” as equating with
“if”. I find it difficult in any event to attach as much weight as the Court
of Appeal did to the difference. But it seems to me, as it did to Lord
Neuberger, that it would also be open to the Trustee to make on account
payments during the Realisation Period in respect of Realisation Period
debts as they fell due. The calculation made or being made under clause
7.9 would indicate what proportion of such debts could safely be paid.
The Trustee’s extensive and absolute discretions and powers under
clauses 17.3 and 17.5 would avoid any argument. It is however
unnecessary on the facts to reach any concluded decision on the
correctness of Lord Neuberger’s refinement to the case advanced by
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parties C and D. It is not, in my opinion, critical to the outcome of these
appeals whether or not that refinement be accepted.
Conclusion
34. I would therefore allow the appeals of interested parties C and D
and dismiss the appeal of interested party B, set aside the decisions of
the courts below and declare that, on the true construction of clause 7.6
of the Security Trust Deed, and in the events that have happened, the
Receivers were not obliged to use cash or other realisable or maturing
assets of Sigma to pay Short Term Liabilities falling due for payment
during the Realisation Period after 6 October 2008 either in the order in
which they fell due or pari passu with other Short Term Liabilities due
for payment during the Realisation Period. I would further declare that
such Liabilities are to be treated along with all other Short Term
Liabilities in respect of which payments fall to be made under clause
7.11 out of the Short Term Pool to be established under clauses 7.6 to
7.10.
LORD COLLINS (with whom Lords Hope and Mance concur)
35. I agree with Lord Mance that the appeals of interested parties C
and D should be allowed for the reasons he gives, and I add only a few
remarks of my own on the approach to interpretation. In complex
documents of the kind in issue there are bound to be ambiguities,
infelicities and inconsistencies. An over-literal interpretation of one
provision without regard to the whole may distort or frustrate the
commercial purpose. This is one of those too frequent cases where a
document has been subjected to the type of textual analysis more
appropriate to the interpretation of tax legislation which has been the
subject of detailed scrutiny at all committee stages than to an instrument
securing commercial obligations: cf Satyam Computer Services Ltd v
Upaid Systems Ltd [2008] EWCA Civ 487, [2008] 2 CLC 864, at [2].
36. Sigma financed its investments over a 13 year period by debt
securities issued or guaranteed by it. It entered into liquidity facilities
intended to hedge against market liquidity risks. It entered into financial
instruments intended to hedge against currency and interest rate risk.
Others provided liquidity facilities, or entered into financial hedging
instruments. The Security Trust Deed secures a variety of creditors, who
hold different instruments, issued at different times, and in different
circumstances.
37. Consequently this is not the type of case where the background or
matrix of fact is or ought to be relevant, except in the most generalised
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way. I do not consider, therefore, that there is much assistance to be
derived from the principles of interpretation re-stated by Lord Hoffmann
in the familiar passage in Investors Compensation Scheme Ltd v West
Bromwich Building Society [1998] 1 WLR 896, 912-913. Where a
security document secures a number of creditors who have advanced
funds over a long period it would be quite wrong to take account of
circumstances which are not known to all of them. In this type of case it
is the wording of the instrument which is paramount. The instrument
must be interpreted as a whole in the light of the commercial intention
which may be inferred from the face of the instrument and from the
nature of the debtor’s business. Detailed semantic analysis must give
way to business common sense: The Antaios [1985] AC 191, 201.
38. Once clause 7.6 of the Security Trust Deed is seen in context, the
conclusion that the Receivers were not obliged to give priority to the
first maturing Short Term Liabilities is consistent with the wording of
the clause in the context of the Trust Deed as a whole and with the
commercial purpose of the instrument.
LORD WALKER (dissenting)
39. These appeals will determine how the enormous loss incurred by
Sigma Finance Corporation is to be borne as between the anonymous
investment banks, hedge funds and other entities which are its secured
creditors. Lord Mance refers to them as victims of the current financial
crisis. An alternative view would be that they are among the authors of
the crisis. But that is not an issue for the Court.
40. Although I was one of those who gave permission for a further
appeal (as it then was, to the Appellate Committee of the House of
Lords) I find, on closer consideration, that the case involves no issue of
general public importance. There is no doubt as to the principles of
construction to be applied. They are clearly summarised (under the
heading “the law”) in Lord Mance’s judgment. The only issue is as to
the interpretation of the security trust deed in the light of those
principles. Sales J and the majority of the Court of Appeal (Lloyd and
Rimer LJJ) took one view but Lord Neuberger (sitting in the Court of
Appeal) took a different view.
41. In respectful dissent from the majority of this Court I prefer the
view taken by the judge and the majority of the Court of Appeal. Since
no issue of principle is involved it would be quite inappropriate to give
any lengthy explanation of my reasons. I will limit myself to three fairly
general points.
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42. First, I completely agree that it is necessary to construe the
language of clause 7.6 of the deed “in the landscape of the instrument as
a whole” (in the words of Lord Mustill in Charter Reinsurance Co Ltd v
Fagan [1997] AC 313, 384H). One of the most striking features of the
landscape of the deed, to my mind, is that clause 7 does not provide for
the immediate winding-up of Sigma on the occurrence of a default
which amounts to an enforcement event. On the contrary, secured
creditors are prohibited from taking steps to wind up the company. It is
therefore necessary to repress any instinctive feeling (and it is, I
acknowledge, a strong instinctive feeling) that pari passu distribution at
the earliest practicable date is the most natural (one might almost say the
only rational) solution.
43. Instead, the assets were to be retained and marshalled (in
accordance with the detailed provisions of clauses 7.6 to 7.10) in order
to match the company’s short-term and long-term liabilities, as defined,
all of which were to be paid (under clause 7.11 or 7.12) as they fell due.
The procedure envisaged was comparable to that of a funded
occupational pension scheme which is closed to new entrants but not
wound up. In such a case the trustees would adjust the way in which the
fund was invested in order to match its predictable short-term, mediumterm and long-term liabilities. Scheme members would still have to wait
for the payment of their respective pensions to fall due, and as each
became entitled to a pension he or she would (in the typical case) then
be entitled to preference, as against those whose pensions had not fallen
due, if and when there was eventually a winding-up.
44. Second, the need to exclude any instinctive feeling about
insolvent winding-up is reinforced by the fact, to which Lord Mance
rightly attaches importance, that the parties cannot have contemplated
that Sigma would have insufficient assets to meet its liabilities even to
secured creditors – especially not on the scale of the extraordinary loss
that has actually occurred. These skilled and sophisticated investors
expected to make money, not to lose it. The fact that the effect of the
deed, in a situation which the parties never contemplated, may appear
fortuitous or arbitrary does not therefore carry much weight. It is not for
the Court to make a new contract for experienced commercial operators
advised by expert lawyers.
45. Third, clause 7.6 (the crucial provision which has to be fitted into
the landscape of the deed as a whole) is concerned with what is to
happen during the 60-day realisation period. In setting up the pools the
trustee was to perform what might well be a difficult exercise, but it was
essentially an exercise of an administrative nature. The references to the
trustee’s “absolute discretion” are to my mind explained by the trustee’s
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wish to protect itself from possible criticism, rather than to any power
for the trustee to prefer one secured creditor to another. The direction
for payment of liabilities falling due for payment during the realisation
period was no doubt expected to be more or less ancillary (as Lord
Mance puts it) but it has, in the wholly unexpected events which have
occurred, assumed unexpected importance. Reference was made to the
direction applying “so far as possible” (rather than “if and so far as
possible”) and to the fact that those words are not immediately adjacent
to the words “on the due dates therefore”. I would not attach any
importance to those details of language. The words are wide enough to
cover both the possibility that a payment might for practical reasons
have to be delayed by a few days, and the much more remote possibility
(as it would have appeared to the parties at the time) that there would be
a permanent deficiency of assets.
46. I would therefore dismiss these appeals.
