In re Sigma Finance Corporation
Encyclopedia
Re Sigma Finance Corporation (In Administration) [2009] UKSC 2 was the first substantive case decided in the Supreme Court of the United Kingdom. The case involved the correct interpretation of a clause within a security trust deed
. The court held that the principles of interpreting such clauses were well-established and involved looking at the document as a whole, including any background information the parties would have had when the contract was made.
(SIV) established to invest in certain types of asset-backed securities and other financial instruments, and aimed to profit from the difference between the cost of funding its activities and the returns made on its investment portfolio. Its activities were much like a very simplified form of banking, although with less than half the leverage of a traditional bank and without any exposure to interest rate or foreign currency exchange rate risk. However, due to the impact on the financial markets stemming from the sub-prime mortgage market
in the United States of America, on the value of asset backed securities generally, despite Sigma having no direct exposure to US subprime mortgages, the value of Sigma’s assets quoted by the investment banks fell short of the amount it needed to pay the secured creditors. Following an auction in December 2008 the values achieved fell far short of the amounts required to satisfy the secured creditors, let alone the unsecured creditors. All of Sigma’s assets were secured under a security trust deed (STD) in favour of those creditors investing in and through Sigma.
The STD provided that in such an event there should be a 60 day realisation period during which the trustees should use Sigma’s assets to create, as far as possible, two pools of funds relating to its short- and long-term liabilities. However, the final sentence in Clause 7.6 of the STD also provided that, “During the Realisation Period the Security Trustee shall so far as possible discharge on the due dates realisable or maturing Assets of the Issuer.”
Various classes of creditors, both secured and unsecured, brought actions against Sigma and a dispute arose as to the correct application of the STD given that Sigma has insufficient funds to satisfy all of its creditors and had failed to meet a margin call. Certain creditors argued that the clause required Sigma’s receivers to allocate assets to its short-term liabilities pari passu
i.e. equally and without preference; other creditors argued that a ‘pay as you go’ approach should be adopted with assets allocated according to the dates on which liabilities fell due, starting with the earliest.
asking for directions from the court as to how to progress.
Mr Justice Sales held that the natural meaning of Clause 7.6 was that assets were to be distributed according to the dates when the relevant debts became due within the realisation period i.e. that the ‘pay as you go’ approach was the correct one.
and Lord Justice Rimer
in the majority; Lord Neuberger dissenting
), the Court of Appeal upheld the decision of Mr Justice Sales and dismissed the appeals.
.
The leading judgment was given by Lord Mance
, with whom Lords Hope
, Scott
and Collins concurred
. The principles upon which the court should interpret such a document were held to be well-established and clear. The court should look at the document as a whole rather than focus on a single phrase, including any background information which would have been available to the parties at the time the contract was agreed. Applying this principle, it was held that the court should look not at the final sentence in Clause 7.6 in isolation but at the context in which the sentenced appeared and at the scheme of the STD as a whole. Clause 7.6 appeared in the STD in the context of an assumption of a situation in which Sigma had enough assets to cover at least its secured creditors, not a situation requiring the application of priorities between creditors. The final sentence of Clause 7.6, it was held, was not intended to prioritise creditors whose debts fell due during the realisation period over other creditors. It was also held to be improbable that commercial parties would contemplate that priority would be conferred to some creditors over others by the fortuitous timing of whose debts fell due during the realisation period. Clause 7.6 was an ancillary provision which did not override the trustee’s absolute discretion as to how assets were to be realised. The reasonable person’s understanding of Clause 7.6 was aided by a clear basic scheme that debts arising during the realisation period were to be part of the short term pool of creditors with the assets to be distributed equally amongst all the creditors at the discretion of the trustee i.e. pari passu.
A further judgment was given by Lord Collins, with whom Lords Hope and Mance concurred. Lord Collins, in his brief judgment, offered further thoughts on the approach to interpretation. He warned against over-literal interpretation of one provision of a document without regard to the whole as risking distortion or frustration of a commercial purpose. Such an approach, which may be appropriate in interpreting tax legislation, was inappropriate in a commercial context. Detailed semantic analysis had to give way to business common sense.
Lord Walker, dissenting, argued that the case involved no issue of general public importance. The principles of construction to be applied were clear and were neatly summarised in Lord Mance’s judgment. Lord Walker preferred the view taken by the majority of the Court of appeal. However arbitrary or fortuitous it might appear to the court that priority would be given to creditors whose debts fell due during the realisation period, that was nonetheless the effect of the deed and the court should not make a new contract for experienced commercial operators as advised by expert lawyers.
Deed
A deed is any legal instrument in writing which passes, or affirms or confirms something which passes, an interest, right, or property and that is signed, attested, delivered, and in some jurisdictions sealed...
. The court held that the principles of interpreting such clauses were well-established and involved looking at the document as a whole, including any background information the parties would have had when the contract was made.
Facts
Sigma Finance Corporation (Sigma) was a structured investment vehicleStructured investment vehicle
A structured investment vehicle was an operating finance company established to earn a spread between its assets and liabilities like a traditional bank...
(SIV) established to invest in certain types of asset-backed securities and other financial instruments, and aimed to profit from the difference between the cost of funding its activities and the returns made on its investment portfolio. Its activities were much like a very simplified form of banking, although with less than half the leverage of a traditional bank and without any exposure to interest rate or foreign currency exchange rate risk. However, due to the impact on the financial markets stemming from the sub-prime mortgage market
Subprime mortgage crisis
The U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages....
in the United States of America, on the value of asset backed securities generally, despite Sigma having no direct exposure to US subprime mortgages, the value of Sigma’s assets quoted by the investment banks fell short of the amount it needed to pay the secured creditors. Following an auction in December 2008 the values achieved fell far short of the amounts required to satisfy the secured creditors, let alone the unsecured creditors. All of Sigma’s assets were secured under a security trust deed (STD) in favour of those creditors investing in and through Sigma.
The STD provided that in such an event there should be a 60 day realisation period during which the trustees should use Sigma’s assets to create, as far as possible, two pools of funds relating to its short- and long-term liabilities. However, the final sentence in Clause 7.6 of the STD also provided that, “During the Realisation Period the Security Trustee shall so far as possible discharge on the due dates realisable or maturing Assets of the Issuer.”
Various classes of creditors, both secured and unsecured, brought actions against Sigma and a dispute arose as to the correct application of the STD given that Sigma has insufficient funds to satisfy all of its creditors and had failed to meet a margin call. Certain creditors argued that the clause required Sigma’s receivers to allocate assets to its short-term liabilities pari passu
Pari passu
Pari passu is a Latin phrase that literally means "with an equal step" or "on equal footing." It is sometimes translated as "ranking equally", "hand-in-hand," "with equal force," or "moving together," and by extension, "fairly," "without partiality."...
i.e. equally and without preference; other creditors argued that a ‘pay as you go’ approach should be adopted with assets allocated according to the dates on which liabilities fell due, starting with the earliest.
High Court
An application was made under Section 35 of the Insolvency Act 1986Insolvency Act 1986
The Insolvency Act 1986 is an Act of the Parliament of the United Kingdom that provides the legal platform for all matters relating to personal and corporate insolvency in the UK.-History:...
asking for directions from the court as to how to progress.
Mr Justice Sales held that the natural meaning of Clause 7.6 was that assets were to be distributed according to the dates when the relevant debts became due within the realisation period i.e. that the ‘pay as you go’ approach was the correct one.
Court of Appeal
By a majority of two to one (Lord Justice LloydTimothy Lloyd
Sir Timothy Andrew Wigram Lloyd , styled The Rt Hon. Lord Justice Lloyd, is an English judge, a member of the Court of Appeal....
and Lord Justice Rimer
Colin Rimer
Sir Colin Percy Farquharson Rimer is an English judge of the Court of Appeal.He was educated at Dulwich College from 1954 to 1962 and at Trinity Hall, Cambridge....
in the majority; Lord Neuberger dissenting
Dissenting opinion
A dissenting opinion is an opinion in a legal case written by one or more judges expressing disagreement with the majority opinion of the court which gives rise to its judgment....
), the Court of Appeal upheld the decision of Mr Justice Sales and dismissed the appeals.
Supreme Court
By a majority of four to one, the Supreme Court allowed the appeal. The judgment of the majority (comprising Lords Mance, Hope, Scott and Collins) was given by Lord Mance with a further, brief judgment, given by Lord Collins. Lord Walker dissentedDissenting opinion
A dissenting opinion is an opinion in a legal case written by one or more judges expressing disagreement with the majority opinion of the court which gives rise to its judgment....
.
The leading judgment was given by Lord Mance
Jonathan Mance, Baron Mance
Jonathan Hugh Mance, Baron Mance, PC is a Justice of the Supreme Court of the United Kingdom.-Early life:Mance was born on 6 June 1943, one of four children of Sir Henry Mance, an important figure in Lloyd's Register. Like his father, he attended Charterhouse, a boarding school in Godalming, Surrey...
, with whom Lords Hope
David Hope, Baron Hope of Craighead
James Arthur David Hope, Baron Hope of Craighead, is a Scottish judge and Deputy President of the Supreme Court of the United Kingdom, having previously been the Second Senior Lord of Appeal in Ordinary.-Early life:...
, Scott
Richard Scott, Baron Scott of Foscote
Richard Rashleigh Folliott Scott, Baron Scott of Foscote PC, QC , is a British judge, who formerly held the office of Lord of Appeal in Ordinary.-Early life:...
and Collins concurred
Concurring opinion
In law, a concurring opinion is a written opinion by one or more judges of a court which agrees with the decision made by the majority of the court, but states different reasons as the basis for his or her decision...
. The principles upon which the court should interpret such a document were held to be well-established and clear. The court should look at the document as a whole rather than focus on a single phrase, including any background information which would have been available to the parties at the time the contract was agreed. Applying this principle, it was held that the court should look not at the final sentence in Clause 7.6 in isolation but at the context in which the sentenced appeared and at the scheme of the STD as a whole. Clause 7.6 appeared in the STD in the context of an assumption of a situation in which Sigma had enough assets to cover at least its secured creditors, not a situation requiring the application of priorities between creditors. The final sentence of Clause 7.6, it was held, was not intended to prioritise creditors whose debts fell due during the realisation period over other creditors. It was also held to be improbable that commercial parties would contemplate that priority would be conferred to some creditors over others by the fortuitous timing of whose debts fell due during the realisation period. Clause 7.6 was an ancillary provision which did not override the trustee’s absolute discretion as to how assets were to be realised. The reasonable person’s understanding of Clause 7.6 was aided by a clear basic scheme that debts arising during the realisation period were to be part of the short term pool of creditors with the assets to be distributed equally amongst all the creditors at the discretion of the trustee i.e. pari passu.
A further judgment was given by Lord Collins, with whom Lords Hope and Mance concurred. Lord Collins, in his brief judgment, offered further thoughts on the approach to interpretation. He warned against over-literal interpretation of one provision of a document without regard to the whole as risking distortion or frustration of a commercial purpose. Such an approach, which may be appropriate in interpreting tax legislation, was inappropriate in a commercial context. Detailed semantic analysis had to give way to business common sense.
Lord Walker, dissenting, argued that the case involved no issue of general public importance. The principles of construction to be applied were clear and were neatly summarised in Lord Mance’s judgment. Lord Walker preferred the view taken by the majority of the Court of appeal. However arbitrary or fortuitous it might appear to the court that priority would be given to creditors whose debts fell due during the realisation period, that was nonetheless the effect of the deed and the court should not make a new contract for experienced commercial operators as advised by expert lawyers.
See also
- English contract lawEnglish contract lawEnglish contract law is a body of law regulating contracts in England and Wales. With its roots in the lex mercatoria and the activism of the judiciary during the industrial revolution, it shares a heritage with countries across the Commonwealth , and the United States...
- English property lawEnglish property lawEnglish property law refers to the law of acquisition, sharing and protection of wealth in England and Wales. Property law can refer to many things, and covers many areas. Property in land is the domain of the law of real property. The law of personal property is particularly important for...
- 2009 Judgments of the Supreme Court of the United Kingdom2009 Judgments of the Supreme Court of the United KingdomThis is a complete list of the judgments given by the Supreme Court of the United Kingdom between the court's opening on 1 October 2009 and the end of that year. Most of the cases were heard in the House of Lords before judgments were given in the new Supreme Court...
External links
- Full text of the decision
- Press Summary
- N. Beale, 'Case Comment', UKSCBlog, (10 November 2009)
- 'Reflections on first two judgments of the Supreme Court', UKSCBlog, (29 October 2009)
- M. Herman, 'Law lords decide Sigma SIV dispute', The TimesThe TimesThe Times is a British daily national newspaper, first published in London in 1785 under the title The Daily Universal Register . The Times and its sister paper The Sunday Times are published by Times Newspapers Limited, a subsidiary since 1981 of News International...
, (London 29 October 2009). - A. Thomson, 'U.K. Court Overturns Ruling on SIV's Assets', The Wall Street JournalThe Wall Street JournalThe Wall Street Journal is an American English-language international daily newspaper. It is published in New York City by Dow Jones & Company, a division of News Corporation, along with the Asian and European editions of the Journal....
, (New York 30 October 2009).