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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Fons Hf v Corporal Ltd & Anor [2014] EWCA Civ 304 (20 March 2014) URL: https://www.bailii.org/ew/cases/EWCA/Civ/2014/304.html Cite as: [2014] EWCA Civ 304 |
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ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MANCHESTER DISTRICT REGISTRY
Mark Cawson QC (sitting as a Deputy Judge of the High Court)
1MA30294
Strand, London, WC2A 2LL |
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B e f o r e :
LADY JUSTICE GLOSTER
and
LADY JUSTICE SHARP
____________________
FONS HF (IN LIQUIDATION) |
First Respondent (Claimant) |
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- and - |
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(1) CORPORAL LIMITED |
Second Respondent (First Defendant) |
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(2) PILLAR SECURITISATION S.à.r.l |
Appellant (Second Defendant) |
____________________
WordWave International Limited
A Merrill Communications Company
165 Fleet Street, London EC4A 2DY
Tel No: 020 7404 1400, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Mr Andrew Mitchell QC and Mr Neil Cadwallader (instructed by Heatons LLP) for the First Respondent
Hearing dates : 22nd and 23rd January 2014
____________________
Crown Copyright ©
Lord Justice Patten :
Introduction
"The Chargor, as a continuing security for the payment, discharge and performance of the Secured Obligations, charges and agrees to charge in favour of the Lender:
3.1.1 by way of first legal mortgage, the Shares;
3.1.2 by way of first equitable mortgage, the Distribution Rights from time to time accruing to or on the Shares; and
3.1.3 to the extent not validly and effectively charged by way of mortgage pursuant to clauses 3.1.1 or 3.1.2, by way of first fixed charge, the Secured Property and all the Chargor's interest in the Secured Property."
"all shares (if any) specified in Schedule 1 (Shares), and also all other stocks, shares, debentures, bonds, warrants, coupons or other securities now or in the future owned by the Chargor in Corporal from time to time or any in which it has an interest."
Background
(1) RBS's secured loan facility of about £8m;
(2) £4,483,448 due to Baugur Group HF under a shareholder loan agreement;
(3) 19,975,000 preference shares of £1 each in Corporal held as to 65% by Baugur and 35% by Fons; and
(4) the A and B ordinary shares of 10p each in Corporal comprising 245,000 A ordinary shares held by Baugur and Fons in the same proportions as the preference shares and B ordinary shares (representing about 2% of the ordinary share capital) held by management.
"[21] The language used by the parties will often have more than one potential meaning. I would accept the submission made on behalf of the appellants that the exercise of construction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person, that is a person who has 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, would have understood the parties to have meant. In doing so, the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other."
"The court's job is to discern the intention of the parties, objectively speaking, from the words used in the commercial document, in the relevant context and against the factual background in which the document was created. The starting point is the wording of the document itself and the principle that the commercial parties who agreed the wording intended the words used to mean what they say in setting out the parties' respective rights and obligations. If there are two possible constructions of the document a court is entitled to prefer the construction which is more consistent with "business common sense," if that can be ascertained. However, I would agree with the statements of Briggs J, in Jackson v Dear ([2012] EWHC 2060 (Ch) at 40) first, that "commercial common sense" is not to be elevated to an overriding criterion of construction and, secondly, that the parties should not be subjected to ". . . the individual judge's own notions of what might have been the sensible solution to the parties' conundrum". I would add, still less should the issue of construction be determined by what seems like "commercial common sense" from the point of view of one of the parties to the contract."
"Shares"
"(a) all dividends, distributions, interest and other income paid or payable on any Share;
(b) all shares or other property derived from any Share (whether by way of conversion, consolidation, subdivision, substitution, redemption, bonus, preference, option or otherwise); and
(c) all other allotments, accretions, rights, benefits and advantages of all kinds accruing, offered or otherwise derived from or incidental to any Share".
And Secured Property in clause 3.1.3 means:
"the assets charged at clause 3 (Charging clause) and includes any part or parts of them."
"6.7 Matters relating to the Shares
6.7.1 the Shares specified in Schedule 1 (Shares) are at the date of this deed the only certificated Shares legally and beneficially owned by the Chargor in Corporal;
6.7.2 it is and will remain the sole beneficial owner of the Secured Property and (save where the Shares have been registered in the name of the Lender or its nominee pursuant to the provisions of this deed) it and/or its nominee is and will remain the absolute legal owner of the Shares subject to the provisions of this deed;
6.7.3 the Shares are fully paid and none of the Secured Property is subject to any lien, charge, equity, encumbrance, option to purchase or similar rights of any person other than the Lender;
6.7.4 the Lender is entitled to be registered or to require a nominee to be registered as a member of each of the relevant companies to which the Shares relate without any right of the board of directions of any such company to refuse registration or to consent to such registration only subject to satisfaction of conditions; and
6.7.5 it has not nominated another person or persons to enjoy or exercise all or any of its rights as the registered holder of the Shares."
Debentures and other securities
"77. I have analysed in para 57 above the nature of the particular documents or instruments specified within the Definition. They are all, with the possible exception of "debentures" given the potentially wide common law definition thereof, documents or instruments either designed to be transmissible, or even to be of a bearer nature, or at least have about them a formality or quality demonstrative of making some underlying right more readily enforceable. As to "debentures", whilst "debentures" might, in an appropriate context, be construed as extending to a simple loan agreement, I accept that the ordinary businessman or, indeed the ordinary company lawyer, would be surprised to hear a simple loan agreement described as a "debenture" absent more by way of indicia of a debenture as commonly understood (cf. the citation from Lemon v Austin Friars at page 16, per Pollack MR, referred to in para 68 above), and that a simple loan agreement does not, without more, accord with the legal meaning of debenture as ordinarily understood.
78. As the various documents or instruments specifically set out in the Definition are to be taken as examples of "other securities", they do, in my judgment, point firmly to what the relevant reasonable objective observer would have understood the parties to have intended by the word "securities", namely some document or instrument with like qualities.
79. Consequently, I accept Mr Cadwallader's argument that ordinary business people, or more pertinently, a relevant reasonable objective observer, looking at the wording of the Definition taken as a whole, in particular given the inclusion of the references to "shares", "stocks", "bonds", "warrants" and "coupons", would not understand the parties to have intended the reference to "other securities ", or indeed the reference to "debentures", as extending to documents such as the SLAs, or the unsecured liabilities arising thereunder. I consider that, in the present context, the words "other securities" and "debentures" bear an ordinary meaning quite different from a mere loan agreement."
"The term "debenture" has not, so far as I am aware, ever received any precise legal definition. It is, comparatively speaking, a new term. I do not mean a new term in the English language, because there is a passage in Swift which has been mentioned to me where the term "debenture" is used. I have the quotation before me[1]. But although it is not a term with any legal definition, it is a term which has been used by lawyers frequently with reference to instruments under Acts of Parliament, which when you turn to the Acts of Parliament themselves are not so described. The "debentures" of a railway company are frequently spoken of; but the Companies Clauses Act of 1845 speaks of "bonds and mortgages" and not "debentures"; in argument, however, they are frequently so called. In the same way the instruments of a company incorporated under the Act of 1862, of which a register must be kept, are commonly called debentures, but the term in the Act is "mortgages" and "charges." It is an expression used frequently in the Law Courts, both by counsel and Judges, and it is a very convenient term; but it has no legal definition. That is the opinion of Mr. Justice Grove and of Lord Justice Lindley as expressed in the case of British India Steam Navigation Company v. Commissioners of Inland Revenue. The term itself imports a debt - an acknowledgment of a debt - and speaking of the numerous and various forms of instruments which have been called debentures without anyone being able to say the term is incorrectly used, I find that generally, if not always, the instrument imports an obligation or covenant to pay. This obligation or covenant is in most cases at the present day accompanied by some charge or security. So that there are debentures which are secured, and debentures which are not secured. This distinction is shewn on the face of the 17th section, which speaks of "debentures" issued by an incorporated company, and secured upon its capital stock and chattels."
"I have seen debentures of various kinds and classes, and it is a mistake to say that to be debentures the instruments must be issued and numbered seriatim. I have even seen a single debenture issued to one man. There is nothing in the section requiring that more than one instrument should be issued. In this case the security is given to each one so that each shares pari passu with the other. No doubt as a rule the instruments called debentures are issued so that each person gets his own document and can deal with it separately. He has greater facility of dealing with it in the market than is afforded by this instrument, but it would be unreasonable to hold that because the obligation to pay and the security in favour of several persons is contained in one single document, therefore the instrument is not within the protection of the section. There would not be any principle in doing that. I do not see why a single debenture should not be given to half-a-dozen persons and still be a good debenture within the Act. In my opinion, therefore, this is a valid instrument."
Now what is a "debenture"? I am unable to add anything to what I have already stated on this point in Edmonds v. Blaina Furnaces Company. My attention has been called to extracts from Skeat's Etymological Dictionary and Blount's Law Dictionary as to the derivation of the word "debenture," from which it appears that the term is a very old one and is derived from the Latin "debentur," because it is said "these receipts began with the words 'debentur mihi'".
Bearing in mind the four divisions of sect. 17 as I have just given them, I must try and find out what "debenture" means. In the course of the argument I asked Sir Arthur Watson and Mr. Byrne to define a "debenture," and they did not satisfactorily do so. I do not accept Sir Arthur Watson's definition that a debenture must be one of a series of instruments or issued pari passu with others.
I have myself known an instance of a single debenture payable to one individual. In my opinion a debenture means a document which either creates a debt or acknowledges it, and any document which fulfils either of these conditions is a "debenture." I cannot find any precise legal definition of the term, it is not either in law or commerce a strictly technical term, or what is called a term of art."
"Our attention has been called to what is a matter of interest, that this word "debenture" is one very old in use in the English language. Some account of it is to be found in the opening words of the first chapter of Part 3 of Sir Francis Palmer's Company Precedents (12th ed.). Again, Chitty J., in Levy v. Abercorris Slate and Slab Co. (1), mentioned the fact that he had had his attention called to the old uses of the word "debenture." Sir Francis Palmer in his book has collected a number of characteristics, some of which are to be found in various debentures. They are tabled on pp. 3 and 4 of the volume to which I have already referred, and some nine characteristics are pointed out as not uncommon in some debentures. But it is not essential that these characteristics should all be present, and some indeed are almost the antithesis the one of the other. For instance, sometimes you have a number of debentures issued as a series with a register of the series; on the other hand, you sometimes have a debenture which is issued to one person only, a single debenture. That single debenture is perhaps less common in the present day than it was formerly. At any rate, there are a number of characteristics which I think are summarized in the passage to which I have referred; but whatever the characteristics which you would expect to find or may find in the debentures, the root meaning of the word is "indebtedness"; that it does record an indebtedness.
…
Now, Sir Francis Palmer in his catalogue of the characteristics of a debenture says: "A debenture is, as a general rule, one of a series." This document is certainly one of a series. The term "debenture" is applied, as a general rule, to instruments issued by a company. This instrument is issued by a company. It is not issued, it is true, under seal. A debenture usually provides for the payment of a specific principal sum at a specified date, but that, as he points out in the paragraph, is not essential, for there are millions of debentures which have not an actual provision for repayment because they are perpetual or permanent debentures. A debenture usually provides for payment of interest. This document does not, and a debenture generally contains a charge on the undertaking of the company; but from the cases that are referred to it is quite plain that there are a number of debentures in which there is no such charge; and indeed one must be careful not to confuse a debenture with a mortgage debenture."
"Now, it has been said by a wiser man than myself that it is impossible to give an exhaustive definition of the word "debenture"; and I certainly do not propose to incur the reproach of venturing where wise men fear to tread, and therefore I shall not attempt to give any definition of the word "debenture." But there are certain characteristics which, if found in a document, have usually in legal and commercial transactions been held to constitute that document a debenture. One of those is that the document is an acknowledgment of indebtedness, and I look to this document to see whether it does or does not contain at least that characteristic. I find that it does. It certifies that the company "is indebted to" the plaintiffs "or other registered holder for the time being of this certificate in the sum of 2100l." That is a clear acknowledgment of the indebtedness of the company in that sum. It is quite true that the document contains special provisions with regard to the funds out of which that indebtedness will be satisfied by payment; but that, in my opinion, is irrelevant to the question that we have to determine. If you find that a document of this kind contains an acknowledgment of indebtedness, it satisfies, at all events, that part which was thought to be sufficient by Chitty J. and was said in express terms to be sufficient by Lindley J., and I need not express my own opinion. On these authorities it is obviously sufficient to constitute the document a debenture, and on that simple ground, in my opinion, the judgment of Lawrence J. was correct."
"debenture stock, bonds and any other securities of a company whether constituting a charge on the assets of the company or not".
"If we begin by asking what the word "debenture" means, apart from any definition, the reply must be that it has no precise meaning. Chitty J. observed in the case of Levy v. Abercorris Slate and Slab Co., that the word "means a document which either creates a debt or acknowledges it, and any document which fulfills either of these conditions is a debenture." An interesting extract from Skeat's Etymological Dictionary (1882) will be found in a footnote to the case (p. 264). Sir Nathaniel Lindley had previously stated simply, "What the correct meaning of 'debenture' is I do not know": British India Steam Navigation Co. v. Inland Revenue Commissioners. In Lemon v. Austin Friars Investment Trust, Ld., the same ignorance was professed in the Court of Appeal. Warrington L.J. in particular, after observing that it had been said "by a wiser man than himself" that it was impossible to give an exhaustive definition of the word "debenture," went on to remark that he did not propose to incur the reproach of venturing where wise men fear to tread. The text books are agreed at least in this that no accurate definition of the word can be found. I think it sufficient to cite Buckley on the point (11th ed., p. 174). It is clear, therefore, that it was desirable to insert in any consolidation of the Companies Acts a definition of the word.
…
I do not think there is any strong argument for suggesting that s. 74 of the Act of 1929, or any of its predecessors, ought by reason of its nature to be confined to what may be called ordinary debentures. As we have seen, some definition was certainly desirable, and the very wide terms used by the Legislature in the Act of 1928 and reproduced in the consolidating Act of the following year seem to me to show that it was intended to give freedom of contract as regards the particular matter involved in s. 74 in relation to any securities granted on loan by a company registered under the Companies Acts. It is contended that the context otherwise requires. I am unable to find any such context."
"does not mean as in popular language some obligation which is auxiliary to some other obligation, but means any obligation created by any instrument."
It appears from that passage not only that the word "security" must be construed in the same way in both headings, but that the word as used in Sch 1 has not its ordinary meaning, but means any written obligation for payment of money."
See Harman LJ at pp. 1176-7
Conclusion
Lady Justice Sharp :
Lady Justice Gloster :
"a debenture means a document which either creates a debt or acknowledges it, and any document which fulfils either of these conditions is a debenture."
has been widely accepted in subsequent cases; see, in addition to Lemon v. Austin Friars Investment Trust, Ltd. supra, City of London Brewery Co Ltd v IRC [1899] 1 QB 121 at 139 per Rigby LJ, Clark v Balm Hill & Co [1908] 1 KB 667 at 670 per Phillimore J; R v Findlater [1939] 1 KB 594 at 599 per the Court of Criminal Appeal (and despite the disapproval of Edmonds v. Blaina Furnaces Company expressed by North J in Topham v Greenside Glazed Fire-Brick Company (1887) 37 Ch D 281 at 290). In those circumstances it is not now realistically open to us to question whether Chitty J's definition, formulated in the context of the courts' concern to avoid the impact of the Bills of Sale Acts on corporate loans, and which has been described as:
"a departure from the established core concept of a debenture, i.e. an instrument issued in a series to enable persons to trade and deal with it in the markets." (see Tennekoon, The Law and Regulation of International Finance (1991), at page 126),
is correct.
"The vast increase in the provision of long and medium-term loans for companies by the commercial banks and their subsidiaries in recent years has had a substantial influence on the forms of security taken in connection with such loans to companies and on the style, contents and nomenclature of the relevant documentation. In particular, the terms 'loan' and 'security agreements' are now widely used in place of the terms 'secured' and 'unsecured debentures', and in order to embrace the whole range of loan and debt securities…,it has become usual to refer to them simply as debt securities, or in a more expanded form, as debentures, debenture stock, loan stock and notes and other debt securities."
Note 1 “Your modern wits, should each man bring his claim,
Have desperate debentures on your fame,
And little would be left you, I'm afraid,
If all your debts to Greece and Rome were paid.”
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