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England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Sigma Finance Corp, Re  EWCA Civ 1303 (25 November 2008)
Cite as:  EWCA Civ 1303,  BCC 393
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COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
MR JUSTICE SALES
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE LLOYD
LORD JUSTICE RIMER
|In the matter of Sigma Finance Corporation
(in Administrative Receivership)
WordWave International Limited
A Merrill Communications Company
190 Fleet Street, London EC4A 2AG
Tel No: 020 7404 1400, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Interested Party B, Appellant in appeal 2008 / 2697
Simon Mortimore Q.C. and Daniel Bayfield (instructed by Jones Day LLP) for
Interested Party C, Appellant in appeal 2008 / 2689
Sue Prevezer Q.C. and Edmund King (instructed by Quinn Emanuel Urquhart Oliver & Hedges LLP) for Interested Party D, Appellant in appeal 2008 / 2707
Mark Howard Q.C. and Jonathan Dawid (instructed by Mayer Brown International LLP) for Interested Party A, Respondent
Gabriel Moss Q.C. and Barry Isaacs (instructed by Lovells LLP) for the
Administrative Receivers, Respondents
James Potts (instructed by Allen & Overy) for the Security Trustee, Respondent
Hearing date: 20 November 2008
Crown Copyright ©
Lord Justice Lloyd:
"The Receivers estimate that Sigma's liabilities to creditors comprise secured liabilities of approximately US$6.2 billion and unsecured liabilities of approximately US$3.658 billion. Even leaving aside possible swap liabilities, the Receivers assess Sigma to have an insolvent deficit in excess of US$5.5 billion in respect of secured liabilities, and in excess of US$9 billion in respect of all liabilities (secured and unsecured)."
"8. It appears that Sigma has arrived at this position as a result of problems it has experienced in funding its activities consequent upon the negative impact upon the financial markets over the last year or so stemming from perceived difficulties arising from the sub-prime mortgage market in the United States. These have caused the value of a variety of asset backed and other financial securities of the kind held by Sigma to fall substantially in value and the market for such securities to become less liquid, in that there are now many fewer investors willing to purchase such instruments. The market for debt securities of the kind issued by Sigma has also fallen away, thereby reducing its ability to fund its activities. For many months prior to October 2008 Sigma had been unable to issue debt securities, which meant that it became unable to "roll over" its obligations in relation to the Notes and other financial instruments which it had previously issued, and which were falling due for repayment from time to time. The result of this was that Sigma had to resort to funding its activities through various other techniques, including the sale of assets in its portfolio and entering into securities lending arrangements and "repo" agreements (both of which, as a matter of commercial substance, involved borrowing money against the provision of security in the form of assets taken from its asset portfolio).
9. "Repo" agreements which Sigma entered into included provision for the relevant counterparty to make a "margin call" for provision by Sigma of further cash or assets, if the value of the assets provided by Sigma by way of security for the transaction fell below a certain level. In September 2008, Sigma received such margin calls which it did not honour. Sigma's board of directors resolved on 30 September 2008 that Sigma's position as a going concern was no longer sustainable, that it might then be or might become insolvent, and that "the required steps under the relevant transaction documents entered into by [Sigma] should therefore be taken to provide for an orderly winding down of [Sigma's] affairs." Liabilities of Sigma falling due on that day (in the sum of US$541,944 in respect of the interest coupon due in relation to Notes issued or guaranteed by Sigma), on 1 October 2008 (in the sum of US$901,146 in respect of the interest coupon due in relation to other such Notes) and subsequently have not been met by payment."
"(i) Party A is the holder of US Medium Term Notes with a face value of US$225 million issued by Sigma Finance Incorporated (a wholly-owned subsidiary of Sigma) and guaranteed by Sigma. Those Notes matured, so that payment was due under them, on 23 October 2008. No payment has yet been made, and the question arises whether the Receivers should be directed to use Sigma's assets to satisfy Sigma's payment obligation in respect of these Notes. In the terminology used in the Security Trust Deed, Party A is a "Beneficiary" in respect of "Short Term Liabilities" which fall due in the "Realisation Period";
(ii) Party B is the holder of Notes maturing on 30 October 2008 (with a face value of US$428 million) and on 14 November 2008 (with a face value of US$430 million). For the purposes of the Security Trust Deed, therefore, Party B is also a Beneficiary in respect of Short Term Liabilities which fall due in the Realisation Period. However, it is apparent that Sigma is massively insolvent. Its financial position is such that if the Receivers use its assets to pay the Notes held by Party A which matured on 23 October, no funds will remain to meet Sigma's payment obligations in relation to the Notes held by Party B;
(iii) Party C is an advisory institution which represents a group of holders of US Medium Term Notes with a face value in excess of US$400 million. These are all due to mature in June 2009. For the purposes of the Security Trust Deed, Party C's clients are Beneficiaries in respect of Short Term Liabilities which fall due only after the end of the Realisation Period. If the Receivers use Sigma's assets to pay the Notes held by Party A, or those held by Party A and Party B, then it is clear that no funds will remain to meet Sigma's payment obligations in relation to the Notes held by the clients of Party C;
(iv) Party D is the holder of Notes maturing more than 365 days after the "Enforcement Date" for the purposes of the Security Trust Deed. The Enforcement Date is 2 October 2008. For the purposes of the Deed, Party D is a Beneficiary in respect of "Long Term Liabilities". Again, if the Receivers use Sigma's assets to pay the Notes held by Party A, or by Party A and Party B, then it is clear that no funds will remain to meet Sigma's payment obligations in relation to the Notes held by Party D."
"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 [relevant Notes], 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."
"7.9 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, 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) [deals with a possibility that does not matter for present purposes]"
"I accept Mr Howard's submission that where the maturity date for a debt instrument has arrived and the payment obligation contained in the instrument has not been satisfied, the liability contained in the instrument remains due on each day thereafter until it is satisfied. I consider that the words, "on the due dates therefor" and "falling due for payment", in the last sentence of clause 7.6 are clearly intended to cover Short Term Liabilities falling within this class of case, so that they should be paid at the same time as any such instruments maturing on the first day of the Realisation Period."
i) The first two sentences of clause 7.6 impose an obligation on the Trustee to form the pools, and in particular the Short Term Pool.
ii) The terms of clause 7.11.2 require the assets in the Short Term Pool to be used to pay the Short Term Liabilities at, but not before, the end of the Realisation Period.
iii) However, there is power, contained in the third sentence of clause 7.6, to pay in full liabilities which fall due during the Realisation Period as they fall due, but this power is only to be exercised "so far as" it is "possible".
iv) If there is a shortfall in the Pool, then the Short Term Liabilities are not to be paid in full, but are to be pro-rated under proviso (a) to clause 7.11.2.
v) As the liabilities referred to in the sentence are within the definition of Short Term Liabilities, it is not "possible" to pay them in full, because that is precluded by clause 7.9 and proviso (a) to clause 7.11.2, and the sentence therefore cannot apply.
"The words "so far as possible" mean that, while the Trustee has a duty to pay each RP liability as it falls due, the payment is limited to the amount which the Trustee is confident will be paid in respect of that liability pursuant to the provisions of clause 7.11.2 and the provisos thereto; at the end of the Realisation Period, any balance due in respect of the RP liability is to be paid from the Short Term Pool."
"It may seem somewhat surprising that the various parties did not wish to provide that as soon as an event of default occurred involving Sigma's insolvency the shutters should come down in relation to payment of its liabilities such that all assets and all its outstanding liabilities at that time should fall to be treated on a general pari passu basis within the Pool arrangements. However, that is not what the relevant provisions provide for, and it is not for the court to seek to re-write the agreement on the basis of its own views of what might be a fairer solution or its speculation about what the parties might have wished to achieve had they applied their minds more directly in advance to the particular situation which has now arisen."
"It [i.e. the "pay as you go" construction of the third sentence] is a construction which cannot properly be castigated as unfair or unjust, and it produces a somewhat crude but practical and workable regime for managing Sigma's affairs in the Realisation Period leading up to the creation of the Pools. Since the parties obviously considered that the Security Trustee (or Receivers appointed by it) might well need a 60 day period in order to establish the liabilities and assets to go into the Pools and how they should be allocated, I do not think that the perceived desirability of having a simple and workable system telling the Security Trustee what to do in relation to maturing liabilities while that process was being carried out can be discounted. It should also be recalled that the normal operation of Sigma's business was on a "pay as you go" basis. Against that background it does not seem implausible that the parties intended that its business should be continued on that same basis during the Realisation Period until the Pools could be established in a considered and orderly fashion, at which stage a new, pari passu regime should come into operation. The parties already accepted certain risks to themselves inherent in the "pay as you go" nature of Sigma's business, and by providing for "pay as you go" during the Realisation Period they appear to me to have agreed to continue to bear such risks until the Pools are set up."
Lord Justice Rimer
"… 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);"
I do not understand the sense of the words in parenthesis, which appear to state the obvious (it is the proviso to clause 7.11.2 that deals with a perceived deficiency); more importantly, I also do not understand how that provision can be said to include an obligation to pay liabilities that have fallen due for payment before the expiry of the realisation period. Interpreted in the context of clause 7 as a whole, the words "when due" appear to me to mean "when falling due after the realisation period". They are inapt to catch liabilities that had accrued due during the realisation period. There is a good reason why they were not intended to catch such liabilities: clause 7.6 required them to be discharged during the realisation period.
Lord Neuberger of Abbotsbury
The rival interpretations
a) Any RP liability has to be paid by the Trustee in full on the date it falls due, so long as the SIV has assets, so that there would be a "first come, first served" approach as between RP liabilities; only if there are sufficient assets to pay the RP liabilities in full, will there be anything left to meet any of the liabilities falling due after the end of the Realisation Period; this is party A's contention, which was accepted by the Judge;
b) This is similar to meaning (a), in that the Trustee must devote the assets first to paying off the RP liabilities in full, but those liabilities are to be treated equally, rather than paid on a first come first served basis; so if there are insufficient assets to pay the RP liabilities in full, they are to be paid on a pari passu basis; this is party B's contention;
c) The consequence of the words "so far as possible" is that, while the provision imposes a duty on the Trustee to pay off the RP liabilities in full as they fall due, this duty only applies if there are sufficient assets to pay all Short Term Liabilities and Long Term Liabilities in full; otherwise the RP liabilities are to be treated as part of the Short Term Liabilities to be met out of the Short Term Pool under clause 7.11; thus, the provision does not apply in an insolvent situation; this is parties C and D's original contention;
d) The words "so far as possible" mean that, while the Trustee has a duty to pay each RP liability as it falls due, the payment is limited to the amount which the Trustee is confident will be paid in respect of that liability pursuant to the provisions of clause 7.11.2 and the provisos thereto; at the end of the Realisation Period, any balance due in respect of the RP liability is to be paid from the Short Term Pool; unlike meaning (c), the provision applies both in insolvent and solvent situations; this is a variant on parties C and D's case, and, although mentioned on behalf of party B, it emerged with greater significance as a result of the oral argument in this court.
The approach to construction
Commercial common sense
The language of the provision
The provision in its documentary context