Re Sigma Finance Corporation [2009] UKSC 2
Supreme Court, Lord Hope (Deputy President), Lord Scott,
Lord Walker, Lord Mance and Lord Collins, 29 October 2009
In proceedings concerning the construction of a clause in a security trust deed contract, the Supreme Court has reiterated the need not give an over-literal interpretation of one provision of a commercial contract without regard to the context of the agreement as a whole.
Mark Howard QC and Jonathan Dawid (instructed by Mayer Brown (International) LLP) for interested party A. Richard Sheldon QC and Felicity Toube (instructed by Dechert LLP) for interested party B. Simon Mortimore QC and Daniel Bayfield (instructed by Jones Day LLP) for interested party C. Susan Prevezer QC and Edmund King (instructed by Quinn Emanuel Urquhart Oliver and Hedges LLP) for interested party D. James Potts (instructed by Allen & Overy LLP) for the security trustee. Gabriel Moss QC and Barry Isaacs (instructed by Lovells LLP) for the administrative receiver.
The proceedings concerned a structured investment vehicle company established to invest in certain types of asset-backed securities and other financial instruments.
The company aimed to profit from the difference between the cost of funding its activities and the returns made on its investment portfolio. The sub-prime mortgage crisis in the United States rendered the company’s available assets far short of the amount needed to pay even the secured creditors.
All of the company’s assets were secured under a security trust deed (STD) in favour of the creditors investing in the company.
The STD provided that in that event of an enforcement event, such as the company anticipating entering liquidation, there should be a 60 day realisation period during which the security trustee should use the company’s assets to create, so far as possible, two pools of funds relating to its short and long term liabilities.
Clause 7.6 of the STD provided that: “During the Realisation Period the Security Trustee shall so far as possible discharge on the due dates therefore any Short Term Liabilities falling due for payment during such period, using cash or other realisable or maturing Assets of the Issuer.”
The company entered liquidation and a dispute arose between various classes of creditors as to the correct application of the STD.
The High Court and the Court of Appeal both construed cl 7.6 as meaning that the remaining assets fell to be distributed preferentially to the creditors whose debts fell due during the realisation period, with distribution to be made according to the dates when payment became due. The other creditors appealed.
Lord Mance:
The principles upon which a court should interpret a document such as the present were not in doubt. They had been reviewed and restated by the House of Lords in a series of cases: Charter Reinsurance Co Ltd v Fagan [1996] 3 All ER 46; Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] 3 All ER 352 and Chartbrook Ltd v Persimmon Homes Ltd [2009] All ER (D) 12 (Jul).
In the instant case the focus was on the general nature of the business involved—apparent from the document itself—and upon the scheme and wording of the STD read as a whole.
The conclusion reached below attached too much weight to what the courts perceived as the natural meaning of the words of one sentence of cl 7.6, and too little weight to the context in which that sentence appeared and to the scheme of the STD as a whole.
The resolution of an issue of interpretation in a case like the present was an iterative process, involving checking each of the rival meanings against other provisions of the document and investigating its commercial consequences.
Caution was appropriate about the weight capable of being placed on the consideration that the document was a long and carefully drafted document. Of much greater importance, in the ascertainment of the meaning that the deed would convey to a reasonable person with the relevant background knowledge, was an understanding of its overall scheme and a reading of its individual sentences and phrases which placed them in the context of that overall scheme.
Ultimately, that was where his lordship differed from the conclusion reached by the courts below.
His lordship went on to conclude that cl 7.6 was not intended to deal with a situation requiring the application of priorities between creditors. It was improbable that cl 7.6 could be read as extracting from the short term pool debts which fell due during the 60 day realisation period so as to give priority over other creditors.
It was an ancillary provision which did not override the trustee’s absolute discretion as to the manner in which assets were to be realised.
The appeal would therefore be allowed.
Lord Collins:
His lordship agreed. He added that in complex documents of the kind in issue there were bound to be ambiguities, infelicities and inconsistencies. An over-literal interpretation of one provision without regard to the whole might distort or frustrate the commercial purpose.
The instant case was one of those too frequent cases where a document had been subjected to the type of textual analysis more appropriate to the interpretation of tax legislation which had been the subject of detailed scrutiny at all committee stages than to an instrument securing commercial obligations.
Lord Hope delivered a concurring judgment. Lord Scott agreed with Lord Mance and Lord Walker dissented.
