Fons HF (in Liquidation) v Pillar Securitisation S.à.r.l
| Jurisdiction | England & Wales |
| Judge | Lord Justice Patten,Lady Justice Sharp,Lady Justice Gloster |
| Judgment Date | 20 March 2014 |
| Neutral Citation | [2014] EWCA Civ 304 |
| Docket Number | Case No: A3/2013/1986 |
| Court | Court of Appeal (Civil Division) |
| Date | 20 March 2014 |
[2014] EWCA Civ 304
IN THE COURT OF APPEAL (CIVIL DIVISION)
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
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Patten
Lady Justice Gloster
and
Lady Justice Sharp
Case No: A3/2013/1986
Mr Jonathan Davies-Jones QC and Mr Andreas Gledhill (instructed by Keystone Law) for the Appellant
Mr Andrew Mitchell QC and Mr Neil Cadwallader (instructed by Heatons LLP) for the First Respondent
Hearing dates : 22 nd and 23 rd January 2014
Introduction
This appeal concerns the proper interpretation of the definition of the word " Shares" which is contained in clause 1.1 of a legal charge ("the Charge") entered into on 29 th September 2008 between the claimant, Fons HF ("Fons") as Chargor, and Kaupthing Bank Luxembourg S.A. ("Kaupthing") as Lender/Chargee. Under clause 3.1 of the Charge (headed "Grant of security") this provided that:
"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."
" Shares" in clause 3.1.1 is defined as meaning:
"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."
The particular issue which divides the parties is whether this definition encompasses the rights of Fons under two shareholder loan agreements dated 17 th October 2007 and 15 th February 2008 ("the SLAs") under which Fons made unsecured loans to a company, Corporal Limited ("Corporal"), in which it held both ordinary and preference shares. The loan under the first SLA was £563,500 and Fons was the sole lender. Under the second SLA, BG Holding EHF ("Baugur") and Fons acted as joint lenders and advanced £1.5m in proportion to their respective shareholdings in Corporal. Fons provided 35 per cent of the loan. As in the case of the first SLA, the loan was unsecured.
Kaupthing contends that the rights of Fons under the SLAs were charged either as " debentures" or as " other securities" under the clause 1.1 definition of " Shares". The judge, Mr Mark Cawson QC (sitting as a deputy judge of the High Court), rejected this argument but gave Kaupthing permission to appeal.
Background
Before coming back to some of the detailed provisions of the Charge and the SLAs, it is convenient to set out some of the relevant factual background as found by the judge.
On 30 th June 2006 Fons, through a wholly owned subsidiary, Talden Holdings SA ("Talden"), invested some £7m in Corporal by subscribing for 85,750 A ordinary shares at 10p per share and 6,991,425 preference shares at £1 per share. As part of the same arrangements, Corporal entered into a facility agreement with Royal Bank of Scotland plc ("RBS") and a subordination deed, the parties to which were (1) Corporal as debtor, (2) Baugur Group HF, Baugur and Talden as subordinated creditors and (3) RBS.
As a result, the capital and debt structure of Corporal became ranked in the following order:
(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.
On 30 th March 2007 Fons purchased Talden's shareholding in Corporal for £7m.
In 2003 Hamleys, the well-known toy retailer, had been acquired by Baugur and the business was carried on through Corporal. By 2007 additional finance was required in order to develop Hamleys' concessions in a number of House of Fraser stores. Because the facility with RBS had only recently been agreed, Baugur and Fons decided to lend the money to Corporal themselves in proportion to their respective shareholdings. On this basis, Baugur advanced £1,046,500 in August 2007 and Fons advanced £563,500 under the first of the relevant SLAs on 17 th October 2007. On 15 th February 2008 Baugur and Fons agreed to provide a further loan to finance the refurbishment of Hamleys' Regent Street store and advanced £1.5m, again in proportion to their shareholdings in Corporal.
The first SLA provided that the loan would bear interest at 8% per annum rolled up on an annual basis and should become repayable at any time on demand by Fons following the last day of the subordination period as defined in the subordination deed with RBS. In practice this meant a date after RBS had been repaid. It was also repayable if an "exit event" occurred such as a listing of Corporal's shares or a business sale of Corporal. Clause 6 provided that any payment by Corporal should be made in full without set off or counterclaim or any other deductions or withholdings. There was also a provision in clause 4.2 that a certificate from Fons as to the amount at any time due under the SLA should be conclusive absent any manifest error.
The second SLA was entered into on the same terms as the first save that Baugur and Fons were jointly described as "the Lenders" in respect of the £1.5m "Loan". The clause 4.2 certificate was to be given by Baugur as "Agent" for them both.
The judge heard evidence from Mr Andri Freyr Stefansson, who is now Senior Legal Counsel with Landsbankinn HF, and who was in-house legal counsel for Fons between February 2007 and April 2009, about the circumstances leading up to the grant of the Charge. He was also shown various e-mail exchanges between the CEO of Fons (Mr Haraldsson) and the CEO of Kaupthing (Mr Gudmundsson) which referred to discussions between the companies about what was described as a "pledge in hamlays (sic)" to provide security for Fons' and Talden's indebtedness to Kaupthing. As of September 2008, Fons owed some 2.5 bn Icelandic Krona (the equivalent of £14m) and the debt was unsecured. It had also guaranteed Talden's own liability to Kaupthing.
The judge summarises in paragraphs 24–29 of his judgment the evidence which he heard about the drafting of the Charge and various minor changes in the definition of " Shares", none of which seems to me to be admissible on the question of construction. An earlier claim for rectification had been abandoned. The judge also made findings to the effect that Kaupthing was unaware of the existence of the SLAs at or prior to the execution of the Charge and that Mr Stefansson (who was aware of their existence) did not discuss them with Kaupthing during the negotiations. Again, none of this seems to me to be relevant. The construction of the Charge is an objective exercise to be carried out by the court through the eyes of a notional reasonable man who is credited with all the background information which would reasonably have been available to the parties at the time of the contract: see Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at p. 912F-913E. The background information includes anything which would have affected the way in which the reasonable man would understand the words used but does not extend to the negotiations or to evidence of the parties' subjective intent.
The task of the court is to determine what the parties meant by the language which they used. Consistently with that objective, the court will seek to give the words their natural and ordinary meaning derived from the context of the agreement and all other relevant facts indicating the nature and purpose of the transaction. On occasions it will become evident (as it did in ICS itself) that something has gone wrong with the language used as a matter of drafting and the innovation introduced by Lord Hoffmann in his speeches in Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749; ICS (supra); and Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101 has been the ability of the court to correct these errors through a process of interpretation rather than resorting to equity's jurisdiction to order rectification based on common or unilateral mistake.
In most cases, however (and this is one of them), there will not have been any discernable error as such in the drafting process. The parties will have committed themselves to an agreed formula and the only issue between them will be how it should be applied. Ambiguities created by different possible meanings of the word or phrase in question will often fall to be resolved by a resort to what is commonly referred to as business common sense. In Rainy Sky SA v Kookmin Bank [2011] UKSC 50 Lord Clarke of Stone-cum-Ebony JSC said:
"[21] The language used by the parties will often have more than one potential meaning. I...
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