Re Sigma Finance Corporation (in Administrative Receivership)

JurisdictionEngland & Wales
CourtCourt of Appeal (Civil Division)
JudgeLord Justice Lloyd,Lord Justice Rimer,Lord Neuberger
Judgment Date25 November 2008
Neutral Citation[2008] EWCA Civ 1303
Docket NumberCase Nos: A2 2008/2689, 2697 and 2707
Date25 November 2008
In the matter of Sigma Finance Corporation (in Administrative Receivership)

[2008] EWCA Civ 1303


Lord Neuberger OF ABBOTSBURY

Lord Justice Lloyd


Lord Justice Rimer

Case Nos: A2 2008/2689, 2697 and 2707







Royal Courts of Justice

Strand, London, WC2A 2LL

Richard Sheldon Q.C. and Felicity Toube (instructed by Dechert LLP) for 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

Lord Justice Lloyd

This judgment is given on three appeals from an order of Sales J made on 7 November 2008, in proceedings issued on 3 November and heard by the judge on 4 November. The case is unusual not only for the speed at which the case was brought on and decided, at first instance and on appeal, but also because the identity of the Appellants and the principal Respondent is not disclosed, and the hearings have taken place, and judgments were delivered, in private. Nor was either the judge's judgment or our own to be disclosed, without further order of the court, because of considerations of commercial confidentiality. Having heard argument on the appeals on 20 November, we were asked by Counsel to give judgment, or at least to announce the result of the appeals, no later than today, having regard to the various steps that might need to be taken before or no later than Saturday 29 November, which is the end of a period of relevance under the document which we have to construe, as I will explain. For that reason we give judgment today, although, for my part at least, I would have preferred to have had more time in which to formulate and express my reasoning; among other things this judgment might then have been shorter.


I would like to pay tribute to the judge not only for his diligence and speed in giving judgment, but also for the clarity and comprehensive quality of his judgment. The case is far from easy, and the proper application of large sums of money, on the one hand, and the incidence as between competing creditors of a very large deficiency of assets, on the other, turn on the decision. Counsel representing the classes of competing creditors presented us with very clear, well argued and persuasive submissions, both written and oral. In the end I have come to the clear conclusion that the judge was right in his decision and his reasoning. As Rimer LJ is of the same opinion, and despite the dissent on the part of Lord Neuberger in relation to the appeals by Parties C and D, for reasons set out in their respective judgments, it follows that all the appeals will be dismissed. I set out my own reasons for that conclusion in what follows.


The case is about the affairs of a structured investment vehicle, Sigma Finance Corporation, incorporated under the law of the Cayman Islands, to which I will refer as the SIV. Its business consists only of investing in asset-backed securities and other financial instruments. It issued, or guaranteed, US dollar Medium Term Notes (MTNs) and Euro MTNs in order to finance its activities. Its creditors include the holders of these MTNs, and also the providers of liquidity under liquidity facilities, counterparties in relation to derivatives used as a hedge against currency and interest rate risks, "repo" counterparties under repurchase and securities lending agreements, and the holders of Capital Notes. All of these creditors, other than the holders of Capital Notes and the "repo" counterparties, are secured creditors. In effect, all of the SIV's assets are secured in favour of the secured creditors under a Security Trust Deed (STD). The STD is governed by English law, and has a jurisdiction clause under which these proceedings have been brought here.


The available assets now fall very far short of the amount needed to pay even the secured creditors of the SIV in full, hence the competition between various classes of creditors, and the dispute as to the correct application of the STD in the present circumstances. The judge recorded at paragraph 7 that:

"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)."


I can also conveniently quote paragraphs 8 and 9 of his judgment which set out the circumstances in which this position arose, and in which the SIV got to the position in which the dispute has arisen:

"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."


As the judge explained, this led to steps being taken as a result of which it is common ground that the Enforcement Date, the significance of which I will explain, was 2 October 2008, and the Realisation Period, likewise to be explained below, runs from that date until Saturday 29 November 2008.


Four classes of creditors are represented before the court by the unnamed Interested Parties. I take from paragraph 6 of the judge's judgment this description of them and their different positions:

"(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...

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