Re Sigma Finance Corporation (in Administrative Receivership)

JurisdictionEngland & Wales
Judgment Date29 October 2009
Neutral Citation[2009] UKSC 2
Date29 October 2009
CourtSupreme Court
In Re Sigma Finance Corporation
(in administrative receivership)
(Conjoined Appeals)

[2009] UKSC 2


Lord Hope, Deputy President

Lord Scott

Lord Walker

Lord Mance

Lord Collins


Michaelmas Term

On appeal from: [2008] EWCA Civ 1303

Appellant: B

Richard Sheldon QC

Felicity Toube

(Instructed by Dechert LLP)

Respondent: A

Mark Howard QC

Jonathan Dawid

(Instructed by Mayer Brown (International) LLP)

Appellant: C

Simon Mortimore QC

Daniel Bayfield

(Instructed by Jones Day LLP)

Security Trustee

James Potts

(Instructed by Allen & Overy LLP)

Appellant: D

Sue Prevezer QC

Edmund King

(Instructed by Quinn Emanuel Urquhart Oliver and Hedges LLP)

Administrative Receiver

Gabriel Moss QC

Barry Isaacs

(Instructed by Lovells LLP)

LORD MANCE (with whom Lords Hope, Scott and Collins concur)


1. Sigma Finance Corporation ("Sigma") and those who invested in it are victims of the current financial crisis. Sigma is a structured investment vehicle, whose business involved acquiring asset-backed securities and other instruments, using funds raised by issuing or guaranteeing US dollar and Euro medium term notes (MTNs) as well as liquidity from other sources, such as facilities, derivatives, repurchase (or "repo") contracts and capital notes (the last two categories representing its unsecured creditors). All of Sigma's assets are secured in favour of its secured creditors upon the terms of a Security Trust Deed (STD), dated 27 March 2003, made between Sigma as issuer and Deutsche Trustee Company Limited ("Deutsche Trustee") as security trustee and governed by English law.

2. The financial crisis affected the value and liquidity of Sigma's assets, as well as its ability to issue notes and raise funds to cover its obligations under previously issued notes and instruments as they matured from time to time. As a result, it began to resort to selling assets, either outright or under repo agreements. The latter involved Sigma in further potential liability to meet margin calls, if and when the value of the assets sold and agreed to be repurchased at some future date fell below a certain level. In September 2008, Sigma received margin calls which it did not honour. On 30 September 2008, its board resolved that it could no longer continue in business, and on 1 October 2008 Sigma wrote informing Deutsche Trustee as security trustee that it had resolved that there was "no reasonable likelihood of Sigma avoiding an insolvent liquidation" and that there had been non-payment of interest due on 30 September 2008 constituting a "Potential Enforcement Event" for the purposes of the Security Trust Deed. On 2 October 2008 one of Sigma's liquidity providers gave notice of an event of default under its facility agreement. In consequence, an actual "Enforcement Event" occurred and the floating charge created under clause 4.1 of the Security Trust Deed crystallised on that date, and the liquidity facility was also cancelled. On 6 October 2008 the Security Trustee appointed Receivers under clause 14.1 of the Deed, and directed them to comply with clauses 7.6 to 7.9 of the Deed as if references in those clauses to the Security Trustee were references to the Receivers.

3. Under the Security Trust Deed, the occurrence of an Enforcement Event started a 60-day "Realisation Period", and triggered an obligation on the Trustee to use its reasonable endeavours to establish by the end of that period a Short Term Pool (for Short Term Liabilities, defined by clause 1 to cover "outstanding payment obligations … which are due and payable or which have scheduled maturity or payment dates falling less than 365 days from the Enforcement Date"), as well as a number of Long Term Pools (for "any liabilities …. which are not Short Term Liabilities") and a Residual Equity Pool. Following realisation of its remaining portfolio in December 2008 after the Court of Appeal had given judgment and refused a further stay, Sigma's assets consist of cash of no more than around US$450m.

4. Sigma's unpaid secured liabilities are estimated to total around US$6.2bn. They include (a) about US$900,000, representing coupon payments on notes which fell due on 30 September and 1 October 2008, (b) about US$1.350bn, representing principal and coupon payments on notes which fell due during the Realisation Period, (c) about US$3.134bn, representing principal on notes constituting Short Term Liabilities falling due between 30 November (i.e. after the end of the Realisation Period) and 1 October 2009 and (d) about US$1.511bn, representing principal on notes constituting Long Term Liabilities falling due after 2 October 2009. As is evident, Sigma's remaining assets fall far short of the liabilities included in (a) and (b), or in (b) alone.

5. The issue on these appeals is how Sigma's remaining assets are to be distributed. This is an issue of construction of the Security Trust Deed. Secured creditors are under the terms of their notes precluded from seeking to wind up Sigma, and the Security Trust Deed defines their contractual rights against Sigma and in respect of its assets. Four interested creditors have advanced various possibilities. Interested parties A and B submit that the assets fall to be distributed preferentially to the creditors in respect of the debts identified in (b), or in (a) and (b). Assuming that to be right, they differ between themselves as to priority. Mr Howard QC representing interested party A submits that the assets are to be distributed according to the dates when the relevant debts became due, while Mr Sheldon QC representing interested party B submits that all debts falling due in (or prior to) the Realisation Period are part of a single pool, within which Sigma's remaining assets fall to be distributed pari passu. Mr Mortimore QC representing interested party C and Miss Prevezer QC representing interested party D maintain, first, that Sigma's remaining assets fall to be allocated equitably as between Short and Long Term Liabilities, and, secondly, that, having been so allocated, its Short Term Liabilities identified in (a), (b) and (c) fall in effect to be distributed pari passu in relation to each other, and that its Long Term Liabilities identified in (d) fall to be treated likewise in relation to each other.

6. Sales J and, by a majority, the Court of Appeal accepted the case advanced by Mr Howard for interested party A. Lord Neuberger dissented, concluding that the case advanced by interested parties C and D was generally correct, but with the refinement that creditors with debts falling due in the Realisation Period were entitled to be paid within that period such amount as the Trustee was confident would ultimately be paid to them out of the Short Term Pool, with any balance due being paid later from that Pool. Against the decision of the majority, these appeals are brought by leave of the House of Lords.

The Security Trust Deed

7. The appeals turn ultimately on the meaning given to the final sentence of clause 7.6 of the Deed. But this needs to be set in its context. Clause 7 is long and detailed, and provides inter alia:


7.1 The Security Trustee shall be entitled to enforce the Security on and from the Enforcement Date only in accordance with this Clause notwithstanding any contrary instruction or direction from any Beneficiary or any other person. The Security Trustee shall not exercise any of its powers under this Clause until the Enforcement Date.

7.2 Without prejudice to any rule of law which may have a similar effect, the floating charge constituted by Clause 4.1.2 shall on the Enforcement Date automatically be converted with immediate effect into a fixed charge as regards the assets subject to such floating charge and without notice from the Security Trustee to the Issuer.

7.3 On the Enforcement Date or as soon thereafter as can practicably be arranged the Security Trustee shall (to the extent that the relevant Liquidity Facility has not been cancelled by the relevant Liquidity Provider) on behalf of, and as attorney for, the Issuer draw Advances under each Liquidity Facility up to the Available Amount and shall specify repayment dates (except in the case of Swing-line Advances) for such Advances falling after the Realisation Period. If the Issuer has Committed Liquidity (as defined in the IMC) and more than one Liquidity Facility, the Security Trustee shall ensure that, as between Liquidity Facilities, any drawings are made pro rata to the aggregate available commitments under such Liquidity Facilities. Advances drawn shall be used in order (i) to discharge the Issuer's obligations to pay sums due and owing to Beneficiaries in accordance with the relevant Beneficiaries' Documents and (ii) to effect replaying of any Advance made under a Liquidity Facility. If and to the extent that all or any part of the Advances drawn down are not immediately required by the Security Trustee for the purposes of (i) or (ii) above, the Security Trustee shall deposit the unutilised portion(s) of such Advances on a call basis with any bank or financial institution whose short-term unsecured, unguaranteed and unsubordinated debt is rated A-1 by S&P, P-1 by Moody's and F1 by Fitch or shall invest such portion(s) in certificates of deposit, United States or United Kingdom government securities or commercial paper rated A-1 + by S&P and P-1 by Moody's.

7.4 If the Security Trustee applies an Advance (or part thereof) to discharge any of the Issuer's Short Term Liabilities because of the default, late payment or non-performance of any Asset in the Short Term Pool (a "non-performing asset") any monies subsequently recovered or received in respect of such non-performing asset shall be applied by the Security Trustee in repayment (or part payment) of such Advance before being applied pursuant to the trust declared in Clause 7.11.2.


7.6 The...

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