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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Sigma Finance Corporation, Re Insolvency Act 1986 [2008] EWHC 2997 (Ch) (07 November 2008) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2008/2997.html Cite as: [2008] EWHC 2997 (Ch)

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		07/11/2008

Mr Justice Sales :

Introduction

1. This is an application pursuant to section 35 of the Insolvency Act 1986 by the Receivers appointed on 6 October 2008 in respect of the assets of Sigma Finance Corporation ("Sigma") for directions from the court regarding their obligations concerning management of those assets. The directions to be given depend upon the proper construction of clause 7.6 of the Amended and Restated Security Trust Deed dated 27 March 2003 between Sigma as Issuer and Deutsche Trustee Company Ltd as Security Trustee ("the Security Trust Deed"). The court has been assisted on the application by submissions on behalf of four companies (referred to below as Parties A, B, C and D) which are each representative of a defined group of creditors of Sigma with different and competing interests in relation to the construction of clause 7.6. The Receivers and the Security Trustee have adopted a neutral position in relation to that question.
2. At the outset of the hearing I gave directions that the hearing of the application should take place in private and that no person should be permitted to inspect the documents on the Court file in respect of the application without the permission of the court or the written consent of the Receivers. I gave these directions on the basis that, were the market to become aware of the factual circumstances in which the application is made, Sigma's status as a distressed and vulnerable seller of assets would be made apparent in a way and at a point in time which would be likely to result in prejudice to Sigma's creditors. I also gave a direction that the true identities of Parties A, B, C and D should not be disclosed. This was on the basis that disclosure of their identities could be detrimental to their market position, that they are not in strict terms parties to the application but only appeared to assist the court by their submissions and that in the absence of anonymity being granted in such circumstances the court might in future cases be deprived of the benefit of such assistance.
3. Sigma is a company incorporated under the laws of the Cayman Islands. It is what is commonly known as a structured investment vehicle, established to invest in certain types of asset-backed securities and other financial instruments. It has no other business. Sigma sought to profit from the difference between its cost of funding its activities and the returns made on its investment portfolio.
4. Sigma carried on its specialised form of business with a limited pool of creditors, comprising holders of instruments (Euro Medium Term Notes and US Medium Term Notes) issued or guaranteed by it in relation to the funds it obtained to fund its investment activities, providers of liquidity under liquidity facilities obtained by Sigma, counterparties in relation to derivative instruments used as a hedge against currency and interest rate risk, "repo" counterparties (in respect of repurchase agreements and securities lending agreements) and holders of Capital Notes issued by Sigma in respect of capital provided to support Sigma's secured obligations. Substantially all of Sigma's assets are charged to its secured creditors under the Security Trust Deed.
5. The Security Trust Deed created a floating charge in relation to Sigma's assets, which has now crystallised. The Security Trustee has exercised its powers under that Deed to appoint the Receivers over Sigma's assets. Most, but not all, of Sigma's creditors are secured creditors for the purposes of the Security Trust Deed, in which they are described as "Beneficiaries". The holders of Capital Notes and "repo" counterparties are not secured creditors under the Deed.
6. Each of the main groups of secured creditors under the Security Trust Deed is represented by Parties A, B, C and D respectively:

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. All of the assets which Sigma currently owns are in a form which allows them to be realised promptly. It is party to certain swap transactions where it is as yet uncertain whether or not the transactions will close for Sigma's overall advantage, with it being "in the money", or with it being "out of the money" and so having to meet further liabilities under them. For present purposes, the detail does not matter. 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.
10. On 1 October 2008, Sigma wrote to the Security Trustee stating that it had been resolved that there was "no reasonable likelihood of Sigma avoiding an insolvent liquidation" and that the non-payment of the coupon due on 30 September 2008 constituted a "Potential Enforcement Event" for the purposes of the Security Trust Deed. Sigma also notified counterparties that it had decided to make no further payments on liabilities falling due.
11. On 2 October 2008, one of Sigma's liquidity providers served notice of an event of default under its liquidity facility agreement with Sigma upon the Security Trustee. It is common ground that as a result an "Enforcement Event" for the purposes of the Security Trust Deed took place on 2 October 2008, which date became the "Enforcement Date" as defined in that Deed. The floating charge under clause 4.1 of the Security Trust Deed crystallised and on 6 October 2008 the Security Trustee appointed the Receivers under clause 14.1 of that Deed.
12. The occurrence of an Enforcement Event also had the effect of starting the 60 day "Realisation Period" stipulated in the Security Trust Deed. That period commenced on the Enforcement Date and will end on 29 November 2008. The Realisation Period is an important concept governing the operation of various provisions in the Security Trust Deed.

The Security Trust Deed

13. The question of construction of the Security Trust Deed which arises in these circumstances relates to clause 7.6, and in particular its last sentence. Clause 7 provides in relevant part as follows:

"7. ENFORCEMENT

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. On the Enforcement Date the Security Trustee shall be entitled to exercise the Issuer's rights in and under the Transaction Documents having given notice to the other parties to such documents of its intention to do so.

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 repayment 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.

7.5 If the Security Trustee applies an Advance (or part thereof) to discharge any of the Issuer's Long Term Liabilities because of the default, late payment or non-performance of any Asset in the Long Term Pool (a "non-performing asset"), any monies subsequently recovered or received by the Security Trustee in respect of such non-performing asset shall be applied pursuant to the trust declared in Clause 7.12.2 and the Liquidity Provider's claim for repayment of that Advance (or such part thereof as is used to discharge the Issuer's obligations to pay sums due in respect of Long Term Liabilities) and interest thereon shall be treated as a claim on the relevant Long Term Pool notwithstanding that the repayment date of such Advance falls within 365 days of the Enforcement Date.

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. [Emphasis added]

7.7 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 ensure that at the time the Short Term Pool and each Long Term Pool is established (1) the aggregate principal amount of the Assets allocated to each such Pool is equal to the aggregate principal amount of the liabilities to which such Pool has been allocated, (2) the Assets allocated to each such Pool have maturity and payment dates corresponding to the relevant liabilities and (3) payments, recoveries and receipts in respect of the Assets allocated to each such Pool are scheduled to be made or received in the currency in which the relevant liabilities are denominated and (4) the aggregate principal value of Assets rated AA/Aa or lower (or if the Asset has a short-term rating, A-1 + or lower) issued or guaranteed by any one single body corporate or sovereign or by separate bodies corporate which are members of the same group does not exceed an amount equal to 50% of the Residual Equity Pool Stake attributable to such Short Term Pool or, as the case may be, Long Term Pool and (5) the aggregate principal value of Assets rated A (or if the Asset has a short term rating, A-1/P-1) issued or guaranteed by any one single body corporate or sovereign or by separate bodies corporate which are members of the same group does not exceed an amount equal to 50% of the Residual Equity Pool Stake attributable to the Issuer's Short Term Liabilities or, as the case may be, those of its Long Term Liabilities in relation to which a Long Term Pool is established. The Security Trustee shall also use its reasonable endeavours to ensure that the credit quality by rating category and percentage of Assets comprising the Short Term Pool and each Long Term Pool is the same or better than the following … [details were then set out]

7.8 Subject to Clause 7.7, it is a matter for the Security Trustee's absolute discretion which Assets are allocated to which Pool and no liability shall attach to the Security Trustee if its allocation of Assets between Pools proves to be unfavourable or disadvantageous to any person. Provided that the Security Trustee uses its reasonable endeavours as provided in Clause 7.7, no liability shall attach to the Security Trustee if the purpose for which such endeavours were to be made fails to be realised and the Security Trustee shall be under no liability to any Beneficiary if the Assets allocated to any Pool are insufficient to meet the liabilities of the Issuer to which such Pool related in full or in a timely manner, notwithstanding that the claim of any other Beneficiary shall have been discharged in full. For the avoidance of doubt, the Security Trustee shall not be obliged to ensure that each Pool complies with the criteria set out in the Second Schedule to the IMC. Subject to the above and to Clause 7.7, the Security Trustee (i) shall have no regard to the credit quality of each Asset when establishing the Short Term and Long Term Pools and when determining which Assets should be allocated to which Pool and (ii) shall not be concerned with the ultimate composition of each of the Short Term Pool and Long Term Pools with regard to the concentration of assets by rating category nor to the spread across the Pools of Assets of any given rating category.

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.

7.10 The Security Trustee shall open and maintain and operate with any bank or financial institution in the United Kingdom or the United States of America 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 which is otherwise acceptable to each of the Rating Agencies: [specified investment and cash accounts]

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) if at the time a payment is proposed to be made to a Beneficiary pursuant to this Clause such Beneficiary is in default under any of its obligations to make a payment to the Issuer pursuant to any Beneficiaries' Document (the "defaulted payment") the amount of the payment which shall be made to such Beneficiary shall be reduced by an amount equal to the amount of the defaulted payment. Any amount so withheld shall be paid to the relevant Beneficiary as and when (and pro rata to the extent that) the defaulted payment is duly paid by that Beneficiary.

7.12 Subject to Clause 7.5, all payments, recoveries and receipts in respect of Assets placed in each Long Term Pool shall be held by the Security Trustee on trust and shall be paid in accordance with the following priority of payments:

7.12.1 first, to pay when due the Relevant Proportion of the remuneration payable to the Security Trustee under 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 outstanding of the Long Term Liabilities to which such Long Term Pool relates divided by the amount of the Issuer's Total Indebtedness, both amounts to be determined on the last day of the Realisation Period);

7.12.2 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 Long Term Liabilities to the relevant Beneficiaries (pro rata to the respective amounts of the Long Term Liabilities due, owing or incurred to each Beneficiary); and

7.12.3 third, in accordance with Clause 7.13 below

Provided that (in respect of 7.12.2 above):

(a) if at any time the Security Trustee reasonably believes that payments, recoveries and receipts in respect of Assets allocated to any Long Term Pool will be insufficient to meet the Long Term Liabilities of the Issuer to which such Long Term Pool relates, the Security Trustee shall calculate the proportion of such liabilities which in its reasonable opinion can be met and shall pay only that proportion of any amounts due in respect of the Long Term Liabilities to which such Long Term Pool relates; and

(b) if at the time a payment is proposed to be made to a Beneficiary pursuant to this Clause such Beneficiary is in default under any of its obligations to make a payment to the Issuer pursuant to any Beneficiaries' Document (the "defaulted payment") the amount of the payment which shall be made to such Beneficiary shall be reduced by an amount equal to the amount of the defaulted payment. Any amount so withheld shall be paid to the relevant Beneficiary as and when (and pro rata to the extent that) the defaulted payment is duly paid by that Beneficiary…."

14. Other relevant provisions of the Security Trust Deed are as follows:

"1. DEFINITIONS

1.1 …"Beneficiaries" means [the holders of various Notes issued or guaranteed by Sigma]… (vi) Liquidity Providers …(viii) the Security Trustee … and "Beneficiary" means any of them;

"Beneficiaries' Documents" means: [various Notes issued or guaranteed by Sigma] …

(h) the Revolving Credit And Swing-Line Facility Agreements between the Issuer and the banks named therein, and any other agreement evidencing a Liquidity Facility; …

(p) this Deed; …

"Liquidity Provider" means any bank or financial institution who is for the time being party to a Liquidity Facility; …

"Long Term Liabilities" means any liabilities of the Issuer to a Beneficiary which are not Short Term Liabilities (including any liabilities of the Issuer to a Liquidity Provider which pursuant to Clause 7.5 are required to be treated as Long Term Liabilities);

"Long Term Pool" means each pool of Assets required to be established by the Security Trustee on or after the Enforcement Date pursuant to Clause 7.6 and placed in a separate investment account, payments, recoveries and receipts in respect of which shall be applied in accordance with Clause 7.10; …

"Realisation Period" means the period commencing on (and including) the Enforcement Date and ending on (but excluding) the day which is 60 days after the Enforcement Date; …

"Short Term Liabilities" means those outstanding payment obligations of the Issuer to Beneficiaries (i) which are due and payable or which have scheduled maturity or payment dates falling less than 365 days from the Enforcement Date or (ii) which in accordance with Clause 5.3 or 6.10 are required to be treated as Short Term Liabilities;

"Short Term Pool" means the pool of Assets allocated by the Security Trustee and placed in a separate investment account to be named "Short Term Pool – Investment Account" and/or a separate cash account to be named "Short Term Pool – Cash Account", payments, recoveries or receipts in respect of which shall be applied pursuant to Clause 7.11; …

"Total Indebtedness" means the total principal amount owing for the time being by the Issuer to [(i) and (ii): holders of various Notes (iii) Liquidity Providers in respect of Advances under a Liquidity Facility and (iv) [various other liabilities …]

3. COVENANT TO PAY

The Issuer hereby covenants with the Security Trustee that it will pay and discharge in full each Secured Obligation at the time and in the manner provided for under the Beneficiaries' Documents and the provisions of the Notes and [other instruments] under which such Secured Obligation arises.

4. SECURITY

4.1 The Issuer as beneficial owner hereby as security for the payment and discharge of the Secured Obligations: …

4.1.2 charges in favour of the Security Trustee as trustee for the Beneficiaries with the payment and discharge of the Secured Obligations by way of first floating charge the whole of the Issuer's Assets …

4.2 The Security Trustee shall hold the benefit of the Security on the terms of the trusts herein provided and shall deal with the Assets and apply all payments, recoveries or receipts in respect of the Assets in accordance with Clause 7. …

11. REMUNERATION OF THE SECURITY TRUSTEE

11.1 The Issuer hereby covenants with the Security Trustee to pay to the Security Trustee remuneration for its services as security trustee as from the date of this Deed, such remuneration to be at such rate and payable on such dates as may from time to time be agreed between the Issuer and the Security Trustee. At any time after the occurrence of an Enforcement Event or Automatic Enforcement Event or in the event of the Security Trustee finding it necessary or expedient to undertake any exceptional duties (or duties otherwise outside the scope of the normal duties of the Security Trustee under these presents) the Issuer shall pay such additional special remuneration as may be agreed between the issuer and the Security Trustee. In the event of the Security Trustee and the Issuer failing to agree upon whether such duties are of an exceptional nature or otherwise outside the scope of the normal duties of the Security Trustee under these presents, or failing to agree upon such remuneration or such increased or additional remuneration, such matters shall be determined by a merchant bank (acting as an expert and not as an arbitrator) selected by the Issuer and approved by the Security Trustee or, failing such approval, nominated by the President for the time being of The Law Society of England and Wales, the Expenses involved in such nomination and the fee of such merchant bank being shared equally between the Security Trustee and the Issuer and the determination of such merchant bank shall be conclusive and binding on the issuer and the Security Trustee. …

13. POWERS OF POSSESSION AND SALE

… 13.2 The Security Trustee may, out of the profits and income of the Assets and monies received by it in the exercise of any of the foregoing powers, pay and discharge all expenses and outgoings incurred in and about the exercise of any such powers.

14. APPOINTMENT AND POWERS OF RECEIVER

14.1 The Security Trustee may, if it thinks fit, appoint a Receiver at any time on or after the Enforcement Date. …

14.3 The following provisions as to the appointment, powers, rights and duties of a Receiver shall have effect: …

14.3.4 the Security Trustee may from time to time fix the remuneration of such receiver and direct payment thereof out of the Assets, but the Issuer alone shall be liable for the payment of such remuneration; …

14.3.6 subject to any direction by the Security Trustee to the contrary, any such Receiver may for the purpose of defraying any costs, charges, losses and expenses (including its remuneration) which shall be incurred by it or which it anticipates may be incurred by it in the exercise of the powers, authorities and discretions vested in it or for any purposes of these presents advance, raise or borrow money on the security of the Assets from the Security Trustee or otherwise, either in priority to the sums hereby secured and the Security or otherwise and at such rate or rates of interest and generally on such terms and conditions as it may think fit, and for the purposes aforesaid may execute and do all such assurances, deeds, acts and things as it may think fit; …"

15. The present application concerns the duties of the Receivers in acting for the Security Trustee in dealing with the assets of Sigma under the Security Trust Deed during the Realisation Period. In view of the insolvency of Sigma, there is an acute divergence between the interests of the different groups of creditors in relation to the construction of the last sentence of clause 7.6:

"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".

The positions of the Parties on the construction of clause 7.6

16. Mr Howard QC for Party A submitted that the natural meaning of this provision is that during the Realisation Period the Security Trustee should use the available and realisable assets of Sigma to pay its liabilities in full or (if there are insufficient assets) to the greatest extent possible in order as they fall due within that Period. At the hearing, this construction was conveniently labelled the "pay as you go" construction. The effect of this construction would be that Sigma's liabilities to Party A falling due on 23 October 2008 would be met (or substantially met) out of its assets, but leaving little or nothing over to meet any other liabilities falling due on later dates within that Period (including the liabilities which have arisen or are due to arise in relation to the Notes held by Party B) or falling due on dates after that Period.
17. Mr Howard QC made the powerful points that the Security Trust Deed and the various financial instruments connected with it are sophisticated and carefully drafted documents, prepared by and entered into with the advice of specialist commercial law firms, made by sophisticated commercial parties well able to determine the nature of the rights and obligations assumed thereunder and whose intention should be taken from the clear and natural meaning of the words which are used in the Security Trust Deed in the last sentence of clause 7.6. He submitted that the mere fact that the practical effect of that provision in the circumstances which have arisen might be thought to be surprising or unfair in some way was not a proper basis on which the court would be justified in departing from the clear natural meaning of the words used, so as to re-write the Deed: see BP Exploration Operating Co. Ltd v Kvaerner Oilfield Products Ltd [2005] 1 Lloyds LR 307, [93] per Colman J for a statement of familiar basic principle in this area which I did not understand the other Parties to dispute in any significant respect.
18. Mr Howard emphasised the distinction which appears in the Security Trust Deed between the Realisation Period (leading up to the establishment of the Short Term Pool, Long Term Pools and the Residual Pool by the end of the Period), and the regime which applies after the Realisation Period when Sigma's remaining assets (if any) have been placed into the Pools and a form of distribution pari passu depending on the extent of the assets and the extent of the liabilities allocated to each Pool governs. He submitted that the last sentence of clause 7.6 of the Security Trust Deed creates a discrete payment regime applicable in the Realisation Period, separate from that applicable under the Pool regime. He contended that the words in that provision, "shall so far as possible discharge …", referred to the practical possibility of discharge of liabilities having regard to the assets which proved to be available, and made it clear that the obligation of the Security Trustee did not extend beyond procuring payment of such liabilities out of those available assets.
19. Mr Sheldon QC for Party B was at pains to agree with Mr Howard regarding the distinction between the payment regime applicable during the Realisation Period and that applicable thereafter once the Pools are established, but submitted that the proper and natural interpretation of the last sentence of clause 7.6 was to the effect that the Receivers should establish the total value of the liabilities falling due within the Realisation Period and then allocate the available assets pari passu as between those liabilities. He submitted that this construction was required (since on Party A's construction he maintained that the words in that provision, "falling due for payment during such period", would be otiose) and was the intended effect of the use of the phrase, "shall so far as possible discharge …". The possibility referred to in that phrase was, he suggested, what was to be regarded as possible having regard to the assets of Sigma which were available and to all of the liabilities which were scheduled to fall due in the Realisation Period. The effect of the construction put forward by Mr Sheldon would be that the limited assets available to Sigma should be shared pari passu between Party A, Party B and any other Beneficiary in relation to liabilities falling due within the Realisation Period. There would be nothing left for other Beneficiaries in the position of Party C and Party D.
20. Mr Mortimore QC for Party C and Miss Prevezer QC for Party D made common cause, albeit there were differences in the detail of the arguments they presented. The main thrust of their submissions was that the Security Trust Deed did not create any sharp distinction between the payment regime applicable in the Realisation Period and that applicable thereafter, once the Pools were set up. Rather, the intention was, they said, that even during the Realisation Period the Receivers were required to make an assessment of the likely total secured liabilities of Sigma extending into the future and not to pay Short Term Liabilities in full as they fell due in the Realisation Period in the event that they considered that there were insufficient assets to meet all secured liabilities. They said that the possibility referred to in the words, "shall so far as possible discharge …", was what was possible having regard to the need for general distribution of Sigma's available assets on a pari passu basis between all its creditors (not just those whose debts fell due within the Realisation Period). They sought to support this interpretation by reference to clause 7.9 of the Security Trust Deed, which they submitted required the Receivers to apply a general pari passu approach to the distribution of Sigma's assets, rather than a "pay as you go" approach.
21. They submitted that the constructions contended for by Party A and Party B respectively would operate unfairly as between different groups of creditors, resulting in distribution of Sigma's available assets on the basis of adventitious happenstance depending upon the particular dates when liabilities fell due; and in that regard they relied in particular on dicta of the Court of Appeal in In the Matter of Whistlejacket Capital Ltd (in Receivership) [2008] EWCA Civ 575 at [43], [58]-[59] and [63]. They also submitted that those constructions did not make allowance for payment of the fees and expenses of the Security Trustee and the Receivers in relation to realising the security created under the Security Trust Deed, which they said would be a very surprising result which the parties cannot have intended. They said that the constructions supported by Parties A and B would produce another absurd effect, which could not have been intended: liabilities falling due before the Realisation Period but not paid by Sigma would not be treated in the same way as liabilities falling due within the Realisation Period, but would be postponed and have to be treated as liabilities falling into the Short Term Pool to be met out of the assets (if any) available at that stage.
22. Mr Mortimore and Miss Prevezer relied upon the speech of Lord Steyn in Sirius Insurance Co v (Publ) v FAI General Insurance Ltd [2004] 1 WLR 3251 at [18]-[19], where he said

"18 ….The aim of the inquiry is not to probe the real intentions of the parties but to ascertain the contextual meaning of the relevant contractual language. The inquiry is objective: the question is what a reasonable person, circumstanced as the actual parties were, would have understood the parties to have meant by the use of specific language. The answer to that question is to be gathered from the text under consideration and its relevant contextual scene.

19 There has been a shift from literal method of interpretation towards a more commercial approach. In Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191, 201, Lord Diplock, in an opinion concurred by his fellow Law Lords, observed: "if detailed semantic and syntactical analysis of a word in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense." In Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, 771, I explained the rationale of this approach as follows:

"In determining the meaning of the language of a commercial contract … the law … generally favours a commercially sensible construction. The reason for this approach is that a commercial construction is more likely to give effect to the intention of the parties. Words are therefore interpreted in the way in which a reasonable commercial person would construe them. And the standard of the reasonable commercial person is hostile to technical interpretations and undue emphasis on niceties of language."

The tendency should therefore generally speaking be against literalism. What is literalism? It will depend on the context. But an example is given in The Works of William Paley (1838 ed), vol III, p 60. The moral philosophy of Paley influenced thinking on contract in the 19^th century. The example is as follows: the tyrant Temures promised the garrison of Sebastia that no blood would be shed if they surrendered to him. They surrendered. He shed no blood. He buried them all alive. This is literalism. If possible it should be resisted in the interpretative process. This approach was affirmed by the decisions of the House in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, 775E-G, per Lord Hoffmann and in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 913D-E, per Lord Hoffmann."

23. The effect of the construction contended for by Parties C and D would be that the available assets of Sigma would not be wholly used up in meeting Sigma's obligations to Party A, or to Party A, Party B and other creditors with instruments maturing during the Realisation Period, but would have to be used pari passu as between all Sigma's secured creditors. In other words, Parties C and D and those of Sigma's creditors in an equivalent position would derive some benefit from Sigma's remaining assets, whereas otherwise they would derive none.

Discussion

24. After the hearing and having listened to all the learned arguments advanced by Counsel on all sides, I find myself coming back to the last sentence of clause 7.6 and still reading it as I did at the outset in preparing for the hearing, as a provision which bears the natural and ordinary meaning for which Mr Howard for Party A contends. It is true that such an interpretation exposes certain limited infelicities in the drafting of other parts of the Security Trust Deed to which I refer below; but I do not consider that addressing those infelicities involves a degree of strain in construing the Deed which begins to approach the extent of the strain which would in my opinion be required to arrive at the constructions for which the other Parties contend. It is not suggested that there is any interpretative presumption in favour of a pari passu basis for distribution of the assets of Sigma: the rights and obligations of the parties under the Security Trust Deed fall to be determined according to ordinary principles of construction of the words used in the Deed in their proper context. In that regard, the natural, "pay as you go" construction put forward by Party A is strongly supported by comparison of the specific provision in the last sentence of clause 7.6 with other provisions in the enforcement regime in clause 7.
25. It is also the case that Party A's "pay as you go" construction produces a regime for distribution of Sigma's assets in the Realisation Period which operates on an adventitious basis (depending upon the maturity dates of particular instruments) and which could be regarded as being in a certain sense unfair, at least from the point of view of creditors of Sigma, such as Parties B, C and D, who happen to lose out as a result of adoption of such a construction. But in my judgment neither of these features of the enforcement regime created by the Security Trust Deed "flouts business common sense" in the sense referred to by Lord Diplock in the passage quoted by Lord Steyn in the Sirius Insurance case at [18], and neither justifies a departure from the ordinary meaning of the last sentence of clause 7.6 as derived from its language and the contrast between it and its immediate contextual context in the form of other provisions of clause 7.
26. Judged from the perspective of lenders to Sigma who accept its Notes on the basis of the Security Trust Deed, or who enter into liquidity arrangements with it again on the basis of the Deed, none of them could know when entering into those transactions how the operation of clause 7.6 might ultimately affect them. The provisions in clause 7 operate both in relation to events of default on the part of Sigma involving Sigma's insolvency and in relation to events of default which do not (e.g. a simple refusal to meet one of its obligations or a downgrading of the credit rating status of its Notes). Even in relation to insolvency, it is by no means obvious that the parties expected Sigma to become so massively insolvent as in fact in the unusual economic circumstances now applicable it has become, such that its available assets will be exhausted partway through the Realisation Period and before creation of the various Pools. No-one could know in advance when an Enforcement Event might occur and when the Realisation Period might commence. Each of the lenders to Sigma took a chance (depending upon the date when any Realisation Period commenced and the maturity dates in respect of any repayment obligations) that it might be in the advantageous position in which Party A now finds itself in respect of distributions to be made or might have to take its chances in relation to repayment in the later part of the Realisation Period or in the Pool arrangements. In that regard, when entering into the relevant transactions they were all "in the same boat" and each assumed risks similar to those which everyone else assumed. It does not seem to me to be unfair that they should bear the risks specified in the contractual and security documentation in accordance with the clear terms set out in that documentation when those risks happen to arise (even when they do so, as here, in a particularly acute form). Moreover, in relation to the suggestion of unfairness, I would adopt the same approach as Briggs J in Re Cheyne Finance plc (in receivership) (No. 1) [2008] 1 BCLC 732 at [28]:

"It would, in my judgment, be wrong to adopt a strained construction of cl. 12 merely to remedy, as I accept it would do, a potential for what some would regard as unfairness where the risk appears to have been deliberately undertaken in a detailed regime designed … entirely to replace the statutory insolvency scheme as between the parties …"

27. 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. I do not find the judgment of the Court of Appeal in the Whistlejacket Capital case of direct assistance in relation to the very different contractual provisions which apply in the present case. In my view, the "pay as you go" construction of the last sentence of clause 7.6 does not in any way come close to the standard of flouting business common sense adverted to by Lord Steyn in Sirius Insurance. It 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.
28. I turn to consider the detail of the provisions of the Security Trust Deed. In my view, it is a striking feature of the scheme of enforcement set out in clause 7 that the Realisation Period operates as a distinct phase separate from the operation of the Pools which are to be established at the end of it. I accept Mr Howard's and Mr Sheldon's submissions to this effect. The Realisation Period is specially defined as a specified period in the Deed. The first two sentences of Clause 7.6 set out what is to be done by the Security Trustee in that Period, namely that reasonable endeavours should be used to establish the various Pools by the end of it. The second sentence of clause 7.3 (ensuring that any drawdown by the Security Trustee under a liquidity facility after the Enforcement Date should provide for repayment dates "falling after the Realisation Period") also emphasises that the Realisation Period is, in the structure of clause 7, to be treated as a special and distinct period governed by its own regime. It is only once the Pools have been established that the special provisions for distribution on a pari passu basis as set out in clause 7.11 (Short Term Pool) and clause 7.12 (Long Term Pool) apply.
29. Although clause 7.6 provides that the Pools are to be established "by the end of the Realisation Period", it appears from clause 7.11.1 and clause 7.12.1 that the Pools could only be operated after the first charge upon them (in each case, "the Relevant Proportion of the remuneration payable to the Security Trustee …") has been determined, which can only be done as at "the last day of the Realisation Period". This interpretation is reinforced by clauses 7.11.3 and 7.12.3, which provide for later adjustment "if at any time after the Realisation Period" it appears that there may be a further shortfall in the assets available to meet liabilities as both have been allocated to the Short Term and Long Term Pools respectively. It would not make sense for these provisions to be drafted in this way if it was contemplated that the Pools could be established and made operational before the end of the Realisation Period.
30. Meanwhile, the last sentence of clause 7.6 governs how the Security Trustee should throughout the whole of the Realisation Period deal with liabilities maturing during it. The second sentence of clause 7.6, and particularly the words, "(but not thereafter)", emphasise that the regime to apply in the Realisation Period is distinct from the regime which then follows. In my view, the enforcement scheme in clause 7 contemplates a sharp conceptual division between the Realisation Period and what happens from the end of the Realisation Period, when it is the Pool arrangements which govern. In the light of that clear structure, I do not find it possible to read back into the last sentence of clause 7.6 the Pool payment arrangements set out in clauses 7.11 and 7.12, as Mr Mortimore and Miss Prevezer submitted I should.
31. Clause 7.9 cannot bear the weight which Mr Mortimore and Miss Prevezer sought to place upon it. I do not read it as creating any conflict with the last sentence of clause 7.6; nor in my view does it inform in any other way the interpretation to be placed on that sentence. Clause 7.9 is directed to the point at which the Pools are established, and sets out how assets are to be allocated to the Pools. In practice, this is an exercise which falls to be conducted alongside that necessary to determine the "Relevant Proportion" in each case under clauses 7.11.1 and 7.12.1, which state that the "Relevant Proportion" is to be established by reference to the Total Indebtedness as at the last day of the Realisation Period. In my view, it is clear that the exercise in clause 7.9 is intended to be conducted by reference to the same point in time. Up to that point, it is clause 7.6 which governs how the Security Trustee is to act.
32. The last sentence of clause 7.6 creates an especially strong obligation upon the Security Trustee ("shall so far as possible discharge …"). This may be contrasted with the weaker obligation in the first sentence of clause 7.6 ("shall use its reasonable endeavours …") and with those in clause 7.3 ("On the Enforcement Date or as soon thereafter as can practicably be arranged the Security Trustee shall …") and in clauses 7.11.2 and 7.12.2 ("to pay when due or as soon thereafter as can practicably be arranged …"). This again emphasises the distinct nature of the payment regime which is to apply during the Realisation Period.
33. In my judgment, the words in clause 7.6, "shall so far as possible discharge on the due dates therefor [etc]", read with the closing words of the clause ("using cash or other realisable or maturing Assets of the Issuer"), naturally relate to the possibility of being able to pay the Short Term Liabilities referred to on their due dates having regard to the extent of the realisable or maturing assets of Sigma which are in practical terms available to the Security Trustee. I accept Mr Howard's submission on this point. The words both make it clear what the Security Trustee's positive duty is and also specify the limits of that duty so that no question could arise of the Security Trustee having to use its own assets to meet those liabilities.
34. I do not find it any more viable to spell out of the word, "possible", in clause 7.6 a reference to future Short Term Liabilities maturing later in the Realisation Period and an intention that they be paid pari passu with such Liabilities maturing earlier in the Period (as Mr Sheldon submitted) than I do in relation to the wider submissions of Mr Mortimore and Miss Prevezer. If such an elaborate scheme had been intended, the parties would have spelled it out clearly as they did spell out the elaborate pari passu arrangements in respect of the Pools, in clauses 7.11 and 7.12. There is nothing of that kind in the last sentence of clause 7.6. On the contrary, it seems to me to set out a very simple and clear obligation upon the Security Trustee with no specification of any pari passu element within it. I regard the contrast between clause 7.6 and clauses 7.11 and 7.12 as a very powerful indicator that clause 7.6 was intended to operate in a different manner and without any pari passu element.
35. Further, on Party A's "pay as you go" construction, I do not think that the words in the final sentence of the provision, "falling due for payment during such period", are otiose in a manner which demands adoption of a strained interpretation of the other words in that provision (as Mr Sheldon submitted). I consider that those words fulfil the same function as the words in parenthesis in the previous sentence, namely to emphasise strongly that the regime in clause 7.6 governs during the Realisation Period but not thereafter.
36. I do not accept the submissions of Mr Mortimore and Miss Prevezer that Party A's "pay as you go" construction would have absurd consequences, such that the parties must have intended some different interpretation to apply. In my view, on Party A's construction there is no difficulty regarding accommodation within the clause 7.6 regime of payment of Short Term Liabilities which fell due but were unpaid by Sigma before commencement of the Realisation Period (there were in fact examples falling within this category: see paragraph [9] above). 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.
37. So far as concerns the objection that on Party A's construction the holders of Notes maturing in the Realisation Period will be paid before the remuneration and expenses of the Receivers are met out of Sigma's assets (which I accept would be a surprising result), clause 14.3.4 allows the Security Trustee to direct payment of the Receivers' remuneration out of Sigma's assets and clause 14.3.6 allows the Receivers to cover their expenses and remuneration by borrowing money on the security of Sigma's assets in priority to the sums secured by and the security constituted by the Security Trust Deed. Therefore, provided the Security Trustee and the Receivers take prompt steps to protect the Receivers' position, it appears that in practical terms the "pay as you go" construction of clause 7.6 need not leave the Receivers exposed as to their remuneration and expenses. The need for steps to be taken to protect their position may be somewhat inconvenient, especially when compared with the specific provisions in clauses 7.11.1 and 7.12.1 for protection of their position in relation to the Pool arrangements, but I do not consider that this is any more than an infelicity in the drafting of the overall scheme of the Security Trust Deed. It is not a feature of the drafting which could, in my view, justify adopting a different interpretation of clause 7.6.
38. The position in relation to protection of the Security Trustee in respect of its remuneration and expenses is slightly less clear; but, again, I do not consider that any infelicity in the drafting here could justify adoption of a different interpretation of clause 7.6. In fact, the Security Trustee is in a position to protect itself. It can appoint a Receiver to act on its behalf under clause 14 (rather than acting itself), and then the points in paragraph [37] above apply. Further, under clause 13.2 the Security Trustee may use the profits and income of the assets and monies received by it in the exercise of its powers of getting in and dealing with the assets to pay and discharge all expenses and outgoings incurred in and about the exercise of any such powers. In my view, this provision is also intended to operate in priority to the security in the Security Trust Deed - it would be most odd if the Receivers' expenses had such priority, if a Receiver were appointed to act on behalf of the Security Trustee, but the Security Trustee's expenses did not have that priority if it simply acted itself. I also accept the submission of Mr Howard that the term "expenses" in clause 13.2 is apt also to cover the Security Trustee's remuneration. The word "expenses" in relation to a Receiver in clause 14.3.6 is followed by the words, "(including its remuneration)", and I consider that where the same word is used in a similar context in relation to the Security Trustee the ambit of its meaning is properly informed by what the parties have spelled out in relation to a Receiver.
39. Moreover, it is possible for the Security Trustee to protect itself under the last sentence of clause 7.6. This is because "Short Term Liabilities" are defined to mean the "outstanding payment obligations of [Sigma] to Beneficiaries (i) which are due and payable or which have scheduled maturity or payment dates falling less than 365 days from the Enforcement Date…". The "Beneficiaries" are defined to include the Security Trustee. So to the extent that the Security Trustee can make proper charges in respect of its services and can specify that those charges should be paid on dates within the Realisation Period, it may benefit from the "pay as you go" regime in clause 7.6.
40. Even if I am wrong about the interpretation and operation of clause 13.2, and even if the operation of clause 7.6 on a "pay as you go" basis may be inconvenient for the Security Trustee, these features of the drafting of the Security Trust Deed would not in my view outweigh the powerful indicators referred to above regarding the proper construction of clause 7.6 in the sense contended for by Party A.

Conclusion

41. For the reasons given above, I have concluded that the "pay as you go" construction of the final sentence of clause 7.6 of the Security Trust Deed contended for by Party A is the correct construction of that provision. The directions to be given to the Receivers should be formulated on that basis and agreed, if possible.