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See full size imageIn this judgment handed down on 29 October 2009, the Supreme Court delivered its first substantial commercial judgment, addressing a classic credit crunch issue, the order of priority of creditors of Sigma, an insolvent structured investment vehicle (“SIV”), which both The Times and The Wall Street Journal described as the word’s largest such fund.

The role of SIVs and similar vehicles in the financial crisis have received considerable attention, and the ruling alluded to this. In his leading judgment, Lord Mance described Sigma and its creditors as “victims” of the financial crisis, whilst in his dissenting judgment, Lord Walker commented that they could equally be characterised as its authors.

However, at the heart of the case was a simple question of contractual interpretation. The final sentence of clause 7.6 of the deed governing the SIV provided:

“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.”

Did this clause require Sigma’s receivers to allocate assets to its Short Term Liabilities pari passu, or according to the dates upon which those liabilities fell due – a “pay as you go” approach?

Sales J at first instance and a majority in the Court of Appeal (Lord Neuberger dissenting) favouring the pay as you go construction asserted by Mark Howard QC on behalf of Party A.  In contrast, however, a majority of the panel in the Supreme Court overturned the Court of Appeal’s decision. Lord Mance’s judgment highlighted the need to interpret clause 7.6 in the context of the provisions of the deed as a whole which, at least so far as Lords Mance, Hope, Scott and Collins were concerned, did not indicate that the clause was intended to apply in an insolvency context.

Did this make new law? No: as Lord Mance commented, the principles upon which contracts should be interpreted are not in doubt. At its highest, the judgment shows the Supreme Court following the general approach of the House of Lords in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38 (discussed by UKSC Blog here) in favouring a construction taking its lead from the wider commercial intentions of the parties rather than the semantics of the contractual wording in issue. Is this likely to reduce the volume of SIV-based litigation? No: there have been several recent cases involving SIVs, including In Re Cheyne Finance plc [2007] EWHC 2402, In Re Whistlejacket Capital [2008] EWCA Civ 575 and In Re Golden Key Ltd ([2009] EWCA Civ 636. Each of those cases has turned on the specific wording of the trust deed, and in Cheyne and Golden Key the Court ultimately favoured pay as you go constructions of the relevant trust deeds. Insolvency practitioners and their lawyers are likely to be kept busy for some while yet, as the effect of each trust deed will fall to be interpreted on its terms.

All of that leads to conclusion reached by Lord Walker in his dissenting judgment, that permission to appeal to the Supreme Court should not have been granted in the first place. However, with a reported $9 billion of liabilities at stake, the economics of the litigation were probably not in doubt. Given the volume of insolvency litigation before the courts – most recently, the Court of Appeal’s judgment in conjoined Lehmans and Woolworths appeals ([2009] EWCA Civ 1160) – this will undoubtedly not be the last time that the Supreme Court is asked to deal with the legal fall-out of the credit crunch.
For further commentary on the Sigma case, see a post about it on the ever popular “Bankruptcy, Insolvency and Corporate Rescue” blog, an excellent summary by Freshfields, and even the case’s own Wikipedia entry.
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