Vol 7 (2010) - Issue 1

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Re Sigma Finance Corporation (In Administrative Receivership) [2009] UKSC 2

Following on from a previous case note in this publication which considered the Court of Appeal ruling, this article considers the recent decision of the Supreme Court in the Sigma litigation which was delivered on 29 October 2009 (Re Sigma Finance Corporation (In Administrative Receivership) [2009] UKSC 2). That decision was not only the first substantive decision of the new Supreme Court, but is to date the only occasion on which one of the numerous recent structured investment vehicle (or 'SIV') disputes has reached England’s highest court.

This article considers the outcome of that final appeal, as well as the wider relevance of the Supreme Court’s decision in the context of the other SIV disputes to date.

Recap of the facts

Sigma Finance Corporation ('Sigma') was a SIV incorporated under the law of the Cayman Islands, which was established to invest in certain types of assetbacked securities and other financial instruments. Sigma funded its activities largely by issuing its own shorter-term securities (principally, medium term notes) on the capital markets, and sought to profit from the spread between the return on its investments and its cost of funds. At its height, Sigma was the largest SIV in the market by value, with assets and liabilities understood to be in excess of USD 50 billion.

In 2007 and 2008, as is well known, the sub-prime mortgage crisis in the United States prompted market dislocation which severely impacted upon asset-backed securities and the vehicles which held them. These events had the combined effect of reducing the value of the securities held by Sigma in its investment portfolio and, at the same time, reducing the appetite among investors to acquire the notes which Sigma itself issued. This in turn limited Sigma’s ability to fund its activities, and eventually precipitated an 'Enforcement Event' (as defined within Sigma’s governing documentation) on 2 October 2008.

It is important to appreciate that the Enforcement Event did not render all of Sigma’s secured obligations immediately due and payable – indeed the absence of such acceleration was an integral feature of the provisions at the heart of the dispute.

In effect, all of Sigma’s assets were subject to a floating charge given under an English law Security Trust Deed dated 27 March 2003 (the 'Security Trust Deed') in favour of the Security Trustee (the 'Trustee') for the benefit of the secured creditors (which included holders of Sigma’s medium term notes, its derivative counterparties and certain other classes of its creditors). The occurrence of the Enforcement Event on 2 October 2008 caused that floating charge to crystallise and constituted the 'Enforcement Date' for the purposes of the Security Trust Deed. On 6 October 2008, the Trustee appointed administrative receivers over Sigma’s assets (the 'Receivers').

At the time of the Receivers’ appointment, Sigma’s liabilities to secured creditors were estimated at approximately USD 6.2 billion, and its liabilities to unsecured creditors a further approximately USD 3.6 billion. However, Sigma only held very limited assets by that point, and therefore had an insolvent deficit in excess of USD 9 billion in respect of all liabilities (secured and unsecured). On any analysis, there was a huge shortfall for the secured creditors.