Vol 6 (2009) - Issue 1

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Re Sigma Finance Corporation [2008] EWCA Civ 1303

In Re Sigma Finance Corporation [2008] EWCA Civ 1303, the Court of Appeal was required to determine whether Mr Justice Sales had correctly construed clause 7.6 of the security trust deed (the ‘Security Trust Deed’) pursuant to which the assets of Sigma Finance Corporation (‘Sigma’) were secured for the benefit of the holders of loan notes issued by the company and held by the security trustee appointed (the ‘Security Trustee’). The Security Trust Deed was governed by English law and contained a jurisdiction clause which had enabled proceedings to be commenced in England.

The issue, very broadly, was whether Sigma’s secured liabilities were to be discharged as they fell due or on some other basis, in the period following enforcement by the Security Trustee but prior to distribution of the company’s assets. Lord Justices Lloyd and Rimer affirmed the decision of Sales J and held that Sigma’s secured liabilities were to be discharged as they fell due in that period. Lord Neuberger, sitting as a judge of the Court of Appeal, also rejected a construction requiring the discharge of such liabilities pari passu but, dissenting, considered that clause 7.6 accelerated those liabilities in part and required the receiver appointed to pay an amount he considered ‘safe’, having regard to the likely amount available for final distribution at the end of the realisation process.

This case note considers the causes of the disagreement between the appellate judges and two aspects of the case which may have wider implications for the construction of such security documents.

The facts

Sigma had carried on business as a structured investment vehicle which used short to medium term funding to acquire longer term and hopefully profitable asset-backed and other financial securities. Sigma’s principal source of short to medium term funding was intermediated securities in the form of loan notes issued by the company and secured against the longer term assets acquired. The loan notes issued were held by the Security Trustee for the benefit of individual investors in accordance with the Security Trust Deed.

This investment structure relied on Sigma’s continuing ability to repay, or rather to rollover, short to medium term funding. The structure failed when the market in asset-backed securities evaporated with the widening of the sub-prime mortgage crisis. Sigma was unable to repay existing liabilities through the issue of new loan notes, the sale of assets or other funding arrangements such as sale and repurchase transactions.

In these circumstances, the notice issued to the Security Trustee by a creditor providing a facility to Sigma constituted an enforcement event with an enforcement date effective from 2 October 2008. An immediate effect of enforcement was to trigger an asset realisation process which was to be completed within the prescribed 60 day realisation period ending on 29 November 2008 (the ‘Realisation Period’).

Clause 7.6 of the Security Trust Deed provided:

'[1] The Security Trustee shall use its reasonable endeavours … to establish by the end of the Realisation Period a Short Term Pool, a number of Long Term Pools … and a Residual Equity Pool.

[2] In order to establish such Pools, the Security Trustee shall during the 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.

[3] 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 assets allocated to the various short and long term asset pools were to correspond to the various secured liabilities in terms of maturity, payment dates and currency of payment. The long term pools were, moreover, to comprise a pool in relation to each series of loan notes.