Sigma Finance Corp, Re

This judgment is given on three appeals from an order of Sales J made on 7 November 2008, in proceedings issued on 3 November and heard by the judge on 4 November. The case is unusual not only for the speed at which the case was brought on and decided, at first instance and on appeal, but also because the identity of the Appellants and the principal Respondent is not disclosed, and the hearings have taken place, and judgments were delivered, in private. Nor was either the judge’s judgment or our own to be disclosed, without further order of the court, because of considerations of commercial confidentiality. Having heard argument on the appeals on 20 November, we were asked by Counsel to give judgment, or at least to announce the result of the appeals, no later than today, having regard to the various steps that might need to be taken before or no later than Saturday 29 November, which is the end of a period of relevance under the document which we have to construe, as I will explain. For that reason we give judgment today, although, for my part at least, I would have preferred to have had more time in which to formulate and express my reasoning; among other things this judgment might then have been shorter.

I would like to pay tribute to the judge not only for his diligence and speed in giving judgment, but also for the clarity and comprehensive quality of his judgment. The case is far from easy, and the proper application of large sums of money, on the one hand, and the incidence as between competing creditors of a very large deficiency of assets, on the other, turn on the decision. Counsel representing the classes of competing creditors presented us with very clear, well argued and persuasive submissions, both written and oral. In the end I have come to the clear conclusion that the judge was right in his decision and his reasoning. As Rimer LJ is of the same opinion, and despite the dissent on the part of Lord Neuberger in relation to the appeals by Parties C and D, for reasons set out in their respective judgments, it follows that all the appeals will be dismissed. I set out my own reasons for that conclusion in what follows.

The case is about the affairs of a structured investment vehicle, Sigma Finance Corporation, incorporated under the law of the Cayman Islands, to which I will refer as the SIV. Its business consists only of investing in asset-backed securities and other financial instruments. It issued, or guaranteed, US dollar Medium Term Notes (MTNs) and Euro MTNs in order to finance its activities. Its creditors include the holders of these MTNs, and also the providers of liquidity under liquidity facilities, counterparties in relation to derivatives used as a hedge against currency and interest rate risks, “repo” counterparties under repurchase and securities lending agreements, and the holders of Capital Notes. All of these creditors, other than the holders of Capital Notes and the “repo” counterparties, are secured creditors. In effect, all of the SIV’s assets are secured in favour of the secured creditors under a Security Trust Deed (STD). The STD is governed by English law, and has a jurisdiction clause under which these proceedings have been brought here.

The available assets now fall very far short of the amount needed to pay even the secured creditors of the SIV in full, hence the competition between various classes of creditors, and the dispute as to the correct application of the STD in the present circumstances. The judge recorded at paragraph 7 that:

“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).”

I can also conveniently quote paragraphs 8 and 9 of his judgment which set out the circumstances in which this position arose, and in which the SIV got to the position in which the dispute has arisen:

“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.”

As the judge explained, this led to steps being taken as a result of which it is common ground that the Enforcement Date, the significance of which I will explain, was 2 October 2008, and the Realisation Period, likewise to be explained below, runs from that date until Saturday 29 November 2008.

Four classes of creditors are represented before the court by the unnamed Interested Parties. I take from paragraph 6 of the judge’s judgment this description of them and their different positions:

“(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.”

The judge held in favour of the contentions of Party A, with the result that the available assets would all have to be used to pay the creditors represented by that Party, leaving nothing for those represented by the other three classes represented before us. Each of Parties B, C and D appeals, with permission to appeal given by the judge.

The questions at issue on the appeal, as also those before the judge, turn on the true construction of one sentence of clause 7.6 of the STD. However, that sentence must be seen in the context of the STD as a whole. Although this is only in part a matter of contract (it declares trusts as well, as its name suggests), it is a commercial document, by reference to which the rights of investors and other creditors are to be ascertained, and there is no doubt that it is to be construed in accordance with well-established general principles applicable to commercial agreements and other documents. It is of particular importance in that, as in the case of other structured investment vehicles, the rights of secured creditors are defined and confined to those arising under the STD. This type of vehicle was referred to in argument as being “insolvency-remote”. That is an over-optimistic label, but it is true that creditors were not to be entitled to resort to normal insolvency procedures to enforce their rights, but were limited to the enforcement of rights through the STD, and therefore in accordance with its terms. Their rights are determined by those terms, which do not necessarily (and certainly do not in this case) correspond with those afforded by statutory insolvency procedures.

The importance of Clause 7 is that it governs the position in the event of, and in the course of, what is called “Enforcement”, a process triggered by the occurrence of an Enforcement Date, following the happening of an Enforcement Event. The many definitions in the STD in clauses 1 and 2 include that of an Automatic Enforcement Event, and of other Enforcement Events.

Clause 3 of the STD is a covenant by the Issuer (the SIV) with the Security Trustee (which I will call the Trustee, for short) to pay all its secured obligations (as defined) in accordance with the relevant obligations. Clause 4 creates a floating charge over virtually all of its assets to secure payment of the secured obligations.

Clause 5 deals with the occurrence of an Automatic Enforcement Event. This happens if, and only if, the SIV no longer maintains both a Long Term Rating and a Short Term Rating with at least one rating agency (namely Standard & Poor, Moody’s, Fitch or any other internationally recognised rating agency). It seems likely that such an occurrence would only occur in the event of a catastrophic failure of either the SIV or rating agencies generally. If it were to happen the Enforcement Date would be the date on which the Trustee receives notice from the SIV’s investment manager that the event has occurred.

Clause 6 deals with the more likely contingency of the occurrence of another kind of Enforcement Event. These events are defined as meaning any of eight different categories of occurrence. Three of them relate to events defined as an “Event of Default” in conditions applying to various series of MTNs, another three to failure by the SIV to pay any amount of principal or interest within ten days of the due date for payment under various commercial paper programmes, one relates to an “Event of Default” under a liquidity facility, and the eighth relates to failure by the SIV to pay within ten days of the due date any sum due from the SIV to Royal Trust of Canada under a custody agreement. In each case, however, the mere occurrence of the Event of Default or other failure is not enough. As regards the MTNs and the commercial paper programmes, there had to be also a resolution by holders of the relevant instruments directing the Trustee to enforce the Security. As regards the others, the Trustee must have been notified of the event under the Liquidity Facility, or in the case of indebtedness to Royal Trust, have been instructed by Royal Trust to enforce.

The evidence is that the event that triggered Enforcement in the present case was notification by a liquidity provider of an Event of Default, and that this event was the SIV’s inability to pay its debts as they fell due. We were told in the course of argument that inability or failure to pay an unsecured liability might constitute an event of default under this facility, but of course the SIV’s finances were such that, by the beginning of October 2008, it could not pay its secured debts as they fell due, let alone any unsecured liabilities. No doubt the occurrence of such an Event of Default entitled the Liquidity Provider to cancel the availability of the facility.

Under clause 6, because the occurrence of the Enforcement Event is not automatic, the process is rather different from that under clause 5. If the Trustee receives notice of the occurrence of a Potential Enforcement Event (which means, in effect, the relevant failure to pay or Event of Default), the Trustee must notify the SIV, so as to give it the opportunity to challenge the notice, on the basis that the event has not occurred. If that opportunity is not taken within the 3 days allowed, or if the challenge is made but not made good within 10 days, then the Trustee is to notify the relevant creditor or class of creditors and, in the case of the holders of MTNs or commercial paper, an appropriate meeting is to be held to consider whether or not to direct the Trustee to enforce the Security, or in the case of a liquidity provider or Royal Trust, the relevant entity is to notify the Trustee or instruct it to enforce, as the case may be. In fact in the present case the SIV waived the provision for three days’ notice for a challenge, since it had already taken the view that it would not, because it could not, pay any liabilities falling due for payment in future. Otherwise, however, the occurrence of an Event of Default under the documents relating to a particular creditor or class of creditors, or a failure to pay, would not necessarily lead to Enforcement. Even if the SIV did not challenge the occurrence of the relevant event, a decision remained to be taken, in one way or another, as to whether that should lead to Enforcement.

It is also to be noted that the various Enforcement Events do not include anything concerned with the adequacy of the assets of the SIV as compared with its liabilities. Instead they all seem to be concerned with inability to pay debts as they fall due: cash-flow insolvency rather than balance-sheet insolvency.

When the Trustee first receives a copy of a resolution passed by the relevant class of holders of MTNs or commercial paper, or a notification from a liquidity provider or Royal Trust, the day of such receipt is the Enforcement Date. Clause 7 then comes into operation. The floating charge crystallises under clause 7.2. Under clause 7.3, if any liquidity facility had not been cancelled by its provider, the Trustee is required to draw all available sums, in order to pay the SIV’s obligations to pay sums due and owing to beneficiaries in accordance with their rights, and to repay any advance under a liquidity facility. In the present case any facility otherwise available had been cancelled, so this option did not arise. The clause shows that it was envisaged that Enforcement might occur in circumstances in which a liquidity facility had not been cancelled, which would presumably only arise if, despite the occurrence of an Enforcement Event, the SIV was still able to pay its debts as they fall due. It is difficult to tell how likely that was, given the terms in which Enforcement Event is defined.

The judge referred to clause 7.3 but only because of the provision whereby, if the Trustee is able to and does draw advances under such a facility, it is to specify repayment dates for those advances which fall after the end of the Realisation Period.

It is unnecessary to refer to clauses 7.4 and 7.5 which are consequential on 7.3. Clause 7.6, on the other hand, is central to the case. It is as follows:

“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.”

The point of this clause is that, unlike the position under statutory insolvency, or some other SIVs, Enforcement does not accelerate any liabilities. Instead, the Trustee is to set up pools of assets, matched so far as possible to the respective liabilities, and the various classes of creditors are to be confined to recovery out of the assets allocated to the particular pool. If the assets are inadequate, then the allocation to the pools is to be abated pro rata, and if it turned out that the assets in a particular pool were inadequate, then payments out of the pool would have to be abated, but the STD does not bring forward the due date of any liabilities, nor does it provide that all liabilities are to be discharged, pro rata, out of all available assets.

The first sentence of clause 7.6 requires the Trustee, to the extent of its reasonable endeavours, to establish by the end of the Realisation Period the required pools: one Short-Term Pool, one or more Long-Term Pools and a Residual Equity Pool. The Realisation Period runs for 60 days from (and including) the Enforcement Date. As already mentioned, on the facts, it continues until (and including) Saturday 29 November. The second sentence requires the Trustee to realise, dispose of or otherwise deal with the assets of the SIV in such manner as it deems appropriate in order to establish the pools, and requires that this be done within that period, not thereafter. I will leave until later, after a review of the rest of the context, quite what the third sentence means, but it is to be noted that it might be a matter of chance whether any Short Term Liabilities would fall due for payment during the Realisation Period, just as it would be a matter of chance which such liabilities fell due then, if any.

Clause 7.7 requires the Trustee to use reasonable endeavours to ensure as regards the Short Term and Long Term Pools that the principal amount of the assets allocated is equal to the principal amount of the corresponding liabilities, that the assets and liabilities match in term of maturity and payment dates and currency of payment, and that directions set out in the clause are followed as regards the rating of the assets comprised in each pool. Clause 7.8 makes it clear that, so long as the Trustee uses its reasonable endeavours to see that the contents of clause 7.7 is implemented, it is under no liability to any creditor if the purpose is not achieved and if the assets in any pool turn out to be inadequate to pay the relative liabilities.

Clause 7.9 is the next important clause:

“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.”

As is clear, this applies to the process of allocating assets to the pools, and is therefore to be complied with during, or at the end of, the Realisation Period, when the pools are set up. The calculation is applied in relation to the nominal values of the assets, rather than their realisable values.

Clause 7.10 does not need to be cited. Clause 7.11, on the other hand, sets out the obligations of the Trustee in relation to the assets in the Short-Term Pool, and is therefore important:

“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)

[deals with a possibility that does not matter for present purposes]”

This provision, which sets out the trusts applying to the assets comprised in the Short-Term Pool, creates what was referred to in argument as a waterfall, or in other words an order of priority of payment, with the first priority being given to the remuneration due to the Trustee itself and any sums due in respect of costs charges and expenses incurred by the Trustee or any Receiver. An aspect of this provision on which some reliance was placed in argument is that, because of the words in brackets in clause 7.11.1, even if, as is theoretically possible, the pools were established before the last day of the Realisation Period (because clause 7.6 says they must be established “by the end of”, rather than “at the end of”, the period) no payment out would be possible until after the Realisation Period, because it is at that stage that the calculation is to be done which ascertains what proportion of the remuneration and so on is to be paid out of this pool.

The other important aspect of this provision is proviso (a), which imposes a pari passu distribution as regards payments out of the pool once the Trustee reasonably believes that the assets in the pool will be inadequate to meet the corresponding liabilities. This proviso refers to “any time after the Realisation Period”, whereas the equivalent proviso to clause 7.12 says “if at any time”, without referring to the Realisation Period That seems to do no more than reflect the reality, namely that what is dealt with under clause 7.12 is Long Term Liabilities, which have maturity or payment dates of 365 days or longer from the Enforcement Date, and it is unlikely that any question would arise in practice of applying the proviso until a long time beyond the Realisation Period. Even as regards the Short Term Pool, because (for reasons already mentioned) payment out of the pool before the end of the Realisation Period is not possible, the inclusion of the words “after the Realisation Period” in proviso (a) does not seem to be strictly necessary.

I do not need to refer to other provisions of clause 7, nor to many of the later provisions of the STD. In clause 10 the SIV covenants that it will not issue any further Notes or commercial paper after an Enforcement Event or Automatic Enforcement Event, and that on such an Event it will deliver to the Trustee a list of the Assets and Liabilities forming its total indebtedness. Clause 11 entitles the Trustee to remuneration. Under clause 13, subject to the Trustee being satisfies as to its indemnity (for which, among other things, clauses 16 and 17.16 provide), the Trustee may itself exercise wide powers of enforcement on and after the Enforcement Date by taking possession and selling assets, and by clause 13.2 it may pay and discharge all expenses and outgoings incurred in and about the exercise of such powers out of the profits and income of assets and of any money received in exercise of the powers. By clause 14 it may appoint receivers on and after the Enforcement Date, who are to have all the powers of the Trustee. Their remuneration is fixed by the Trustee but payable by the SIV and out of the relevant assets: see clause 14.3.4. Clause 14.3.6 gives the receiver a power to borrow in order to defray costs, charges, losses and expenses, including its own remuneration.

Among the general provisions concerning the Trustee in clause 17 there are two to which reference was made in argument. One is clause 17.16 by which the Trustee is free from any obligation to expend or risk its own funds or incur any financial liability, if it has reasonable grounds for believing that repayment of the funds or adequate indemnity against such financial liability is not assured to it. The other is clause 17.26 under which the Trustee is under no duty to ensure that any payment is made when due in respect of any asset.

In view of those various provisions of the STD, it seems to me that the overall context of the provision which has to be interpreted in this case can be described and summarised as follows. Until Enforcement, the basis on which the business of the SIV is to be carried is that liabilities are paid as they fall due, without any requirement to have specific regard to whether the assets are sufficient to cover the liabilities. That is shown by the absence of any covenants or events of default defined by reference to the ratio of assets to liabilities. Enforcement may arise as a result of an event which does not involve cash-flow insolvency, because if that were not possible, it would be difficult to understand in what circumstances clause 7.3 might be applicable. In such a case the third sentence of clause 7.6 may not give rise to any problem. But Enforcement is at least as likely to arise, and probably more so, in a case of cash-flow insolvency, though this could in some circumstances be as regards unsecured liabilities only, not accompanied by inability to pay secured liabilities as they fall due. Most of the Enforcement Events are concerned with inability to pay secured liabilities as they fall due. Thus, although solvent Enforcement is a possible contingency, as is Enforcement in a situation of solvency as regards secured, though not unsecured, creditors, it is more likely to occur in a case where the SIV cannot pay its secured debts as they fall due.

The STD does not accelerate any obligations on Enforcement. They all continue to be payable in accordance with their terms. Instead the STD requires the Trustee to set up pools of assets to provide for their payment, matching assets to liabilities so far as possible in terms of principal amount (rather than market value), maturity and currency, and with prescribed composition as regards credit rating. If at the time when the pools are set up the principal amount of the assets (by no means necessarily the same as their market value) is less than that of the liabilities, then the Trustee is to reduce the amount of assets to be allocated to the respective pools accordingly, under clause 7.9. Moreover, if after the pools have been set up, the Trustee believes that the assets in a pool will not be sufficient to meet the corresponding liabilities, then the Trustee is, in effect, to pay only a dividend on those liabilities, so far as the assets in that pool suffice. There may well be different outcomes, as regards extent of payment, in relation to different pools, so that although the concept of pari passu distribution plays a part in the scheme of the STD, it is applied in a special and unusual way, which is not pari passu across the whole body of creditors, but rather separately within certain distinct classes of creditors.

Clause 7.6 is directed, first, at the process of setting up the pools, prescribing that this is to be done, by the use of the Trustee’s reasonable endeavours, within the Realisation Period, i.e. 60 days from the Enforcement Date, a timescale which is rather firmly emphasised by the provision that the Trustee must complete the exercise (so far as it may be necessary) of realising, disposing or otherwise dealing with assets for this purpose by the end of the Realisation Period (see the words “but not thereafter”). In the context of Short-Term Liabilities which may be outstanding for up to 365 days from the Enforcement Date, and Long-Term Liabilities which extend beyond that, it seems to me that a 60 day period is not particularly long in relation to the practical exigencies of this situation, especially if the task is to be undertaken, in practice, by receivers newly appointed by the Trustee, who might have no prior knowledge of the situation and of the position of the SIV and its creditors.

Because of the provisions of clause 7.11.1 and 7.12.1 as regards calculating the proportion of the remuneration and other matters which have first priority of payment out of the pools, no payment is possible out of a pool until after the Realisation Period. Both for that reason and for reasons of practicality, it seems to me most unlikely that the Pools would be set up until the last day or two of the Realisation Period.

It might be that, on particular facts, no Short-Term Liabilities would fall due for payment during the Realisation Period, but it is clearly possible that they would, so provision had to be made for their payment. If they had to be paid out of the Short-Term Pool, their payment would necessarily be deferred until after the Realisation Period. That is inconsistent with the general approach of the STD, which is to provide for payment of liabilities on the due date. Even as regards payment out of a pool, the obligation is to pay “when due or as soon thereafter as can practicably be arranged”. The third sentence of clause 7.6 is directed to these particular obligations, and requires them to be paid as they fall due, rather than being deferred. The issue between the parties is as to the effect of the qualification “shall so far as possible discharge”.

Party A argues that the effect of the third sentence as a whole is that the Trustee is to pay these liabilities as they fall due, day by day, until it has no more assets with which to pay them. Once the last day arrives on which there are funds to pay, the liabilities falling due on that day may have to be paid pro rata, but otherwise all liabilities that are to be paid are paid in full, and those falling due later are not paid at all. This is first-in-time priority, referred to in argument as pay-as-you-go.

Party B contends that the sentence requires the Trustee to pay, as a class, “all Short-Term Liabilities falling due for payment during such period”, i.e. during the Realisation Period, and that any inadequacy of assets is to be taken account of by paying all of those liabilities pro rata, rather than on the basis of priority to those first in time.

Parties C and D submit that the sentence requires pro rata payment, but over the class of secured liabilities (short-term and long-term) as a whole, by way of the pools to be set up under the earlier part of clause 7.6, and in accordance with clauses 7.11 and 7.12.

Counsel offered us submissions, fortified by reference to a number of decided cases, about the proper approach to the interpretation of commercial documents. Mr Mortimore made what seemed to me a good point in this respect, namely that the STD is analogous to a constitutional document, such as the memorandum and articles of association of a company, rather than to an ordinary commercial contract which deals with the rights and obligations of its parties alone. The STD, by contrast, affects the rights among themselves of a large number of people who are not parties to it. That may be a reason why no party has advanced any argument based on the implication of terms, which is especially difficult in such cases. It is also a reason why it may be difficult to bring much in the way of surrounding circumstances into the process of construction. Otherwise, on the part of Counsel for Parties C and D, arguments as regards the correct approach to the interpretation of a document such as the STD were directed, in part, to suggesting that the judge gave too much weight to his view, formed on his first reading, of the ordinary and natural meaning of the words of the third sentence in isolation. It seems to me that this is a somewhat arid debate, in the present case. Of course any given words in a commercial document need to be construed in the context of the document as a whole, and of any relevant surrounding circumstances. But it is unavoidable to start with the words themselves, both as a practical matter, reading into a case, and as a matter of the process of analysis. I do not accept that the judge failed to take account of the context of the document as a whole and of the commercial purpose discernible from it. The question is whether he came to the right conclusion from this material.

No reliance was placed on any particular surrounding circumstances except in the case of Party D, represented by Miss Prevezer Q.C., who referred to two Information Memoranda relating to the placing of Euro MTNs and US dollar MTNs respectively, which bear the same date as the STD. She pointed out that these documents refer repeatedly to the Notes as ranking pari passu and without any preference or priority amongst themselves, and that reference was made to the Realisation Period and to what was to be done within that period without any suggestion that any of the short-term liabilities might attract special priority is they fell due during that period. It seems to me that no weight can be given to these documents as regards the interpretation of the STD. They are not intended (so far as relevant) as anything other than an explanation of its terms and effect. If the explanation is wrong then an investor might theoretically have a remedy arising from any misrepresentation, subject to proof of reliance and so on, but the document cannot cast light on the correct interpretation of the STD itself, particularly because it governs the rights of other classes of creditors as well as the MTN holders, and those others may not have been aware of the terms of these memoranda.

We also had cited to us some other cases in which the courts have had to consider problems in the interpretation of the relevant documents of a SIV: Re Cheyne Finance plc (in receivership) (No. 1) [2007] EWHC (Ch) 2402 2, [2008] 1 BCLC 732, Re Cheyne Finance plc (in receivership) (No 2) [2007] EWHC (Ch) 2402, [2008] 1 BCLC 741 and Re Whistlejacket Capital Ltd (in receivership) [2008] EWCA Civ 575. For my part, it seems to me that the documents concerned in those cases are so different in their relevant provisions from that which we have to consider that they are of assistance only at the highest level of generality. I find the differences in the regime applicable under the STD in the present case, as compared with those other cases, more notable than the similarities.

Mr Howard, for Party A, contended that the judge was right to prefer the reading of the third sentence of clause 7.6 which gives priority according to the date on which relevant liabilities fall due within the Realisation Period, or first-in-time priority. He argued that the judge was entitled, and correct, to conclude that this followed from the natural and ordinary meaning of the words of the sentence, and was not displaced by anything in the context of the STD or any consequences of the reading.

For Parties C and D, Mr Mortimore and Miss Prevezer drew attention to a number of points which, they said, make such a reading commercially unattractive or bizarre, and one which flouts business common sense, and that it is therefore unlikely to have been, objectively viewed, what the parties the intended. First and foremost is the adventitious nature of the priority conferred by the first in time principle. On the facts of the present case, admittedly with a deficiency of a scale greater than that which might have been anticipated, one group of Noteholders gets paid in full, and no others get a cent, whereas under the scheme of the STD itself, once beyond the Realisation Period, all Noteholders would be paid in part, even though not according to a strict pari passu distribution across all classes. Why should the pure chance of obligations falling due during the 60 day period give rise to absolute priority over other creditors of the same type, especially at a time when it is known that the SIV is massively insolvent, so that the abatement provisions will operate, if and when they are applicable?

The haphazard nature of the application of the priority advocated by Party A is the more unlikely to have been intended, according to Parties C and D, because to some extent the timing of the Realisation Period, and therefore the identity of the creditors who have the benefit of this first-in-time priority, is open to manipulation. Thus, the Enforcement Date occurred some three days earlier than it might have done in the present case because the SIV waived the three days allowed to it to challenge whether an Enforcement Event had happened. It is not suggested that this was done otherwise than properly or for any ulterior motive, but there was an element of choice on the part of the SIV. Equally, in theory, the timing of meetings or of service of notice of a resolution on behalf of Noteholders or corresponding action on the part of another creditor, giving rise to an Enforcement Event, could possibly be arranged deliberately in such a way as to affect the timing of the Realisation Period. It is at least a theoretical possibility, though it seems to me rather more remote in terms of probability than that which gave rise to a similar argument, on a very different provision, in Re Whistlejacket Capital, referred to above.

They also argued that Mr Howard’s reading gave rise to a very odd anomaly, namely that the prior liabilities, non-payment of which gave rise to the Enforcement Event, would not be given priority under the third sentence, since they would not fall due during the Realisation Period, with the result that those falling due during the Realisation Period (or during the early part of it) would be paid in full, whereas those whose debts fell due before it, and remained unpaid, would either not be paid at all, or at best would be relegated to share in the appropriate pool. Further, they argued that Mr Howard’s reading appeared to require the Trustee to pay out to those creditors whose debts fell due during the Realisation Period, without making any provision for the remuneration and expenses of the Trustee itself or the receivers.

They submitted that, in the context of the STD as a whole, it would be very surprising to find that the third sentence of clause 7.6 sets up a sub-class of Short-Term Liabilities falling due for payment during the Realisation Period, there being no other indication that those liabilities are to be treated differently from other Short-Term Liabilities or indeed, apart from having a separate pool provided for them, from Long-Term Liabilities. They also argued that it would be particularly surprising to find such an effect resulting from a sentence tacked on, as it were, at the end of a clause which otherwise deals only with practical and administrative matters, having no effect as between different creditors. In an extreme case, such as the present, the implementation of the obligation in the third sentence, as interpreted by the judge, results in the subversion and frustration of the rest of the clause, because it means that, by the end of the Realisation Period, there are no assets to go into any pool. That is all the more the case if, as the evidence suggests in this case, the obligation to pay on the due dates could require fire sales of assets, so as to produce something with which to pay the first of the relevant creditors, to the substantial prejudice of other creditors, even those with liabilities falling due later in the Realisation Period. Those are powerful considerations, eloquently advanced in their cogent submissions by Mr Mortimore and Miss Prevezer.

However, the question is whether, and if so how, the sentence can be read so as to produce the result for which they contend, which is (put simply) that, if the assets will not be sufficient to pay the liabilities so that, once the pools are constituted there will have to be an abatement, either under clause 7.9 (if the deficiency arises on nominal values) or at any rate under proviso (a) to each of clauses 7.11.2 and 7.12.2, when realisable values are to be taken into account, then it is not possible to discharge the liabilities falling due within the Realisation Period, because that cannot be done consistently with the rest of the STD.

I must summarise next the arguments on behalf of Party B, which espouses Party A’s view that Short-Term Liabilities falling due within the Realisation Period are treated separately, but aligns itself with Parties C and D in favouring pari passu treatment (though only within that special class) rather than first-in-time priority. On behalf of Party B, Mr Sheldon argued that the STD does clearly treat differently those Short-Term Liabilities which fall due during the Realisation Period as compared with other secured liabilities, but that it treats this sub-class of Short-Term Liabilities as a whole, by means of the use of the phrase, which he said was to be read together and not dissected, “any Short-Term Liabilities falling due for payment during such period [i.e. the Realisation Period]”. On his submission, Party A’s reading of the sentence would not give proper effect to the use of this phrase, which requires all such liabilities to be paid so far as possible, so that if there is a deficiency at that stage, it is to be borne pro rata by each of the creditors in respect of such liabilities. He submitted that Party A’s reading did not give any meaning to the words “during such period”. To the argument that his own reading did not give effect to the words “on the due dates therefor”, he countered that this is qualified by “so far as possible”, so that if an abatement is required, for which time may have to be allowed to see what amount can be paid, a short period of deferral may be necessary, and punctual payment may not be possible.

A number of detailed points were taken on the wording of the third sentence in particular, and clause 7.6 and other parts of the STD as a whole. I will discuss the most important of these.

As already mentioned there is an issue about the treatment, on Party A’s reading, of unpaid amounts which fell due before the Realisation Period, whose non-payment may have led to the Enforcement Event which triggered Enforcement. The third sentence of clause 7.6 speaks of Short-Term Liabilities falling due for payment during the Realisation Period. The pre-Enforcement liabilities would have fallen due before, not during, the Realisation Period. On the literal words of the sentence, therefore, they are not required to be paid under this sentence, which would be odd. Of course if the Enforcement is not on the basis of insolvency, there would not be any such outstanding liabilities. But if it is triggered by an event involving non-payment there will be. One would naturally expect these to be paid with at least as high a priority as any other liability, other than expenses of the Enforcement.

The judge held that these liabilities are covered by the third sentence of clause 7.6, as he explained in his paragraph 36:

“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.”

Mr Mortimore and Miss Prevezer submitted, with some justification, that if this treats the pre-Enforcement liabilities as “falling due” on the first day of the Realisation Period, as well as having fallen due beforehand, this would be an unorthodox construction, to say the least. I agree, but one thing that is clear is that no specific thought was given to these liabilities when clause 7.6 was drafted, or indeed in relation to any part of clause 7. There was even an argument that these liabilities are not among those to be paid out of the pools. They are within the definition of Short-Term Liabilities, because this includes liabilities “which are due and payable or which have scheduled maturity or payment dates falling less than 365 days from the Enforcement Date” (my emphasis). However, clause 7.11.2 directs payment of amounts in respect of Short-Term Liabilities to be paid “when due or as soon thereafter as can practicably be arranged”. It was said that this does not allow for payment of sums which have already fallen due before the Pool is constituted – in effect before the end of the Realisation Period. I do not accept that argument, but it does show that the fate of these pre-Enforcement liabilities was not dealt with in express terms.

The point of the argument to the effect that these liabilities are not covered by the third sentence on the first-in-time priority reading was that this showed the latter reading to produce an absurd anomaly, or alternatively that the literal reading which it involves has to be qualified to produce a sensible result in this respect, and may therefore be suspect more generally. It seems to me that, if the first-in-time priority reading is correct, it would not be a major qualification to it to read the sentence as if it said “any Short-Term Liabilities already due or falling due for payment during such period”, and so required the pre-Enforcement liabilities to be paid, as the judge said, in effect as if they had fallen due on the Enforcement Date, the first day of the Realisation Period. I would therefore agree with the judge on this point, and I do not regard this qualification of the literal effect of the sentence as sufficient by itself to show that first-in-time priority cannot have been intended.

So far as the point about the remuneration and expenses of the Trustee and the receivers is concerned, the judge dealt with this at paragraphs 37 to 39 of his judgment, and gave effect to this in paragraph (3) of his order. None of the three Appellants challenges that part of the order. The respective Appellant’s Notices make it clear that only paragraph (2), dealing with priority, is sought to be set aside. In those circumstances I need say no more than that I agree with the judge for the reasons he gave on this aspect of the case.

In terms of the wording of the third sentence, the remaining arguments turn on whether Party A’s reading gives enough (or any) meaning to the various parts of the sentence, or whether on the other hand the other Parties’ readings put altogether too much weight on words in the sentence, especially the words “so far as possible”.

One criticism of the first-in-time priority reading is that it is said that it gives no content to the words “so far as possible”. If all they mean is “so far as the available assets allow”, they add nothing to “using cash or other realisable or maturing Assets of the Issuer” at the end of the sentence. Clause 17.16 shows that the Trustee cannot be required to use its own funds, so that these words are not needed (even in the absence of the concluding words of the sentence) to protect the Trustee.

The judge described the sentence as creating “an especially strong obligation” on the Trustee (see his paragraph 32) as compared with the qualified obligation in the first sentence (by reference to reasonable endeavours) and elsewhere such as in clause 7.3 and in clauses 7.11.2 and 7.12.2. That seems to me to be a fair point, but the words “so far as possible” do qualify the obligation to some extent. It seems to me that one respect in which they do so could be as regards payment on the due date. If payment is possible, but not until a day or more late, for example because of delays or difficulties in realisation, then the words “so far as possible” could protect the Trustee from any claim that it was in breach of its obligations, while on the other hand the delay in payment would not give rise to any right to interest (we were told that Notes were issued on terms that did not carry a right to post-maturity interest) and would also not affect the first-in-time priority, applied by reference to the date on which the liability should have been paid.

As it seems to me, the substantial force of the arguments for Parties C and D derives from the following factors, the order in which I state them not being any indication of their relative significance: (a) the apparent position and purpose of the third sentence of clause 7.6 as being incidental to the rest of the clause, whereas, on the present facts, if Party A is right, its implementation destroys the whole purpose of the rest of the clause; (b) the fact that, on this interpretation, although it is likely to have been clear from the Enforcement Date that the SIV was massively insolvent and that clause 7.9 would have to be invoked in setting up the pools and that (even if clause 7.9 did not apply because the deficiency did not arise on the nominal values) there would certainly be an abatement on all payments out of the pools under proviso (a) to each of clauses 7.11.2 and 7.12.2, that deficiency was simply to be ignored during the Realisation Period in favour of payment in full according to first-in-time priority; (c) the element of pure chance as to which liabilities would be paid in full, leaving the rest with nothing, instead of a dividend for all, together with the risk that the identity of the liabilities to be paid in full might have been influenced by a degree of manipulation; (d) the risk that the requirement to pay the first-in-time Short-Term Liabilities in full would require an improvident fire-sale of assets for the sake of the first in time, to the prejudice of those later in the queue.

Those factors, undoubtedly powerful in themselves, do not alone explain how “so far as possible” in the third sentence can be read so as to import a principle of pari passu distribution, or a requirement that payment on the due dates is not to be made if there is a deficiency of assets as against liabilities. One way of putting the argument of construction in favour of this (not quite how it was put by Mr Mortimore or Miss Prevezer, but expressing their arguments in a different way) might be this:

However they are put, the arguments for Parties C and D involve saying that “so far as possible” means, or includes, only if and insofar as it is possible consistently with the scheme of pari passu distribution which is reflected in clause 7.9 and in proviso (a) to clauses 7.11.2 and 7.12.2. One difficulty with that argument is that, as it seems to me, either it is possible to make such payments, consistently with that scheme (because a deficiency is not apparent) or it is not possible. The sentence does not say “if possible” but “so far as possible”; the latter phrase seems clearly to indicate that partial payment may be possible.

An alternative reading might be that, in an insolvent Enforcement, the sentence requires the Trustee to make payments on account in respect of the Short-Term Liabilities falling due during the Realisation Period, at it were by way of dividend, rather than paying them in full. A version of such an argument is at the centre of Party B’s submissions, but in that case the argument is that all the available assets are to be applied (so far as possible) in paying the Short-Term Liabilities falling due during the Realisation Period, without having any regard to the Short-Term Liabilities falling due thereafter and the Long-Term Liabilities.

In his judgment, which I have had the opportunity to read in draft, Lord Neuberger favours a version of this approach, and formulates it as follows in paragraph [95(d)] of his judgment (I quote it here for ease of reference):

“The words “so far as possible” mean that, while the Trustee has a duty to pay each RP liability as it falls due, the payment is limited to the amount which the Trustee is confident will be paid in respect of that liability pursuant to the provisions of clause 7.11.2 and the provisos thereto; at the end of the Realisation Period, any balance due in respect of the RP liability is to be paid from the Short Term Pool.”

With the greatest respect, I find that reading problematical. Unlike clause 7.11.2, for example, it does not define clearly or at all what is to be the state of mind of the Trustee in order for this to apply: is the Trustee to be satisfied of something, or to “reasonably believe” something (as in proviso (a) to clauses 7.11.2 and 7.12.2), and if so what? Nor does it begin to prescribe what the Trustee is to do, and what, if any, is the scope of its discretion, or judgment, if it is in whatever is the relevant state of mind as regards the short-term, medium-term or long-term prospects for payment in full, or only on account, of the SIV’s various secured liabilities.

The sentence is, on the face of it, clear and unequivocal as to the Trustee’s obligation to discharge the Short-Term Liabilities falling due during the Realisation Period. It seems to me that if this obligation was intended to be qualified so as to require only payment on account, then, whether or not the proposed abatement is to be applied having regard to only the Short-Term Liabilities falling due during the Realisation Period (as Party B contends) or taking into account all of the secured liabilities, and therefore with a view to what might be payable on account of these Short-Term Liabilities if they fell to be met out of the Short-Term Pool, the STD would have made it clear in what circumstances this qualification of the obligation was to arise, and what the Trustee was required to do, if the obligation was qualified in this way, instead of paying in full.

Lord Neuberger suggests (at paragraph [111] below) that the third sentence has the effect that, when a Short-Term Liability falls due during the Realisation Period, the Trustee is obliged to pay on account of that liability “as much as he can be confident that the creditor concerned will receive if he had to wait for payment under clause 7.11 from the Short Term Pool at the end of the Realisation Period”. That does not strike me as language consistent with the approach of the STD to defining the obligations imposed on the Trustee. I find it difficult to suppose that, if those concerned with the drafting and negotiation of the STD had sought to cover this point expressly, so as to achieve something along the lines of this result, they would not have used much more specific and elaborate language, not least in order to protect the Trustee by careful definition of its obligations and of the contingencies in which different obligations would arise.

I would not myself attach too much significance to the use of the word “discharge”, though my impression is that the STD is quite careful in using “discharge” in relation to Liabilities, and “pay” in relation to “amounts” (including of course amounts due in respect of Liabilities as in clause 7.11.2). It does use “pay and discharge” in clause 13.2. In principle, it seems to me that, for a monetary liability to be discharged, it must be paid in full, but a context could show that discharge pro tanto was envisaged under a particular transaction.

In the version of the argument in favour of pari passu distribution which I have set out in paragraph [58] above, paragraph (iii) treats the third sentence as conferring a power to pay on the due dates the Short-Term Liabilities falling due during the Realisation Period. However, this does not give adequate recognition to the words of the sentence which seem to me clearly to impose an obligation to pay these liabilities, on the due dates for payment, subject only to whatever is meant by “so far as possible”.

The essence of the argument in favour of Party A and first-in-time priority can be summarised as follows. The STD is a commercial document prepared by skilled and specialist lawyers for use in relation to sophisticated financial transactions where all parties are likely to have had, or at least to have access to, proper legal and financial advice as to the extent of, and any limitations on, the rights conferred on investors. Its intention should be understood by reference to the clear and natural meaning of the words used.

The third sentence of clause 7.6 is clear in imposing an obligation on the Trustee to pay on the due dates the Short-Term Liabilities falling due during the Realisation Period, out of the available assets, so far as possible. It is unlike most other provisions of the STD in imposing a specific obligation to pay as and when liabilities fall due (even the comparable obligation in clauses 7.11.2 and 7.12.2 is specifically qualified), and it is not subject to any clear indication that the obligation is conditional on the Trustee being of the view that the available assets are sufficient to discharge the corresponding liabilities, comparable to the provision which the STD does impose, in careful and quite elaborate terms, in proviso (a) to clauses 7.11.2 and 7.12.2. If it had been intended that the obligation to pay imposed by the third sentence should be conditional on a view being taken by the Trustee as to the adequacy of the assets, the draftsman was perfectly capable of inserting a suitable provision, and would have done so in careful and specific terms, defining exactly what it was that the Trustee needed to be satisfied of, or to “reasonably believe”, and when. The model of clause 7.9 would not by any means necessarily be sufficient for this purpose, since it is directed to the nominal values of assets, not to their realisable value.

Looking at the sentence in the context of clause 7.6, of clause 7 overall, and of the STD as a whole, the argument for pari passu distribution involves placing on the words “so far as possible” a weight and significance that they cannot bear. It may be that they are not needed to reinforce the proposition, expressed in the last words of the sentence, that the liabilities are only to be discharged out of the available assets of the SIV, and therefore are not to be discharged beyond the extent of those assets. It may be that they qualify the obligation of punctual payment, so that if there is a delay, the Trustee is not in breach. But to discern in those four words a condition which would import something along the lines of proviso (a) to clauses 7.11.2 and 7.12.2, but by way of an absolute bar on distribution during the Realisation Period, is just not a legitimate or tenable reading of the words. The attempt to read these words in that way is not in truth an exercise in interpretation but rather the creation of a set of obligations other than those which are expressed in the STD as properly construed, in order to avoid what, in the present extreme economic circumstances, may seem an unfair and unexpected result.

As the judge said in paragraph 27 of his judgment:

“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.”

As Mr Howard submitted to us, the parties to the STD could have provided for the shutters to come down, in the judge’s phrase, on the Enforcement Date. Such an approach might have been expected, at any rate in a case in which Enforcement was likely to be proceeding in a case of cash-flow insolvency, and it might have been qualified by a provision allowing payment in full if the assets were reasonably believed to be sufficient. But it is clear that this is not the approach of the STD, which does not impose its own regime of pari passu distribution except through the pools once constituted. Later in paragraph 27 the judge went on to say this:

“It [i.e. the “pay as you go” construction of the third sentence] 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.”

It is true, as was urged on us for the several Appellants, that the arrival of the Enforcement Date does make a major change to the business of the SIV. The floating charge crystallises, no more Notes or commercial paper can be issued, and the Trustee will take charge, directly or by a Receiver. Those are among the reasons why one might expect that the shutters would come down at that point, but the third sentence of clause 7.6 is inconsistent with that. During the Realisation Period the Trustee is to pay Short-Term Liabilities as they fall due “so far as possible”. That is altogether different from what the Trustee is to do later and in other respects.

I turn to the arguments as between Parties A and B, as to whether, within the class of creditors with Short-Term Liabilities which fall due during the Realisation Period, there is to be first-in-time priority or pari passu distribution. Mr Sheldon made an attractive case for the latter, arguing that the sentence designates the special class of such liabilities, and directs that it is these liabilities which have to be paid out of the available assets, so far as possible. He contended that those four words can readily, in this limited context, be understood as showing that, if the assets do not suffice to pay all of these liabilities in full, each of them should be paid pari passu, rather than using the available funds to pay in full the first in time. Mr Sheldon is entitled to point out that the third sentence contains an element of meaningless duplication, on Party A’s reading, namely the opening words “During the Realisation Period” and the later words “during such period”, whereas on Party B’s reading, the latter words are there as part of an overall phrase defining the class of liabilities which the Trustee is to pay, so far as possible, during that period.

Despite Mr Sheldon’s able formulation of the case, it seems to me that it cannot stand with the requirement to pay “on the due dates therefor”, which is a clear direction in favour of first-in-time. I agree that there may be an element of duplication in the two references to the period. Even if “so far as possible” can be read as potentially qualifying the obligations to pay on the due dates, it seems to me that the sentence cannot be understood as imposing a pari passu distribution within the class of Short-Term Liabilities falling due during the Realisation Period, any more than it can be understood as subjecting those liabilities to pari passu treatment with all other secured liabilities, as Parties C and D contend.

In my judgment Mr Howard’s arguments, which I have referred to above and sought to summarise in paragraphs [67] to [69] above, are correct, and the judge was right to accept them. I do not consider that the words “so far as possible” can be read as requiring the Trustee, in the event of a perceived deficiency of assets, either to refrain from paying liabilities as they fall due, in accordance with the third sentence, so that all those liabilities would fall to be satisfied (so far as they can) through the short-term pool, or to treat as a class all Short-Term Liabilities falling due during the Realisation Period, and paying all of those pro rata. Among the principal factors leading me to that conclusion is that other provisions of the STD, above all proviso (a) to clauses 7.11.2 and 7.12.2, show in what elaborate and careful terms an obligation to pay liabilities under the STD only pro rata was formulated, and I do not find it possible to suppose that such an obligation was to be imposed by text such as that of the third sentence of clause 7.6 which has no equivalent in terms of the precision and care of the definition of the supposed obligation.

Those and the other reasons set out above are those which have led me to the conclusion that the judge was right in his decision on the issues raised. I would therefore dismiss the appeals.

I gratefully adopt Lloyd LJ’s summary of the background position against which this appeal arises and his full exposition of the provisions of the STD relevant to the question of construction upon which it turns. Like Lloyd LJ, I too would dismiss this appeal and would also pay my tribute to the quality of Sales J’s judgment, produced by him in commendably short order. But for the fact that Lord Neuberger of Abbotsbury, whose judgment I have read in draft, takes a different view, I would probably have been content simply to express my agreement with Lloyd LJ’s reasons for dismissing the appeal. In the circumstances I propose to explain in my own words why I have reached the same conclusion as he has.

The resolution of the problem turns on the sense of the four words -- “so far as possible” – in the last sentence of clause 7.6. The phrase is a familiar piece of English but the question is what it means in the context. Clause 7.6 is a sub-clause in a clause headed “Enforcement” (meaning enforcement by the security trustee), comprising a total of 16 sub-clauses and occupying nearly seven pages. The clause is concerned with the mechanics of the realisation for the benefit of the secured creditors of the fixed charge that arises in consequence of the occurrence of an enforcement event. The interpretation of the last sentence of clause 7.6 at least requires a consideration of it in the context of the scheme of clause 7 as a whole; and clause 7 itself needs to be considered in the context of the STD as a whole, considered against the factual background in which it came to be executed.

The general scheme of clause 7 is clear. Following the enforcement date, enforcement by the security trustee is governed by two consecutive phases. There is first a 60-day realisation period during which the security trustee is required “to use its reasonable endeavours” to constitute three pools, comprising a short term pool, several long term pools and a residual equity pool. For that purpose, the security trustee is required during the realisation period – “but not thereafter” – to “realise, dispose of or otherwise deal with the Assets in such manner as, in its absolute discretion, it deems appropriate.” None of the liabilities to the secured creditors is accelerated; and the theory is that, following the realisation period, the assets respectively allocated to the short and long term pools will respectively meet, at least pro rata, the SIV’s short and long term secured liabilities as they fall due. Clause 7.9 recognises that the assets may at the outset be foreseen to be insufficient to meet all the secured liabilities intended to be satisfied by the pools; and clause 7.11.3 recognises that the potential for such a shortfall may become apparent following the setting up of the pools.

The essential question that is raised by the third sentence of clause 7.6 is whether in a case in which, during the currency of the realisation period, it can be foreseen that the proportion of assets to future liabilities is such that there will be a deficiency as regards secured creditors, the scheme of clause 7 is: (a) that all secured creditors share in one or other of the pools so established; or (b) that those creditors whose debts fell due during the realisation period are still entitled to be paid during that period (and, if the assets permit, in full), with the consequence that the pools (if any) established by its end are established exclusively for the benefit of those creditors whose debts fall due following its end.

That description of the question somewhat oversimplifies it since, in the events that have happened, the case really concerns four classes of secured creditor. First, a class unrepresented before us, being secured creditors whose debts (totalling less than $1m) fell due before the realisation period but remained unpaid at its commencement (“the pre-enforcement debts)”. Second, two classes of secured creditors whose debts fell due during the realisation period (“the realisation period debts”). Party A is such a creditor, its debt falling due on 23 October 2008. Party B is also such a creditor, its debt falling due on 30 October 2008. Parties A and B do, however, have conflicting interests. They both claim that the scheme of clause 7 is that all available assets must be applied during the realisation period in or towards the discharge of their respective debts. The difference between them is that Party A claims that the realisation period debts fall to be paid in the date order that they respectively fall due, which means that it is entitled to the first call on the available assets. If that is right, the consequence in practice is that Party B will receive nothing. Party B’s argument is that all realisation period creditors are entitled to share pari passu in the available assets. The fourth class of secured creditors is all other short and long term secured creditors whose debts fall due for payment after the realisation period, that class being represented by Parties C and D.

As regards pre-enforcement debts, there is, I consider, no doubt that they are short term liabilities within the meaning of the definition of that phrase in the STD. On the other hand, I have difficulty in seeing how they can strictly be regarded as liabilities to which the last sentence of clause 7.6 is referring, since they did not fall due during that period, they fell due before it. Whatever that sentence may mean, I can, however, conceive of no commercial reason why the STD should have treated realisation period debts differently from pre-enforcement debts and I suspect that the omission to include an express reference to the latter debts in the regime created by that sentence was a mistake. Party A was and is content to treat those debts as in fact covered by the last sentence and the judge held that they were. Since I consider that Party A’s argument is essentially correct, it is not strictly necessary to consider the position of the pre-enforcement debts further, save in so far is it is relied upon by other parties in support of their contrary arguments.

Party A’s case is that the scheme of the STD is simple. Before the occasion of an enforcement event the SIV will have been meeting its liabilities to its secured creditors on a “pay as you go” basis, i.e. as they fell due for payment. The enforcement mechanism of the STD, involving the establishment of the pools, required time to be set up, which was fixed at the 60-day realisation period. The scheme is that during that limited period, and whilst establishing the pools, the security trustee will continue a like “pay as you go” practice and will discharge, in date order as they fall due, the liabilities falling due for payment during that period; and it is expressly obliged to discharge them “so far as possible … using cash or other realisable or maturing Assets of the Issuer”. The test of what is possible is simple. It is geared to the availability of cash or other realisable or maturing assets. To the extent that there are such assets, they must be applied in discharging the realisation period debts in the order in which they fall due for payment. The security trustee is given no discretion not so to apply the assets. The argument is not a difficult one. It has the merit of apparently reflecting what the last sentence of clause 7.6 says.

Party B agrees with most of that, but says that the true sense of the sentence is that the obligation of the security trustee is, so far as possible, to discharge all realisation period debts; and, to the extent that there is a deficiency of assets enabling it to do so, all are entitled to share in what is available on a pari passu basis. The argument focuses on the words “falling due for payment during such period, ….”

Parties C and D say that both arguments are wrong. Clause 7.9 reflects that it may appear to the security trustee early in the realisation period that there is a deficiency of assets to meet the accrued and future indebtedness to secured creditors, in which event there will be a proportionate shortfall in the assets allocated to the short and long term pools accordingly. All liabilities to secured creditors are, according to the definitions in the STD, either short or long term, and the short term liabilities as defined include both the pre-enforcement debts and realisation period debts. Since clause 7.9 reflects that in the case of such a deficiency, there is to be a pari passu satisfaction of short term liabilities out of the short term pool, it follows that the last sentence of clause 7.6 in such a case cannot be intended to confer priority on either the pre-enforcement debts or the realisation period debts. Moreover, since that sentence does not even include the former debts, the argument that it gives a special priority to the realisation period debts is even weaker: because the pre-enforcement debts can only be satisfied out of the short term pool. The answer of Parties C and D to the question what “so far as possible” means is that it means “so far as possible in a manner consistent with a pari passu treatment of all short term liabilities in the event of a deficiency of assets”. If, therefore, the security trustee foresees during the realisation period a deficiency of assets – however small – the shutters immediately come down on the last sentence of clause 7.6 and not a dollar may be paid out to any realisation period creditor. That is because payment of such creditors is to be regarded as impossible. As an alternative argument, although one advanced only when the parties were invited by the court to focus more precisely on the sense of the “so far as” in the key phrase, Parties C and D submitted that its sense is that in the case of an apparent deficiency the obligation of the security trustee is to pay a dividend in respect of the realisation period debts on the dates they respectively fall due. That dividend would be in line with that expected to be paid out of the short term pool in respect of all other short term liabilities as they in turn fall due.

In my judgment there are major difficulties with the arguments of Parties C and D. First, if the thought underlying the words “so far as possible” was directed at informing the security trustee that payment of the realisation period creditors could only be made in circumstances in which it was perceived that the enforcement was likely to be a solvent one, with all creditors being paid 100 per cent of their debts, the sentence would have said so. The trust deed is a 45-page document reflecting the considered input of (probably) a team of commercial lawyers. It is inconceivable that if this was the thought behind the qualification in the last sentence of clause 7.6, the qualification would have been articulated by the use of the phrase “so far as possible” rather than by spelling it out expressly. That point is underlined by the fact that, within three sub-clauses, clause 7.9 expressly recognises that the assets available for allocation to the pools may be insufficient to meet all liabilities in full; and proviso (a) to clause 7.11.2 also provides a specific regime for the administration of the short term pool in circumstances in which a deficiency becomes apparent after the realisation period. To suggest, as Parties C and D in effect do, that “so far as possible” really means “(save in the case of a perceived deficiency of assets available to satisfy all secured creditors, in which case this sentence shall have no application)” is in my judgment an impossible one.

Secondly, the words anyway do not attempt to bear the burden that Parties C and D seek to load on to them. Their natural meaning is that the security trustee is required to discharge the realisation period debts as they fall due to the extent that the available assets so permit: that is the sense of the “so far as possible”. But the “so far as” is given no meaning by the primary argument advanced by Parties C and D. That argument is that the phrase imposes an absolute bar on payment in any case in which an insolvency is foreseen; but that cannot stand with the fact that the phrase conveys that the security trustee is required to go at least part of the forbidden distance. Again, if the draftsman had thought that a concept of possibility was the right way to provide that nothing in the relevant sentence was to permit payments out in the case of a perceived insolvency, he might at least have considered that the phrase “if possible” was more appropriate.

Third, in answer to this point Parties C and D have advanced as an alternative argument (one that did not apparently occur to them until, following the reserving of judgment, the court invited the parties to focus on the phrase) that the sense of the “so far as possible” is, in a case of perceived insolvency, to enable a dividend to be paid to the realisation period creditors. I am unpersuaded by this as well. Again, it tries to load too much on too little. If a “discharge” of the clause 7.6 liabilities in a case of a perceived insolvency were only intended to permit a dividend to be paid, clause 7.6 would have been expanded to say so. Mr Howard, for Party A, pointed out that, quite apart from all other considerations, the key sentence talks about the “discharge” of the relevant obligations – that is, payment in full, albeit only “so far as possible” – whereas proviso (a) to clause 7.11.2 provides that, in the case of a deficiency, the security trustee is to “pay” an appropriate proportion of the due liability. The language is different. That, he said, is because it is considering different things. The point is a fair one. If both provisions had been focusing on like considerations, there would have been at least some attempt to reflect that in their drafting.

Fourth, the argument is anyway inconsistent with the scheme of clause 7. The proposition that realisation period debts were intended, in a case of perceived insolvency, to be satisfied out of the short term pool does not in my opinion fit comfortably with the way in which that pool was supposed to operate. The definition of the “short term pool” defines it as one that was to be applied pursuant to clause 7.11. Although the pools can be established at any time during the realisation period, the second sub-paragraph of clause 7.11.1 shows that the application of the assets in the short term pool is only intended to commence after the end of the realisation period. The second charge on that fund is described in clause 7.11.2, which requires the security trustee:

“… 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);”

I do not understand the sense of the words in parenthesis, which appear to state the obvious (it is the proviso to clause 7.11.2 that deals with a perceived deficiency); more importantly, I also do not understand how that provision can be said to include an obligation to pay liabilities that have fallen due for payment before the expiry of the realisation period. Interpreted in the context of clause 7 as a whole, the words “when due” appear to me to mean “when falling due after the realisation period”. They are inapt to catch liabilities that had accrued due during the realisation period. There is a good reason why they were not intended to catch such liabilities: clause 7.6 required them to be discharged during the realisation period.

That interpretation admittedly leaves the pre-enforcement debts in the cold. If they are covered neither by the third sentence of clause 7.6 nor by clause 7.11.2, how are they to be paid? As I have said, I consider that they have simply been overlooked in the working out of the scheme of clause 7. But I find it impossible to interpret the STD as intending to leave them to be satisfied out of the short term pool whilst the liabilities of the realisation period creditors were to be discharged (if only “so far as possible”) during the realisation period. As it seems to me, the omission to deal expressly with the pre-enforcement debts is just one of several infelicities in the drafting of the STD, but it is not one that helps the arguments of Parties C and D. In my view the only rational interpretation of the STD is that the pre-enforcement debts are to be treated as impliedly included within the class of liabilities referred to in the third sentence of clause 7.6. I agree with what Lloyd LJ has said on that.

I am not, therefore, prepared to accept the arguments of Parties C and D, persuasively though they were advanced by Mr Mortimore and Ms Prevezer. As between Parties A and B, I agree with Lloyd LJ’s reasons for rejecting Party B’s submission, attractively though it was presented by Mr Sheldon. I cannot usefully add to what he has said. It follows that, like Lloyd LJ, I agree with and accept the submissions of Party A.

I think it likely that many lawyers may be instinctively surprised at such a conclusion, since the culture with which they will be familiar is one ordinarily providing for a pari passu sharing in an insolvency. The notion of first come, first served, or pay as you go, is alien to that culture and so cannot be right. I too had an instinctive initial sympathy with the case advanced by Parties C and D, since when the available pot is too small to pay everyone in full, a pari passu distribution has an obvious appeal. But we are not here concerned to apply any conventional insolvency regime. The STD reflects a commercial bargain made between, or on behalf of, the interested parties and our task is to interpret what that bargain was. It seems to be apparent that the STD foresaw the possibility that any enforcement might be either a solvent or an insolvent one as regards secured creditors. It is, however, improbable that it foresaw the possibility of the extraordinary, probably unprecedented, market events that have recently unfolded. In those extraordinary events, Party A’s successful argument can, on one view, perhaps be regarded as having achieved an unfair result. But any such assessment necessarily assumes that the parties had made some different bargain which is not being respected. This litigation is concerned with ascertaining the bargain they in fact made. I have expressed my view as to what it was, and the court’s duty is to give effect to it. It is not the court’s function to re-write it.