Golden Key Ltd, Re Insolvency Act 1986

Golden Key Limited (“the Company”) was incorporated in November 2005 in the Cayman Islands to operate as a structured investment vehicle, or “SIV” as they are commonly called. The Company invested primarily in US sub-prime residential mortgage-backed securities. It was highly leveraged, and depended on short-term commercial paper, secured on its commercial assets, to fund its investment portfolio.

The commercial paper (“CP”) issued by the Company consisted of US Notes (“USCP”), for investors in the USA, and Euro Notes (“Euro CP”), for investors outside the USA. The CP was issued with various maturity dates, and in a number of different currencies, but the term to maturity was normally 185 days (i.e. approximately six months) or less. The Company issued the CP as and when it was necessary to do so in order to meet its funding requirements. When Notes matured, investors would typically roll them over into fresh Notes issued by the Company. Although the USCP and Euro CP Note Programmes allowed for CP to be issued as either interest-bearing CP or at a discount (“discount CP”), all of the CP issued by the Company was in fact discount CP.

Apart from the CP which I have described, the Company issued two other types of debt securities, namely Tier 1 and Tier 2 Mezzanine Notes, and Capital Notes. These Notes represented funding of a quasi-capital nature, and ranked in priority behind the CP. All of the CP issued under the USCP and Euro CP Note Programmes ranked as Senior Obligations, together with certain other obligations, including in particular those under a Liquidity Facility provided by Barclays Bank Plc (“Barclays”). All of the Senior Obligations ranked pari passu with each other. By contrast, the Mezzanine Notes ranked senior to the Capital Notes and the Tier 1 Mezzanine Notes ranked senior to the Tier 2 Mezzanine Notes.

The Company itself was the sole issuer of the Euro CP, the Mezzanine Notes and the Capital Notes. The USCP was issued jointly by the Company and a wholly-owned subsidiary, Golden Key US LLC, which is a Delaware limited liability company, as co-issuer. The latter company is not thought to hold any assets of material value, with the consequence that the holders of USCP can for all practical purposes be treated as being creditors solely of the Company.

With the benefit of hindsight, it comes as no surprise that the Company became a victim of the financial crisis brought about by the collapse of the US sub-prime mortgage sector in 2007. The sequence of events which led to the Company’s demise as a going concern is summarised by Mr Mark Keith Adams, one of the joint receivers of the Company, in paragraphs 22 and 23 of his witness statement dated 25 September 2008:

“22.

Market conditions began to deteriorate in 2007 as the defaults on United States sub-prime mortgages increased above historical levels and investors became more cautious about investing in securities backed directly or indirectly by sub-prime mortgage loans and in debt issued by funded market value structures. Consequently, during August 2007, (i) the market for the Company’s investment portfolio was materially affected by decreased liquidity and (ii) the Company began to have significant difficulty “rolling over” its commercial paper, and thus could not pay maturing commercial paper using the proceeds of new issuances. In August 2007 the Collateral Manager:

(a)

sought to liquidate parts of the investment portfolio and realise Breakable Deposits to raise funds; and

(b)

made requests for Liquidity Advances pursuant to the Liquidity Facility.

23.

The downward pricing pressure on structured credit assets and illiquidity in the market for both structured credit assets and asset backed commercial paper contributed to the depreciation of the Company’s investment portfolio market value measured on a mark to market basis. As that market value deteriorated the Company breached various tests provided in the documentation which had the effect, inter alia, of changing the rules which governed the management of the Company’s assets, the way in which funds were distributed to creditors and the Company’s operating state. The Company’s notes were also downgraded, which meant that it was unable to issue further commercial paper.”

These events led in due course to the appointment of Mr Adams, together with Mr Neville Barry Kahn and Mr Nicholas James Dargan, as joint receivers of the Company (“the Receivers”) pursuant to a Deed of Appointment dated 14 April 2008 and made by The Bank of New York (now known as The Bank of New York Mellon, and to which I will refer as “BNYM” or “the Bank”) under the powers contained in a Deed of Charge dated 18 November 2005 as subsequently amended (“the Deed of Charge”).

By virtue of clause 8.1 of the Deed of Charge, all monies from time to time received by the Security Trustee (i.e. the Bank) or the Receivers are to be applied in or towards discharge of the Company’s liabilities,

“as provided in the priority of payments set forth in Section 7.3 (Post-Wind Down Priority of Payments) or Section 7.4 (Post-Acceleration Priority of Payments) of the Collateral Trust Agreement.”

The Collateral Trust Agreement was entered into between the Company and BNYM as the Security Trustee on the same day as the Deed of Charge, namely 18 November 2005. It was subsequently amended and restated by an Amended and Restated Collateral Trust and Security Agreement dated 18 July 2007 (“the CTSA”), and it is with the provisions of the CTSA in this later form that the present proceedings are primarily concerned.

As Mr Adams explains in his witness statement, the “contractual architecture” (as he aptly terms it) of the Company provides for four possible operating states:

“Wind Down Event” and “Enforcement Event” are defined in the CTSA by reference to certain tests or events relating to the Company’s financial circumstances. Thus “Wind Down Event” is defined as meaning any one of fourteen specified events, including a breach of the Market Value Coverage Test and a breach of the Capital Wind Down Test; while “Enforcement Event” is defined as meaning any one of thirteen specified events, including the failure to pay any amounts of principal, interest or any other amount when due and payable on the CP, and the occurrence of a Mandatory Acceleration Event. The concept of “Confirmation” is also defined, and means with respect to a Wind Down Event or an Enforcement Event that the Security Trustee has received notice from the Company (or the Collateral Manager on the Company’s behalf) of the occurrence of such an event.

“Acceleration Redemption Date” is defined in the CTSA by reference to the meaning given to that term in relation to the CP “in the global notes or definitive notes relating thereto”. This definition therefore takes one to the relevant terms of the USCP and the Euro CP, which are to be found respectively in the Amended and Restated USCP Issuing and Paying Agency Agreement dated 18 July 2007 (and made between the Company as Issuer, Golden Key US LLC as Co-Issuer and BNYM as the USCP Issuing and Paying Agent) (“the USCP Issuing and Agency Agreement”) and in the Amended Euro CP Issuing and Paying Agency Agreement dated 18 November 2005 (and made between the Company as Issuer, BNYM, acting through its London branch, as Euro CP Issuing and Paying Agent, and BNYM in two other capacities) (“the Euro CP Issuing and Agency Agreement”). In bare summary, when notice of the occurrence of a “Mandatory Acceleration Event” (such notice being itself defined as an “Acceleration Redemption Notice”) is given by the Security Trustee, the Company is obliged, by giving notice to the Security Trustee and the relevant Issuing and Paying Agent, to redeem the outstanding CP on a stipulated date. The date upon which the outstanding CP is to be redeemed is the Acceleration Redemption Date, and (subject to what I say in paragraph 13 below) is to be not less than 15 nor more than 30 days after receipt of the notice of the Mandatory Acceleration Event. Where no such notice is given, or no such date is stipulated in the notice given by the Company, the Acceleration Redemption Date shall be the date which falls 30 days after notice of the Mandatory Acceleration Event was given by the Security Trustee to the Company.

A Mandatory Acceleration Event is defined in the CTSA as meaning “the occurrence of (i) an Insolvency Event in relation to the Issuer or the Co-Issuer, or (ii) a breach of the Mandatory Acceleration Test”. These terms are in turn defined in the CTSA. “Insolvency Event” means, in general terms, the taking of a formal step under any applicable insolvency law, but includes, in relation to the Company, failing generally to pay its debts as they become due. The definition of “Mandatory Acceleration Test” takes one to a yet further agreement, the Amended and Restated Collateral Management Agreement dated 18 July 2007 and made between the Company, the Co-Issuer, and a Guernsey company called Avendis Financial Services Limited (“Avendis”) (“the Collateral Management Agreement”). In clause 11.1 of schedule 4 to the Collateral Management Agreement, the Mandatory Acceleration Test is set out. In outline, it will be satisfied so long as the market value of the Company’s portfolio amounts to at least 92% of the aggregate outstanding face amount of the CP, the Mezzanine Notes and the Capital Notes, together with any liquidity loan facilities entered into by the Company. Clause 11.2 provides that the Mandatory Acceleration Test is to be calculated by the Administrator on each business day.

A Mandatory Acceleration Event may or may not also be an Insolvency Event. The notice period which I have described in paragraph 11 above applies to all USCP and Euro CP where (as happened in the present case) the Mandatory Acceleration Event is not an Insolvency Event. In circumstances where the Mandatory Acceleration Event is an Insolvency Event, provision is made for all the outstanding CP to be redeemed immediately on the date on which the Company and the Co-Issuer receive an Acceleration Redemption Notice from the Security Trustee.

I now come to the key events which occurred in August and September 2007.

On 20 August 2007, the Security Trustee (BNYM) received from the Collateral Manager Confirmation of the occurrence of a Wind Down Event, following breaches of the Market Value Coverage Test and the Capital Wind Down Test.

On 23 August 2007, at or around 16.20 hours (EST), the Company delivered to various parties a confirmation of the occurrence of an Enforcement Event resulting from a breach of the Mandatory Acceleration Test. The notification was in the following terms:

“Golden Key Ltd – Confirmation of the Occurrence of Mandatory Acceleration Event and Enforcement Event

Notification is given in accordance with Clause 9.04 of the Collateral Management Agreement of a breach of the Mandatory Acceleration Test, which constitutes a Mandatory Acceleration Event. Also, Notification is given in accordance with Clause 9.02(a) of the Collateral Management Agreement of the occurrence of the Mandatory Acceleration Event (as a result of a breach of the Mandatory Acceleration Test) which constitutes an Enforcement Event.”

According to information given by BNYM to Mr Adams, the Bank in its capacity as Security Trustee was aware of the occurrence of a Mandatory Acceleration Event before receipt of the formal notice on 23 August as a result of telephone discussions which had taken place with the Collateral Manager, Avendis, earlier on the same day (it is common ground that the reference to 23 September 2007 in paragraph 29(b) of Mr Adams’ statement is an error, and he meant to say 23 August). In its capacity as Collateral Manager, Avendis had managed the Company’s investment portfolio at all times until 23 August 2007, and had also acted as agent to administer the Company’s rights and obligations in respect of its collateral and creditors. Avendis’ role was suspended once confirmation of an Enforcement Event had been received on that day.

Until 23 August 2007, the Company had duly paid or rolled over all CP as it matured. On 23 August 2007, $10 million of CP matured, but was not paid by the Company. Furthermore, no CP has been redeemed since that date.

On 24 August 2007, at or around 09.36 (EST), following receipt of the confirmation referred to above, the Security Trustee served on the Company, the Collateral Manager and other parties notice of a Mandatory Acceleration Event. The notice was in the following terms:

“Notice is hereby given pursuant to section 3.3(b) of the [CTSA] that the Security Trustee has received notice dated 23 August 2007 of the occurrence of an Enforcement Event. The Enforcement Event which the Security Trustee has been notified has occurred is the event specified in paragraph (vii) of the definition of Enforcement Event, being the occurrence of a Mandatory Acceleration Event. The Mandatory Acceleration Event which the Security Trustee has been notified has occurred is the breach of the Mandatory Acceleration Test.”

It was then the duty of the Company to give notice of between 15 and 30 days to BNYM (in its twin capacities as the Security Trustee and as the Issuing and Paying Agent for the USCP and the Euro CP) to redeem the outstanding CP on the date specified in such notice, being a date no later than 30 days after the day on which the Acceleration Redemption Notice was delivered. However, the Company failed to comply with this obligation, and as a result the default Acceleration Redemption Date of 30 days after the date on which the Acceleration Redemption Notice was delivered took effect. It is common ground that the Acceleration Redemption Date was accordingly 23 September 2007.

As a result of the occurrence and confirmation of an Enforcement Event, certain other consequences followed. In particular, the Security Trustee became exclusively entitled to exercise all rights in relation to the Company’s assets, including its investment portfolio, with minor exceptions that can for present purposes be ignored. The Company was also prevented from issuing any further CP, or any other debt securities.

No questions arise about the redemption of any of the CP before 23 August 2007. There is also no dispute about the rights of holders of CP which (as issued) had maturity dates on or after 23 September 2007. Everybody agrees that, as a result of the service of notice of a Mandatory Acceleration Event by the Security Trustee, all such outstanding CP was accelerated and became immediately due and payable on the Acceleration Redemption Date, with any deficiency to be borne by the noteholders pari passu. The issues which arise, and which the Receivers ask the court to resolve in these proceedings, concern the intermediate period from 23 August to 23 September 2007 and the correct method of application of the funds received into, and not paid out of, the Company’s US dollar cash account before the latter date. Those funds total approximately $245 million, but are also subject to a claim by Barclays which I mention below.

I will explain the issues in more detail later in this judgment. In general terms, however, they are as follows:

These questions were debated inconclusively between the Receivers and the interested parties, and in the absence of agreement the Receivers now ask for appropriate directions from the court pursuant to section 35 of the Insolvency Act 1986. The proceedings were begun by an originating application issued on 25 September 2008. The application was served on four noteholders of the Company, who between them represent the competing interests and have expressed a wish to be heard. They all also wish, however, for commercial reasons, to remain anonymous, and they are therefore described in the originating application as Party A, Party B, Party C and Party D. I was told that an order was made by Morgan J directing that they should not be joined as respondents to the application, but permitting them to make submissions on the questions of construction and directing that their identities should be kept confidential. A similar procedure was followed, albeit in circumstances of considerable urgency, by Briggs J in Re Cheyne Finance Plc (in Receivership) (No. 1) [2007] EWHC 2116 (Ch), [2008] 1 BCLC 732: see paragraph 2 of his judgment.

The representation of the parties before me has been as follows. The Receivers, who are neutral in relation to the questions of construction and have appeared in order to assist the court if required, were represented by Mr Robin Dicker QC and Mr Barry Isaacs. Party A, whose CP matured on 23 August 2007, was represented by Mr Antony Zacaroli QC. Party B, whose CP matured on 24 August 2007, was represented by Mr Robert Miles QC and Mr Richard Hill. Parties C and D, whose CP matured on unspecified later dates, and between whom there is evidently no conflict of interest, were represented by Mr Mark Phillips QC and Mr Tom Smith. I take this opportunity of expressing my gratitude to all counsel for their clear and helpful arguments, both written and oral.

Both Party A and Party B are holders of USCP, the face value of Party A’s CP being $10 million and the face value of Party B’s CP being $210 million. Parties C and D are also holders of USCP, the face value of their holdings being $193 million and $120.788 million respectively.

Before I come on to the arguments, I need to say a little more about the financial arrangements which were put in place by the Company. I will also have to refer to the relevant contractual provisions in rather more detail than I have done so far.

It is convenient to record at this point that the only evidence before the court is the witness statement of Mr Adams and the exhibits thereto. The interested parties were all given an opportunity to comment on this evidence in draft, and none of it is controversial.

It may be relevant that there appears to have been a substantial divergence between the provisions of the CTSA relating to the opening and maintenance of bank accounts, and what actually happened in practice. The situation is explained by Mr Adams in section G (paragraphs 45 to 54) of his witness statement. Much of the relevant information was supplied to him by the Administrator, an English company called QSR Management Limited (“QSR”), which was appointed to perform certain administrative and cash management functions under the direction of the Company or the Collateral Manager, Avendis, pursuant to the terms of an Amended and Restated Administration Agreement dated 18 July 2007 (“the Administration Agreement”). The terms of the CTSA refer to a number of different bank accounts, such as the US Operating Account, the Note Defeasance Account, the Liquidity Reserve Account and the Swing Line Reserve Account. However, it appears to have been agreed at an early stage with QSR that only a limited number of actual bank accounts would be set up, and that the accounts referred to in the CTSA would be replaced with ledger accounts maintained by QSR’s financial accounting team. These ledger accounts had no actual cash flow capability, but they were regarded as sufficient to track the appropriate movements or allocations of money for the purposes of the “payment waterfalls” set out in the CTSA.

The only actual, physical, bank accounts set up at the time of establishment of the SIV investment programme were:

According to information supplied by QSR, the cash accounts performed the functions of the US Operating Account as defined in the CTSA, viz.:

“The bank account located in New York for recording the deposit of all cash for the account of the Issuer and from which each of the payments shall be made in accordance with the Priority of Payments.”

In practice, throughout the life of the Company all major payments received by the Company appear to have been deposited in the US dollar cash account, and payment of fees, expenses and other costs and payments relating to CP were likewise paid out of the US dollar cash account.

Although the CTSA provides for the establishment of a Note Defeasance Account, no such account was opened until 28 August 2007, when so-called “Defeasance Accounts” in sterling, US dollars and euros were opened by QSR. On 26 September 2007, approximately $6.64 million was transferred from the US dollar cash account to the US dollar Defeasance Account. Certain sums were also transferred to the sterling Defeasance Account in order to fund payments of fees, costs and expenses. So far as the Receivers are aware, no payments were ever made to the euro Defeasance Account. The picture which emerges is that these accounts were relatively insignificant, and were used only for the payment of fees, costs and expenses to various service providers and advisers, and in connection with associated foreign exchange transactions.

I now turn to the current financial position of the Company. In late 2007 BNYM retained the Blackstone Group International Limited (“Blackstone”) to provide an overview of the assets and liabilities of the Company. Blackstone estimated that, as at 27 September 2007, the Company’s liabilities in relation to its CP amounted to approximately $1.378 billion, and its liability in relation to the Liquidity Facility was approximately $298 million, making a total for the Senior Obligations of about $1.676 billion. The Company’s liabilities in relation to its Mezzanine Notes and Capital Notes were approximately $130 million and $50 million respectively, giving a total for those subordinated liabilities of approximately $180 million. Mr Adams says that, apart from the addition of interest where applicable, he has no reason to believe that these figures have materially changed since 27 September 2007.

Blackstone estimated the nominal value of the Company’s investment portfolio on 27 September 2007 to be approximately $1.507 billion, and the Company also had approximately $260 million available in cash. Even at that date, however, both the market and the intrinsic value of the portfolio were estimated by Blackstone to be significantly lower than the nominal value. In June 2008 the Receivers appointed another company, Cairn Financial Products Limited (“Cairn”), to provide advisory and related services in relation to the assets. According to recent updates provided by Cairn, there has been a further significant deterioration in the market value of the portfolio since September 2007, and defaults on the mortgage loans underlying the securities in the investment portfolio have continued to increase. On current estimates, the value of the assets is insufficient to repay the Senior Obligations in full, and they are likely to suffer a significant shortfall. Holders of Junior Obligations, including the Mezzanine Notes and the Capital Notes, will not receive any return of capital on their investments.

The likely financial consequences of the disputed questions of construction are illustrated by Mr Adams in paragraphs 83 to 88 of his statement, with the assistance of a simplified but theoretical example. For present purposes, it is enough to refer to his conclusions set out in paragraph 89. The Receivers estimate that, if Parties A and B succeed in their contentions, Party A would recover 100% of its total claim of $10 million and Party B would recover more than 90% of its total claim of $210 million. If, however, the contentions of Parties C and D prevail, Parties A and B would recover significantly lower amounts, and there would be a corresponding increase in the sums available for distribution to noteholders with later maturity dates, and all the noteholders “would be expected to have an equivalent percentage recovery of their investment”, or in other words they would recover on a pari passu basis.

There is one further complication that I need to mention. In August 2007 the Company found that it had insufficient funds to redeem maturing CP, and it therefore made calls for additional funds under the Liquidity Facility. Barclays thereupon made Liquidity Advances on 13, 14, 17 and 20 August 2007. However, on 21 August 2007 Barclays requested the Collateral Manager not to distribute the monies which had been advanced on 20 August, on the basis that they had been paid under a mistake. The nature of the alleged mistake was that the requests for Liquidity Advances had been based on calculations which had been performed incorrectly, and that the conditions precedent which would entitle the Company to call for the advances were not satisfied when the requests were made. Barclays therefore asked that the disputed sums be held on trust pending further discussions about the calculations. On the following day, 22 August, Barclays wrote again to the Company saying that they also considered the advance of 17 August 2007 invalid, and requested that the relevant sums should be returned and not distributed.

After referring to these events, Mr Adams continues as follows in paragraphs 57 and 58 of his statement:

“57.

As a result of the adverse claim made by Barclays, and following control of the Company’s assets passing to the Security Trustee, no distributions were made in respect of the Company’s CP liabilities on or after 23 August 2007.

58.

Barclays have recently quantified their claim at $257.2 million being the total amount of the Liquidity Advances made on 17 and 20 August 2007 (the “Barclays Position”). Barclays have asserted that these advances were made by mistake and that (under New York law) a constructive trust should be imposed on that amount and to the extent that monies were paid out before the claim was made on 21 August 2007, those funds should be replenished prior to any distribution to holders of CP and other Senior Secured Parties. The Barclays Position is disputed by the Company and the Company is involved in discussions with Barclays in relation thereto.”

The dispute with Barclays remains unresolved, but for the purpose of resolving the questions of construction I have been asked to assume that it will be resolved in the Company’s favour.

In order to resolve the questions of construction, the provisions of three documents in particular are important:

A number of the documents are expressed to be governed by New York law, including the CTSA and the USCP Issuing and Agency Agreement (but not the Euro CP Issuing and Agency Agreement, which is governed by English law). However, no evidence of New York law has been adduced, and all parties have asked me to proceed on the footing that there is no material difference between the principles of New York and English law which fall to be applied in construing the documents. In other words, it is agreed that for the purpose of the present proceedings I should apply the presumption (in the absence of evidence to the contrary) that foreign law is the same as English law.

The Deed of Charge is governed by English law. I have already referred to Clause 8.1, which requires all money received by the Security Trustee (BNYM) or the Receivers to be applied in or towards discharge of the Company’s liabilities in accordance with the orders of priority set out in either Section 7.3 or Section 7.4 of the CTSA. There is no other part of the Deed of Charge to which I need to draw specific attention. In general terms, its purpose was to create, in favour of BNYM as Security Trustee, security for the prompt payment and performance of the Secured Obligations consisting of:

The general purpose of the CTSA was to appoint BNYM as the Security Trustee and to establish a trust whereby all of the Company’s assets (with immaterial exceptions) would be held by the Security Trustee as security for the Company’s obligations to the secured parties, including the holders of the CP, and for the due performance of and compliance with the terms of the CTSA. The operative part of the CTSA consists of a declaration of trust and nine Articles, each of which is subdivided into Sections which take their numbering from the relevant Article. There is also an annex, more than 50 pages in length, containing an alphabet soup of complex and interlocking definitions.

The recitals at the beginning of the CTSA recorded, among other matters, that BNYM had agreed to act as trustee, for the benefit of itself and the secured parties, to the extent and in the manner provided for in the CTSA. Under the declaration of trust, which follows immediately after the recitals, the Company assigned to BNYM

“to hold in trust as the Security Trustee under this Agreement, for the benefit of the Secured Parties, all of the Issuer’s right, title and interest in, to and under all of the following:

(A)

this Agreement and the Collateral;

…

(C)

the Deed of Charge …; and

(D)

the Proceeds of each of the foregoing …

TO HAVE AND TO HOLD the foregoing … (… hereinafter referred to as the “Trust Estate”) unto the Security Trustee and its successors in trust under this Agreement …

IN TRUST, under and subject to the terms and conditions set forth herein and in the other Security Documents, and for the benefit of the Secured Parties and for the enforcement of the payment of the Secured Obligations, and for the performance of and compliance with the covenants and conditions of this Agreement and each of the other Security Documents.”

There then followed a proviso to the effect that the CTSA and the trust created by it should cease following the payment and satisfaction in full and in cash of all of the Secured Obligations.

The term “Collateral” is defined as including virtually all of the Company’s assets.

The trust thus created is reinforced by the provisions of Article VIII which sets out the powers and duties of BNYM as Security Trustee. Section 8.1 confirms the Security Trustee’s acceptance of the trusts created by the CTSA, while Section 8.6 expressly provides that:

“All monies received under or pursuant to any provision of this Agreement or any Security Document shall be held in trust for the purposes for which they were paid or are held.”

In Article IX, which contains miscellaneous provisions, two points are worthy of mention. Section 9.2 provides that all notices, requests, demands and other communications provided for or permitted under the CTSA “shall be in writing”, and shall be sent to the Company, Avendis, QSR and BNYM at the addresses there specified. Section 9.3 is headed “Non-petition”, and provides (in short) that none of the secured parties is to institute any form of bankruptcy or insolvency proceedings against the Company or the Co-issuer. This provision is one aspect of an important feature of the contractual arrangements which Mr Adams describes in paragraph 20 of his statement:

“It is an essential feature of the SIV structure that it is “insolvency remote” in the sense that the Company’s creditors have agreed, by way of various different contractual mechanisms, only to look to the assets secured under the CTSA and Deed of Charge for repayment of their claims, and then only in accordance with the terms of the Limited Recourse provisions set out in the documentation governing the Company’s operations.”

The important point is that all of the noteholders, by virtue of this and other similar provisions in the contractual documentation, have agreed to limit their rights of recourse against the Company and its assets to their entitlement under the documentation, and not to pursue any insolvency procedures against the Company. In other words, the usual rights of an unsatisfied creditor to initiate insolvency proceedings are ousted in favour of the rights, whether sounding in contract or trust, provided by the documentation. No party has submitted that there is any objection, from a public policy point of view, in investors agreeing to make their investment upon such a basis. One consequence of this, as it seems to me, is that the degree of assistance which can be obtained, in construing the documentation, from analogies with the general law of insolvency is limited. Since the parties have expressly agreed to oust the general law of insolvency, one should not too readily assume that the parties intended their rights to be governed or influenced by insolvency concepts, such as pari passu distribution, unless the documentation expressly so provides.

Article III provides the framework of the different operating states to which I have already referred in the introductory section of this judgment.

Section 3.1 deals with Wind Down Events, and provides that upon the confirmation of a Wind Down Event the Company (or the Collateral Manager on its behalf) is to comply with the Wind Down Management Procedures set out in Schedule 6 to the Collateral Management Agreement so as to arrange for the payment in full of the Secured Obligations, unless and until the earlier to occur of the confirmation of an Enforcement Event and the delivery of an Acceleration Redemption Notice. Since, in the present case, confirmation of the occurrence of a Wind Down Event was given on 20 August 2007, and confirmation of the occurrence of an Enforcement Event on 23 August, this operating state continued for only three days.

Section 3.2 deals with the position following confirmation of an Enforcement Event, and provides (in short) that the Security Trustee steps into the shoes of the Company and is thereafter exclusively entitled to exercise the Company’s rights under the relevant documentation. Section 3.4 provides for the liquidation and sale of the Collateral, and for the proceeds to be distributed in accordance with the priority of payments set out in the relevant sections of Article VII. Section 3.7 spells out the Limited Recourse terms upon which the CP and all other obligations of the Company are to be issued:

“The Secured Parties will have recourse only to the Collateral subject to the Priority of Payments. Once all Collateral and any recoveries that may from time to time be received in respect thereof have been applied in accordance with this Agreement, any remaining unpaid amounts due in respect of the Secured Obligations of the Issuer shall be deemed extinguished, and no recourse may be had in connection therewith against the Issuer or its assets.”

Article VII contains provisions dealing with the establishment of Custodial Accounts and the Priority of Payments. The definition of “Custodial Accounts” leads to a complex hierarchy of further definitions which are helpfully represented in tabular form in paragraph 77 of Mr Adams’ statement. As I have already said, the reality of what happened on the ground did not correspond with the requirements of Section 7.1. It should be noted, however, that both the US Operating Account and the Note Defeasance Account are Custodial Accounts by virtue of the definitions.

Section 7.2 deals with the Pre-Wind Down Priority of Payments. No issue arises about the priority of payments at this stage, but the provisions are still of importance because they set the scene for the two succeeding orders of priority set out in Sections 7.3 and 7.4. Section 7.2(a) lays down the general principle that on each Business Day before any of the trigger events for the subsequent orders of priority, and after the application of funds standing to the credit of various accounts, the funds standing to the credit of the US Operating Account that constitute Available Funds (i.e. a credit balance) will be divided into Interest Proceeds and Principal Proceeds and applied by the Administrator in the order of priority set out in Section 7.2(b) and (c).

For present purposes the difference between Interest Proceeds and Principal Proceeds does not matter, and it is enough to say that the fifth priority in the order set out for the Interest Proceeds requires the payment, on a pro rata and paripassu basis, of “interest and principal then due and payable in respect of the Commercial Paper, including on the Maturity Date thereof”. So far as material, the same order of priorities applies to the Principal Proceeds by virtue of Section 7.2(c)(i).

It is convenient at this point to refer to the definition of “Maturity Date”, which in respect of CP is as follows:

“the date specified as the maturity date in respect of such Commercial Paper, which shall not exceed 185 calendar days after the date of issuance of such Commercial Paper (subject to compliance with any applicable legal and regulatory requirements) being the date upon which its outstanding principal amount, together with the accrued and unpaid interest thereon (if any) or its outstanding face amount is due and payable.”

It will be noted from this definition that the Maturity Date is defined as the date specified as such in respect of the CP. The second limb of the definition, beginning with the words “being the date”, is in my judgment naturally read as explanatory: upon the date so specified, the outstanding face amount of discount CP will be due and payable.

Section 7.3 deals with the Post-Wind Down Priority of Payments, and provides so far as material as follows:

“On each Business Day following the Confirmation of a Wind Down Event or the Confirmation of an Enforcement Event but prior to the occurrence of an Acceleration Redemption Date and following the application of the funds standing to the credit of the Note Defeasance Account … (if any and to the extent required to make payments on amounts that are due and payable as provided under Section 7.5, 7.6, 7.7 and 7.8), the Collateral Manager, the Administrator or the Security Trustee, as applicable, shall instruct the Custodian to withdraw funds standing to the credit of the US Operating Account that constitute Available Funds (following the Confirmation of a Wind Down Event) or all other funds received or recovered by the Security Trustee (following the Confirmation of an Enforcement Event) for the following purposes and in the following order of priority (the “Post-Wind Down Priority of Payments”):

(a)

FIRST, to the payment of taxes and filing and registration fees and similar governmental levies and charges then due and payable by the Co-Issuers, if any;

(b)

SECOND, to the payment of all Administrative Expenses then due and payable to the Security Trustee and any Receiver appointed by the Security Trustee;

(c)

THIRD, to the payment, on a pro rata and pari passu basis, of [certain other administrative expenses];

(d)

FOURTH, on a pro rata and pari passu basis, to (i) Defease the Commercial Paper by crediting to Note Defeasance Account an amount equal (a) in the case of Discount Commercial Paper, the face amount of such Discount Commercial Paper, (b) in the case of Interest-Bearing Commercial Paper, the outstanding principal amount of such Interest-Bearing Commercial Paper, together with interest accrued (but unpaid) and interest to be accrued through to their respective Maturity Dates until all Commercial Paper has been Defeased in full …”

Provision is then made for the payment of (or the crediting of reserves in respect of) five further sub-categories of Senior Obligations under the heading FOURTH, followed by subsequent headings running from FIFTH to SIXTEENTH.

It should be noted at this stage that the obligation in relation to the CP under the fourth heading is not to pay it, but rather to “defease” the CP by crediting to the Note Defeasance Account an amount equal (in the case of discount CP) to its face amount, in other words including the full amount of the discount which would accrue through to maturity. This obligation is reflected in the definition of “Defease” which reads as follows:

“ “Defease”, “Defeased”, Defeasance” and like words mean to credit to the Note Defeasance Account an amount of money sufficient to pay (i) with respect to Discount Commercial Paper, the face amount of such Commercial Paper …”

Section 7.4 deals with the Post-Acceleration Priority of Payments, and I will again quote the relevant parts of it:

“Upon the occurrence of an Acceleration Redemption Date, all funds received or recovered by the Security Trustee shall be applied in the following order of priority (the “Post-Acceleration Priority of Payments” and, together with the Pre-Wind Down Priority of Payments, the Post-Wind Down Priority of Payments, the Note Defeasance Payments, the Liquidity Reserve Payment, the Swing-Line Reserve Payments and the CP Interest Reserve Payments, the “Priority of Payments”):

(a)

FIRST, to the payment of the amounts referred to in paragraphs (a) and (b) of the Post-Wind Down Priority of Payments in the same order of priority specified therein;

(b)

SECOND, to the payment, on a pro rata and pari passu basis, of Administrative Expenses then due and payable [to specified recipients, and subject to a cap in respect of Indemnity Obligations];

(c)

THIRD, on a pro rata and pari passu basis, to (i) the payment of accrued interest and principal then due and payable in respect of the Commercial Paper until all Commercial Paper has been paid in full, …”

There then follow three further sub-categories of payment under the heading THIRD, and further headings running from FOURTH to FIFTEENTH.

Section 7.5 is headed “Note Defeasance Account”, and subsection (a) provides as follows:

“(a)

On any date which is the Maturity Date for any Commercial Paper or on any date on which interest is due and payable for any Interest-Bearing Commercial Paper, the Administrator or the Security Trustee, as applicable, shall … withdraw from the Note Defeasance Account (to the extent of available funds following the sale or redemption of any Permitted Short-Term Investments credited to the Note Defeasance Account), in the case of such Commercial Paper which is Discount Commercial Paper, the amount necessary to pay the face amount of such Discount Commercial Paper … and pay such amounts, to the USCP Issuing and Paying Agent or the Euro CP Issuing and Paying Agent, as applicable, to be applied in redemption (in whole or in part) of such Commercial Paper …”

This provision is in my judgment important, because it directs in mandatory terms that on the Maturity Date for any CP the amount needed to redeem it in full is to be withdrawn from the Note Defeasance Account and paid to the relevant Paying Agent, to be applied in redemption of the CP. One therefore finds here an obligation to use the proceeds of the Note Defeasance Account to redeem maturing CP in full. Furthermore, this provision clearly needs to be read in conjunction with, among others, Section 7.3, and the obligation in subsection 7.3(d)(i) to defease the CP by crediting to the Note Defeasance Account an amount equal to the full face value of the discount CP. It would seem to follow that what the provisions, read together, envisage is that during the period between confirmation of a Wind Down Event or an Enforcement Event and the occurrence of an Acceleration Redemption Date, funds standing to the credit of the US Operating Account are to be applied (after satisfying the first, second and third priorities) in ensuring that the Note Defeasance Account contains sufficient funds to redeem the CP in full (and to satisfy the other equal-ranking obligations under the fourth priority), and the proceeds of the Note Defeasance Account are then to be used to redeem CP in full as and when it falls due on its maturity date. I can find no indication here of any intention that maturing CP should not be paid in full, so long as there are sufficient funds in the Note Defeasance Account available for that purpose.

By contrast, once an Acceleration Redemption Date has occurred, Section 7.4 will apply and it directs that all funds received or recovered are then to be applied in accordance with the Post-Acceleration Priority of Payments. Under this priority “waterfall”, it is clear that all outstanding CP is to be redeemed on a pro rata and pari passu basis.

The main purpose of this agreement was to set out the mechanics for the issue of USCP, and to lay down the terms and conditions to which it would be subject. The agreement recited that the Company and the Co-Issuer had requested BNYM, and BNYM had agreed, to act as depository for the safe keeping of, and as issuing and paying agent for, the USCP to be issued from time to time jointly by the Co-Issuers with maturities of up to 185 calendar days from date of issue. The recital went on to say that the USCP Notes would be offered and sold in the USA, or to US persons, in accordance with the procedures described in the agreement.

Section 6.1 provided that each USCP Note should be issued “with a single, fixed maturity date, without any option on the part of the Issuer to pre-pay or extend”. By virtue of Section 6.2.1, the USCP could be represented by a global security issued in the form of a master USCP Note in the form attached as Exhibit A (the “Master USCP Note”), delivered to BNYM as custodian and agent for The Depository Trust Company (“DTC”) and recorded in the book entry system maintained by DTC. Each such note was designated a “Book- Entry USCP Note”. Provision was also made for the issue of notes in the form of a “Certificated USCP Note”, but in the event all of the USCP Notes which were issued took the form of Book-Entry Notes.

Section 8 deals with the presentment and payment of USCP Notes. By virtue of Section 8.1:

“Each matured or maturing Book-Entry USCP Note shall be paid on the Maturity Date or Acceleration Redemption Date thereof, as applicable, in accordance with the provisions of Sections [sic] 8.3 of this Section 8.”

Section 8.3 then deals with sufficiency of funds. Section 8.3.1 provides a procedure whereby, before the happening of any Insolvency Event, the Company could request the transfer of funds from the US Operating Account to the USCP Debt Account in order to redeem maturing notes. Section 8.3.2 then provides as follows:

“If, after giving effect to (a) the Priority of Payments [which has the same meaning as in the CTSA]; and (b) the transfer required by Section 8.3.1 to the USCP Debt Account, there will not be sufficient funds in the USCP Debt Account on the New York Business Day identified for payment thereof in accordance with Section 8.1 above, to satisfy such USCP Note, [BNYM] shall promptly cease paying USCP Notes until such insufficiency is cured or an Enforcement Event has occurred, in which case payments shall be made at the direction of the Security Trustee in accordance with the Priority of Payments. Nothing in this Section 8.3.2 shall be construed to release the Co-Issuers from their obligations in respect of the US Commercial Paper.”

The form of the Book-Entry USCP Notes is set out in Exhibit A to the Agreement. The terms of the Book-Entry Notes (“the Terms of the Notes”) begin with a number of definitions, including a definition of “Maturity Date” as meaning, in relation to a USCP Note,

“the date specified as such in the Terms and Conditions Annex, which date shall be a Business Day and shall not exceed 185 calendar days from the Issue Date thereof.”

Sections 4 and 5 of the Terms of the Notes deal with maturity and mandatory acceleration, as follows:

“SECTION 4. Maturity. Except as required pursuant to Section 5 below, a USCP Note may not be redeemed in whole or in part prior to its Maturity Date. On its Maturity Date, the principal amount of each USCP Note, together with accrued and unpaid interest thereon, will be immediately due and payable.

SECTION 5. Mandatory Acceleration. The USCP Notes shall be redeemed after the occurrence of a Mandatory Acceleration Event. If the Security Trustee delivers to the Issuer and the Co-Issuer notice of the occurrence of a Mandatory Acceleration Event (an “Acceleration Redemption Notice”), which Acceleration Redemption Notice shall be copied to the USCP Issuing and Paying Agent [i.e. BNYM]:

(1)

where such Mandatory Acceleration Event is an Insolvency Event in respect of the Issuer or the Co-Issuer, the USCP Notes shall become immediately due and payable on the date on which the Issuer and the Co-Issuer receive such Acceleration Redemption Notice, and the Issuer shall be obliged to redeem the USCP Notes in whole but not in part on such date at the Redemption Amount;

(2)

where such Mandatory Acceleration Event is not an Insolvency Event in respect of the Issuer or the Co-Issuer, the Issuer shall be obliged, by giving not less than fifteen (15) nor more than thirty (30) days’ notice to [BNYM] (and [BNYM], in turn, will provide same-day notice to DTC), which notice shall be irrevocable, to redeem the USCP Notes in whole but not in part on the date specified in such notice, which date shall not be later than the date which falls 30 days after the day on which such notice is delivered by [BNYM] to the Issuer and the Co-Issuer, at the Redemption Amount; and the USCP Notes shall become immediately due and payable on the date specified in such notice.

The “Acceleration Redemption Date” is the date upon which the USCP Notes become due and payable in accordance with the foregoing paragraph or the subsequent sentence, as applicable. In the event that the Issuer or the Collateral Manager on its behalf does not duly deliver a notice in accordance with clause (2) above, the Acceleration Redemption Date shall be the date which falls thirty (30) days after the date on which the Acceleration Redemption Notice was delivered by [BNYM] to the Issuer and the Co-Issuer, and the USCP Notes shall become immediately due and payable on such date …”

These are the provisions, it will be recalled, by reference to which the Acceleration Redemption Date is defined in the CTSA, and the effect of which I have attempted to summarise in paragraphs 11 and 13 above.

Issues 1, 2 and 3 overlap, and it will be convenient to consider them together. I will also follow Mr Adams, and the parties in their submissions, in using the term “the Shorts” as a collective description of Parties A and B and other noteholders with the earliest redemption dates, and the term “the Longs” to refer to the noteholders with later redemption dates, including Parties C and D, in circumstances where it is unnecessary to distinguish between their individual interests.

The main argument for the Shorts was presented in opening by Mr Zacaroli. On behalf of Party B, Mr Miles adopted Mr Zacaroli’s submissions and added some further observations. In reply, however, their roles were reversed, with Mr Miles taking the lead and Mr Zacaroli providing some supporting observations.

The main thrust of the argument for the Shorts is that noteholders whose USCP matured between 23 August and 23 September 2007 acquired immediate and vested rights to payment in full of the redemption value of their Notes on the maturity date, and those vested rights were not affected in any way by the occurrence and notification of a Mandatory Acceleration Event on 23 and 24 August, or the occurrence of the Acceleration Redemption Date on 23 September 2007.

The starting point, submit the Shorts, is the notice and confirmation of a Wind Down Event on 20 August 2007. This had the effect of terminating the Pre-Wind Down Priority of Payments and bringing Section 7.3 of the CTSA into operation. On each Business Day thereafter, Section 7.3 provides that the first duty of the Collateral Manager, Administrator or Security Trustee (as the case may be) (“the responsible person”) is to apply the funds standing to the credit of the Note Defeasance Account to make payments of amounts that are due and payable under (relevantly) Section 7.5. Subject thereto, the responsible person is obliged (“shall”) to instruct BNYM (as Custodian) to withdraw funds standing to the credit of the US Operating Account for the purposes and in the order of priority of the payment waterfall set out in the sixteen sub-paragraphs of Section 7.3(a) to (p) (i.e. the Post-Wind Down Priority of Payments).

As I have already explained, Section 7.5 provides in mandatory terms for the redemption in full of maturing CP by withdrawal of the necessary funds from the Note Defeasance Account and the payment of those funds to the relevant Paying Agent “to be applied in redemption (in whole or in part)” of the CP.

The relevant heading in the payment waterfall is the fourth one in sub-paragraph (d). The first three headings all relate to the payment of certain taxes and expenses which were, in each case, “then due and payable”. Under sub-paragraph (d), the remaining funds in the US Operating Account on 21 August 2007, and each subsequent Business Day, should have been paid pari passu according to six sub-categories, the first (and for present purposes most relevant) of which was to “defease” the CP. “Defease” means to credit to the Note Defeasance Account an amount equal to the full face value of all the discount CP (together with the full face value, plus interest accrued and accruing to maturity, of any interest-bearing CP).

At the beginning of the day on 21 August 2007, the sum standing to the credit of the US dollar cash account (which in practice performed the functions of the US Operating Account, together with the other cash accounts) was in excess of $148 million, and further sums of more than $210 million were received into that account during the course of the day in the form of Liquidity Advances received from Barclays. The opening balance on the account on 22 August was in excess of $180 million, and on 23 August in excess of $202 million.

Accordingly, submit the Shorts, on 21 August, but for the intervention of Barclays, the funds in the US dollar cash account should have been applied in accordance with the payment waterfall in Section 7.3. This would have resulted in a substantial sum being credited to the Note Defeasance Account. Similarly, any sums remaining in the account on 22 and 23 August should also have been applied in accordance with the payment waterfall, and this would in turn have led to the crediting of further substantial sums to the Note Defeasance Account pursuant to sub-paragraph (d).

23 August was the specified maturity date of Party A’s USCP Notes. The face value of those Notes should therefore have been paid to Party A on that date from the Note Defeasance Account. This obligation is reinforced by Section 8.1 of the Deed of Charge. Party B’s Notes matured on the following day, when the opening balance of the US dollar cash account was in excess of $183 million, and the same procedure should then have been followed in relation to Party B to the extent of the available funds.

The confirmation of an Enforcement Event on 23 August 2007 had no effect on the rights of Parties A and B set out above, say the Shorts, because the wording of Section 7.3 expressly envisages that it will apply as much after the confirmation of an Enforcement Event as before: see the opening words of the sub-section. The obligation to make payments from the Note Defeasance Account under Sections 7.3 and 7.5 is triggered by a maturity date being reached, and is not affected in any way by the confirmation of an Enforcement Event. The key change effected by confirmation of an Enforcement Event is that the Collateral Manager is thereafter obliged to comply with the Enforcement Management Procedures set out in Schedule 7 to the Collateral Management Agreement, but only if directed to do so by the Security Trustee. The Security Trustee also has a discretion whether to preserve any part of the Collateral or to collect and convert it into cash for distribution in accordance with the Priority of Payments: see Section 3.4(a) of the CTSA. In respect of any Collateral which is in fact realised into cash, the Security Trustee is obliged to deposit the proceeds into the Custodial Accounts to be applied pursuant to Sections 7.3 to 7.8: see Section 3.4(b).

Accordingly, submit the Shorts, the holder of any Notes which matured during the Post-Wind Down period and before the Acceleration Redemption Date was entitled to be paid the face value of its Notes on the relevant maturity date from the available funds in the US Operating Account (which in practice means the US dollar cash account) during that period.

The Shorts go on to submit that the rights of Parties A and B were also unaffected by the service of an Acceleration Redemption Notice on 24 August 2007. This question turns on the effect of Sections 4 and 5 of the Terms of the Notes, which I have set out in paragraph 67 above. The first sentence of Section 5 provides that “[t]he USCP Notes shall be redeemed after the occurrence of a Mandatory Acceleration Event”. The Shorts submit that this obligation can have no application to noteholders who already have an accrued right to distribution under the trust constituted by the CTSA in an amount equal to the full face value of their Notes. But for the intervention of Barclays, that trust would have been given effect in favour of Parties A and B in accordance with the procedure described above. This argument is supported by a linguistic point. Section 5 imposes an obligation on the Company to redeem the USCP Notes after the occurrence of a Mandatory Acceleration Event. It is a logical nonsense, say the Shorts, to oblige the Company to redeem Notes (on whatever date) when the Company was already required, before that supposed obligation could arise, to pay the face value of those Notes on their prior maturity. Accordingly, even if Section 5 of the Terms of the Notes had the effect of postponing the maturity date of Notes which would otherwise have matured between the date of the Acceleration Redemption Notice and the Acceleration Redemption Date, it cannot have had that effect in relation to Notes which had already matured.

The Shorts also advance a wider argument that, on the proper construction of Section 7.5 of the CTSA and Section 5 of the Terms of the Notes, the service of an Acceleration Redemption Notice cannot postpone the maturity date of any Notes with maturity dates prior to 23 September 2007. In support of this submission they rely on the definitions of “Maturity Date” in the CTSA and in the Terms of the Notes: the maturity date is the date specified as such from the outset, and it cannot be later than 185 days from the date of issue. If the maturity date could be postponed under Section 5 of the Terms of the Notes, it would no longer be the date originally specified, and it might be more than 185 days from the date of issue. Section 5 provides for the acceleration of Notes which have not yet reached their maturity date, but it does not provide for the postponement of Notes which have already reached their maturity date. This distinction is reinforced by Section 4, which says that the principal amount of each Note will be “immediately due and payable” on its maturity date, and precludes redemption prior to its maturity date “except as required pursuant to Section 5 below”. In the light of these provisions, say the Shorts, very clear language would be required if Section 5 had been intended to have the effect of extending the maturity date for any Notes at all, let alone potentially beyond the period of 185 days after issue or so as to alter the priority afforded to Notes accruing due for payment in the interim. No such clear language is to be found in Section 5. Acceleration and postponement are opposite concepts, and the former is the only word that is used in the documentation. Furthermore, Section 5 says that the Notes “shall become immediately due and payable” after delivery of an Acceleration Redemption Notice, either at once if the Mandatory Acceleration Event is an Insolvency Event or on the Acceleration Redemption Date if (as in the present case) the Mandatory Acceleration Event is not an Insolvency Event. This language, submit the Shorts, is wholly inappropriate in relation to Notes which have already become due and payable. On a natural reading, the wording of Section 5 is implicitly confined to Notes which have not already matured.

The Longs submit that on the true construction of the documents, and in the events which have happened, Parties A and B had no right to payment of their Notes on 23 and 24 August 2007. The basic reason for this is that on 23 August a Mandatory Acceleration Event occurred in relation to the Company, with the result that by virtue of Section 5 of the Terms of the Notes all outstanding CP issued by the Company then fell due to be paid pro rata and pari passu on a specified date, namely the Acceleration Redemption Date. It is said that this construction leads to the commercially logical and fair result that once the Company is in a situation where it is actually, or is likely to be, insolvent all outstanding CP shares equally in the Company’s assets. This is consistent with the commercial expectations of all parties, and finds strong support in the reasoning of the Court of Appeal in Re Whistlejacket Capital Management Limited [2008] EWCA Civ 575 (“Whistlejacket”).

The arguments for the Shorts, submit the Longs, amount to an attempt to subordinate the position of the holders of other CP, but no basis for any such subordination can be found in the documentation. Where the intention is that certain creditors of the Company are to be subordinated to other creditors, the documents use clear and express language for that purpose. Thus the Mezzanine Notes are contractually subordinated to the CP and other Senior Obligations, and the Capital Notes are contractually subordinated to the Mezzanine Notes. By contrast, there are no provisions that contractually subordinate any class of Senior Obligations to any other class of Senior Obligations, and none that subordinate any tranche of CP to any other tranche of CP.

In relation to Section 7.3 of the CTSA, the Longs stress that the concept of “defeasance” merely involves the setting aside of monies in a separate account sufficient to pay the CP in full, and does not of itself involve any concept of payment. It is purely a provision for the allocation of funds.

The operation of the Note Defeasance Account is governed by Section 7.5 of the CTSA, and does impose an obligation to pay amounts in redemption of CP, but only “to the extent of available funds” as at the relevant Maturity Date. In the present case, there is no evidence that any Defeasance Accounts were established until 28 August 2007, i.e. after the Notes of Parties A and B had matured; and even after the accounts were established, no money appears to have been transferred to them before 23 September 2007: see paragraph 53 of Mr Adams’ statement. Thus to the extent that any Defeasance Accounts were established before the Acceleration Redemption Date, they appear to have been effectively empty. It follows that there were no “available funds” in the Note Defeasance Account out of which the maturing CP of Parties A and B could have been paid.

The effect of Sections 4 and 5 of the Terms of the Notes, on their true construction, is to impose a new obligatory payment date (the Acceleration Redemption Date) for all unpaid CP, once a Mandatory Acceleration Event has occurred and an Acceleration Redemption Notice has been delivered. Where the Mandatory Acceleration Event is not an Insolvency Event, the Company is given a considerable degree of flexibility in determining when the Acceleration Redemption Date will be: it may fall between 15 and 30 days after service of the Acceleration Redemption Notice by the Security Trustee. This flexibility appears to be for purposes of administrative convenience, and in particular to allow BNYM and DTC to redeem the Notes in an orderly fashion. By contrast, where the Mandatory Acceleration Event is an Insolvency Event, all the outstanding Notes are to become immediately due and payable upon the date of receipt of the Acceleration Redemption Notice. In these circumstances, insolvency is likely to alter the administrative procedures for payment in such a way that the same considerations of administrative convenience do not apply. For example, the mechanics of payments will not be dealt with by DTC, but will be dealt with as part of the relevant insolvency process. The in-built variability in the Acceleration Redemption Date clearly indicates that it was not intended to determine any right to priority of payment, and any construction which had this effect would lead to a commercially irrational result not in keeping with the expectations of the parties.

The Maturity Date of CP is the date upon which the outstanding face amount is due and payable. Once a Mandatory Acceleration Event has occurred, and an Acceleration Redemption Notice has been delivered, the Acceleration Redemption Date becomes the date on which the CP is due and payable. There is accordingly no obligation to make a payment out of the Note Defeasance Account in respect of CP prior to the Acceleration Redemption Date.

Overall, the structure of the documentation is logical and coherent, and four stages may be distinguished:

The “pay as you go” construction contended for by the Shorts would give some CP a random and arbitrary preference over other CP, and the parties cannot sensibly have envisaged that it would operate at a time of actual or likely insolvency when, by definition, the Company would be unlikely to have sufficient assets to meet its liabilities.

On the priority of payment issues, the Receivers are obliged to apply the priorities in Section 7.4 rather than Section 7.3 of the CTSA because an Acceleration Redemption Date has occurred and, accordingly, Section 7.4 by its terms applies and Section 7.3 by its terms does not apply. That is the effect of the clear, express and unambiguous language of the two sections. The only exception to this might be if Parties A and B could identify a legal basis upon which they enjoy priority and to which the Receivers would be bound to give effect. However, they are unable to do this, because there was no failure to comply with the terms of the CTSA, and in any event they had no accrued right to payment capable of giving rise to a proprietary right now enforceable against the Receivers. There was no failure to comply, because the occurrence of a Mandatory Acceleration Event on 23 August 2007 and delivery of an Acceleration Redemption Notice imposed a new obligatory payment date for all outstanding CP. Nor was there any enforceable accrued right to payment, because of the absence of “available funds” in the Note Defeasance Account. Furthermore, there is no evidence that there were any funds in the USCP Debt Account, out of which maturing Notes should have been paid pursuant to Section 8.3.1 of the USCP Issuing and Agency Agreement.

In evaluating these competing submissions, I agree with counsel for Parties C and D that it is appropriate to start with the Terms of the Notes themselves. These are the terms upon which an investor will have purchased the Notes, and this is the place where he would expect to look in the first instance for information about his rights. The investors were not, of course, direct parties to the CTSA and the other documents comprising the contractual framework of the SIV, but I do not understand it to be disputed that the terms of the CTSA, in particular, were binding on investors by virtue of arrangements made at the time of purchase with or through DTC. However, this does not detract from the point that the first place an investor would naturally look for information about his rights would be in the Terms of the Notes themselves.

In my judgment Section 4 of the Terms of the Notes establishes the following important points. First, the principal amount of the Note will be immediately due and payable on the maturity date. Secondly, by virtue of the relevant definition, the maturity date will be the date specified as such in the Terms and Conditions Annex supplied to the investor at the time of purchase. It will therefore be fixed and ascertainable from the outset. Thirdly, the Note will not be redeemable before the specified maturity date, except as required pursuant to Section 5. Nothing is said about redemption after the specified maturity date, and apart from the possibility of acceleration under Section 5 there is nothing which qualifies the clear statement in the second sentence of Section 4 that the principal amount of each Note will be immediately due and payable on the maturity date.

Section 5 begins with the heading “Mandatory Acceleration”, and then says that the Notes “shall be redeemed after the occurrence of a Mandatory Acceleration Event”. Machinery is then set out, by virtue of which the Notes “shall become immediately due and payable” on one of two dates, depending on whether the Mandatory Acceleration Event is an Insolvency Event. If it is not, the relevant date is the Acceleration Redemption Date. In my judgment it is reasonably clear, as a matter of ordinary English usage, that Section 5 is not intended to apply, at the very least, to Notes which reached their maturity date, and therefore became “immediately due and payable” pursuant to Section 4, before the occurrence of a Mandatory Acceleration Event. The two Sections have to be read together, and I agree with counsel for the Shorts that clear language would have been needed if the intention was to defeat rights to immediate payment which had already accrued under Section 4.

Counsel for Parties C and D accepted that the consequence of his submission was to make vested rights under Section 4 potentially defeasible upon the happening of a Mandatory Acceleration Event. I do not find that a plausible intention to attribute to the parties, particularly as it would lead to the surprising consequence that, assuming availability of funds, an investor whose Notes had matured before the Mandatory Acceleration Event could lose his right to payment in full merely because steps had not been taken to redeem them at the due time, possibly due to some administrative failure. Furthermore, the concept of acceleration, which runs right through Section 5, is the very opposite of postponement; yet the construction contended for by the Longs involves the postponement of otherwise vested rights to payment, not the acceleration of rights to payment which would otherwise lie in the future.

What Section 5 does leave unclear, in my judgment, is what is meant to happen to Notes which mature after the occurrence of a Mandatory Acceleration Event, but before the date on which the accelerated Notes become due and payable (i.e. in the present case the Acceleration Redemption Date). Are such Notes to be treated as remaining due and payable on their respective maturity dates, or are they caught by the machinery in Section 5 in such a way that they become due and payable only on the Acceleration Redemption Date?

Even looking at Sections 4 and 5 in isolation, I would be inclined to answer this question in the former sense. There is nothing in Section 5, on the face of it, to modify the clear principle stated in the second sentence of Section 4; and as in the case of Notes maturing before a Mandatory Acceleration Event, the effect of the alternative construction would again be to postpone an otherwise vested right, not to accelerate a future right. On the other hand, there is obvious force in the point that, at a time when insolvency is likely to be imminent, if not already an actual fact, pari passu distribution is fairer and produces a more commercially sensible result than continuation of a pay as you go regime.

Any doubt on the point, however, is in my judgment dispelled by reference to the CTSA, and the carefully delineated system of successive operating states which it contains. The Post-Wind Down Priority of Payments in Section 7.4 applies only upon the occurrence of an Acceleration Redemption Date. It does not apply from the occurrence, or notification, of a Mandatory Acceleration Event, although those events are necessary precursors of an Acceleration Redemption Date. It seems clear, therefore, that the scheme of the CTSA, for better or for worse, is that distribution on a pro rata and pari passu basis applies only to funds received or recovered by the Security Trustee on or after the Acceleration Redemption Date. Funds received or recovered before that date, but after confirmation of a Wind Down Event (in the present case 21 August 2007) or confirmation of an Enforcement Event (23 August), are to be dealt with in accordance with the combined effect of Sections 7.3 and 7.5. As I have already explained, those sections provide for the outstanding CP to be “defeased” by means of crediting the Note Defeasance Account, and for withdrawals from the Note Defeasance Account of the amounts needed to redeem Notes on their maturity dates. Subject only to the question of availability of funds in the Note Defeasance Account, that system seems to me clearly to envisage the continuation of payment of maturing CP on a pay as you go basis, in the same way as during the initial pre-wind down phase when Section 7.2 applies.

I accept the submission of counsel for the Shorts that the structure established by the CTSA is one that depends on written notification of defined and (for the most part) clearly ascertainable events in order to bring about a change of operating state. A structure of that sort has the merits of being clear, certain and relatively simple to operate, all of which are in themselves desirable commercial objectives. The point that one might expect to find machinery for pari passu distribution once insolvency is imminent has force, I acknowledge, but (as I have already suggested in paragraph 48 above) less force than in many commercial contexts precisely because the parties have all agreed to sign up to an investment structure which is “insolvency remote”. In those circumstances, it is dangerous to start with assumptions about what the parties must or are likely to have intended, and there is in my judgment no substitute for a close examination of the language of the contractual terms in order to ascertain what their rights may be.

I now come to the question of availability of funds. It is true that no Note Defeasance Account of any description was established before 28 August 2007, and that the so-called “Defeasance Accounts” opened on that date appear to have been inactive at all times up to the Acceleration Redemption Date. However, it seems to me that these are matters of machinery, and should not be allowed to defeat vested rights to payment which accrued on the maturity dates of CP if there would have been sufficient funds in the Note Defeasance Account had it been opened and operated as it should have been. The noteholders are in the position of beneficiaries under a trust, and since equity normally regards as done that which ought to be done, they should not be in any worse a position merely because the Security Trustee failed to establish the necessary accounts and to follow the procedure of defeasance laid down in Section 7.4. For similar reasons, I am unimpressed by the argument based on insufficiency of funds in the USCP Debt Account on the relevant maturity dates. I should emphasise that this is not a dispute between unsecured and secured creditors, where the former are laying claim to funds which should have been, but were not, paid into a trust account or otherwise secured for the benefit of the secured creditors. It is rather a contest between two different classes of secured creditors, and the question is how trust monies in the hands of the Security Trustee should have been applied. That question, it seems to me, must be answered by reference to the substantive rights conferred upon the beneficiaries rather than the machinery laid down for giving effect to those rights.

I am also unable to agree with the submission for the Longs that continuation of the pay as you go regime is tantamount to subordinating one category of secured debt to another. The true position, in my judgment, is that all the noteholders held their CP on the same terms. The result of those terms may be that some noteholders are paid in full, while others recover nothing, but that depends on the relative maturity dates of the Notes and the operation of the relevant contractual provisions. It is not a matter of one category of debt being subordinated to another.

I have carefully considered the judgment of the Court of Appeal in Whistlejacket to see if I can derive any assistance from it, but have concluded that the terms of the documentation in that case are so different that the reasoning of the Court cannot help me. The contractual structure in Whistlejacket appears to have been considerably simpler than in the present case, with a single unified priority regime which, importantly, did not provide explicitly for payment of maturing notes on a pay as you go basis. There were, admittedly, acceleration provisions analogous to those contained in Section 5 of the Terms of the Notes in the present case, but the Court’s interpretation of that provision (as not affecting priorities of payment) was heavily coloured by their conclusion that the single priority regime was concerned only with prescribing the order of priority, and did not also provide for priority of payment. In the present case, by contrast, provision for payment on a pay as you go basis is clearly made both in the pre-wind down period (Section 7.2 of the CTSA) and in the post-wind down period (Section 7.3 read with Section 7.5).

I should also briefly mention another recent case which has gone to the Court of Appeal, Re Sigma Finance Corporation (in Administrative Receivership) [2008] EWCA Civ 1303 (“Sigma Finance”). That case raised a short question of construction of a provision in the security trust deed, which came into force after the happening of various specified events of default and the passing of a resolution by holders of the relevant instruments to enforce the security. When that happened, the security trustee had to use its reasonable endeavours to establish various pools of assets before the end of “the Realisation Period”, and for that purpose was obliged to realise, dispose of or otherwise deal with the assets in such manner as, in its absolute discretion, it deemed appropriate. The relevant clause (clause 7.6) then concluded as follows:

“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 case turned on the meaning to be attributed to the words “so far as possible” in the passage which I have quoted. Upholding the decision of Sales J at first instance, the Court of Appeal decided by a majority (Lloyd and Rimer LJJ, Lord Neuberger of Abbotsbury dissenting) that the Security Trustee was obliged to continue paying maturing notes in full during the realisation period on a pay as you go basis, until it had no more assets with which to pay them.

Like all cases of this nature, Sigma Finance turned on the interpretation of the bargain actually made between the parties. The fact that the Court of Appeal were divided shows how difficult these questions may be. For my part, however, I do find some assistance in, and would respectfully echo, what Rimer LJ said in paragraph 92:

“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 [the parties in an equivalent position to the Longs], 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 [i.e. the Security Trust Deed] 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.”

I should at this stage notice an alternative argument advanced by counsel for Parties C and D. This argument is that the Security Trustee should have given notice of an Insolvency Event on 23 August 2007, which would have had the effect of rendering all the CP immediately due and payable on receipt of that notice. The definition of “Insolvency Event” includes if the Company “shall fail generally to pay its debts as they become due”. Since the Company ceased making payments on its CP on 24 August 2007, it is apparent that such an Insolvency Event had occurred by that date. Accordingly, when the Security Trustee served the Acceleration Redemption Notice on 23 August 2007, the notice should have referred not only to the Mandatory Acceleration Event which consisted of a breach of the Mandatory Acceleration Test, but also to a further Mandatory Acceleration Event, namely the failure of the Company to pay its debts as they became due. Since the latter event was an Insolvency Event, it would have triggered Section 5(1) of the Terms of the Notes and made all the CP immediately due and payable.

In my judgment this argument breaks down both as a matter of construction and on the facts. As a matter of construction, it is not the mere happening of a Mandatory Acceleration Event which triggers redemption, but rather receipt by the Company of an Acceleration Redemption Notice (followed, where the event is not an Insolvency Event, by the Acceleration Redemption Date). In my view the scheme of Section 5 of the Terms of the Notes, like that of the CTSA, depends on written notification of the specified events in order to bring about a change of operating state, and the obligation to serve a notice cannot be dismissed as mere machinery in the same way as I have held that the failure to open the Defeasance Accounts should be regarded. The scheme of the Notes is, to that extent, a mechanistic one, but as I have already pointed out it does at least have the merits of clarity, certainty and simplicity. I would add that such advantages are particularly apparent where the triggering event in question, namely inability to pay one’s debts as they fall due, is a relatively soft-edged one where there may be considerable room for argument as to precisely when it occurs.

The argument also breaks down on the facts, as it seems to me, because the main reason why no distributions were made in respect of maturing CP on 23 or 24 August 2007 was the adverse claim made by Barclays on 21 and 22 August. In the light of that claim, which appears to have been at least in part of a proprietary nature, it would clearly have been imprudent for the Company or the Security Trustee to make any payments out of the disputed funds. However, for the purposes of the present proceedings I have been asked by all parties to proceed on the footing that Barclays’ claim does not succeed. On that footing, there is no evidence before me which establishes that the Company was unable to pay its debts as they fell due on 23 August. Furthermore, even taking Barclays’ claim into account, the necessary evidence is still lacking. Parties C and D can hardly rely upon the failure to pay Party A on 23 August as evidence of insolvency, because their own case is that Party A’s Notes did not become due and payable on that day. In order to establish that the Company was unable to pay its debts as they fell due on 23 August, a detailed examination of the Company’s financial position on that day would be necessary. The existing evidence does not enable such an exercise to be performed, because it was prepared on the footing that it was common ground that the Acceleration Redemption Date did not occur until 23 September 2007: see paragraphs 68 and 69 of Mr Adams’ statement.

For the reasons which I have given, I would answer the first three questions in the originating application as follows:

This issue arises only if I am wrong in relation to Issues 1, 2 and 3, and in particular if (contrary to what I have held) the service of notice of a Mandatory Acceleration Event postponed to 23 September 2007 the stated maturity dates of all outstanding CP that otherwise matured before that date. The further question that then arises is whether the postponement applies to Notes which had a maturity date falling on, or the day before, the date of service of the Acceleration Redemption Notice (i.e. 24 August 2007).

I shall begin with Party A, whose Notes matured on 23 August. This was also the day on which a Mandatory Acceleration Event occurred. The Longs rely on the opening words of Section 5 of the Terms of the Notes, which require redemption “after the occurrence of a Mandatory Acceleration Event”, and argue that the subsequent provisions relating to service of an Acceleration Redemption Notice are mere mechanics. As I have already explained, I am unable to accept that submission. In my judgment the notice provisions are an integral part of the contractual framework, and until receipt of an Acceleration Redemption Notice, at the earliest, there is nothing to displace the basic principle that CP becomes immediately due and payable on its stated maturity date. It is true that a consequence of this construction is that a delay by the Security Trustee in serving notice of the occurrence of a Mandatory Acceleration Event would confer priority on the holders of Notes with a maturity date falling on or after the occurrence of the event but prior to the date of service of the relevant notice. However, the possibility of a noteholder obtaining priority in this way seems to me to be inherent in a notice-based system, and although it may seem a little surprising, it comes nowhere near being so absurd or repugnant as to justify the conclusion that the parties cannot have intended it. After all, the “accidental” priority that a noteholder might thereby obtain is not very different in kind from the admitted priority which is obtained by a noteholder whose Notes mature on the day before the happening of a Mandatory Acceleration Event. Such holders are paid in full, and are not at any risk of a claw back, even though the underlying situation of the Company is unlikely to be significantly different from its position on the following day.

I now turn to Party B, whose notes matured on 24 August 2007. Counsel for Party B argued that in general a reference to a “date” is to a calendar date, and it runs from the first stroke of midnight of the preceding day to the following midnight (local time). In the absence of an indication to the contrary in the context, the law takes no account of fractions of a date: see for example Trow v Ind Coope (West Midlands ) Limited [1967] 2 QB 899 (CA) at 915 A-C per Lord Denning MR and 921 B-F per Harman LJ. Accordingly, for USCP, issued under New York law, the Maturity Date of 24 August 2007 ran from 00:00 to 24:00 hours (EST). If Party B’s Notes did not become due and payable at 00:00 hours, there is no other time on that day at which they could have become due and payable.

It follows, submits Party B, that an Acceleration Redemption Notice given after 00:00 hours was given after Party B’s notes had matured and become due and payable. The relevant notice was not given until 09:36 hours (EST), and therefore it could have had no effect on Party B’s Notes, which had already become immediately due and payable.

The riposte of the Longs to this submission was to say that, since the law normally pays no regard to fractions of a day, the Acceleration Redemption Notice should likewise be regarded as having been served with effect from 00:00 hours on 24 August, even though it was not in fact served until 09:36 hours, with the consequence that Party B cannot establish a prior vested right to payment. The argument is superficially attractive, but I am unable to accept it. If it were right, it would mean that the Security Trustee could never safely pay out maturing CP on its maturity date, because of the possibility that an Acceleration Redemption Notice might be served after the payment was made but before midnight, thereby postponing the date upon which the CP became due and payable. The relevant provisions of the USCP Issuing and Agency Agreement enable maturing CP to be paid until close of business on the relevant day. This provision would be of no effect if in practice payment always had to be delayed until the following day because of the possibility that an Acceleration Redemption Notice might be served. In my view, therefore, regard must be had to the precise time at which the Notice is served, and it cannot have any effect on CP which has already matured and become payable at the beginning of the day.

The Longs sought to buttress their submission on this point by referring to the decision of the House of Lords in Afovos Shipping Co v Romano Pagnan [1983] 1 WLR 195, and the statement of Lord Hailsham of St Marylebone at 201B where he said:

“I take it to be a general principle of law not requiring authority that where a person under an obligation to do a particular act has to do it on or before a particular date he has the whole of that day to perform his duty”.

It was argued that Party B had no accrued right to payment (which could, for example, be enforced by action) until close of business on the relevant day, because the CP could be paid at any time prior to this. However, this submission appears to me to be beside the point. It confuses the time when the CP became immediately due and payable (the beginning of the day) with the time when payment became overdue (midnight at the end of the day).

For these reasons, my answer to the fourth question in the originating application is that any postponement effected by the service of notice of a Mandatory Acceleration Event does not apply to CP with stated Maturity Dates of either 23 August or 24 August 2007.