'Pay As You Go' Principle In SIV Insolvencies - Appeal

In Golden Key Ltd (In Receivership) [2009] EWCA Civ

636 the Court of Appeal had to construe the complex documents

governing the relationship between a structured investment vehicle

and its noteholders. The Court held that in cases dealing with

complex documentation in sophisticated securities markets,

particular weight should be given to the commerciality of a

possible interpretation of the contracts and the likelihood of

well-advised parties having been willing to agree to certain

outcomes.

Golden Key Ltd ("Golden Key") was a structured

investment vehicle ("SIV") that issued commercial paper.

It became insolvent in 2007. In general terms, the question before

the Court was at what contractual stage was a provision triggered

for Golden Key to cease paying its noteholders on a 'pay as you

go' basis and move to treating them on a pari passu basis. If

the pari passu principle was triggered at an early stage, all the

noteholders would be repaid in part, whereas if it was triggered at

a later stage a few creditors would be repaid in full and others

would receive nothing. The decision at first instance, which we

reported on in our April 2009 edition, has now been appealed.

The documents governing Golden Key's relationship with its

noteholders were complex and much of the Court of Appeal's

judgment focuses on interpreting them in detail. However, a number

of issues arose which are of general interest.

Arden LJ emphasised that the Court must look to the commercial

objectives of the parties and "unless the contrary

appears, the court must assume that the parties to a

commercial document intended to produce a commercial

result, and the court must thus take into account the

commerciality of the rival constructions". She continued:

"The line between giving weight to the

commerciality of a provision and writing a provision into

an agreement can become a fine one when the court finds

that there are deficiencies in the contractual documents.

This is particularly liable to happen in what might be

called multidimensional documentation because of the sheer

number of permutations that those who negotiate and draft

the documents have to take into account".

Once issue which Arden LJ took into account was that on one

party's interpretation of the documents, Golden Key would have

been able to determine (within a window of 15 days) the exact time

at which all its commercial paper became due and payable following

a default. Arden LJ considered that the parties could...