Sigma Finance & Pari Passu Wins The Day

Introduction The Supreme Court has not allowed a clause in a Security Trust Deed dealing with the distribution of assets in Sigma Finance Corporation (Sigma) between "experienced commercial operators advised by expert lawyers" to permit the preferential distribution of certain assets.

Facts Sigma was a structured investment vehicle that raised funds primarily by issuing or guaranteeing medium term notes. The funds so raised were invested in acquiring amongst other things, asset-backed securities. Like many of its peers, Sigma was a victim of the current financial crisis.

Some of Sigma's liabilities were secured pursuant to a Security Trust Deed which provided, upon the occurrence of an enforcement event, a 60-day "realisation period" during which time the Security Trustee was obliged to organise Sigma's assets into a "short-term pool" to cover short-term liabilities and "long-term pools" to cover long-term liabilities. However, a clause in the Security Trust Deed provided that during the 60-day "realisation period" the Security Trustee was to "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" Sigma (Distribution Clause).

The question in dispute was whether the Security Trustee was required to continue to pay the liabilities that fell due during the "realisation period" (on a pay as you go basis) in which case it was likely that the other secured creditors (in respect of short and long term liabilities) would be left with empty pools.

The Court of Appeal ruled in favour of those creditors whose debts fell due during the "realisation period" and required the Security Trustee to discharge such debts first. However, on appeal to the Supreme Court, the Court of Appeal's judgment was overturned.

Judgment The Supreme Court (by a 4-1 majority) held that the Distribution Clause was based on the assumption that Sigma would have sufficient assets to cover all its secured liabilities when no issue of priority could arise. Therefore, the Supreme Court was of the opinion that to give effect to the Distribution Clause in an insolvency situation involved the risk of giving a clause buried in another provision (that dealt with something different) the effect of "changing fundamentally the apparent financial structure of the relationship".

The Supreme Court disagreed with the Court of Appeal that the effect of the Distribution...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT