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Insolvency Law

Expert guidance on all aspects of corporate and personal insolvency

30 OCT 2009

Sigma Finance appeal judgment handed down by the Supreme Court

As predicted on this blog on Wednesday the Supreme Court  has now handed down its judgment in Re Sigma Finance Corporation (in administrative receivership) and In Re The Insolvency Act 1986 (Conjoined Appeals). The judgment can be seen here.

As The Times summary of the case notes:

"...five law lords today said investors in Sigma should be treated equally and each take a proportional share of what remains...Adam Plainer, a partner at Jones Day who advised a late maturing investor, said: ""The law lords have ruled that the remaining assets should be split proportionally among all entitled creditors, which is a basic principle of UK insolvency law. [is it?? has anybody read Professor Mokal's highly persuasive work in the CLJ on pari passu? see here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=303739] When a business goes bust all creditors of the same class are usually treated equally and the law lords are saying a structured investment vehicle is no different, which is a victory for business common sense."

The Lord Mance's judgment contains a number of interesting points. He notes, "The issue on these appeals is how Sigma’s remaining assets are to be distributed...Four interested creditors have advanced various possibilities. Interested parties A and B submit that the assets fall to be distributed preferentially to the creditors in respect of the debts identified in (b), or in (a) and (b). Assuming that to be right, they differ between themselves as to priority. Mr Howard QC representing interested party A submits that the assets are to be distributed according to the dates when the relevant debts became due, while Mr Sheldon QC representing interested party B submits that all debts falling due in (or prior to) the Realisation Period are part of a single pool, within which Sigma’s remaining assets fall to be distributed pari passu."

In a dissenting judgment the Lord Walker notes: "These appeals will determine how the enormous loss incurred by Sigma Finance Corporation is to be borne as between the anonymous investment banks, hedge funds and other entities which are its secured creditors. Lord Mance refers to them as victims of the current financial crisis. An alternative view would be that they are among the authors of the crisis. But that is not an issue for the Court."

He goes on, "First, I completely agree that it is necessary to construe the language of clause 7.6 of the deed “in the landscape of the instrument as a whole” (in the words of Lord Mustill in Charter Reinsurance Co Ltd v Fagan [1997] AC 313, 384H). One of the most striking features of the landscape of the deed, to my mind, is that clause 7 does not provide for the immediate winding-up of Sigma on the occurrence of a default which amounts to an enforcement event. On the contrary, secured creditors are prohibited from taking steps to wind up the company. It is therefore necessary to repress any instinctive feeling (and it is, I acknowledge, a strong instinctive feeling) that pari passu distribution at the earliest practicable date is the most natural (one might almost say the only rational) solution."

The opinions of the former Lords of Appeal in Ordinary, now Supreme Court Justices, is the first insolvency related judgment to be handed down by the new Supreme Court. Lord Mance's lengthy erudite judgment is an exercise in close textual analysis and must be read carefully. It cannot possibly be adequately reviewed in this short blog entry, so happy reading during reading week - which has arrived just in time for full digestion!

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