Top court gives Sigma creditors equal rights

Investment banks, hedge funds and other creditors seeking to recoup huge losses from the collapse of Sigma Finance will all be treated on an equal footing, the new Supreme Court ruled on Thursdayy.

The court, which replaced the law lords, overturned a Court of Appeal decision that Sigma creditors whose debts fell due first should be treated preferentially to other creditors, whose debts were due to be repaid later, and might therefore have ended up with nothing.

The case is one of a growing number in which investors have needed the courts’ help to determine how complex structured credit vehicles should be unwound and how legal contracts should be interpreted.

Lawyers say some of the transactions were structured under time pressure at the height of the markets boom, without a real expectation that the vehicles would become insolvent.

Sigma was a Structured Investment Vehicle, which held “toxic” credit products based on US subprime mortgages. It once had $50bn (£30bn) of assets but became insolvent and its collateral now falls far short of the amount needed to pay secured creditors.

The Sigma case hinges on the legal interpretation of a security trust document governing the Sigma assets, which has been disputed by four creditors.

The dispute has centred on one clause, which says the security trustee shall “so far as possible discharge on the due dates any short-term liabilities falling due for payment”.

The Supreme Court justices decided on a four-to-one split that the Court of Appeal had given “too much weight” to the perceived natural meaning of the words and too little to “the context in which that sentence appears”.

Lord Mance said in his judgment: “Even the most skilled drafters sometimes fail to see the wood for the trees and the present document on any view contains certain infelicities.”

Lord Collins, another justice, said that in complex documents there were bound to be ambiguities, but “detailed semantic analysis must give way to business common sense”.

In the case of insolvency, a fundamental principle of English law is that creditors of the same class should be treated equally. This is why the Court of Appeal ruling – which would have seen one group of creditors paid first – had surprised lawyers.

While the Supreme Court decision that creditors will be treated on a pari passu (or equal footing) basis can now be applied in the case of uncertainty, lawyers said the courts were expected to apply payments that were clearly stated in contract.

Adam Plainer, the London head of business restructuring at Jones Day, which acted for one of the Sigma creditors, said: “It is fundamental that investors have some certainty as to how any courts are likely to interpret conflicting provisions in an insolvency. I am pleased that business common sense prevailed.”