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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Fons HF v Corporal Ltd & Anor [2013] EWHC 1801 (Ch) (28 June 2013) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2013/1801.html Cite as: [2013] EWHC 1801 (Ch) |
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CHANCERY DIVISION
MANCHESTER DISTRICT REGISTRY
B e f o r e :
(sitting as a Deputy Judge of the High Court)
____________________
| FONS HF (In Liquidation) |
Claimant |
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| - and - |
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| (1) CORPORAL LIMITED (2) PILLAR SECURITISATION S.A.R.L. |
Defendants |
____________________
Andreas Gledhill, instructed by Keystone Law, for the Second Defendant
Hearing dates: 10 and 11 June 2013
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Crown Copyright ©
MARK CAWSON QC
INTRODUCTION
"All shares (if any) specified in Schedule 1 (shares), and also all other stocks, shares, debentures, bonds, warrants, coupons or other securities now or in the future owned by the Chargor in Corporal from time to time or any in which it has an interest".
Background
9.1 Firstly, RBS's secured loan facility of approximately £8,000,000;
9.2 Secondly, £4,483,448 due to Baugur Group under a shareholder loan agreement;
9.3 Thirdly, £19,975,000 preference shares of £1 each in Corporal held as to 65% by Baugur and 35% by Fons; and
9.4 Fourthly, A and B ordinary shares of 10p each in Corporal comprising 24,500 A ordinary shares held as to 65% by Baugur and 35% by Fons, and B ordinary shares (representing only about 2% of the ordinary share capital) held by management.
13.1 The loan would bear interest at a rate of 8% per annum, rolled up on an annual basis (Clause 3);
13.2 The loan should become repayable:-
13.2.1 If an "Exit Event" occurred, which included default in making any payment due, Corporal ceasing to trade, and Corporal becoming insolvent;
13.2.2 At any time on demand by Fons following the last day of the "Subordination Period" (as defined by the Subordination Deed, and meaning in essence, when RBS had been repaid).
(Clauses 4 and 5).
14.1 Clause 4.2 provided that a certificate from Fons as to the amount at any time due from Corporal to Fons under the SLA should, in the absence of manifest error, be conclusive; and
14.2 By clause 6, it was provided that any payment made by Corporal under the SLA should be made in full, without set off or counterclaim and, unless otherwise required by law, free and clear of any deductions or withholdings.
29.1 Payment of the proceeds from the expected sale of Fons' stake in WF Group Holdings Ltd/Woodward Food Service ("Woodwards"), estimated to produce "between GBP 8.5-9 million";
29.2 Payment of the proceeds of the expected sale of a subsidiary of Woodwards called DBC, estimated to produce a further £2.5 million;
29.3 Payment of the proceeds of expected sales of Fons' stakes in Hornblow and two other companies, estimated to produce ISK 300 million (equivalent to some £1.7 million at the then exchange rate); and
29.4 Such additional cash payment or security as might be required to cover "in full the Bank's exposure on Fons HF and/or Talden Holdings SA
The Charge
"(a) All dividends, distributions, interest and other income paid or payable on any Share;
(b) All shares or other property derived from any Share (whether by way of conversion, consolidation, subdivision, substitution, redemption, bonus, preference, option or otherwise); and
(c) A other allotments, accretions, rights, benefits and advantages of all kinds accruing, offered or otherwise derived from or incidental to any Share".
The correct approach to construction
"(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
(1) The background was famously referred to by Lord Wilberforce as the 'matrix of fact', but the phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.
(2) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.
(3) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax ...
(4) The rule that words should be given their 'natural and ordinary meaning' reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require Judges to attribute to the parties an intention which they plainly could not have had
"If the ordinary meaning of words makes sense in relation to the rest of the document and the factual background, then the Court will give effect to that language even though the circumstances appear hard for one side or another"
Whilst Lord Hoffmann had earlier in that case recognised, as he had in ICS v West Bromwich, that different principles might apply if one could detect a linguistic mistake, this is a recognition that a court has no jurisdiction to construe a contract simply to achieve a result which is, objectively, more reasonable than that agreed to by the parties.
"... The object of the Court is to give effect to what the contracting parties intended. To ascertain the intention of the parties the Court reads the terms of the contract as a whole, giving the words used their natural and ordinary meaning in the context of the agreement, the parties' relationship and all the relevant facts surrounding the transaction so far as known to the parties
In the same case, at 269F, Lord Hoffmann reaffirmed that: "... The primary source for understanding what the parties meant is their language interpreted in accordance with conventional usage ... ".
"In determining the meaning of the language of a commercial contract ... the law generally favours a commercially sensible construction. The reason for this approach is that a commercial construction is more likely to give effect to the intention of the parties. Words are therefore interpreted in the way a reasonable commercial person would construe them
"In the context of a professionally drawn legal document such as this, the Court should start from a strong presumption that such expressions [established legal terms] are used in their ordinary legal meanings ".
This is a recognition that when an agreement drafted by a lawyer uses established legal terms or expressions, then there is a strong presumption that those terms are employed in their proper legal sense.
"The ultimate aim of interpreting a provision in a contract, especially a commercial contract, is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person would have understood the parties to have meant. As Lord Hoffman made clear in the first of the principles he summarises in the Investors Compensation Scheme case ... the relevant reasonable person is one who has all the background knowledge which would reasonably have been available to the parties in the situation they were in at the time of the contract".
" Unless the most natural meaning of the words produces a result which is so extreme as to suggest that it was unintended, the Court has no alternative but to give effect to its terms".
This was on the basis that:
"To do otherwise would be to risk imposing obligations on the other party which they were never willing to assume and in circumstances which amount to no more than guesswork on the part of the Court".
"If the language of the bond leads clearly to a conclusion that one or other of the constructions contended for is the correct one, the Court must give effect to it, however surprising or unreasonable the result might be. But if there are two possible constructions, the Court is entitled to reject one that is unreasonable and, in a commercial context, the one which flouts business common sense ... the more unreasonable the result, the more unlikely it is that the parties can have intended it".
"[25] The matter does not of course rest there because when alternative constructions are available one has to consider which is the more commercially sensible. On this aspect of the matter Mr Zacaroli has all the cards ...
[26] The Judge said that it did not flout common sense to say that the clause provided for a very limited level of release, but that, with respect, is not quite the way to look at the matter. If a clause is capable of two meanings, as on any view this clause is, it is quite possible that neither meaning will flout common sense. In such circumstances, it is much more appropriate to adopt the more, rather than the less, commercial construction".
"The court's job is to discern the intention of the parties, objectively speaking, from the words used in the commercial document, in the relevant context and against the factual background in which the document was created. The starting point is the wording of the document itself and the principle that the commercial parties who agreed the wording intended the words used to mean what they say in setting out the parties' respective rights and obligations. If there are two possible constructions of the document a court is entitled to prefer the construction which is more consistent with "business common sense," if that can be ascertained. However, I would agree with the statements of Briggs J, in Jackson v Dear ( [2012] EWHC 2060 (Ch) at 40 ) first, that "commercial common sense" is not to be elevated to an overriding criterion of construction and, secondly, that the parties should not be subjected to ". . . the individual judge's own notions of what might have been the sensible solution to the parties' conundrum". I would add, still less should the issue of construction be determined by what seems like "commercial common sense" from the point of view of one of the parties to the contract."
Expressions used within the Definition
57.1 "Shares" - it is trite that a share means a share in a company's share capital - see Section 540(1) of the Companies Act 2006;
57.2 "Stocks " - stocks are fully paid shares converted into stocks, often issued as a divisible series;
57.3 "Bonds" - a bond is by common definition an obligation by deed - see e.g. Stroud's Judicial Dictionary at page 322. However, a bond is a common way of securitising a debt so as to make it a marketable or bearer commodity, and an instrument so created is a common meaning of bond;
57.4 "Warrants " - a warrant is a negotiable instrument that entitles the bearer to the shares specified in it - see e.g. Halsbury's Laws, Companies, at para 382, and Section 122 of the Companies Act 2006 ;
57.5 "Coupons" - a coupon is, generally, a bearer instrument issued by a company that entitles the holder to payment (usually of some interest) in certain circumstances. Thus, for example, a company that issues a share warrant may, if so authorised by its article, provide (by coupon or otherwise) for the payment of the future dividends on the shares included in the warrant - see Section 779(3) of the Companies Act 2006.
"But it appears to me that the very intention of this instrument is to record indebtedness, to record the source from which that indebtedness is to be liquidated, and to show that the persons who are holders of the certificates are holders in a series and are to be paid pari passu, and that their names are to be recorded in a register. This instrument does, therefore, contain a number of characteristics of a debenture, and in my judgment we ought to hold affirmatively that it is a debenture within the meaning of s. 102 [of the Companies (Consolidation) Act, 1908]
This latter passage does lend support to the proposition that whilst an acknowledgement of indebtedness might be the primary qualification of a debenture, it may not be sufficient in itself to constitute one absent other indicia of a debenture.
Mr Gledhill referred me to a passage from the Judgment of Warrington L.J. in Lemon v. Austin Friars Investment Trust Ltd at page 17 where he said:
"If you find that a document of this kind contains acknowledgement of indebtedness, it satisfies, at all events, that part which was thought to be sufficient by Chitty J. and was said in express terms to be confirmed by Lindley J., and I need not express my own opinion. On these authorities it is obviously sufficient to constitute the document a debenture and on that simple ground, in my opinion, the Judgment of Lawrence J. was correct"
However, as Mr Cadwallader pointed out in reply, this raises the question of what Warrington L.J. meant by the expression "document of this kind".
"In English law a debenture need not be executed as a deed. The debt need not be quantified at the date of its creation and repayment need not be made at a fixed date but instead only in the event of a winding up or upon some contingency. Although the modern meaning of the term "debenture" is thus very wide, it would go too far to assert that every document creating or acknowledging the indebtedness of the company is a debenture. The term would not be used when referring to bills of exchange or other negotiable instruments, deeds of covenant and many other documents where a company stipulates to pay a sum of money".
No authority is cited for the latter proposition.
The parties' respective contentions
Pillar
71.1 The SLAs were "securities" within the meaning of the Definition, alternatively they were "debentures", and so fell within the definition of "Shares" charged by Clause 3.1.1.
71.2 The reference to "securities" cannot have been intended to be limited to "security" within the definition of "security" in Clause 1.2.1.7, i.e. an enforceable security providing for a right of recourse. This is because, applying Clause 1.2.2 of the Charge, the other types of instrument specifically referred to in the Definition are taken to be examples of "securities ", and not all of these fall within the Clause 1.2.1.7 definition of "security", in particular shares, bonds, warrants and coupons, albeit that debentures may or may not fall within such definition.
71.3 It is argued on behalf of Pillar that the cases that I have referred to above demonstrate that the words "securities" and "debentures" can have more than one meaning dependent upon the context. Thus, so it is argued, the wording of the Definition is ambiguous, one engages immediately with the decision of the Supreme Court in Rainy Sky SA, and the issue as to which meaning is to prevail is to be determined by reference to what gives effect to the more, rather than the less commercial construction, even if the construction rejected can in no sense be described as flouting common sense.
71.4 As to what is the more, rather than the less commercial construction of Clause 3.1.1 and the Definition, it is argued that:-
71.4.1 It would make no commercial sense to limit the meaning of the word "securities" within the Definition to secure Obligations within the meaning of "security" defined by Clause 1.2.1.7, or even to the concept of "security" in the more limited "popular language" sense referred to in para 62 above. This is because, so it is said, there is simply no sense in Kaupthing having taken a charge over Fons' shares held as shareholder, but not also over loans made as a shareholder to Corporal, particularly bearing in mind that, in the present case, Fons' unsecured rights under the SLAs in fact rank ahead of its rights as shareholder.
71.4.2 The same point is made by Pillar insofar as it might be suggested that the reference to "securities " points to some instrument that is designed to be transmissible or marketable as a security of the kind envisaged by provisions such as Section 738(a) of the Companies Act 1986, or insofar as it might be suggested that the reference to "debentures" points to something rather more formal than simply an acknowledgement of a debt, but to some document containing more indicia of a debenture than that. Again, it is said that when Kaupthing came to taking security in respect of Fons' interest in Corporal, it objectively made no sense to treat as excluded from the Charge the benefit of instruments such as the SLAs.
71.4.3 It is said that the Charge plainly intended to catch more than just the shares held by Fons in Corporal, hence the extended definition which did not, as we have seen, appear in the draft charges prepared in respect of the shareholdings in Hornblow and 365. In this respect, it is suggested that it is significant that the only other interest in Corporal in fact capable of being caught by the Charge was that of Fons under the SLAs.
71.4.4 It is said that the point is further reinforced by the fact that the indebtedness of Kaupthing was at least £11.5 million, and perhaps as much as £14 million, whereas the value of Fons' shareholding in Corporal was, so the evidence would tend to suggest, significantly less than that.
71.4.5 Further, so far as may be necessary, Mr Gledhill, on behalf of Pillar, points to the certification provision in Clause 4.1 of the SLAs as introducing into the SLAs something which makes the enjoyment or enforcement of the rights under the SLAs more secure or certain, and the same point is made in respect of Clause 6 thereof limiting rights of set off etc. These, so it is said, are indicia of a "security" within the meaning considered in para 55 above, if not also of a "debenture".
71.4.6 Mr Gledhill submits that no significance should be attached to the label of the document "Legal Charge over shares", not least because the effect of the Definition is, on any view, to extend the meaning of "Shares" to instruments that are plainly not shares in the ordinary sense, or necessarily analogous thereto.
71.4.7 Mr Gledhill further submits on behalf of Pillar that no significance is to be attached to the fact that the definition uses the words "owned by the charger in Corporal", insofar as it might be said by Fons to support the argument that the use of the word "securities", or indeed the use of the word "debentures" pointed to a need for the indebtedness to be a secured one in the sense of providing for a right of recourse, or something that could properly be described as proprietary. Pillar's case as to this is that:-
71.4.8.1 The word "owned" simply qualifies what precedes it, i.e. that the "stocks, shares, debentures, bonds, warrants, coupons and other securities" have to be owned by Fons to be subject to the charge; and
71.4.8.2 So far as the word "in" is concerned, it is permissible to speak in terms of investing "in" a company to which one has lent money, and Mr Gledhill points to the fact that para 15 of the written statement of Petur Mar Halldorsson, filed and served on Fons' behalf but not ultimately relied upon at trial, said this about the SLAs: "We saw that as a more secure asset in the form of a loan note in Corporal at 8% interest it was a higher rate of interest
However, I do note from para 15 of Mr Halldorsson's witness statement that in referring to a "more secure asset", he is contrasting making a loan to Corporal/Hamleys, as opposed to making a loan to "Baugur Group in Iceland
71.4.8 Thus, in conclusion, the essence of Pillar's case is that the reasonable objective observed, having regard to the language used, but also mindful of the commercial sense of the situation, and what is said by Pillar to be the commercial answer which made most sense, would have understood the parties to mean that the Definition, and the word "securities" and/or that "debentures" used therein extended to rights such as those of Fons under the SLAs, even if Kaupthing was not specifically aware of the latter.
Fons
72.1 The definition of "security" in Clause 1.2.1.7 of the Charge ought to be applied to the word "securities" in the Definition, so as to limit the latter to securities that involve the giving of "security" within the meaning of Clause 1.2.1.7, and that having so defined "securities", that ought to then inform how "debenture" ought to be construed, limiting the definition to debentures that do involve the grant of "security" within the meaning of clause 1.2.1.7.
72.2 Even if that is not right, the use of words such as "stocks", "shares", "debentures ", "bonds", "warrants", and "coupons" in conjunction with the expression "other securities ", clearly points to an intention to confine the latter to "securities" in the sense of something in the nature of a bearer or transmissible instrument, or at least in the "popular language" sense referred to in para 62 above involving something tangible that makes some underlying debt or contribution to capital, and its enforceability or enjoyment in some way more secure or certain.
72.3 Mr Cadwallader cautions that the exercise of construction or interpretation of a document is not about simply looking at what makes most commercial common sense, and that is not what Rainy Sky SA decided. One must not, he says, conflate the idea of the available meaning of words with all the meanings that the relevant word might have. Thus before deciding the issue on the basis of what makes most commercial sense, one must determine and decide the available meaning of the words in the context in which they are applied, and it is only if one is then left with ambiguity that it becomes permissible to look at which of the alternatives makes the most sense from a commercial perspective.
72.4 Mr Cadwallader argues that business people, seeing the expressions "debentures" and "other securities" as used in conjunction with the rest of the wording of the Definition, would not understand either of them as extending to unsecured loan agreements such as the SLAs on the basis that the ordinary meaning of those words as used in the context of the Charge itself is insufficiently wide to extend to documents or instruments that do not have the attributes referred to in sub-paras 72.1 or 72.2 above.
72.5 Consequently, one simply does not get to the question as to which of the rival constructions makes the most commercial sense.
72.6 However, I understand it to be Fons' case that, in any event, a consideration of what makes most commercial sense provides no real assistance in the present case because there is no sufficient evidence that the construction contended for by Pillar does in fact make more commercial sense than that contended for by Fons.
72.7 Mr Cadwallader prays in aid of Fons' construction considerations such as:-
72.7.1 The reference in the Definition to a requirement that the relevant document or instrument be "owned by the Chargor in Corporal";
72.7.2 The label "Legal Charge over shares" - cf. Chartbrook (supra) at 1112H-1113 A.
72.8 Mr Cadwallader also prays in aid the principle of contra preferentum construction, on the basis that the Charge was drafted by Kaupthing's solicitors, Eversheds LLP, albeit amended in accordance with Fons' suggestions. Therefore it is said that the benefit of any doubt in relation to construction ought to be given to Fons.
My decision as to the true meaning of "Shares"