22 LAW SOUTH EAST
Shares – is the right to be repaid under a loan agreement covered by a share charge?
James McNeil, Paris Smith head of banking, looks at ’Fons HF (in liquidation) v (1) Corporal Ltd (2) Pillar Securitisation SARL (2013) EWHC 1801 (Ch) (June 28, 2013),’ in which the High Court was asked to consider whether a legal charge over the shares in a company included a charge over the unsecured loan owed by that company to its shareholder
Background
The High Court held that a reasonably objective observer would not
understand the definition of ’shares’
... the test of commercial common sense ... applies only where the wording in a document is actually ambiguous
Fons HF (Fons) was the sole shareholder of Corporal (Company). Fons then entered into two loan agreements providing unsecured loans to the Company (Loan Agreements) and then on September 29, 2008, Fons gave Kaupthing Bank Luxembourg SA (Kaupthing) a charge over all the shares that Fons owned in the Company (Charge). The crux of this case rested on the definition of shares contained in the Charge. The Charge defined shares as being:
“All shares (if any) specified in Schedule I (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“.
Kaupthing then transferred the benefit of the Charge to Pillar Securitisation SARL (Pillar). Fons and Kaupthing then both went into liquidation. It then became clear that Fons’ right to be repaid under the Loan Agreements was worth more to Pillar than the shares which Fons held in the Company. Pillar therefore argued that the benefit of the right to be repaid under the Loan Agreements fell within the definition of Shares in the Charge as this right/benefit was either “debenture(s)“ or “other securities“.
Fons however argued that the definition clearly referred to obligations designed to make an underlying debt or contribution to capital more secure and that loans advanced under the Loan Agreements did not fall within that wording.
Decision
The High Court held that a reasonably objective observer would not understand the definition of “shares“ to include the right to be repaid under the Loan Agreements. However, the Court did agree that it was possible for the words “debenture“ and “securities“ to have a number of meanings, but importantly the definition, when viewed as a whole, was not ambiguous.
It was therefore not necessary
to resolve an ambiguity in the wording by considering whether it made more commercial
www.businessmag.co.uk THE BUSINESS MAGAZINE – SOLENT & SOUTH CENTRAL – OCTOBER 2013
Details: James McNeil 023-8048-2108
james.mcneil@
parissmith.co.uk www.parissmith.co.uk
James McNeil
sense to include the right to be repaid under the Loan Agreements within the definition of shares within the Charge.
Comment This case provides:
• a clear and forceful interpretation of documents that are very widely used in order to create security over shares and the rights which attach to them; and
• guidance that the test of commercial common sense which can be applied when determining the construction of a contract/term is not an overriding criterion of construction. It therefore applies only where the wording in a document is actually ambiguous.
Note: This case is expected to be heard in the Court of Appeal between December 18, 2013, and April 22, 2014.
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