UK New Supreme Court Hands Down Its First Business Case Ruling: The Sigma SIV
By: Ainsley Brown
The UK’s highest court, its new Supreme Court – new in name only, it still has the same functions as the old House of Lords – has handed down its first business case ruling. And it is a significant one, not just for those directly affected by the ruling but also within the wider UK and international capital markets.
What am I am talking about? Well, the Sigma SIV ruling.
The ruling by the UK Supreme Court – it will take some getting use to saying that – can be best characterized as part of the clean up after the fallout from the UK’s, and the world’s for that matter, financial markets’ meltdown.
Sigma SIV, the world’s largest structured investment vehicle collapsed and went into bankruptcy in 2008 owing investors about $9 billion. Nine billion dollars, it just blows the mind, and not surprisingly it was a figure that was significantly more that its actual investments. So as is the usual case with these things to court we go.
In the High Court, later to be affirmed in the Court of Appeal, a very controversial ruling was made which departed significantly from the normal practice in bankruptcy in the UK. The court ruled that investors, who were owed about $6.2 billion, would be ranked and paid according to how soon their investment matured. This would mean that otherwise identical investments that came to maturity first, let’s say in 2009, would rank in priority – i.e. get their money first – than those that matured at a later date, say 2010.
At first blush that my might seem not only to make sense but to be fair – first in first out, right? However on much deeper consideration not only does it not make sense it is wholly unfair. You need to consider three things. First, the investments, apart from the maturity date are identical, logic and any sense of justice would dictate that like ought to be treated alike. Second, no matter what the maturity date Sigma SIV has already collected money from investors, and presumably invested it in a like manner. Why should an investor be prejudiced by a later maturity date when they have already expended funds? Third, a later maturity date says nothing of the time of investment. An earlier maturity date does not necessarily indicate an earlier investment. An investor, as part of their portfolio or tax management could have chose or been assigned a later maturity date. So the first in first out is actually turned on its head.
The judges of the UK Supreme Court – I guess they are still called Law Lords – did not have to turned to either logic or a sense of fairness, the simply had to turn to the law. The normal practice, in fact is one of is foundational principles, in UK bankruptcy and insolvency law is that like ought to be treated alike. That is to say that all identical creditors – and at this point the investors are creditors – are ranked equally and are entitled to the remaining assets of Sigma SIV in proportion to their investment.
Thankfully the Law Lords, by a majority of four to one, reaffirmed this basic principle and made it clear that structured investment vehicles are no different in an insolvency situation. As the clean up from the financial fallout continues this ruling has now provided firm guidance to the financial community and their lawyers on how investment vehicles and similar financial products are going to be treated, as far as creditor rakings are concerned, in insolvency.
