In Golden Key Ltd (In Receivership) [2009] EWCA Civ 636 the Court of Appeal had to construe the complex documents governing the relationship between a structured investment vehicle and its noteholders. The Court held that in cases dealing with complex documentation in sophisticated securities markets, particular weight should be given to the commerciality of a possible interpretation of the contracts and the likelihood of well-advised parties having been willing to agree to certain outcomes.

Golden Key Ltd ("Golden Key") was a structured investment vehicle ("SIV") that issued commercial paper. It became insolvent in 2007. In general terms, the question before the Court was at what contractual stage was a provision triggered for Golden Key to cease paying its noteholders on a 'pay as you go' basis and move to treating them on a pari passu basis. If the pari passu principle was triggered at an early stage, all the noteholders would be repaid in part, whereas if it was triggered at a later stage a few creditors would be repaid in full and others would receive nothing. The decision at first instance, which we reported on in our April 2009 edition, has now been appealed.

The documents governing Golden Key's relationship with its noteholders were complex and much of the Court of Appeal's judgment focuses on interpreting them in detail. However, a number of issues arose which are of general interest.

Arden LJ emphasised that the Court must look to the commercial objectives of the parties and "unless the contrary appears, the court must assume that the parties to a commercial document intended to produce a commercial result, and the court must thus take into account the commerciality of the rival constructions". She continued: "The line between giving weight to the commerciality of a provision and writing a provision into an agreement can become a fine one when the court finds that there are deficiencies in the contractual documents. This is particularly liable to happen in what might be called multidimensional documentation because of the sheer number of permutations that those who negotiate and draft the documents have to take into account".

Once issue which Arden LJ took into account was that on one party's interpretation of the documents, Golden Key would have been able to determine (within a window of 15 days) the exact time at which all its commercial paper became due and payable following a default. Arden LJ considered that the parties could not have intended that the issuer would be able to have such an influence.

A difficulty with this approach is that there will often be competing commercial considerations which the Court has to balance. The Court was right to note the oddity of the issuer being able to determine the date on which its payment obligations changed. However, the Court attached very little weight to the fact that the argument that it preferred, which was that the 'pay as you go' principle continued to operate until a notice was served by the security trustee, led to some noteholders' rights being prioritised over others purely on the basis of the maturity date of their notes. Those purchasing newly issued commercial paper in Golden Key would not customarily know the maturity date of the paper already in issue. Arguably, therefore, the parties had a commercial expectation that all senior notes would be treated equally.

On a separate issue, the Court held that once a party had accrued rights of redemption, very clear wording would be needed to reverse those rights.

Practical implications

This case emphasises the importance of careful drafting of complex suites of documents. Where there is ambiguity between provisions, the Court will seek to give them a commercial interpretation. However, in certain securities transactions, the commercial objectives may themselves be complex and difficult to determine. As with the other SIV cases, this case also means that parties must consider carefully if they should call for an event of default or whether they would be better placed if they waited until their securities have matured.

This article was originally written for Stephenson Harwood's quarterly publication, Finance Litigation Legal Eye. If you would like to receive this publication, please contact Stephenson Harwood ( www.shlegal.com).

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