The 'Pay As You Go' Principle Upheld In The Latest SIV Insolvency

In Golden Key Ltd (In Receivership) [2009] EWHC 148

(Ch) the High Court has held that there should be no

presumption that parties to a bankruptcy remote arrangement

intended that creditors within the same class would be repaid pari

passu in the period following a default.

Golden Key Ltd ("Golden Key") was a structured

investment vehicle ("SIV") that invested primarily in the

US sub-prime mortgage market and which defaulted under its loan

documents and then became insolvent in late 2008. Its receivers

applied to the Court for directions as to how Golden Key's

remaining assets should be distributed.

The Courts have had to give directions to receivers in a number

of cases involving the collapse of SIVs. In each case, investments

in the SIVs were regulated by highly complex suites of documents

which, as was the case with Golden Key, circumvented the statutory

insolvency regime. The statutory regime in this case was

substituted by 'contractual architecture' which involved a

number of steps that would lead up to the effective insolvency and

distribution of Golden Key's assets (being the Confirmation of

a Wind Down Event, an Enforcement Event and the occurrence of an

Acceleration Redemption Date).

The Judgment turned almost in its entirety on the wording of the

contractual documentation, which was by no means clear. The Judge

referred to the fact that the regime was underpinned by

"an annex, more than 50 pages in length, containing an

alphabet soup of complex and interlocking


After considering numerous provisions of the suite of

contractual documents, the Court followed the decision in Re

Sigma Finance Corporation [2008] EWCA Civ 1303, and held that

the wording of the documents meant that, upon the occurrence of

certain events, the receivers should continue to pay debts as they

fell due, despite the fact that this would inevitably lead to

certain secured creditors being repaid in full whilst others within

the same class would not be paid at all. This is in contrast to the

usual position under English insolvency law, where creditors within

a class are repaid pari passu.

Practical implications

A number of cases involving SIVs have come before the Courts

with different results, each case turning on the exact wording of

the relevant contractual documentation. When substituting the

statutory insolvency regime, the parties should...

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