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
definitions".
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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