The Insolvency Point Of No Return For Securitisation Issuers

On 7 March 2011, the Court of Appeal delivered judgment1 on an appeal and a cross-appeal from a decision of the Chancellor of the High Court2 in the case of BNY Corporate Trustee Services Ltd v Eurosail UK 2007-3BL PLC & Ors [2010] EWHC 2005.

Both the appeal and cross-appeal concerned questions of interpretation with respect to the terms of interest bearing notes, due 2027 and 2045 (the "Notes") issued by Eurosail-UK 2007-3BL plc (the "Issuer"), and more specifically, the effect a post enforcement call option agreement ("PECO") has on the determination of a securitisation issuer's solvency.

Appeal and Cross-Appeal

The Court of Appeal was asked to consider:

whether, without regard to the PECO, the Issuer should be "deemed unable to pay its debts" within the meaning of section 123 (2) of the Insolvency Act 1986 (the "Act") (which is a balance sheet test) for the purposes of the terms and conditions of the Notes (the "Conditions"); and if the answer to question 1 was positive, whether the existence of the PECO had the effect that the Issuer was not unable to pay its debts within the meaning of section 123 (2) of the Act for the purposes of the Conditions. Judgment

The Court of Appeal's judgment was supportive of the judgment of the Chancellor of the High Court, who had previously determined that (i) on the facts in question, the Issuer should not be deemed unable to pay its debts, and (ii) even if the Issuer had been deemed unable to pay its debts, the PECO would not have altered this conclusion.

In relation to the first question the Court of Appeal was asked to consider, the court concluded that:

Any analysis of a company's inability to pay its debts under section 123 (2) of the Act should not be limited to whether the liabilities of a company exceed its assets. Rather, given the historical background for section 123 (2) of the Act, it is more appropriate to consider whether the relevant company has "reached the point of no return because of an incurable deficiency in its assets". Accordingly, in practical terms, even though a company is currently able to pay its debts as they fall due, for the purposes of section 123 (2) of the Act, it is necessary to consider whether, on the basis of the facts provided, the relevant company will be able to meet all of its liabilities, including those that are future or contingent. The decision as to whether a company has reached the "point of no return" will be based on "commercial reality and on commercial...