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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> BNY Corporate Trustee Services Ltd v Eurosail-UK 2007-3BL Plc & Ors> [2011] EWCA Civ 227 (07 March 2011) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2011/227.html Cite as: [2011] BCC 399, [2011] Bus LR 1359, [2011] EWCA Civ 227, [2011] 1 WLR 2524 |
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ON APPEAL FROM HIGH COURT OF JUSTICE
CHANCERY DIVISION
The Chancellor of the High Court
Case No: HC10C01541
Strand, London, WC2A 2LL |
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B e f o r e :
LORD JUSTICE WILSON
and
LORD JUSTICE TOULSON
____________________
(1) BNY CORPORATE TRUSTEE SERVICES LIMITED |
Claimants |
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- and - |
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(1) EUROSAIL-UK 2007-3BL PLC (2) NATIXIS (3) NEUBERGER BERMAN EUROPE LTD (ON BEHALF OF SEALINK FUNDING LTD) (4) ORPINGTON STRUCTURED FINANCE I LTD (5) MUNICIPALITY FINANCE PLC (6) CARRERA CAPITAL FINANCE LTD (7) PATRON EMF S.A.R.L. (8) PAMPLONA CREDIT OPPORTUNITIES MASTER FUND |
Defendants |
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WordWave International Limited
A Merrill Communications Company
190 Fleet Street, London EC4A 2AG
Tel No: 020 7404 1400, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Mr R Dicker QC and Mr J Goldring (instructed by Berwin Leighton Paisner LLP) for the 1st Defendant, a Respondent and Cross-Appellant
Mr R Snowden QC and Mr D Bayfield (instructed by Brown Rudnick LLP) for the 7th and 8th Defendants, Respondents and Cross-Appellants
Mr W Trower QC and Mr D Allison (instructed by Allen & Overy LLP) for the Claimant, a Respondent
Hearing dates: 25th, 26th and 28th January 2011
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Crown Copyright ©
Lord Neuberger MR:
The factual and contractual background and the issues
The basic nature of the transaction
The rights of the Noteholders
"The Noteholders have full recourse to the Issuer in respect of the payments described above, and are accordingly entitled to bring a claim under English law, subject to the Trust Deed, for the full amount of such payments in accordance with Condition 10."
Condition 10 empowers the Trustee to "take such proceedings against the Issuer … as it may think fit to enforce the provisions of the Notes or the Trust Deed", but it is not bound to do so unless a specified proportion of the outstanding Noteholders request it.
"The Issuer … ceasing … to carry on business … or being unable to pay its debts as and when they fall due or, within the meaning of Section 123(1) or (2) (as if the words 'it is proved to the satisfaction of the court' did not appear in Section 123(2)) of the Insolvency Act 1986 (as that Section may be amended from time to time), being unable to pay its debts".
The nature of the problem which has arisen
The Post Enforcement Call Option Agreement ("PECO")
"Although the [Notes] will be full recourse obligations of the Issuer, upon enforcement of the security for the [Notes], the Trustee … will, in practice, have recourse only to the [mortgages] and to any other assets of the Issuer then in existence ….".
"As indicated … above, issuers of notes are concerned to comply with the criteria published by the rating agencies so that their instruments may attract the highest possible rating. One of those criteria is colloquially called 'insolvency remoteness' by which is meant the practical impossibility of the issuer being subjected to any insolvency process. In other jurisdictions this is achieved by provisions which limit the rights of Noteholders against the issuer to the value of its assets, but in England and Wales that produced adverse tax consequences. The PECO is designed to achieve the same result by ensuring, so far as practically possible, that if the assets of the issuer prove to be insufficient the Noteholder to whom a balance is due will not take steps to wind up the issuer. It appears that both the leading auditors and the major rating agencies treat the two methods of achieving insolvency remoteness as commercially equivalent."
The "adverse tax consequences" involved stamp duty being payable on the issue. The relevant legislation has now been amended so that stamp duty no longer arises on straightforward limited recourse issues.
"to acquire all (but not some only) of the Notes (plus accrued interest thereon) in the event that the Security for the Notes is enforced and the Trustee, after the payment of the proceeds of such enforcement, determines that the proceeds of such enforcement are insufficient, after payment of all claims ranking in priority to or pari passu with the Notes pursuant to the Deed of Charge, to pay in full all principal and/or interest and any other amounts whatsoever due in respect of the Notes. The Trustee shall promptly after the Security is enforced and the proceeds of such enforcement are paid, make a determination of whether or not there is such insufficiency. If the Trustee determines that there is such an insufficiency the Trustee shall forthwith give notice (the 'Insufficiency Notice') of such determination to OptionCo and the Issuer."
Clause 3.2 of the PECO provides that the option may be exercised at any time after an Insufficiency Notice has been given. Clause 6 allows assignment, novation or transfer with the prior written consent of the Trustee to be given only if the Trustee is satisfied that it will not be materially prejudicial to the Noteholders.
The questions to be determined
The first question: absent the PECO, is the Issuer within the ambit of section 123(2)?
The statutory background to section 123(2)
"(a) if a creditor … to whom the company is indebted in a sum … has served on the company … a written demand … to pay … and the company has for 3 weeks thereafter neglected to pay the sum …,
(b) if … execution or other process issued on a judgment … in favour of a creditor … is returned unsatisfied;
(c) [applies to Scotland];
(d) [applies to Northern Ireland];
(e) if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due."
"A company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company's assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities."
"For the purposes of references in any provision of the [1986] Act or the [Insolvency] Rules about winding up to a debt or a liablility, it is immaterial whether the debt or liability is present or future, whether it is certain or contingent, or whether it is fixed or liquidated, or is capable of being ascertained by fixed rules or as a matter of opinion ….".
"A company shall be deemed to be unable to pay its debts … if it is proved to the satisfaction of the court that the company is unable to pay its debts, and, in determining whether a company is unable to pay its debts, the court shall take into account the contingent and prospective liabilities of the company."
The meaning of section 123(2)
"If the cash flow test were the only relevant test [for insolvency] then current and short-term creditors would in effect be paid at the expense of creditors to whom liabilities were incurred after the company had reached the point of no return because of an incurable deficiency in its assets."
"A balance has to be struck between the right of an honest and prudent businessman, who is prepared to work hard, to trade out of his difficulties if he can genuinely see a light at the end of the tunnel, and the corresponding obligation to 'put up the shutters', when, by continuing to trade, he would be doing so in disregard of those business considerations which a reasonable businessman is expected to observe."
The Issuer's assets and liabilities: the audited accounts
The Issuer's assets and liabilities: adjustments to the audited accounts
Is section 123(2) engaged in this case?
The second question: if section 123(2) did apply, would the PECO disapply it?
Conclusion
The Trustee's attendance at the hearing
Lord Justice Toulson:
"A company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company's assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities."
"In practical terms insolvency arises at the moment when debts cannot be met as they fall due. That moment is often difficult to pinpoint precisely, yet it is the pivot on which all else turns." (Emphasis added)
Lord Justice Wilson: