Structured finance transaction documents have typically included subordination provisions in their post-default waterfalls, effectively changing a swap counterparty’s right to get paid from above that of the noteholders to below that of the noteholders.

The case concerned credit default swaps entered into between Lehman Brothers Special Financing Inc., and various parties, and the rights of the parties in respect of collateral held by a trustee.

Following the Court of Appeal decision in their application to the Court for directions to enable them to identify client money and its traceable proceeds (as previously reported here), the administrators of Lehman Brothers International (Europe) sought further directions regarding the further work to be carried out, the evidence to be prepared and the identification of appropriate respondents and sought a protective costs order.

Administrators will note with concern the decision of the East London Employment Tribunal in Spencer v Lehman Brothers (in administration) and Others, which suggests that administrators can be held to be personally liable for the discrimination of employees of the business in administration.

Introduction

In another case involving administrators, an employment tribunal somewhat controversially has held that the individual administrators could be liable as principals in an agency relationship with employees of a company in administration.

In BNY Corporate Trustee Services Ltd v Eurosail UK 2007 - 3BL PLC & Ors, the English Court of Appeal has decided that the mere fact that a company’s aggregate liabilities exceed its assets may not render the company to be deemed unable to pay its debts under section 123(2) of the UK Insolvency Act 1986 (commonly referred to as the “balance sheet test”). The test is whether a company has reached a point of no return such that its state of affairs is not or is unlikely to continue having regard to its contingent and future liabilities.

In BNY Corporate Trustee Services Limited v Eurosail–UK 2007–3BL Plc and others, the Court of Appeal ruled on the interpretation of the so-called "balance-sheet" test of insolvency under section 123(2) of the Insolvency Act 1986. This is essentially that a company is deemed unable to pay its debts if the value of its assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities. This appears to be the first reported case on the interpretation of the balance-sheet test of insolvency.

In previous issues of TransAtlantic, we reported that the UK Pensions Regulator had issued contribution notices (CNs) and financial support directions (FSDs) against insolvent companies in the Nortel and Lehman Brothers groups. Click here for the June story on Nortel (see page 5); click here for the November story on Lehman (see page 7).

BNY Corporate Trustee Services Limited v Eurosail-UK 2007-3BL Plc & others [2011] EWCA Civ 227

The Court of Appeal has allowed companies around the country to breathe a solvent sigh of relief, as it has held that the so-called “balance sheet” test of insolvency in s123(2) Insolvency Act 1996 is intended to apply where a company has reached a “point of no return” rather than being used as a “mechanistic, even artificial, reason for permitting a creditor to present a petition to wind up a company”.