In Rainy Sky S.A and six others v Kookmin Bank [2011] UKSC 50, the Supreme Court provided useful guidance on the role of business common sense in construing a clause in a commercial contract, particularly in circumstances where there are competing plausible constructions, neither of which is clearly preferable on the language used alone.

The facts

When is a company in insolvent? When is a company's assets less than its liabilities (taking account of contingent and prospective liabilities)?

Under English law this is a commercial test and requires that a company has reached a "point of no return" and is not based solely on a review of the company's balance sheet:  

If a tenant company fails to pay its rent when due (subject to any grace periods in the lease) the landlord ordinarily has the right to forfeit the lease either by peaceable re-entry of the property or by legal proceedings. However, if the tenant is insolvent (or soon to become insolvent) then this right may be stayed by the moratorium under the Insolvency Act 1986.

The Court of Appeal decision in the Nortel case upheld the High Court ruling that FSD/CN liability is an expense of the administration and therefore ranks ahead of administrators' remuneration, floating charges and unsecured creditors. Much of the press coverage which has followed in the immediate aftermath seems to have assumed that the decision is a victory for "good" pensioners over the "bad" banks.

The Supreme Court’s decision in a dispute over a parent company guarantee will change the way insolvency practitioners deal with the distribution of assets when a corporate group collapses.

The Supreme Court recently considered the scope of the anti-deprivation principle, in Belmont Park Investments PTY Limited (respondent) v. BNY Corporate Trustee Services Limited and Lehman Brothers Special Financing Inc (appellant) [2011] UKSC 38 (Belmont). Understanding the scope of this principle is important for anyone entering a contract where the parties’ rights and obligations change if one of them enters an insolvency procedure. Robert Spedding explains how the courts applied the principle in Belmont and makes some practical suggestions for avoiding problems.

In recent years, several foreign companies have used the English law scheme of arrangement as a flexible restructuring method to compromise creditor claims.  The decision of the High Court in the latest of these cases, that of the German company Rodenstock GmbH, clarifies that an English court will accept jurisdiction where the only connection to England is that the company’s finance documents were governed by English law.

One of the many issues which arose from the collapse of Lehman Brothers was whether “flip provisions”, which reverse a swap counterparty’s priority in the order of payment on insolvency, were invalid on the basis that they contravened the anti-deprivation principle.  This is a long-established common law principle which seeks to prevent an insolvent party from arranging its affairs to frustrate the legitimate claims of creditors.

In its recent decision in Belmont Park Investments PTY Ltd v BNY Corporate trustee Services Ltd and Lehman Brothers Special Financing Inc,[1] the Supreme Court ruled in favour of investors, clarifying the limits of the anti-deprivation rule and holding that a commercially sensible transaction entered into in good faith and without the intention to evade insolvency laws should not infringe the anti-deprivation rule.

Background

The recent case of Stephen Petitioner offers some clarification regarding issues relating to the validity of appointment of administrators.

The Facts