So Eurosail-UK 2007-3BL plc (Eurosail) is not ‘balance sheet’ insolvent, no event of default has occurred under the RMBS notes it has issued and a post-enforcement call option (PECO) does not make limited recourse any of the notes it relates to.

The English Supreme Court’s eagerly awaited decision on the Eurosail litigation, concerning how the “balance sheet” test for insolvency should be applied, was released today. The decision clarifies how courts should apply the balance sheet test, and what circumstances and facts must be taken into account in doing so.

Balance sheet test must take into account commercial context of company

Introduction

The UK Supreme Court judgment in BNY Corporate Trustee Services Limited and others v Eurosail-UK 2007-3BL PLC [2013] UKSC 28 was handed down on 9 May 2013. It considered: (a) the meaning of the balance sheet insolvency test as laid out in section 123(2) of the UK Insolvency Act 1986 (the "Act"); and (b) the legal effect of a post-enforcement call option ("PECO") and, in particular, whether the existence of a PECO is relevant to an assessment of balance sheet insolvency.

Nearly three years after the High Court decision on the case of BNY Corporate Trustee Services Ltd v Eurosail UK 2007 – 3BL PLC and others was handed down, the case has run its course in the Supreme Court. The case, which considers the correct interpretation of the balance-sheet insolvency test in section 123(2) of the Insolvency Act 1986, is of importance to insolvency practitioners, financial institutions, legal advisers, company directors and companies.  

Court of Appeal decision  

The guidelines laid down by the English courts for applying the balance sheet test for insolvency affects not only whether a company is technically insolvent, but also the enforceability of clauses in transactional banking documents and the ability of a liquidator to challenge certain antecedent transactions. The Supreme Court’s decision will therefore be welcomed by advisors, bankers and insolvency practitioners as it has overturned the high threshold laid down by the Court of Appeal.

Eurosail’s journey has come to an end: the Supreme Court rejects the “point of no return” test, returns to balance sheet basics.

John Houghton, European Head of Restructuring and Co-Global Chair of Bankruptcy and Restructuring remarks:

The Supreme Court handed down an important judgement last week in the case of BNY Corporate Trustee Services Limited v Eurosail - UK 2007 - 3BL PLC ("the Eurosail Case"), which needs to be considered by anyone who is a party to a contract which contains events of default relating to the insolvency of a party to that contract.

Background

The Court of Appeal has held that a settlement agreement, in which the defendant acknowledged that a debt was payable in full and agreed the mechanics and timing of payments, had the effect of excluding the defendant’s right of equitable set-off: IG Index Ltd v Ehrentreu [2013] EWCA Civ 95. The claimant was therefore entitled to summary judgment on the debt. The defendant however remained free to pursue his cross-claim for damages against the claimant.

Peter Bloxham has completed the first phase of his independent review of the Investment Bank Special Administration Regulations 2011 and in February 2013 presented an interim report, which HM Treasury has now published. In addition to making a number of immediate recommendations, the interim report sets out further areas to be reviewed as part of a second phase of work.

CMS is advising HSBC on its expedited appeal of a recent controversial decision by the High Court refusing assistance under the cross-border assistance provisions of section 426 of the Insolvency Act 1986.  The decision of the Court of Appeal will be of great interest to those involved in cross-border insolvency and restructuring as well as foreign courts.