CROSS-BORDER UPDATE. By way of reminder, the cash-flow test provides that a company is deemed unable to pay its debts ‘if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due.’ The balance sheet test set out at S123(2) provides that 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.’ Both tests are frequently incorporated as triggering events in contractual termination clauses and also operate as key markers in other contexts, including, for example, the operation of wrongful trading provisions. While Eurosail continued to pay interest and principal under the loan notes when due, a group of its noteholders commenced litigation, arguing that Eurosail was insolvent under the s123(2) balance sheet insolvency test. Secondly, an insufficient understanding of the rationales of the commercial insolvency tests and the powerful image of multiple defaults that an insolvent company brings to mind were main reasons for the decision in Eurosail. " This seems to be a straight balance sheet test. Court of Appeal decision In 2011, the Court of Appeal held that Eurosail, the … The Supreme Court has this week considered the application of the balance sheet test for insolvency in BNY Corporate Trustee Services Limited v Eurosail and others [2013] … The Supreme Court has delivered a judgment providing welcome clarification on the construction and effect of section 123(2) of the Insolvency Act 1986 (the “balance-sheet” insolvency test) and its interaction with section 123(1)(e) of the Act (the “cash flow” insolvency test).The decision is relevant … The Supreme Court has recently provided clarification of the balance sheet test of corporate insolvency contained in section 123(2) of the Insolvency Act in a long- running case related to the collapse of the Lehman Brothers Group in October 2008. The author sets out here solvency test requirements in both jurisdictions and possible implications arising from the recent landmark UK Supreme Court decision in BNY Corporate Trustee Services Ltd v Eurosail-UK-2007-3BL plc 1 WLR 1408 (the “ Eurosail case ”). As their lordships noted at the outset of their judgment, ‘There is no statutory provision which links section 123(2) of the 1986 Act to the detailed provisions of the Companies Act 2006 as to the form and contents of a company’s financial statements.’ (para 1) One consequence is that parties may wish to move away from the use of these tests as triggers on termination clauses because of uncertainties as to whether the tests are met. The 2013 Eurosail case stated that, when considering a borrower's potential insolvency, these tests should not be applied either (i) mechanically or (ii) in isolation of one another. The decision clarifies how courts should apply the balance sheet test, and what circumstances … The Supreme Court unanimously confirmed the solvency of Eurosail 3BL, and in doing so provided important clarification on the relevant tests for insolvency. Eurosail’s journey has come to an end: the Supreme Court rejects the “point of no return” test, returns to balance sheet basics. The PECO is the mechanism to ensure the “insolvency remoteness” and is crucial in enabling the special purpose entity to achieve the best credit rating. Although the balance sheet and cash-flow tests continue as independent bases upon which to establish that a company is unable to pay its debts, the decision in Eurosail confirms that the tests have to some extent merged. www.quinnemanuel.com Balance Sheet Insolvency: The Point of No Return The decision of the Court of Appeal in BNY Corporate Trustee Services Limited v Eurosail … It is based on the law in force in May 2013, Druces LLP The Supreme Court held that the balance sheet test in section 123(2) of the Act requires the court to be satisfied that, on the balance of probabilities, a company has insufficient assets to be able to meet all of its liabilities, including prospective and contingent liabilities. If your company is experiencing signs of financial distress, it is imperative that you take steps to discover whether the business is indeed insolvent. Section 122(1) of the Insolvency Act 1986 (as amended1) specifies 7 circumstances in which a COMI Maybe? 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 BNY Corporate Trustee Services Limited and others v Eurosail plc [2013] – UK Supreme Court considers the meaning of the ‘Balance-Sheet Insolvency Test’ 31 May 2013 Practice Area: Insolvency and Restructuring. The decision … Regulatory Information | Privacy Policy – Global | Privacy Policy – EU | Manage Cookies. This Practice Note will give a basic overview of the applicable tests for cashflow and balance sheet insolvency under section 123 of the Insolvency Act 1986 (IA 1986), in particular in the light of the Supreme Court decision in BNY Corporate Trustee Services v Eurosail-UK 2007-3BL (the Eurosail decision).. The premise is unfounded, as multiple defaults was an inappropriate criterion for commercial insolvency tests. On new deals, Eurosail may encourage borrowers to argue that the … Lord Neuberger’s description in the Court of Appeal of s123(2) being a “point of no return” test “should not pass into com… On 9 May 2013 the Supreme Court unanimously dismissed the appeal and cross-appeal in BNY Corporate Trustee Services Ltd & Ors v Neuberger Berman Europe Ltd & Ors; BNY Corporate Trustees Services Ltd & Ors v Eurosail-IK 2007-3BL PLC [2013] UKSC 28. View our summary of the Court of Appeal decision in Eurosail, upheld in outcome on appeal, here. Facility agreements almost always contain events of default based on a borrower's insolvency. Eurosail: the balance-sheet insolvency test clarified The question as to whether a company is insolvent or not is not only relevant to creditors who might wish to present winding up petitions against debtors. The case involves a “special purpose entity” (Eurosail) set up … Background. Salisbury House
This is the first time that UK’s highest court has had to interpret the balance sheet test at S123(2) of the Insolvency Act 1986. In Eurosail, the Supreme Court appears to have relied on a two-tier exercise while applying the balance sheet insolvency test set forth in IA 1986 s.123(2). Section 123 of the Insolvency Act 1986 includes both a cash flow and balance sheet test of insolvency. The case involves a “special purpose entity” (Eurosail) set up to purchase a portfolio of mortgages on UK residential property by the issue of loan notes. In BNY Corporate Trustee Services Limited V Eurosail-UK [2013] UKSC 28, the Supreme Court has clarified the meaning of the insolvency tests under Sections 123 (1)(e) and 123 (2) of the Insolvency … Section 123 of the Insolvency Act 1986 includes both a cash flow and balance sheet test of insolvency. THE STATUTORY TEST FOR INSOLVENCY - S 123 IA 1986 BNY Corporate Trustees Services Limited & Ors v Eurosail- UK 2007 -3BL PLC [2013] UKSC 28 Christopher Brockman & Richard Ascroft, Guildhall Chambers Introduction 1. The underlying portfolio comprised various currencies and a currency swap agreement was therefore crucial to Eurosail, which was intended to be “insolvency remote”. In BNY Corporate Trustee Services Limited V Eurosail-UK [2013] UKSC 28, the Supreme Court has clarified the meaning of the insolvency tests under Sections 123 (1)(e) and 123 (2) of the Insolvency … 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 Supreme Court held that the existence of the PECO (enabling a trustee to buy in the issuer’s outstanding notes at a nominal price) did not affect the assessment of the balance sheet solvency of Eurosail. The views expressed in this publication reflect those of the authors and are not necessarily the views of Weil London or of its clients. In summary the Supreme Court held as follows: About the cash-flow and the balance sheet tests: The cash-flow and balance sheet tests provide independent but related bases upon which a creditor can ask the court to order a company be wound up on the grounds that it is ’unable to pay its debts’. The Supreme Court upheld the Court of Appeal’s decision that Eurosail was not “balance sheet insolvent” under the s123(2) test, holding that: 1. the fact that a company’s latest audited balance sheet showed a net deficit did not necessarily mean that the company was “balance sheet insolvent” for the purposes of s123(2) IA; 2. instead, the court must be satisfied that, on the balance of probabilities: 3. BNY Corporate Trustee Services Limited v Eurosail-UK 2007-3BL PLC [2013] UKSC 28. The Supreme Court clarifies that the ‘balance sheet insolvency’ test is fact specific 2 Eurosail’s latest audited balance sheet showed a net deficit of over £74m. The Supreme Court has recently provided clarification of the balance sheet test of corporate insolvency contained in section 123(2) of the Insolvency Act in a long- running case related to the collapse of the Lehman Brothers Group in October 2008. This website is maintained by Weil, Gotshal & Manges LLP in New York, NY © 2021 Weil, Gotshal & Manges LLP, All Rights Reserved. The loss of the swap agreement on the collapse of the Lehman Group led some of the noteholders to perceive that Eurosail was insolvent although some notes had already been repaid and the majority are not due for repayment until 2045. Introduction. The Supreme Court also held that the assessment of “balance sheet” insolvency for the purpose of Section 123(2) may differ from a company’s statutory balance sheet prepared in accordance with the requirements of the Companies Act 2006, in that it may need to take into account contingent assets or contingent liabilities which are not reflected in the statutory balance sheet. Originally published 8 March 2011. It is intended as general guidance only. These materials may contain attorney advertising. On new deals, Eurosail may encourage borrowers to argue that the … On 9 May 2013 the Supreme Court of England and Wales considered the "balance sheet test" for insolvency under section 123(2) of the Insolvency Act 1986 and refined the Court of Appeal’s earlier interpretation. Reference has also be made to Gittins v Serco Home Affairs [2012] EWHC 651 (Ch) at [33] to illustrate the test. Summary On 9 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 The UK Supreme Court has now unanimously confirmed the test for balance-sheet insolvency under section 123 of the Act in its … 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. The Supreme Court has unanimously affirmed the Court of Appeal's decision on the test for balance sheet insolvency under section 123(2) of the Insolvency Act 1986 (section 123(2)) (BNY Corporate Trustee Services Ltd and others v Eurosail-UK 2007-3BL PLC and others [2013] UKSC 28) (see box "The balance sheet test"). Introduction. Quotation with attribution is permitted. In BNY Corporate Trustees Services Ltd v Eurosail-UK 2007-3BL Plc [2013] UKSC 28, the English Supreme Court stated that balance sheet insolvency test required a court to be satisfied that, on the balance of probabilities, a company has insufficient assets to meet its liabilities, taking into account prospective and contingent liabilities. London Wall
Supreme Court’s decision The meaning of the "Balance Sheet Insolvency Test" is finally determined by the UK Supreme Court 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. 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. BNY Corporate Trustee Services Ltd and others v Eurosail-UK 2007-3BL PLC and others [2013] UKSC 28. Secondly, an insufficient understanding of the rationales of the commercial insolvency tests and the powerful image of multiple defaults that an insolvent company brings to mind were main reasons for the decision in Eurosail. UK’s Supreme Court rules it a question of judgment and steers a U–turn from ‘Point of No Return’ analysis UK’s Supreme Court has this week considered the application of the balance sheet test for insolvency in BNY Corporate Trustee Services Limited v Eurosail and others [2013] UKSC 28.. The Court of Appeal considered the balance sheet test for insolvency within s.123 (2) of the Insolvency Act, and held that Eurosail 3BL should not be considered balance sheet insolvent. For further information please contact Richard Baines, Partner and Head of Druces LLP’s Restructuring & Turnaround Group. On 9 May 2013 the Supreme Court of England and Wales considered the "balance sheet test" for insolvency under section 123(2) of the Insolvency Act 1986 and refined the Court of Appeal’s earlier interpretation. Although the facts of the case are esoteric, this is an important decision to the banking and finance sector as the insolvency of a corporate borrower is the key event of default in loan documents and other finance contracts. BNY Corporate Trustee Services Limited and others v Eurosail plc [2013] – UK Supreme Court considers the meaning of the ‘Balance-Sheet Insolvency Test’ 31 May 2013 Practice Area: Insolvency and Restructuring. Direct or indirect reference to these tests is prevalent throughout English-law finance documents, including those based on Loan Market Association standard forms, as a way of determining whether an event of default has occurred and/or termination clauses have been triggered. The 2013 Eurosail case stated that, when considering a … Eurosail: Balance Sheet Test of Insolvency. Many commercial agreements contain provisions in which events of default can be triggered by one party’s insolvency. The author sets out here solvency test requirements in both jurisdictions and possible implications arising from the recent landmark UK Supreme Court decision in BNY Corporate Trustee Services Ltd v Eurosail-UK-2007-3BL plc [2013] 1 WLR 1408 (the “Eurosail case”). Co-Contributor: Sally Willcock. E info@druces.com, This site uses cookies; for more information, please click here. The Supreme Court agreed with the conclusions of the High Court and the Court of Appeal that Eurosail, a special purpose securitisation vehicle which had issued loan notes by way of financing, was not balance sheet insolvent, but it did so based in part on slightly different reasoning from the lower courts. While Eurosail continued to pay interest and principal under the loan notes when due, a group of its noteholders commenced litigation, arguing that Eurosail was insolvent under the s123(2) balance sheet insolvency test. On Thursday 9 May, the Supreme Court delivered a hugely significant, conclusive judgment in relation to the widely-reported Eurosail 3BL (Lehman originated) RMBS transaction. The two tests *Costs information for Debt Recovery claims up to £100,000, * Costs information for Employment Tribunal claims, Mental Health, Capacity and Court of Protection, * Costs information for Uncontested Probate, * Costs information for Immigration applications and representation, Leasehold Extension and Collective Enfranchisement, * Costs information for Residential Conveyancing, Turnaround, Restructuring & Insolvency Briefing Notes, Site Designed and Built by Clever Marketing. Michael Rutstein . Since Eurosail, and most recently in Evans v. 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