Golden Key Ltd, Re Insolvency Act 1986

In a structured investment vehicle, contractual payment priorities govern the distribution of secured assets. Where the documents provide for payment of maturing commercial paper on a pay-as-you-go basis before an Acceleration Redemption Date, that regime continues until the specified date occurs. A mandatory acceleration notice does not postpone notes which have already matured, and does not postpone notes maturing before the notice is served unless the contractual language clearly requires that result. Insolvency concepts such as pari passu distribution cannot be imported into an insolvency-remote contractual structure unless the documentation provides for them.

Golden Key Ltd was a highly leveraged structured investment vehicle whose assets secured commercial paper and other obligations. Following breaches of contractual tests in August 2007, a Wind Down Event and an Enforcement Event were confirmed, and the Security Trustee served notice of a Mandatory Acceleration Event. The Acceleration Redemption Date was 23 September 2007.

The receivers sought directions under section 35 of the Insolvency Act 1986 concerning the application of funds received between 21 August and 23 September 2007. The principal issues were whether the pre-acceleration or post-acceleration priority provisions applied, whether maturing commercial paper had to be paid in maturity-date order, and whether the acceleration notice postponed notes maturing on 23 or 24 August 2007.

1. Priority regime. The receivers were required to apply funds received between 21 August and 23 September 2007 under the priorities applicable before the Acceleration Redemption Date. Section 7.4 of the CTSA applied only upon the occurrence of that date; before then, sections 7.3 and 7.5 governed.
2. Pay-as-you-go payments. Sections 7.3 and 7.5, read together, required available funds to be used to defease commercial paper and to redeem maturing paper on its stated maturity date. The contractual scheme therefore gave priority to commercial paper maturing before 23 September over later paper. The result was not a contractual subordination of one class of Senior Obligations to another, because all noteholders held their paper on the same terms.
3. Effect of acceleration. Section 5 of the Terms of the Notes did not postpone notes which had already matured before the Mandatory Acceleration Event. Nor did it postpone notes maturing after that event but before receipt of the Acceleration Redemption Notice. Clear language would have been required to defeat vested rights to immediate payment under section 4.
4. Trust machinery. The failure to establish or fund the Note Defeasance Account did not defeat rights which would have accrued if the contractual machinery had been operated properly. The relevant question concerned the substantive rights of beneficiaries under the security trust, rather than the defective operation of administrative accounts.
5. Insolvency concepts and authorities. The parties had created an insolvency-remote structure, so analogies with ordinary pari passu insolvency distribution carried limited weight. Re Whistlejacket Capital Management Limited [2008] EWCA Civ 575 was distinguishable because its documentation contained a single priority regime and did not expressly provide for pay-as-you-go payments. The reasoning in Re Sigma Finance Corporation (in Administrative Receivership) [2008] EWCA Civ 1303 provided assistance in recognising that contractual bargains must be enforced even where the result differs from ordinary insolvency expectations.
6. Notice and timing. The contractual change of operating state depended on written notice. The alternative argument that an Insolvency Event arose merely from non-payment failed on construction and on the evidence. Any postponement did not apply to paper with stated maturity dates of 23 or 24 August 2007, because the relevant notes had already become due and payable before the notice could affect them.

The first three questions were answered in favour of the Shorts. The fourth question was also answered so that the 23 and 24 August notes were not postponed.