BNY Corporate Trustee Services Ltd v Eurosail- UK 2007- 3BL Plc & Ors

For the purposes of Insolvency Act 1986, section 123(2), contingent and prospective liabilities cannot simply be added to present liabilities at face value. The court must assess the company’s present assets and consider the timing, currency, likelihood and funding of future liabilities in the commercial context.

Present claims, including unadmitted claims in a liquidation, may be assets and should be valued accordingly. A post-enforcement call option does not reduce the issuer’s liabilities unless and until the option company releases them. Insolvency remoteness and the existence of an event of default are distinct concepts.

The claimant trustee sought declarations concerning whether Eurosail, a securitisation issuer, was unable to pay its debts under section 123(2) of the Insolvency Act 1986, as incorporated into the notes’ events of default provisions.

The dispute arose after the failure of Lehman Brothers’ swap counterparties, currency losses and financial statements showing net liabilities. The first question concerned the proper treatment of present, contingent and prospective liabilities. The second concerned whether the post-enforcement call option altered that analysis.

1. Section 123(2) analysis. The statutory comparison is between the value of the company’s present assets and the amount of its liabilities, taking account of contingent and prospective liabilities. Future liabilities cannot simply be aggregated at face value with present debts. The court must consider the relevant facts, including when the liability falls due, its currency, the assets available to meet it and any allocation of losses.

2. The Issuer’s claims in the Lehman liquidations were present assets, although unadmitted. They could be included at their present value, which the evidence suggested was approximately 35–37 per cent of face value. Annual financial statements were not determinative because the statutory exercise was not the preparation of an accounting balance sheet.

3. Future currency liabilities due on notes maturing in 2045 could not be treated as presently payable at the spot exchange rate. Currency movements were speculative, and any liability dependent on future movements was not then a liability of material value for section 123(2). Losses attributable to the underlying mortgage pool were substantially self-cancelling through the Principal Deficiency Ledger.

4. The Issuer had paid all interest, had no Principal Deficiency Ledger deficit and was projected to redeem the relevant A notes before their stated maturities. The evidence therefore did not establish a present deficiency in assets. The first question was answered in the negative.

5. The PECO did not alter the result. It did not affect the Issuer’s liabilities because the option company was under no obligation to release the Issuer, and the option had not been exercised. It could make a winding-up petition less likely, but it did not affect whether an event of default existed. Insolvency remoteness and an event of default were different concepts.

6. A declaration was made that, whether or not the PECO formed part of the transaction, Eurosail was not unable to pay its debts within section 123(2) for the purposes of Condition 9(a)(iii).

Earlier proceedings were disposed of by Sales J on 24 March 2009. No appellate history of the present proceedings is stated in the judgment.