BNY Corporate Trustee Services Ltd v Eurosail-UK 2007-3BL Plc and Others
| Jurisdiction | England & Wales |
| Judge | THE CHANCELLOR OF THE HIGH COURT,The Chancellor |
| Judgment Date | 30 July 2010 |
| Neutral Citation | [2010] EWHC 2005 (Ch) |
| Court | Chancery Division |
| Date | 30 July 2010 |
| Docket Number | Case No: HC10C01541 |
[2010] EWHC 2005 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Before: The Chancellor of The High Court
Case No: HC10C01541
Mr W Trower Qc & Mr D Allison (Instructed By Allen & Overy Llp) For The Claimant
Mr R Dicker Qc & Mr J Goldring (Instructed By Berwin Leighton Paisner Llp) For The 1st Defendant
Mr R Snowden Qc & Mr D Bayfield (Instructed By Brown Rudnick Llp) For The 7 th & 8 th Defendants
Mr G Moss Qc & Mr R Fisher (Instructed By Sidley Austin Llp) For The 2 nd To 6 th Defendants
Hearing dates: 20 and 21 July 2010
APPROVED JUDGMENT
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Introduction
On 16th July 2007 the first defendant (“Eurosail or the Issuer”) issued notes to an aggregate value of £660m as part of a securitisation transaction in relation to a portfolio of UK Residential Non-Conforming Mortgage loans with a face value of £650m. The notes are of five classes, A to E, divided into subclasses 1 to 3, variously denominated in and classified as euros (a), US$ (b) and £sterling (c). The A1 notes mature in 2027, all the rest in 2045. The rate of interest payable varies according to the class, currency denomination and maturity of the note. The Issuer's risk in relation to changes in interest and exchange rates was ‘hedged’ by means of interest and currency rate swaps with Lehman Brothers Special Financing Inc whose obligations thereunder were guaranteed by Lehman Brothers Holdings Inc. The securitisation transaction also included a Post Enforcement Call Option Agreement (“PECO”) which provides that in the event that the security for the notes is enforced and found to be insufficient to pay all amounts due in respect of them then an associate company of the Issuer is to have a call option in respect of the benefit of all the notes at a nominal price.
As the underlying residential mortgages are redeemed or enforced the proceeds are applied in accordance with one or other of two specified priorities, namely the priority of payments prior to or post enforcement. The former applies unless and until the claimant (“the Trustee”) serves an enforcement notice on Eurosail declaring the notes to be due and repayable following the occurrence of an event of default. One such event is:
“the Issuer … being unable to pay its debts as they fall due or, within the meaning of Section 123( 1) or (2) (as if the words “it is proved to the satisfaction of the court” did not appear in Section 123(2)) of the Insolvency Act 1986 (as that Section may be amended from time to time), being deemed unable to pay its debts;..
provided that..the Trustee shall have certified to the Issuer that such event is, in its sole opinion, materially prejudicial to the interests of the Noteholders.”
That subsection so amended reads as follows:
“A company is also deemed unable to pay its debts if… the value of the company's assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities”.
In September and October 2008 Lehman Brothers Holdings Inc and Lehman Brothers Special Financing Inc each filed for protection in the US under Chapter 11. The latter failed to pay the sums due under the swap agreements on 15th September 2008 or thereafter and the former has failed to comply with its guarantee. On 13th November 2009 the swap agreements were terminated and the Issuer has filed claims against both companies for its loss of in excess of $221m. But the failure of the Lehman Brothers Group and the termination of the swap agreements did not themselves constitute events of default in respect of the notes.
The second to sixth defendants (“the A3 Noteholders”) contend that the consequence of the failure of the Lehman Brothers Group and the changes in both interest and currency rates since July 2007 has been that the Issuer should now be deemed to be unable to pay its debts within the meaning of s.123(2) Insolvency Act 1986 and the Trustee should recognise that such inability is materially prejudicial to the interests of the noteholders so as to constitute an event of default. Earlier proceedings were disposed of by Sales J in his judgment given on 24th March 2009. Since then, in addition to the quantification of the loss to the Issuer arising from the swap terminations, there have been published the Financial Statements and Management Accounts of Eurosail made up to 30th November 2009 indicating net liabilities of approximately £75m and £130m respectively.
On 7th May 2010 the Trustee issued the Part 8 claim now before me raising two specific questions, namely:
“(1) Whether, without regard to the PECO, Eurosail is unable to pay its debts within the meaning of section 123(2) of the Insolvency Act 1986 (“the Act”) for the purposes of Condition 9(a)(iii) of the Conditions; and if the answer to question (1) is in the affirmative,
(2) Whether the PECO has the effect that Eurosail is [not un]able to pay its debts within the meaning of section 123(2) of the Act for the purposes of Condition 9(a)(iii) of the Conditions.”
The Trustee does not ask the Court to determine whether, if in answer to either question the Court concludes that the Issuer is, within that meaning, unable to pay its debts, that is a circumstance materially prejudicial to the interests of the noteholders.
Notices to noteholders drawing their attention to these proceedings have been given in accordance with the conditions under which the notes were issued on four occasions. In consequence the seventh and eighth defendants (“A2 Noteholders”) have been joined. Thus the parties before me include representative A2 and A3 noteholders but not noteholders of classes A1 or B to E. Counsel for the Trustee have considered whether there are any separate arguments open to noteholders of any of those classes which I ought to consider and have concluded that there are not. In addition they have considered whether the Trustee should seek any representation orders and have decided that no such orders are necessary.
Accordingly the two questions for my determination are those set out in paragraph 5 above. Counsel for the Issuer and the A2 Noteholders contend that I should answer the first in the negative and the second in the affirmative. Counsel for the A3 Noteholders contends for the exact opposite, namely an affirmative answer to the first and a negative answer to the second. I will deal with the submissions on those issues in due course but first it is necessary to consider the securitisation transaction in much greater detail.
The Securitisation Transaction
Crucial to the success of any such transaction is the credit rating conferred on the notes by the well known credit rating agencies, such as Standard & Poor's, Fitch and Moody's. In December 2005 Standard & Poor's published criteria for the benefit of potential issuers. One criterion is called “Insolvency Remoteness”. This requires, among other conditions, that the terms of the issue limit the liability of the issuer to its creditors to the value of the assets backing the notes subject to the rating. It was recognised that in the case of issuers in England and Wales such a provision might give rise to liabilities to tax and they were enjoined to implement suitable alternatives in order to mitigate the risk of a voluntary or involuntary insolvency proceeding. Other contemporary articles relating to the published criteria suggest that the PECO is a commonly used alternative.
The Issuer is a special purpose vehicle designed for use in this transaction but no others. It was incorporated in England and Wales on 8th May 2007 as a company limited by shares. Its share capital is held by a parent company the shares in which are held on exclusively charitable trusts. It was incorporated specifically to acquire a portfolio of residential mortgages loans held by eight named mortgagees or their associates. The first step in the securitisation transaction was the acquisition of the benefit of those mortgage loans by the Issuer. The mortgage loans so acquired had a face value of £650m less £5. The price paid by the Issuer was £646m less £5 funded from the proceeds of the issue of the notes. The note issue raised, in all, £659,750,000. £13,750,000 of that was used to pay the costs and to fund two special reserves. Accordingly the margin between assets and liabilities (£4m on £650m) was always small (0.62%).
As I have already indicated the notes so issued consisted of 5 basic classes with three sub-classes and a choice of three currencies. The Terms and Conditions (“the Conditions”) on which they were issued were set out in the Prospectus published by Lehman Brothers, as arranger and lead manager, on 13th July 2007. Condition 1 deals with the form, denomination and title of the notes. Condition 2 covers their status, security and administration. Condition 2(a) provides for the notes of each class to constitute direct, secured and unconditional obligations of the Issuer ranking pari passu without preference or priority amongst notes of the same class. It is not disputed that this provision (and others to the like effect) provides for unlimited recourse to the Issuer by its creditors. Condition 2(b) refers to the pre and post enforcement priorities to which I have referred. Conditions 2(c)-(e) deal with certain provisions of the Trust...
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