BNY Corporate Trustee Services Ltd and Others v Neuberger Berman Europe Ltd (on behalf of Sealink Funding Ltd) and Others
| Jurisdiction | England & Wales |
| Judge | Lord Carnwath,Lord Neuberger,Lord Mance,Lord Clarke,Lord Sumption,Lord Walker,Lord Hope |
| Judgment Date | 29 April 2015 |
| Neutral Citation | [2013] UKSC 28 |
| Court | Supreme Court |
| Date | 29 April 2015 |
[2013] UKSC 28
Lord Hope, Deputy President
Lord Walker
Lord Mance
Lord Sumption
Lord Carnwath
Appellant/Cross-respondents
Gabriel Moss QC
Richard Fisher
(Instructed by Sidley Austin LLP)
2 nd Respondent/Cross-appellant
Robin Dicker QC
Jeremy Goldring
(Instructed by Berwin Leighton Paisner LLP )
1 st Respondent
David Allison
(Instructed by Allen & Overy LLP)
Heard on 25 and 26 February 2013
Lord Walker (with whom Lord Mance, Lord Sumption and Lord Carnwath agree)
Sections (1) and (2) of section 123 of the Insolvency Act 1986 ("the 1986 Act") provide as follows:
"(1) A company is deemed unable to pay its debts –
(a) [non-compliance with a statutory demand for a debt exceeding £750 presently due]
(b) to (d) [unsatisfied execution on judgment debt in terms appropriate to England and Wales, Scotland and Northern Ireland respectively]
(e) if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due.
(2) 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."
A company in the situation described in subsection (1)(e) is often said to be "cashflow" insolvent. A company in the situation described in subsection (2) is often said to be "balance-sheet" insolvent, but that expression is not to be taken literally. It is a convenient shorthand expression, but a company's statutory balance sheet, properly prepared in accordance with the requirements of company law, may omit some contingent assets or some contingent liabilities. 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. This appeal is concerned with the construction and effect of section 123(1)(e) and (2) as incorporated into the documentation of an issue of loan notes.
The statutory provisions were incorporated, with some small modifications, into the conditions applicable to loan notes issued in the course of a securitisation transaction comprising a portfolio of non-conforming mortgage loans secured on residential property in the United Kingdom. The issuer is Eurosail-UK 2007–3BL plc ("Eurosail"), one of many similar single purpose entities ("SPEs") set up by the Lehman Brothers group (but off the balance sheet of any of that group's companies) not long before its collapse. Eurosail is the principal respondent to this appeal, and it has a cross-appeal on a subsidiary issue. The other respondent appearing before this court, BNY Corporate Trustee Services Ltd ("the Trustee") is part of the BNY Mellon Group. It is the trustee for the holders ("Noteholders") of loan notes of various classes issued by Eurosail. It has adopted a neutral attitude in the proceedings (as explained in its written case), and has not appeared by counsel before this court. But it will, in the event that the appeal succeeds and the cross-appeal fails, have an important judgment to make as to material prejudice to the Noteholders' interests.
In 2007 Eurosail (described in the documentation as "the Issuer") acquired a portfolio of mortgage loans, secured on residential property in England and Scotland and denominated in sterling, to the principal amount of approximately £650m. Most of the mortgages were regarded as "non-conforming" in that they did not meet the lending requirements of building societies and banks. This purchase was funded by the issue on 16 July 2007 of loan notes in five principal classes (A, B, C, D and E) comprising 14 different subclasses, some denominated in sterling, some in US dollars and some in euros. In the designation of the classes "a" indicated that the loan was denominated in euros, "b" US dollars and "c" pounds sterling. The senior (class A) notes were divided into three sub-classes, denominated in one of the three currencies, designated and issued as follows:
The B, C, D and E Notes were issued in smaller amounts, with variations in currency but no subclasses having different priorities as between themselves. There were also some notes designated as ETc "revenue-backed" notes. The total sum raised was just under £660,000,000. After payment of costs and expenses of the issue the initial surplus of assets over prospective liabilities (if taken at face value) was quite small.
| A1b | US$200,000,000 |
| A1c | £102,500,000 |
| A2a | € 64,500,000 |
| A2b | US$100,000,000 |
| A2c | £ 63,000,000 |
| A3a | €215,000,000 |
| A3c | £ 64,500,000 |
The provisions of section 123(1) and (2) of the 1986 Act are incorporated into an important provision in the conditions of issue of the Notes ("the Conditions"). Condition 9(a) (events of default) provides that the Trustee may on the occurrence of any of five specified events (an "Event of Default") serve on Eurosail a written notice (an "Enforcement Notice") declaring the Notes to be due and repayable. In some circumstances the Trustee is obliged to serve such a notice. In the absence of an Event of Default the A1 Notes were repayable in 2027 at latest (in fact they have already been repaid, as have the revenue-backed notes). All the other Notes are repayable in 2045 at latest.
The Events of Default include (Condition 9(a)(iii)):
"The Issuer, otherwise than for the purposes of such amalgamation or reconstruction as is referred to in sub-paragraph (iv) below, ceasing or, through or consequent upon an official action of the Board of Directors of the Issuer, threatens to cease to carry on business or a substantial part of its business or being unable to pay its debts as and when 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…"
Under a proviso to Condition 9(a), an occurrence falling within sub-paragraph (iii) counts as an Event of Default only if the Trustee certifies to Eurosail that it is, in the Trustee's sole opinion, materially prejudicial to the interests of the Noteholders.
The service of an Enforcement Notice would have immediate and far-reaching consequences for all the Noteholders (other than the A1 and ETc Noteholders, whose Notes have already been fully redeemed). As described in more detail below, an Enforcement Notice shifts their rights from the regime prescribed in Condition 2(g) (priority of payments prior to enforcement) to the regime prescribed in Condition 2(h) (priority of payments post-enforcement). Under the latter regime Noteholders of Class A3 ("A3 Noteholders") rank pari passu with Noteholders of Class A2 ("A2 Noteholders") for repayment of principal. That is in contrast with the present regime, under which A2 and A3 Noteholders rank pari passu for interest payments (clause 2(g)(vi)) but A2 Noteholders have priority over A3 Noteholders in receiving repayments of principal out of funds representing principal sums received on the redemption of mortgages in the portfolio (those funds being included in the definition of "Actual Redemption Funds" in the preamble to the Conditions): Condition 5(b)(i)(2) and (3).
It is in these circumstances that the construction of section 123(2) of the 1986 Act, as incorporated into Condition 9(a)(iii), has assumed such importance. Eurosail, together with those of the A2 Noteholders who appeared below, succeeded before Sir Andrew Morritt C [2010] EWHC 2005 (Ch), [2011] 1 WLR 1200, and the Court of Appeal [2011] EWCA Civ 227, [2011] 1 WLR 2524. The Court of Appeal considered that section 123(2) should be interpreted broadly and in line with standards of commercial probity:
"A balance has to be drawn between the right of an honest and prudent businessman, who is prepared to work hard, to continue to trade out of his difficulties if he can genuinely see a light at the end of the tunnel, and the corresponding obligation to 'put up the shutters', when, by continuing to trade, he would be doing so at the expense of his creditors and in disregard of those business considerations which a reasonable businessman is expected to observe."
(That is a quotation from paragraph 216 of the Report of the Review Committee on Insolvency Law and Practice (1982) (Cmnd 8558), better known as the Cork Report, reflecting the view of Professor Goode; this passage is quoted in para 54 of the judgment of Lord Neuberger MR in the Court of Appeal). The appellant A3 Noteholders say that this passage is not in point. They have argued for a much stricter construction. They have emphasised that a company's inability to pay its debts is no more than a precondition to the exercise of the court's jurisdiction, which is discretionary, to make a winding up order or an administration order. The precondition to be satisfied should be, they have argued, transparent and certain, leaving scope for the exercise of discretion on the hearing of the petition. There has also been argument as to whether the statutory text (as incorporated in an amended form, and also allowing for possible future legislative amendment) must bear the same meaning as it would in actual winding-up proceedings, or whether it can and should, as incorporated, take account of the commercial context of the Conditions.
Those, in outline summary, are the positions of the...
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