Cheyne Finance Plc ((in Receivership)) v The Insolvency Act 1986

JurisdictionEngland & Wales
Judgment Date17 October 2007
Neutral Citation[2007] EWHC 2402 (Ch)
Docket NumberNo.6745 of 2007
CourtChancery Division
Date17 October 2007

(in Private)

In The Matter Of Cheyne Finance Plc (in Receivership)
In The Matter Of The Insolvency Act 1986

[2007] EWHC 2402 (Ch)


Mr. Justice Briggs

No.6745 of 2007




Royal Courts of Justice

Mr. R. Sheldon QC and Mr. B. Isaacs (instructed by Lovells) appeared on behalf of the Receivers.

Mr. W. Trower QC and MR. R. Fisher (instructed by Hunton & Williams) appeared on behalf of Party A.

Mr. S. Mortimore QC and MISS H. Stonefrost (instructed by Milbank Tweed, Hadley and McCloy LLP) appeared on behalf of Party B.

Mr. M. Pascoe QC and MR. D. Allison (instructed by Ashurst and Kay Scholer LLP) appeared on behalf of Party C.

Mr. S. Isaacs QC and Mr. D. Bayfield (instructed by Jones Day, Herbert Smith and Sidley Austin) appeared on behalf of Party D.


This is a second urgent application for directions by Receivers of the business and assets of Cheyne Finance Plc (“Cheyne”), appointed on 4 th September 2007 pursuant to a Security Trust Deed (“the Trust Deed”) dated 3 rd August 2005 between Cheyne and the Bank of New York.


I heard and determined an earlier application in mid-September. The opening paragraphs of my judgment on that application are a sufficient general introduction to this application.


That application raised an issue as to how the Receivers should apply monies coming into their hands during the period between their appointment and the happening, if one should happen, of an Insolvency Event, as defined. That issue turned on a question of construction of the Trust Deed. The only factual assumption then required was that at that time an Insolvency Event had not occurred.


My decision on that application, which has not been appealed, was that pending the happening of an Insolvency Event the Receivers should apply monies coming into their hands, first, in prompt payment of the debts of Senior Creditors and any prior debts as and when they fell due; secondly, in making provision for payment of the same classes of debt not yet due and, if that left any surplus – which then seemed unlikely, at least in the short term – in the manner provided for in the payment priority established in clause 12.1(c) and following of the Trust Deed.


I shall refer in this judgment to debts of Senior Creditors and those ranking in priority to them collectively as “Senior Debts”. I use that phrase rather than “Senior Obligations”, which is a defined term with a slightly narrower meaning in the Common Terms Agreement.


I preferred the “pay as you go” construction over a rival “pari passu” construction pursuant to which full provisioning for payment of all Senior Debts was to take precedence over payment on time and in full of such debts as and when they fell due. I was not asked by the Receivers on that occasion to construe the definition of “Insolvency Event” in the Common Terms Agreement, principally because, as at that time, the Receivers had not formed the view that Cheyne was insolvent on any arguable construction of that definition, or even that Cheyne was balance sheet insolvent, a concept apparently deliberately omitted from the Common Terms Agreement and Trust Deed by confining the incorporation of the Insolvency Act definition so as to exclude s.123(2).


It appeared to be more or less assumed, both by the Receivers and the proponents of the rival arguments on that occasion, that for as long as the Receivers had the wherewithal to pay Senior Debts actually due and those falling due in the very near future then they could not make an Insolvency Event determination even though they regarded a default in payment of Senior Debts as inevitable in the middle or longer term future (see para.7 of my earlier judgment).


My determination of the issue of construction then raised did not depend upon that assumption about the meaning of Insolvency Event, and I then regarded it as one which might need to be tested if the Receivers' expectations as to Cheyne's longer term ability to pay its Senior Debts changed.


Intensive work which has since been carried out by and at the Receivers' direction into Cheyne's likely future cash flow has caused a change in the Receivers' expectations and has precipitated an urgent need for the meaning of the Insolvency Event definition to be determined.


The happening of an Insolvency Event depends upon a determination by the Receivers that Cheyne is, or is about to become, unable to pay its Senior Debts. The Receivers do not suggest that the courts should usurp their function by making that determination itself, a process which might involve factual issues being determined by an adversarial process. Rather they invite the court to decide whether, on certain assumed facts, Cheyne is or is about to become unable to pay its debts within the meaning of the Insolvency Event definition. They recognise that the fact-finding part of the task entrusted to them is to remain their responsibility and the invitation to the court to decide the insolvency question on assumed facts is in substance designed as a convenient vehicle for resolving all relevant issues of construction of the Insolvency Event definition.



These are stated fully but concisely in the second witness statement of Neville Barry Kahn, one of the three Receivers. Since they are, by definition, not in dispute before me I need only summarise their consequences. They are derived from work done by the Receivers in defining the dates upon which the Senior Debts will all fall due and the amounts falling due on each relevant date, and from work done and opinions formulated by the Receivers' chosen valuers on the amounts of cash capable of being made available for payment on those dates on various hypotheses as to the manner in which the Receivers carry out the necessary asset realisation programme.


By way of introduction, first, it is plain that Cheyne could not pay its Senior Debts in full as they fall due merely by letting its own investments run to maturity and collecting the resulting cash. The investments must be sold in an uncertain market before maturity so that any estimation of Cheyne's incoming cash flow is critically dependent upon assumptions about the future market for Cheyne's assets, and in particular about the effect on that market, in which Cheyne is a substantial player, of any particular sales campaign.


Secondly, in advising as to Cheyne's likely incoming cash flow in the future, its advisors have, I suspect prudently and inevitably, taken and projected forward present market values and avoided subjective guesswork as to where the market may move hereafter.


Thirdly, the valuers have subjected to intense scrutiny the effect upon realisations of Cheyne's marketing programme driven, as it is, by the need to meet predictable and extremely large payment obligations in the near and medium term future. Their opinion is that sales at the volume and rate required to pay Senior Debts as and when they fall due will probably incur forced sale discounts in ranges lying between 0 and 7 per cent, depending upon the class of asset involved.


The results of this exercise may be stated as follows:

(a) If the Receivers were able to avoid incurring any discounts from open market value by reason of the size and timing of their sales programme, they would, by selling at present market values, just be able to pay all Senior Debts on time and in full. The prospect of avoiding incurring such discounts is regarded by the Receivers, on advice, as unlikely.

(b) If forced sale discounts are encountered at the mid-point of each of the ranges advised by the valuers as being the most likely, then Cheyne will default in paying its Senior Debts as they fall due in February 2009, with a consequential shortfall as against debts falling due then or thereafter.

(c) If higher but still realistically possible discounts are incurred, default with a consequentially larger shortfall could occur as early as November 2008.

(d) The Receivers have considered whether there is any method of realisation of Cheyne's investment portfolio which holds out the prospect of realising better value than forced sales at the rate necessary to pay all Senior Debts in full and on time. Following tentative negotiations their present view is that best value would be obtained by a sale of the whole portfolio to an investment bank in return for an underwritten note. This would, they think, hold out a better and indeed realistic prospect of paying all Senior Debts in full but not on time, i.e. not in accordance with the maturity dates of those debts. This is because the cash flow profile required, when aggregated with Cheyne's existing cash assets to match the maturity dates of the Senior Debts, would not be obtainable on an underwritten note received on a negotiated sale of the investment portfolio.


Mr. Kahn summarises the position in his second witness statement as follows:

“As described above, the Receivers are currently in a position to continue with the 'pay as you go' approach to approximately 31 October 2007.

The Receivers also have a substantial investment portfolio of assets in their hands. However, the best current assessment is that the high level of asset sales required to continue with the 'pay as you go' approach would involve Cheyne Finance selling assets for discounted prices which would in turn deplete its balance sheet and render it unable to pay some of its late-maturing Senior Obligations.”


A recent further sale means that Cheyne can now pay due debts from liquid funds until 14 th November, but it is agreed before me that I should...

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