BNY Corporate Trustees Services v Eurosail [2013]
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BNY Corporate Trustees Services Ltd v Eurosail-UK 2007-3BL Plc [2013] UKSC 28, often referred to as the Eurosail case, involved the Supreme Court of the United Kingdom's interpretation of Section 123(2) of the Insolvency Act 1986, focusing on the balance-sheet test as applied in commercial bond documentation. This case set the foundation for what is now known as the Eurosail test.
The matter revolved around the insolvency of Eurosail-UK 2007-3BL Plc, a special purpose entity created for a securitisation involving mortgage loans. The collapse of Lehman Brothers had repercussions on certain tranches of securities issued by Eurosail-UK 2007-3BL Plc, as Lehman Brothers could not meet its obligations under derivative contracts. The central question was whether the company should be considered insolvent immediately or if insolvency should be determined when it faced an imminent inability to meet its obligations.
The Supreme Court decision had implications for the treatment of different tranches of noteholders and their entitlement to share losses resulting from Lehman's collapse. Additionally, the case addressed the effectiveness of the post-enforcement call option (PECO) in maintaining the company's bankruptcy remote status.
The Supreme Court rejected the point of no return test adopted by the Court of Appeal and emphasised the significance of prospective liabilities in assessing balance-sheet insolvency. Lord Walker, delivering the main judgment, underscored the need for caution when determining balance-sheet insolvency, especially in cases involving imponderable factors like currency and interest rate movements over an extended period. The court dismissed the notion of a fixed point of no return and advised against its adoption as a paraphrase of Section 123(2).
Lord Hope, in a concurring judgment, supported Lord Walker's reasoning and offered insights on the PECO. Although the PECO became irrelevant due to the court's finding of non-insolvency, Lord Hope clarified that, in assessing insolvency, assumptions about the PECO's impact on liabilities should not be made. This decision had broader implications for the securitisation market, particularly regarding the use of PECOs.
In summary, this case clarified the approach to balance-sheet insolvency, rejected the point of no return concept, and provided guidance on the limited efficacy of PECOs in the context of securitisation transactions.
The matter revolved around the insolvency of Eurosail-UK 2007-3BL Plc, a special purpose entity created for a securitisation involving mortgage loans. The collapse of Lehman Brothers had repercussions on certain tranches of securities issued by Eurosail-UK 2007-3BL Plc, as Lehman Brothers could not meet its obligations under derivative contracts. The central question was whether the company should be considered insolvent immediately or if insolvency should be determined when it faced an imminent inability to meet its obligations.
The Supreme Court decision had implications for the treatment of different tranches of noteholders and their entitlement to share losses resulting from Lehman's collapse. Additionally, the case addressed the effectiveness of the post-enforcement call option (PECO) in maintaining the company's bankruptcy remote status.
The Supreme Court rejected the point of no return test adopted by the Court of Appeal and emphasised the significance of prospective liabilities in assessing balance-sheet insolvency. Lord Walker, delivering the main judgment, underscored the need for caution when determining balance-sheet insolvency, especially in cases involving imponderable factors like currency and interest rate movements over an extended period. The court dismissed the notion of a fixed point of no return and advised against its adoption as a paraphrase of Section 123(2).
Lord Hope, in a concurring judgment, supported Lord Walker's reasoning and offered insights on the PECO. Although the PECO became irrelevant due to the court's finding of non-insolvency, Lord Hope clarified that, in assessing insolvency, assumptions about the PECO's impact on liabilities should not be made. This decision had broader implications for the securitisation market, particularly regarding the use of PECOs.
In summary, this case clarified the approach to balance-sheet insolvency, rejected the point of no return concept, and provided guidance on the limited efficacy of PECOs in the context of securitisation transactions.
