Supreme Court decides there is no point to the 'point of no return' test for insolvency defaults

By Brian Cain

The wording of the provisions contained in section 123 of the Insolvency Act 1986 is often incorporated into finance documents — in the instant case some loan notes — so that an event of default will occur if the debtor becomes insolvent within the meaning of the section.

Eurosail was a Lehman Brothers group special-purpose vehicle (SPV) set up to be the issuer of the relevant series of notes. BNY was the trustee of the loan notes. Section 123 with some minor modifications that are not material was incorporated into the notes. If Eurosail was unable to pay its debts within the meaning of section 123, BNY then had to decide whether to certify that occurrence as being materially prejudicial to the interests of the noteholders. If BNY certified Eurosail was unable to pay its debts within the meaning of section 123, there was an event of default. The effect of that would be to materially alter the ranking of the various noteholders in relation to their priority for payment of principal due on the notes. There was consequently a dispute between the noteholders of various classes as to how section 123 and the provision in the notes should be construed and applied. The question for the Supreme Court was whether Eurosail was unable to pay its debts as they fell due within the meaning of section 123…

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