Share on LinkedIn Tweet This Share on Facebook Share Tweet Share BNY Corporate Trustee Services Limited and others v Eurosail-UK Dear Reader,Judgment has been handed down today in the case of BNY Corporate Trustee Services Limited and others (Respondents) v Eurosail-UK 2007-3BL PLC (Appellant)  UKSC 28. The Supreme Court had to consider the construction and effect of section 123(1)(e) Insolvency Act 1986 (“cash-flow” insolvent) and section 123(2) Insolvency Act 1986 (“balance-sheet” insolvent) as incorporated into the documentation of an issue of loan notes. The statutory provisions were incorporated into the conditions applicable to loan notes issued in the course of securitisation transactions compromising "sub-prime" mortgage loans secured on residential homes in the UK. Judgment The problem with the provisions of the Insolvency Act 1986 was highlighted by Lord Walker at  of his judgment: “Section 123(1)(e) introduced the words 'as they fall due' and section 123(2) has introduced a direct reference to a company’s assets and liabilities. These two provisions, both labelled as 'deeming' provisions (though neither is obviously of that character) stand side by side in section 123(1)(e) and section 123(2) with no indication of how they are to interact”. The Supreme Court sought to define the meaning of “cash-flow” insolvent and “balance-sheet” insolvent in order to determine the relationship between the two provisions. Lord Walker determined that the cash-flow test concerned not only the petitioner’s own presently-due debt, nor the other presently-due debt owed by the company, but also with debts falling due from time to time in the reasonably near future. The express reference to assets and liabilities (balance-sheet insolvent), he reasoned, was a practical recognition that once the court moves beyond the “reasonably near future”, any attempt to apply a cash-flow test would become too speculative, and at this stage the only sensible test for the courts to apply was a comparison of present assets with present and future liabilities. The burden of proof would be on the party which asserts balance-sheet insolvency; whether or not the test is satisfied will depend on the available evidence as to the circumstances of a particular case (see  and  of his judgment). The Supreme Court rejected the test of a company reaching “the point of no return”, which had been applied by Lord Neuberger MR in the Court of Appeal. Lord Walker stated that “the 'point of no return' test…. is not the correct test, if and in so far as it goes beyond the need for a petitioner to satisfy the court, on the balance of probabilities, that a company has insufficient assets to be able to meet all its liabilities, including prospective and contingent liabilities. If it means more than that, it is unhelpful…”Lord Walker adopted the approach of Toulson LJ who stated: “Essentially, section 132(2) requires the court to make a judgment whether it has been established that, looking at the company’s assets and making proper allowance for its prospective and contingent liabilities, it cannot reasonably be expected to be able to meet those liabilities. If so, it will be deemed insolvent although it is currently able to pay its debts as they fall due. The more distant the liabilities, the harder this will be able to establish”. The Supreme Court has therefore affirmed that in applying the provisions of the Insolvency Act 1986, the court must apply both the cash-flow and balance-sheet test so as to avoid a situation where current and short-term creditors would in effect be paid at the expense of creditors to whom liabilities fell due at a later date. For more information, please refer to the full judgment. Contact us Wendy Parker Brenna Conroy If you would like to discuss any of the topics in this article, please contact a member of our Practice Management Team: Paul Adams, Senior Practice ManagerElizabeth Bousher, Practice ManagerTo find out more about our Insolvency team and their work, visit the Insolvency and Restructuring page on our website.