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Turnaround, Restructuring & Insolvency Briefing Notes
Rent in administration proceedings: a headache for landlords
Richard Baines, Head of Druces LLP’s Business Turnaround, Restructuring and Insolvency team deals with developments in the law relating to the effect of the moratorium in administration proceedings on the rights of landlords to be paid rent due under the lease in this article first published in the May 2013 issue of the In-House Lawyer.
Eurosail: the Supreme Court provides clarification of the balance sheet test of corporate insolvency
Eurosail: the Supreme Court provides clarification of the balance sheet test of corporate insolvency
The Supreme Court has recently provided clarification of the balance sheet test of corporate insolvency contained in section 123(2) of the Insolvency Act in a long- running case related to the collapse of the Lehman Brothers Group in October 2008. The case involves a “special purpose entity” (Eurosail) set up to purchase a portfolio of mortgages on UK residential property by the issue of loan notes. The underlying portfolio comprised various currencies and a currency swap agreement was therefore crucial to Eurosail, which was intended to be “insolvency remote”. The loss of the swap agreement on the collapse of the Lehman Group led some of the noteholders to perceive that Eurosail was insolvent although some notes had already been repaid and the majority are not due for repayment until 2045.
The Supreme Court held that the balance sheet test in section 123(2) of the Act requires the court to be satisfied that, on the balance of probabilities, a company has insufficient assets to be able to meet all of its liabilities, including prospective and contingent liabilities. The Supreme Court also held that the assessment of “balance sheet” insolvency for the purpose of Section 123(2) may differ from a company’s statutory balance sheet prepared in accordance with the requirements of the Companies Act 2006, in that it may need to take into account contingent assets or contingent liabilities which are not reflected in the statutory balance sheet. The Court held that the assessment of balance sheet insolvency in section 123(2) is not concerned with “the point of no return” and held that phrase should not be used as a paraphrase for the effect of Section 123(2).
Another part of the decision was concerned with the effect of the post enforcement call option (PECO) on the solvency of Eurosail. The PECO is the mechanism to ensure the “insolvency remoteness” and is crucial in enabling the special purpose entity to achieve the best credit rating. The Supreme Court held that the existence of the PECO (enabling a trustee to buy in the issuer’s outstanding notes at a nominal price) did not affect the assessment of the balance sheet solvency of Eurosail. Although the facts of the case are esoteric, this is an important decision to the banking and finance sector as the insolvency of a corporate borrower is the key event of default in loan documents and other finance contracts.
The terms of section 123(2) are almost invariably incorporated into event of default clauses in loan documents and the current economic climate means that it is crucial to have a clear meaning attributed to the definition of the balance sheet test of corporate insolvency. BNY Corporate Trustee Services Limited v Eurosail-UK 2007-3BL PLC appeal  UKSC 28. For further information please contact Richard Baines, Partner and Head of Druces LLP’s Restructuring & Turnaround Group.
This note is not intended to be treated as legal advice. It is intended as general guidance only. It is based on the law in force in May 2013
Tambrook: The Court of Appeal Reverses First Instance Decision
In April 2013, the High Court refused to make an administration order under the cross-border assistance provisions of section 426 of the Insolvency Act. The first instance judge held that the Court had no jurisdiction to grant assistance in respect of a letter of request from the Royal Court of Jersey because there were no insolvency proceedings in existence or anticipated in Jersey.
Tambrook Jersey Limited (Tambrook) is registered in Jersey and has its centre of main interests (COMI) there, although the majority of its assets are in England. Tambrook owns property in England and had granted security over that property to a bank in England in respect of loan facilities. Tambrook defaulted on the loan and the sole director was advised to appoint administrators in England in order to arrange a sale, with the bank’s consent.
Because there is no procedure similar to administration available in Jersey, the bank made an application to the Royal Court of Jersey seeking assistance by way of a letter of request to the English Court. As a result, the Royal Court of Jersey issued the letter of request to the English High Court requesting assistance under section 426 (4) of the Insolvency Act by the appointment of administrators to Tambrook by the English court. Although there have been many applications of this kind before, the judge at first instance decided that it was not possible to “assist” a foreign Court where no foreign insolvency proceedings were on foot. The judge’s decision appears to be based on a narrow interpretation of the English court’s power to offer assistance.
However, the matter came before the Court of Appeal on 1 May 2013 and the appeal was allowed. This means that Jersey companies will be able to continue to seek an administration order in England as has been the practice for many years without the need for a parallel Jersey bankruptcy procedure. The Court of Appeal did not give detailed reasons, which are to follow. It is thought that the decision of the judge in the first instance was based on a narrow interpretation of section 426 Insolvency Act even though the case was one which the Court would likely have granted as it was in the interest of both the secured creditor and the company. Indeed, the judge at first instance noted that a number of similar successful applications for assistance from the Jersey Court had been received and accepted by the English Courts in the past.
For more information on this issue and on cross-border insolvency topics generally, please contact Richard Baines, a Partner in Druces LLP’s Business Turnaround, Restructuring & Insolvency team.This briefing note deals with the law as at 9 May 2013 and is intended as a general guide to the law only and is not intended to be applied to specific circumstances without further advice.
Freight forwarder’s contractual lien versus the administration moratorium
Partner Richard Baines’ article in the March issue of “The In-House Lawyer” discusses the case of Re La Senza Ltd (in administration) on general contractual liens which provides useful confirmation of the rights of holders of a contractual general lien over goods. Logistics services providers and other suppliers need to have an effective contingency plan to cope with the prospect of their retailer customers defaulting on payments or going into administration or liquidation. Following the latest round of high-street retailer collapses, including Comet, Jessops, Blockbusters, and HMV these issues are now highly relevant to freight forwarders, hauliers, shipping lines and other creditors with rights of lien. A copy of the article can be downloaded from the link below.
The Supreme Court in Rubin -v- Eurofinance and New Cap -v- Grant
The Supreme Court recently overturned the potentially ground-breaking Court of Appeal decisions in Rubin & Anor -v- Euro Finance SA and New Cap Reinsurance Corp -v- Grant & ors relating to the application of common law jurisdiction rules about the enforceability here of foreign judgments in insolvency proceedings.
This complex and detailed judgment has been analysed by Julian Johnstone, head of Druces LLP’s litigation team in a continuing series of articles published by Druces’ partners and fee-earners in the In-House Lawyer magazine. A copy of Julian’s article can be accessed and downloaded in the link below.
Wrongful trading, the benchmark for directors’ duties: recent developments
Richard Baines, Head of Druces LLP’s Business Turnaround, Restructuring and Insolvency team and Matthew McCormick, Trainee, outline recent developments in the law relating to wrongful trading in this article first published in September 2012 in The In-House Lawyer.
Winding Up Petitions
In this article, Winding up petitions, the sharpest debt recovery tool in the box?, published in The In-House Lawyer on 7 June 2012, Marie-Louise King, Partner in Druces LLP’s Commercial Litigation & Dispute Resolution team and Claire Rigby consider the use of winding-up petitions as a method of corporate debt collection and address some of the unintended consequences of doing so. Essential reading.
Administration Sales and TUPE: Normal Service Resumed
For many years, the accepted way to rescue a company and preserve employment and at the same time maximising return to creditors has been administration followed by the sale of the business and assets to a purchaser (usually by a ‘pre-pack’).
The automatic transfer of the employees to the purchaser under the Transfer of Undertakings (Protection of Employment) (TUPE) Regulations invariably applied to a business sale out of administration. That remained the case until 2006 when a new regime (TUPE Regulations 2006) came into effect on 6 April of that year. This introduced an element of uncertainty for purchasers, administrators and employees. Fortunately that uncertainty has now been resolved following a clear Court of Appeal Decision in Key2Law (Surrey) LLP -v- De’Antiquis .
Richard Baines, Head of Druces LLP’s Business Turnaround, Restructuring and Insolvency team and Scott Thistleton, a trainee solicitor at Druces LLP consider in detail the issues surrounding the uncertainty and its resolution by the decision in Key2Law in their latest article published in the In-House Lawyer, April 2012 issue
Administrations: Landlord and Tenant update
Summary: Richard Baines, Head of Druces’ Business Turnaround, Restructuring and Insolvency team, looks at the recent Court decisions relating to the impact of administrations on landlords and tenants, in an article first published in the InHouse Lawyer magazine in February 2012
Relevant to: Administrators, landlords and tenants
Court of Appeal confirms that TUPE applies to sales out of administrations
Confirming the approach taken by the Employment Appeal Tribunal in OTG v Barke, the Court of Appeal decided in the case of Key2Law (Surrey) LLP v De’Antiquis on 20 December 2011 that administration proceedings under Schedule B1 of the Insolvency Act 1986 cannot constitute “insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor” within the meaning of regulation 8(7) of the TUPE Regulations 2006. The decision means that in a sale of business by administrators the employees rights under TUPE should not be ignored or discounted. This decision is clearly as significant for buyers of business as for administrators. Please contact Richard Baines, Head of Druces’ Business Turnaround, Restructuring and Insolvency team for further information