Ila Conference 2013 Eurosail on Trial – the Implications

ILA CONFERENCE 2013

EUROSAIL ON TRIAL – THE IMPLICATIONS

David Chivers QC – Erskine Chambers Jeremy Goldring – South Square Chambers David Allison – South Square Chambers

Introduction

1. The session will be spent exploring the arguments for and against the findings of the Court of Appeal in the Eurosail case, considering the wider implications of the decision, and discussing the possible approach of the Supreme Court on what represents the first opportunity for the highest court to consider the meaning of section 123 IA 1986 since its introduction onto the statute book more than 25 years ago.

2. This paper is intended to serve as an introduction to the issues that will be discussed during the session. It addresses the following topics:

(1) section 123 IA 1986 and its statutory context;

(2) the statutory history of section 123 IA 1986;

(3) the facts of the Eurosail case; and

(4) the findings of the Court of Appeal.

(1) Section 123 IA 1986

3. Section 123 is one of the four main sections in Chapter VI of Part IV of the IA86, concerned with the grounds and effect of winding up petitions.

4. Section 122(1) is headed “Circumstances in which company may be wound up by the Court”. Sub-paragraphs (a) to (g) identify those circumstances. One of the circumstances in which a company may be wound up is that the company is unable to pay its debts. Section 122(1) provides (in so far as relevant) that:

“A company may be wound up by the court if - …

(f) the company is unable to pay its debts,”.

5. Section 123 (headed “Definition of inability to pay debts”) then elaborates on the preconditions for the exercise of the statutory power granted to the Court in section 122(1)(f), by providing a definition of inability to pay debts. The raison d’etre for section 123 is to assist in answering the fundamental question raised by section 122(1)(f): is the company unable to pay its debts?

6. If, but only if, the company is unable to pay its debts, then the Court ‘may’ order it to be wound up under the IA 1986 pursuant to section 122(1)(f). The Court is not, therefore, required to make a winding up order once it is shown that a Company is unable to pay its debts.

7. Sections 123(1) and (2) provide as follows (underlining added):

“(1) A company is deemed unable to pay its debts— (a) if a creditor (by assignment or otherwise) to whom the company is indebted in a sum exceeding £750 then due has served on the company, by leaving it at the company’s registered office, a written demand (in the prescribed form) requiring the company to pay the sum so due and the company has for 3 weeks thereafter neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor, or (b) if, in England and Wales, execution or other process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part, or (c) if, in Scotland, the induciae of a charge for payment on an extract decree, or an extract registered bond, or an extract registered protest, have expired without payment being made, or (d) if, in Northern Ireland, a certificate of unenforceability has been granted in respect of a judgment against the company, or (e) if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due. (2) A company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities.” 8. Section 124 goes on to identify those entitled to present a winding up petition, which include “any creditor or creditors (including any contingent or prospective creditor or creditors)”. There is no statutory definition of “contingent creditor” or “prospective

creditor”, but it is obvious that the reference is to two different types of un-accrued claim (identified by Buckley LJ in Stonegate Securities v. Gregory [1980] 1 Ch 576, at 579D- E): (a) a “creditor in respect of a debt which will only become due in an event which may or may not occur”; and (b) a “creditor in respect of a debt which will certainly become due in the future, either on some date which has been already determined or on some date determinable by reference to future events”.

(2) Statutory history of section 123 IA 1986

9. The structure and much of the language of the provisions dealing with the Court’s power to wind up companies, including section 123 IA 1986, may be traced back to the Companies Act 1862. The phrase “unable to pay its debts” appeared in the Companies Act 1862, section 79(4), the equivalent to section 122(1)(f) IA 1986, giving the Court power to wind up a company “whenever the company is unable to pay its debts”.1 Section 80 of the 1862 Act, like section 123 IA 1986, provided the preconditions for the exercise of the statutory trigger to be found in the previous section:

“A company under this Act shall be deemed to be unable to pay its debts … (4) whenever it is proved to the satisfaction of the court that the company is unable to pay its debts.” 10. Section 82 of the 1862 Act permitted a creditor with an accrued but unpaid claim to petition on the basis of the company’s inability to pay its debts. But at this stage the power to wind up was limited:

(1) Creditors with merely contingent or future debts were not entitled to petition. Thus, a stockholder with a right to be redeemed in 100 years’ time or in respect of future interest which had not accrued due could not present a petition: see, for example, Re Melbourne Brewery and Distillery [1900] 1 Ch 453, at 457 (per Wright J).

(2) An inability to pay debts that would or might fall due in the future could not found the Court’s power to make a winding up order under section 79(4). Re European Life Assurance Society (1869) LR 9 Eq 122 concerned two petitions by shareholders, against a company that was paying its debts as they fell due. Sir

1 Similarly, section 79(5), the equivalent to section 123(1)(g), gave the court such jurisdiction “whenever the court is of the opinion that it is just and equitable that the company should be wound up”.

William James V-C held (at 127) that the debts referred to in section 80 were those “absolutely due – that is to say, debts for which a creditor may go at once to the company’s office and demand payment”.

The Companies Act 1907

11. The power to wind up companies on the basis of inability to pay debts under the 1862 Act was amended by s 28 of the Companies Act 1907. Headed “Reckoning of contingent liabilities on petition to wind up”, it provided (underlining added):

“In determining whether a company is unable to pay its debts within the meaning of section 80 of the Companies Act, 1862, the Court shall take into account the contingent and prospective liabilities of the company, and any contingent or prospective creditor shall be a creditor entitled to present a petition under section 82 of that Act: Provided that the Court shall not give a hearing to a petition for winding up the company by such a creditor, until security for costs has been given as the court thinks reasonable, and until a prima facie case shall also be established to the satisfaction of the Court.”

12. Much of the language of this amendment was derived from s 21 of the Life Assurance Companies Act 1870. Within a year of Re European Life Assurance Society, the power of the Court to make winding up orders against life insurance companies had been extended by s 21 of the Life Assurance Companies Act 1870, which had included the following:

“The Court may order the winding up of any company, in accordance with the Companies Act 1862, on the application of one or more policy holders or shareholders, upon it being proved to the satisfaction of the court that the company is insolvent, and in determining whether or not the company is insolvent the court shall take into account its contingent or prospective liability under policies and annuity and other existing contracts; But the Court shall not give a hearing to the petition until security for costs for such amount as the Judge shall think reasonable shall be given, and until a prima facie case shall also be established to the satisfaction of the Judge.”

13. The position in relation to ordinary companies following the 1870 Act, however, had remained that (a) only creditors with accrued debts could petition, and (b) only an inability to pay those debts could satisfy the requirement of section 80 of the 1862 Act. The Company Law Amendment Committee (Cd 3052)2, reporting in 1906, recommended reform of (amongst other things) the law relating to creditors’ winding up petitions. The

2 The Committee was appointed by the Board of Trade, whose President was David Lloyd-George MP: see page 1 of the Report.

mischief that section 28 of the 1907 Act was aimed at is clearly identified (para 45, underlining added):

“Greater facilities are also wanted, we think, for winding up insolvent companies at the instance of creditors whose debts are not immediately payable. As things stand, a creditor must, in order to obtain a winding up order, be in a position to prove that there is a debt currently payable to him from the company. If his debt is due on a current bill, bond or debenture, the time for payment of which has not yet arrived, he has no remedy by a winding up petition, and this although the company may be notoriously insolvent. In the meanwhile the company may be disposing of its assets to his prejudice or contracting new liabilities, and when at last his debt matures and he obtains a winding up order, he may find that the interim transactions, having been completed three months before the winding-up, cannot be impeached. In the case of life assurance companies the Life Assurance Companies Act, 1870, enables the Court to order a winding up on the application of any one or more policy holders, upon giving proof to the satisfaction of the Court that the company is insolvent; and in determining whether or not the company is insolvent, the Court is to take into account the company’s contingent or prospective liability under policies any annuity and other existing contracts. We think that the principle of this section should be extended to the case of other companies, and that a creditor, whose debt is not yet payable, should be at liberty to present a petition for winding up, and the court empowered to make an order, where insolvency is proved, taking into account the debts due and to become due. We think, too, that it should not be a bar to a winding up order that the assets are mortgaged to their full value, and, moreover, that it should be no bar to a winding up order that the petitioner, whether contributory or creditor, fails to prove that there are assets. These amendments, if adopted would, we think, make is possible to put an end by winding up proceedings to many objectionable companies.” 3

14. The effect of section 28 of the 1907 Act was to give both contingent and prospective creditors standing to present a winding up petition and to make contingent and prospective debts relevant to the Court’s power to wind up an ordinary company for the first time.4

15. Section 28 (like its equivalent in the 1870 Act) also recognised that petitions arising out of contingent or prospective claims could (in the words of Malins V-C5) be abusive “wreckers’ petitions” aimed at disrupting solvent companies. The company was therefore

3 As to the genesis of the 1907 Act, see Re British Equitable Bond and Mortgage Corporation [1910] 1 Ch 574, at 578 (per Neville J) adopting, in more measured language, the submission of Gore-Browne KC (at 577), a member of the 1906 Committee (see page (iii)). 4 The Committee also recommended that, for the first time, every limited company should be required to file a balance sheet: para 33. 5 See Re British Alliance Assurance Corporation (1878) LR 9 Ch D 635, at 640.

provided with the extra protections of (a) security for costs and (b) a requirement that the petitioner prove a prima facie case before the hearing of any petition.

The Companies Acts 1908, 1929, 1948 and 1985

16. When the Companies Acts were consolidated in 1908, the provisions relating to future or contingent creditors’ standing and their liabilities were divided, but their effect remained the same.6 Section 130 of the Companies (Consolidation) Act 1908 included the following:

“A company shall be deemed unable to pay its debts – (iv) if it is proved to the satisfaction of the court that the company is unable to pay its debts, and in determining whether a company is unable to pay its debts, the court shall take into account the contingent and prospective liabilities of the company.”

17. The language used in 1908 remained substantially the same in section 168 and section 169 of the Companies Act 1929, section 222 and section 223 of the Companies Act 1948 and section 517 and section 518 of the Companies Act 1985 (prior to its amendment by the Insolvency Act 1985).

The Insolvency Acts 1985 and 1986

18. The Insolvency Act 1985 (as well as altering the law of personal bankruptcy) amended the provisions in the Companies Act 1985 concerned with corporate insolvency including section 517 and section 5187. It introduced what became the wording used in s 123. Most of the provisions of the Companies Act 1985, amended by the Insolvency Act 1985, including section 518, were then consolidated into the IA 1986, where section 518 was numbered section 123. The IA 1986 came into force on 29 December 1986.

19. The Court of Appeal found that section 123(2) was not intended to change the law: see [54] to [58] per Lord Neuberger MR and [111] to [113] per Toulson LJ.

(3) Summary of facts in the Eurosail case

20. Eurosail-UK 2007-3BL PLC (the “Issuer”) is a special purpose company, incorporated in England and Wales.

6 See Re British Equitable Bond & Mortgage Corp [1910] 1 Ch 574, 579. 7 Insolvency Act 1985, Sch 6, paras 25, 27.

21. On 16 July 2007, the Issuer issued notes (the “Notes”) pursuant to the terms and conditions (the “Conditions”) set out in a Trust Deed of the same date. The trustee under the Trust Deed is BNY Corporate Trustee Services Limited (the “Trustee”), who acts as note trustee and security trustee of the holders of the Notes and certain other secured creditors pursuant to the terms of the Trust Deed and a Deed of Charge dated 16 July 2007.

22. The Notes were issued in different Classes, which are ranked in order of seniority from Class A through Class E. Within each Class, Notes were issued in a variety of sterling, US dollar and euro-denominated classes. The aggregate proceeds of the Notes amounted to €345,000,000, US $300,000,000 and £278,275,000.

23. Each Note is an interest bearing obligation of the Issuer. Condition 2(h) of the Notes provided that “The Noteholders have full recourse to the Issuer in respect of the payments [mentioned in Condition 2(h)], and are accordingly entitled to bring a claim under English law, subject to the Trust Deed, for the full amount of such payments in accordance with Condition 10.”

24. The interest payable on the Notes is linked to Sterling LIBOR, US Dollar LIBOR and EURIBOR, depending upon the currency in which such notes are denominated. The interest rate payable on the Notes differs as between Classes and subdivisions of Classes to reflect the different rights of the Noteholders and the dates on which the various Classes of Notes are anticipated to be repaid. The interest coupon payable on the A3 Notes is higher than the coupon paid on the other Class A Notes, but is lower than the interest coupon paid on all of the more junior Notes.

25. The A Notes represent the majority in value of all of the Notes, and are subdivided into Class A1, A2 and A3 Notes. The Class A1, A2 and A3 Notes are further subdivided into A1a, A1b, A1c, A2a, A2b, A2c, A3a, A3c Notes, reflecting the currencies in which they were issued (where a=Euro, b = US Dollar, c = Sterling).

26. Within the A Class of Notes, and prior to delivery of an Enforcement Notice by the Trustee in accordance with Condition 9 of the Notes, the A1 Noteholders are repaid principal before the A2 Noteholders, who are paid before the A3 Noteholders. Prior to the delivery of an Enforcement Notice by the Trustee, interest is paid on all Notes on an ongoing basis sequentially by class i.e. interest is paid to all Class A Noteholders on a

pari passu basis, then to all Class B noteholders etc. The Issuer is obliged to pay interest on the most senior class of Notes outstanding (i.e. the A Class) and, to the extent that it is able in accordance with the transaction documents, interest to the more junior Classes of Notes (albeit an inability to pay interest to the more junior Classes of Notes on any payment date does not give rise to an Event of Default).

27. The final maturity date of all of the Notes was June 2045, other than the Class A1 Notes for which the date was September 2027. The prospectus relating to the Notes anticipated that there might, depending upon the circumstances, be significant repayment of principal prior to the maturity dates from the amortization of loan assets during the course of the transaction.

28. The Issuer’s obligations in respect of the Notes are, pursuant to the terms of the Trust Deed and the Deed of Charge, secured against a portfolio of sterling-denominated non- conforming residential mortgage loans secured on properties in the United Kingdom, which loans were acquired by the Issuer with the proceeds of the issue of the Notes. As at the point of acquisition, the loan portfolio contained English and Scottish residential mortgage loans with a face value of approximately £649,999,995. The rates of interest payable, and redemption dates, varied within the mortgage portfolio. Funding for repayment of the liabilities on the Notes is derived from the income producing assets held by the Issuer (i.e. the mortgage loans).

29. The income stream from the loan portfolio is in Sterling but the Issuer was obliged to make substantial interest and principal payments in US Dollars and Euros. Therefore the Issuer entered into various currency exchange transactions in relation to its obligations under the Notes.

30. The various rates of interest payable on the mortgages were not aligned with the rates of interest payable on the Notes. Therefore the Issuer also entered into various interest rate hedging transactions in relation to its obligations under the Notes.

31. Both the currency exchange transactions and the interest rate hedging transactions (the “Swaps”) were entered into with Lehman Brothers Special Financing Inc. (the “Swap Counterparty”). The obligations of the Swap Counterparty under the Swaps were guaranteed by Lehman Brothers Holdings Inc (“LBHI”).

32. As reported in the Issuer’s Quarterly Investor Report for the quarter ending in June 2010, the aggregate Sterling equivalent of the principal due under the remaining Class A Notes was £439,119,876.93, and the aggregate outstanding principal balance of the remaining mortgages in the portfolio was £432,131,704.81. The aggregate Sterling equivalent balance of all remaining Notes then outstanding (including the A Notes) was £532,347,313.85.

PECO

33. The securitisation structure includes a Post Enforcement Call Option (“PECO”). Clause 3.1 of the PECO is the grant of an option, binding on all Noteholders by the Trustee on their behalf, to an affiliate company of the Issuer (referred to as OptionCo) “to acquire all (but not some only) of the Notes (plus accrued interest thereon) in the event that the Security for the Notes is enforced and the Trustee, after the payment of the proceeds of such enforcement, determines that the proceeds of such enforcement are insufficient, after payment of all claims ranking in priority to or pari passu with the Notes pursuant to the Deed of Charge, to pay in full all principal and/or interest and any other amounts whatsoever due in respect of the Notes. The Trustee shall promptly after the Security is enforced and the proceeds of such enforcement are paid, make a determination of whether or not there is such insufficiency. If the Trustee determines that there is such an insufficiency the Trustee shall forthwith give notice (the ‘Insufficiency Notice’) of such determination to OptionCo and the Issuer.”

Condition 9(a)(iii) of the Notes

34. The key provision of the Notes is Condition 9(a)(iii) which provides as follows:

“The Trustee may, at the Trustee’s discretion, or shall, if so requested in writing by the holders of not less than 25 per cent. in aggregate Sterling Equivalent Principal Amount Outstanding of the then outstanding Notes of the Most Senior Class of Notes, of if so directed by or pursuant to an Extraordinary Resolution of the holders of the then outstanding Notes of the Most Senior Class of Notes (subject in each case to the Trustee being indemnified and/or secured to its satisfaction), serve a notice (an “Enforcement Notice”) on the Issuer declaring, in writing, the Notes to be due and repayable (whereupon the Security shall become enforceable) at any time after the happening of any of the following events (each an “Event of Default”)…

(iii) the Issuer… within the meaning of Section 123(1) or (2) (as if the words “it is proved to the satisfaction of the court” did not appear in Section 123(2)) of the Insolvency Act 1986 (as that Section may be amended from time to time), being deemed unable to pay its debts; …

provided that, in the case of each of the events described in sub-paragraphs (ii) and (iii) of this paragraph (a), the Trustee shall have certified to the Issuer that such event is, in its sole opinion, materially prejudicial to the interests of the Noteholders.”

35. It can be seen that the occurrence of an Event of Default does not automatically lead to the service of an Enforcement Notice by the Trustee. There is the additional requirement of a direction by the Noteholders or the exercise of the Trustee’s discretion and the requirement that the Trustee has certified to Eurosail that such event is, in the Trustee’s sole opinion, materially prejudicial to the interests of the Noteholders.

36. If an Enforcement Notice were to be served by the Trustee, the principal on the Notes would become repayable immediately. The amounts that would otherwise be used to pay principal on the outstanding A2 (and subsequently A3 etc) Notes and the amounts that would otherwise be used to pay interest on the junior Notes, would be paid pari passu and pro-rata to the remaining holders of the A Notes as a single class (without priority inter se) towards the interest and principal due on such Notes. The Trustee would become entitled to enforce its security over the mortgage loans.

Loss of the Swaps

37. On 15 September 2008, LBHI filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. The Swap Counterparty subsequently failed to make certain scheduled payments under the Swaps due on 15 September 2008, and filed for Chapter 11 protection on 3 October 2008.

38. The Swaps were terminated on 13 November 2009 and the Issuer filed a claim against the Swap Counterparty and LBHI’s bankruptcy estate in the amount of $221,341,197.30. The Issuer has not purchased new hedging arrangements such that the transaction is unhedged and exposed to adverse movements in interest and currency rates.

39. Between August 2007 and June 2010:

(1) Sterling depreciated significantly against both the euro and the dollar; and

(2) the aggregate interest paid under the mortgages was greater than the interest which the Issuer had to pay out to holders of the Notes, thereby creating “Excess Spread” available to service certain parts of the debt arising under the Notes in accordance with the transaction documents.

40. In light of the loss of the currency hedge, the Issuer has (as permitted under the transaction documents) applied Sterling collections and realisations on the underlying mortgages at spot exchange rates which are unfavourable (as compared to the rates agreed in the Swaps) in order to meet the payments required in respect of the Notes denominated in Euro and US dollars.

41. The continuing payments enabled the A1 Noteholders to be fully repaid on 13 December 2010.

The Non-Payment Event of Default

42. As a result of the Swap Counterparty’s failure to make payments due under the Swaps, the Issuer failed to make scheduled payments of interest and principal due on the Class A1b and the Class A2b Notes on 15 September 2008 (which failure continued for more than three business days) resulting in an Event of Default occurring in respect of the Notes pursuant to Condition 9(a)(i) of the Notes (the “Non-Payment Event of Default”).

43. Following the giving of notice by the Trustee to the Noteholders of the Non-Payment Event of Default, certain of A3 Noteholders (holding approximately 25% of the total Class A Notes) purported to direct the Trustee to serve an Enforcement Notice on the Issuer. Certain of the A1c Noteholders purported to direct the Trustee not to serve such a Notice.

44. The Trustee sought directions by way of Part 8 Claim as to whether it was obliged to comply with the A3 Noteholder request in accordance with Condition 9(a) of the Notes, or whether there was a conflict of interest between the sub-classes of the Class A Notes such that, in accordance with paragraph 19(c) of Schedule 4 to the Trust Deed, a valid request was not duly made unless made by the requisite percentage of the holders of each sub-class.

45. On 12 and 24 March 2009, Sales J determined that the position adopted by the Trustee and the A1c Noteholders was correct and that the conflict of interest provision did apply. As such, it was declared that:

(1) no valid request had been given to the Trustee to serve an Enforcement Notice; and

(2) the Trustee’s decision not to serve an Enforcement Notice at all times up to and including 24 March 2009 was a proper exercise of its discretion.

Issuer’s financial statements

46. The Issuer’s annual report and audited financial statements for the years ended 30 November 2007, 2008 and 2009 all recorded a balance sheet with net liabilities. As at 30 November 2009, those net liabilities were stated to be £74,557,000. Foreign currency liabilities of the Issuer were recorded in its financial statements in their sterling equivalents, calculated at the exchange rate prevailing at the reporting date.

47. The Issuer’s financial statements as at 30 November 2009 did not record as assets, or attribute any value to, any claims that the Issuer may have against the Swap Counterparty and LBHI arising from the failure and termination of the Swaps. The Issuer has since lodged a claim for approximately $220 million in the US bankruptcy cases of both the Swap Counterparty and LBHI and this is recorded in the “Business Review” section of the Directors’ report included with the Issuer’s audited financial statements as at 30 November 2009.

48. The Issuer’s management accounts as at 30 November 2009 recorded net liabilities of £129,740,000. The difference between the net liabilities recorded as at 30 November 2009 in the financial statements and management accounts was, according to the joint expert, principally attributable to an adjustment made on the basis that the Notes were regarded by the Issuer as non-recourse liabilities, such that the liabilities in respect of the Notes could be adjusted to reflect the impaired value of the underlying assets.

Issues for determination

49. The A3 Noteholders contended that an Event of Default has occurred as the Issuer was unable to pay its debts within the meaning of section 123(2) IA 1986. Moreover, they contended that the existence of the PECO was entirely irrelevant as it applied only in circumstances where there was a deficiency following enforcement of the security and payment of the sums due to Noteholders. The Notes were full recourse obligations of the Issuer.

50. The Issuer and the A2 Noteholders (i.e. those noteholders who pre-enforcement were entitled to payment in full of their principal prior to any payments in respect of principal reaching the A3 Noteholders) disagreed. They said that no Event of Default had occurred

as the Issuer was not unable to pay its debts within the meaning of section 123(2) IA 1986. Moreover, they contended that the PECO precluded a determination that the Issuer was unable to pay its debts within the meaning of section 123(2) IA 1986 as it was impossible for the Issuer’s liabilities to exceed its assets, because the PECO’s practical effect was to make the Notes limited in recourse to the value of the Issuer’s assets.

51. The Trustee sought directions by way of Part 8 Claim which raises two questions:

(1) whether, without regard to the PECO, Eurosail is unable to pay its debts within the meaning of section 123(2) IA 1986; and

(2) if the answer to the above question is in the affirmative, whether the PECO has the effect that Eurosail is not unable to pay its debts within the meaning of section 123(2) IA 1986 for the purposes of Condition 9(a)(iii) of the Notes.

(4) Findings of the Court of Appeal

52. On the first question, the Court of Appeal found that, without regard to the PECO, Eurosail was not unable to pay its debts within the meaning of section 123(2) IA 1986.

53. Lord Neuberger MR said that the relevant question was whether the company “reached the point of no return” and that this is “only when it can be said that the company’s use of its cash or other assets for current purposes amounts to what may be vernacularly characterised as a fraud on the future or contingent creditors”: see [49].

54. Toulson LJ said that the relevant question was “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”: see [119].

55. On the second question, the Court of Appeal found that if the Issuer were otherwise unable to pay its debts within the meaning of section 123(2), the PECO would not operate so as to prevent an Event of Default from occurring.

56. The Court of Appeal found that while the purpose of the PECO was to render the Issuer insolvency remote in the sense of ensuring that it could not be wound up, it did not prevent the triggering of an Event of Default in circumstances where the Issuer breached the section 123(2) IA 1986 test. The Issuer’s obligation to pay the noteholders’ claims for

principal and interest remained a full recourse obligation until (i) the security had been enforced by the Trustee; (ii) the collateral had been realised and distributed with a deficiency to the noteholders; and (iii) OptionCo had exercised the PECO and acquired the Notes.

57. The appeal against the decision of the Court of Appeal was heard by the Supreme Court on 25 and 26 February.