European Perspective In Brief - May/June 2013

Europe has struggled mightily during the last several years to triage a long series of critical blows to the economies of the 27 countries that comprise the European Union, as well as the collective viability of eurozone economies. Here we provide a snapshot of some recent developments relating to insolvency and restructuring in the EU. The U.K.—On May 9, 2013, the U.K. Supreme Court handed down its highly anticipated ruling in BNY Corporate Trustee Services Limited v Eurosail and others [2013] UKSC 28, in which the court for the first time interpreted the balance-sheet test for insolvency in section 123(2) of the Insolvency Act 1986. In its ruling, the Supreme Court also provided useful guidance concerning the correct application of the cash-flow test for insolvency in section 123(1)(e). These issues are highly significant, as "insolvency" must be proved for many purposes under English insolvency law. The Supreme Court agreed with determinations by both the High Court and the Court of Appeal that Eurosail, a special-purpose securitization vehicle, was not balance sheet‒insolvent. Even so, the Supreme Court's reasoning differed slightly from that of the lower courts. Key elements of the court's judgment include the following:

The cash-flow test (i.e., whether a debtor can pay its liabilities as and when they fall due) not only considers debts presently due, but also can include liabilities maturing in the "reasonably near future," depending on such factors as the nature of the company's business and whether it will continue trading. Consideration of liabilities accruing beyond the "reasonably near future" would require speculation, and in these circumstances, a comparison of present assets with present future liabilities (with adjustments for contingencies) might be the only sensible test for insolvency. The balance-sheet test requires the court to evaluate whether a company has sufficient assets to substantiate a reasonable expectation that it can expect to satisfy all of its liabilities, including prospective and contingent liabilities. This evaluation must be undertaken on the basis of available evidence and the particular circumstances of the case, with the caveat that relying on more distant liabilities (i.e., those which are not presently payable) will make the balance-sheet test for insolvency less easy to satisfy. The "point of no return" test adopted by the Court of Appeal as a formulation for the balance-sheet test for insolvency...

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