In Golden Key Ltd (In Receivership) [2009] EWHC 148 (Ch) the High Court has held that there should be no presumption that parties to a bankruptcy remote arrangement intended that creditors within the same class would be repaid pari passu in the period following a default.
Golden Key Ltd ("Golden Key") was a structured investment vehicle ("SIV") that invested primarily in the US sub-prime mortgage market and which defaulted under its loan documents and then became insolvent in late 2008. Its receivers applied to the Court for directions as to how Golden Key's remaining assets should be distributed.
The Courts have had to give directions to receivers in a number of cases involving the collapse of SIVs. In each case, investments in the SIVs were regulated by highly complex suites of documents which, as was the case with Golden Key, circumvented the statutory insolvency regime. The statutory regime in this case was substituted by 'contractual architecture' which involved a number of steps that would lead up to the effective insolvency and distribution of Golden Key's assets (being the Confirmation of a Wind Down Event, an Enforcement Event and the occurrence of an Acceleration Redemption Date).
The Judgment turned almost in its entirety on the wording of the contractual documentation, which was by no means clear. The Judge referred to the fact that the regime was underpinned by "an annex, more than 50 pages in length, containing an alphabet soup of complex and interlocking definitions".
After considering numerous provisions of the suite of contractual documents, the Court followed the decision in Re Sigma Finance Corporation [2008] EWCA Civ 1303, and held that the wording of the documents meant that, upon the occurrence of certain events, the receivers should continue to pay debts as they fell due, despite the fact that this would inevitably lead to certain secured creditors being repaid in full whilst others within the same class would not be paid at all. This is in contrast to the usual position under English insolvency law, where creditors within a class are repaid pari passu.
Practical implications
A number of cases involving SIVs have come before the Courts with different results, each case turning on the exact wording of the relevant contractual documentation. When substituting the statutory insolvency regime, the parties should consider carefully how a Court might interpret each provision of the relevant contractual regime, since the Court will look at the entire suite of documents and how they interact. Where the underlying contractual structure is particularly complex, there is a risk that the Court may interpret clauses in ways which the drafters did not contemplate.
This article was originally written for Stephenson Harwood's quarterly publication, Finance Litigation Legal Eye. If you would like to receive this publication, please contact Stephenson Harwood (link to Stephenson Harwood website here www.shlegal.com ).
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