page_title: BNY Corporate Trustees Services Ltd v Eurosail-UK 2007-3BL plc
section_title: Lord Hope
hierarchical_section_title: BNY Corporate Trustees Services Ltd v Eurosail-UK 2007-3BL plc / Decision / Lord Hope
caption_attribution_description: English: Lord Hope, Deputy President of the Supreme Court of the United Kingdom pictured on 11 March 2013
context_page_description: BNY Corporate Trustees Services Ltd v Eurosail-UK 2007-3BL plc [2013] UKSC 28 was a decision of the Supreme Court of the United Kingdom in relation to the proper interpretation of section 123 of the Insolvency Act 1986 as it had been applied in commercial bond documentation. The analysis and reasoning in the case are now commonly referred to as the Eurosail test.
  The ruling related to the insolvency of a special purpose company which had issued asset-backed securities as part of a securitisation. However, the collapse of Lehman Brothers meant that certain tranches of the securities were exposed because Lehman Brothers would not be able to meet its obligations under derivative contracts which had been entered into. Although strictly speaking the Court was expressing an opinion on the proper interpretation of an event of default in the bond documentation, the ruling is treated as an authoritative interpretation on section 123.
  The Supreme Court also rejected the "point of no return" test suggested by the Court of Appeal, and also ruled on the limited efficacy of the post-enforcement call option.
context_section_description: Lord Hope gave a short concurring judgment in which he agreed with Lord Walker and then went on to consider the PECO.  Technically speaking the additional protection afforded by the PECO became irrelevant because of the decision that the company was not insolvent.  But Lord Hope noted that "A PECO is widely used in securitisation transactions of the kind that was entered into in this case, and we have been told that the question is of some importance to the securitisation market more generally. So it is appropriate that we should give our reasons", and therefore he expressed his opinion on the issue.
  Lord Hope expressed the view that the Supreme Court agreed "with the Chancellor and the Court of Appeal that it has no effect on the way the liability of the Issuer to the Noteholders for the purposes of the default provision".  In the courts below the view had been expressed that "[u]nless and until the option holder releases the Issuer from all further liability, which it is under no obligation to do, the liability of the Issuer is unaffected."  Accordingly, even though there might be a commercial expectation that the PECO would operate to secure the release of company from its obligations under the notes, for the purpose of applying the insolvent test one should not make that assumption.  In this case the liability under the notes would remain the same - it is simply that exercising the PECO would mean that the liability of the company was transferred to the OptionCo.
  Some market commentators predicted that this would lead to originators reverting to traditional limited recourse language, particularly as the tax advantages related to PECOs no longer subsisted.
caption: Lord Hope of Craighead.
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