EuroResource--Deals and Debt

Europe, the U.S. and Canada—On 7 May 2013, the US Bankruptcy Court for the District of Delaware denied a motion by European creditors of Nortel Networks Corp. ("Nortel") to certify a direct appeal to the U.S. Court of Appeals for the Third Circuit of the bankruptcy court's 3 April 2013 ruling (In re Nortel Networks, Inc., Case No. 09-10138 (KG), 2013 BL 92666 (Bankr. D. Del. Apr. 3, 2013), denying a request to submit to arbitration a dispute over the allocation among creditors of US$7.3 billion in cash raised in Nortel's liquidation. According to the court, the appeal was "frivolous" because "the agreement at issue plainly did not call for arbitration and … the circumstances dictate that the underlying dispute proceed" before it rather than before an international arbitrator. By finding the appeal frivolous, the court defeated arguments that it lacked jurisdiction over the liquidation proceeds pending a ruling from the court of appeals. 

In refusing to certify the appeal, the court sided with Nortel bondholders—principally US hedge funds—and against Nortel's European creditors, a group that includes retirees and disabled former workers. Bondholders, whose claims are against Nortel US and Nortel Canada, are seeking an expedited trial in the US and Canada to decide the proper allocation of the liquidation proceeds. European creditors argue that international arbitration, with limited appellate rights, is the better and faster alternative for resolving the dispute. The decision means that Nortel's international creditors will likely join issue in a January 2014 trial. Nortel, the Toronto-based former technology icon, filed for bankruptcy protection in a number of countries in January 2009. 

Nortel US fired the first volley in the fray on 14 May when it filed objections in the US bankruptcy court seeking to eradicate billions of dollars worth of claims filed by European entities, contending that the parties are trying to appropriate funds that should rightfully go to creditors of the defunct telecom's US unit. Nortel's British retirees responded on 21 May by asking the court to strike the objections, contending that they do not properly address any of the pension fund's allegations. 

The UK—On 9 May 2013, the UK 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 securitisation 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 cash-flow test (i.e. can a debtor pay its liabilities as and when they fall due?) considers not only debts presently due but can also include liabilities maturing in the "reasonably near future", depending on factors such 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 based upon 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 was rejected. The Supreme Court determined that the test interpreted the scope of the balance sheet test too narrowly.

The UK—On 27 March 2013, the English High Court handed down a ruling in In the Matter of Simon Carves Limited and In the Matter of the Insolvency Act 1986, [2013] EWHC 685 (Ch), that illustrates the limitations of letters of support. In that case, Carillion Construction Limited ("CCL") sought leave to make an application under section 423 of the Insolvency Act 1986 (the "1986 Act") against Simon Carves Limited (in liquidation) ("SCL") and its ultimate parent company Punj Lloyd Limited ("PLL"). CCL was an unsecured creditor of SCL when SCL went into administration in 2011. After SCL entered administration, its business and assets were sold to a sister company by way of a pre-packaged transaction. Unsecured creditors received a nominal dividend return. 

By its application, CCL sought to compel PLL to honour three separate letters of support issued by PLL to CCL's board of directors from 2008 to 2010. It was partly on the basis of those letters that SCL continued to trade after March 2008 until 7 July 2011(when the administration order was made) despite posting significant losses during that period. CCL claimed that the letters of support constituted enforceable obligations. It also claimed that the dividend payable to unsecured creditors was nominal only because the failure by SCL to enforce the letters of support diminished the proceeds available for distribution to SCL's creditors. According to CCL, the failure to enforce those obligations constituted a transaction defrauding creditors for the purposes of section 423 of the 1986 Act. 

The court ruled that the letters of support were not binding on PLL. Because the letters of support issued by PLL were addressed to SCL's directors in connection with the preparation of annual accounts, the court explained, the letters were relevant only to enable the directors to consider whether it was appropriate for the financial statements for the year to be prepared on a going concern basis. According to the court, there was no evidence that SCL and PLL had agreed that the letters would be binding. The court held that "the letters do not even purport to be a contract with SCL" and that "there is no indication in the letters of what the consideration was (if any) passing from SCL (or, for that matter, from the Board of Directors) in return for PLL's financial support." The court also found that there was no agreement between SCL and PLL that the letters of support would not be enforced, and so there was no "transaction" for the purposes of section 423 of the 1986 Act. 


Jones Day is advising WCL Group Limited ("WCL") in connection with its £153 million (US$237 million) acquisition by Nord Anglia Education (UK) Holdings plc ("Nord Anglia Education"). WCL delivers premium K–12 education to approximately 4,500 students in 11 international schools located in the US, Spain and Qatar. In addition, WCL offers leading-edge educational products and services to schools worldwide, including its international curricula, which are used by nearly 1,500 schools in some 80 countries. Nord Anglia Education is a leading provider of education services worldwide. Its International Schools division provides British education for children between the ages of two and 18 years in 14 international schools in Asia, Europe and the Middle East with more than 10,000 students.

Jones Day advised the management team of Cabot Credit Management Limited ("CCM") in connection with the buyout of CCM by funds managed by private equity group J.C. Flowers & Co LLC. CCM is a market-leading acquirer and manager of consumer debt in the UK and Ireland, with more than £7.6 billion of assets under management covering more than 3.5 million customer accounts. CCM's key focus is the acquisition and servicing of portfolios of semi-performing debt.