EuroResource--Deals and Debt

Recent Developments

Global—On 24 June 2013, the Republic of Argentina filed a petition asking the U.S. Supreme Court to review a ruling handed down by the U.S. Court of Appeals for the Second Circuit on 26 October 2012 (see NML Capital, Ltd. v. Republic of Argentina, 699 F.3d 246 (2d Cir. 2012)) upholding a lower court order enjoining Argentina from making payments on restructured defaulted debt without making comparable payments to holdout bondholders. The Second Circuit's decision reflected judicial dissatisfaction with a sovereign debtor that for many years has flouted judgments entered by U.S. courts, notwithstanding the debtor's possession of resources sufficient to pay such judgments in whole or in part.

The Second Circuit remanded the case to the district court for the purpose of clarifying how the injunction was to function. On 21 November 2012, a U.S. district court ordered Argentina to pay holders of the original defaulted bonds in full—approximately US$1.33 billion—on 15 December 2012 when interest payments were due to holders of Argentina's restructured debt. The Second Circuit later stayed that ruling until it had an opportunity to hear the merits of Argentina's appeal. The court heard argument on the dispute earlier this year and is expected to issue its decision in the coming weeks. Thus, if the U.S. Supreme Court decides to hear Argentina's appeal of the 26 October 2012 decision, it would not do so until after the court of appeals has ruled on the merits of the dispute.

The UK—On 9 May 2013, the English Court of Appeal upheld the ruling of the Upper Tribunal (Tax and Chancery) affirming the decision of Andrew Caldwell, the Independent Valuer of Northern Rock appointed by HM Treasury, that no compensation should be paid to former shareholders of Northern Rock in connection with the company's nationalization on 22 February 2008. In Harbinger Capital Partners v. (1) Andrew Caldwell (2) HM Treasury [2013] EWCA Civ 49, the majority upheld the independent valuer's interpretation of the valuation assumption required by Section 5(4) of the Banking (Special Provisions) Act 2008 (the "Act").

Following Northern Rock's nationalisation, the U.K. government established a scheme under the Act to determine the compensation payable to shareholders. The scheme contemplated the appointment of an independent valuer to assess the value of the shares using certain assumptions, including the "withdrawal assumption" that all financial assistance provided to Northern Rock by the Bank of England and HM Treasury had been withdrawn. At the time of nationalisation, this assistance amounted to £27 billion in loans and guarantees worth £29 billion.

The independent valuer concluded that if Northern Rock had repaid this financial assistance on or before the valuation date, the company would have had a negative net worth, rendering its shares without value. This finding was upheld by the Upper Tribunal in June 2011. Harbinger Capital Partners, a New York hedge fund with a security interest in Northern Rock's preferred shares, appealed the decision, claiming that the withdrawal assumption should have been construed to account for a repayment demand by the Bank of England and HM Treasury, but not the actual disbursement by Northern Rock.

The Court of Appeal dismissed the appeal in a split decision. In its decision, the court considered principles of EU State Aid law and Article 1 of the First Protocol to the European Convention on Human Rights, finding that the valuer's interpretation was compatible with both.

Germany—On 15 November 2012, the German Federal Supreme Court ruled that a contractual termination clause based on insolvency—an "ipso-facto" clause—is invalid because it frustrates the insolvency administrator's right to assume or to reject the contract. See BGH IX ZR 169/11 dated 15/11/2012 – ZInsO 2013, 292. An administrator in German insolvency proceedings may, to the benefit of the estate, assume or reject contracts entered into by the debtor pre-insolvency, provided that performance remains due by both parties as of the commencement of the insolvency proceedings. In Germany, contracts frequently include a unilateral termination right triggered by the occurrence of an insolvency-related event, such as the commencement of insolvency proceedings by or against either party or if the other party's inability to pay its debts becomes apparent. In its landmark ruling, the highest German court held that an insolvency-related termination right or an insolvency-related automatic termination provision in an energy supply agreement frustrated the insolvency administrator's right to elect to assume or reject the contract and was, therefore, invalid.

The full implication of the decision is not yet clear, including whether the holding will apply to ipso-facto provisions in contracts other than energy supply agreements. The court's reasoning specifically refers to contracts for the delivery of goods. The court also noted that its ruling does not invalidate contractual ipso-facto clauses that correspond to statutory insolvency-related termination rights. Further, the court confirmed that contractual termination provisions based upon non-insolvency events, such as a payment default, are valid because they do not interfere with an insolvency administrator's right to assume or reject.


Jones Day is advising LondonMetric Property PLC ("LondonMetric") in connection with the £247.56 million (US$378.96 million) sale of 11 distribution assets to a joint venture between Prologis Europe and Norges Bank Investment Management. LondonMetric, which was created on 28 January 2013 as a result of the merger between London & Stamford Property plc and Metric Property Investments plc, is a UK real estate investment trust trading on the London Stock Exchange.