Cheyne Finance Plc, Re

This is a second urgent application for directions by Receivers of the business and assets of Cheyne Finance Plc (“Cheyne”), appointed on 4^th September 2007 pursuant to a Security Trust Deed (“the Trust Deed”) dated 3^rd August 2005 between Cheyne and the Bank of New York.

I heard and determined an earlier application in mid-September. The opening paragraphs of my judgment on that application are a sufficient general introduction to this application.

That application raised an issue as to how the Receivers should apply monies coming into their hands during the period between their appointment and the happening, if one should happen, of an Insolvency Event, as defined. That issue turned on a question of construction of the Trust Deed. The only factual assumption then required was that at that time an Insolvency Event had not occurred.

My decision on that application, which has not been appealed, was that pending the happening of an Insolvency Event the Receivers should apply monies coming into their hands, first, in prompt payment of the debts of Senior Creditors and any prior debts as and when they fell due; secondly, in making provision for payment of the same classes of debt not yet due and, if that left any surplus – which then seemed unlikely, at least in the short term – in the manner provided for in the payment priority established in clause 12.1(c) and following of the Trust Deed.

I shall refer in this judgment to debts of Senior Creditors and those ranking in priority to them collectively as “Senior Debts”. I use that phrase rather than “Senior Obligations”, which is a defined term with a slightly narrower meaning in the Common Terms Agreement.

I preferred the “pay as you go” construction over a rival “pari passu” construction pursuant to which full provisioning for payment of all Senior Debts was to take precedence over payment on time and in full of such debts as and when they fell due. I was not asked by the Receivers on that occasion to construe the definition of “Insolvency Event” in the Common Terms Agreement, principally because, as at that time, the Receivers had not formed the view that Cheyne was insolvent on any arguable construction of that definition, or even that Cheyne was balance sheet insolvent, a concept apparently deliberately omitted from the Common Terms Agreement and Trust Deed by confining the incorporation of the Insolvency Act definition so as to exclude s.123(2).

It appeared to be more or less assumed, both by the Receivers and the proponents of the rival arguments on that occasion, that for as long as the Receivers had the wherewithal to pay Senior Debts actually due and those falling due in the very near future then they could not make an Insolvency Event determination even though they regarded a default in payment of Senior Debts as inevitable in the middle or longer term future (see para.7 of my earlier judgment).

My determination of the issue of construction then raised did not depend upon that assumption about the meaning of Insolvency Event, and I then regarded it as one which might need to be tested if the Receivers’ expectations as to Cheyne’s longer term ability to pay its Senior Debts changed.

Intensive work which has since been carried out by and at the Receivers’ direction into Cheyne’s likely future cash flow has caused a change in the Receivers’ expectations and has precipitated an urgent need for the meaning of the Insolvency Event definition to be determined.

The happening of an Insolvency Event depends upon a determination by the Receivers that Cheyne is, or is about to become, unable to pay its Senior Debts. The Receivers do not suggest that the courts should usurp their function by making that determination itself, a process which might involve factual issues being determined by an adversarial process. Rather they invite the court to decide whether, on certain assumed facts, Cheyne is or is about to become unable to pay its debts within the meaning of the Insolvency Event definition. They recognise that the fact-finding part of the task entrusted to them is to remain their responsibility and the invitation to the court to decide the insolvency question on assumed facts is in substance designed as a convenient vehicle for resolving all relevant issues of construction of the Insolvency Event definition.

These are stated fully but concisely in the second witness statement of Neville Barry Kahn, one of the three Receivers. Since they are, by definition, not in dispute before me I need only summarise their consequences. They are derived from work done by the Receivers in defining the dates upon which the Senior Debts will all fall due and the amounts falling due on each relevant date, and from work done and opinions formulated by the Receivers’ chosen valuers on the amounts of cash capable of being made available for payment on those dates on various hypotheses as to the manner in which the Receivers carry out the necessary asset realisation programme.

By way of introduction, first, it is plain that Cheyne could not pay its Senior Debts in full as they fall due merely by letting its own investments run to maturity and collecting the resulting cash. The investments must be sold in an uncertain market before maturity so that any estimation of Cheyne’s incoming cash flow is critically dependent upon assumptions about the future market for Cheyne’s assets, and in particular about the effect on that market, in which Cheyne is a substantial player, of any particular sales campaign.

Secondly, in advising as to Cheyne’s likely incoming cash flow in the future, its advisors have, I suspect prudently and inevitably, taken and projected forward present market values and avoided subjective guesswork as to where the market may move hereafter.

Thirdly, the valuers have subjected to intense scrutiny the effect upon realisations of Cheyne’s marketing programme driven, as it is, by the need to meet predictable and extremely large payment obligations in the near and medium term future. Their opinion is that sales at the volume and rate required to pay Senior Debts as and when they fall due will probably incur forced sale discounts in ranges lying between 0 and 7 per cent, depending upon the class of asset involved.

The results of this exercise may be stated as follows:

Mr. Kahn summarises the position in his second witness statement as follows:

“As described above, the Receivers are currently in a position to continue with the ‘pay as you go’ approach to approximately 31 October 2007.

The Receivers also have a substantial investment portfolio of assets in their hands. However, the best current assessment is that the high level of asset sales required to continue with the ‘pay as you go’ approach would involve Cheyne Finance selling assets for discounted prices which would in turn deplete its balance sheet and render it unable to pay some of its late-maturing Senior Obligations.”

A recent further sale means that Cheyne can now pay due debts from liquid funds until 14^th November, but it is agreed before me that I should assume, and the Receivers do not suggest otherwise, that the circumstances of that recent sale have no effect on the best current assessment which I have described, namely that default and a consequential shortfall will occur in relation to Senior Debts.

Having formed the view that the sales programme necessary to pay Senior Debts as they fall due is not the method likely to realise best value for Cheyne’s Senior Creditors, the Receivers therefore ask for the following questions to be determined by the court:

That formulation of the questions is the subject of an agreed amendment made at the outset of the hearing, and differs in that respect from the form as it appears in the Application Notice.

I have heard submissions from four interested parties, and I will call them Parties A, B, C and D. All have appeared, as on the last occasion, on the basis that their anonymity is to be preserved. But this time all the parties also seek that the hearing be conducted, and judgment given (at least at this stage) in private, so as to avoid confidential information – for example, about the Receivers’ expectations and advice as to the value of its portfolio – falling into the public domain. Maintaining anonymity of the parties will therefore, unlike on the last occasion, not have the compensating advantage that the hearing and judgment be conducted and given in public. I have therefore sought and obtained on a confidential basis from the Receivers the identity of all parties, which is not to be placed on the court file or otherwise made public.

Party A, as before, represents all Senior Creditors with short maturity dates for whom continuation of the pay as you go regime is preferable to an early declaration of an Insolvency Event. Party B, again as before, represents all Senior Creditors whose interests would be served by an early declaration of an Insolvency Event. Party C is a member of the class represented by Party B. Party D are a group of holders of subordinated debt, i.e. not Senior Creditors. The debt in question consists of Mezzanine Capital Notes ranking below the Senior Obligations in the payment priority established by clause 12 of the Trust Deed. On the assumed fact that continuing with pay as you go is less likely than the determination of an immediate Insolvency Event to yield anything for them, they also support Party B on the issues before me.

Question 1 is the most important question and has occupied most of the court’s time. Strictly, question 2 falls away if question 1 is answered in the affirmative, but I have been requested by all parties, other than Party D, to decide question 2 in any event, regardless of the outcome of question 1. To an extent, the analysis of the issues underlying question 2 sheds light on the answer to question 1, to which I now turn.

The definition of Insolvency Event in the Common Terms Agreement is as follows:

“Insolvency Event means a determination by the Manager or any Receiver that the Issuer [Cheyne] is, or is about to become, unable to pay its debts as they fall due to Senior Creditors and any other persons whose claims against the Issuer are required to be paid in priority thereto, as contemplated by Section 123(1) of the United Kingdom Insolvency Act 1986 (such subsection being applied for this purpose only as if the Issuer’s only liabilities were those to Senior Creditors and any other persons whose claims against the Issuer are required under the Security Trust Deed to be paid in priority thereto).”

The argument on question 1 has revealed two related issues as to the construction of the Insolvency Event definition in the Common Terms Agreement, namely:

For Party A, Mr. Trower QC and Mr. Fisher submitted that on the question whether Cheyne is unable to pay its debts as they fall due only those Senior Debts which are presently due are to be considered. On the question whether Cheyne is about to become so unable, then that admits in addition only those Senior Debts which are about to become – i.e. on the point of becoming – due, and excludes all Senior Debts with medium or longer term maturities.

Parties B, C and D all submit that, both in principle and because all Cheyne’s Senior Debts have fixed maturity dates and amounts and because Cheyne is in run-off rather than a going concern, all Senior Debts can and must be considered whenever falling due.

In its essentials, Party A’s submission was simple, and may be summarised as follows:

Attractively though those submissions were presented, I have come to the conclusion that they lead to the wrong result and must be rejected. My reasons follow.

Section 123(1)(e) dates only from the Insolvency Act 1985. There is very little authority on its present form, and its previous form was rather different. Putting on one side the improbability that the draftsman of, still less the parties to, the Common Terms Agreement or the Trust Deed knew its history, that history may be summarised as follows.

Section 80 of the Companies Act 1862 provided to the extent relevant as follows:

“A Company under this Act shall be deemed to be unable to pay its Debts…

Whenever it is proved to the satisfaction of the Court that the Company is unable to pay its debts.”

In re European Life Assurance Society (1869) 9 LR Eq 122, it was held that ‘debts’ in s.80 meant only those actually due. Furthermore, prospective creditors had no locus to petition.

Section 28 of the Companies Act 1907 both permitted prospective creditors to petition and required the court to have regard to contingent and prospective liabilities when applying the 1862 Act. That new provision was consolidated in the Companies (Consolidation) Act 1908 in s.130 in the following form:

“A company shall be deemed to be unable to pay its debts –…

(iv)

if it is proved to the satisfaction of the court that the company is unable to pay its debts, and, in determining whether a company is unable to pay its debts, the court shall take into account the contingent and prospective liabilities of the company.”

No substantive change occurred in 1929 in s.169(4) of that Act; or in 1948 in s.223(d) of that Act; nor indeed in the 1985 Companies Act in s.518(1)(e), despite slight changes in the language.

During the long period from 1907 to 1985 English courts addressed the questions posed by, for example, s.223(d) of the 1948 Act, without any rigid distinction between commercial and cash flow insolvency on the one hand and balance sheet insolvency on the other. The submission that commercial insolvency could not be established by reference to future debts could not have succeeded. This is reflected, for example, in the decision of the Court of Appeal in Byblos Bank SAL v. Al-Khudhairy [1987] BCLC 232, in which inability to pay debts within s.223 of the Companies Act 1948 was incorporated into a debenture as a trigger for the appointment of Receivers. At p.247 Nicholls L.J. said this:

“Construing this section first without reference to authority, it seems to me plain that, in a case where none of the deeming paras (a), (b) or (c) is applicable, what is contemplated is evidence of (and, if necessary, an investigation into) the present capacity of a company to pay all its debts. If a debt presently payable is not paid because of lack of means, that will normally be sufficient to prove that the company is unable to pay its debts. That will be so even if, on an assessment of all the assets and liabilities of the company, there is a surplus of assets over liabilities. That is trite law.

It is equally trite to observe that the fact that a company can meet all its presently payable debts is not necessarily the end of the matter, because para.(d) requires account to be taken of contingent and prospective liabilities. Take the simple, if extreme, case of a company whose liabilities consist of an obligation to repay a loan of £100,000 one year hence, and whose only assets are worth £10,000. It is obvious that, taking into account its future liabilities, such a company does not have the present capacity to pay its debts and as such it ‘is’ unable to pay its debts. Even if all its assets were realised it would still be unable to pay its debts, viz, in this example, to meet its liabilities when they became due.”

Mr. Trower described this as a case about balance sheet insolvency. I disagree. Nicholls L.J. is speaking about the ability of the company to meet its liabilities when they became due. What is striking, and for present purposes persuasive, is his explanation that the phrase “is unable to pay” is a reference to the company’s present capacity, not to the date upon which relevant debts will fall due.

In the Insolvency Act 1985, repeated in s.123 of the 1986 Act, commercial and balance sheet insolvency are for the first time split apart. In place of the mandatory requirement to take account of contingent and prospective liabilities there has been added in s.123(1)(e) the phrase “as they fall due” after “debts”. The mandatory requirement to consider contingent and prospective liabilities now only appears in s.123(2). There is no English authority on the question whether, as Mr. Trower submitted, those changes prevent reference to prospective, i.e. future, debts under s.123(1)(e).

To the limited extent that academic writers have addressed this point, they are divided. In their Annotated Guide to the Insolvency Legislation 2006/2007 (9^th Ed) Messrs. Sealy and Millman say this at p. 149:

“Paragraph (e) (as Companies Act 1985 s.518(1)(e)) formerly read: “if it is proved to the satisfaction of the court that the company is unable to pay its debts (and, in determining that question, the court shall take into account the company’s contingent and prospective liabilities)”. This formula was unhelpful in that it ran together two issues: (1) the question of whether current debts could be met as they fell due, i.e. “commercial” solvency; and (2) the question whether the company would ultimately prove solvent if its future as well as present liabilities were brought into the reckoning. The confusion was resolved by the amendment made by [the Insolvency Act] 1985: contingent and prospective liabilities are no longer to be taken into account for the purposes of para.(e), while insolvency calculated on a balance-sheet basis becomes a separate test under s.123(2).”

The English version of Professor Keay’s McPherson’s Law of Company Liquidation reaches the same conclusion.

Professor Goode in his Principles of Corporate Insolvency Law (3^rd Ed) treats the developed Australian jurisprudence on this question as applicable to cash flow insolvency under s.123(1)(e), and as permitting what he describes as “an element of futurity”, at least by reference to the near future. In fact, the Australian jurisprudence is not necessarily limited to considering debts falling due in the near future, although typical fact situations may often impose that restriction in practice.

The third edition of Professor Fletcher’s Law of Insolvency assumes that contingent and prospective liabilities logically have no part to play in the cash flow evaluation of the company’s affairs. For reasons which appear from the Australian jurisprudence, I doubt that supposed logic.

There is a wealth of Australian authority on the question of whether a cash flow or commercial insolvency test permits references to debts which will fall due in the future, i.e. in English terminology “prospective debts”, rather than “prospective or contingent liabilities”. The reason why this question has, unlike in England, been analysed in such detail in Australia is probably that neither the Australian courts nor legislature have developed a balance sheet test of the type found in s.123(2).

Prior to 1992 the statutory test for insolvency in force in Australia was one based on inability to pay debts as they become due – see, for example, ss.107 to 109 of the Queensland Insolvency Act 1874.

In Bank of Australasia v. Hall (1907) 4 CLR 1514, Griffith C.J. said this at p.1527:

“It was argued that only debts then actually payable and the amounts of which were then actually ascertained should be taken into consideration. One answer to this argument is that the matter for determination is the ability of the debtor, which is a state or condition that cannot be determined without having regard to all the facts. Another answer is that the debts referred to are not his debts ‘then’ payable, but his debts ‘as they become due’ – a phrase which looks to the future.”

On p.1528 he said this:

“The words ‘as they become due’ require, as already pointed out, that some consideration shall be given to the immediate future; and, if it appears that the debtor will not be able to pay a debt which will certainly become due in, say, a month (such as the wages payable by Robertson for the month of July) by reason of an obligation already existing, and which may before that day exhaust all his available resources, how can it be said that he is able to pay his debts ‘as they become due’ out of his own moneys?”

The only dissenting judge, Higgins J., agreed on the meaning of the phrase “as they become due”. At p.1554 he said this:

“The critical words are ‘as they become due’; so that, on the one hand, a debtor in making a payment or giving a security to a creditor, has to take into account, not only his debts immediately payable, but his debts which will become payable …”

In Sandell v. Porter (1966) 115 CLR 666, construing s.95 of the Bankruptcy Acts 1924 to 1960, Barwick CJ said this at p.670:

“The conclusion of insolvency ought to be clear from a consideration of the debtor’s financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor’s inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency.”

In Hymix Concrete Property Ltd. v. Garrity [1977] 13 ALR 321, Jacobs J (with whom Barwick CJ and Gibbs J agreed) said at p.328 that an inability to pay debts as they become due was to be recognised in an endemic shortage of working capital rather than in a temporary lack of liquidity. Such an analysis requires some review of the future.

In Taylor v. Australia and New Zealand Banking Group Ltd. [1988] 6 ACLC 808, McGarvie J. said at p.811 that the question of whether a company was able to pay its debts as they fell due was a question of fact to be decided as a matter of commercial reality in the light of all the circumstances. In that case the company had sold its main business asset and paid off its overdraft with part of the proceeds. In deciding whether it was then insolvent for the purposes of a preference claim against the bank the judge conducted a detailed review of the company’s present and future debts before concluding that its finite assets were insufficient to enable it to pay them as they fell due.

From 1992 onwards the question of whether a company was solvent was to be decided pursuant to a formula now to be found in s.95A of the Corporations Act 2001, which is as follows. Under the heading “Solvency and Insolvency”:

“(1)

A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.

(2)

A person who is not solvent is insolvent.”

The familiar phrase “as and when they become due” has been supplemented by the words “and payable”.

In Cuthbertson v. Thomas (1998) 28 ACSR 310 Einfeld J. said this at p.319:

“Certain predicted events about which there is little uncertainty, such as the planned sale of a major asset or the falling due of a substantial loan, may influence whether the company is able to pay its debts as they become due and payable.”

On p.320 he said this:

“In essence the issue of a company’s solvency should be viewed as it would by someone operating in a practical business environment.”

In Southern Cross Interiors Pty. Ltd. v. The Deputy Commissioner for Taxation (1998) 29 ACSR 130, Palmer J. held that the addition of the words “and payable” added nothing to the old formula based on “due”. In his judgment, both in English and in Australian company legislation the word “due” had always meant “due and payable”.

Finally, in Lewis v. Doran [2005] NSWCA 243, at para.103 there is a helpful explanation of the question how far into the future the enquiry as to present insolvency may go. In short, it is a fact sensitive question depending upon the nature of the company’s business and, if known, of its future liabilities.

It is clear from that brief review of the Australian decisions that in an environment shorn of any balance sheet test for insolvency, cash flow or commercial insolvency is not to be ascertained by a slavish focus only on debts due as at the relevant date. Such a blinkered review will, in some cases, fail to see that a momentary inability to pay is only the result of a temporary lack of liquidity soon to be remedied, and in other cases fail to see that due to an endemic shortage of working capital a company is on any commercial view insolvent, even though it may continue to pay its debts for the next few days, weeks or even months before an inevitable failure.

Furthermore, the common sense requirement not to ignore the relevant future was found to be implicit in the Australian cases in the simple phrase “as they become due”.

Returning to the English legislation, it is, in my view, critical to note that when separating out balance sheet insolvency from commercial insolvency in 1985 the legislature did not merely remove the requirement to include contingent and prospective liabilities in framing s.123(1)(e) out of its predecessor, but added what in Australia have always been regarded as the key words of futurity, namely the phrase “as they fall due”. In that context “fall due” is, in my judgment, synonymous with “become due”.

Mr. Trower submitted that the existence of the balance sheet test in s.123(2) makes an Australian type of approach to the commercial insolvency test unnecessary, because a company will always be balance sheet insolvent in circumstances where a review of future debts shows that it is commercially insolvent. I disagree. First, I can see no good reason why the developed understanding in Australia of the nature of the exercise required by the phrase “unable to pay debts as they become (or fall) due” should not be recognised when the same phrase is, for the first time, deliberately inserted into the English insolvency test. The Australian approach makes commercial sense, whereas the blinkered approach of ignoring the future does not.

Secondly, a company may not always be balance sheet insolvent where an Australian style test for commercial insolvency is satisfied, as in this example: The company has £1,000 ready cash and a very valuable but very illiquid asset worth £250,000 which cannot be sold for two years. It has present debts of £500, but a future debt of £100,000 due in six months. On any commercial view the company clearly cannot pay its debts as they fall due, but it is, or would be, balance sheet solvent.

In my judgment, the effect of the alterations to the insolvency test made in 1985 and now found in s.123 of the 1986 Act was to replace in the commercial solvency test now in s.123(1)(e), one futurity requirement, namely to include contingent and prospective liabilities, with another more flexible and fact sensitive requirement encapsulated in the new phrase “as they fall due”.

In the case of a company which is still trading, and where there is therefore a high degree of uncertainty as to the profile of its future cash flow, an appreciation that s.123(1)(e) permits a review of the future will often make little difference. In many, if not most, cases the alternative balance sheet test will afford a petitioner for winding up a convenient alternative means of proof of a deemed insolvency.

The irony of the present case is that the Insolvency Event test, when applied by the Receivers appointed under the Trust Deed, will be in relation to a company in run-off, closed to future business, when its future cash flow profile is abnormally clear and when no balance sheet alternative test is available.

This leads me to my second main reason for rejecting Party A’s case on the future debts issue. In my judgment, the presumed common intention to be derived from the parties’ choice to define inability to pay debts by reference to s.123(1) rather than s.123(2) is simply that they wished Cheyne’s solvency to be adjudicated on a commercial rather than balance sheet basis, and nothing more than that. The definition incorporates the whole of s.123(1), not just s.123(1)(e). The common feature of the lettered sub-sub-sections of s.123(1) is that they are indiciae of commercial rather than balance sheet insolvency. Companies which fail to pay their judgment debts or, without good reason, to respond to statutory demands, are usually unable to pay their debts as they fall due regardless of the state of their balance sheets.

Even if my view as to the meaning and effect of s.123(1)(e) were wrong and a higher court concluded that it was to be interpreted as imposing the blinkers for which Mr. Trower contends, it would, in my judgment, be perverse to conclude that the parties to the Common Terms Agreement and Trust Deed intended that consequence, because of its potentially bizarre and uncommercial effects in the context of the affairs of Cheyne. In my last judgment I questioned whether, if the Receivers had sold all Cheyne’s assets for cash, and knew for sure that it would default in the distant rather than near future, it could not be determined to be insolvent until that distant event of default was about to occur. The Receivers would be obliged to go on paying early maturing Senior Debts in full, knowing that a failure to pay anything in respect of later maturing debts of identical seniority was a racing certainty. I cannot envisage any reason why the parties to the Common Terms Agreement and Trust Deed should have intended thereby to confer an absolute priority on the holders of early maturing Senior Debt. The manner in which that priority would impact on Senior Creditors would depend, not upon anything to be found in the Payment Priority, but upon the unpredictable outcome of a run-off which, at the time both of the framing of the contractual documents and the making of any investment in Cheyne pursuant to them, must have been regarded by the participants as an unpleasant but hopefully remote future risk.

Mr. Trower accepted that his construction had that consequence but submitted that it was commercially understandable because later maturing paper carried a slightly higher coupon and because investors with later maturity dates are always exposed to greater risks due to the longer time line in which those risks may occur.

In my judgment, the extra coupon on the longer notes does not begin to explain a deliberate choice of Mr. Trower’s construction in preference to that advocated by Parties B to D. Furthermore, incurring a risk of future adverse events, such as is inherent in the pay as you go regime during a run-off while insolvency is merely a risk rather than a probability, is different in kind from a contractual choice absolutely to prefer earlier Senior Debt where insolvency is not merely a risk but a dead certainty.

Party A’s construction also produces a conflict between the Insolvency Event definition and the Receivers’ obligation under clause 10.2(a) of the Trust Deed, whereas the alternative construction does not. Clause 10.2(a), it will be recalled, is as follows:

“It shall be a term of any appointment of a Receiver under subclause 10.1 that such Receiver shall, unless and until an Insolvency Event Notice is delivered by the Security Trustee in accordance with Clause 9:

(a)

manage the Security Assets and the business of the Chargor with the objective of arranging for timely payment in full of the Chargor’s obligations to the Senior Creditors and any creditors ranking in priority to the Senior Creditors in the Payment Priority and … in each case as and when they fall due for payment in accordance with Clause 12 below …”

In my judgment, the management objective thereby identified is to ensure, if possible, the timely payment in full of all Senior Debts as and when they fall due. It would be extraordinary if, during a run-off period when the Receivers knew that a medium or long term default was inevitable but could not determine an Insolvency Event until just before default occurred, they were to be saddled with an impossible objective, impossible because they knew that good management could not enable all Senior Debts to be paid in full.

Mr. Trower submitted that it was implicit in clause 10.2(a) that if a choice had to be made between payments of all debts in full or payment of early maturing debts on time, the Receivers had to choose a management method best calculated to secure the latter, even if it caused a greater failure to achieve the former. Again, I disagree because of the commercially bizarre results which this would produce. I put to Mr. Trower the example where Cheyne had liabilities of £1 billion falling due in one month and £6 billion falling due in six months. To raise the £1 billion would require a fire sale for £3 billion of a portfolio which, if sold in an orderly manner over six months, could raise £6 billion. Plainly, no commercially rational framers of the Trust Deed would impose upon the Receivers an obligation to effect that fire sale. Yet Mr. Trower submitted on that precise example that this is what clause 10.2(a) required.

On the alternative construction there is substantial harmony between the definition of Insolvency Event and clause 10.2(a). For as long as, paying due regard to future debts, it appears that Cheyne can pay all its Senior Debts in full as they fall due, the obligation in clause 10.2(a) is attainable. Once it appears that Cheyne can no longer expect to pay all its Senior Debts in full as and when they fall due, the objective in 10.2(a) ceases to be attainable, but the Receivers can at exactly the same time determine that there has been an Insolvency Event. All debts are then accelerated and the 10.2(a) obligation ceases to apply.

Party A’s best point, in my judgment, was the effect of the phrase “or is about to become” in the Insolvency Event definition. As a matter of language, the phrase does, on the face of it, point to a review only of the immediate future, and may suggest that the draftsman thought, so that the parties should be presumed to have intended, that “is unable” otherwise required the Receivers to wear the blinkers for which Mr. Trower contended, and then lifted the blinkers slightly so as to permit a very restricted look ahead at debts which will fall due imminently.

If the test whether Cheyne is unable to pay its debts when they fall due permits a review of all Cheyne’s future Senior Debt then it is hard to envisage how, if Cheyne is about to fail that test, it is not already insolvent. Mr. Mortimore QC for Party B suggested that “is about to become” was designed to deal with a situation where the Receivers proposed a transaction which, once consummated, would cause Cheyne to fail the test, rather like a preference which renders a company insolvent under the Insolvency Act s.240(2)(b).

I cannot see how the discharge of the clause 10.2(a) duty while Cheyne is not insolvent could lead to a situation where the proposed transaction makes it insolvent on Party B’s approach to the future debts issue. As will appear, on Party A’s approach the answer to that question may be different. It may be that, in truth, the phrase “or is about to become” is a piece of thoughtless drafting which adds little or nothing to “is”. Though mindful that contracts should, if possible, be construed to avoid such a conclusion, the other factors which lead me to resolve the future debts question against Party A’s construction easily outweigh this apparent contra-indication.

I therefore conclude that the definition of Insolvency Event does permit the Receivers to have regard to Cheyne’s ability to pay Senior Debts falling due in the future.

I turn, therefore, to the standard of proof question. Here the rival contentions range between Party C’s Australian type submission that the Receivers should determine an Insolvency Event unless satisfied on the balance of probabilities that Cheyne will be able to pay all Senior Debts when they fall due, to Party A’s submission that the Receivers should not determine an Insolvency Event unless satisfied that there is no reasonable prospect that Cheyne will be able to pay its debts when they fall due. In the middle lay Parties B and D’s submission that the burden was on the Receivers to satisfy themselves of Cheyne’s insolvency on the balance of probabilities.

Party A’s approach would prevent an Insolvency Event where, as on the presently assumed facts, the prospect that Cheyne will pay its Senior Debts in full when they fall due is less than likely but more than fanciful. By contrast, all the other parties advocated the balance of probabilities which, regardless of the burden of proof which separated Party C’s submission from that of Parties B and D, would require a determination of insolvency on the assumed facts.

In using the language of litigation, (standard and burden of proof, balance of probabilities, reasonable and fanciful prospects), both counsel and I have borne in mind throughout that the Trust Deed calls for experienced professionals working in the commercial world to make the determination, not the court at the end of a trial or a summary judgment application under CPR Part 24. The language is, however, useful because it compresses well understood concepts into short phrases.

I have come to the conclusion that the level of confidence with which, before determining an Insolvency Event, the Receivers must consider that Cheyne is or is about to become unable to pay its Senior Debts as they fall due is better reflected in a balance of probabilities than in a view that the contrary prospect is so unlikely as to have become fanciful. They must be satisfied, (a state of mind which calls for careful and thorough enquiry), that inability to pay is more likely than not. My reasons follow.

Parties B to D are entitled to take some comfort from the fact that the incorporation of s.123(1) as the relevant test of itself uses a definition which is framed to be used in court and resolved on a balance of probabilities, even though the test is, in fact, to be applied outside court and not by a judge. By contrast with a state of mind requisite for a finding of wrongful trading – that is, knowledge that there was no reasonable prospect that the company would avoid going into insolvent liquidation – which is used as a test for directors’ personal liability, the Insolvency Event test is imposed upon the Receivers in the Trust Deed to determine the time at which run-off by fiduciaries with pay as you go is replaced by a pari passu distribution by the same fiduciaries in accordance with the Payment Priority. If that change is postponed for as long as there is more than a fanciful prospect of payment in full, its consequences may work grave prejudice to Senior Creditors with later maturing debts out of all proportion to the prejudice to early maturing creditors of becoming subject to pari passu distribution of assets realised to produce best value rather than early cash. The fact that the market for Cheyne’s investment portfolio may go up as well as down may well make it hard to say that the prospect of payment in full is only fanciful, even though unlikely.

Being satisfied on the balance of probabilities is, in my judgment, typical of the standards on which commercial fiduciaries are accustomed to act when making important business decisions in the best interests of their beneficiaries. I can see no good reason in the present case to impose any higher hurdle.

The assumed facts are, as I have said, summarised by the passage in the second witness statement of Mr. Kahn at para.93, where he states that on the Receivers’ best current assessment Cheyne is now unable to pay all its Senior Debts as they fall due. Accordingly, I answer question 1 in the affirmative.

It follows that question 2 does not strictly arise on the assumed facts, since the Receivers will presumably make a determination of insolvency if those facts do not change for the better. I am asked nonetheless to address question 2 in any event in case, on appeal, a different answer is given to question 1 than that which I have given. I shall do so briefly, reflecting the brevity of the submissions made on these further questions.

I do so, first, on the assumption that I am correct in my construction of Insolvency Event, but assuming that, perhaps because the assumed facts change or are found to differ from the true facts, the Receivers nonetheless do not make an Insolvency Event determination. A future default in paying Senior Debts is therefore assumed to be improbable, but there may still be a real risk of it.

Question 2(a)(i). In advance of an Insolvency Event clause 10.2(a) of the Trust Deed requires the Receivers to manage the assets so as to maximise the prospect (which, although probable, may be still subject to real risk), of a timely payment in full of all Senior Debts. If a proposed asset sale maximises that prospect, then the Receivers should sell. If not, they should not. The question as framed omits the words “all”, “timely” and “in full”, which should be added to any affirmative answer.

Question 2(a)(ii). On my construction of Insolvency Event, the answer must be no. Such a sale would convert Cheyne from a company probably able to pay all Senior Debts in full on time, and therefore solvent, into one that could not. No sensible interpretation of clause 10.2(a) could permit such a sale, not least because it would cause an Insolvency Event where it was otherwise improbable.

Question 2(b). On my construction of Insolvency Event the answer must again be no, because if there has been no Insolvency Event absent the sale Cheyne will probably be able to pay all its Senior Debts in full, and clause 10.2(a) requires the Receivers to maximise that prospect, whereas the sale would prevent it.

I turn now to question 2 on the alternative construction of Insolvency Event to that which I have preferred. On that construction it is, on the assumed facts, probable, but not necessarily certain, that Cheyne will fail to pay all Senior Debts in full as they fall due, but the Receivers are unable to declare an Insolvency Event, so remain bound by clause 10.2(a) of the Trust Deed.

One of the reasons why I have rejected that construction of Insolvency Event is that, in my judgment, it gives rise to extraordinary difficulties in understanding how the clause 10.2(a) duty is to be performed, it being unlikely that the stated objective can be achieved in full. The same problems are magnified if future default is not merely probable, but certain.

Question 2(a)(i). Again, in my judgment, the answer must be yes, but with the addition of the words “all”, “on time” and “in full”. Where a proposed sale increases the prospects of achieving that objective from, for example, just better than fanciful to, for example, just less than even, then they should sell. If not, they should not sell.

Question 2(a)(ii). This question raises the problem that a proposed transaction may affect the prospects of achieving different parts of the clause 10.2(a) objective in different ways. For example, a proposed sale may substantially increase the prospects of payment of all Senior Debts in full, but at the price of making it certain that some will be paid late. The portfolio sale referred to in the assumed facts is just such a transaction.

Unsurprisingly, on my construction of Insolvency Event, clause 10.2(a) provides no answer to this conundrum. On the alternative construction of Insolvency Event no other provision of the Trust Deed does either. In my judgment, the Receivers would have to make that choice by applying their own judgment as to which course would best serve the interests of the Senior Creditors as a whole. I reject Party A’s submission that clause 10.2(a) impliedly prefers prompt payment of early maturing debts over all other parts of the stated objective.

The consequence of such a decision may be to accelerate the date when, on the alternative construction of Insolvency Event, an actual or imminent default in payment of a Senior Debt on time triggers an Insolvency Event. If so, so be it. If the beneficial transaction made such a default imminent, then it would trigger an immediate Insolvency Event even prior to the sale. But to treat that consequence as meaning that therefore the Receivers should not sell would be to allow the tail to wag the dog. It would almost, by definition, be a transaction which the Receivers would wish to pursue after an Insolvency Event, so the fact that a decision to sell would trigger an Insolvency Event would not, in my judgment, matter.

Question 2(b). This question presumably contemplates some kind of distressed sale which, although it fails to achieve best value, generates the early cash necessary to postpone an immediate or early Insolvency Event constituted by an actual or imminent default. On the alternative construction it would not trigger an Insolvency Event. Again, unsurprisingly, in my view, clause 10.2(a) provides no clear answer to this conundrum. I would answer it, like question 2(a)(ii), by reference to the Receivers’ judgment as to the best interests of the Senior Creditors as a whole. From the evidence it seems most unlikely that the Receivers would think that such a transaction was in the best interests of Senior Creditors as a whole, unless perhaps the increased probability of a later default was marginal, whereas the proposed transaction secured major advantage in terms of earlier payment.

In my judgment, the Receivers would not be obliged slavishly to effect any sale which would postpone an early or imminent default regardless of the gravity of later defaults thereby caused by failing to obtain best value.

That is the substantive part of the order. Could I just invite your Lordship to look at the application because there are one or two other consequentials. Your Lordship sees on p.2 of the application that we seek a sealing order under Rule 7.3(1)(v). My Lord, can I suggest that we add words along the following lines – it is basically to ensure that two things happen – first of all, an application is made to a judge rather than to a registrar; and also to make sure that any such application is made on notice to the applicants’ solicitors. What I would suggest is something along the following lines at the end of what appears, “Not to be made open to inspection without the court’s permission, such permission to be made on application to the judge on 48 hours notice to the applicants’ solicitors”.

My Lord, then there is the question of costs. On the last occasion your Lordship directed that that the costs of all parties be costs in the receivership. My Lord, the Receivers, subject to one caveat, would have no objection to a similar order here. My Lord, the caveat concerns interested Party D who has no less than three instructing solicitors. My Lord, I think it is agreed that only one set of solicitors’ costs of Party D would be permitted.

My Lord, three short points: there is a point on construction on which reasonable parties could differ; it does involve within the drafting a point of law of significance, being the meaning of ----

My Lord, for all those reasons we would ask that we do have permission to appeal against your Lordship’s judgment.

I am aware that Mr. Sheldon may want to something about the timing. Your Lordship’s order on the last occasion was to make an order that the appeal would be pursued with extreme diligence.

Whilst we would want, and anticipate trying to bring the appeal on next week, my position is that I can undertake that we will notify the other parties as to whether or not we do intend to take up the permission to appeal by close of business UK time on Monday, and lodge an application, an appellant’s notice on Tuesday, and then take all steps to have the matter brought on as quickly as possible.

My Lord, I appreciate there is urgency but, my Lord, realistically that is what I am in a position to offer your Lordship.

My Lord, Mr. Fisher has not addressed that yet, but can I perhaps deal with the timing issue. We clearly need to know where we stand as soon as possible. There are these negotiations, refinancing negotiations, which are going on.

I must say, I am a little concerned that the timetable proposed by my learned friend is a little bit on the slack side. We really need to know whether or not there is going to be an appeal by the end of this week so that we can take steps – I do not know if your Lordship is in any position to assist on this – to have a hearing before the Court of Appeal next week. I think, on the timetable my friend suggests, that it is likely to push it back a week. What I would propose is that everyone be told by close of business on Friday. That should give my friend’s clients enough time to think about it. Then we are in your Lordship’s hands about when the notice of appeal is actually filed.

My Lord, I do not want to anticipate an application for a stay, my Lord, but it does raise issues about the holding the fort at the moment, but we do have certain -----

The other matter is the potential sale which might render the appeal nugatory.

As regards the Insolvency Event and payments out, the position would be that if the Court of Appeal took a different view the determination by the Receivers on the basis of your Lordship’s interpretation would simply be a nullity.

On the stay point, Mr. Pascoe set out timetable is somewhat leisurely, but we will not get the approved judgment, or at least the transcript of the judgment until about 24 hours time from now and we have got to take instructions ----

The only undertakings I am in a position to give to your Lordship are those which I set out when I was on my feet a few moments ago. If your Lordship puts a tighter timetable on it, then so be it, but we do need time to consider it carefully and those are the undertakings I am instructed to give.

My Lord, in terms of a stay, we would just make a couple of observations. The current position, assuming your Lordship is minded to give permission, is that the Receivers have a judgment, but it will be one in respect of which your Lordship has given permission, and therefore it is accepted that there is a real prospect that the Court of Appeal may go the other way.

My Lord, it is then a matters for the Receivers, in the light of that judgment, as to whether they feel confident enough in circumstances, where your Lordship has given a judgment which they say has one conclusion but permission has been given to appeal, to call an Insolvency Event.

My Lord, in terms of a stay, my clients would like the position to be preserved so that an appeal is not rendered nugatory. It does seem to us that a sensible solution to that would be that payments are not made on a pay as you go basis, but that a book sale is not effected so that there is no irreversible change of position. Then, were the Court of Appeal to say we disagree with your Lordship and give directions which therefore lead to the Receivers to reconsider whether or not an Insolvency Event had occurred, the position, albeit there would be some late payments, could be restored to that which ----