Vol 5 (2008) - Issue 6

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Re Whistlejacket Capital Limited [2008] EWCA Civ 575 and the Race to Priority

The vulnerability of structured investment vehicles (‘SIVs’) to the difficulties experienced in financial markets has attracted much attention. Issues arising out of their insolvencies required the consideration of the courts prior to the recent events which now dominate the UK press. Those issues, which stem largely from the security documentation governing the operation of SIVs, last year manifested themselves in the decision of the English High Court in Re Cheyne Finance Plc (No. 1) [2008] 1 BCLC 732. Cheyne was the first SIV to enter receivership. Following that decision, on 12 February 2008 receivers were appointed in relation to a second SIV: Whistlejacket Capital Limited, a Jersey-incorporated company. Thereafter the receivers of Whistlejacket sought judicial guidance in relation to the distribution of the company’s assets, in circumstances where the assets of Whistlejacket were inadequate to meet its extensive liabilities.

Both Cheyne Finance plc and Whistlejacket Capital Ltd involved points of construction on documentation governing the operation of the SIV. They did not involve matters of general legal principle. However, the latest development in Whistlejacket Captial Ltd calls for comment as it is instructive for creditors of SIVs and other corporate entities with similar governing documentation seeking to identify their position in the priority of repayment. The issues arising for determination by the Court of Appeal in Whistlejacket related to the effects of a ‘waterfall’ priorities provision and of an acceleration provision relating to the stated maturity dates of senior notes on insolvency.

Factual background

The receivers brought an application for directions as to the manner in which they should manage and apply Whistlejacket’s assets having regard to the interests of various noteholders. Several series of senior notes with a variety of maturity dates had been issued by Whistlejacket. The Security Trust Deed contained a priority provision, setting out the order of priority in which Whistlejacket’s creditors were to be paid. The third level of priority provided that any monies received were to be applied to pay, ‘pari passu and pro rata in accordance with the respective amounts then owing thereto, any amounts due to Senior Creditors’.

The provisions governing the notes, contained in an Indenture, accelerated the stated maturity dates of the relevant notes on insolvency. If the Security Trustee delivered to Whistlejacket notice of an Insolvency Acceleration Event (an ‘Insolvency Redemption Event’), Whistlejacket was obliged to pay the noteholders what was termed the Enforcement Redemption Amount on a date known as the Insolvency Redemption Date. That due date for payment was thirty days after the insolvency. On 15 February 2008 notice of an insolvency was delivered to Whistlejacket, the redemption date therefore being 16 March 2008. The redemption amount was however calculated by reference to the Redemption Price Calculation Date, itself defined under the Indenture as the date on which the Insolvency Redemption Event occurred. Therefore although the redemption date here was 16 March 2008, the amount required to be paid on that date was calculated by reference to the earlier date of 15 February 2008.

The issues

The dispute was essentially one as to priority as between different senior creditors. The issues were whether: (i) the waterfall provision provided, after insolvency, for a ‘Pay as You Go’ regime of payments to creditors by reference to the stated maturity dates of their notes (i.e. disregarding future claims of creditors whose notes did not yet fall due, and thus creating an order of priority as between different senior creditors based purely on date of maturity); and (ii) the ‘acceleration’ provision had the effect of postponing the stated maturity dates of certain notes.

As to the first issue, the receivers contended that they would be acting properly by making pari passu distributions to all senior creditors, taking into account amounts owing but not yet due among the whole class of senior creditors. As such, their contention was that the provision did not create any order of priority within the class of senior creditors.