Vol 4 (2007) - Issue 4

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Merrill Lynch International Bank Limited v Winterthur Swiss Insurance Company [2007] EWHC893 (Comm 28/2007)

This recent case before the Queen’s Bench in the High Court shows the importance of ensuring that ‘event of default’ provisions in contracts are broadly defined to cover all potential proceedings both within the English jurisdiction and in any other foreign jurisdiction. The High Court held that the institution of safeguard proceedings by the Eurotunnel companies amounted to a bankruptcy event of default under an ISDA master agreement and triggered a back to back credit indemnity insurance.

1. Facts

Merrill Lynch (the ‘Bank’) had engaged in certain hedging transactions one including an ISDA Master Agreement and certain interest rate collar transactions forming part of it (the ‘ISDA Agreement’) with Eurotunnel Finance Limited (‘EFL’), a member of the Eurotunnel group of companies.
Under the ISDA Agreement, the Bank was exposed to distinct and independent credit risks in respect of –

(i) EFL’s failure to pay the amounts due on periodic (six monthly) payment dates; and

(ii) the occurrence of a ‘Bankruptcy’ Event of Default as defined in s.5(a)(vii) of the ISDA Agreement (‘Section 5’) in respect of the Eurotunnel entities.

In December 2000 the Bank purchased a credit in-demnity insurance from Winterthur International Insurance Company Limited (‘WIICL’) the predecessor to Winterthur Swiss Insurance Company (the ‘Insurer’) in order to protect against these risks (the ‘Policy’).

On 11 July 2006 Eurotunnel SA together with the other Eurotunnel entities instituted proceedings in France before the Tribunal de Commerce de Paris (the ‘Tribunal’) demanding the opening of a procedure de sauvegarde pursuant to Livre 6, Titre II Articles I.620 1 of the French Commercial Code (the ‘Safeguard Proceedings’).
The Safeguard Proceedings are a new statutory proce-dure in French Law intended to offer interim protection to reorganise a commercially insolvent company. The procedure is listed in Annex A of the EC Regulation on Insolvency Proceedings (No. 13446/2000 of 29 May 2000 (the ‘Regulation’) with the effect that it is to be treated as a ‘Main Insolvency Proceeding’ for the pur-pose of Article 3 of the Regulation.

On 14 July 2006, following the institution of the Safeguard Proceedings, the Bank, by notice to EFL, purported to declare a ‘Bankruptcy’ Event of Default under Section 5 and to designate 17 July 2006 as the Early Termination Date in respect of all transactions. Relying upon the termination, the Bank proceeded to determine and calculate the amount it claimed was owed by EFL on early termination to be the sum of ap-proximately EUR 29 million.

On 20 July 2006 the Bank sent EFL a Notice of State-ment of Calculation of the amount it claimed was due and also sent the Insurer a Notification of Loss pursuant to clause 1(i)(c) of the Policy.

EFL immediately disputed there had been any ‘Bank-ruptcy’ or that the Bank was entitled to terminate the ISDA Agreement and demand payment of the EUR 29 million. Instead, on 25 July 2006 EFL made the next semi annual payment which would have been due had there been no Early Termination Date. The Bank ap-plied this payment in partial discharge of the amount it claimed it was owed by EFL. The dispute between EFL and the Bank as to the validity of the early termination and the Bank’s entitlement to demand the EUR 29 mil-lion has never been resolved (having been overtaken by events in the Safeguard Proceedings.

On 2 August 2006, the Tribunal delivered a judgment opening the Safeguard Proceedings in respect of Eurotunnel SA and each of the other Eurotunnel entities and ordered, inter alia the appointment of two Administrateurs Judiciaires (the ‘Administrators’). As a result of the judgment, a six month observation period came into effect during which period various restrictions applied to creditors’ rights to obtain payment of their debts and take enforcement measures against the Eurotunnel entities.