Another day, another CMBS transaction declares an insolvency related event of default (after the REC6 default), this time based on the ‘balance sheet’ event of default. The notice posted by the issuer clearly states that after the sale of property securing the Brisk loan, the issuer will not have sufficient assets to repay the Class D Notes and the Class E Notes. Its assets are less than its liabilities. Hence, an insolvency event of default must occur. Simple, right? Well, maybe…

The event of default as listed in condition 10(c) of the notes issued by EMC-III occurs if, amongst other things, the Issuer is “unable to pay its debts as and when they fall due within the meaning of Section 123(1)(e) or (2) of the Insolvency Act 1986 (as amended)”.

Ignoring for a moment the fact that Section 123(2) of the Insolvency Act doesn’t actually deal with paying debts “as and when they fall due”, if we look at the wording of the section, it states that:

A company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities”.

As the event of default in condition 10(c) did not modify the wording in the statue (as other securitisations have done in their events of default e.g. see Eurosail-UK 2007-3BL plc ), it seems to me that no one (as far as I know) has proved to satisfaction of the court that the value of the issuer’s assets is less than the amount of its liabilities (incidentally, section 123(1)(e) contains the same wording highlighted above). But, hey that’s what I say. On the face of it, such a test would most likely be satisfied in court but does it mean that the issuer should not have called an event of default (as no court proceedings were initiated) or do wider director’s duties at law mean that the issuer was right to call an event of default in the circumstances?