Deiulemar Shipping SpA and another v Transfield ER Futures Ltd [2012] EWHC 928 (Comm)


The High Court held that there was no real prospect of successfully arguing that the Defendant was balance sheet insolvent for the purposes of an event of default under the 1992 ISDA Master Agreement.


The case concerned six Forward Freight Swap Agreements ("FFAs") entered into between July and September 2008.  The obligation of each party to make payment under the FFAs was subject to no "Event of Default" or "Potential Event of Default" having occurred (section 2(a)(iii) of the ISDA Master Agreement).

Deiulemar Shipping SpA (the "Claimant") sought to establish the existence of a pre-existing "Event of Default" on the part of Transfield ER Futures Ltd (the "Defendant") in order to avoid a counterclaim totalling approximately USD $45 million.  The Claimant contended that the pre-existing event of default negated its liability to make payment to the Defendant under the FFAs.  Specifically, the Claimant alleged that at the time of its failure to pay, the Defendant was "insolvent" in a balance sheet sense on the basis that it had an excess of liabilities to assets.  That was partly because the Defendant had entered into further FFAs with Pioneer Futures Company Limited ("Pioneer") which was in provisional liquidation.  Under the FFAs with Pioneer, the Defendant allegedly owed Pioneer USD $8 million.  The Claimant argued that this left the Defendant insolvent because its net assets were less than Pioneer's contingent claim.  In addition, it had received substantial shareholder loans and its financial position had markedly deteriorated over time.  As a result there was an incurable deficiency in its assets.

The Claimant's assertion that the Defendant was insolvent was supported partly by the fact that the Defendant's financial status had fluctuated over time which on occasions left it temporarily in an unfavourable position.  However, the Defendant's long-term assets as opposed to its liabilities were generally positive and its cash deposits had been significantly reduced as a result of loan reductions from USD $61 million to $29 million.


The question for the court was whether the financial position of the Defendant was such that it had genuinely reached the "point of no return" (BNY Corporate Trustee Services Ltd v Eurosail UK 2007 3BL).  It is not appropriate to look solely at the company's assets versus liabilities.


Because the Defendant's liability to Pioneer was contingent, the court assessed the likelihood of Pioneer succeeding in its claim against the Defendant.  The court came to the view that if legal advice had been taken by a reasonable commercial person, Pioneer's claim was reasonably likely to succeed although the Defendant at least had an arguable defence which should be taken into account.

While the Defendant's net assets had fluctuated, it was utterly fanciful to suggest that it had reached "the point of no return".  The Defendant's financial circumstances did not affect its ability to perform the FFAs and there was no reasonable basis for including the shareholders' loans as liabilities as the shareholders' loans were made on a long-term basis, were interest free and unsecured.  Moreover, a reasonable commercial person would factor into its insolvency calculations at least some possibility of the Defendant successfully defending Pioneer's claim, which made it even less likely that the Defendant was insolvent.

It is important to note that only the facts known at the time of the alleged event of default should be considered for the purposes of deciding whether a company is insolvent.  It was therefore not appropriate for the court to consider whether Pioneer was successful in its claim against the Defendant after the alleged event of default.


This case is a useful reminder that the court will adopt a sensible commercial approach to considering whether a company is balance sheet insolvent in the context of contractual provisions.  In considering the position, the court will look at the financial position of the company as a whole and will not just focus on whether the company's liabilities are greater than its assets.