INSOLVENCY, HEDGING AND INSURANCE
MerriU Lynch International Bank Ltd v Wlntertbut Swiss insurance Company [2007] EWHC 893 (Comm) (Gloster ])
Whether safeguard proceedings in France were a bankruptcy
event enabling a bank to terminate an International Swaps and
Derivatives Associacion (ISDA) agreement and claim for its loss
under an insurance policy.
BACKGROUND
Winterthur Swiss Insurance Company (the 'Insurer') agreed to
insure Merrill Lynch Internationai Bank Ltd (the 'Bank') with
respect to its financial loss pursuant to the Bank's credit exposure
under an ISDA Master Agreement with Eurotunnel Finance
Limited ('EFL'). EFL's obligations were guaranteed by other
Eurotunnel companies (the 'Credit Support Providers').
In July 2006, amongst other Eurotunnel companies, the
Credit Support Providers started French proceedings demanding
the opening of the judicial 'proicifwe de sauvegnril^'- This is a new
statutory procedure under French bankruptcy or insolvency law
intended to offer interim protection to companies experiencing
financial difficidties. Following the commencement of the
proceedings (but before the French court had actually opened the
'safeguard procedure') the Bank purported to declare a Bankruptcy
Event of De&ult under the ISDA Master Agreement and designated
an Early Termination Dace in respect of all rel.ated hedging
transactions. The Bank then notified EFL of the amount it was owed.
On the same cfay, the Bank sent the Insurer a notification of loss
pursuant to the related insurance policy.
EFL disputed there had been any bankruptcy, refused to pay the
Bank and went on to pay the next semi-annual payment due under
the ISDA Agreement. Later, in August 2006, the French courts
Butterworlhs Journal of International Banking and Financial Law
actually opened the 'safeguard procedure'. The Insurer then sought to
avoid the Bank's claim under the insutance policy.
CONCLUSION
The Bank was entitled to claim under the insurance policy. A
Counterparty Bankruptcy had occurred. The institution of
proceec{ings by the Ctedit Support Providers in July 2006 was a
proceeding .'peeking'... any other relief under any bankruptcy or
insolvency law or other similar law affecting creditors' rights' under
the definition in the policy, albeit that the French court did not
formally open the procedure until August 2006.
The Bank had validly terminated the ISDA Master Agreement on
the grounds of a Bankruptcy Event of Default. Thereupon the total
amount due by EFL to the Bank in respect of the Early Termination
Date was determined by the Bank.
A Bankruptcy Trigger Event, as defined in the insutance policy,
did occut, notwithstanding there was no prior Counterparty Failure
to Pay under the ISDA Master Agreement. Commercial contractual
documents should be interpreted in a way which is commercially
realistic rather than literalistic. The occurrence of a bankruptcy
event during the currency of an ISDA Master Agreement materially
increased the risk of a tutute default by EFL at a subsequeiil periodic
payment date- It was in the interests of the Banksndthe Insurer to
terminate and avoid the risk of EFL's obligations becoming more
substantial and less enforceable by the time of the next scheduled
payment ciate as a result of unanticipated changes in interest rates.
Jonathan Lawrence, K&L Gates.
Email: Jonathan.lawrenee @kIgates.com, www.klgates.com
July/August 2007