BNY Corporate Trustees Services Ltd v Eurosail-UK 2007-3BL plc [2013] UKSC 28 (often referred to as simply the Eurosail case) was a decision of the Supreme Court of the United Kingdom in relation to the proper interpretation of section 123(2) of the Insolvency Act 1986[1] (the so-called "balance-sheet test") as it had been applied in commercial bond documentation.

The essential question for the court was whether this inevitable future shortfall means that the company could be treated as insolvent today, or whether it was necessary to wait until either it ran out of funds, or at least came close to doing so.

[3] If it was decided that because the financial track the company was inevitably on meant it should be treated as insolvent now, then this would trigger an event of default under the bond documentation, which would result in an acceleration of the payment of all of the tranches on the notes.

Lord Walker restated the basic proposition, that "whether or not the test of balance-sheet solvency is satisfied must depend on the available evidence as to the circumstances of the particular case".

However, Lord Walker noted that there may be no payment due at all under the swap contracts depending upon the movements in currency exchange rates over the periods.

This meant that trying to evaluate balance-sheet insolvency in the context of those contingencies was "a matter of speculation rather than calculation and prediction on any scientific basis".

On the evidence before the court, he concluded that the company's ability to pay all of its debts (whether present or future) could not be finally determined until much closer to the date for redemption.

Accordingly, even though there might be a commercial expectation that the PECO would operate to secure the release of company from its obligations under the notes,[13] for the purpose of applying the insolvent test one should not make that assumption.

Some market commentators predicted that this would lead to originators reverting to traditional limited recourse language, particularly as the tax advantages related to PECOs no longer subsisted.

[14] The Supreme Court cited with approval the decision of Briggs J in Re Cheyne Finance plc [2008] EWHC 2402 (Ch), [2008] BCC 182, in relation to the "element of futurity" inherent in the insolvency test.

"[17] It has been referred to as a "profound and far-reaching" decision, noting in particular that "the contention that a PECO structure gives effective limited recourse is now discredited.

"[18] UK based issuers who operate these structures will not be able to rely on the PECO to effectively discount the value of their liabilities to noteholders back to the level of their assets, at least until the conclusion of the transaction.