Bankruptcy – how remote is your note?

Author: | Published: 26 Aug 2014

Limited recourse provisions don’t preclude an issuer from becoming insolvent. Is this a concern?

For decades, limited recourse provisions have been a standard feature of securitisations and structured finance transactions. Despite this, there continues to be uncertainty over what they seek to achieve, which can sometimes leads to confusing and unclear drafting. Recent English case law on the topic has provoked further debate over how limited recourse provisions operate.

In ARM Asset Backed Securities [2013] EWHC 3351 (Ch), Justice David Richards found that an issuer of limited recourse bonds would be insolvent on both a cashflow and a balance sheet basis if it had 'liabilities of a certain amount on bonds or other obligations which exceed the assets available to it to meet those obligations'.

This judgment has met with criticism from some quarters. However, it is consistent with English law insolvency rules, along with the Court of Appeal...