EUROTUNNEL effectively declared itself insolvent on July 13, after last-ditch negotiations failed to reconcile conflicting interests among its creditors that were blocking agreement on a debt restructuring plan.

Chairman & Chief Executive Jacques Gounon had already lodged papers on July 11 with the commercial courts in Paris for a Procédure de Sauvegarde which would protect both the Channel Tunnel operator and its employees from creditors.

Given that its auditors had already refused to endorse last year’s accounts because the company expected to become insolvent in January 2007, Gounon expected court protection to be granted on July 25. Meanwhile, extraordinary general meetings on July 27 at which shareholders would have been urged to approve the restructuring plan have been cancelled.

Holders of some 64% of the total debt, represented by the Ad Hoc Creditors’ Committee, signed a restructuring plan on May 23 (RG 7.06 p384). This was rejected by bondholders at the most junior debt levels led by Deutsche Bank, which Gounon accused of wrecking the talks. Eurotunnel says it can no longer negotiate because the waiver allowing it to do so expired on July 12, but the two creditor groups were expected to continue talking to each other.

One option is for the creditors to seek ’substitution’, a procedure under which the holders of more senior tiers of debt can apply to the UK and French governments to take over the assets and run the Tunnel themselves. The full legal and practical implications of this arrangement are totally unknown and untested, however.

If the trains actually stopped running, the governments have the right to terminate the concession and manage the operation themselves - in which case both creditors and shareholders could be left with nothing. But nobody expects it to be that simple.