26 Jul 2011
Lehman loses UK Supreme Court appeal as Justices unanimously uphold the supremacy of English law
The UK Supreme Court has today unanimously dismissed an appeal by Lehman Brothers' bankruptcy estate following a legal battle with a group of Australian noteholders - ultimately upholding the supremacy of English law where the parties agree that it is to govern their contractual relations.
The Belmont Australian investor group - who comprise 29 Australian companies, government bodies and charities - are noteholders in Lehman's Dante Collateralised Debt Obligation (CDO) programme, which had a total overall value in the region of US$12.5 billion at the time of Lehman's bankruptcy. To date, the Belmont investors have received no return on their investments despite having contributed to the capital which was also used to purchase collateral in the CDO programme.
This appeal concerns the application of the anti-deprivation rule, a principle of insolvency law dating from the 18th century which has as its aim the prevention of assets being withdrawn from a bankrupt/insolvent estate to the detriment of creditors generally. The Supreme Court held that noteholder priority provisions within the CDO documentation, giving noteholders priority as regards the distribution of collateral held within the CDO structure in the event of Lehman's insolvency, did not offend this age-old principle of English law.
Today's ruling is of significant importance to the rating of synthetic credit-linked notes under multi-jurisdictional arrangements with a swap counterparty and has important knock-on consequences for financial markets on both sides of the pond insofar as the structuring of complex financial products is concerned.
Jean-Pierre Douglas-Henry, banking litigation partner at City law firm Lawrence Graham who acted successfully for the Belmont investors, said: "The Supreme Court has held that priority provisions, in effect subordination provisions, work under English law.
"This is a critical decision as to the efficacy of complex structured and other investment products and security instruments such as CDO / swaps and floating charges with automatic crystallisation provisions.
"English law means what it says and can be relied upon in English law governed financial products and instruments.
"The Supreme Court has determined that investors who invested in Lehman's Dante Programme to fund the acquisition of the disputed collateral get priority over its distribution upon the bankruptcy of Lehman, as provided for in the transaction documentation. This is one of the main reasons why the notes were given a Triple-A rating by the rating agencies and the decision today ensures the future of bankruptcy remote structuring in England."
The order in which creditors get paid is a source of conflict in football insolvencies too. The Supreme Court therefore gave HMRC and the Premier League permission to intervene in the appeal on the basis that it concerns the review of the anti-deprivation rule as a matter of public policy.
On this issue, Douglas-Henry added: "The Supreme Court did not deal with the footballer rule beyond saying that they saw no reason for challenging the validity of the anti-deprivation rule and would leave it to the courts charged with dealing with the HMRC/Premier League proceedings.
"While the court upheld the rights of UK investors, footballers and their wives have been left to slug it out with the tax-man."