Supreme Court upholds CoA Lehman ruling using 200-year-old insolvency law

A seven-strong panel of Supreme Court justices has dismissed an attempt by the trustees of Lehman Brothers to recoup £61m from noteholders, by upholding an insolvency law principle that has existed for 200 years.

In a unanimous judgment led by Lord Collins of Mapesbury, the court said the anti-deprivation rule – first laid out in 1812 – was too well-established to be discarded in this case.

The decision is a victory for Lawrence Graham, Hogan Lovells and counsel from 3 Verulam Buildings and Brick Court Chambers, representing the respondents and original claimants in the case.

The Supreme Court upheld the previous decisions of High Court chancellor Sir Andrew Morritt and the Court of Appeal in dismissing the appeal of Lehman group company Lehman Brothers Special Financing (LBSF).

Before going bankrupt in 2008 LBSF had established a multi-issuer secured obligation programme under which credit-linked notes were issued to various investors. Under swap agreements with the issuers, LBSF agreed it would pay to each issuer the amounts that issuer had to pay to the noteholders, in return for the issuer paying to LBSF the yield on the collateral backing the applicable notes. The issuers’ obligations to pay LBSF under the swap agreements were also secured on the collateral backing the notes.

When LBSF and Lehman Brothers Holdings Inc (LBHI), which was providing credit support to the swaps, applied for Chapter 11 bankruptcy protection in the US these events constituted an event of default under the swap documentation. This meant that the security over the collateral became enforceable.

The respondents, led by Belmont Park Investments, were Australian companies, investors and charities who held some of the LBSF notes worth A$91.1m (£61m). Another group of noteholders were involved in the lower courts but settled their case before the Supreme Court appeal.

The noteholders launched proceedings to force trustee company BNY Corporate Trustee Services to realise the collateral and apply the proceeds of the collateral in favour of the noteholders, in priority to any claim of LBSF.

LBSF countered by claiming that the contractual provisions in the notes unlawfully deprived LBSF of property to which it was entitled.

However, the Supreme Court decided that the contractual provisions were entered into in good faith and were not designed to deliberately evade insolvency law. That meant they did not offend the anti-deprivation rule.

Giving the leading judgment Collins said: “It would go well beyond the proper province of the judicial function to discard 200 years’ of authority, and to attempt to rewrite the case law in the light of modern statutory developments. The anti-deprivation rule is too well established to be discarded despite the detailed provisions set out in modern insolvency legislation, all of which must be taken to have been enacted against the background of the rule.”

The line-up:

For the appellants, Lehman Brothers Special Financing: Weil Gotshal & Manges partner Matthew Shankland instructed Erskine Chambers’ Richard Snowden QC and James Potts.

For the 1st to 29th respondents: Lawrence Graham partner Jean-Pierre Douglas-Henry instructed 3 Verulam Buildings’ Richard Salter QC and Jonathan Davies-Jones.

For the 30th respondent, BNY Corporate Trustee Services: Hogan Lovells partner Hugh Lyons instructed Brick Court Chambers’ Mark Howard QC and Stephen Midwinter.

For the Commissioners for Her Majesty’s Revenue & Customs (intervening): HMRC Solicitors instructed 3 Verulam Buildings’ Gregory Mitchell QC

For the Football Association Premier League (intervening): McCormicks Solicitors partner Peter McCormick instructed 3-4 South Square’s Gabriel Moss QC and Daniel Bayfield.

Sitting: Lord Phillips of Worth Matravers, Lord Hope of Craighead, Lord Walker of Gestingthorpe, Lady Hale of Richmond, Lord Mance of Frognal, Lord Collins of Mapesbury and Lord Clarke of Stone-cum-Ebony.