High Court concludes that Swiss insolvency proceedings against Lehman Brothers excluded from the Lugano Convention

17/01/14

Enasarco v. Lehman Brothers Finance S.A. [2014] EWHC 34 (Ch)

On 16 January 2014, Mr. Justice David Richards gave judgment dismissing the application made by Lehman Brothers Finance S.A. (“LBF”) seeking a stay of English proceedings brought by Enasarco in favour of Swiss proceedings.

The English proceedings arise out of a complex structure forming part of a €10 billion secured medium term note programme devised by the Lehman group of companies. The claim involves a set of notes, with a principal value of €780 million and due to mature in 2023, issued by a special purpose vehicle to a noteholder.

The notes had the benefit of principal protection provided by a derivative agreement, incorporating the 1992 ISDA Master Agreement and selecting the Second Method and Loss methodologies, whereby LBF granted cash settled put options to the issuer which ensured there would be sufficient funds to pay the noteholder at maturity not less than the original purchase price of the notes.

LBF suffered an event of default under the derivative agreement when on 15 September 2008 Lehman Brothers Holding Inc filed for bankruptcy protection in New York, resulting in automatic early termination of the derivative agreement.  Thereafter, the issuer calculated its Loss, using market quotations for a replacement transaction, and claimed approximately US$61.5 million from LBF.  LBF responded by denying the claim and claiming an entitlement to, or an amount equivalent to, approximately US$30.8 million. This led to the commencement of the English proceedings by Enasarco against LBF which claim US$61.5 million plus interest under the derivative agreement.

Prior to the commencement of the English proceedings, the liquidators of LBF (which is subject to Swiss insolvency proceedings) rejected Enasarco’s claim for US$61.5 million; Enasarco filed a claim with the Swiss bankruptcy court challenging the liquidator’s rejection of its claim and seeking an order for inclusion of the claim in LBF’s schedule of claims.

LBF sought a stay of the English proceedings in favour of the Swiss proceedings pursuant to Article 27 of the Lugano Convention, Article 28 of the Lugano Convention, or section 49(3) of the Senior Courts Act 1981.

After detailed consideration of European, Swiss and English case law, and the relationship between the Brussels Convention/Lugano Convention and the Insolvency Regulation, the Judge concluded that Article 27 of the Lugano Convention was not applicable because the Swiss proceedings were insolvency proceedings within the exclusion from the scope of the Convention contained in Article 1(2)(b). The Judge was satisfied that there was a very strong case for refusing to grant a discretionary stay under Article 28 or on case management grounds.  The fact that the derivative agreement contained an exclusive jurisdiction agreement in favour of England was held to be a powerful factor in favour of refusing a stay.

The judgment is here.