Does the Lugano Convention permit a stay of English proceedings for relief under a derivative agreement?

Does the Lugano Convention permit a stay of English proceedings for relief under a derivative agreement?

Can English proceedings be stayed under the Lugano Convention or under the court's inherent jurisdiction on case management grounds? The case of Fondazione Enasarco v Lehman Brothers Finance SA [2014] EWHC 34 (Ch)[2014] All ER (D) 90 (Jan) looked at this. In the case Lehman Brothers Finance SA's (LBF) application for a stay of English proceedings in respect of a claim brought by the claimant (Enasarco) for relief under a derivative agreement was refused where there were strong grounds for such refusal and where the English court was the natural court to consider the issues raised because they raised contractual questions governed by English law.

What did the court decide?

Mr Justice Richards decided that:

  1. the Swiss proceedings (relating to construction of the derivative agreement and whether the claim should be included in LBF's schedule of claims) were derived directly from LBF's liquidation and closely connected to it
  2. the Swiss proceedings fell within the exception to the Lugano Convention
  3. the request to stay the English proceedings should be rejected, whether under the Lugano Convention or under the court's case management powers (under the SCA 1981, s 49(3))

How did the problem arise?

Enasarco invested in notes marketed by the Lehman group. ARIC was the special purpose vehicle for the notes programme. The principal amount of the notes was protected by a derivative agreement between LBF and ARIC. The agreement was governed by English law and contained an exclusive jurisdiction clause, as regards states which are parties to the Lugano Convention, in favour of the English courts.

In 2008, LBF's holding company filed for protection under Ch 11 of the US Bankruptcy Code, which constituted an event of default under the derivative agreement and resulted in its automatic early termination, with LBF as the defaulting party. LBF subsequently entered bankruptcy proceedings in Switzerland. In 2009, the English court recognised the Swiss bankruptcy proceedings of LBF as foreign main proceedings under the Cross-Border Insolvency Regulations 2006, SI 2006/1030 (the CBIR).

ARIC filed a claim in the Swiss bankruptcy of LBF for the loss under the derivative agreement. LBF rejected ARIC's calculation of loss and contended that ARIC in fact owed it money under the derivative agreement. ARIC's claim under the derivative agreement was assigned to Enasarco, which sought to resolve the loss calculation in the English courts.

The effect of the recognition o

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About the author:
Kathy specialises in restructuring and cross-border insolvency. She qualified as a solicitor in 1995 and has since worked for Weil Gotshal & Manges and Freshfields. Kathy has worked on some of the largest restructuring cases in the last decade, including Worldcom, Parmalat, Enron and Eurotunnel.