Lehmans and subordinated loan agreements

Lehmans and subordinated loan agreements

James Goodwin, barrister at Wilberforce Chambers, assesses the practical implications of the Chancery Division ruling in the latest Lehman Brothers case concerning whether the claimant company was entitled to the relief that it claimed as a creditor of the defendant.

Original news

Lehman Brothers Luxembourg Investments S.à.r.l v Lehman Brothers UK Holdings Ltd (in administration) [2016] EWHC 617 (Ch), [2016] All ER (D) 183 (Mar)

The Chancery Division made a ruling with regard to the solvency of the defendant company, Lehman Brothers UK Holdings Ltd (Lehmans UK), which was in administration. The court held that the solvency condition in the standard terms of three loan agreements would be satisfied in the case of the defendant. As a result, the claimant company was entitled to the relief that it claimed as a creditor of the defendant.

What are the key lessons from this case?

This case is a prime example of the utility of a Part 8 claim, the alternative procedure by which a claimant seeks the court’s decision on a question unlikely to involve a substantial dispute of fact. Often used by trustees seeking guidance, the procedure can be used effectively to obtain declaratory relief.

Where a legal issue arises, especially in respect of the interpretation of a document, and would have far-reaching effects if challenged further down the line, then a party might very sensibly mitigate the risk by seeking the court’s assistance.

What was the issue?

The administrators of Lehmans UK had made payments (and was expected to make further payments) to its parent company, Lehman Brothers Luxembourg Investments S.à.r.l. (the parent company). These were part repayments of subordinated loans (ie a debt ranking behind other debts) made by the parent company to Lehmans UK. The sums were very large—the subordinated loans totalled around £1bn and the part repayment totalled around £100m.

The question which arose was whether these part repayments were held by the parent company on trust for Lehmans UK or whether the parent company held the repayment sums at its free disposal.

The reason why the repayments might have been held on trust is that the relevant terms of the subordinated loan agreements provided that any repayments received by the parent company from Lehmans UK would be ‘void for all purposes’ if Lehmans UK was not ‘solvent at the time or immediately after the payment’.

If the repayments were void, then the subordinated loan contract made clear that the sum would be held on trust by the parent company for Lehmans UK.

In these circumstances the parent company brought a Part 8 claim seeking a declaration from the court that the sums were not held on trust and were, therefore, at the parent company’s free disposal.

Was Lehman UK 'solvent' at the relevant time?

Yes. Under the subordinated loan agreements, solvency was determined by reference to whether Lehmans UK was able to pay all liabilities other than the subordinated liabilities to the parent company. All known creditors (other than the parent company) had been paid in full.

Henderson J held as a matter of construction that solvency must be determined at the time of the payment and that ‘liabilities’ could not include possible unknown liabilities.

What are the practical implications of this case?

The result is of benefit to the Lehmans Group in confirming its understanding of the subordinated loan agreement (which showed signs of sloppy drafting and therefore potentially open to challenge) and confirming its understanding that the parent company is free to use the repayments for its own purposes.

But the case also serves a useful reminder that where large sums of money are at stake (or if the issue is important for other reasons) then the costs of a Part 8 claim to solve a legal issue might be a sensible price to pay to mitigate risk.

A note of caution

It is important to note that the only defendant to the claim by the parent company was Lehmans UK, who supported the parent company’s position. Realistically, the absence of adversarial argument means that the position contended for by a Part 8 claimant is more likely to prevail. However, it should not be thought that this is any guarantee: the court will always exercise its own discretion. Moreover, plenty of Part 8 claims, despite the lack of factual dispute, are fiercely contested between parties arguing for divergent legal results. Part 8 is a useful and often essential tool for ironing out legal ambiguities, but it is not a panacea.

Interviewed by Susan Ghaiwal.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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Lehmans—background and key issues

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First published on LexisPSL Restructuring and Insolvency

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About the author:

Stephen qualified as a solicitor in 2005 and joined the Restructuring and Insolvency team at Lexis®PSL in September 2014 from Shoosmiths LLP, where he was a senior associate in the restructuring and insolvency team.

Primarily focused on contentious and advisory corporate and personal insolvency work, Stephen’s experience includes acting for office-holders on a wide range of issues, including appointments, investigations and the recovery and realisation of assets (including antecedent transaction claims), and for creditors in respect of the impact on them of the insolvency of debtors and counterparties.