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

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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.