Lehman Brothers to collect on debts following exit from administration?

Grant & Ors v FR Acquisitions Corporation (Europe) Ltd & Anor (Re Lehman Brothers International (Europe)) [2022] EWHC 2532 (Ch)Can a counterparty become liable for a debt that was previously suspended by a company’s administration once the company exits administration?

Overview

This case considers whether a party that has been relying on a company’s administration as an event of default to justify non-payment under an agreement can continue to rely on that default once the company later exists administration as a solvent company.

Background

Lehman Brothers International (Europe) (“Lehman Brothers“), a global financial services firm, entered administration in 2008 largely as a result of its involvement in the suboptimal mortgage crisis. At the time, Lehman Brothers was party to two interest rate swap transactions (the “Swaps“) with FR Acquisitions Corporation Ltd and JFB Firth Rixson (together, “Firth Rixson“), members of the Firth Rixson group of companies, which make and supply specialised metal products primarily to aerospace engine manufacturers.

It was common ground between the parties that under the interest rate swap agreements, Firth Rixson owed Lehman Brothers more than £8 million and US$53 million. However, the ISDA Master Agreements governing the Swaps contained a term that made any payment obligation arising under the transactions subject to the condition precedent that “no Event of Default or Potential Event of Default with respect to the other party has occurred and is continuing”. Firth Rixson had been relying on that term since the inception of the administration for considerably more than a decade as a basis to decline paying Lehman Brothers the amounts owing.

There was no dispute that the making of the Administration Order had triggered the suspensory condition. However, in an unexpected turn of events, the administration of Lehman Brothers was highly successful, with the Administrators having paid in full (or fully reserved for) all provable debts (including subordinated debts), statutory interest entitlements and non-provable liabilities. Substantial assets remain available in the estate. In these circumstances, the Administrators are now working to bring the administration to an end by terminating their appointments and returning Lehman Brothers to the control of its directors.

The Parties’ Submissions

The issue was whether the suspensory condition will remain in effect following the termination of the Administrators’ appointments, such that Firth Rixson will become liable to make payment to Lehman Brothers. The Administrators contended that, if and when their appointments terminate and Lehman Brothers is placed under the control of its directors, no Event of Default or Potential Event of Default will be “continuing” under the ISDA Master Agreements. At that stage, the suspensory condition will fall away, and Firth Rixson will become liable to make payment.

Firth Rixson disagreed. They argued that the mere termination of the Administrators’ formal appointment will not, particularly in the circumstances that have transpired, undo or “cure” the effects of those events over the last ten years, nor mean that the relevant Events of Default have been “cured” such that they are no longer “continuing”.

The Court’s Decision

The Court agreed with the Administrators, finding that, if and when the Administrators have been discharged and a notice has been published that Lehman Brothers has surplus assets over liabilities and is able to pay its debts as they become due, (a) no Event of Default will be continuing under the ISDA Master Agreements, and (b) Firth Rixson will have a contractual obligation to pay the sums owing to Lehman Brothers under the Swaps.

The Court reached this conclusion by interpreting the words of the ISDA Master Agreements, as well as considering the overall purpose of the relevant provisions. It was common ground that any Event of Default, insofar as it related to Lehman Brothers’ solvency or its ability to pay its debts as they become due, has ceased to be “continuing”. However, Firth Rixson pointed out that Lehman Brothers had admitted its inability generally to pay its debts as they become due. The Administrators proposed to cure this Event of Default by publishing, or causing Lehman Brothers to publish, a notice to the effect that Lehman Brothers has a surplus of assets over liabilities, and is now able to pay its debts as they fall due. The Court agreed that this would cure the Event of Default, and included a direction that this be done.

With respect to the overall purpose of the suspensory condition, the Court found that the suspensory condition was aimed at protecting the non-defaulting party from the additional credit risk involved in performing its own obligations, whilst the defaulting counterparty remains unable to meet its own. The Court pointed out that Firth Rixson made their election not to rely on the termination provisions: that was their (unusual) choice. None of the Events of Default or alleged Events of Default on which Firth Rixson relied was such that it had any has a substantive adverse effect on Firth Rixson or its rights in relation to the Swaps, and their credit risk was not increased or adversely affected by any of them. The Swaps came to an end more than a decade ago. In the events that happened, Firth Rixson is the debtor. Firth Rixson is not exposed to any risk of Lehman Brothers failing to perform its obligations: Lehman Brothers has no such obligations to Firth Rixson.

Accordingly, the Court concluded that Firth Rixson will be contractually obligated to pay the sums owing to Lehman Brothers under the Swaps on the discharge of the Administrations and the publication of the notice described above.

Judge: Mr Justice Hildyard

Counsel: Mr Daniel Bayfield KC and Mr Ryan Perkins of South Square (instructed by Linklaters LLP) for the Applicant Joint Administrators (PwC); Mr Robin Dicker QC and Mr Henry Phillips of South Square (instructed by Macfarlanes LLP for the Respondents, though since 12 September 2022 the Respondents have been represented by Cleary Gottlieb Steen & Hamilton LLP)