Vol 8 (2011) - Issue 5

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Belmont Park Investments Pty Limited v BNY Corporate Trustee Services Limited and Lehman Brothers Special Financing Inc. [2011] UKSC 38

Introduction

On 27 July 2011 the Supreme Court handed down judgment in Belmont Park Investments Pty Limited v BNY Corporate Trustee Services Limited and Lehman Brothers Special Financing Inc [2011] UKSC 38. This case called on the Supreme Court to consider the scope of the so-called anti-deprivation principle, pursuant to which contractual provisions purporting to dispose of property on bankruptcy or liquidation, thereby reducing the value of the insolvent estate to the detriment of creditors, may be invalid. The judgment provides welcome clarification as to the factors the courts will consider in deciding if the anti-deprivation principle is engaged in a particular case. Moreover, unanimously dismissing the appeal, the Supreme Court held that the contractual provisions in issue in this case did not infringe the anti-deprivation principle, a decision which should provide comfort to those working in the investment product market.


Background

As part of the Lehman Brothers so-called 'Dante Programme' notes were issued by special purposes vehicles ('the Issuers'), with the subscription proceeds paid by investors being used to purchase government bonds and other secure investments ('the Collateral'), which vested in BNY Corporate Trustee Services Limited ('the Trustee') pursuant to a trust deed and supplemental trust deed. In addition the Issuers entered into a swap agreement ('the Swap Agreement') with Lehman Brothers Special Financing Inc ('LBSF'), pursuant to which LBSF received the income on the Collateral and, in return, paid to the Issuers the interest that was due to the noteholders.

Crucially, the supplemental trust deed contained a clause, which came to be referred to as the 'flip clause', providing that LBSF would have priority in relation to realisation of the collateral, unless one of the numerous 'Events of Default' under the Swap Agreement occurred, in which case the noteholders would have priority thereto.


The proceedings

On 15 September 2008 and 3 October 2008 respectively, Lehman Brothers Holding Inc ('LBHI') and LBSF filed for Chapter 11 protection, both events constituting Events of Default under the terms of the Swap Agreement.

Thereafter the parties who would become the first 29 Respondents in the Supreme Court case ('the Belmont Noteholders'), being the noteholders of a number of series of notes issued as part of the Dante Programme, issued proceedings in England against the Trustee for orders to procure the realisation of the Collateral and its application in favour of the Belmont Noteholders in priority to LBSF, by virtue of the application of the flip clause. Further English proceedings to similar effect were issued by Perpetual Trustee Co. Ltd ('Perpetual'), which also held notes issued as part of the Dante Programme.

In summary the position adopted by LBSF, which was joined as a party to these proceedings, was that its rights under the Swap Agreement and over the Collateral were the property of LBSF within the meaning of that term as defined in the Insolvency Act 1986 and formed part of LBSF’s insolvent estate and moreover that it was illegitimate to provide for the alteration of those rights in reliance on LBSF’s bankruptcy; to do so would breach the anti-deprivation principle.

Proceedings were also commenced by LBSF against the Trustee in the United States Bankruptcy Court for the Southern District of New York for a declaration that the flip clause altering LBSF’s right to a priority distribution vis-à-vis Perpetual breached the United States Bankruptcy Code and, as such, was unenforceable.