Alison Grant v FR Acquisitions Corporation (Europe) Ltd

Hearing dates: 13 th and 14 th January 2021

APPROVED JUDGMENT

Remote hand-down: This judgment was handed down remotely at 10:30 on 11 October 2022 by circulation to the parties or their representatives by email and by release to The National Archives.

THE HONOURABLE Mr Justice Hildyard

This application for directions made by the joint Administrators of Lehman Brothers International (Europe) 1 (“the “Administrators” and “LBIE” respectively) concerns the construction and effect of various standard form Events of Default provisions which were (and typically are) included in the 1992 and 2002 versions of the ISDA Master Agreements (multicurrency – cross border versions). 2

LBIE is a party to two interest rate swap transactions (together, “the Swaps”) each incorporating the terms of an ISDA Master Agreement. One is a sterling interest rate swap (“the Sterling Swap”) to which the first Respondent, FR Acquisitions Corporation (Europe) Ltd (“FRAC”), is a party. The Sterling Swap is governed by the 1992 ISDA Master Agreement. The other is a US dollar interest rate swap (“the Dollar Swap”) with the second Respondent, JFB Firth Rixson Inc (“JFB”) now governed by the 2002 ISDA Master Agreement. 3 FRAC and JFB (together, “Firth Rixson”) are part of the Firth Rixson group of companies, which make and supply rings, industrial forgings and other specialised metal products, primarily to aerospace engine manufacturers.

It is common ground between the parties that under the two interest rate swap agreements (together “the Transactions”) there is owing to LBIE (a) by FRAC, under the terms of the Sterling Interest Rate Swap, a principal amount of more than £8 million and (b) by JFB, under the Dollar Interest Rate Swap, a principal amount of more than US$53 million.

However, since the inception of the administration of LBIE by order of the Court on 15 September 2008, and thus now for considerably more than a decade, Firth Rixson have relied on a provision in both ISDA Master Agreements (together “the ISDA Master Agreements”), Section 2(a)(iii), to suspend their payment obligations to LBIE. Section 2(a)(iii) makes 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”.

There is no doubt or dispute that the making of the Administration Order triggered that suspensory condition. Between 2010 and 2012, the Administrators engaged in litigation with Firth Rixson (and a number of other parties) before the High Court and the Court of Appeal as to the meaning of Section 2(a)(iii). It was held that Firth Rixson are entitled to rely on Section 2(a)(iii) to suspend their payment obligations until such time as there are no longer any continuing Events of Default in respect of LBIE (or, as the Court of

On that basis, Firth Rixson have declined to pay LBIE any of the amounts owing. It seems likely, as Mr Bayfield suggested was the case, that in relying on the suspensory condition (rather than terminating the Swaps), Firth Rixson probably expected that the administration would end in LBIE's dissolution, rather than its exit from administration as a solvent company. What has transpired was difficult, if not impossible, to foresee.

For in the event, the administration of LBIE has been highly successful. The Administrators have 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 those circumstances, the Administrators are now working to bring LBIE's administration to an end by terminating their appointments and returning LBIE to the control of its directors. On 15 July 2020, Sir Geoffrey Vos C (as he then was) held in Re Lehman Brothers International (Europe) [2020] Bus LR 1875 that the Administrators were pursuing (and were entitled and bound to pursue) the first objective under paragraph 3 of Schedule B1 to the 1986 Act (i.e., rescuing LBIE as a going concern).

The Administrators contend that, if and when their appointments terminate under paragraph 79 of Schedule B1 of the Insolvency Act 1986 (“IA 1986”) and LBIE is placed under the control of its directors, no Event of Default or Potential Event of Default will be “ continuing” with respect to LBIE under the ISDA Master Agreements. They contend that at that stage, the suspensory condition provided for by Section 2(a)(iii) will fall away, and Firth Rixson will become liable to make payment.

Firth Rixson disagree. They contend that the mere termination of the Administrators' formal appointment and the other proposed Relevant Steps (as defined in footnote 20 below) 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 disagreement arises out of two essential factors:

(1) First, Firth Rixson assert that various events in the course of LBIE's administration, including, inter alia, both the scheme of arrangement proposed by the Administrators and sanctioned by the Court on 18 June 2018 (the “Scheme”), and a successful application and order made for its recognition and enforcement in the USA under the US Bankruptcy Code (“Chapter 15”), have given rise to freestanding Events of Default separate from (and additional to) the original Event of Default triggered by LBIE's entry into administration.

(2) Second, Firth Rixson assert that certain Events of Default (including the Event of Default triggered by LBIE's entry into administration, its subsequent conversion into a distributing administration, and the alleged Event of Default arising out of the Scheme and its US recognition) will continue to have effect and are incapable of cure.

In these contexts:

(1) In relation to what they submit is the continuing effect of the Event of Default which occurred when the Administration Order was made, Firth Rixson have emphasised that LBIE became a distributing administration in December 2009. They submit that since that date the administration has been “functionally equivalent” to a liquidation, in that LBIE's assets have been realised and the proceeds distributed to its creditors in respect of their provable claims pursuant to a mandatory statutory regime involving permanent alterations to creditors' rights. They suggest that, in those circumstances, there is no going back, and the notion that the effects of such matters and more than ten years of continuous Events of Default can be undone or “cured” merely by taking certain formal steps at the close of the administration is incorrect and does not reflect the true meaning and effect of the ISDA Master Agreements.

(2) Firth Rixson maintain that, in any event, the Scheme also constituted an Event of Default, which, since the Scheme's provisions continue in full force and effect, must be regarded as “continuing”.

(3) Furthermore, Firth Rixson contend that the Order made in the US under Chapter 15 (“the Chapter 15 Order”) and its ancillary orders (including a permanent injunction) recognising and giving effect to the Scheme in the United States, also constituted an Event of Default, and that the fact that it is “continuing” is illustrated vividly by the continuation of the permanent injunction granted as part of the Chapter 15 Order.

If Firth Rixson's arguments are accepted, the result will be that Firth Rixson would be under no obligation to make payments in aggregate of £8,149,086 and US$53,629,230 (exclusive of interest). That result, the Administrators contend, would be uncommercial and unfair, especially in circumstances in which (as Mr Bayfield put it in opening) Firth Rixson would be relying on “a provision which the court has held to be designed to mitigate counterparty credit risk” and “Firth Rixson is not subject to any credit risk at all”; to which Firth Rixson inevitably responded that, even if the result might appear unfair, this was no reason or basis for subverting the meaning of the carefully honed wording, and that the Administrators were simply trying “to conjure up one or more arbitrarily worded phrases and insert them into the Master Agreements.”

I turn to address the issues which arise under the following headings:

(1) The undisputed background facts relating to (a) the Transactions (b) LBIE's administration (c) an application made by the Administrators in December 2010 resulting in judgments at first instance and the Court of Appeal (d) the 2018 Scheme (e) the proceedings culminating in the Chapter 15 Order and (f) the application made by the...