Re Lehman Brothers International (Europe) ((in Administration)) (No 8); Lomas and Others v Burlington Loan Management Ltd and Others
| Jurisdiction | England & Wales |
| Judge | The Honourable Mr Justice Hildyard,Mr Justice Hildyard |
| Judgment Date | 05 October 2016 |
| Neutral Citation | [2016] EWHC 2417 (Ch) |
| Docket Number | Case No: 7942 of 2008 |
| Court | Chancery Division |
| Date | 05 October 2016 |
[2016] EWHC 2417 (Ch)
The Honourable Mr Justice Hildyard
Case No: 7942 of 2008
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
IN THE MATTER OF LEHMAN BROTHERS INTERNATIONAL (EUROPE)
AND IN THE MATTER OF THE INSOLVENCY ACT 1986
Royal Courts of Justice
Strand, London, WC2A 2LL
William Trower QC, Daniel Bayfield (QC from 11 January 2016) and Stephen Robins (instructed by Linklaters LLP) for the Administrators
Robin Dicker QC, Richard Fisher and Henry Phillips (instructed by Freshfields Bruckhaus Deringer LLP) for the First to Third Respondents
Antony Zacaroli QC, David Allison QC and Adam Al-Attar (instructed by Kirkland & Ellis International LLP) for the Fourth Respondent
Tom Smith QC and Robert Amey (instructed by Michelmores LLP) for the Fifth Respondent
David Foxton QC and Craig Morrison (instructed by Cleary Gottlieb Steen & Hamilton LLP) for the Sixth Respondent
Hearing dates: 9–11 November & 16–25 November 2015
Further submissions received 7, 14 & 21 December 2015
Further hearing 24 June 2016
Supplemental submissions received 21 July 2016
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
| INTRODUCTION | 5 |
| The ISDA Master Agreements in issue: the 1992 and 2002 Forms | 6 |
| The significance of the points in issue | 6 |
| The issues for adjudication | 7 |
| The parties to Waterfall IIC and their roles | 7 |
| Structure of Judgment | 8 |
| PART 1: THE ISDA MASTER AGREEMENTS | 8 |
| The basic framework of the ISDA Master Agreements | 9 |
| Specific provisions relating to interest under the ISDA Master Agreements | 12 |
| Provisions of the 1992 Form relating to interest | 12 |
| The provisions of the 2002 Form relating to interest | 15 |
| Applicable principles of construction: English law | 16 |
| Issue 11 | 17 |
| Points relevant to construction and not contentious | 18 |
| Wentworth's submissions on Issue 11 | 20 |
| The SCG's approach | 29 |
| GSI's submissions on Issue 11 | 33 |
| My assessment and preferred construction | 36 |
| My answers to Question 11 | 42 |
| Further sub-questions under Question 11 | 43 |
| Issue 12 | 46 |
| Issue 13 | 49 |
| Issues 14 to 18 | 51 |
| Issue 14 | 51 |
| Issue 15 | 54 |
| Issue 16 | 55 |
| Issue 18 | 55 |
| Issue 10 | 55 |
| Wentworth's arguments on Issue 10 | 58 |
| The SCG's arguments on Issue 10 | 61 |
| Adjudication of Issue 10 | 67 |
| Issue 19: whether answers different under New York law | 68 |
| THE GERMAN MASTER AGREEMENT | 71 |
| Brief summary of Issues 20 and 21 and the competing arguments | 72 |
| Expert evidence on relevant principles of German law | 73 |
| Relevant provisions of the GMA | 74 |
| Relevant provisions of the BGB | 77 |
| Issue 20: circumstances in which a "damages interest claim" lies under the BGB | 81 |
| Issue 20(1) | 82 |
| Common ground between the experts | 82 |
| The Accrual Issue | 83 |
| The 2016 BGH Decision and its consequences | 85 |
| Is the Accrual Issue affected by the fact that LBIE is in an English not a German insolvency proceeding? | 89 |
| The Default Issue | 93 |
| The test for serious and definitive refusal (sec. 286(2) no.3) | 94 |
| Does the opening of insolvency proceedings itself amount to serious and definitive refusal within the meaning of section 286(2) no.3 of the BGB? | 96 |
| Should a proof in LBIE's administration be taken to constitute a warning notice for the purposes of the BGB? | 102 |
| Conclusion on Issue 20(1) | 105 |
| Issue 20(2) | 105 |
| Issue 21 | 108 |
| Issue 21(i) | 108 |
| Issue 21(ii) | 110 |
| Issue 21(iii) | 113 |
| General position | 113 |
| Simplified or "abstract" method of quantification | 114 |
| ISDA Master Agreements: Supplemental Issue 1(A) | 115 |
| Genesis of Supplemental Issue 1(A) | 116 |
| The opposing parties and their perspectives | 117 |
| Relevant contractual provisions | 119 |
| York's submissions | 122 |
| York's contentions as to the application of its analysis of the Judge's reasoning | 123 |
| Administrators' position and contentions | 125 |
| The SCG's submissions on Supplemental Issue 1(A) | 128 |
| My assessment and conclusions as to Supplemental Issue 1(A) | 130 |
| Issue 27 | 132 |
| Conclusion | 132 |
| SCHEDULE | 133 |
| The SCG's case on the first aspect of Issue 20 (the "Accrual Issue") | 134 |
| Wentworth's case on the first aspect of Issue 20 | 137 |
| My conclusions on the Accrual Issue | 143 |
| APPENDIX 1 | 147 |
| APPENDIX 2 | 150 |
INTRODUCTION
This is the third tranche of what has become known as the Waterfall II Application, which concerns the application of statutory interest pursuant to rule 2.88 of the Insolvency Rules 1986 ("Rule 2.88") on debts proved in the administration of Lehman Brothers International (Europe) ("LBIE").
LBIE was the principal trading company for the European operations of the Lehman Brothers group. LBIE entered into administration on 15 September 2008, the same day as the ultimate holding company of the group filed for protection under Chapter 11 of the US Bankruptcy Code. The collapse of the Lehman group shook the financial world.
The need for LBIE's Administrators ("the Administrators") to seek directions on the issues in this application, and also on an earlier application ("Waterfall I"), arises in the context of a substantial surplus in LBIE's administration after paying or providing for the provable debts owed by LBIE in full. The Administrators presently estimate that the surplus is in the region of £7 billion. Such a situation is unusual. The questions raised as to the application of the substantial surplus are both novel and complex.
It was held in Waterfall I, at first instance (by David Richards J as he then was) and in the Court of Appeal, that the surplus was to be distributed in the order of, first, statutory interest payable under Rule 2.88; secondly, non-provable claims of creditors, including claims to currency exchange losses resulting from a depreciation of sterling against the currency in which creditors' claims were payable between the commencement of the administration and the date on which dividends were paid on such claims; and thirdly, some US$2.27 billion of subordinated debt. (The judgments in Waterfall I are reported at [2014] EWHC 704 (Ch), [2015] Ch 1 and at [2015] EWCA Civ 485.) Waterfall I is on its way to the Supreme Court; but even if the Supreme Court were to reverse the Court of Appeal's decision, there would still be a surplus after payment in full of the subordinated debt.
Waterfall II concerns three main issues: (a) the entitlement of creditors to interest on their debts for periods after the commencement of the administration of LBIE; (b) the construction and effect of various agreements made since the commencement of the administration between LBIE acting by the Administrators and very significant numbers of its creditors; and (c) the construction and effect of pre-administration agreements in various standard forms containing (amongst other things) provisions entitling a counterparty of a defaulting party such as LBIE to interest on amounts payable under the relevant agreement(s). To make Waterfall II more manageable, David Richards J (as he then was) divided its hearing into three, with a separate hearing for each of the above issues.
The first part ( Waterfall IIA) and the second part ( Waterfall IIB) have been adjudicated at first instance and are on appeal to the Court of Appeal. It was held in Waterfall IIA that statutory interest pursuant to Rule 2.88 accrues on all debts, including contingent and future debts, from the commencement of the administration and ceases to accrue after payment of the final dividend. Waterfall IIA is reported at [2015] EWHC 2269 (Ch). Waterfall IIB is not of substantial relevance for the purposes of Waterfall IIC; but it is reported at [2015] EWHC 2270 (Ch).
The application now before me, Waterfall IIC, principally concerns the scope of the entitlements of certain creditors of LBIE to interest in right of proved debts arising under or pursuant to certain standard form master agreements governed variously by English, New York or German law on the terms of which LBIE and its claimant counterparties undertook derivatives transactions before the collapse of LBIE in September 2008.
The ISDA Master Agreements in issue: the 1992 and 2002 Forms
The master agreements in issue are (1) the 1992 and 2002 forms of Master Agreement (together "the ISDA Master Agreements", severally "the 1992 Form" and "the 2002 Form") produced by the International Swaps and Derivatives Association, Inc (formerly the International Swap Dealers Association, Inc) ("ISDA") and (2) another form of master agreement for financial derivative transactions governed by German law ("the GMA").
Put shortly, the principal question now to be addressed both in the case of the ISDA Master Agreements and in the (analytically quite different) case of the GMA...
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