Perpetual Trustee Co Ltd v BNY Corporate Trustee Services Ltd & Anor

The anti-deprivation principle invalidates arrangements that remove property from an insolvent estate or contract out of mandatory insolvency distribution rules. It does not invalidate an interest which was inherently limited or conditional from the outset. A priority interest under a security arrangement may therefore change when the secured party becomes the defaulting party, provided the change reflects the structure and performance conditions of the transaction rather than a deprivation of property belonging unconditionally to the insolvent party. The principle may be relevant where insolvency proceedings occur abroad, but cross-border assistance questions should be decided only on a specific request. A contractual event of default occurring before termination may independently trigger a change of priority.

The claimants were noteholders under transactions in the Dante Programme. Collateral had been charged to secure both the issuers’ obligations to the noteholders and Lehman Brothers Special Financing Inc under related swap agreements. The trust deeds gave Lehman BSF priority while it performed the swap and gave the noteholders priority if an event of default occurred under the swap agreement and Lehman BSF was the defaulting party.

Following the Lehman insolvencies, the noteholders sought enforcement of the collateral and priority over Lehman BSF. Lehman BSF argued that the priority provision was void under the anti-deprivation principle and sought a stay pending proceedings in the United States Bankruptcy Court. The central questions were whether the provision was invalid under English law and whether the English proceedings should be stayed.

1. Validity of the priority provision. The anti-deprivation principle prevents parties from contracting out of mandatory insolvency distribution rules and invalidates a provision which removes from an insolvent estate property unconditionally owned at the commencement of insolvency. It does not invalidate an interest which is inherently limited or determinable on insolvency or another event. The court adopted the first five propositions extracted by Neuberger J in Money Markets International Stockbrokers Ltd v London Stock Exchange Ltd [2002] 1 WLR 1150, while recognising an uncertain area requiring construction of the transaction as a whole.
2. Clause 5.5 was valid. The collateral was acquired with investors’ subscription money and was not derived from Lehman BSF. Lehman BSF’s priority was conditional on its continuing performance of the swap agreement. Its security interest was therefore limited as to priority from the outset and did not pass to an insolvency office-holder free from that limitation. The arrangement did not create a springing security for Lehman BSF’s obligations or an attempt to exclude the mandatory insolvency regime.
3. The court also held, in the alternative, that the principle was not confined to an English insolvency process. Cross-border insolvency law and the common law permit co-operation with foreign insolvency regimes. The precise powers available under the UNCITRAL Model Law should be determined only upon a specific request, not in the abstract.
4. The change to noteholder priority could be triggered by the Lehman group parent’s Chapter 11 filing, which was an event of default under the swap agreement, even though it was not Lehman BSF’s own insolvency filing. The relevant default had to precede termination, but it did not have to be the default specified in the termination notice.
5. The stay application was not finally determined in favour of Lehman BSF. The claims were adjourned to a date not earlier than 1 October 2009, allowing the foreign representative and the US Bankruptcy Court time to consider any request for assistance. Questions concerning the Trustee’s indemnities were deferred.

First instance decision. The judgment itself does not state any prior appellate decision.