ALISON GRANT & Ors v FR ACQUISITIONS CORPORATION (EUROPE) LTD & Anor

Under the ISDA Master Agreement, whether an Event of Default is continuing depends on whether the event or state of affairs constituting it continues, not whether its historical legal effects continue to affect creditors’ rights.

An administration-related Event of Default ends when the administration and administrators’ appointments end, even where the administration was distributing and permanently altered creditors’ rights. A solvent scheme designed to resolve surplus-related litigation is not an arrangement with creditors within Section 5(a)(vii)(3). Recognition of that scheme under Chapter 15 does not create a separate Event of Default. Once the relevant steps were taken, the payment condition in Section 2(a)(iii) ceased to suspend payment obligations.

The joint administrators of Lehman Brothers International (Europe) sought directions concerning two interest rate swaps governed by the 1992 and 2002 ISDA Master Agreements. The respondents had withheld payments for more than a decade, relying on Section 2(a)(iii), because LBIE had entered administration and other insolvency-related events had occurred.

The principal issues were whether the relevant Events of Default remained continuing after LBIE’s proposed exit from administration; whether insolvency set-off had cured payment defaults; whether a solvent scheme of arrangement and its recognition under Chapter 15 constituted further Events of Default; and whether recognition orders in France and Spain had the same effect.

1. Payment default. The payment default under Section 5(a)(i) ceased to be continuing when mandatory insolvency set-off operated under rule 14.24 of the Insolvency (England and Wales) Rules 2016. The cross-claims were replaced by a single net claim.
2. Written admission of inability to pay. An admission under Section 5(a)(vii)(2) speaks to a continuing inability and is not merely a one-off event. Any uncertainty could be removed by publishing a notice that LBIE had a surplus and could pay its debts as they fell due. The court directed that this notice be published.
3. Meaning of continuing. The relevant inquiry is whether the identified event or state of affairs constituting the Event of Default continues. It is not necessary to ask whether the administration has permanently altered creditors’ rights. The administration-related Events of Default under Sections 5(a)(vii)(4) and (6) will end when the administrators’ appointments terminate under paragraph 79 of Schedule B1 to the Insolvency Act 1986. The fact that LBIE became a distributing administration does not alter that conclusion.
4. Scheme. Section 5(a)(vii)(3) must be read in context. An arrangement with creditors means a process entered into in circumstances of financial distress, or involving a fundamental change materially affecting counterparty credit risk. LBIE’s solvent scheme concerned the distribution and adjudication of surplus and the compromise of litigation. It was therefore not an arrangement within that provision and created no Event of Default.
5. Recognition orders. The Chapter 15 proceedings and order did not constitute separate Events of Default under Sections 5(a)(vii)(4) or (8). Nor did the Spanish and French recognition orders. They recognised or gave effect to an existing proceeding and did not independently create the relevant insolvency event.
6. Disposition. When the relevant steps were taken, no Event of Default remained continuing under Section 2(a)(iii). The respondents would then be contractually obliged to pay the sums owing under the swaps. Counsel were invited to agree the form of order; costs and other outstanding matters were reserved.