2009-07-28 20:46:02 -

Perpetual Trustee Company Limited (“Perpetual”), acting in its capacity as trustee for retail investors in Australia, New Zealand and Papua New Guinea obtained a judgment in the English High Court on 28 July 2009 to the effect that certain provisions which allow for the subordination of the rights or beneficial entitlements of Lehman Brothers Special Financing Inc. (“LBSF”) on its bankruptcy or default are valid and effectual under English law. Perpetual was represented by English lawyers from Sidley Austin* working together with lawyers from the Australian firm of Henry Davis York. The action, which is called Perpetual Trustee Company Limited v BNY Corporate Trustee Services Limited and Lehman Brothers Special Financing Inc. (together with a similar case called Belmont Park

Investments Pty Limited and Others v BNY Corporate Trustee Services Limited and Lehman Brothers Special Financing Inc.), has been closely monitored by market participants given its potentially far-reaching significance to similar synthetic CDO and other derivative transactions in which parties have deliberately selected English law to govern their dealings.

The proceedings were brought by Perpetual as the holder of certain credit-linked notes (the “Notes”) issued as part of the “Dante” Note Programme sponsored by LBSF and its affiliates. The proceedings were brought against BNY Corporate Trustee Services Limited (“BNY”).
LBSF obtained an order under which it was joined as party to the proceedings.

The Court considered a variety of issues including the issue of whether BNY should be prevented from applying “Noteholder Priority” in relation to the distribution of the proceeds of the Collateral over which it was directed to enforce security following an acceleration of the Notes held by Perpetual. The documents (which were governed by English law) provided for a reversal of the priority of payments to allow Perpetual (as holder of the Notes) to be paid ahead of LBSF (as Swap Counterparty) if there was an Event of Default in relation to LBSF under the Swap Agreement. An Event of Default under the Swap Agreement had occurred as a result of the Chapter 11 Bankruptcy filing of LBSF in the United States and other events.

While BNY adopted a neutral stance on the substantive issues, LBSF maintained that certain provisions of the US Bankruptcy Code (the so-called “ipso facto” rule) and, in the alternative, provisions of English law, operated to prevent the reversal of the priority of payments.

The decision confirms that provisions in contracts governed by English law that subordinate the rights or beneficial entitlements of the swap counterparty on an insolvency or other default will not generally be prohibited by English law. The efficacy of provisions such as these is widely perceived to be an important assumption in the assignment by credit rating agencies of credit ratings to credit-linked notes and other instruments. The validity of provisions such as these as a matter of US law has yet to be determined by the US courts and is presently the subject of litigation in the US.

Leave to appeal has been granted.

As to the question of whether the English Court will permit the application of foreign insolvency laws (by virtue of an application under the Cross Border Insolvency Regulations 2006 (“CBIR”) to invalidate these subordination provisions, the English Court adjourned the proceedings to permit an appropriate application for recognition and assistance under the CBIR to be made by LBSF.

Sidley Austin – Background to the firm


Sidley has a leading Insolvency and Restructuring practice and a leading Structured Finance practice, operating inside one of the largest international law firms. Sidley represents various interests in and around major restructurings.

Sidley is one of the world's largest full-service law firms, with approximately 1700 lawyers practising in 16 U.S. and international cities, including Beijing, Brussels, Frankfurt, Geneva, Hong Kong, London, Shanghai, Singapore, Sydney and Tokyo. Every year since 2003, Sidley has been named to Legal Business’ Global Elite, its designation for the 18 firms “that define the pinnacle of the legal profession.” BTI, a Boston-based consulting and research firm, has named Sidley to their Client Service Hall of Fame as one of only two law firms to rank in the Client Service Top 10 for seven years in a row.

Please contact Robin Parsons on +44 (0) 20 7360 3651 for further information.

*Sidley Austin LLP, a Delaware limited liability partnership which operates at the firm’s offices other than Chicago, London, Hong Kong, Singapore and Sydney, is affiliated with other partnerships, including Sidley Austin LLP, an Illinois limited liability partnership (Chicago); Sidley Austin LLP, a separate Delaware limited liability partnership (London); Sidley Austin LLP, a separate Delaware limited liability partnership (Singapore); Sidley Austin, a New York general partnership (Hong Kong); Sidley Austin, a Delaware general partnership of registered foreign lawyers restricted to practicing foreign law (Sydney); and Sidley Austin Nishikawa Foreign Law Joint Enterprise (Tokyo). The affiliated partnerships are referred to herein collectively as Sidley Austin, Sidley, or the firm.


Sidley AustinJanet Zagorin, 212-839-8797Director of Practice
Development jzagorin@sidley.com : mailto:jzagorin@sidley.com orRobin

Parsons, +44 (0) 20 7360 3651Partner, London rparsons@sidley.com : mailto:rparsons@sidley.com