Title: Case Note: Belmont Park Investments Pty Limited V BNY Corporate Trustee Services Ltd [2011] UKSC 38
Abstract: The insolvency of Lehman Brothers in September 2008 reignited interest in a principle of English insolvency law that has come to be known as the anti-deprivation principle. This principle, which stretches back to at least the early years of the 19th century, has been best summarised by Cotton LJ as the rule that 'there cannot be a valid contract that man's property shall remain his until his bankruptcy, and on the happening ofthat event shall go over to someone else, and be taken away from his creditors'.1 Its rationale is readily apparent; there would be little point in having a prescribed regime for dealing with the assets of an insolvent company if that company could avoid that scheme simply by entering into contracts whereby its property would be transferred to specific creditors or third parties on the company's insolvency.In July 2011, the Supreme Court handed down its decision in Belmont Park Investments Pty Limited ? BNY Corporate Trustee Services Ltd} The decision, which was an appeal from the Court of Appeal decision in Perpetual Trustee Co Ltd ? BNY Corporate Trustee Services Ltd,5 was keenly anticipated in legal and structured finance circles. Yet the decision was something of a disappointment. Despite the complexity of the issues involved, the majority in the Supreme Court took a rather simplistic approach to the anti-deprivation principle. In doing so, it effectively robbed the principle of much of its scope, effectively restricting its application to situations where there is an evident intention to avoid the insolvency laws and missing the opportunity to build on the decision of Briggs J in Lomas ? s^B Firth Rixson, Ine,4 and develop a more nuanced test, which strikes a balance between the competing principles of party autonomy and the need to protect the third party creditors of an insolvent entity.This case comment will analyse some of the key issues arising from the decision. In doing so, it will focus primarily on the judgment of Lord Collins, with whom Lord Philips, Lord Hope, Lady Hale and Lord Clarke agreed, and whose judgment was also accepted by Lord Walker. The two other judgments, of Lord Walker and Lord Mance, will be referred to where they provide an interesting contrast to Lord Collins' approach.Facts and lower court proceedingsThe facts in Belmont have been widely reported,5 and the following brief summary will suffice for the purposes of this comment.6 The case concerned the order in which the proceeds of the enforcement of security should be applied in the context of a synthetic securitisation. Lehman Brothers had established a multi-issuer secured obligation programme under which a special purpose vehicle would issue notes to investors, and use the proceeds of that issuance to purchase various highly rated securities as collateral. At the same time, the issuer would enter into a credit default swap (CDS) with Lehman Brothers Special Financing (LBSF) under which the issuer provided credit protection on a portfolio of loans owned by LBIE and other members of the Lehman group. In return for the issuer providing this credit protection, LBSF agreed to make premium payments over the life of the CDS, which the issuer used to enhance the return on collateral and pay interest to the noteholders. Alternatively, if the notes were redeemed early, the CDS would be terminated and a payment would be due either to or from the issuer reflecting the then mark-to-market value of the CDS.In order to secure the issuer's obligations to the noteholders and LBSF, the issuer granted security over the collateral purchased with the subscription money paid by the noteholders. Under these security arrangements, LBSF was entitled to be paid in priority to the noteholders. However, the arrangements were structured in such a way that LBSF would lose that priority where an event of default occurred in respect of LBSF under the CDS. This has come to be referred to as the 'flip provision', and was the provision that was at the heart of the litigation. …
Publication Year: 2012
Publication Date: 2012-01-01
Language: en
Type: article
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Cited By Count: 3
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