The ILA Technical Committee wishes to draw to the attention of its members the recent decision of Henderson J in Perpetual Trustee Company Limited v BNY Corporate Trustee Services Limited(1) and Lehman Brothers Special Financing Inc(2) [2009] EWHC 2953 (Ch) pursuant to which the English court sent a letter of request to a US judge, in circumstances where there were concurrent proceedings continuing in both England and the US concerning the validity of priority provisions in a security trust deed.
Members will recall that the English Court of Appeal recently handed down judgment on the priority provisions referred to above and found that, as a matter of English law, being the governing law of the contract, the relevant provisions which "flipped" priority in a security trust deed in favour of noteholders did not fall foul of the ‘Rule in British Eagle’. Members are referred to the separate bulletin (no #233) concerning this aspect of the proceedings for further information. It is also understood that an application for leave to appeal the decision to the Supreme Court has been made.
Following the Court of Appeal's decision, the English court was asked by Perpetual Trustee Company Limited ("Perpetual"), a noteholder, to send a letter of request to the US judge (Peck J) who had carriage of the ongoing US chapter 11 bankruptcy proceedings in respect of Lehman Brothers Special Financing Inc ("LBSF") (the swap counterparty against whom the flip clause operated.). A substantive application was pending before Peck J requiring him to consider the effects of the English law governed priority provisions under US bankruptcy law. Perpetual which had chosen not to participate in the US proceedings, was concerned to ensure that, should Peck J find the relevant clause to be invalid under US bankruptcy law, he should go no further than granting a declaratory order and should not make an order that might compel the security trustee to take an action which might put it in breach of the English court order.
In fact, both courts had already been alive to the possibility that the security trustee could be put in an impossible position should the English and US courts arrive at conflicting decisions, and to this end, before the English Court of Appeal hearing referred to above, there had been an exchange of correspondence between Peck J and the Vice Chancellor, Andrew Morritt. It is understood that pursuant to this communication it was agreed that the English court would only rule on the validity of the priority provisions as a matter of English law and the US court would only rule on the validity of the priority provisions as a matter of US bankruptcy law (i.e. leaving the crucial point as to who should get paid in priority for a later date once the issues of legal principle in both jurisdictions had been resolved).
Although at the time of the interlocutory application before Henderson J no recognition application had been made by LBSF to the English courts pursuant to the Cross-border Insolvency Regulations 2006 ("CBIR"), the equivalent US provisions, namely chapter 15 of the US Bankruptcy Code, had already been invoked. Unlike the position in Great Britain, where a US foreign representative of either main or non-main proceedings intends to make a recognition application oversees that representative is required first to obtain authorisation to proceed from the US Bankruptcy Court under section 1505. A prior and widely-worded authorisation had been obtained from the US judge in this case.
From the English Court’s perspective, and as has recently been confirmed in the Nortel case [summarised in the separate bulletin number #200] the English court has an inherent power to issue a letter of request wherever it considers it would be appropriate in the circumstances to do so and in pursuance of these powers had already entered into correspondence. It would also appear that Article 25 of the CBIR, which contains express powers concerning cooperation and direct communication between the English court and foreign courts or foreign representatives, does not require a prior recognition order to come into play. In any event, no issue arose in this case as to the English Court’s jurisdiction to cooperate.
Having considered Perpetual’s application requesting that the English court enter into further correspondence, Henderson J held that the detailed letter it proposed was too schematic in such an early stage of the judicial dialogue and would go well beyond the understanding already reached between the two courts (where they had come to a full understanding of the potential conflict, with a clear intention from both courts to proceed on a cautious and co-operative manner). There was a risk that such a letter would be seen by the US court as a pre-emptive attempt to establish the primacy of the English court and would go beyond the principle of comity which is based on common courtesy and mutual respect.
However, a more limited letter would be sent as there was nothing to lose (and perhaps something to be gained) in sending a letter to the US court essentially setting out the limits of the order of the English Court of Appeal and requesting that the US court exercise similar restraint pending further communication between the courts. This was especially the case, as the noteholders' concerns that the US court may seek to resolve the underlying and key issue as to which party was to have priority, was seen as valid in light of LBSF seeking declaratory relief in the US court that it was entitled to payment under the relevant provisions.
Since the letter of request was sent the US application in relation to the priority provisions under the security trust deed has been heard, we understand that judgment has been reserved. In the meantime LBSF has sought and obtained an order for recognition as foreign representative of foreign main proceedings pursuant to the CBIR. As the representative of foreign main proceedings the default position is that the limited automatic stay provided for by Article 20 of the CBIR would take effect, unless a modification of that stay was made under Article 20(6) of the CBIR, or additional relief were granted pursuant to Article 21(g)of the CBIR. Article 20 of the CBIR is expressed to be the same in scope and effect as if the debtor was subject to a winding up order under UK insolvency law and provides:
‘Upon recognition of a foreign proceeding that is a foreign main proceeding, ….
(a) commencement or continuation of individual actions or individual proceedings concerning the debtor’s assets, rights, obligations or liabilities is stayed;
(b) execution against the debtor’s assets is stayed; and
(c) the right to transfer, encumber or otherwise dispose of any assets of the debtor is suspended.’
In many cases this default form of stay may not be appropriate as it may unduly restrict the actions of the debtor in the recognising forum which may not be appropriate, particularly where the debtor is in a form of "debtor in possession" rescue proceedings. In the case of LBSF, the recognition order accordingly went on expressly to provide that the stay and suspension under Article 20 did not affect or inhibit LBSF’s rights to transfer encumber or otherwise dispose of or deal with any of its own assets as "debtor in possession" subject to the provisions of chapter 11 of the US Bankruptcy Code.
ILA Technical Committee
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