Update - Other Surplus Litigation - Firth Rixson Judgment

On 26 June 2020, the Administrators brought an application for directions under paragraph 63 of Schedule B1 in respect of two counterparties (FR Acquisitions Corporation (Europe) Ltd) and JFB Firth Rixson Inc., referred to collectively as “Firth Rixson”) to GBP and USD interest rate swaps governed by ISDA Master Agreements.

The application arose in circumstances where LBIE is owed principal amounts of, respectively, £8 million and US$53 million under the outstanding swap transactions. However, for more than a decade, Firth Rixson have relied on section 2(a)(iii) of the ISDA Master Agreement to suspend their payment obligations to LBIE. Section 2(a)(iii) provides, in summary, that the payment obligation of a party under an ISDA Master Agreement is suspended (but not extinguished) when an event of default in respect of its counterparty has occurred and is continuing.

Firth Rixson have for more than a decade relied on a number of alleged events of default in order to avoid making any payments to LBIE, including: LBIE’s entry into administration, its inability to pay its debts as they fell due (and its admission in writing of the same), and its failure to make two payments under the sterling swap, as well as the implementation of the surplus scheme in 2018 and the recognition of that scheme under Chapter 15 of US Bankruptcy Code.

The Administrators therefore sought directions as to the circumstances in which it could properly be said that any continuing events of default in respect of LBIE had been “cured”, such that the suspensory effect of section 2(a)(iii) would be lifted and the payment obligations of Firth Rixson would be revived.

Following a hearing in January 2021, the High Court (Mr Justice Hildyard) handed down its judgment on 11 October 2022, finding in favour of the Administrators on all points. As a result, the Court has confirmed that, as and when LBIE exits administration and publishes a statement confirming that it has a surplus of assets over liabilities and is now able to pay its debts as they fall due, there will be no continuing events of default. Further, the Judge concluded that the surplus scheme was not an “arrangement” within the meaning of the relevant event of default in the ISDA Master Agreement (Section 5(a)(vii)(3)). This was because “arrangement” had to be read in the context of the provision as a whole and was only apt to cover processes entered into by a debtor in circumstances of financial distress, or which involve a fundamental change in the status of the relevant entity (such as by dissolution or winding-up), such as materially to affect the counterparty’s credit risk. For similar reasons, the Chapter 15 order was also found never to have been an event of default. with the Judge also noting that it would be inconsistent to find that overseas recognition proceedings were an event of default in circumstances where the scheme being recognised was not. A full copy of the judgment can be downloaded below.

The Administrators are in the process of seeking to agree the form of the order detailing the Judge’s findings, together with a number of consequential matters, including costs and permission to appeal. If these cannot be agreed, then they will be dealt with at a short consequential hearing, likely to be heard in late November 2022.