When an Event of Default is "continuing" is not defined or addressed in the ISDA Master Agreement. Until now it does not appear to have been expressly considered in case law either. In Grant & Ors v FR Acquisitions Corporation (Europe) Ltd & Anor (Re Lehman Brothers International (Europe) LBIE) [2022] EWHC 2532 (Ch) the Court determined that the correct test to apply is whether the event or state of affairs that constituted the Event of Default remains, not whether creditors' rights remain affected.

When Lehman Brothers International (Europe) ("LBIE") exits administration as a solvent company, any Events of Default under the ISDA Master Agreements1 will no longer be "continuing", and the respondents ("Firth Rixson") will be contractually obliged to pay sums owed to LBIE under interest rate swap transactions.

Practical points

  • Parties should carefully consider their options under any contract. When LBIE entered administration in 2008, Firth Rixson, as a "Non-defaulting Party", was entitled to terminate the transactions under Section 6(a) of the ISDA Master Agreements by designating an Early Termination Date. Instead, it made the "unusual" choice to suspend its payment obligations under Section 2(a)(iii), quite possibly thinking that LBIE would eventually be dissolved rather than re-emerge as a solvent company. Also, any party that has previously relied on Section 2(a)(iii) may want to check, in light of this judgment, whether the Events of Default relied on are continuing.
  • In 2014 (following the Court of Appeal's decision in Lomas & Ors v JFB Firth Rixson Inc & Ors [2012] EWCA Civ 419) ISDA published an optional amendment to insert a time limit on the operation of Section 2(a)(iii) where an Event of Default has occurred, which might help to avoid such a scenario in future.
  • As the Court noted, the ISDA Master Agreement is one of the most widely used standard form agreements in the financial world and serves as the contractual foundation for more than 90% of the over-the-counter derivatives transactions globally. Mr Justice Burton commented in Lehman Brothers Finance SA v SAL Oppenheim JR & CIE. KGAA [2014] EWHC 2627 that "the ISDA Master Agreement is intended to be normative, and to apply in as many situations and with as much straightforward application as possible." That meant the Court here had to "ascribe even more than usual deference to the words used, and take as the context not the specific position as between the parties, but its anticipated use by such a variety of intended users in such a variety of circumstances".
  • The Court also referred to the comments of Lady Justice Gloster in Pioneer Freight Futures Co Ltd v TMT Asia Ltd [2011] 1 CLC 885: "…the commercial function or purpose of the condition precedent to payment as set out in Section 2(a)(iii) is to mitigate counterparty credit risk…". These comments were repeated in Lomas v Firth Rixson Inc [2012] 1 CLC 713: "… the purpose of Section 2(a)(iii) is to protect the Non-defaulting Party from the additional credit risk involved in performing its own obligations whilst the defaulting counterparty remains unable to meet its own." When there is no longer a continuing Event of Default which has suspended contractual obligations to make payments, this case shows that the Courts will uphold obligations to make such payments.


LBIE had entered into separate interest rate swap transactions governed by the ISDA Master Agreements with two Firth Rixson group companies. The parties agreed that principal amounts of more than £8m and $53m were owed to LBIE under the terms of the swaps. However, since LBIE entered administration in 2008, Firth Rixson had relied on Section 2(a)(iii) in the ISDA Master Agreements to suspend its payment obligations to LBIE. Under Section 2(a)(iii), any payment obligation is subject to the condition precedent that "no Event of Default or Potential Event of Default with respect to the other party has occurred and is continuing". LBIE entering administration and failing to make payments when due triggered that condition. In previous litigation2, the Court held that Firth Rixson was entitled to suspend its payment obligations until there were no "continuing" Events of Default in respect of LBIE.

Now the administrators of LBIE are getting ready for LBIE to exit administration as a solvent company. They argued that, when certain steps have been taken and LBIE's directors re-take control of the company, there will no longer be any "continuing" Events of Default. Firth Rixson on the other hand contended that: (i) termination of the administration cannot "cure" all the Events of Default; and (ii) certain further Events of Default have arisen during the course of the administration. The administrators therefore applied to the Court for directions.

The Court's decision in relation to each alleged Event of Default

  • Failure to pay The parties agreed that LBIE's failure to make payments under one of the swaps gave rise to an Event of Default under s5(a)(i) of the ISDA Master Agreement3. However, insolvency set-off (which took place in December 2009) meant that LBIE's liability for the unpaid amounts under the swap was discharged and "cured" LBIE's failure to pay.
  • Insolvency Under Section 5(a)(vii)(2) of the ISDA Master Agreement, an Event of Default will occur if a party "becomes insolvent or is unable to pay its debts or fails or admits in writing its inability generally to pay its debts as they become due." The parties agreed that LBIE was no longer insolvent or unable to pay its debts, but it had admitted in writing its inability to pay its debts as they become due. In order to "cure" this Event of Default, the administrators proposed that LBIE would publish a notice that LBIE now has a surplus of assets over liabilities and is able to pay its debts as they fall due.
  • Administration The parties agreed that LBIE's entry into administration triggered an Event of Default under Sections 5(a)(vii)(4) and (6) of the ISDA Master Agreements4, and that that Event of Default was currently "continuing". The key issue was whether it would still continue when the appointment of the administrators of LBIE was terminated. LBIE argued that the Event of Default would end with the administration. LBIE's administration was converted to a distributing administration in 2009. In a distributing administration the role of the administrator is, in many ways, "functionally equivalent to a liquidation". Effectively the entirety of LBIE's assets have been realised and the proceeds distributed to creditors under a statutory regime. Firth Rixson contended that the process has a permanent impact on creditors' rights and the Event of Default could not be "cured" by exiting administration, but instead only when its legal effects end. The Court agreed with the administrators' interpretation: "the focus is on the state of coming to be and continuing to be in administration; and, in my judgment, that state of affairs will no longer be "continuing" when the administration terminates, whether or not the administration at some earlier point became a distributing administration."
  • Scheme of Arrangement There will be an Event of Default under Section 5(a)(vii)(3) of the ISDA Master Agreements if a party "makes a general assignment, arrangement or composition with or for the benefit of its creditors". Firth Rixson argued that the scheme of arrangement, which had been proposed by the administrators and sanctioned by the Court in 2018, was an arrangement for the purposes of Section 5(a)(vii)(3), triggering an Event of Default when it was sanctioned and acting as a "continuing" Event of Default because it permanently varied creditors' rights. The administrators countered that it did not trigger an Event of Default: although it was a scheme of arrangement for the purposes of Part 26 of the Companies Act 2006, it was not an "arrangement" for the purposes of Section 5(a)(vii)(3) of the ISDA Master Agreements. The Court agreed with the administrators. The term "arrangement" is not a term of art and must be interpreted according to its context. The phrase "general assignment, arrangement or composition with or for the benefit of its creditors" describes processes entered into by a debtor in financial distress, or which involve a fundamental change in status (such as dissolution or winding-up). That was not the case here – the scheme of arrangement's purpose was to maximise the surplus of assets. However, the judge commented obiter that, if he was wrong and the scheme did in fact trigger an Event of Default, that would continue for as long as the scheme has effect, even after termination of the administration.
  • Chapter 15 Order Firth Rixson also argued that an order made by the US Bankruptcy Court recognising the scheme of arrangement under Chapter 15 of the US Bankruptcy Code triggered an Event of Default under Section 5(a)(vii)(4) and (8) of the ISDA Master Agreement5. The Court held that it did not constitute an Event of Default. If the scheme of arrangement itself was not an Event of Default, an order for its recognition should not, without more, constitute an Event of Default either.
  • Spanish and French Exequaturs Finally, Firth Rixson argued that orders made in France and Spain giving recognition and effect to the English administration order also gave rise to Events of Default under Section 5(a)(vii)(4) because they constituted proceedings "seeking…relief under any bankruptcy or insolvency law or other similar law affecting creditors' rights" and within the meaning of Section 5(a)(vii)(8), they had an "analogous effect to" the Events of Default under Section 5(a)(vii)(4) and (6). The Court held that they did not constitute standalone Events of Default. Section 5(a)(vii)(4) does not extend to proceedings simply intended to recognise and give effect to an Event of Default (i.e. the English administration order).

Mr Justice Hildyard noted that, although he came to his conclusions by interpreting the words used in the ISDA Master Agreements, the judgment he reached also reflected the commercial purpose of Section 2(a)(iii) as set out by Lady Justice Gloster in Pioneer Freight Futures Co Ltd v TMT Asia Ltd) and the Court of Appeal in Lomas v Firth Rixson Inc (detailed above). Once the relevant steps have been taken for LBIE to exit administration, none of the alleged Events of Default will have any substantive adverse effect on Firth Rixson nor affect its credit risk. At that point there will no longer be any need for protection to mitigate counterparty credit risk.