In 2002 a European subsidiary of Lehman Brothers created a complicated synthetic debt structure called Dante, which was intended to provide credit insurance for another subsidiary, LBSF, against credit events affecting certain reference entities, the obligations of which formed the reference portfolio. A special purpose vehicle issued notes to investors, the proceeds of which were used to purchase collateral which vested in a trust. The issuer entered into a swap with LBSF under which LBSF received the income on the collateral and paid the issuer the amount of interest due to noteholders. The trustee was to apply all proceeds from the collateral first towards meeting the issuer’s obligations to LBSF and only after that in meeting the issuer’s obligations to noteholders. All well and good. The catch was that if LBSF defaulted under the swap, priority shifted to the noteholders.

As you may recall, things went badly for Lehman Brothers in 2008 (infernally, in fact) and as a result LBSF defaulted on the Dante swap. The claims of noteholders exceeded the value of the collateral, meaning LBSF was deprived of its costs to unwind the transaction and its rights in the collateral.

LBSF tried to argue that the unwinding costs and its priority in the collateral formed part of its insolvent estate, and that the swap contract therefore violated the statutory and common-law ‘anti-deprivation’ rules in insolvency – the equivalent of Canadian fraudulent conveyance rules.

Nice try, but all three levels of court said no chance. The contractual arrangements were bona fide commercial agreements that did not involve a deliberate intention to defeat insolvency laws. In the UKSC, Lord Mance advanced the additional theory that LBSF wasn’t really deprived of anything anyway: it didn’t lose its priority but merely the opportunity to acquire that right; the switch in priorities simply amounted to termination of future reciprocal rights – also no evasion of insolvency laws.

Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd, [2011] UKSC 38 [Link available here].