A defined hierarchy of creditors exists when a company enters insolvency, with secured creditors being at the top, and first in line for payment once the Insolvency Practitioner’s fees have been met. Unsecured creditors, on the other hand, rank near the bottom of the list.

A secured creditor is generally a bank or other asset-based lender that holds a fixed or floating charge over a business asset or assets. When a business becomes insolvent, sale of the specific asset over which security is held provides repayment for this category of creditor.

The English High Court in Lehman Brothers International (Europe) (In Administration) [2016] EWHC 2417 (Ch), in one of a series of cases arising from the Lehman insolvency, has had to consider (among other issues) the meaning of “Default Rate” under the ISDA Master Agreement.

Creditors’ Voluntary Liquidation happens when shareholders and directors agree to place the business into liquidation because it can no longer pay its bills when they fall due. This is the most common form of liquidation in the UK.

A winding up order can be used by creditors to enforce payment of a debt by a delinquent company. Often as an act of last resort, creditors petition the court to have the business liquidated, usually after several failed attempts to recover their money.

The expense of going through the courts to obtain an order of this type indicates their determination, and this is a method often used by large secured creditors such as HMRC and the banks.

The recent Court of Appeal decision in Horton v Henry has highlighted the protection afforded to a bankrupt holding a private pension to the detriment of his bankruptcy creditors.

Facts

The High Court in London handed down judgment on Part C of the Lehman Waterfall II Application on 5 October 2016.

The judgment examines the extent of creditors’ entitlements to Default Rate interest on debts arising under ISDA Master Agreements governed by English law and New York law. As some £4.4 billion of LBIE’s admitted claims arise under ISDA Master Agreements and the debts were outstanding for more than five years, this judgment will materially influence the amount of money which must be applied in satisfaction of creditors’ entitlements to statutory interest.

An opinion issued this week is the first examination by a Scottish court of the principle of 'modified universalism' and the requirements for an enforceable floating charge where all the company's property is situated in a non-UK jurisdiction.

This opinion by Lord Tyre in the Court of Session concerns three companies incorporated in Scotland, but which carried on business in India.

When considering whether or not to bring a legal action, it is important to establish if it is competent and commercially worthwhile to do so. The ability to bring, or continue with, legal proceedings against a company can be restricted if that company enters into a formal insolvency process. The position of creditors may be improved now that the Third Party (Rights Against Insurers) Act 2010 has at last been brought into force.

Summary

WATERFALL IIC JUDGMENT (ISDA MASTER AGREEMENT ISSUES)1