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What Constitutes an Insolvency Derived Claim?

12 March 2014

Fondazione Enasarco v Lehman Brothers Finance SA & anr [2014] EWHC 34 (Ch), 16 January 2014 is an important decision in the context of characterising which claims will fall as insolvency derived claims and thus be subject to separate "insolvency" jurisdictional rules.

Proceedings before the Swiss court, challenging the rejection by Swiss liquidators of a claim under a derivative agreement in Swiss bankruptcy proceedings, were closely connected with and directly derived from the Swiss bankruptcy proceedings so as to be excluded from the scope of the Lugano Convection.

Thus proceedings before the English court to enforce the derivative agreement, which contained an English jurisdiction clause, would not be stayed. Essentially the insolvency derived aspects of the matter were to be determined by the Swiss court who could then be guided by the decision of the English court on English law-governed contractual matters.

Fondazione Enasarco (E) had taken an assignment of claims against Lehman Brothers Finance SA (LBF) under a derivative agreement (which incorporated the standard ISDA Master Agreement 1992 terms). LBF was subject to Swiss bankruptcy proceedings and E's claim in those proceedings had been rejected. LBF's liquidators asserted that money was owing to LBF. E filed a claim with the Swiss bankruptcy court challenging the claim rejection and the liquidators' position that money was owing to LBF (the Swiss Proceedings). Given that the derivative agreement was governed by English law and subject to English jurisdiction, E also commenced separate proceedings in England, claiming that money was owed to it and that no sums were payable by E (or the assignor) to LBF (the English Proceedings).

LBF's liquidators sought an order from the English courts that the English Proceedings should be stayed either: (i) automatically pursuant to the Lugano Convention on the Recognition and Enforcement of Judgments in Civil and Commercial Matters 2007 (the Lugano Convention) (which is the equivalent of Council Regulation (EC) No 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the Brussels Regulation) for EEA Member States and in all material respects for this case contains the same provisions) on the basis that the Swiss courts were first seised; or (ii) as a matter of the English court's discretion pursuant to the Lugano Convention or s49(3) of the Senior Courts Act 1981.

LBF's Swiss bankruptcy proceedings had been recognised by the English courts pursuant to the Cross Border Insolvency Regulations 2006 (CBIR) in 2009.

Swiss Proceedings fall within insolvency exclusion

Insolvency matters are excluded from the scope of the Lugano Convention in the same way that they are from the Brussels Regulation. The exclusion in Article 1(2)(b) in both pieces of legislation covers "bankruptcy, proceedings relating to the winding-up of insolvent companies or other legal persons, judicial arrangements, compositions and analogous proceedings".

A key question was therefore whether the Swiss Proceedings were closely connected with and directly derived from the Swiss bankruptcy proceedings. If so then Article 27 (lis alibi pendens) of the Lugano Convention, which would require an automatic stay of the English Proceedings, would be inapplicable. Article 27 requires a court second seised of proceedings involving the same parties and same cause of action to stay its proceedings.

Richards J held that the Swiss Proceedings were closely connected with and directly derived from the Swiss bankruptcy proceedings. The Swiss Proceedings therefore fell within the insolvency exclusion, and therefore outside the Lugano Convention, meaning there was no required automatic stay of the English Proceedings under Article 27. Richards J also held there were strong grounds for refusing a discretionary stay of the English Proceedings under either Article 28 of the Lugano Convention or the Senior Courts Act 1981. Accordingly, contractual issues under the English law-governed derivative agreement fell to be determined in the English Proceedings.

What constituted the requisite connection to the insolvency proceedings?

In Richards J's view, the Swiss Proceedings clearly fell outside the Lugano Convention (and by extension, outside the Judgments Regulation) because:

• The proceedings arose, and could only arise, under Swiss insolvency law.
• They formed an integral part of the Swiss bankruptcy proceedings, designed to achieve the primary purpose of such proceedings, namely the distribution of assets to creditors, and had to take place in the court dealing with the liquidation.
• The purpose of the proceedings was not simply to establish whether E had a good contractual or other claim, but to determine the amount and ranking of the claim for the purposes of the liquidation. The ranking of claims was a matter arising exclusively under Swiss insolvency law.
• The determination of the relevant amount depended on more than just the contractual or similar rights of E and LBF. (A good contractual claim could be reduced or even extinguished for insolvency purposes by cross-claims or other matters arising exclusively under Swiss insolvency law.)
• The Swiss proceedings were self-contained and did not purport to finally judicially determine liability between the parties in relation to the underlying contractual dispute on the derivative agreement.

Richards J was also satisfied that there was a very strong case for refusing a stay of the English Proceedings on discretionary grounds because:

• The derivative agreement contained an exclusive jurisdiction clause in favour of the English courts (this was a strong factor in favour of refusing a stay: relying on the Supreme Court in The Alexandros T [2013] UKSC 70 (covered in the November/December 2013 Litigation Review).
• It was likely that the Swiss court would be “greatly assisted” by having the judgment of the English court on matters under the derivative agreement, given that it was governed by English law. Richards J rejected the argument that, because the Swiss court could order expert evidence on foreign law and purport to make a determination on issues under foreign law there was a risk of an "irreconcilable conflict" between a decision of the English court and the Swiss court on liability under the derivative agreement since any decision of the English court would itself constitute good evidence of foreign law.
• There were practical considerations in refusing the stay. These included the fact that the relevant contractual documents were complex and stood to be construed in English as a matter of English law. For the Swiss court to reach a decision, the relevant documents would have to be translated and construed in a language which was not that of the contract.
• The merits of having issues under the derivative agreement determined by the English courts had previously been recognised by the liquidators of LBF (not least when they initially consented to lifting the automatic stay under the CBIR in 2011 in respect of earlier litigation to determine the method of calculating the termination amount under the derivative agreement).
• E was not precluded from pursuing the English Proceedings because it had chosen to participate in the Swiss Proceedings. Under Swiss law, E had had no choice but to issue its challenge to the schedule of claims within the 20 days required if it wished to preserve any right it might have to participate in the distribution of LBF's assets. The true analysis was that it was the liquidators' choice in excluding the claim from the schedule of creditors that had forced E to participate in the Swiss Proceedings.


While the question of whether court proceedings are closely connected with and directly derived from the insolvency proceedings seems quite straightforward, it can be tricky when considering specific fact patterns. As in this case, the issues may be split between those which are clearly insolvency derived and those which are clearly of a contractual nature. In such cases the question has been whether only one Member State’s court has jurisdiction over the whole spectrum of the issues involved or whether the issues could be split between the courts? Richards J's decision effectively provides the answer that it is possible for the issues to be split between courts and means that, where a matter has insolvency derived and non-insolvency derived aspects, the courts supervising (or conducting) the insolvency proceedings have jurisdiction over the insolvency derived aspects and could then be guided by a decision of another court in respect of the non-insolvency derived (ie contractual) aspects. This seems to be an eminently sensible and practical solution, although the application to each case will be highly fact based and may require a practical approach from the judge concerned.

Further information

This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legislation in commercial dispute resolution. For more information please contact Sarah Garvey, or tel +44 20 3088 3710.