Continuing or cured? The suspension of swap payments following an event of default may not be unlimited

The High Court of England and Wales has recently provided welcome clarification around the nature of events of default under derivatives contracts governed by the ISDA Master Agreement, in particular in relation to whether an insolvency related event of default can be cured and so cease to be continuing. This brings to an end a long running debate around the extent to which, and for how long, a party can continue to rely on the condition precedent to payment contained in the ISDA framework documentation where the other party is subject to such an event of default. It is also likely to have wider application in other financing documentation that contains similar provisions.    


The High Court decision (The joint administrators of  Lehman Brothers International (Europe) v FR Acquisitions Corporation (Europe) Ltd and JFB Firth Rixson Inc [2022] EWHC 2532 (Ch)) arose in the context of a dispute between the joint administrators of Lehman Brothers International Europe (LBIE) and swap counterparties FR Acquisitions Corporation (Europe) Ltd and JFB Firth Rixson Inc. (together, Firth Rixson) in relation to certain interest rate swaps. The relevant swaps were governed by the 1992 ISDA Master Agreement and 2002 ISDA Master Agreement (the ISDA Master Agreements), respectively, and were due to reach maturity in December 2010. Following a significant decline in the floating interest rates payable by LBIE under each swap, LBIE, although in administration, was entitled to receive a net payment from the counterparties, however no payments were made due to Events of Default on the part of LBIE.

Since the appointment of the administrators of LBIE in September 2008, Firth Rixson have relied upon Section 2(a)(iii) of the ISDA Master Agreements to suspend their payment obligations to LBIE. This provision makes payments under the swaps 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". In 2012 the Court of Appeal ruled that, so long as the Event of Default with respect to LBIE was "continuing", Firth Rixson would be under no obligation make payments under the swap agreements but that the payment obligations would "revive if the Event of Default is cured".

After a decade of administration of LBIE, the joint administrators were looking to terminate their appointments under Paragraph 79 of Schedule B1 to the Insolvency Act 1986 and return LBIE to its directors' control. In this event, LBIE argued that no Event of Default or Potential Event of Default would be "continuing" under the ISDA Master Agreements and the suspension of payment obligations would fall away. The concept of what constitutes a "continuing" Event of Default is not addressed in the ISDA Master Agreement and so there has been uncertainty as to how this works in practice.

Events of Default

A number of Events of Default had originally occurred with respect to LBIE:

  • Section 5(a)(i): Non-payment by LBIE of two amounts due under the sterling swap: it was agreed that this Event of Default would no longer be continuing as the relevant payment obligation had been discharged in full by operation of insolvency set-off.

  • Section 5(a)(vii)(2): “The party, any Credit Support Provider of such party or any applicable Specified Entity of such 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.": it was common ground between the parties that this Event of Default has ceased to be "continuing".

  • Section 5(a)(vii)(3):  "The party, any Credit Support Provider of such party or any applicable Specified Entity of such party ... (3) makes a general assignment, arrangement or composition with or for the benefit of its creditors." (the "Scheme Event Of Default"): the Court considered whether the scheme of arrangement entered into by LBIE in the course of its administration (the "Scheme") was an “arrangement” for the purposes of this provision and found that the Scheme did not affect, let alone alter, adversely, the credit risk to which any creditor agreed and that the scheme was and is not an "arrangement" made by LBIE "with or for the benefit of its creditors" within the meaning of Section 5(a)(vii)(3).

  • Section 5(a)(vii)(4): "The party…institutes or has instituted against it a proceeding seeking a judgment of insolvency or bankruptcy or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors' rights…" and Section 5(a)(vii)(6):  "The party…seeks or becomes subject to the appointment of an administrator, provisional liquidator, conservator, receiver, trustee, custodian or other similar official for it or for all or substantially all its assets":  It was common ground that these Events of Default occurred with respect to LBIE by reason of LBIE's entry into administration on 15 September 2008 and the appointment of the joint administrators of LBIE on the same date and were continuing at the date of the application to the Court but where the dispute arose was whether these Events of Default would cease to be "continuing" if and when the appointments of the joint administrators of LBIE were terminated under paragraph 79 of Schedule B1 to the Insolvency Act 1986.

  • Section 5(a)(vii)(8):  "The party…(8) causes or is subject to any event with respect to it which, under the applicable laws of any jurisdiction has an analogous effect to any of the events specified in clauses (1) to (7) above (inclusive)": Firth Rixson argued that the recognition of the Scheme referred to above as a foreign proceeding under Chapter 15 of the US Bankruptcy Code gave rise to permanent and incurable Events of Default under Sections 5(a)(vii)(4) and 5(a)(vii)(8), which are continuing.  The Court held that the Chapter 15 order was not a separate Event of Default and that, viewed in context, Section 5(a)(vii)(4) should be restricted to proceedings in respect of companies in financial distress and that neither the Chapter 15 proceedings nor the subsequent Chapter 15 order constituted an Event of Default if the Scheme did not

Continuing or Cured – the arguments

Firth Rixson claimed that the Events of Default that occurred when LBIE initially came into administration have not, and cannot, be cured and so are continuing. Specifically, since the conversion of the LBIE estate into a distributing administration, the administration has been "functionally equivalent" to a liquidation with realisation of assets and distribution of proceeds in a significant and irremediable way. In this sense, the Events of Default cannot be “cured” by the operation of the Insolvency Act in terminating the administration and to accept this as such would not be in line with the meaning and effect of the language used in the ISDA Master Agreements about the event needing to be "continuing".

With regard the remaining Events of Default other than the non-payment Event of Default, LBIE argued that "continuing" indicates an ongoing process or subsisting state of affairs. To decide whether an Event of Default is continuing, it is necessary to identify the process or state of affairs that constitutes the Event of Default, and to decide whether that process or state of affairs remains in existence.

LBIE further argued that this is the only point that needs to be assessed in order to determine whether an Event of Default is continuing.  Section 2(a)(iii) makes no reference to the continuing legal effects of an Event of Default, only to the continuation of the Event of Default itself. To the extent possible, deference should be given to the plain language of the clause to determine the relevant process or state of affairs. This is consistent with the requirement that the ISDA Master Agreement should be construed, insofar as possible, in a way that is reasonably predictable, objective and certain. For example, under Section 5(a)(vii)(4), the relevant process or state of affairs is a "proceeding" under "insolvency law". LBIE contended that it followed that, when the insolvency proceeding comes to an end, the Event of Default necessarily ceases to continue.

Continuing or cured – the conclusion

Mr Justice Hildyard concluded that the insolvency Events of Default relate to "factual events or states of affairs" absent of any consideration of the effect of the events on the non-defaulting Party. The appropriate test is therefore whether the state of affairs that constituted the Event of Default are continuing and not whether the effects to creditors’ rights are continuing or irreversible. This means that, in the particular circumstances of LBIE, the termination of the joint administrators appointment will cure the Event of Default currently existing under Section 5(a)(vii)(4) and, as such, Firth Rixson’s obligation to pay under the ISDA Master Agreements will cease to be suspended.

Looking forward

This judgment has important ramifications for those counterparties that have relied upon the condition precedent set out under Section 2(a)(iii) of the ISDA master documentation in relation to Lehman and other similar situations. Where a defaulting party such as LBIE ceases to be in administration, then positions that may have matured some time ago will need to be re-examined to assess whether a liability now arises, together with any applicable interest that has accrued on such amount. Each case will be fact specific and so parties will need both to check the terms of their documentation and also have a detailed understanding of the situation with regard to the defaulting counterparty.

This decision is also likely to have implications for other financing documentation and the concept of whether or not a particular event is continuing will need to be looked at in a new light as a result. 

This note is for guidance only and should not be relied on as legal advice in relation to a particular transaction or situation. Please contact your normal contact at Hogan Lovells if you require assistance or advice in connection with any of the above.


Authored by James Doyle, Jennifer O’Connell, Neil Kurzon, and Isobel Wright.


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