Acting on behalf of investors in Australia, New Zealand and Papua New Guinea, who had funds frozen, through credit-linked notes, following the Lehman Brothers collapse; Perpetual has obtained a judgment in the English High Court to the effect that certain provisions, which allow for the subordination of the rights or beneficial entitlements of Lehman Brothers Special Financing Inc. (LBSF) on its bankruptcy or default are valid and effectual under English law.

Participants in the structured credit and credit default swap markets have closely monitored the action (which is called Perpetual Trustee Company Limited v BNY Corporate Trustee Services Limited and Lehman Brothers Special Financing Inc), given its potentially far reaching significance to similar synthetic collateralised debt obligations and other derivative transactions in which parties have deliberately selected English law to govern their dealings.

Alex Mufford, a partner in HDY's banking and finance team, said: "These credit-linked notes are complicated structured investments. The ratings attached to the notes rely upon contract provisions being enforceable in accordance with their terms. It is pleasing to see that the English courts are prepared to uphold the validity of the contract, notwithstanding the US insolvency of the swap counterparty."

Matthew Kersey, a partner at HDY’s insolvency and restructuring team, added: "There are remaining unresolved issues under US law and international insolvency law and a strong possibility of an appeal by Lehmans so market participants will need to continue to monitor this case."

The court considered a variety of matters including the issue of whether BNY should be prevented from applying "Noteholder Priority" in relation to the distribution of the proceeds of the collateral over which it was directed to enforce security following an acceleration of the credit-linked notes held by Perpetual.

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The documents (which were governed by English law) provided for a reversal of the priority of payments to allow Perpetual and the investors it represents, to be paid ahead of LBSF, if there was an Event of Default in relation to LBSF under the Swap Agreement.