Perpetual Trustee Company Limited ("Perpetual"), acting in its capacity as trustee for retail note investors in Australia, New Zealand and Papua New Guinea, 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.

Henry Davis York partners Matthew Kersey and Alex Mufford, together with English lawyers from Sidley Austin, acted for Perpetual.

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, together with a similar case called Belmont Park Investments Pty Limited and Others v BNY Corporate Trustee Services Limited and Lehman Brothers Special Financing Inc.), given its potentially far-reaching significance to similar vehicles and other derivative transactions in which parties have deliberately selected English law to govern their dealings.

Mufford, a partner in HDY's banking and finance team, said: "These 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."

Kersey, a partner in HDY's insolvency and restructuring team, anticipated an appeal by Lehmans.

"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 decision confirms that provisions in contracts governed by English law, which subordinate the rights or beneficial entitlements of the swap counterparty for an insolvency or other default, will not generally be prohibited by English law.

The validity of provisions such as these as a matter of US law has yet to be determined by the US courts and is currently the subject of litigation in the US.