UK Supreme Court rules in favour of flip clauses

The UK Supreme Court, which is the UK's highest court, has handed down its long-awaited decision in Belmont Park Investments Pty Limited v BNY Corporate Trustee Services Limited and Lehman Brothers Special Financing Inc [2011] UKSC 38, in which the Court considered the validity and enforceability of so-called "flip" clauses under English bankruptcy law.

Flip clauses are common in rated structured finance and securitisation transactions, and effectively reverse or flip a party's priority in the relevant payment waterfall below the payment of obligations owed to other creditors following certain events. The UK Supreme Court reaffirmed the earlier decisions of the English High Court and Court of Appeal that the flip clause under consideration was valid and enforceable in the circumstances and did not offend the anti-deprivation principle under English bankruptcy law.

Facts

Credit-linked notes were issued by a special purpose vehicle established by Lehman Brothers as issuer. The proceeds of issue were used to purchase collateral comprising "AAA" rated securities. The collateral was charged by the issuer in favour of BNY Corporate Trustee Services Limited as trustee to secure the issuer's obligations under the notes and under a related credit default swap entered into with Lehman Brothers...