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Mayer Brown JSM represents the liquidators of various Lehman Brothers entities in Hong Kong in an unprecedented case of disclaiming complex securitisation contracts as Unprofitable Contracts

28 May 2010

Mayer Brown successfully appeared before the High Court and obtained leave to disclaim certain securitisation contracts on behalf of the Liquidators of Lehman Brothers Commercial Corporation Asia Limited (“LBCCA”) using section 268 (Disclaimer of onerous property of a company being wound up) of the Hong Kong Companies Ordinance (“CO”).

In its decision on 19 May 2010, the High Court affirmed five key principles in determining whether a contract is an unprofitable one within the meaning of "onerous property" in s.268 CO:

  • a contract is unprofitable if it imposes on the company continuing financial obligations or liabilities which may be regarded as detrimental to the creditors;
  • before a contract may be unprofitable it must give rise to prospective liabilities;
  • contracts which delay the winding up of a company's affairs because they are to be performed over a substantial period of time and will involve expenditure that may not be recovered are unprofitable;
  • a contract is not necessarily unprofitable merely because it is financially disadvantages - it is necessary to consider the nature and cause of the disadvantage; and
  • a contract is not unprofitable merely because the company could have made or could make a better bargain.

This decision provides new and important Hong Kong authority on the application of s.268 CO. Prior to this case, there was a lack of clear judicial guidance on the statutory power of Liquidators to disclaim unprofitable contracts (even though such a power has existed under Hong Kong law since 1933). The Liquidators' statutory power to disclaim is expected to become more significant and prominent, especially during this ongoing global credit crisis. In some cases (especially in the context of structured finance and derivative contracts), disclaiming an unprofitable contract may be the only available option to cease ongoing contractual obligations of an insolvent entity and facilitate its liquidation.

The Mayer Brown team was led by Richard Tollan (Partner, Restructuring, Bankruptcy and Insolvency) and Kingsley Ong (Consultant, Structured Finance & Derivatives).

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