Outside Publication

Caught in the Corporate Web: Triangular Setoffs and the Cross-Border Lehman Bankruptcy, Newsletter of the Asia Pacific Regional Forum

October 2009

This article first appeared in the October 2009 issue of the Newsletter of the Asia Pacific Regional Forum of the International Bar Association (Vol 16, No 2), and is reproduced by kind permission of the International Bar Association, London, UK. © International Bar Association.


The 15 September 2008 bankruptcy filing of Lehman Brothers was the singular cataclysmic event in last autumn's worldwide financial meltdown. At the time of its filing, Lehman's US holding company posted a balance sheet of US$691 billion in assets and US$613 billion in liabilities, approximately seven times the size of what was then the largest bankruptcy in history, the 2002 Worldcom filing. Moreover, unlike Worldcom, the impact of the 158-year old investment bank's demise was felt worldwide, particularly in Asia where, for example, investors in Hong Kong were left holding US$1.62 billion in Lehman minibonds and South Korean regulators tallied its financial system's Lehman exposure at US$720 million. 

The financial collapse created a legal tangle of equal enormity and complexity. Until its filing, Lehman operated internationally through some 7,000 different legal entities in more than 40 countries. As a consequence, there are currently at least 75 separate Lehman insolvency, administration, liquidation, rehabilitation, receivership and like proceedings pending in courts throughout the world, each run as a debtor-in-possession, or by a court-appointed liquidator, administrator, trustee, custodians, supervisor or curator. 

In an unprecedented attempt to untangle Lehman's corporate web, on 26 May 2009 representatives of bankrupt Lehman entities in the United States, Hong Kong, Singapore, Australia, Germany, the Netherlands and Luxembourg signed what has been billed as 'the first ever multilateral cross-border insolvency protocol', the Cross-Border Insolvency Protocol for the Lehman Brothers Group of Companies. The Lehman Protocol is not a legally binding document, but rather 'a statement of intentions and guidelines'. It is designed to facilitate the coordination of the various Lehman proceedings, and to enable the cooperation in the administration of those proceedings 'in the interest of ... all of Lehman's creditors worldwide'.

Despite its proclaimed intentions, the Lehman Protocol operates more to assist the various court administrators than to further the cause of Lehman's hapless creditors. Nowhere is that more apparent than in Article 8 of the Protocol, entitled 'Claims', which concerns itself only with ensuring that no Lehman creditor obtain a duplicate recovery through multiple filings in different jurisdictions. The skewed perspective of the Protocol authors reveals itself mostly in what the Protocol omits, namely, any attempt to allow Lehman creditors who also happen to be Lehman debtors to offset their Lehman claims against their Lehman debts, where the requisite 'mutuality of obligations' does not exist.

By any measure of equity or justice, a party which owes one Lehman entity US$1 million and is owed US$1 million by another Lehman entity should be free to offset the two amounts (a so-called 'triangular setoff') and declare all accounts settled. Instead, the current regime requires such party to pay the creditor Lehman entity the full US$1 million now, and then wait in line for years to receive a payoff on its US$1 million claim, most likely at mere pennies on the dollar.

In this article, we address the problem faced by creditors caught in the Lehman corporate web, we summarise the existing legal hurdles to the setting off of Lehman debts and claims, and we propose a means by which the new Lehman Protocol could form the basis for a solution.

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