Vol 10 (2013) - Issue 3

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Re Lehman Brothers International (Europe) (in administration) and others, [2012] EWHC 2997 (Ch)

Summary
The High Court of England and Wales has held in the 'Extended Liens' application that a 'general lien' granted in favour of LBIE (as defined below) over financial collateral was a floating charge and could not be interpreted as being a species of lien under English Law. Whilst the extension of the security to cover obligations owed by LBF (as defined below) to LBIE’s affiliates did not invalidate the charge, the fact that LBIE did not exert sufficient possession or control over the financial collateral as it related to the LBIE affiliates, rendered the charge incapable of constituting financial collateral for the purposes of the FCAR (as defined below).

Facts and background
Lehman Brothers International (Europe) (‘LBIE’) entered into a master custody agreement ('MCA') with Lehman Brothers Finance SA ('LBF') in August 2003, which governed the terms upon which LBIE provided custodial services to LBF. The MCA was based on a form of agreement which was originally used to govern the terms upon which LBIE would hold as custodian certain property belonging to its 'street customers'. The bulk of the Property (as defined in the MCA) of LBF held by LBIE consisted of intangibles, mainly dematerialised securities and money. The MCA contained certain provisions which purported to grant security interests over the Property in favour of LBIE.
The Administrators of LBIE sought directions in relation to these security provisions which would determine whether LBIE could validly claim a proprietary interest in any of the Property.

Did the MCA create a general lien and if not did it create any other type of security interest?
Clause 13 of the MCA purported to create a 'general lien' over the intangible Property until all liabilities owed to LBIE by LBF were discharged. In addition, the provisions purported to create security over the Property for other debts owed by LBF to various other LBIE affiliates.
It was common ground between the parties that under English law any right classified as a 'general lien' could only apply to tangible property and older style certificated securities. As the Property in question consisted of mainly intangibles, the court held that it was highly improbable that the parties to the MCA had intended to create a general lien over the Property in question. It was held that although the MCA did not create a valid ‘lien’ over the Property, it did create a charge, specifically a floating charge as between LBIE and LBF.
Briggs J. went on to consider whether the rights as between LBF and LBIE’s affiliates were incapable of creating a charge. His comments on this point were that, it is not essential to the nature of a charge, that the chargee (i.e. LBIE) must be a trustee or fiduciary for the creditor (i.e. the LBIE affiliates). Indeed, in this case, no trustee or fiduciary relationship existed between LBIE and its affiliates in respect of any security interest which may or may not have been created over the Property. He held that all that was necessary to create a charge is that the chargee has a specifically enforceable right to have the Property appropriated in payment of a debt owed to it, and the absence of a trustee relationship between the charge and the creditor did not bear upon this question.

Did the charge constitute a ‘financial collateral arrangement’ for the purposes of the Financial Collateral Arrangements (No. 2) Regulations 2003?
Having determined that the security interest created by the MCA was a floating charge, Briggs J. had to go on to consider whether it constituted a financial collateral arrangement for the purposes of the Financial Collateral Arrangements (No.2) Regulations 2003 (‘the FCAR’). The reason this mattered is that the FCAR disapply section 53(1) of the Law of Property Act 1925, section 365 of the Companies Act 1985 and section 245 of the Insolvency Act 1986 in respect of financial collateral arrangements; in the event that the security interest created by the MCA did not constitute a financial collateral arrangement for the purposes of the FCAR those provisions would have rendered it invalid.