Vol 6 (2009) - Issue 1

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Lehman Administrators not at ‘Beck and Call’ of Creditors: Four Private Investment Funds v the Joint Administrators of LBIE (in administration) [2008] EWHC 2869 (Ch)

Introduction

This case arises out of the recent collapse of the Lehman Brothers banking group (the ‘Lehman Group’). The applicants, four private investment funds managed in the USA, sought an order requiring the administrators of Lehman Brothers International (Europe) (‘LBIE’) to provide additional information regarding certain securities held by LBIE on behalf of the applicants.

Mr Justice Blackburne refused the application and held that the court would not be justified in intervening in the day-to-day management of the administration by ordering the administrators to provide additional information to the applicants. Whilst the court was sympathetic to the position of the applicants, the court was firm in its view that the administrators must be accorded a wide measure of latitude to achieve their statutory purpose, particularly where there was no suggestion of improper conduct by the administrators.

This decision follows on from the recent case of RAB Capital plc where the applicants sought the return of securities held on their behalf by LBIE. Both of these decisions are illustrative of the court’s noninterventionist approach to applications brought by parties adversely affected by the collapse of the Lehman Group.

Facts

Each of the applicants was party to both a prime brokerage agreement with Lehman Brothers Inc (‘LBI’) (a US company) and LBIE (a UK company) and a margin lending agreement with LBIE which was arranged by LBI as agent. The prime brokerage account under the prime brokerage agreement was maintained by LBI while the lender’s account under the margin lending agreement was maintained by LBIE.

The funds lodged securities with LBI, which acted as their prime broker, as security for payment and performance of their obligations and liabilities to LBIE. These securities were then transferred to LBIE which was authorised to make loans to the applicants and provide other services. Under clause 5 of the margin lending agreement, LBIE was authorised to lend the securities to itself or others, and to pledge, re-pledge, hypothecate and re-hypothecate them on the terms that (unless otherwise agreed) the funds would be entitled to any distributions made in respect of those securities.

The applicants’ case

The applicants claimed that by Friday 12 September 2008 that they had agreed with LBI that most of their securities would be transferred to a third party bank on 16 September 2008. Due to the collapse of LBI and LBIE on 15 September 2008 the transaction was never completed.

The applicants criticised the administrators for having ‘a marked reluctance’ to providing them with further and better information about the state of their securities and for providing unsatisfactory reasons for their failure to do so. Counsel for the applicants submitted that the applicants were not seeking to involve the administrators in a ‘burdensome fact-finding investigation’ nor were they seeking to put themselves in a more favourable position compared to other former LBIE clients. They stated that their objective was merely a ‘reporting to investors’ exercise.