Vol 7 (2010) - Issue 4

Article preview

Re Lehman Brothers International (Europe) (in administration) (No. 2) [2009] EWCA Civ 1161

1. Introduction
Prior to entry into administration in September 2008, Lehman Brothers International (Europe) (in administration) ('LBIE') primarily acted as broker and/or custodian for its clients under a variety of documents including the International Prime Brokerage Agreements, the Master Custody Agreements and the Margin Lending Agreements. Pursuant to these agreements LBIE’s clients have proprietary rights in assets held on trust by or on behalf of LBIE.

The process of returning trust assets to LBIE’s clients by the joint administrators (the 'Joint Administrators') has proven to be very complex and often problematic. The key difficulties include working out the net positions between LBIE and its clients, the lack of certainty in relation to the correct identity of possible claimants and the issue of potentially competing claims in relation to the same trust asset.

In order to overcome the above difficulties the Joint Administrators proposed a scheme of arrangement under article 26 of the Companies Act 2006 (the 'Act'). Under Section 899 of the Act, a scheme of arrangement is described as a compromise or arrangement between a company and its creditors which has been approved by the requisite majority of creditors for which court sanction is being sought.

The permission to explore the use of the scheme of arrangement in the context of LBIE’s administration was granted by the English High Court on 16 March 2009. In summary, the key provisions of the scheme of arrangement proposed by the Joint Administrators ('Scheme') were as follows:

(a) the Scheme would facilitate the return of trust property;

(b) the Scheme would only apply to 'creditors' with proprietary claims, while unsecured creditors would be excluded;

(c) the creditors under the Scheme would be required to release all claims against LBIE and the Joint Administrators in respect of trust property;

(d) in exchange for the release of claims, creditors under the Scheme would receive an allocation and distribution of the pooled trust property; and

(e) the Scheme would introduce a 'bar date' for the submission of claims and as a result of such bar date any claims submitted after that date could be disregarded.

The High Court hearing in relation to the Scheme took place before Mr Justice Blackburne at the Royal Courts of Justice on 29 and 30 July 2009.
On 21 August 2009 the court held that it did not have jurisdiction to sanction the Scheme insofar as it was concerned with the distribution of trust property and where it sought to do so in ways that would vary, or in some cases, extinguish the proprietary rights of LBIE’s clients.

2. The issue on appeal
The Joint Administrators, having consulted with their legal advisers and representatives of the Creditors’ Working Group appealed the decision and the same point of principle was examined by the Court of Appeal, i.e. whether a scheme of arrangement under Section 895 of the Act which varies proprietary rights could be approved by the court.

The London Investment Banking Association ('LIBA') appeared in the appeal (as well as at first instance). LIBA indicated that it supported the efforts made by the Joint Administrators to return assets to LBIE’s clients as quickly and as efficiently as possible. However, LIBA’s greatest concern was that the use of the Scheme could undermine the fundamental inviolability of trusts thereby lessening the legal protection afforded to assets under custody in the UK.