Vol 7 (2010) - Issue 6

Article preview

UK HM Treasury Consultation Paper on Special Administration Regime for Investment Firms

Very recently, the UK Treasury published a consultation paper which sought views on proposals for a special administration regime for investment firms. It is part of a series of HM Treasury consultations following the collapse of Lehman Brothers on 15 September 2010. Other parts of the consultation by HM Treasury have included proposals for management of investment firms and the establishment of 'living wills' to avoid the precipitative way in which Lehmans Europe entered into administration. In addition, HM Treasury has proposed a special regime, modified from a normal administration regime.
One of the major changes is to establish three special administration objectives which would apply instead of those in a conventional administration. Another major area of difference is to allow trust or client creditors to approve the special administrators' proposals, alongside the unsecured creditors. The proposal does not, however, incorporate the role of a separate client asset trustee, which was contained in some of the earlier consultation papers, which would probably have created more rather than less confusion in the early stages of an investment firm insolvency.

The special administration objectives
The first objective is to ensure the return of client assets as soon as is reasonably practicable. There is a definition of client assets in the Banking Act 2009 (the 'Banking Act') and the government intends to augment that definition to include client money (see below for a discussion on client money). The experience of Lehmans certainly supports the need for a mechanism and objective to return assets to clients. The Lehman Brothers International Europe administrators went to court for directions very shortly after their appointment and a suitable process was put together to ensure the return of assets based on criteria of hardship and general prioritisation. However, the identity, control and return of assets on a case like Lehmans are complex beyond belief. A major area where difficulties still arise relates to assets held on behalf of other affiliates and the concept of extended liens in favour of affiliate companies.
The decision of the appeal court in relation to Lehman client money has had a profound impact on the case and the timing of returns for both client money claimants and unsecured creditors. The decision put the onus on the administrators to undertake a tracing exercise in order to identify both claimants and funds to add to the client money pool and that is expected to result in very significant delay and additional costs. The administrators have made an application for permission to appeal the judgement to the UK Supreme Court and at the time of writing that application is still pending.
The second special administration objective requires the administrator to work with financial market infrastructure bodies and engage with them on a timely basis. This became the behaviour of the Lehman administrators and the first month of the assignment was taken up with daily communications with not just the UK authorities, but also US trade bodies and government departments.
The third objective of the special administration regime is to rescue the investment bank as a going concern or to wind it up in the best interest of its creditors. This objective reflects the current conventional administration objectives and provides a suitable legal framework which is very familiar to experienced administrators in the financial services industry.