Anthony Victor Lomas and Others v Burlington Loan Management Ltd and Others
| Jurisdiction | England & Wales |
| Judge | Mr Justice David Richards |
| Judgment Date | 31 July 2015 |
| Neutral Citation | [2015] EWHC 2270 (Ch) |
| Docket Number | Case No: 7942 of 2008 |
| Court | Chancery Division |
| Date | 31 July 2015 |
[2015] EWHC 2270 (Ch)
Mr Justice David Richards
Case No: 7942 of 2008
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
IN THE MATTER OF LEHMAN BROTHERS INTERNATIONAL (EUROPE)
(IN ADMINISTRATION)
AND IN THE MATTER OF THE INSOLVENCY ACT 1986
Royal Courts of Justice
Rolls Building,
London, EC4A 1NL
William Trower QC, Daniel BayfieldandAlexander Riddiford (instructed by Linklaters LLP) for the Applicants
Robin Dicker QC, Richard FisherandHenry Phillips (instructed by Freshfields Bruckhaus Deringer LLP, Ropes & Gray International LLP and Schulte Roth & Zabel International LLP) for the 1 st, 2 nd and 3 rd Respondents
Antony Zacaroli QC, David AllisonQC andAdam Al-Attar (instructed by Kirkland & Ellis International LLP) for the 4th Respondent
Hearing dates: 18, 19, 20 and 21 May 2015
Introduction
This judgment concerns the construction and effect of agreements made since the commencement of the administration of Lehman Brothers International (Europe) (LBIE) between LBIE acting by its joint administrators and very significant numbers of its creditors.
The agreements are in standard forms. The first, the Claims Resolution Agreement, was a multi-lateral agreement made in late 2009 to which over 90 per cent in value of eligible creditors with claims to trust assets became party. The others, Claims Determination Deeds, were bilateral agreements in largely standard terms. The first were made in late 2010 and their terms evolved over time. By September 2014, some 1,600 deeds with about 1,290 different counterparties, agreeing claims totalling over £9.9 billion, had been made.
The principal purpose of these agreements was to simplify and accelerate the ascertainment of claims to trust assets and unsecured claims and to accelerate the return of trust assets and distributions among unsecured creditors. As counsel for the administrators say in their skeleton argument, these agreements:
"have made a significant contribution to the success of the Administration. They have enabled the Administrators to deal with an estate of unprecedented size and complexity with much greater efficiency than would otherwise have been the case."
The claims to trust assets and client money have all been substantially satisfied and the admitted claims of all unsecured creditors have been paid in full. The surplus funds available in the administration are estimated to reach or exceed £7.39 billion. Counsel for the administrators are right to say that the agreements have "resulted in substantial benefits to the estate (and thus its stakeholders)."
The issues in short are whether the agreements, or any of them, have the effect of releasing or modifying the rights of creditors to interest on their proved debts or to currency conversion claims.
These issues are among those raised by the administrators in an application notice issued in June 2014 and amended in May 2015. The issues require resolution so that the administrators can proceed to a distribution of the surplus funds. An earlier application ( Waterfall I) raised other issues relevant to the distribution of the surplus. In order to make the present application ( Waterfall II) manageable, it has been divided for the purpose of hearing into three. The first part ( Waterfall IIA), on which I am handing down judgment at the same time as this, raised issues concerning, principally, the entitlement of creditors to interest on their proved debts: see [2015] EWHC 2269 (Ch). The present judgment concerns the post-administration agreements ( Waterfall IIB). The third part concerns the effect of pre-administration ISDA and other market standard contracts and is fixed for hearing later this year.
The principal issue as regards the post-administration agreements is their effect on currency conversion claims. These claims arise where debts and liabilities are payable in a foreign currency but, as required by rule 2.86 of the Insolvency Rules 1986, are, for the purposes of proof and the payment of proved debts, converted into sterling at the prevailing exchange rate at the date of commencement of the administration and where sterling depreciates against the foreign currency between that date and the date of distribution(s). It was held in Waterfall I at first instance and on appeal that creditors are entitled to payment of currency conversion claims as non-provable debts, ranking after statutory interest under rule 2.89: see [2014] EWHC 704 (Ch), [2015] Ch 1 and [2015] EWCA Civ 485.
This is a significant issue. Most of the business of LBIE was conducted, and therefore most of its liabilities were incurred, in US dollars. Between 15 September 2008, when LBIE was placed in administration, and the dates of distributions in respect of proved debts, sterling depreciated against the US dollar and against the euro and the Japanese yen, in which business was also conducted. Currency conversion claims may amount to some £1.3 billion.
A further issue raised on this part of the application is whether, if on their true construction the post-administration agreements release or modify the claims in question, the administrators should be directed not to give effect to them, by an application of the principle in Ex parte James (1874) LR 9 Ch App 609 or by analogy with it or under paragraph 74 of schedule B1 to the Insolvency Act 1986 (relief against acts which would cause unfair harm to one or more creditors).
The administrators have adopted for the most part a neutral stance on the issues in Waterfall IIB. The main submissions have been made on behalf of the first to third respondents, which are creditors with proved debts with a principal value of over £2.75 billion (the Senior Creditor Group, or SCG) and on behalf of the fourth respondent (Wentworth), the holder of the US $2.27 billion subordinated debt. The subordinated debt was held in Waterfall I to rank after statutory interest and non-provable debts. It is therefore, broadly speaking, in the interests of the SCG to argue that claims to interest and currency conversion claims are not released or modified by the post-administration agreements and in the interests of Wentworth to argue the contrary.
The respondents have not been appointed as representatives of different classes of creditors but they have advanced submissions in effect on behalf of those classes, and the administrators are content to act on directions given by the court on this basis. Where either of them have not made submissions that they might have done and the administrators consider them arguable, counsel for the administrators have advanced those submissions. The administrators uploaded all the position papers of the respondents and their own position paper on the LBIE administration website and invited any creditor who considered there to be relevant positions or arguments not canvassed in those position papers to contact them.
The Issues
There are five issues raised on this part of the application.
Issue 1 (paragraph 34 of the application notice) concerns the effect of the various agreements on currency conversion claims and any other non-provable claims:
"Whether (as a matter of construction) a creditor's Currency Conversion Claim and/or any other non-provable claim has been released in circumstances in which the creditor entered into either:
(i) a Foreign Currency CDD incorporating a Release Clause;
(ii) a Sterling CDD incorporating a Release Clause; or
(iii) the CRA."
Issue 2 (paragraph 35 of the application notice) concerns the effect of some of the agreements on claims to statutory post-administration interest payable under rule 2.88 of the Insolvency Rules 1986:
"Whether (as a matter of construction) a creditor's claim to Statutory Interest has been released in whole or in part in circumstances in which the creditor entered into either:
(i) a CDD incorporating a Release Clause; or
(ii) the CRA."
Issue 3 (paragraph 36A of the application notice) asks whether, if any of the agreements have the effect of releasing any claims referred to in Issues 1 and 2, the administrators should be directed not to enforce such releases:
"If (as a matter of construction) a CDD or the CRA has the effect of releasing a Currency Conversion Claim, Statutory Interest claim or other non-provable claims, whether, by reason of, or by analogy with, the rule in Ex parte James (1874) LR 9 Ch App 609 and/or because to enforce such release(s) would unfairly harm creditors who have entered into a CDD or the CRA within the meaning of paragraph 74 of Schedule B1 to the Insolvency Act 1986, in all the circumstances, the Administrators should be directed not to enforce, or to cause LBIE to enforce, such release(s)."
Issue 4 (paragraph 38 of the application notice) raises a specific issue on one of the agreements, the Claims Resolution Agreement:
"Whether (and if so in what circumstances) Part VII of the CRA, which specifies that claims of acceding creditors are to be calculated in US dollars, is capable of giving rise to a Currency Conversion Claim."
Evidence
The administrators have filed witness statements, giving evidence of the background to and the development of the relevant post-administration agreements. The respondents have also filed witness statements, giving evidence from their standpoint. Some of the evidence is not admissible on questions of construction of the agreements,...
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