Lehman Brothers; CRC Credit Fund Ltd and Others v GLG Investments Plc (Sub-Fund: European Equity Fund) and Others

JurisdictionEngland & Wales
JudgeMR JUSTICE BLACKBURNE,Mr Justice Blackburne,Mr Justice Briggs
Judgment Date20 January 2010
Neutral Citation[2009] EWHC 2141 (Ch),[2009] EWHC 3228 (Ch),[2010] EWHC 47 (Ch)
Docket NumberCase No: 7942 of 2008 and Case No: 16389 of 2009,Case No: 7942 of 2008
CourtChancery Division
Date20 January 2010
In The Matter of Lehman Brothers International (Europe) (in administration)
And In The Matter of the Insolvency Act 1986
And In The Matter of the Companies Act 2006
Number 2

[2009] EWHC 2141 (Ch)

Before: Mr Justice Blackburne

Case No: 7942 of 2008 and Case No: 16389 of 2009




William Trower QC and Daniel Bayfield (instructed by Linklaters LLP) for the Administrators and LBIE

Richard Snowden QC and Andrew Thornton (instructed by Freshfields Bruckhaus Deringer) for the London Investment Banking Association

Anthony Zacaroli QC (instructed by Allen & Overy LLP) for the GLG Partners LP

Hearing dates: 29 th and 30 th July 2009

Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.


Mr Justice Blackburne:


This application, brought both by way of ordinary application pursuant to paragraphs 63 and 68(2) of schedule B1 to the Insolvency Act 1986 and by way of a Part 8 claim form, is by the administrators of Lehman Brothers International (Europe). Its purpose is to establish whether a scheme of arrangement under Part 26 of the Companies Act 2006 (“the 2006 Act”) which the administrators wish to promote between LBIE and certain scheme creditors is one which the court has jurisdiction to sanction. If there is jurisdiction then the administrators seek a direction that they be at liberty to apply to the court for directions with a view to convening meetings of scheme creditors under section 896 of the 2006 Act.


The administrators who have appeared before me by Mr William Trower QC and Mr Daniel Bayfield recognise that because the only other persons represented before me are the London Investment Banking Association (“LIBA”), a trade association for firms in the investment banking and securities industry, and GLG Partners LP, which manages a number of hedge funds and is a member of a working group which has assisted the administrators in the preparation of the scheme, any view that I express on the question of jurisdiction cannot bind the very considerable number of former clients of LBIE who will qualify as scheme creditors under the scheme if I should conclude that there is jurisdiction and that the administrators should be at liberty to apply for the requisite meetings to be convened. It would be open to such persons to raise afresh the question of jurisdiction. That said, the proposal has attracted considerable support. The first hearing in relation to the proposed scheme (in March) was the subject of advance notice on the section of the PwC website dedicated to the administration of LBIE. It invited anyone who wished to attend or appear at that hearing to contact Linklaters LLP, who act for the administrators. One of the members of the scheme working group, GLG Partners LP, has appeared before me by Mr Antony Zacaroli QC to add its support to the submissions of Mr Trower and Mr Bayfield. But the proposal has met with opposition from LIBA which has been represented before me by Mr Richard Snowden QC and Mr Andrew Thornton. LIBA acknowledges the difficulties faced by the administrators but its view is that the court has no jurisdiction to sanction the scheme.


The Financial Services Authority, which is entitled to be heard, has chosen not to be represented before me. Instead, its General Counsel's Division has sent a letter to Linklaters, stating that the FSA is supportive “in principle… of the use by the Administrators of mechanisms (including Schemes of Arrangement) that should lead to savings of time and money, provided that the particular mechanism delivers an appropriate degree of protection to consumers and others entitled to protection under FSMA 2000”. But the letter then goes on to say that “it would not expect to object to a Scheme that met [that] description… but cannot yet say that it does not object to the Scheme currently formulated”. It expressly takes no position on the issue of jurisdiction that has been debated before me.


The proposed scheme which, so far as I need to, I will describe in more detail later does not claim to be a fully worked-up scheme, ready to be presented to the intended creditors. Despite its length and detail (it runs to 86 pages and includes eight appendices and has obviously been the subject of a great deal of thought and very careful drafting), the document before me does not claim to be other than a summary of the principal terms and effect of what is proposed. Section 1 of the document states why the scheme is being promoted. It is to set out the procedures which LBIE wishes to use “for the purpose of returning certain property which LBIE holds or controls and which belongs to its customers”. The proposal goes on to explain that as part of its business LBIE “held, directly or indirectly, significant quantities of assets in trust for its customers” and that “[w]here assets are held in trust, they do not form part of LBIE's general estate but instead are held by LBIE as trustee for the benefit of those persons who have claims to those assets”.


The question of jurisdiction which has been debated is whether it is possible to resort to a scheme of arrangement with creditors under Part 26 of the 2006 Act for the purpose identified in the proposal. It raises the question whether what is proposed is a “compromise or arrangement” within the meaning of section 895 of the 2006 Act.

The background


In a witness statement made in support of this application, David Ereira, a partner of Linklaters, sets out what has led to the proposal. He explains that one of LBIE's major business areas has been that of prime services where LBIE acted as prime broker to institutional clients, mostly hedge funds. He goes on to explain that, as prime broker, LBIE provided a broad range of services, including execution of securities and derivatives trades, clearing and settlements of trades (whether executed by LBIE or by other executing brokers on its behalf), custody, financing, foreign exchange, stocklending, and valuation and reporting for the client's portfolio. LBIE's clients, he states, would often actively trade in securities and derivatives, taking both long and short positions, and would also require stock borrowing and financing facilities and foreign exchange services. LBIE's prime services clients comprised the majority of entities which, as the result of the various contractual arrangements which he later describes, have proprietary interests in assets held by or on behalf of LBIE. Other persons with such interests included clients who placed securities with LBIE by way of safe custody, private individuals whose accounts were dealt with by the Private Investment Management division of LBIE, market counterparties who posted collateral with LBIE pursuant to derivatives trades otherwise than on a title transfer basis and LBIE's affiliates within the Lehman group of companies.


LBIE did not hold assets itself but did so through depositories, exchanges, clearing systems and sub-custodians. The method used depended on the type of assets held, the systems through which assets were traded, the currencies involved and regulatory requirements.


Mr Ereira summarises the principal contracts entered into by LBIE where the clients and counterparties retained a proprietary interest in assets transferred to LBIE. They are International Prime Brokerage Agreements, Master Custody Agreements, Margin Lending Agreements, and what is described as the Credit Support Annex (New York law version) to the ISDA Master Agreement. Mr Ereira also refers to LBIE's standard terms of business which set out the terms on which LBIE might hold assets for the client. He points out, however, that his understanding was that when holding assets for a client LBIE would normally have entered into one or more of the other contracts the terms of which would prevail over LBIE's standard terms of business in the event of any inconsistency.


Mr Ereira then embarks upon a review of some of the key terms of LBIE's standard terms of business and of the principal forms of contract which LBIE entered into where clients retained a proprietary interest in assets transferred to LBIE, pointing out, however, that his review was by reference to what he describes as the “pro-formas” or standard terms in use at the time LBIE went into administration or versions which were regularly entered into by LBIE. He explains that the agreements were usually subject to some degree of negotiation with the client.


I do not think that any useful purpose will be served in seeking to summarise how these various contracts operate. A key consideration in respect of any client, once the contractual terms governing that client's relationship with LBIE have been established, is to identify what, as at the date that LBIE went into administration or later in the case of financial contracts which were still open at that time, the net financial position is as between LBIE and the client and, in particular, whether there is a net sum due from the client to LBIE or vice versa. A no less important consideration is to identify what rights, if any, LBIE is entitled to exercise over assets of the client held or controlled by LBIE in the case where there is a balance due from the client to LBIE, either generally or in respect of any particular transaction or series of transactions. I do no more than summarise the issues.


Those questions aside—the net financial position between LBIE and the client and the extent to which LBIE is entitled to have recourse to a client's assets to satisfy LBIE's monetary claim or claims against that client—the administrators have faced a range of complex issues in...

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