Lehman Brothers Europe Ltd ((in Administration)) and Others
| Jurisdiction | England & Wales |
| Judge | The Honourable Mr Justice Hildyard,Mr Justice Hildyard |
| Judgment Date | 03 August 2017 |
| Neutral Citation | [2017] EWHC 2031 (Ch) |
| Docket Number | Case No: CR-2008-000019 |
| Court | Chancery Division |
| Date | 03 August 2017 |
[2017] EWHC 2031 (Ch)
The Honourable Mr Justice Hildyard
Case No: CR-2008-000019
IN THE HIGH COURT OF JUSTICE CHANCERY DIVISION
Royal Courts of Justice 7 Rolls Building, Fetter Lane, London, EC4A 1NL
Felicity Toube QC and Hannah Thornley (instructed by Linklaters LLP) for the LBEL Administrators
Tony Beswetherick (instructed by Hogan Lovells International LLP) for the LBH Administrators
Hearing dates: 19 May 2017, 15 June 2017, 11 July 2017, 21 July 2017 and 24 July 2017
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.
Introduction
The joint administrators ("the Administrators") of Lehman Brothers Europe Limited (In Administration) ("LBEL" or "the Company") have applied for directions that would enable a substantial surplus to be distributed to the sole member of LBEL, Lehman Brothers Holdings plc (In Administration) ("LBH"), while the Company remains in administration. The joint administrators of LBH ("the LBH Administrators") have also applied for directions in respect of their role in the prospective distribution.
The applications precede, and have been made to help facilitate, a proposed settlement of the proceedings known as "Waterfall III".
There would be a number of advantages to the creditors of LBEL, LBH and other parties to the proposed settlement if LBEL were able to make the distribution to its member within the administration, rather than first placing the Company into liquidation, which is the usual procedure provided for in the Insolvency Act 1986 ("the 1986 Act").
However, there is no express provision in the insolvency legislation for distributions to members (as distinct from creditors) within an administration. Further, in a short judgment of Briggs J (as he then was) in ( Re Lehman Brothers Europe Limited unreported, 25 June 2012), it was held that the statutory administration regime does not permit administrators to make distributions (at least directly) to a company's members.
The anticipated surplus is considerable. There is no intention (and there never has been) for the Company to resume business as a going concern. The surplus must in due course be distributed. If the surplus can only be distributed in a liquidation then that is the course (as the Administrators fully appreciate and acknowledge) that will have to be followed. But liquidation would complicate and delay matters, and have disadvantageous tax consequences. Furthermore, although it is not suggested that it would become impossible, the settlement of Waterfall III would also be delayed and complicated.
As a consequence, the Administrators have, with some ingenuity, devised a scheme which in broad terms is intended to enable a distribution by the Company further to the exercise of the residual powers of the directors and the shareholders of the Company still vested in them under the Companies Act 2006 (the "2006 Act").
In brief summary, the proposal is that the Administrators would first appoint a director who, together with the single member of the Company, would be the one to implement the distribution to LBH further to a reduction of capital as permitted by the 2006 Act (in the case of a private company, without the sanction of the Court, but subject to strict and important conditions).
In terms:
i) the Administrators apply pursuant to paragraph 63 of Schedule B1 ("Schedule B1") of the 1986 Act for directions that they may in due course appoint a director in order (if a settlement is reached in relation to Waterfall III) to distribute surplus funds to LBH, within the administration and that thereafter LBEL shall (at the appropriate time) be dissolved rather than put into liquidation ("the Proposal"); and
ii) the LBH Administrators apply pursuant to paragraph 63 of Schedule B1 that they be at liberty to support and to take such further steps as may be considered desirable and appropriate to give effect to the Proposal.
The need for several hearings
The hearing of these applications for approval of the Proposal have been somewhat drawn out, reflecting the fact that I have found the issues to which it gives rise by no means straightforward or easy.
Following the issue of the Administrators' application notice dated 16 May 2017, it first came before me on 19 May 2017. On that occasion, I directed that the Administrators should give specific notice of the application to HM Revenue & Customs ("HMRC") and I adjourned the hearing to give HMRC an opportunity to oppose or comment on the tax implications of the application.
When the hearing resumed on 11 July 2017 (after a short hearing on 15 June 2017), following a response from HMRC, I directed that the LBH Administrators and the prospective director of LBEL provide certain confirmations in respect of the application and adjourned the hearing a second time so that such confirmations could be given.
The hearing resumed again on 21 July 2017, on which date the LBH Administrators also attended court by their counsel, Mr. Tony Beswetherick. Subsequent to that hearing, the LBH Administrators determined that they should also seek directions in respect of the Proposal, which they did by application notice dated 23 July 2017.
The Administrators' application has developed and been refined over time. In particular, the Administrators decided not to pursue one aspect of the application initially made, being an application in the alternative for directions that the Administrators may in due course appoint a director and (if a settlement is reached in relation to Waterfall III) terminate the administration in order to return surplus funds to the director of LBEL, so that the director may distribute the surplus funds to LBH, before LBEL is then put into members' voluntary liquidation ("Option 2").
Option 2 introduced its own difficulties, including complex legal issues as to the correct treatment of statutory interest and limitation. It also did not avoid the difficulties inherent in moving to liquidation, even though the move would follow, rather than be the context of, the proposed distribution. After it had been ventilated at the initial hearing, at the hearing on 21 July 2017 I was informed that Option 2 had been abandoned.
On 24 July 2017, after hearing brief final submissions from the Administrators' counsel, Ms. Felicity Toube QC, I granted the application in principle although I suggested to Ms. Toube that the terms of the Order would need to be significantly more focused than the draft attached to the original application. I also reserved my reasoned judgment. This judgment sets out the reasons for my decision.
Background to these applications
LBEL was placed into administration on 23 September 2008 by its directors pursuant to paragraph 22 of Schedule B1.
The purpose of the Company's administration, as set out in the proposals of the Administrators dated 14 November 2008 and approved by creditors on 1 December 2008 ("the 2008 Proposals"), is to "achieve a better result for the company's creditors as a whole than would be likely if the company were wound up (without first being in administration)" pursuant to paragraph 3(1)(b) of Schedule B1.
The latest progress report that I have been shown is dated 20 April 2017 and covers the period 23 September 2016 to 22 March 2017. According to that report, as at 22 March 2017 the Administrators have realised assets of just under £500 million. Following interim dividends paid in 2012, 2013 and 2014, respectively, the Company's admitted unsecured creditors have now received dividends totalling 100 pence in the pound. These creditors have not yet received any statutory interest under rule 14.23(7) of the Insolvency Rules (England and Wales) 2016 ("the 2016 Rules") (previously rule 2.88(7) of the Insolvency Rules 1986 ("the 1986 Rules")).
The April 2017 progress report shows that, on 22 March 2017, the Administrators held a cash balance of over £275 million. This substantial surplus cannot currently be distributed because of an outstanding claim against LBEL's estate by an affiliated company, Lehman Brothers Limited (in administration) ("LBL"), in Waterfall III. However, as already mentioned, there is now a strong prospect of a settlement of Waterfall III, whereby LBL would withdraw its claim against LBEL and a proof of debt submitted by LBEL in LBL's estate (in the amount of approximately £447 million) would be admitted in an agreed amount.
Following resolution of Waterfall III, therefore, the Administrators would presently expect to be in a position to distribute the surplus (including the amount received from LBL in respect of LBEL's admitted proof of debt). The Administrators propose that this surplus be used to:
i) make a distribution to LBEL's creditors of statutory interest at 8% simple interest per annum (estimated at the time the application was issued to be an amount of approximately £38 million in aggregate);
ii) establish a reserve (estimated at the time the application was issued to be £105 million, but subject to potential revision) for Administrators' costs and any additional matters, including (if required) tax;
iii) make an interim shareholder distribution ("the Interim Distribution") to LBH; and
iv) in due course (as appropriate), make a final shareholder distribution to LBH, following determination of the extent to which the reserves are required for the various purposes for which they were established.
The question I have had to decide...
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