Lehman Brothers International (Europe) ((in Administration))

Hearing dates: 13 & 15 & 18 June 2018

Judgment Approved

Part A: the purpose and scope of this judgment, and the broad context of the application

The ultimate question considered in this judgment is whether the Court should sanction a scheme of arrangement between Lehman Brothers International (Europe) (in administration) (“LBIE”) and certain of its creditors pursuant to Part 26 of the Companies Act 2006 (the “CA 2006”). The Scheme has been proposed by LBIE's Administrators pursuant to section 896(2)(d) of the CA 2006, which empowers an administrator to propose a scheme of arrangement on behalf of the company.

This is my second judgment in this matter. I have already provided, on 15 June 2018, a short ex tempore judgment sanctioning the Scheme. I considered that necessary in order to explain my decision both to the Court of Appeal given the then imminent hearing before it of one of the proceedings compromised by the Scheme, and to the US Bankruptcy Court, given the Administrators' stated intention to apply on 19 June 2018 for recognition of the Scheme as a foreign main proceeding under Chapter 15 of the US Bankruptcy Code. However, as I indicated at the time, and with the encouragement of the parties, I have also thought it right, in the context of an administration which has been in being for nearly a decade and has involved multiple proceedings of very considerable value and complexity, to provide an additional full judgment elaborating my reasoning. I had hoped to provide this before the Scheme became effective; but it proved a more time-consuming task. This judgment should be read with the fact in mind that the Scheme has already come into effect; and any inappropriate use of tenses which abides should impliedly be corrected.

Turning to the substance of the matter, the basic purpose of the Scheme is to compromise various complex legal proceedings so as to facilitate the distribution of the surplus in LBIE's estate (and, in due course, to bring the administration to an end). The Administrators present the Scheme as providing the only realistic way of enabling the distribution of the surplus in LBIE's estate without years of further litigation.

LBIE, an unlimited company incorporated in England and Wales, was the Lehman Group's main trading company in Europe. It has been in administration since September 2008. Its immediate holding company, LB Holdings Intermediate 2 Ltd (“LBHI2”), which holds all of the ordinary share in its capital, has been in administration since January 2009. The purpose of each administration was to realise the respective assets of these companies to their best advantage, rather than the preservation of the companies as going concerns. Each has become a distributing administration.

The collapse of the Lehman Group in September 2008 shook the financial world. Its effects are still being felt today. It is perhaps ironic that in the result, at least in the case of LBIE, the process of administration has yielded a very substantial surplus; and that the litigation sought to be resolved by the Scheme, and which is delaying the completion of administration, relates not to deficiencies but to the unusual legal issues relating to surplus assets (“the Surplus”).

After four dividends to creditors with an aggregate value of 100p in the £ (including distributions to unsecured creditors of approximately £12.6 billion), LBIE's general estate contains liquid assets with a total value of some £6.6 billion. Total estimated future realisations range from approximately £1.2 billion to £1.7 billion. Although not all of these assets will be available (or, in any event, immediately available) for distribution as part of the Surplus, since it is necessary for the Administrators to hold a proportion of the assets in reserve for expenses and any unresolved provable debts, on any view, however, the Surplus is substantial.

There has never, at least in this jurisdiction, been an administration like it. The issues to which it has given rise have been correspondingly novel, with very considerable amounts in dispute. There has at every stage been every likelihood that the issues requiring resolution to establish rankings and priorities as to entitlement to the Surplus (in what has become known as the ‘Waterfall proceedings’) would eventually proceed to the Court of Appeal and onward to the Supreme Court: see, for example, Re Lehman Brothers International (Europe) (‘Waterfall I’) [2017] UKSC 38 (in the Supreme Court); Re Lehman Brothers International (Europe) (Nos 6 and 7) (‘Waterfall IIB’) [2017] EWCA Civ 1462 (in the Court of Appeal) and In re Lehman Brothers Europe (No. 9) (‘Waterfall IIC’) [2017] EWHC 20131 (Ch), which, at the time of my earlier decision, was imminently due to come before the Court of Appeal at a hearing commencing on 3 ^rd July 2018.

There are a variety of further proceedings, some still in the foothills, others well on their way up the judicial ladder. I shall return later to describe the matters in issue. For the present it suffices to say that prior to the implementation of the Scheme (a) there remained important issues outstanding (in the sense that they have not finally been determined) which could, according to their resolution, have a fundamental effect on the calculation of creditors' entitlements to the Surplus and (b) until such proceedings (“the Relevant Proceedings”) were compromised or finally determined (such that all appellate processes have been exhausted), as I understand they now have been by effect of the Scheme, it would have been impossible for the Administrators to make further substantial progress in the distribution of the Surplus.

That is because, if the Administrators were to distribute the Surplus on a basis which was later held to be wrong by the Court of Appeal or the Supreme Court, they would be exposed to the risk of personal liability. That is not a risk that any office-holder can reasonably be expected to bear. Thus, until the Relevant Proceedings are dealt with, the Surplus will remain locked in the estate.

Further long delay in the conclusion of the Administration is inherently unsatisfactory. But there is a further reason why delay is damaging to all creditors. Creditors' entitlements to statutory interest (at 8%) ceased once all admitted provable claims had been paid in full (since the underlying debts have been paid), and creditors will not receive any compensation for the period during which the Surplus remains locked in the estate: see Re Lehman Brothers International (Europe) (Waterfall IIB) [2018] Bus LR 508 at [43]–[49] (Gloster LJ). In the context of such a substantial Surplus the effect is significant. I can take the following illustrative figures from the Administrators' skeleton argument:

(1) Assume that the total amount of statutory interest is £5bn.

(2) Assume that creditors could earn an average total return of 15% over three years on any distributions made to them (representing a return of 5% per annum, without compounding). On that basis, the “time value” of £5bn over three years is £750m.

(3) If the Surplus is not distributed for three years, creditors would effectively lose £750m (being the assumed “time value” of £5bn), and would not receive any further statutory interest or other compensation for that loss.

(4) The figure of £750m is a conservative estimate. Nearly all LBIE's investors are sophisticated investment funds or banks, which may be able to earn a significantly higher return than 15% over three years.

Any further delays will lead inexorably to a continuing loss of the time value of money, increasing with every day that the Surplus is not distributed. In such circumstances, the Administrators have had to consider whether any viable solution is available. They have concluded that (a) the existing judgments in the Waterfall proceedings already provide the Administrators with sufficient guidance to distribute the Surplus; (b) although any further appellate litigation might, of course, lead to a reversal of the existing judgments (to the benefit of some creditors and the detriment of others), such litigation is not necessary to enable the Administrators to distribute the Surplus; and (c) it is plainly desirable, looking at the interests of creditors as a whole, for the Administrators to pursue a compromise of the Relevant Proceedings so as to facilitate the distribution of the Surplus: and that is what the Scheme has been conceived to achieve.

Part B: structure of this Judgment and representation of creditors at the Hearing

After that introduction, I propose, in assessing whether to sanction the Scheme, largely to follow the sequence of the Administrators' full and helpful skeleton argument, as follows:

(1) In Part C, I describe in greater detail both (a) the directions so far given by the Court on the basis of which the Administrators propose to proceed (and which the Scheme thus reflects) and (b) the Relevant Proceedings;

(2) In Part D, I summarise the relevant terms of the...