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

JurisdictionEngland & Wales
JudgeSir Geoffrey Vos
Judgment Date15 July 2020
Neutral Citation[2020] EWHC 1932 (Ch)
Docket NumberCase No: CL-2008-000012
CourtChancery Division
Date15 July 2020
In the matter of Lehman Brothers International (Europe) (in administration)

[2020] EWHC 1932 (Ch)

Before:

Sir Geoffrey Vos, Chancellor of the High Court

Case No: CL-2008-000012

IN THE HIGH COURT OF JUSTICE

BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES

INSOLVENCY AND COMPANY LIST

Royal Courts of Justice, Rolls Building

Fetter Lane, London, EC4A 1NL

Mr Daniel Bayfield QC and Mr Ryan Perkins (instructed by Linklaters LLP) for the Applicants

Ms Louise Hutton (instructed by Dentons LLP) for the LB Holdings Intermediate 2 Ltd

Hearing date: 15 th July 2020

Sir Geoffrey Vos, Chancellor of the High Court

Introduction

1

The Joint Administrators (the “Administrators”) of Lehman Brothers International (Europe) (in administration) (“LBIE”) apply to the court for a direction pursuant to paragraph 63 of Schedule B1 (“Schedule B1”) to the Insolvency Act 1986 (the “1986 Act”) that they be at liberty to consent to a request from the directors of LBIE (the “directors”), pursuant to paragraph 64 of Schedule B1, to distribute surplus funds to LBIE's sole shareholder, LB Holdings Intermediate 2 Limited (in administration) (“LBHI2”). LBHI2 is an indirect subsidiary of Lehman Brothers Holdings Inc (“LBHI”) a company which is the subject of Chapter 11 bankruptcy proceedings in New York.

2

The directors have requested the Administrators to consent to their proposal that they (the directors) cause LBIE to make one or more distributions to LBHI2 (the “request”).

3

The Administrators' position, in summary, is that:

“Given that it is clear that the LBIE estate is solvent (with all admitted creditor claims having been paid in full and a sufficient reserve being maintained for the small number of unresolved claims) and given that the Administrators are holding a substantial sum of money to which [LBHI2] is entitled, the Administrators consider it appropriate to consent to the request”.

4

It is unnecessary to recite the history of LBIE's administration or of the administration of other Lehman companies, which have come before this court on numerous occasions since September 2008. Suffice it to say that the original purpose of the administration of LBIE was to achieve a better result for LBIE's creditors as a whole than would be likely if the company were wound up (without first being in administration) under paragraph 3(1)(b) of Schedule B1.

5

The administration has been successful. There is a cash surplus in the hands of the Administrators which is said to be likely to grow. In summary, (i) some £23 billion of custodied securities, investments and associated cash has been returned during the course of the administration, (ii) £12.6 billion has been paid in distributions to unsecured creditors, (iii) £5.1 billion has been paid in statutory interest on those unsecured distributions and (iv) £2.2 billion has been paid to the holder of subordinated debt. As to the latter, it may be noted that the subordinated creditor supports the application, as does LBHI2.

6

The request explains what the directors wish to do as follows:

“The directors propose to make an initial distribution in the amount of £29 million out of the surplus presently available. The directors may also wish to make further distributions of any additional surplus funds which the Administrators confirm are available for distribution to LBHI2 by reducing LBIE's share capital in the manner set out [in the request] (or by creating distributable reserves in any other lawful manner), and/or by making further interim dividend payments on or partial redemptions of the 5% redeemable preference shares and/or the class B redeemable preference shares (“Further Distributions”). The directors will seek the consent of the Administrators before taking any steps to make Further Distributions”.

7

Moreover, one of the Administrators, Mr Russell Downs, explains to the court that: “[t]he Administrators have taken legal advice and reviewed the accounting analysis performed by colleagues at [PricewaterhouseCoopers] to determine whether the [directors' request] is lawful and available to LBIE, and have satisfied themselves that it is both”.

8

Mr Downs explains in his evidence that as at 10 June 2020 there was approximately £493 million in the LBIE estate, the majority of which is held as a conservative reserve against its potential liabilities and against the future estimated costs and contingent expense claims of the administration. That figure does not include anticipated future realisations and Mr Downs says that: “[i]n some instances, if these matters are resolved in favour of LBIE, there will be a double benefit to the estate: not only will there be a recovery of further debts but also a release of the reserves currently held against the claims submitted by putative creditors”. Of the £493 million held, £29 million is said to be a “true surplus” available for distribution now, and £145 million is expected to be available for distribution by the end of 2020.

9

Mr Downs has given the court a full account of the nature of the unresolved claims by and against LBIE's estate. It is not necessary for me to recite that account in this judgment. Suffice it to say that I accept on the evidence that the £29 million is indeed a true surplus, and that there is no reasonable likelihood of those monies being needed to satisfy liabilities of LBIE at any stage.

10

Mr Downs has also explained in some detail why it is not now possible for the administration of LBIE to be terminated. There are some outstanding creditor claims that need to be resolved before that can happen. The timescale is unclear, although I was told in oral argument that the Administrators' term will expire in 2022, so the administration will need to terminate then unless their term is further extended.

11

The Administrators have notified all creditors (by their website), the Commissioners for HM Revenue and Customs (“HMRC”) and the Financial Conduct Authority (the “FCA”) of this application, and none has sought to attend the hearing. I was told that HMRC and the FCA have each indicated in the last day or so that they do not oppose the Administrators' application.

12

On 1 July 2020, however, a Mr Rex Wu emailed indicating an objection. He subsequently repeated that objection in letters to Mr Justice Hildyard and later to me. The substance of his objection was that LBIE and/or LBHI2's capital stock are not entitled to receive a distribution as a result of a covenant given by LBHI as part of a guarantee of certain preferred securities. He contends that the distribution would violate the terms of LBHI's Chapter 11 recovery plan confirmed by the US Bankruptcy Court for the Southern District of New York on 6 December 2011.

13

The essential legal question before the court is whether in consenting to the request the Administrators would be performing their functions with the objective stated in paragraph 3 of Schedule B1 (“paragraph 3”). That said, of course, the court has nonetheless to decide, in all the circumstances, whether it is appropriate as a matter of its discretion to accede to the distributions sought under paragraph 63 of Schedule B1 (“paragraph 63”).

The relevant statutory provisions

14

Paragraph 1(1) of Schedule B1 provides that: “[f]or the purposes of this Act “administrator” of a company means a person appointed under this schedule to manage the company's affairs, business and property”.

15

Paragraph 3 provides as follows:

“(1) The administrator of a company must perform his functions with the objective of — (a) rescuing the company as a going concern, or (b) achieving 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), or (c) realising property in order to make a distribution to one or more secured or preferential creditors.

(2) Subject to sub-paragraph (4), the administrator of a company must perform his functions in the interests of the company's creditors as a whole.

(3) The administrator must perform his functions with the objective specified in sub-paragraph (1)(a) unless he thinks either — (a) that it is not reasonably practicable to achieve that objective, or (b) that the objective specified in sub-paragraph (1)(b) would achieve a better result for the company's creditors as a whole.

(4) The administrator may perform his functions with the objective specified in sub-paragraph (1)(c) only if — (a) he thinks that it is not reasonably practicable to achieve either of the objectives specified in the sub-paragraph (1)(a) and (b), and (b) he does not unnecessarily harm the interests of the creditors of the company as a whole”.

16

Paragraphs 59, 63 and 64 of Schedule B1 provide as follows:

“59 (1) The Administrator of a company may do anything necessary or expedient for the management of the affairs, business and property of the company. (2) A provision of this schedule which expressly permits the administrator to do a specified thing is without prejudice to the generality of sub-paragraph (1)” (“paragraph 59”).

“63 The administrator of a company may apply to the court for directions in connection with his functions”.

“64 (1) A company in administration or an officer of a company in administration may not exercise a management power without the consent of the administrator. (2) For the purposes of sub-paragraph (1) — (a) “management power” means a power which could be exercised so as to interfere with the exercise of the administrator's powers; (b) it is immaterial whether the power is conferred by an enactment or an instrument; and (c) consent may be general or specific” (“paragraph 64”).

17

Paragraph 68 of Schedule B1 (“paragraph 68”) provides as follows:

“(1) Subject to sub-paragraph (2) the administrator of a company shall manage its affairs, business and property in accordance with — (a) any proposals approved under paragraph 53; (b)...

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