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

JurisdictionEngland & Wales
CourtChancery Division
JudgeMr Justice David Richards
Judgment Date14 Mar 2014
Neutral Citation[2014] EWHC 704 (Ch)
Docket NumberCase No: Nos 7942 and 7945 of 2008 and No. 429 of 2009

[2014] EWHC 704 (Ch)




Royal Courts of Justice

Rolls Building

Fetter Lane, London, EC4A 1NL


Mr Justice David Richards

Case No: Nos 7942 and 7945 of 2008 and No. 429 of 2009

In the Matter of Lehman Brothers International (Europe) (In Administration)
And in the Matter of Lehman Brothers Limited (In Administration)
And in the Matter of LB Holdings Intermediate 2 Limited (In Administration)
And in the Matter of the Insolvency Act 1986

William Trower QC and Daniel Bayfield (instructed by Linklaters LLP) for the Joint Administrators of Lehman Brothers International (Europe)

David Wolfson QC and Nehali Shah (instructed by DLA Piper UK LLP) for the Joint Administrators of Lehman Brothers Limited

Anthony Trace QC, Louise Hutton and Rosanna Foskett (instructed by Dentons UKMEA LLP) for the Joint Administrators of LB Holdings Intermediate 2 Limited

Barry Isaacs QC and Mark Arnold QC (instructed by Weil, Gotshal & Manges) for Lehman Brothers Holdings, Inc

Antony Zacaroli QC and David Allison (instructed by Allen & Overy LLP) for Lydian Overseas Partners Master Fund Limited

Hearing dates: 12–15, 18–20 November 2013

Mr Justice David Richards



This is an application by the joint administrators of three companies in the Lehman Brothers group. The circumstances which give rise to the application are both unexpected and unusual.


The circumstances are unexpected because when the Lehman Brothers group collapsed in September 2008, it was not anticipated that there would be any surplus of assets once the general body of unsecured creditors of any of the principal companies had been paid. The principal trading company within the group in the United Kingdom and Europe was Lehman Brothers International (Europe) (LBIE) and it is now anticipated that it is likely to have a significant surplus once all unsubordinated proved debts have been paid in full.


The circumstances are unusual because LBIE is an unlimited company. It has two members, both other companies in the group. Both have ordinary unsecured claims against LBIE and one of them has a very large claim as a subordinated loan creditor. Issues arise as to the potential liability of the members for the liabilities of LBIE, and in particular its subordinated liabilities, and the relationship between their liability, if any, as members and their claims as creditors.


The purpose of the application is to determine the claims which may be made against the surplus before any return to members and the order in which such claims rank for payment, and to resolve the existence and extent of the potential liability of the members. These broadly stated issues involve a number of novel and important questions.


The applicants are the respective joint administrators of LBIE and of its two members, Lehman Brothers Limited (LBL) and Lehman Brothers Holdings Intermediate 2 Limited (LBHI2). LBIE and LBL have been in administration since September 2008 and LBHI2 since January 2009.


Lehman Brothers Holdings, Inc (LBHI) and Lydian Overseas Partners Master Fund Limited (Lydian) were joined as respondents. LBHI is the ultimate parent of the Lehman Brothers group. On 15 September 2008, it commenced Chapter 11 bankruptcy proceedings in the United States Bankruptcy Court for the Southern District of New York, from which it emerged on 6 March 2012. It is an indirect creditor of many companies in the group and the ultimate shareholder of all of them. Its primary interest on this application relates to LBHI2's right to recover subordinated loans made by it to LBIE and issues relating to such subordinated loans. Although there are in some respects important differences between the positions adopted by LBL, LBHI2 and LBHI, they have made common cause on most issues, while in some instances advancing different submissions in support of the same conclusions. For convenience, I will call them "the other Lehman companies" when referring to them collectively.


Lydian is an unsecured unsubordinated creditor of LBIE and its position is aligned with the submissions which have been advanced on behalf of the administrators of LBIE. They have avoided duplication of submissions and Lydian has concentrated on issues relating to foreign currency conversion claims.


The parties have agreed a statement of facts and there have been no contested issues of fact. The entire argument has been directed to legal issues.


The parties cooperated to produce an agreed list of issues, divided into 22 questions, some of which are further subdivided. The oral and written submissions of the parties were not primarily directed to each of those questions, but rather were made by reference to a number of principal issues. I have adopted the same course in this judgment and do not attempt to provide answers to each of the questions in the list of issues.



LBIE was incorporated on 10 September 1990 under the Companies Act 1985 as a company limited by shares. On 21 December 1992, it was re-registered as an unlimited company. It appears that this step was taken for US tax reasons. Re-registration of LBIE as an unlimited company enabled it to be treated as a branch of its then parent company for US tax purposes, thereby enabling losses in LBIE to be set off against profits in the parent.


The share capital of LBIE comprises 6,273,113,999 ordinary shares of $1 each, 2 million 5% redeemable Class A preference shares of $1000 each, and 5.1 million 5% redeemable Class B shares of £1000 each. All these shares, except for 1 ordinary share, are held by LBHI2. The two classes of preference shares result from capital restructurings of LBIE in 2006 and 2007, to which I shall refer below. The remaining ordinary share is held by LBL.


The sole function of LBHI2 was to act as the immediate holding company of LBIE.


LBL was the service company for the operations of the group in the UK, Europe and the Middle East, and as regards companies based in the UK, was the principal employer, seconding employees to other companies within the group, maintained the IT systems and was the lessee of many of the group's premises. It became a shareholder in November 1994, holding a single ordinary share denominated in sterling. In May 1997 all the sterling shares were cancelled and replaced by shares denominated in US dollars and LBL has at all times since then been the holder of a single ordinary share of $1. There is no documentary evidence that LBL held the dollar share as nominee for the other shareholder. This judgment does not deal with the relationship between LBL and LBHI2 as members of LBIE, and whether LBL has any right of indemnity against LBHI2.


The administrations of these companies have involved the realisation of their assets to best advantage, rather than the preservation of the companies as going concerns. Paragraph 65 of schedule B1 to the Insolvency Act 1986 ( IA 1986) permits the administrator of a company to make distributions to creditors of the company, with the permission of the court where the creditors are neither secured nor preferential. Once an administrator gives notice of an intention to make a distribution, the administration is commonly referred to as a distributing administration. Detailed provisions related to the making of distributions to creditors by administrators are contained in rules 2.68–2.105 of the Insolvency Rules 1986 (the Insolvency Rules), which for the most part reflect the equivalent provisions in rules 4.73–4.99 applicable in a winding up. With the permission of the court, the administrators of LBIE declared and paid a first interim dividend of 25.2 pence in the pound in November 2012, totalling some £1.611 billion.

Ranking of claims


Central to many of the issues arising on this application are the claims which may be made against the available assets of LBIE after payment of all its general unsecured unsubordinated creditors and the ranking of those claims. In In re Nortel GmbH [2013] UKSC 52, [2013] 3 WLR 504 ( Re Nortel) Lord Neuberger of Abbotsbury PSC said at [39]:

" In a liquidation of a company and in an administration (where there is no question of trying to save the company or its business), the effect of the insolvency legislation…, as interpreted and extended by the courts, is that the order of priority for payment out of the company's assets is, in summary terms, as follows:

(1) Fixed charge creditors;

(2) Expenses of the insolvency proceedings;

(3) Preferential creditors;

(4) Floating charge creditors;

(5) Unsecured provable debts;

(6) Statutory interest;

(7) Non-provable liabilities; and

(8) Shareholders."

The categories relevant to the issues on this application are, principally, statutory interest and non-provable liabilities.


Provable debts rank equally between themselves and are paid in full unless the assets are insufficient to meet them, in which case they abate in equal proportions between themselves: rule 2.69. Rules 2.72–2.80 provide the machinery for proving debts, including the submission of a proof, its admission or rejection by the administrator and appeals against the administrator's decision. Rule 2.81 provides for the administrator to estimate the value of any debt which, by reason of its being subject to any contingency or for any other reason, does not bear a certain value and provides that he may revise any estimate previously made, if he thinks fit by reference to any change of circumstances or to any information becoming available to him. The amount provable in the administration in such a case is the estimate for the time being. Rule 2.85 provides for set-off. Rule 2.86 provides for the conversion of foreign currency debts into sterling, a rule to which I shall later return. Rule 2.89 provides that a creditor may prove for a debt...

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