Re Lehman Brothers International (Europe), Lomas v Rab Market Cycles (Master) Fund Ltd)
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE BLACKBURNE,Mr Justice Blackburne,Mr Justice Briggs |
| Judgment Date | 21 October 2009 |
| Neutral Citation | [2008] EWHC 2869 (Ch),[2009] EWHC 2545 (Ch) |
| Docket Number | Case No: No. 7942 of 2008,Case No: 7942 of 2008 |
| Court | Chancery Division |
| Date | 21 October 2009 |
[2008] EWHC 2869 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
The Hon Mr Justice Blackburne
In The Matter Of Lehman Brothers International (europe)
(in Administration)
And In The Matter Of The Insolvency Act 1986
Case No: No. 7942 of 2008
Francis Tregear QC and Marcus Staff (instructed by Brown Rudnick LLP)
for the Applicants
William Trower QC and Daniel Bayfield (instructed by Linklaters LLP)
for the Respondents
Hearing dates: 14 th and 17 th November 2008
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 and background
This application, issued on 3 October 2008, arises out of the recent, well publicised collapse of the Lehman Brothers banking group (“the Lehman Group”). It seeks an order that the respondents, who are the administrators of Lehman Brothers International (Europe) (“LBIE”), provide, by a statement in writing, information in respect of certain securities held for the applicants. Although there is a difference of opinion between the applicants and the administrators as to the value of the securities, it is not in dispute that at the time of LBIE's entry into administration their collective worth was very considerable.
Owing to the commercially sensitive nature of some of the information relating to the applicants disclosed by their evidence, not least the impact on them if the fact should become public knowledge that a substantial part of their investments was placed with the Lehman Group and is not immediately recoverable, I acceded to a request by them, when the matter was before me on 21 October, which the administrators did not oppose, that this application should be heard in private and that inspection of any documents relating to this application should be restricted. In order to preserve the confidentiality of these matters, including the identity of the applicant, I have avoided naming them in this judgment and taken steps to ensure that references to the evidence are suitably anonymous.
The applicants, which are loosely connected with one another and are private investment funds managed in the USA, were customers of Lehman Brothers Inc (“LBI”). LBI, which is a United States company and operated from New York, is a member of the Lehman Group. Until its collapse, the Lehman Group was one of the four biggest investment banks in the United States. It operated globally, providing financial services to corporations, governments and municipalities, institutional clients and high net worth individuals around the world. Its main headquarters were in New York with regional headquarters in London and Tokyo and with many offices in other parts of the world. The ultimate parent company is Lehman Brothers Holdings Inc (“LBHI”), a United States company. LBHI filed for bankruptcy protection on 15 September 2008 in the United States under Chapter 11 of the US Bankruptcy Code. LBI is a subsidiary of LBHI and has itself been made the subject of an insolvency procedure and a trustee appointed.
The principal trading company of the Lehman Group in Europe was LBIE which is an unlimited company incorporated in this country. Its business was the provision of a wide range of financial services. It had its headquarters in London. It was authorised and regulated by the Financial Services Authority and was a member of the London Stock Exchange and of other exchanges.
As LBIE relied on LBHI for funding, the collapse into insolvency of LBHI had the consequence that LBIE and other companies within the Group which relied on LBHI for funding were forced into insolvency. As a result, prior to the opening of the markets in this country on Monday 15 September 2008, LBIE and three other companies went into administration. The relevant orders were made by Henderson J at 7:56 am that morning. Since then other companies in the Group have entered administration.
Each of the applicants is party to a prime brokerage agreement with LBI and LBIE (and other companies in the Lehman Group) and also a margin lending agreement with LBIE, arranged by LBI as agent. Both agreements are governed by New York law. LBI maintained the prime brokerage account under the prime brokerage agreement while LBIE maintained the lender's account under the margin lending agreement. Under those contractual arrangements the applicants lodged securities with LBI as their “prime broker” as security for the payment and performance of their obligations and liabilities to any Lehman Group entity. LBI in turn transferred the securities to LBIE which was authorised under the contractual arrangements to make loans to the applicants and provide other services. The securities served as collateral to secure any obligations thereby arising. Under clause 5 of the margin lending agreement, LBIE was authorised to lend the securities to itself or others, and to pledge, re-pledge, hypothecate and re-hypothecate them. Its power to do so was on terms that, unless otherwise agreed, the client would continue to be entitled to any distributions made on or in respect of the securities in question.
On 7 October 2008, which was only shortly after this application was issued, I made an order on the administrators' application for directions concerned with property held in the name or to the order of LBIE that may be subject to trust or proprietary claims (described in the order I made as the “Trust Property”), in particular how such property should be identified and dealt with by the administrators and what steps they should take to identify and deal with claims by counterparties to that property. I ordered that, pending the approval of proposals by LBIE's creditors or further order, the administrators were authorised to continue the management of LBIE's affairs, business and property, as such management related to proprietary claims by third parties, by implementing and/or giving effect to the processes set out in a schedule to that order. The schedule provided for the establishment of a team (“the Trust Property Team”) to take responsibility for dealing with the matter. It also provided for the establishment of a sub-committee to “review the principles applicable to prioritising the determination of the claims of the particular counterparties by identifying, where appropriate, high profile problems or hardship issues, to ensure that the overriding objective of treating all counterparties fairly is not prejudicial to the interests of a minority or that there is not otherwise a problem which requires specific and accelerated attention.” The sub-committee was charged to meet periodically, initially daily, to review the prioritisation and refine the process as events developed. The schedule then identified a series of key steps that the Trust Property Team were to undertake in order carry forward this task and the factors, among others, which the administrators should take into account when identifying what principles should apply when considering what claims should be prioritised for determination.
The hearing of the current application began on Thursday 13 November and resumed and was concluded on the following Monday 17 November. In the meantime, on Friday 14 November, the initial creditors' meeting took place as required by paragraph 51 of Schedule B1 to the Insolvency Act 1986 at which the administrators' proposals were considered and voted on as provided for by paragraph 53. The application of insolvency rule 2.38(4) which governs the calculation of votes at a meeting such as the initial creditors' meeting was, given the number and persons attending the meeting, a complicated and substantial task. The outcome of the voting was not known until the following Wednesday. In the event, the proposals, subject to one modification, were approved.
Proposal (ii) provides, so far as material, that:
“The Administrators will identify and return Trust Property in accordance with the Order of the High Court dated 7 October 2008.”
In effect the proposal constitutes an endorsement of the processes set out in the schedule to that order for the identification and treatment of Trust Property and claims by counterparties to that property. Section 4 of the document issued to LBIE's creditors which contains the proposals sets out, in a part entitled “Trust Property”, the background and so-called “workstream issues” concerned with the identification of trust property. It does so in the following terms:
“LBIE held many classes of assets on behalf of its clients. It had provided significant financing to many clients, especially hedge funds, and under the terms of these agreements LBIE had rights over certain assets. Additionally, under the terms of some custody arrangements, there was a right of set off where clients owed amounts to LBIE.
The identification of unencumbered client assets is therefore complex and considerable data is needed to establish an accurate position on a client by client basis. This is further complicated as LBIE's systems booked trades on a 'contractual settlement' basis rather than an 'actual settled' basis. As such, postings in the systems need to be reversed to reflect the position at 15 September 2008. The reconciliation steps that are required to be undertaken include, for example, amending the LBIE books and records for some 140,000 failed trades, pending transactions that have been contractually settled and corporate...
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