Re Lehman Brothers International (Europe), Lomas v Rab Market Cycles (Master) Fund Ltd)
| Jurisdiction | England & Wales |
| Judge | Lord Justice Patten,Lord Justice Longmore,The Master of the Rolls |
| Judgment Date | 06 November 2009 |
| Neutral Citation | [2009] EWCA Civ 1161 |
| Docket Number | Case No: A2/2009/1994 |
| Court | Court of Appeal (Civil Division) |
| Date | 06 November 2009 |
And In the Matter of the Insolvency Act 1986
And In the Matter of The Companies Act 2006
[2009] EWCA Civ 1161
Before: The Master of The Rolls
Lord Justice Longmore
and
Lord Justice Patten
Case No: A2/2009/1994
Case No: 7942 of 2008 and Case No: 16389 of 2009
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE, CHANCERY DIVISION, COMPANIES COURT
Blackburne J
William Trower QC and Daniel Bayfield (instructed by Linklaters LLP) for the Administrators
Richard Snowden QC and Andrew Thornton (instructed by Freshfields Bruckhaus Deringer LLP) for the London Investment Banking Association
Anthony Zacaroli QC (instructed by Allen & Overy LLP) for GLG Partners LP
Hearing date: 26 th October 2009
Lord Justice Patten:
Introduction
Lehman Brothers International (Europe) (“LBIE”) entered administration on 15 th September 2008. Until then one of its major business areas was the provision of what are described in the evidence as prime services to various institutional clients. Most of these were hedge funds. The services in question included the execution, clearing and settlement of securities and derivative trades and the custody and valuation of the clients' portfolios.
Hedge funds do not have substantial back office functions of their own. They therefore require a third party to deal with the trades themselves and thereafter to provide custodial and reporting services. As part of these transactional arrangements, prime brokers such as LBIE lent cash and securities to the hedge funds and provided foreign exchange services. Any finance was usually secured against the assets of the hedge fund held by or through the prime broker.
These services were provided under a variety of standard form agreements which I will come to in a little more detail later in this judgment. The principal contracts under consideration in these proceedings are International Prime Brokerage Agreements, Master Custody Agreements, Margin Lending Agreements and what is referred to as the Credit Support Annex to the ISDA Master Agreement. As the names suggest, LBIE's prime service clients ranged from hedge funds who used the company to provide the full range of services described above to clients who placed securities with LBIE for safe custody.
It is common ground that a key feature of all these transactions was that the counterparty client obtained (or, in the case of pure custody agreements, retained) proprietary interests in the assets held by or on behalf of LBIE. LBIE held the assets through various depositories, exchanges, clearing systems and sub-custodians depending on the type of asset and the systems through which they were traded. But none of these arrangements is said to have effected any material change in beneficial ownership.
The administrators have therefore recognised that the contracts described above give many of the counterparties specific claims over the cash and securities transferred to LBIE. But they are faced with the serious difficulty that, as things stand, they cannot be certain who is entitled to the trust property in their hands. Therefore any distribution of the assets without the protection of some kind of approval from the court is likely to give rise to claims against LBIE and the administrators for breach of trust by those who claim to be entitled to the property adversely to the counterparties to whom it is in fact distributed. For the same reasons, the recipients of the assets are also at risk. Conversely, if no distribution takes place or delays in distributions continue, the administrators are likely to face proceedings for the return of the assets from those who claim to be entitled to them. In relation to some classes of asset, these may exceed the quantity of the relevant securities which remain available for distribution.
The uncertainties involved in dealing with the trust assets have three primary causes: a lack of response from clients to enquiries made about the transactions in which they were involved; the inability of the administrators to rely on LBIE's books and records; and the failure of custodians, depositories and affiliates to provide information about the assets held on behalf of LBIE.
These difficulties have been recognised for some time. On 7 th October 2008, at an early stage in the administration, directions were obtained from Blackburne J as the designated judge under which the administrators were to take appropriate steps to identify whether money or securities might be subject to trust or proprietary claims. This order envisaged requests for information being sent to counterparties and for Linklaters (the administrators' solicitors) to devise and set up a programme for identifying the legal issues which needed to be determined before a proposal for the distribution of trust property could be prepared.
The administrators have written to 1,707 account holders who are thought to have potential claims against LBIE for the return of trust property. The letters ask for details of any such claims, rights or other interests in the assets in question; confirmation of the positions and balances held with LBIE immediately prior to the making of the administration order on 15 th September 2008; copies of all relevant documentation; and details of any positions which have been terminated or closed since the making of the administration order. Similar requests for information have been added to the administrators' website.
As of 29 th May 2009, 950 responses have been received, some of which are incomplete. In the same period the administrators have received some 1,214 claims for the return of trust assets. A number of these have been identified as priority claims by a Hardship and Prioritisation Committee set up by the administrators in accordance with the prioritisation principles referred to in the order of Blackburne J dated 7 th October 2008.
Aside from issues of priority, the administrators have had to expend considerable resources on making requests for information from clients and locating documents within LBIE's records in order to conduct a line-by-line reconciliation of the clients' positions. Where assets have been distributed, the clients have been required to enter into deeds of undertaking which give the administrators a right to recover the assets or their value where they subsequently turn out to be subject to competing claims. It goes without saying that these measures add to the cost and uncertainties involved in the distribution process.
In order to produce some finality for the clients and for the process of administration in respect of these claims, permission was sought from Blackburne J that the administrators should be at liberty to propose a scheme of arrangement under Part 26 of the Companies Act 2006 between LBIE and the persons who are its creditors in relation to Trust Property as defined in paragraph 9 of what is referred to as the Pearson Statement. This is a witness statement made by Mr Steven Pearson, one of the administrators, on 25 th February 2009 which explains the steps taken to process the proprietary claims and the reasons for seeking to promote a scheme. Mr Pearson says in paragraph 9:
“As set out in my First Statement, made in relation to the application for the Trust Property Order, a redacted version of which has been placed on the Court file and is available on the section of the PwC website dedicated to the administration of LBIE, the Administrators wished to adopt a system for dealing with all property of, or held in the name of, or otherwise to the order of, LBIE which is subject to trust or proprietary claims, whether comprising monies under the FSA's Client Money Rules (“Client Money”) or other monies or assets (“Trust Assets”) (together with “Trust Property”) in an orderly and efficient manner and one which balanced the importance of dealing with the potential proprietary claims and the achievement of the statutory purpose for which we have been appointed.”
On 16 th March 2009 Blackburne J gave the administrators liberty to propose a scheme of arrangement of the type sought. Section 899 of the Companies Act 2006 empowers the court to sanction a compromise or arrangement proposed between a company and its creditors or any class of creditors when it has previously been agreed to in class meetings by a majority in number representing 75% in value of the creditors or class of creditors in question.
There is no statutory definition of “creditor”, “compromise” or “arrangement” but a Scheme has been prepared under which (subject to certain exceptions which I will come to in more detail later) “Scheme Creditors” (as defined) who can establish proprietary claims to the assets held by LBIE at the time of administration will release those claims and any associated pecuniary claims for damages or equitable compensation and will receive, in return, what are described as New Claims. They will give to each Scheme Creditor a right to receive, on a pooled basis, securities or other assets of the type claimed and (when it occurs) will leave the counterparty to recover as an unsecured creditor the value of any shortfall in its proprietary claim caused by the shortage of the relevant assets.
Scheme Creditors will therefore be required under the Scheme to release proprietary rights in assets which are held for their benefit by LBIE as trustee and the combination of the necessary majorities in suitably constituted class meetings and the...
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