Re Lehman Brothers International (Europe) ((in Administration)) (No 2)
| Jurisdiction | England & Wales |
| Date | 2010 |
| Year | 2010 |
| Court | Court of Appeal (Civil Division) |
Company - Scheme of arrangement - Sanction of court - Company in administration - Administrators proposing scheme of arrangement involving distribution of property held by company on trust - Whether scheme dealing with proprietary claims “compromise or arrangement” between company and its creditors or any class of them - Whether court having jurisdiction to sanction proposed scheme -
The company provided services, including the execution, clearing and settlement of securities and derivative trades and the custody and valuation of client portfolios, to various institutional clients, many of which were hedge funds. A key feature of many of those transactions was that the clients obtained or retained proprietary interests in assets held by or on behalf of the company. The company went into administration and the administrators applied for an order proposing a scheme of arrangement under Part 26 of the Companies Act 2006F1 between the company and its creditors in relation to cash and securities held by the company on trust for them. Part 26 of the Act was concerned with “arrangements and reconstructions” and section 895(1) provided that the Part applied where a “compromise or arrangement” was proposed between a company and its creditors or its members. Section 899 empowered the court to sanction such a compromise or arrangement when it had been approved by a majority in value of creditors. The respondent, a trade association for firms in the investment banking and securities industry, opposed the scheme on jurisdictional grounds. The judge held that the court had no jurisdiction under Part 26 to sanction the scheme in so far as it was concerned with the distribution by the company of property held or controlled by it on trust for any of its creditors and to the extent that it varied or extinguished those property rights.
On appeal by the administrators—
Held, dismissing the appeal, that the court’s jurisdiction pursuant to section 895 of the Companies Act 2006 was circumscribed by the requirement that the scheme should be an arrangement between the company and its creditors; that an arrangement between a company and its creditors meant an arrangement which dealt with their rights inter se as debtor and creditor; that, although that formulation did not prevent the inclusion in the scheme of the release of contractual rights or rights of action against related third parties necessary in order to give effect to the arrangement proposed for the disposition of the debts and liabilities of the company to its own creditors, it did exclude from the jurisdiction rights of creditors over their own property which was held by the company for their benefit as opposed to their rights in the company’s own property held by them merely as security; that a proprietary claim to trust property was not a claim in respect of a debt or liability of the company, and a beneficiary who had a beneficial interest in property held on trust by the company was not a creditor of the company notwithstanding the wide meaning that “creditor” was to be given in section 895; and that, accordingly, the court’s power to sanction a scheme of arrangement under Part 26 did not extend to the release of rights over property held by the company under a trust (post, paras 58, 59, 61, 63, 65–67, 69–71, 74, 75, 78, 87).
The following cases are referred to in the judgments:
Alabama, New Orleans, Texas and Pacific Junction Railway Co, In re [
City of Swan v Lehman Brothers Australia Ltd [
Empire Mining Co, In re (
Lehman Brothers International (Europe) (No 3), In re
Midland Coal, Coke and Iron Co, In re [
NFU Development Trust Ltd, In re [
Opes Prime Stockbroking Ltd, In re [
Quistclose Investments Ltd v Rolls Razor Ltd (in liquidation) [
Savoy Hotel, In re [
Sharp v Jackson [
Sinclair v Wilson (
T & N Ltd, In re
T & N Ltd (No 4), In re
Webb v Stenton (
The following additional case was cited in argument:
Prudential Assurance Co Ltd v PRG Powerhouse Ltd
No additional cases were referred to in the skeleton arguments.
APPEAL from Blackburne J
By an application dated 14 July 2009 Anthony Lomas, Steven Anthony Pearson, Michael John Andrew Jervis and Daniel Yoram Schwarzmann, the joint administrators of Lehman Brothers International (Europe) (in administration) (“LBIE”) applied, pursuant to paragraphs 63 and 68(2) of Schedule BI to the Insolvency Act 1986, for directions that they should be at liberty to propose a scheme of arrangement, under Part 26 of the Companies Act 2006, between LBIE and the persons who were its creditors in relation to trust property. GLG Partners LP supported the scheme and the respondent, the London Investment Banking Association, opposed it.
On 21 August 2009 Blackburne J held that the court had no jurisdiction to sanction the scheme of arrangement. With permission of the judge and by an appellant’s notice filed on 10 September 2009, the applicants and LBIE appealed on the ground, inter alia, that the judge was wrong to hold that a creditors’ scheme of arrangement fell outside the jurisdiction of the court under Part 26 of the Companies Act 2006 if it varied the property rights of creditors.
The facts are stated in the judgment of Patten LJ.
William Trower QC and Daniel Bayfield (instructed by
Richard Snowden QC and Andrew Thornton (instructed by
Antony Zacaroli QC (instructed by
The court took time for consideration.
6 November 2009. The following judgments were handed down.
PATTEN LJ
Introduction1 Lehman Bros International (Europe) (“LBIE”) entered administration on 15 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.
2 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.
3 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.
4 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.
5 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.
6 The uncertainties involved in dealing with the trust assets have three primary causes: a lack of response from clients to inquiries 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.
7 These difficulties have been recognised for some time. On 7...
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