The Joint Administrators of LB Holdings Intermediate 2 Ltd ((in Administration)) and Others v Anthony Victor Lomas and Others
| Jurisdiction | England & Wales |
| Judge | Lord Justice Lewison,Lord Justice Moore-Bick,Lord Justice Briggs |
| Judgment Date | 14 May 2015 |
| Neutral Citation | [2015] EWCA Civ 485 |
| Docket Number | Case No: A2/2014/1833, 1822,1826 & 1839 |
| Court | Court of Appeal (Civil Division) |
| Date | 14 May 2015 |
[2015] EWCA Civ 485
Lord Justice Moore-Bick, VICE PRESIDENT OF THE COURT OF APPEAL
Lord Justice Lewison
and
Lord Justice Briggs
Case No: A2/2014/1833, 1822,1826 & 1839
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT, CHANCERY DIVISION, COMPANIES COURT
MR JUSTICE DAVID RICHARDS
7942 AND 7495 OF 2008 AND 429 OF 2009
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr William Trower QC, Mr Daniel Bayfield&Mr Stephen Robins&Mr Alexander Riddiford (instructed by Linklaters LLP) for the LBIE Joint Administrators
Mr David Wolfson QC, Ms Nehali Shah (instructed by DLA Piper UK LLP) for the The LBL Joint Administrators
Mr Richard Snowden QC, Ms Louise Hutton&Ms Rosanna Foskett (instructed by Dentons Ukmea LLP) for LBHI2 Joint Administrators
Mr Barry Isaacs QC (instructed by Weil, Gotshal & Manges) for LBHI
Mr Robin Dicker QC, Mr Richard Fisher&Ms Charlotte Cooke (instructed by Freshfields Bruckhaus Deringer LLP) for CVI GVF (Lux) Master Sarl
Hearing dates: 23 rd– 27 th March 2015
Introduction and background
The collapse of Lehman Brothers in September 2008 sent shock waves round the financial world. Now it turns out that Lehman Brothers' main trading company in Europe ("LBIE") is able to repay all its external creditors in full. That is the background against which this appeal from David Richards J comes before this court. His judgment is at [2014] EWHC 704 (Ch), [2015] Ch 1. The judge set out the essential factual background clearly and concisely, and there is no need to do more than repeat his description.
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 consists of 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 Lehman Brothers Holdings Intermediate 2 Ltd ("LBHI2"). The two classes of preference shares result from capital restructurings of LBIE in 2006 and 2007. The remaining ordinary share is held by Lehman Brothers Ltd ("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.
LBIE and LBL have been in administration since September 2008 and LBHI2 since January 2009. 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 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 to 2.105 of the Insolvency Rules 1986, which for the most part reflect the equivalent provisions in rules 4.73 to 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.
Lehman Brothers Holdings, Inc ("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 relates to LBHI2's right to recover subordinated loans made by it to LBIE and issues relating to those subordinated loans.
In February 2013 the administrators of LBIE, LBL and LBHI2 commenced proceedings seeking the decision of the court on a number of questions arising out of the administrations. On 14 March 2014 David Richards J delivered a formidable judgment running to over 250 paragraphs in which he dealt with the various points raised for his consideration. By an order dated 19 May 2014 set out in the appendix to this judgment he granted the ten declarations, all of which are now the subject of appeals to this court. It is convenient to address the questions by reference to the numbered paragraphs of that order.
Subordinated debt – paragraph (i)
The first question raised by the appeal concerns the ranking in the administration and any subsequent liquidation of the subordinated debt owed by LBIE to LBHI2.
LBHI2 was at the date of the commencement of LBIE's administration and continues to be the holder of $2.225 billion of subordinated loan debt, in respect of which it has lodged a claim in the administration for £1,254,165,598.48. Before a capital restructuring of LBIE in 2006, LBIE had three subordinated loan facilities: a €3 billion long term facility, a $4.5 billion long term facility and a $8 billion short term loan facility. Each of the facilities was provided by its then immediate parent company.
In 2006, in order to use LBIE's foreign tax credits for US tax purposes, it was decided to improve its profitability, in part by restructuring its regulatory capital base so as to replace some subordinated debt with share capital and so reduce its interest payments. LBHI2 was interposed as the immediate holding company of LBIE and $2 billion of existing subordinated debt was replaced with $2 billion of preference shares issued to LBHI2. The existing subordinated loan facility agreements were cancelled and replaced with similar facility agreements with LBHI2 and $4.7 billion of subordinated debt was drawn down by LBIE.
As part of a further restructuring in May 2007, $5.1 billion of subordinated debt was converted into $5.1 billion of preference shares.
The amount outstanding under the subordinated facilities fluctuated, with both drawdowns and repayments. Drawdowns in the course of 2007 led to a peak balance of $4.775 billion, reducing to $2.225 billion at the commencement of the administration.
Considerable work has been undertaken to determine whether that balance represents drawings under the long term or short term dollar facilities, but no firm conclusion has been reached by the administrators of LBIE.
The insolvency code
The statutory code relating to insolvency is contained in the Insolvency Act 1986 and the Insolvency Rules 1986. Subsequent references to sections are to sections in that Act and subsequent references to rules are to those rules. The original enactment of the 1986 Act followed the recommendations of the Cork Committee (although not all its recommendations were accepted). One of the principles that the Cork Committee identified at [1289] was:
"It is a basic principle of the law of insolvency that every debt or liability capable of being expressed in money terms should be eligible for proof in the insolvency proceedings, so that the insolvency administration should deal comprehensively with, and in one way and another, discharge, all such debts and liabilities."
Thus one of the aims of the law of insolvency is the discharge of debts by proof and payment.
As David Richards J explained in his scholarly judgment in Re T & N Ltd [2005] EWHC 2870 (Ch), [2006] 1 WLR 1728 the law of insolvency began with personal bankruptcy and was only later extended to corporations. The range of claims that could be dealt with by proof expanded over the years, so as to include unliquidated and contingent claims. Previous insolvency regimes applicable to corporations simply incorporated by reference the provisions applicable in personal bankruptcy.
In Re Nortel GmbH [2013] UKSC 52, [2014] AC 209 (" 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...
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