The Joint Administrators of Lehman Brothers Holdings Plc ((in Administration)) v LB GP No.1 Ltd ((in Liquidation))
| Jurisdiction | England & Wales |
| Judge | Mr Justice Hildyard |
| Judgment Date | 29 November 2023 |
| Neutral Citation | [2023] EWHC 3056 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: CR-2008-000026 |
In the Matter of Lehman Brothers Holdings Plc (in Administration)
And in the Matter of the Insolvency Act 1986
[2023] EWHC 3056 (Ch)
THE HONOURABLE Mr Justice Hildyard
Case No: CR-2008-000026
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST (ChD)
7 Rolls Building
Fetter Lane
London, EC4A 1NL
Adrian Beltrami KC, Kate Holderness (instructed by Hogan Lovells International LLP) for the Applicant
Lexa Hilliard KC, Tom Roscoe (instructed by Charles Russell Speechlys LLP) for the 1 st Respondent
David Allison KC, Adam Al-Attar, Edoardo Lupi (instructed by Weil, Gotshal & Manges (London) LLP) for the 2 nd Respondent
Sonia Tolaney KC, Richard Fisher KC, Tim Goldfarb (instructed by Alston & Bird (City) LLP) for the 3 rd Respondent
Hearing dates: 9 and 10 October 2023
APPROVED JUDGMENT
Remote hand-down: This judgment was handed down remotely at 10:30 on 29 November 2023 by circulation to the parties or their representatives by email and by release to The National Archives.
THE HONOURABLE Mr Justice Hildyard
Introduction
This judgment relates to a further instalment of the Lehman saga arising out of the collapse of the Lehman Brothers group in 2008. More particularly, it arises out of the unusual circumstance of the process of administration having resulted, not in deficiency, but in considerable recoveries in excess of the claims of unsubordinated creditors. It concerns the priority as between subordinated creditors in the distributing administration of Lehman Brothers Holdings Plc (“PLC”) after payment of or provision for unsubordinated liabilities in full (including statutory interest). The particular issue raised is whether a subordinated creditor having priority as to principal is entitled to be paid statutory interest in priority to repayment of principal on another subordinated claim ranking lower in the queue.
PLC, which is an intermediate holding company within Lehman's UK group structure, has been in a distributing administration since 2 May 2014. Its administrators (“the PLC JAs”) have declared and paid a number of dividends totalling approximately £1,074.7 million, which have now discharged 100% of the principal value of unsecured, non-preferential, unsubordinated creditors. In addition, the PLC JAs have paid 44.6% (or £354.1 million) of the accrued statutory interest on claims to the unsubordinated creditors.
An updated estimated outcome statement published by the PLC JAs on the PLC website as of June 2023 indicated a base case recovery for subordinated creditors of some £233 million and a high case recovery of some £490 million. It is common ground that, though considerable, these funds are not enough to satisfy all subordinated claims. Issues of priority as between different classes of subordinated debt have arisen accordingly.
The subordinated debt and the contesting parties
PLC's subordinated debt comprises the following:
(1) The PLC Sub-Debt, sometimes also referred to as “Claim C”:
(a) These are liabilities of approximately US$1.9 billion (£1.059 billion) under 3 subordinated loan facility agreements dated (in two cases) 30 July 2004, and (in one case) 31 October 2005.
(b) The original lender under the PLC Sub-Debt was Lehman Brothers UK Holdings Ltd, but the debt is now held by Lehman Brothers Holdings Inc. (the second Respondent, “LBHI”).
(2) The PLC Sub-Notes, sometimes also referred to as “Claim D”:
(a) These are liabilities with an aggregate face value of approximately €790 million under subordinated note issuances pursuant to offering circulars dated 29 March 2005, 19 September 2005, 26 October 2005 and 20 February 2006.
(b) The notes were issued, variously, to one of three limited partnerships, Lehman Brothers Capital Funding LP, Lehman Brothers Capital Funding II LP and Lehman Brothers Capital Funding III LP (“the Partnerships”).
(c) The General Partner of each of the Partnerships is LB GP No 1 Limited (in Liquidation) (“GP1”), now acting by its liquidators.
(d) The PLC Sub-Notes were long-dated instruments, falling due in 2035 or 2036, and which did not include acceleration provisions in the event of a PLC insolvency. The Court has confirmed (see further below) that these obligations are future debts which are subject to discounting under rule 14.44 of the Insolvency (England and Wales) Rules 2016 (“IR”). On the PLC JAs' current calculations, discounting reduces the claim on the PLC Sub-Notes to approximately £188 million.
(e) The PLC Sub-Notes were funded by external investors through the issue by the Partnerships of further sets of securities through 3 separate offering circulars. Some of those securities were entitled Enhanced Capital Advantaged Preferred Securities, and they have all been referred to generally as “ECAPS”. Under this structure, the economic interest in the PLC Sub-Notes lies in the ECAPS.
(3) The ECAPS Guarantees, sometimes also referred to as “Claim E”:
(a) The offering circulars for the ECAPS made reference to the provision of a subordinated guarantee to be given by PLC to the Holder of the securities.
(b) The front page and signed execution pages for two of the three ECAPS Guarantees have been located. The third has not been located, notwithstanding an extensive disclosure process in previous Court proceedings described below (“the ECAPS1 Proceedings”), though the PLC JAs have no reason to believe that the guarantee was not in fact executed.
The Respondents are all holders of, or otherwise economically interested in, PLC's subordinated debt. The contest between them which is the subject of this application is essentially between those interested in the PLC Sub-Debt (Claim C) and those interested in the PLC Sub-Notes (Claim D). They are:
(1) LBHI, which is PLC's ultimate parent company, and is interested in Claim C;
(2) LB GP No. 1 Limited (“GP1”), which is interested in Claim D; and
(3) Deutsche Bank A.G. (London Branch) (“DB”), which is also interested in Claim D.
As to DB, under the structure summarised in paragraph [4(2)] above, the economic interest in the PLC Sub-Notes lies in the ECAPS. DB's skeleton argument described its interest as being an economic one in the distributions to be paid by PLC to GP1; and DB is (so the PLC JAs understand it) the beneficial owner of a quantity of ECAPS. In the ECAPS1 Proceedings, DB participated as an informal representative of the beneficial owners of the ECAPS, and the PLC JAs remain content for them to continue to do so. DB has been joined and participated in this application accordingly.
The ECAPS1 Proceedings
The ECAPS1 Proceedings, which eventually resulted in a decision of the Court of Appeal which is of considerable continuing relevance in this application, concerned two applications for directions 1: (a) an application by the joint administrators of LB Holdings Intermediate 2 Ltd (“LBHI2”) as to the relative priority of the subordinated debt in the LBHI2 estate; and (b) an application by the PLC JAs as to the relative priority of the subordinated debt in the PLC estate. The applications were heard together because of the commonality of issues and parties.
LBHI2's subordinated creditors were (i) PLC under 3 subordinated debt agreements (the LBHI2 Sub-Debt, sometimes referred to as “Claim A”); and (ii) Lehman Brothers Holdings Scottish LP3 (“SLP3”, an LBHI entity) under a subordinated note issuance (the LBHI2 Sub-Notes, sometimes referred to as “Claim B”).
In the ECAPS1 Proceedings, there was a single issue for determination in the LBHI2 estate, namely as to the respective priority of those debts, within which SLP3 also advanced a claim for rectification. The initial parties to the application were the joint administrators of LBHI2, SLP3 and PLC. By Order dated 24 July 2018, Mann J permitted the joinder of DB, on condition that DB bore its own costs of participating and avoided duplication of submissions.
The applications in the two estates were made by the respective joint administrators following a lengthy process of engagement with the interested parties. The scope of the applications reflected the issues expressly raised by the parties as matters in dispute, and the drafting itself was finalised after consultation with them. Although GP1 and DB initially contended that, given the need for resolution of the prior dispute in the LBHI2 estate, it was premature to seek directions at the PLC level, the PLC JAs considered it appropriate and in the interests of creditors as a whole for the PLC application to be made alongside the LBHI2 application. Ultimately, this was not actively opposed by any party.
It was common ground, and ultimately ordered, that the PLC Sub-Debt and the PLC Sub-Notes were senior to the ECAPS Guarantees. In the PLC estate, that left for determination the issue of the respective priority between the PLC Sub-Debt and the PLC Sub-Notes, together with a number of further issues which had been raised by the parties.
Following the judgments of Marcus Smith J ( [2020] EWHC 1681 (Ch)) and the Court of Appeal ( [2021] EWCA Civ 1523), and the refusal of the Supreme Court to grant permission to appeal, the answers provided to the issues in the ECAPS1 Proceedings were as follows:
(1) In the LBHI2 estate, the LBHI2 Sub-Debt is senior to the LBHI2 Sub-Notes (and the application for rectification failed).
(2) In the PLC estate, the PLC Sub-Notes are senior to the PLC Sub-Debt and both the PLC Sub-Notes and the PLC Sub-Debt are senior to the ECAPS Guarantees.
(3) Also in the PLC estate:
(a) The PLC Sub-Debt has not been released under the terms of a...
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