12 November 2009
In the Matter of Lehman Brothers International (Europe) (in administration)  EWCA Civ 116
The Court of Appeal has unanimously upheld the decision of Mr Justice Blackburne dated 21 August 2009, holding that the Court did not have jurisdiction to sanction a scheme of arrangement ("Scheme") proposed by the administrators of Lehman Brothers International (Europe) ("LBIE") with respect to client (trust) assets held by LBIE.
The issue on appeal
At the time it went into administration, LBIE held a number of assets on trust for clients (for example, as prime broker or custodian). LBIE had proposed that a scheme of arrangement be implemented under the Companies Act 2006 ("Companies Act") to effect a process for the distribution of the assets to their owners. A scheme of arrangement under the Companies Act is an arrangement between a company and its creditors (or members). It must be sanctioned by various classes of creditors and by the Court.
The issue on appeal (as in the judgment at first instance) centred on whether a person for whom LBIE held assets on trust could be regarded as a 'creditor' and thus whether the proposed Scheme could apply to compromise proprietary claims against LBIE for the return of trust property held by LBIE as trustee.
The Court held that a person with a purely proprietary claim against a company is not its 'creditor'. Since 'creditor' is not defined in the Companies Act, the Court gave effect to the ordinary conventional sense of the word 'creditor' as someone with a pecuniary claim against the company.
The administrators submitted, as they had done in the Court below, that trust claimants were 'creditors' insofar as they had a pecuniary claim against LBIE (for example, for damages for breach of trust). The administrators argued that once a person is a creditor, they can be caught by the Scheme even in relation to non-pecuniary claims. The Court rejected that argument as being inconsistent with the intention of Parliament. The Court found that such a pecuniary claim is merely incidental to the trust claim and, in any event, the fact that someone is a creditor in connection with a different claim does not justify him being treated as a creditor for the purpose of the proprietary claim.
The administrators also sought to rely on authority to the effect that the Court has jurisdiction to sanction a scheme of arrangement affecting proprietary rights held by secured creditors. However, the Court distinguished the position of secured creditors (who, despite having security over property, hold that security only in their capacity as creditors of the company, only for so long as the underlying indebtedness continues and subject to the company's equity of redemption) from that of beneficiaries under a trust.
In addition, the administrators sought to rely on the decisions in Re T&N Limited (No. 3)  EWHC 1447 and the Australian case of Re Opes Prime Stockbroking Limited  FCAFC 125, in which it was held that schemes of arrangement can extend to release rights against third parties related to, and essential for the operation of, the scheme. Those decisions are not without controversy and, interestingly, both Lord Neuberger MR and Patten LJ indicated, obiter dicta, that they considered them to be correct. However, those decisions did not assist the administrators in this case.
Depositors and others who rely on the sanctity of the English trust as a pillar of the English financial and banking systems can breathe a sigh of relief. The Court has shown its inclination to protect the trust concept and not to allow the interests of trust beneficiaries to be 'crammed down' by use of a scheme of arrangement.
On the other hand, for those parties whose assets are tied up in the LBIE administration, the decision is likely to result in the passing of further time (and the expenditure of additional costs) before the return of the assets. The administrators have indicated that they are considering alternative options for facilitating the return of client assets.
The comments made by certain of the Appeal judges supporting the concept that companies proposing schemes of arrangement can extend such schemes to release claims against third parties will also be of general interest to the restructuring community.
You can find a copy of the decision here.
Contact Ian McDonald
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