|[Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback]|
England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> LB Holdings Intermediate 2 Ltd, Re  EWHC 2032 (Ch) (03 August 2017)
Cite as:  EWHC 2032 (Ch)
[New search] [Context] [View without highlighting] [Printable PDF version] [Help]
7 Rolls Building, Fetter Lane, London, EC4A 1NL
B e f o r e :
| IN THE MATTER OF LB HOLDINGS INTERMEDIATE 2 LIMITED (IN ADMINISTRATION)
AND IN THE MATTER OF LEHMAN BROTHERS LIMITED (IN ADMINISTRATION)
AND IN THE MATTER OF LEHMAN BROTHERS INTERNATIONAL (EUROPE) (IN ADMINISTRATION)
AND IN THE MATTER OF LEHMAN BROTHERS HOLDINGS PLC (IN ADMINISTRATION)
AND IN THE MATTER OF THE INSOLVENCY ACT 1986
Tony Beswetherick (instructed by Hogan Lovells International LLP) for the LBH Administrators
Peter Arden QC and Rosanna Foskett (instructed by Dentons LLP) for the LBHI2 Administrators
Philip Marshall QC and Ruth den Besten (instructed by Dechert LLP) for the LBL Administrators
William Trower QC and Alexander Riddiford (instructed by Linklaters LLP) for the LBIE Administrators
Hearing dates: 24 July 2017
Crown Copyright ©
Mr Justice Hildyard :
The status of the administrations
i) The LBIE Administrators have paid dividends to LBIE's ordinary unsecured creditors, with proved claims of 100 pence in the pound (in aggregate) in respect of such claims.
ii) The LBL Administrators have paid a dividend of 100 pence in the pound to former employees of LBL with preferential unsecured claims (comprising claims for unpaid wage and holiday pay) and a first interim dividend of 1.66 pence in the pound to ordinary unsecured creditors.
iii) The LBHI2 Administrators obtained permission on 15 June 2017 to make interim distributions to unsecured creditors, subject to a requirement to give four weeks' notice to the LBIE Administrators before filing a notice of intended distribution. However, the LBHI2 Administrators have not made any distributions to creditors to date.
iv) The LBEL Administrators have paid dividends to LBEL's ordinary unsecured creditors totalling 100 pence in the pound. In addition, the LBEL Administrators received permission of the Court on 24 July 2017 to appoint a director of LBEL and authorise him and LBEL's sole member, LBH, to implement (after reserving for statutory interest and other matters) a capital reduction and distribution to LBH.
v) The LBH Administrators have paid dividends to LBH's unsecured, non-preferential (unsubordinated) creditors of 6.08 pence in the pound in respect of such claims.
Overview of the Waterfall litigation
i) The subordinated debt claim owed to LBHI2 by LBIE is subordinated behind statutory interest and non-provable liabilities.
ii) Currency conversion claims do not exist as a species of non-provable liability.
iii) Statutory interest accrued but not paid in LBIE's administration is not payable in any subsequent liquidation of LBIE.
iv) A contributory's liability under section 74 does not extend to creating a surplus for the payment of statutory interest but it does extend to the payment of non-provable liabilities.
v) The LBIE Administrators are not entitled to prove for a potential contribution claim that might arise in the event of LBIE going into liquidation.
vi) The contributory rule currently applicable in liquidation proceedings extends to administration proceedings.
Summary of the Proposed Settlement
i) A Master Framework Agreement, which (inter alia) sets out a framework for the various transaction documents each of LBIE, LBL, LBHI2, LBEL, LBH (and their respective administrators) and LBHI are to enter into to give effect to the overall Proposed Settlement and provides that Waterfall III will be dismissed by consent.
ii) A Deed of Settlement, by which (inter alia) LBIE and the LBIE Administrators are to release and discharge LBL, LBHI2 and LBH (and their respective administrators) from the various claims which LBIE has against them, waive the four-week notice requirement set out in my Order of 15 June 2017 and confirm that they do not object to LBHI2, LBL and LBH making distributions without any provision or reserve being made for actual or potential claims.
iii) An Inter-Affiliate Settlement Deed, by which (inter alia) LBL, LBHI2, LBEL and LBH agree to pay or receive the sums agreed between the parties and to make any necessary distributions to creditors external to the Lehman Group. The agreement resolves the various inter-company claims between different Lehman Group entities. It takes into account monies that will be received into the estate as a result of the operation of the Proposed Settlement so that each Lehman estate can make one composite distribution to its creditors.
iv) A Limited Recourse Deed, which is an agreement between LBIE and the Wentworth parties (see paragraph 38(i) below) which will limit the subordinated debt claim in the LBIE estate to the actual residual cash in that estate, thus meaning that a contribution claim to cover the subordinated debt will not arise.
v) An Indemnity, which is a capped indemnity given by LBHI to LBIE to cover the unlikely situation of there being a shortfall in relation to LBIE's unsubordinated creditors.
The applications in outline
i) The LBHI2 Administrators apply for directions that (a) the four-week notice provision in my Order of 15 June 2017 is waived; and (b) following the execution of the Transaction Documents, the LBHI2 Administrators be at liberty to make a first interim distribution without reserving for any potential contribution claim by LBIE.
ii) Similarly, the LBL Administrators apply for directions that, following the execution of the Transaction Documents, they be at liberty to make any further distribution without reserving for any potential contribution claim by LBIE.
iii) The LBH Administrators apply for directions that they be at liberty to support and to take such further steps as may be considered desirable and appropriate to give effect to the mechanism for effecting a distribution by LBEL to its sole member (i.e. LBH) for which I gave permission on 24 July 2017.
The relevant legal test
"In re MF Global UK Ltd (No 5)  Bus LR 1156 David Richards J was asked to authorise a settlement agreement to compromise claims by the company to assets said to be held on its own account, which were also said to be held by the company on trust for its own clients. He addressed the approach to be taken by administrators when seeking to compromise the company's own claims as follows, at para 41:
"In commercial matters, administrators are generally expected to exercise their own judgment rather than to rely on the approval or endorsement of the court to their proposed course of action: see In re T & D Industries plc  1 WLR 646. While the compromise of claims raising difficult legal issues may not be on all fours with a purely business decision, administrators commonly exercise the power of compromise without recourse to the court and in general apply to the court for directions only if there are particular reasons for doing so: see In re Lehman Bros International Europe  BCC 132."
One such "particular reason" which might justify administrators applying to the court for directions in relation to the exercise of the power of compromise can be derived by analogy from the second category of cases in which trustees can seek directions from the court. This was identified by Hart J in Public Trustee v Cooper  WTLR 901, 922–924:
"The second category is where the issue is whether the proposed course of action is a proper exercise of the trustees' powers where there is no real doubt as to the nature of the trustees' powers and the trustees have decided how they want to exercise them but, because the decision is particularly momentous, the trustees wish to obtain the blessing of the court for the action on which they have resolved and which is within their powers. Obvious examples of that, which are very familiar in the Chancery Division, are a decision by trustees to sell a family estate or to sell a controlling holding in a family company. In such circumstances there is no doubt at all as to the extent of the trustees' powers nor is there any doubt as to what the trustees want to do but they think it prudent, and the court will give them their costs of doing so, to obtain the court's blessing on a momentous decision. In a case like that, there is no question of surrender of discretion and indeed it is most unlikely that the court will be persuaded in the absence of special circumstances to accept the surrender of discretion on a question of that sort, where the trustees are prima facie in a much better position than the court to know what is in the best interests of the beneficiaries."
The instant case is, in my judgment, just such a case. In signing the documents comprising the global settlement, the administrators and the conflict administrator have already decided that the global settlement is in the best interests of each of the EMEA Companies and their creditors. They do not propose to surrender the exercise of their discretion in that regard to the court, but they seek the approval of the court because of the great significance of the global settlement in the context of the administrations of each of the EMEA Companies. Given the size and complexity of the affairs of the Nortel group and the amounts in the Lockbox, there can, in my judgment, be no doubt that the execution of the global settlement is a truly momentous decision.
In a category two case involving trustees, the approach of the court was summarised by David Richards J in In re MF Global UK Ltd (No 5)  Bus LR 1156, para 32, where he cited with approval the following from Lewin on Trusts, 18th ed (2008), para 29-299:
"The court's function where there is no surrender of discretion is a limited one. It is concerned to see that the proposed exercise of the trustees' powers is lawful and within the power and that it does not infringe the trustees' duty to act as ordinary, reasonable and prudent trustees might act, ignoring irrelevant, improper or irrational factors; but it requires only to be satisfied that the trustees can properly form the view that the proposed transaction is for the benefit of beneficiaries or the trust estate and that they have in fact formed that view. In other words, once it appears that the proposed exercise is within the terms of the power, the court is concerned with limits of rationality and honesty; it does not withhold approval merely because it would not itself have exercised the power in the way proposed. The court, however, acts with caution, because the result of giving approval is that the beneficiaries will be unable thereafter to complain that the exercise is a breach of trust or even to set it aside as flawed; they are unlikely to have the same advantages of cross-examination or disclosure of the trustees' deliberations as they would have in such proceedings. If the court is left in doubt on the evidence as to the propriety of the trustees' proposal it will withhold its approval (though doing so will not be the same thing as prohibiting the exercise proposed). Hence it seems that, as is true when they surrender their discretion, they must put before the court all relevant considerations supported by evidence. In our view that will include a disclosure of their reasons, though otherwise they are not obliged to make such disclosure, since the reasons will necessarily be material to the court's assessment of the proposed exercise."
Similar (albeit expanded) observations appear in the current 19th ed (2014) of Lewin on Trusts, paras 27-079–27–081. Reference can also be made to the decision of Henderson J in Hughes v Bourne  WTLR 1333, para 16.
For my part, whilst noting that the position of an administrator seeking directions under the Insolvency Act 1986, and a trustee seeking directions under the Trustee Act 1925 are not identical, I see no obvious reason why most of the same considerations should not apply when the court considers giving directions to an administrator who wishes to enter into a compromise which is particularly momentous. In short, the court should be concerned to ensure that the proposed exercise is within the administrator's power, that the administrator genuinely holds the view that what he proposes will be for the benefit of the company and its creditors, and that he is acting rationally and without being affected by a conflict of interest in reaching that view. The court should, however, not withhold its approval merely because it would not itself have exercised the power in the way proposed.
In these respects the approach of the court will mirror the attitude which the court would take to a subsequent challenge to the decision by a creditor: see e g In re Longmeade Ltd  Bus LR 506, paras 61–65. But having regard to the fact that its approval will prevent subsequent challenge, the court will require the administrator to put all relevant material before it, including a statement of his reasons, and the court will not give its approval if it is left in any doubt as to the propriety of the proposed course of action."
Steps taken to mitigate conflicts of interest
Rationality of entering into the Proposed Settlement
i) A joint venture entered into by the LBHI2 Administrators, Elliot Management Corporation and King Street Capital Management ("Wentworth") will waive any right to be paid the subordinated-debt advanced to LBIE pursuant to three subordinated loan agreements entered into on 1 November 2006 ("the Sub-Debt"), out of anything other than LBIE's existing assets. This will effectively cap LBIE's liability in respect of the Sub-Debt.
ii) For the same reasons, the Proposed Settlement will effectively remove the possibility of a contribution claim in respect of the Sub-Debt. This will give LBIE certainty in relation to this issue much sooner than it would otherwise have obtained it (i.e. after the determination of the relevant issues in Waterfall III and any appeals against that determination) and means that many of the issues in Waterfall III will not require the Court's determination, with the inevitable potential for uncertainty, delay and cost which this would entail.
iii) LBIE and LBL will agree a nil balance in respect of their mutual claims. This will avoid the need for further costs to be incurred in the LBIE administration in dealing with LBL's claims (including costs in relation to disputed proofs) and the possibility of any balance in favour of LBL being determined.
iv) Waterfall III will be settled. This will remove the possibility of LBL establishing (and the LBIE Administrators' need to reserve for) its recharge claims. It will also provide legal certainty much sooner than would otherwise be the case and will avoid the need for LBIE to incur further substantial costs (both in respect of the determination of the Waterfall III Part B issues at first instance, and in respect of any appeals in respect of any of the Waterfall III issues).
v) LBHI will grant LBIE a capped indemnity to cover any shortfall in LBIE's ability to pay what are described as Senior Creditor Entitlements (i.e. statutory interest accrued in LBIE's administration and certain potential non-provable claims).
vi) Finally, one effect of the Proposed Settlement will be to expedite the distribution by the LBH Administrators to LBH's unsecured creditors. LBIE has a substantial admitted unsecured claim in LBH's estate, and so this aspect of the Proposed Settlement will be to LBIE's advantage.
i) The principal potential disadvantage is that the Proposed Settlement will require the LBIE Administrators to give up any right they might otherwise have to object to LBIE's members making certain distributions without reserving for any future contribution claim. However, as discussed below, the LBIE Administrators consider that this potential disadvantage does not, in reality, amount to a material concession. To the extent that it is a disadvantage at all, it is one which the LBIE Administrators consider is in any case outweighed by the various advantages set out above.
ii) LBIE will be required to acquiesce in the transfer by LBL of its share in LBIE to LBHI2. However, the LBIE Administrators consider that there is no sensible basis on which they could object to such a transfer (and indeed they note that LBHI2 and LBL can, in any event, effectively take the relevant steps without any involvement from LBIE or the LBIE Administrators). Accordingly, the LBIE Administrators do not consider this feature of the Proposed Settlement to be a material disadvantage.
i) It will facilitate a substantial amount becoming available for distribution to LBL's affiliates and creditors. This amount, together with the existing assets in LBL's estate, will enable the LBL Administrators to pay a dividend of 100 pence in the pound to unsecured creditors, together with accrued statutory interest.
ii) LBL's creditors will imminently make a recovery on their outstanding debts.
iii) The Proposed Settlement will resolve the outstanding disputes between the parties to Waterfall III.
iv) The Proposed Settlement will eliminate the risk that further, potentially protracted, legal hearings will take place, together with associated litigation risks on the issues in Waterfall III.
v) The Proposed Settlement will avoid the incurring of further legal and professional costs in preparing for the hearing scheduled in Waterfall III.
vi) The Proposed Settlement will enable the distribution and finalisation of LBL's estate within a reasonable timeframe.
i) The Proposed Settlement does not include any undertaking by LBIE or the LBIE Administrators to avoid liquidation, or release LBL from any contribution claim that a future liquidator of LBIE might make. However, for reasons discussed below, the risk of a contribution claim going forward is now considered unlikely or highly unlikely.
ii) The Proposed Settlement compromises the LBL Administrators' outstanding claims to recharge certain liabilities asserted in Waterfall III (see above).
iii) There remains a risk of a potential future objection by LBIE to a distribution in its estate. However, the LBL Administrators have taken the view that this risk is highly unlikely given that, following the Proposed Settlement, LBIE will no longer be a creditor in LBL's estate, and a year after LBL's transfer of its share to LBHI2, it will not be liable for any contribution claim.
i) It settles the Waterfall III litigation.
ii) It allows progress to be made in the LBHI2 administration, in circumstances where creditors have received no distributions since the commencement of the administration in early 2009.
iii) By virtue of the Inter-Affiliate Settlement Deed, it enables the other affiliates to make distributions to their stakeholders.
iv) It will result in the payment of a substantial sum owed to LBHI2 by LBL.
v) It enables LBHI2 to make a substantial first interim distribution to its creditors.
vi) By virtue of making an interim distribution, it reduces the ongoing accrual of statutory interest on the claims in LBHI2's estate, thus optimising the potential return to LBHI2's subordinated creditors who are otherwise prejudiced by the delay.
vii) It limits the Sub-Debt claim currently owed by LBIE to Wentworth Sons Sub-Debt S.à r.l. (one of the Wentworth parties) to those assets ultimately available in LBIE for distribution to it without recourse to LBIE's contributories.
i) LBL will withdraw and release the claims pursued against LBH in Waterfall III, by which LBL seeks to pass on any liability for a contribution claim to LBH or to rectify LBIE's share register so as to substitute LBH as a member of LBIE in its place.
ii) In addition to removing the threat of that liability, such release will remove the need for LBH to reserve for that claim (and no other party has asserted any claim of that sort), thereby removing the present block upon any distributions being made by LBH to its creditors (which might otherwise remain for several years to come while Waterfall III runs its course).
iii) The dismissal of Waterfall III will lead to substantial savings in legal costs and expenses.
iv) LBHI2 will not be obliged to continue to reserve for a contingent contribution liability as a member of LBIE, meaning that its administrators would be able to pay dividends to its admitted unsecured creditors. LBH has a substantial unsecured claim in LBHI2 which is to be admitted and form the basis of distributions to LBH, together with statutory interest, as part of the Proposed Settlement. There is also a possibility that LBH might in due course receive a return from LBHI2 in respect of LBHI2's subordinated debt liability to LBH and any such return will be increased to the extent that LBHI2 makes distributions to its unsecured creditors more quickly and thereby limits the accrual of statutory interest in that estate.
v) It is anticipated that as a consequence of the Proposed Settlement, LBEL will make a substantial distribution to LBH as its sole member.
vi) There will be an agreed resolution of intercompany positions as between LBH and the other affiliate entities, which reduces the scope for further litigation between those entities.
i) It is clear that the making of a contribution claim under section 74 is exclusively a liquidator's remedy and not one which is available to an administrator even as a contingent claim in the member's insolvency (see Lord Neuberger's judgment on Waterfall I at ).
ii) Moreover, whilst the Supreme Court's extension of the contributory rule to administrations (see ibid. at paragraph ) provides LBIE with some theoretical protection (specifically, by enabling the LBIE Administrators to retain funds reflecting the "reasonable maximum potential liability as a contributory" of each of its members out of any distributions which would otherwise be made to those members as LBIE creditors), this will be to no avail to the LBIE Administrators insofar as objecting to LBHI2 and LBL making distributions to their own respective creditors is concerned.
i) In light of the Supreme Court's decision in the Waterfall I appeal, any entitlement to statutory interest during the period of LBIE's administration would come to an end upon LBIE moving into liquidation. For that reason alone, it would be very difficult to justify moving LBIE into liquidation until such statutory interest (the precise quantum of which will not be known until the Waterfall II proceedings are finally determined) is paid in full.
ii) Secondly, LBIE's entry into liquidation would in any event attract various negative tax consequences.
i) In light of the Supreme Court's decision in Waterfall I, LBIE's liquidators could not make a contribution claim in respect of statutory interest.
ii) Accordingly, the contribution claim would only have any value in the event that: (a) in the pending appeal in Waterfall II, it were established (contrary to David Richards J's decision at first instance) that a non-provable claim to damages on the Sempra Metals basis exists; and (b) LBIE's surplus were insufficient to pay such non-provable claims.
iii) The LBIE Administrators' financial modelling shows that scenario (b) is likely only to arise if LBIE's creditors' entitlement to Statutory Interest were to be inflated as a result of either: (i) the Senior Creditor Group ("the SCG") succeeding on the Bower v Marris issue in Waterfall IIA (contrary to David Richards J's decision at first instance); or (ii) the SCG succeeding on the cost of funding issues in Waterfall IIC (contrary to my own decision at first instance in that case).
i) on their respective websites, announced the Proposed Settlement, summarised its key terms, made documents available to creditors and provided contact details for creditors to send any questions or comments in respect of the Proposed Settlement; and
ii) made direct contact with major creditors regarding the Proposed Settlement and sought their views.