Re Lehman Brothers International (Europe), Four Private Investment Funds v Lomas

The applicants, four private investment funds, sought an order requiring the joint administrators of Lehman Brothers International (Europe) ("LBIE") to provide detailed written information about securities held for the applicants, including whether and where securities had been lent, pledged, re-pledged or re-hypothecated and what third party claims existed. The administrators had already supplied readily available information but resisted bespoke, resource-intensive enquiries, relying on the ordered administration process under Schedule B1 to the Insolvency Act 1986 and the Administrators' duty to act in the interests of creditors as a whole.

The court considered the bases advanced for jurisdiction: the court's equitable jurisdiction in respect of trusts, paragraph 74(1) (unfair harm) and paragraph 68(2) (directions) of Schedule B1. The judge concluded that even if the applicants would suffer harm from lack of information, that harm was not shown to be "unfair" within paragraph 74(1), because the administrators were acting in good faith and in accordance with their statutory duties and approved proposals to prioritise and reconcile trust property claims. Equally, paragraph 68(2) did not warrant directions compelling the detailed disclosure sought: any directions must be consistent with creditor-approved proposals and the administrators' lawful exercise of wide managerial discretion in a complex administration.

Accordingly, the court dismissed the application, holding that absent impropriety or clear unfairness the court should not interfere with the administrators' day-to-day conduct and allocation of resources in the administration.

Background and parties. The application arose from the collapse of the Lehman Brothers group. The applicants were four private investment funds with prime brokerage and margin lending arrangements with Lehman Brothers Inc and LBIE. LBIE entered administration on 15 September 2008 and the respondents were the joint administrators of LBIE.

Nature of the application and relief sought. The applicants sought an order requiring the administrators to provide, by sworn statement, detailed information about the location and treatment of specified securities held for them (including whether securities had been lent, pledged, re-pledged or re-hypothecated, third party claims, loan amounts and interest, and receipt and holding of dividends or other proceeds). The order originally sought broad disclosure and was later refined to seek amplification of particular passages in the administrators' evidence and to require information under a series of numbered paragraphs (notably a focussed Part 2 regarding "Commonly Held Securities"). The applicants emphasised that their primary aim was information, not immediate recovery, but they said the information was necessary to decide whether to pursue further legal steps and to inform investors; two of the funds faced potential winding up if by mid-December material progress was not shown.

Procedural posture. The application was heard in private on 14 and 17 November 2008. The administrators had earlier obtained an order of 7 October 2008 establishing a Trust Property Team and processes for identifying and prioritising proprietary claims; creditors approved administrators' proposals (subject to one modification) at the initial creditors' meeting before conclusion of this hearing.

Issues framed. The court addressed (i) whether it had jurisdiction to grant the order by reference to the court's equitable jurisdiction in trust matters, paragraph 74(1) of Schedule B1 (relief where administrators act or propose to act so as unfairly to harm interests), and paragraph 68(2) of Schedule B1 (court directions to administrators); (ii) whether the administrators' refusal to undertake specific, time-intensive investigations for the applicants would cause unfair harm; and (iii) whether the administrators had acted improperly or beyond the scope of their duties so as to justify court intervention.

Court's reasoning and subsidiary findings. The court accepted that the applicants might suffer harm from lack of information but held that harm alone was insufficient: it had to be "unfair". Drawing a distinction from unfair prejudice principles in company law, the judge emphasised that administrators under Schedule B1 must act to achieve the purpose of administration and in the interests of creditors as a whole, and may lawfully prioritise resources. The administrators had set up an ordered process for identifying and reconciling trust property, explained the practical difficulties (140,000 failed trades, pooled custodial holdings, frozen accounts, limited access to exchange and custodian data, cross-client custodial stocklines) and demonstrated that bespoke enquiries for individual clients would divert scarce resources from the agreed process. The court found no suggestion of bad faith or manifest impropriety; the administrators had provided information readily available and the applicants had not shown that compelling additional disclosure was required or consistent with the creditors' approved proposals. The judge held that paragraph 68(2) directions must be consistent with approved proposals and that courts should be cautious about interfering in the administrators' day-to-day management absent clear cause.

Outcome. The application was dismissed. The judge stressed the administrators' wide managerial discretion in a large and complex administration and declined to compel the bespoke disclosure sought.

The application is dismissed. The court held that although the applicants might suffer harm from lack of further information, they did not establish "unfair" harm under paragraph 74(1) of Schedule B1; nor was it appropriate to give directions under paragraph 68(2) because any directions must be consistent with creditors' approved proposals and the administrators were properly exercising a broad managerial discretion in the complex administration. There was no suggestion of improper conduct by the administrators to justify compelling the detailed disclosure sought.