Lehman Brothers International (Europe), Re Insolvency Act 1986

A scheme of arrangement under Part 26 of the Companies Act 2006 may compromise or rearrange rights between a company and its creditors in their capacity as creditors. It cannot compulsorily vary or extinguish beneficiaries’ proprietary rights in property which the company holds on trust for them.

A beneficiary is not a creditor merely because the company holds that beneficiary’s property. A breach of trust may create a separate monetary claim and thereby make the beneficiary a creditor in respect of that claim, but it does not convert the proprietary claim into a creditor claim. The position differs from that of a secured creditor, whose security is an incident of a debt owed by the company.

LBIE entered administration while holding cash and securities for prime-brokerage and custody clients. The administrators proposed a scheme under Part 26 of the Companies Act 2006 to pool and distribute securities subject to competing proprietary claims. The scheme would require qualifying clients to release their existing proprietary rights and accept new pooled claims, with late claims potentially restricted to any surplus.

Blackburne J held that the court lacked jurisdiction to sanction the scheme so far as it varied or extinguished rights in trust property. The administrators appealed. The central question was whether a Part 26 scheme could extend to trust property where the beneficiaries also had monetary claims against the company.

1. Appeal dismissed unanimously. The court upheld Blackburne J’s conclusion that it had no jurisdiction under Part 26 of the Companies Act 2006 to sanction the proposed scheme insofar as it dealt with property held or controlled by LBIE on trust for clients.
2. Under section 895, an arrangement must be between the company and persons in their capacity as its creditors. A creditor includes a person with a present or contingent monetary claim which will become a debt or similar liability of the company. A person with only a proprietary claim to identified trust property is not a creditor in that respect.
3. A beneficiary’s right to trust property is a right in rem against property which does not form part of the company’s insolvent estate. A trustee’s breach may give rise to a secondary claim for damages or equitable compensation, but that monetary claim does not alter the character of the beneficiary’s primary proprietary entitlement.
4. The wide meaning of “arrangement” did not enlarge the jurisdiction beyond arrangements concerning creditor rights. The court accepted that a scheme may include ancillary releases of closely connected personal claims against third parties, as in Re T&N Ltd (No 3) [2006] EWHC 1447 (Ch). That did not permit a scheme to acquire or redistribute beneficiaries’ own property held by the company as trustee.
5. The secured-creditor authorities were inapposite. Security granted over the company’s property is an incident of the secured debt and may be affected when that debt is reorganised. Trust property is beneficially owned by the beneficiary and was never the company’s property available for creditors.

• Court of Appeal (Civil Division): Appeal dismissed unanimously. The court held that Part 26 did not permit the proposed scheme to vary or extinguish clients’ proprietary rights in trust property.
• High Court of Justice, Chancery Division, Companies Court: Blackburne J held that the court had no jurisdiction under Part 26 of the Companies Act 2006 to sanction the scheme to that extent. Citation not stated in the judgment.