Re Lehmans (Lehman Brothers (Europe) (No.2))

The Court of Appeal dismissed the administrators' appeal and held that Part 26 of the Companies Act 2006 does not permit a court-sanctioned scheme of arrangement to vary or extinguish proprietary rights held by third parties in trust property belonging to the company. The judges emphasised the ordinary meaning of "creditor" as a person with a pecuniary claim against the company and concluded that a beneficiary under a trust is not thereby a creditor in respect of his proprietary rights. The court accepted that Part 26 schemes may alter creditors' contractual or secured rights and may include ancillary releases of related third-party claims, but drew a principled line excluding trust rights in rem over property which never formed part of the company estate.

Background and parties: LBIE entered administration on 15 September 2008. The administrators sought permission to propose a Part 26 Companies Act 2006 scheme to resolve competing proprietary claims to cash and securities held by LBIE for its prime-brokerage and custody clients. LIBA opposed the application on jurisdictional grounds; some hedge funds supported the scheme.

Nature of the application: Permission was sought to convene class meetings and propose a scheme under Part 26 to convert existing proprietary claims to "New Claims" and to distribute trust property on a pooled basis, subject to a Bar Date and other mechanisms for allocation, appropriation and treatment of shortfalls.

Issues framed:

• Whether a scheme under Part 26 can lawfully affect and compel the release or variation of beneficiaries' proprietary rights in trust property held by the company.
• Whether a scheme may extend to those persons who are creditors in respect of pecuniary claims but who also assert rights in rem over trust assets held by the company.

Court's reasoning: The court analysed the statutory language of Part 26 (section 895 and related provisions) and relevant authorities. It accepted that the term "creditor" has a wide meaning for Part 26 purposes but concluded that it is limited to persons who have pecuniary claims (present, future or contingent) against the company. The judges distinguished between rights in personam (debts, contractual or tortious claims and secured rights) and rights in rem (proprietary claims to trust assets which are not part of the company estate). While schemes may re-arrange creditors' debts and ancillary rights against third parties, they cannot, as a matter of statutory construction, be used to appropriate or extinguish proprietary rights in assets held by the company as trustee because those rights do not make the beneficiary a creditor of the company in respect of the property itself.

Subsidiary findings: The court noted authorities in which schemes affected secured creditors or required releases of third-party claims, but held those were consistent with an arrangement altering the company's liabilities; they do not support including pure proprietary rights in trust property within Part 26. The court recognised the administrators' practical difficulties and did not express a view on the fairness of the proposed scheme, suggesting instead that equitable or other relief may be sought in the appropriate forum.

The appeal is dismissed. The Court of Appeal held that Part 26 does not permit a scheme of arrangement to vary or extinguish proprietary rights in trust property held by a company. The statutory phrase "an arrangement between a company and its creditors" must be read to concern rights inter se as debtor and creditor; beneficiaries' rights in rem over trust assets are not captured by that jurisdiction, even where beneficiaries also have separate pecuniary claims against the company.

Appeal from the High Court of Justice, Chancery Division (Companies Court) before Blackburne J (Case Nos 7942 of 2008 and 16389 of 2009). Blackburne J had refused to authorise, under Part 26, a scheme insofar as it would vary or extinguish proprietary rights in trust property; the administrators appealed to the Court of Appeal (this judgment: [2009] EWCA Civ 1161).