Lehman Brothers International (Europe) (No 2), Re

A scheme under Part 26 of the Companies Act 2006 cannot bind dissenting creditors where its essential purpose is to distribute, pool or extinguish property held by the company on trust for them. The fact that those beneficiaries also have actual or contingent pecuniary claims against the company does not bring their independent proprietary rights within the scheme jurisdiction. Schemes may affect secured claims where the security is over the company’s own assets and the scheme rearranges the company’s indebtedness. That reasoning does not extend to trust property which has never formed part of the company’s assets. Questions concerning contractual claims, valuation and bar dates may fall within Part 26, but the court’s trust jurisdiction provides the appropriate mechanism for administering client property.

The administrators of Lehman Brothers International (Europe) sought directions under paragraphs 63 and 68(2) of schedule B1 to the Insolvency Act 1986 and under Part 8. They asked whether a proposed scheme under Part 26 of the Companies Act 2006 could be sanctioned and whether meetings of scheme creditors could be convened under section 896.

The proposed scheme concerned securities and other assets held or controlled by LBIE for clients. It would pool competing proprietary claims, impose a bar date, replace existing rights with new claims and potentially extinguish or reduce claims of clients who did not participate. LIBA opposed the application. The central issue was whether such an arrangement was a compromise or arrangement with creditors within section 895.

1. Application refused. The court had no jurisdiction under Part 26 of the Companies Act 2006 to sanction a scheme which, so as to bind dissentients, distributed trust property and varied or extinguished the proprietary rights of its beneficial owners.
2. The decisive question was whether the scheme affected the clients in their capacity as creditors of LBIE. The proposed scheme was principally concerned with LBIE’s obligations to hold and return client property. Its purpose was therefore proprietary and fiduciary, rather than a compromise or arrangement of the clients’ claims as creditors.
3. The existence of actual or contingent pecuniary claims against LBIE did not alter that conclusion. Nor did the close connection between those claims and the clients’ proprietary claims, or the administrators’ desire to facilitate an early distribution, establish jurisdiction.
4. Re T & N Ltd (No 3) was distinguishable. That scheme formed part of a tripartite settlement involving insurers, and affected the claimants’ rights as creditors and their rights against the insurers. It did not authorise interference with independent trust property rights merely because the beneficiaries also had claims against the scheme company.
5. The authorities concerning secured creditors, including Re Empire Mining Company and Re Alabama, New Orleans Texas and Pacific Junction Railway Company, did not assist the administrators. Those schemes rearranged indebtedness owed by the company and affected security over assets in which the company retained an equity of redemption. Trust property which had never formed part of the company’s assets was materially different.
6. The court indicated that contractual claims, valuation issues and a bar date might, if necessary, be addressed by a Part 26 scheme. The identification and distribution of client assets, competing proprietary claims and protection of fiduciaries were matters for the court’s trust jurisdiction.