Lehman Brothers International (Europe) (in administration) (Number 2)

The administrators of Lehman Brothers International (Europe) applied for a declaration that a proposed scheme of arrangement under Part 26 of the Companies Act 2006 (in relation to the return of client assets held or controlled by LBIE) was within the court's jurisdiction and that they should be at liberty to apply to convene scheme meetings under section 896. The central legal question was whether the proposal was a "compromise or arrangement" within the meaning of section 895 of the Companies Act 2006.

The court held that, insofar as the scheme sought to vary or extinguish proprietary rights in client assets held on trust for beneficial owners (for example by pooling segregated assets, imposing a bar date and converting asset claims into "new claims"), it did not concern those persons in their capacity as creditors and therefore fell outside the scope of Part 26. The judge distinguished authorities concerning secured creditors and earlier schemes affecting a company's own assets (for example Empire Mining and Alabama) and found them inapplicable where the property in question had never formed part of the company’s assets but was held on trust for clients. The court concluded there was no jurisdiction to bind dissentient beneficial owners under Part 26 and recommended use of the court's trust jurisdiction or other procedures as alternative routes.

Background and parties: The application was made by the administrators of LBIE by ordinary application under paragraphs 63 and 68(2) of Schedule B1 to the Insolvency Act 1986 and by a Part 8 claim form. Interested parties who appeared included the London Investment Banking Association (opposed) and GLG Partners LP (supporting the administrators). The Financial Services Authority expressed conditional support for mechanisms that protect consumers but took no position on the jurisdictional issue.

Nature of the application: The administrators sought a declaration that they had jurisdiction to promote and seek court sanction for a scheme of arrangement under Part 26 of the Companies Act 2006 to determine and facilitate distributions of client assets ("Trust Property") and to be at liberty to apply under section 896 to convene scheme meetings.

Key features of the proposed scheme:

• Scope: confined to "Scheme Creditors" who have both a proprietary claim to "Segregated Assets" (assets recorded separately as client property) and a pecuniary claim against LBIE.
• Substance: Scheme Creditors would release pre-existing claims ("Released Claims") in exchange for "New Claims" under the scheme; assets of a stock line would be pooled and allocated rateably among claimants; any shortfall would rank as an unsecured claim; a Bar Date was proposed (with specified consequences for late claims).
• Practical drivers: uncertainty about ownership, incomplete client responses, unreliable books and records, and information gaps from custodians and intermediaries.

Issues framed by the court: (i) whether persons affected by the proposal are "creditors" within the meaning of section 895; (ii) whether the proposal is a "compromise or arrangement" with those creditors such that the court can sanction it under Part 26; and (iii) whether Part 26 can be used to affect proprietary rights in assets held on trust for clients.

Arguments: The administrators and supporting parties argued for a broad construction of "creditors" and "arrangement", submitting that many clients would have pecuniary claims and that the scheme properly rearranged rights as between LBIE and its creditors to facilitate return of client property. LIBA argued that the scheme's core effect was to vary or extinguish beneficiaries' proprietary rights held under trusts independent of any creditor relationship and that Part 26 cannot be used to override trust principles.

Court's reasoning and conclusions: The judge found that the proposed scheme was substantially concerned with discharging LBIE’s obligations as trustee or custodian to return client property and thus concerned beneficial owners in their capacity as beneficiaries rather than in their capacity as creditors. Where property has never formed part of the company’s assets but is held on trust for third-party beneficiaries, Part 26 is not the appropriate vehicle to vary those proprietary rights and bind dissentients. The court distinguished authorities permitting schemes that affected security over a company's own assets (for example Empire Mining and Alabama) because in those cases the assets were part of the company’s estate or the rearrangement removed the indebtedness which the security secured. The judge also considered Re T & N Ltd (No.3) and concluded it did not support using Part 26 to alter independent proprietary rights of beneficial owners. The court therefore concluded there was no jurisdiction under Part 26 to impose the proposed scheme on dissenting beneficial owners. The judge suggested alternative routes, including the court's trust jurisdiction and other procedures, could address the administrators' practical difficulties.

Procedural outcome: the application was refused to the extent it sought to bind dissentient beneficiaries by a Part 26 scheme; the judge offered guidance on alternative means of achieving the administrators' aims.

This is a first-instance decision. The court held that it had no jurisdiction under Part 26 of the Companies Act 2006 to sanction, so as to bind dissentients, a scheme whose substantive purpose was the distribution or variation of proprietary rights in assets held on trust for LBIE’s clients. The judge therefore declined to permit use of Part 26 to impose the proposed pooling, bar-date and release/new-claim arrangements in respect of trust property. The rationale was that the scheme did not primarily concern the persons affected in their capacity as creditors of LBIE and Part 26 cannot be used to override beneficiaries' trust property rights; the court recommended recourse to trust jurisdiction or other court-assisted procedures as an alternative.