Lehman Brothers v International (Europe), Re

Case-management directions should not authorise substantial expenditure before a pending appellate decision where that decision may determine whether the proposed work is necessary or wholly wasted. The court must assess the likely delay avoided against the cost and risk of wasted work. Where the outstanding legal issues are fundamental to identifying the evidence, respondents and questions for trial, those issues should ordinarily be resolved first.

In complex insolvency litigation, administrators may be better placed to assist the court independently than to advance adversarially the interests of one stakeholder group. A protective costs order need not be determined where the underlying work is not authorised.

The administrators of Lehman Brothers International Europe applied under paragraph 63 of Schedule B1 to the Insolvency Act 1986 for directions to progress a second client-money application. They sought authority to undertake further research and prepare evidence, an adjournment for further case-management directions, and a protective costs order.

The application depended on the outcome of a pending Supreme Court appeal in the earlier client-money proceedings. That appeal concerned whether the statutory trust arose on receipt or segregation, the constitution of the client-money pool, and the basis of distribution. Lehman Brothers Inc and Lehman Brothers Finance AG opposed the proposed work as premature and potentially misconceived.

1. Application adjourned. The proposed further work and evidence were not authorised, and no protective costs order was made in relation to that work.
2. The proposed work depended on the Supreme Court maintaining the conclusion that the statutory trust arose on receipt rather than segregation. If the Supreme Court decided that the trust arose only on segregation, the work would be wasted. The court also accepted that the proposed forensic methodology might itself be misconceived because the proper treatment of mixed accounts and the burden of proof remained unresolved.
3. The decisive consideration was not merely the administrators’ understandable wish to avoid delay. The court had to consider whether suitable respondents and effective case-management directions could be identified before the Supreme Court’s decision. It was essential that the outstanding issues in the earlier proceedings be finally determined before the parties were committed to substantial further expense.
4. Although the work might avoid approximately three months of delay, it could cost up to £10 million and carried a substantial risk of being wholly wasted. The balance therefore favoured waiting for the Supreme Court’s judgment. The question whether preliminary issues should later be ordered was left open.
5. The judge expressed a provisional view that the administrators should reconsider adopting an adversarial position for the general estate. Their independent role had assisted the court in the earlier client-money proceedings, and a suitable representative of the general creditors could advance that group’s interests. It might be difficult for the administrators simultaneously to investigate and identify client money and vigorously oppose its identification.
6. The application was adjourned until a date not earlier than the handing down of the Supreme Court’s judgment. Costs already incurred were left to be addressed, if necessary, at the conclusion of the application.

This was a first-instance case-management decision. The judgment records that earlier directions in the related client-money proceedings were given on 15 December 2009 and 20 January 2010, varied by the Court of Appeal on 2 August 2010, with a further appeal pending before the Supreme Court.