Lehman Brothers Europe Ltd, Re

In an exceptional administration with a substantial surplus and no prospect of returning to business, the court may permit the company’s directors and members to use the Companies Act 2006 machinery for a capital reduction and distribution to members. The administrators cannot themselves distribute surplus assets to members under the insolvency legislation. They may, however, consent to the exercise of residual company powers where the course is consistent with, and furthers, the administration’s statutory purpose and approved proposals. The court must exercise particular caution before filling a gap in the detailed insolvency code by judicial invention. Reliance on complementary company legislation may nevertheless provide a lawful solution. Such cases will be rare and fact-sensitive.

The administrators of Lehman Brothers Europe Ltd sought directions under paragraph 63 of Schedule B1 to the Insolvency Act 1986. They proposed appointing a director and consenting to the exercise of company and shareholder powers so that surplus funds could be distributed to Lehman Brothers Holdings plc by means of a capital reduction while LBEL remained in administration.

The application was prompted by the absence of an express statutory power for administrators to distribute surplus assets to members and by an earlier refusal by Briggs J of a direct distribution route. The proposed mechanism was intended to facilitate settlement of the Waterfall III proceedings, benefit creditors and avoid liquidation. The central issues were whether the proposal was legally permissible, whether it furthered the administration’s purpose and complied with the approved proposals, and whether a statutory trust over assets prevented the proposed exercise of company powers.

The application was granted in principle. The court directed that the proposed mechanism was legally permissible, subject to a more focused order.

1. Statutory framework and judicial caution. The insolvency legislation provides routes for distributing surplus to members through liquidation or a return to trading. It does not confer on administrators a power to make such distributions themselves. The court had to proceed cautiously because the insolvency code is detailed and ordinarily comprehensive. Judicial power to supplement it exists in appropriate cases, but a new rule should not be formulated merely because it would be efficient or beneficial.
2. Complementary company legislation. The absence of an insolvency power did not prevent reliance on the parallel machinery of the Companies Act 2006. Paragraph 64 of Schedule B1 recognises that the company, its board and its members retain powers, subject to the administrator’s consent where they are management powers. Those powers included, in principle, the power to reduce capital and distribute the released surplus under Parts 17 and 23 of the 2006 Act.
3. Administration purpose. Any action by the administrators to implement the proposal was a performance of their functions and therefore had to be undertaken for the statutory purpose, not merely without conflicting with it. The proposal satisfied that requirement because it would facilitate the Waterfall III settlement and enable creditors to receive their entitlements earlier. On the particular facts, the contemplated exercise of company powers was also calculated to achieve the administration’s purpose.
4. Approved proposals. The proposal complied with the 2008 proposals. It supported the administration’s purpose, protected and maximised assets, pursued and compromised claims, and was incidental to the approved arrangements. The absence of an express reference to member distributions or the precise proposed exit route did not preclude it.
5. Statutory trust. The court considered the description of assets in administration as subject to a statutory trust inapposite, given the continuing powers of the company and directors. It did not need finally to determine the issue. In any event, whatever trust existed did not prevent the exercise of management powers concerning a surplus with the administrators’ permission.
6. Limits. The decision depended on the rare combination of a substantial surplus, no intention to restore the company to a going concern, creditor protection and support from the relevant constituencies. It was not a general licence to bypass the insolvency code.

First-instance directions application. No appellate history is stated in the judgment.