Re LBEL No. (9)

The administrators of Lehman Brothers Europe Limited applied for directions under paragraph 63 of Schedule B1 to permit them to appoint a director so that, with the companys sole member (Lehman Brothers Holdings plc), the director could implement a capital reduction and effect distributions to the member while LBEL remained in administration. The central legal question was whether distributions to members could be effected without placing the company into liquidation and, if so, whether the administrators could lawfully consent to the directors and member exercising powers under the Companies Act 2006 (notably Part 17 on capital reductions and Part 23 on distributions) in the context of an administration.

The court held that, in exceptionally rare circumstances, reliance on the Companies Act 2006 to give effect to a capital reduction and consequent shareholder distribution is permissible provided (i) any exercise of administrators functions is performed for the statutory purpose of administration (paragraph 3(1) Schedule B1), (ii) consent under paragraph 64 Schedule B1 is given where the exercise of management powers would otherwise interfere with administrators powers, and (iii) creditors interests are preserved by appropriate reservations and reserves (including for statutory interest under rule 14.23(7) of the Insolvency Rules (England and Wales) 2016). The court granted the directions in principle, emphasising the novelty and rarity of the remedy and that the Proposal furthered the administrations purposes and was supported by relevant constituencies (including the LBH administrators and major creditors), with HM Revenue & Customs having been notified.

Background and parties: LBEL was placed in administration on 23 September 2008. The joint administrators of LBEL applied for directions to enable a substantial surplus to be distributed to the sole member, LBH, while LBEL remained in administration. The joint administrators of LBH also sought directions in respect of their role. The application was made to facilitate a proposed global settlement in the related "Waterfall III" litigation and to avoid the delay, complexity and adverse tax consequences that would follow a move to liquidation.

Nature of the application: The administrators sought court directions under paragraph 63 of Schedule B1 that they might appoint a director who, together with the member, would implement a capital reduction under the Companies Act 2006 and thereby permit a shareholder distribution within the administration (the "Proposal"). The administrators proposed to reserve sums for statutory interest (rule 14.23(7) of the Insolvency Rules (England and Wales) 2016) and costs and to make an interim and later a final shareholder distribution to LBH if Waterfall III were settled as envisaged.

Issues framed:

• Whether a court should approve a procedure not expressly provided for in the insolvency statute and designed to achieve distributions to members without liquidation;
• Whether actions by administrators and any appointment of a director must further the statutory purpose of administration and whether the Proposal did so;
• Whether the administrators were constrained by the 2008 Proposals approved by creditors;
• Whether a statutory trust over administration assets prevents directors from distributing any surplus while the company is in administration.

Courts reasoning and findings: The court reviewed authority and guidance including a short earlier decision of Briggs J refusing a similar route in 2012, points from the Supreme Court in Re Lehman Brothers International (Europe) [2017] UKSC 38 and Snowden Js approach in Re Nortel Networks UK Ltd [2017] EWHC 1429 (Ch). The judge emphasised judicial caution before filling statutory gaps but concluded that the 1986 Act and Rules did not prevent recourse to the Companies Act 2006 for a capital reduction and distribution where (i) the administrators exercise of functions is for the statutory purpose of administration (paragraph 3(1) Schedule B1), (ii) paragraph 64 Schedule B1 contemplates directors and members continuing powers subject to administrators consent where necessary, and (iii) creditors interests are protected by reservation of claims and establishment of appropriate reserves. The judge did not finally determine whether a "statutory trust" arises in administration as in liquidation but concluded that, even if some form of statutory restraint exists, it did not prevent the exercise of management powers in relation to a surplus with administrators consent. The court noted that HMRC had been notified and chose not to attend, and that creditors and the LBH administrators were supportive.

Result: The court granted the directions sought in principle, on the basis that in this rare and exceptional case reliance on the Companies Act 2006 to effect a capital reduction and distribution within administration was legally permissible, subject to carefully drawn orders and safeguards to protect creditors and proper exercise of duties by the appointed director and administrators.

The court granted the administrators applications for directions in principle. It held that, in the rare and exceptional circumstances of this case, administrators may permit and facilitate a capital reduction and shareholder distribution under the Companies Act 2006 while the company remains in administration, provided the administrators act only in furtherance of the statutory purpose of administration (paragraph 3(1) Schedule B1), give any required consent under paragraph 64 Schedule B1, and ensure creditors interests are protected by appropriate reservations and reserves. The court treated the Proposal as lawful, pragmatic and beneficial to creditors and approved it subject to detailed orders and safeguards.