LB Holdings Intermediate 2 Ltd, Re

When administrators seek directions approving a particularly momentous compromise, the court’s role is limited. It must determine that the proposed transaction is within the administrators’ powers, that they genuinely consider it beneficial to the company and its creditors, and that their decision is rational, proper and free from relevant conflicts of interest.

The court does not decide whether the settlement is the best available or substitute its own commercial judgment for that of the administrators. Because approval may prevent later challenge, the administrators must place all relevant material before the court, including their reasons. Approval should be withheld if the court remains in doubt about the proposal’s propriety.

The joint administrators of LBIE, LBL, LBHI2 and LBH sought directions under the Insolvency Act 1986 to enter into and perform a proposed settlement of substantial intra-group claims arising principally from the Waterfall III proceedings.

The settlement would resolve contribution, recharge and related inter-company claims, permit distributions without reserves for potential contribution liabilities, and bring significant litigation to an end. The applications also included ancillary directions concerning distributions, confidentiality and implementation of related transactions.

The central issue was whether the proposed settlement was within the administrators’ powers and whether the court should approve it as a momentous decision, having regard to the administrators’ duties, rationality, conflicts of interest and the evidence supporting their assessment.

1. Applications granted. The court granted directions permitting the administrators to enter into and perform the proposed settlement. It also granted the application restricting inspection of exhibit GEB5(B) under rule 12.39(9) of the Insolvency (England and Wales) Rules 2016.
2. The power to enter into settlement agreements and compromises arose under paragraphs 60 of Schedule B1 and 18 of Schedule 1 to the Insolvency Act 1986. The proposed transactions were therefore within the applicants’ powers.
3. The settlement was a genuinely momentous decision because of the size and complexity of the claims, the unusual nature of the administrations and the long-running Waterfall disputes. The court therefore had to examine whether the administrators’ decision was proper, rather than merely note that they possessed the power to act.
4. Applying the principles discussed in Re Nortel Networks UK Ltd [2016] EWHC 2769 (Ch) and In re MF Global UK Ltd (No 5) [2014] Bus LR 1156, the court had to be satisfied that each administrator genuinely considered the settlement beneficial to the relevant company and its creditors, had acted rationally, and had not been affected by a conflict of interest. The court was not required to decide whether the settlement was the best possible arrangement or to substitute its own commercial assessment.
5. Because approval could prevent later challenge, the administrators were required to provide all relevant material, including their reasons. The court had to act cautiously and withhold approval if left in doubt about the settlement’s propriety.
6. The evidence demonstrated independent consideration, professional advice, conflict-mitigation measures and a rational assessment of advantages and disadvantages. The court was satisfied that the administrators’ views were genuine, rational and untainted by conflicts, and that the settlement was not improper. No creditor had objected after being informed of the proposals.

This was a first-instance decision on applications for directions. The judgment referred to related Waterfall proceedings, including the Supreme Court’s decision in Re Lehman Brothers International (Europe) (in administration) [2017] UKSC 38, but no appeal from the present applications was stated.