Lehman Brothers, Re

The court applied the established three-stage test for sanctioning a scheme under Part 26 of the Companies Act 2006 (as derived from Buckley and approved in Re Telewest): (1) statutory compliance and jurisdiction including proper class constitution and voting majorities; (2) whether each class was fairly represented at the meetings; and (3) overall fairness of the scheme. The judge found that the convening directions and class meetings (held pursuant to the order of 11 May 2018) satisfied the statutory requirements and that the requisite majorities in number and value were obtained.

The principal contested issues related to the position of the Wentworth entities within the higher rate creditor class and the risk that their close associations and commercial arrangements (including a lock-up agreement and a consent fee) meant they had a distinct or antagonistic "special interest" which might invalidate the class result. After careful review the judge concluded that, although the Wentworth parties had complex and partly opposing interests, their votes did not so dominate or distort the class view as to justify refusing sanction.

The court also examined the adjudication process provided by the scheme, noting concerns about the absence of oral hearings and appellate review and the one-off paper adjudication model, but concluded that the adjudication mechanism and the scheme as a whole were not so unfair as to require withholding sanction. Finally, the judge considered international recognition issues (including the company falling within section 895(2) of the Companies Act 2006 and the interplay with the Recast Judgments Regulation) and concluded there was nothing in the scheme that would prevent sanction or render it internationally ineffective in a way that should defeat sanction.

Background and parties: This is a first instance companies court decision on whether to sanction a scheme of arrangement affecting Lehman Brothers International (Europe) (in administration) under the Companies Act 2006. The administration had been ongoing for nearly a decade and numerous high value proceedings were outstanding. The principal contested practical issues concerned certain Wentworth entities (their voting and commercial arrangements), the Senior Creditor Group, and the robustness and fairness of the adjudication process provided by the scheme.

An application to sanction a scheme of arrangement under Part 26 of the Companies Act 2006 in the administration of Lehman Brothers International (Europe).

• Whether statutory preconditions and Part 26 requirements were satisfied, including proper class composition and voting majorities;
• Whether each class meeting was fairly representative or whether the majority reflected interests adverse to the class (with particular focus on the Higher Rate Creditor class and the Wentworth entities);
• Whether the adjudication process established by the scheme was fair and practical, particularly given provisions precluding oral hearings and appellate review;
• Whether there were international recognition issues affecting the propriety of sanction (including relevance of section 895(2) Companies Act 2006 and the Recast Judgments Regulation and the possibility of Chapter 15 recognition in the United States).

The judge applied the three-stage test (as reflected in Buckley and Re Telewest). At stage one he was satisfied that the convening directions, meetings held on 5 June 2018 and the statutory majorities met the Part 26 requirements. At stage two he conducted a careful inquiry into whether the Wentworth entities held a "special interest" such that their votes should be ignored; although their arrangements and cross-interests required anxious consideration, he concluded their votes did not so distort the class view as to defeat a proper class decision. At stage three he considered overall fairness including detailed objections and the adjudication procedure; while noting real concerns (no oral hearings, no appellate route, one-off paper adjudication and conflicts of interest), he concluded the process was not unfair to the point of requiring refusal of sanction. On international issues he concluded there was no feature of the scheme that made sanction inappropriate and noted steps intended to secure recognition in the United States. The court therefore sanctioned the scheme, reserving fuller reasons for a later full judgment.

This is a first instance decision. The court sanctioned the proposed scheme of arrangement. The judge applied the three-stage test under Part 26 Companies Act 2006 and concluded that (i) statutory preconditions including properly convened class meetings and requisite majorities were satisfied; (ii) the classes, including the Higher Rate Creditor class despite the complex position of the Wentworth entities, had been fairly represented; and (iii) the adjudication process and overall terms of the scheme were not so unfair as to require withholding sanction. The judge also concluded that there were no international recognition obstacles of sufficient gravity to preclude sanction.