Lehman Brothers, Re

Sanction of a scheme under Companies Act 2006 Part 26 requires a structured three-stage inquiry:

1. compliance with the statutory requirements, including properly constituted classes and the requisite majorities;
2. whether the classes were fairly represented and the votes expressed a genuine class view rather than coercive self-interest; and
3. whether the scheme is fair overall.

Where voting creditors have interconnected interests, the court must scrutinise the apparent majorities and consider the interests of creditors who voted against the scheme. The court may nevertheless sanction the scheme where, viewing the scheme and its practical alternatives in the round, an intelligent and honest member of the relevant class might reasonably approve it.

The administrators of Lehman Brothers International (Europe) sought sanction of a scheme intended to conclude outstanding disputes and establish a paper-based adjudication process for certain interest claims. The principal dispute concerned the composition of the Higher Rate Creditor class and the participation of associated Wentworth entities whose interests were connected with both higher-rate and subordinated claims.

The court had previously directed class meetings at a convening hearing ending on 11 May 2018. The meetings took place on 5 June 2018 and approved the scheme by the requisite majorities. The court reconsidered class composition, the effect of the Wentworth entities’ interests, the fairness and robustness of the adjudication process, and the scheme’s potential international recognition.

The court sanctioned the scheme.

1. Statutory jurisdiction. The court adopted the three-stage approach set out in Buckley on the Companies Acts and quoted and approved in Re Telewest. First, it considered compliance with Companies Act 2006 Part 26, including whether the classes were properly constituted and whether the meetings achieved the requisite majorities in number and value. The court had power to review class composition after the convening hearing. It remained satisfied that the Higher Rate Creditor class had been appropriately constituted and that the statutory preconditions for jurisdiction and sanction were met.
2. Class representation. The court distinguished genuine corporate democracy from coercion. The close association between the Wentworth entities and their interests in different creditor groups required careful scrutiny. Their votes could not simply be assumed to express, or to negate, the class interest. The court considered whether their other interests were the driving force behind their votes and whether the result provided proper evidence that a sensible business person might approve the scheme.
3. Overall fairness. The court considered the alternative of prolonged litigation, the fact that admitted provable claims had been paid in full, and the possible adverse consequences of continuing related proceedings. It also examined the special arrangements involving Wentworth and the Senior Creditors Group, the settlement premium, consultation rights, the absence of an oral hearing, the absence of an appeal process, and the adjudicators’ ability to decide matters without giving reasons. Although these features caused serious concern, the scheme and adjudication process together were not so unfair as to justify withholding sanction.
4. International effectiveness. Lehman Brothers International (Europe) was a company within Companies Act 2006 section 895(2). Recognition in every possible jurisdiction was not a necessary prerequisite to sanction. The proposed Chapter 15 application in the United States provided reassurance concerning a particularly important jurisdiction.

The judgment was a first-instance decision on the administrators’ application for sanction. The court had previously directed the class meetings at a convening hearing ending on 11 May 2018; the meetings were held on 5 June 2018. The scheme was sanctioned.