In the Matter of Lehman Brothers International (Europe) (in Administration) and In the Matter of the Companies Act 2006

The court was asked to sanction a scheme of arrangement proposed by the administrators of Lehman Brothers International (Europe) under Part 26 of the Companies Act 2006 (section 896(2)(d)). The Scheme was intended to compromise a range of outstanding "Waterfall" and related proceedings, fix a bar date (the Effective Date) for claims, provide a procedure for calculating statutory interest (including an adjudication process for certifiable "Higher Rate" claims) and to permit distributions of a substantial surplus in the administration without further years of litigation.

The judge applied the established three-stage approach to sanction (statutory compliance, fair representation at class meetings and overall fairness) drawing on authorities including Re National Bank, Re Telewest and later authorities. He concluded that the classes had been properly constituted, that voting results were reliable and not tainted by coercion despite commercial cross-holdings and a Lock-Up Agreement (including a disclosed £35m consent fee between certain parties), and that the adjudication, consultation and waiver mechanisms (including limited consultation rights for the Subordinated Creditor and the option for Higher Rate Creditors to take an 8% plus a 2.5% settlement premium or to certify) were not unfair or a blot on the Scheme.

The court also addressed cross-border jurisdiction and recognition issues under the Recast Judgments Regulation and concluded (assuming but not deciding applicability) that Article 26(1) (appearance by proof of debt) and Article 8 principles supported the exercise of jurisdiction and that the Scheme would achieve substantial effect. For these reasons the court sanctioned the Scheme and allowed the administrators' application.

Background and relief sought:

The administrators of Lehman Brothers International (Europe) ("LBIE"), an English unlimited company in administration since 2008, applied for sanction of a scheme of arrangement under Part 26 Companies Act 2006 (section 896(2)(d)). The Scheme sought to resolve a set of "Relevant Proceedings" (chiefly the various "Waterfall" proceedings and related applications) that impeded distribution of a substantial surplus in LBIE’s estate, to fix a Bar Date at the Scheme's Effective Date, to settle or withdraw specified proceedings and to provide a mechanism for adjudicating statutory interest entitlements.

Parties and procedural posture:

• Administrators proposed the Scheme.
• Major creditor groups included the Wentworth Group (including the Subordinated Creditor) and the Senior Creditor Group, who held blocking positions by value; other creditors included GSI, Deutsche and SRM among others.
• The Convening Hearing determined class composition and four Scheme Meetings were held (8% Creditors & Specified Interest Creditor meeting; Higher Rate Creditors meeting; Senior Creditor Group meeting; Subordinated Creditor meeting).

Issues framed by the court:

• Whether statutory requirements for sanction were satisfied (properly constituted classes and statutory majorities).
• Whether classes were fairly represented at meetings and whether majority votes were tainted by special interests, cross-holdings or coercion.
• Whether the Scheme (including bar date, waiver of challenge/appeal rights, third-party releases, the Higher Rate certification and adjudication mechanism and the Subordinated Creditor's consultation rights) was fair and free of any 'blot'.
• Cross-border jurisdiction and recognition concerns under the Recast Judgments Regulation and the likely international effect of the Scheme.

Reasoning and key findings:

• The court used the three-stage analysis (statutory compliance; fair representation; whether an "intelligent and honest" member might reasonably approve) and reviewed convening directions, voting results and the Chairman's Report.
• Voting: majorities in the convened classes met statutory thresholds. The court examined the role of Increased Voting Rights Requests and analysed the effect of Wentworth and the Senior Creditor Group votes; it concluded the classes were properly constituted and the votes were not unrepresentative or coercive in a way that would defeat jurisdiction.
• Higher Rate adjudication: Higher Rate Creditors could choose an 8% rate plus a 2.5% settlement premium or certify their contractual rate. A compressed, paper-based adjudication by named senior experts acting as experts (not arbitrators) would resolve disputes; reasons were not to be given and awards were final except for fraud or bias. The court considered consultation and confidential information rights granted to the Subordinated Creditor and concluded these were acceptable in context.
• Fairness: the Scheme was a multi-faceted commercial compromise designed to avoid years of costly litigation and to permit timely distribution of the surplus; the court found no overriding unfairness or "blot" that should prevent sanction. Particular concerns (consent fee arrangements, consultation rights, limitation of judicial review of adjudicators) were addressed and did not defeat sanction.
• Cross-border issues: assuming the Recast Judgments Regulation applied, the court concluded (by reference to Article 26(1) and Article 8 principles and on the basis that lodging proofs submits creditors to the English jurisdiction) that jurisdiction to sanction vis-à-vis creditors who had lodged proofs was established and that the Scheme would achieve substantial effect, with further international recognition steps available (for example Chapter 15 in the US).

Outcome:

The court sanctioned the Scheme, concluding that statutory requirements were satisfied, the Scheme was fair, and that international jurisdiction/recognition issues did not prevent sanction.

The court sanctioned the proposed scheme of arrangement. The judge held that the statutory requirements under Part 26 Companies Act 2006 had been satisfied, the classes were properly constituted and fairly represented, and the Scheme (including the Bar Date, waiver and adjudication mechanisms and limited consultation rights for the Subordinated Creditor) was sufficiently fair and free from any 'blot' to justify sanction. The Scheme was necessary and appropriate to permit distribution of LBIE’s substantial Surplus and to avoid prolonged litigation; international jurisdiction and recognition issues did not prevent sanction.