Lehman Brothers International (Europe), Re

When sanctioning a scheme of arrangement, the court must first ensure statutory compliance, then assess whether the class was fairly represented, and finally decide whether the scheme is one which an intelligent and honest member of the class might reasonably approve.

Class composition depends on similarity of legal rights against the company, not divergent commercial interests. A special interest affects the weight given to votes only where it is adverse to the class and causally explains the vote. The court may discount or disregard such votes, but the response is discretionary.

The court may sanction a scheme offering a practical compromise and accelerated distribution, even though it is not the only or best possible scheme. An expert adjudication process may be final, paper-based and non-speaking where that structure is fair and justified by the scheme’s commercial purpose.

Lehman Brothers International (Europe) was an English company in administration with a substantial surplus after paying admitted unsecured claims in full. Its administrators proposed a scheme under Part 26 of the Companies Act 2006 to compromise statutory-interest claims and terminate several outstanding proceedings, including appeals and creditor challenges.

The scheme provided alternative settlement and certification options for higher-rate creditors, a compressed expert adjudication process, waivers of certain challenge and appeal rights, and a bar date. Concerns were raised about class composition, cross-holdings, a consent fee, the involvement of the subordinated creditor and the fairness of the adjudication procedure.

The central issues were whether the meetings were properly constituted, whether the voting majorities fairly represented the relevant classes, whether the scheme was fair and free from any blot, and whether the court had jurisdiction over creditors domiciled elsewhere in the European Union.

1. Sanction. The scheme was sanctioned. It constituted a compromise or arrangement within Part 26 of the Companies Act 2006, the statutory majorities had been obtained, and there was no blot or overriding unfairness.
2. Three-stage approach. The court applied the established three-stage inquiry: statutory compliance; fair representation and absence of coercion by a majority pursuing interests adverse to the class; and whether an intelligent and honest member of the class, acting in his own interest, might reasonably approve the scheme. The scheme need not be the only fair scheme or the best scheme.
3. Class composition. Classes are constituted by reference to legal rights against the company, not private commercial interests, beneficial ownership, cross-holdings or motives. The Wentworth entities’ economic relationship and the subordinated creditor’s consultation rights did not make the proposed classes invalid. The consent fee justified a separate class for the Senior Creditor Group but did not otherwise alter the analysis.
4. Special interests and voting. A special interest does not invalidate a vote merely because it gives an additional reason for supporting the scheme. The relevant question is whether the interest is adverse to the class and objectively caused the vote. The “but for” approach is a useful heuristic, not an inflexible rule. Even where a vote is unrepresentative, the court may discount it or disregard it altogether. Here the independent support of other creditors and the common benefit of distributing the surplus meant that coercion and unrepresentative voting were not established.
5. Fairness of the procedure. The certification and adjudication process was sufficiently fair. The adjudicator could act as an expert, decide on paper, give no reasons and have only limited remedial choices. The parties could agree to a final and conclusive expert determination, and no public-policy rule required an appeal on questions of law. The subordinated creditor’s consultation rights did not amount to a power to dictate the result.
6. Jurisdiction and cross-border effect. The court assumed, without deciding, that the Recast Judgments Regulation applied. A creditor who had lodged a proof in the English administration had submitted to the English court’s jurisdiction and entered an appearance for the purposes of Article 26(1). The scheme was capable of achieving a substantial effect; worldwide effectiveness or certainty was unnecessary.

First-instance sanction application. No prior appellate decision concerning this sanction application was stated.