Lehman Brothers Australia Ltd v Lomas & Ors

The court refused an application by Lehman Brothers Australia Limited (in liquidation) to direct the administrators of Lehman Brothers International (Europe) to admit an increased unsecured claim based on an arithmetical error in a previously agreed Claims Determination Deed (CDD). The decision turns on the limited scope of the court’s equitable jurisdiction to restrain an officer of the court from enforcing legal rights: principally the rule in Ex Parte James and paragraph 74 of Schedule B1 to the Insolvency Act 1986 were considered.

The judge held that the CDD was a binding contractual mechanism designed to provide finality and that the proper remedy for a mistake of the kind alleged was rectification under the general law of contract if available. The court rejected the proposition that it should, as a matter of general fairness, override contractual releases or require administrators to reopen admitted claims. In doing so the court emphasised a strict, unconscionability-focused approach to Ex Parte James (not a free‑standing test of subjective unfairness), treated paragraph 74 as concerned with discriminatory or perverse exercise of an administrator’s statutory powers, and declined to extend either head of jurisdiction to the facts of this case.

Background and parties:

• The dispute arose between Lehman Brothers Australia Limited (LBA, applicant, in liquidation) and the joint administrators of Lehman Brothers International (Europe) (LBIE, respondents). LBIE entered administration in England in September 2008; LBA entered liquidation in Australia in October 2009. Both were Lehman group affiliates with cross‑claims arising from securities and derivative dealings.

Nature of the application:

• LBA sought a court direction that the LBIE administrators admit a higher unsecured provable claim than the Agreed Claim Amount (£23,355,508) stated in a Claims Determination Deed (the LBA CDD) dated 12 March 2014. LBA contended that a clerical/currency error in a shared Excel model meant the true provable claim should have been £25,028,091.44 and asked the court to prevent the administrators relying on the release in the CDD.

Procedural posture:

• This was a first instance Chancery Division application determined by Mr Justice Hildyard. The applicant did not apply to rectify the CDD and proceeded on the basis that rectification would not be available.

Issues framed:

1. Whether the court, under the judge‑made rule in Ex Parte James, could direct an administrator not to enforce contractual releases such as those in the LBA CDD.
2. Whether paragraph 74 of Schedule B1 to the Insolvency Act 1986 (power to grant relief where an administrator is acting or proposes to act so as to unfairly harm the applicant) provided a basis for relief.

Facts relevant to decision:

• A shared Model prepared by LBIE and reviewed by LBA produced the Agreed Claim Amount. The Model incorrectly recorded the currency of a particular bond, leading to an arithmetic undervaluation of LBA’s shortfall claim by £1,672,583.44. The CDD containing the Agreed Claim Amount was executed on 12 March 2014 and a distribution of £23,355,508 was paid and accepted on 30 April 2014. The error was discovered in August 2016 by a prospective purchaser conducting due diligence.

Court’s reasoning and holding:

• The court analysed the historical development of Ex Parte James and related authorities (including Re Wigzell, Re Clark, Re T.H. Knitwear and Re Nortel GmbH and the Lehman Waterfall IIB decisions). It concluded that Ex Parte James remains a narrow equitable jurisdiction originally crafted to prevent obviously dishonourable or unconscionable conduct by officers of the court (for example, retention of money paid under a mistake of law or receipts from third parties where there is no remedy at law).
• The judge rejected a broad, free‑standing ‘unfairness’ test that would allow the court routinely to override contractual bargains entered into by administrators. Paragraph 74 was held to be focused on discriminatory or perverse uses of statutory powers by an administrator and not a vehicle for eroding contractual finality.
• Because LBA had not pursued the available contractual/equitable remedy of rectification and the CDD served the important purpose of finality (and had been paid), the court would not direct administrators to reopen the agreed claim. Even if a wider fairness jurisdiction existed, the judge would decline to exercise it in the circumstances.

Result:

The application was dismissed.

Application dismissed. The court held that neither the rule in Ex Parte James nor paragraph 74 of Schedule B1 provided a basis to direct administrators to reopen or increase an admitted claim under a freely negotiated Claims Determination Deed. The proper avenue for correcting an agreed contractual figure was rectification; absent an application for rectification (or other available legal remedy), the court would not override the contractual finality of the CDD. The court adopted a restrictive, unconscionability‑focused approach to Ex Parte James and viewed paragraph 74 as aimed at preventing discriminatory or perverse exercises of an administrator’s statutory powers rather than as authorising a general fairness override of contractual rights.