Lehman Brothers Australia Ltd v Lomas & Ors

The court’s power to restrain an administrator from enforcing legal rights is exceptional. The rule in Ex parte James is directed principally to preventing an office-holder from obtaining unjust enrichment through reliance on a legal right where that reliance would be obviously unjust by the standards of all right-minded people. It does not provide a general fairness jurisdiction to rewrite a freely negotiated contract. Paragraph 74 of Schedule B1 to the Insolvency Act 1986 addresses unfair harm caused by the exercise of an administrator’s statutory powers, especially discriminatory or unjustifiable conduct in the interests of creditors as a whole. Neither jurisdiction permits a settled claims determination deed to be reopened merely because an innocent arithmetic error has later been discovered, particularly where the ordinary remedy would be rectification.

Lehman Brothers Australia Ltd, an unsecured creditor of Lehman Brothers International (Europe), applied for directions requiring LBIE’s administrators to admit a claim of £25,028,091.44 rather than the £23,355,508 stated in a Claims Determination Deed. The parties had agreed the lower amount after an accounting reconciliation, and it had been admitted and paid in full.

The shortfall resulted from recording a euro-denominated bond as Australian-dollar denominated. LBA accepted that the deed was contractually binding and did not seek rectification. It relied instead on paragraph 74 of Schedule B1 to the Insolvency Act 1986 and the rule in Ex parte James. The central issue was whether either jurisdiction enabled the court to override the deed.

1. Application dismissed. There was no basis to direct the LBIE administrators to admit a claim exceeding the agreed amount.
2. The rule in Ex parte James developed to prevent an officer of the court from retaining money or benefits where legal recourse was unavailable and retention would be contrary to natural justice. The applicable standard is strict: the proposed reliance on legal rights must be such that it would be pronounced obviously unjust by the standards of all right-minded people. A general or subjective test of unfairness is insufficient.
3. The rule does not ordinarily permit the court to alter or undo contractual rights freely agreed by the parties. Controlling an office-holder’s statutory power is materially different from modifying contractual rights. Where the law provides a remedy, such as rectification, the rule should not operate as a free-standing alternative remedy.
4. Paragraph 74 requires both harm to the applicant’s interests and unfairness in the relevant statutory sense. It concerns the exercise or proposed exercise of an administrator’s powers as administrator, including conduct causing disadvantage which cannot be justified by the interests of creditors as a whole or the administration’s objective, or which is discriminatory. It is not a mechanism for imposing general moral constraints on contractual enforcement.
5. Re Nortel GmbH did not establish a broad fairness jurisdiction. Its reference to unfairness was incidental, and the Supreme Court refused relief under both paragraph 74 and Ex parte James. Waterfall IIB was distinguishable: there, enforcement of a release would have had an unintended and discriminatory effect, whereas finality was the central purpose of the deed here.
6. Even assuming a power to intervene on unfairness grounds, it would not have been exercised. The deed was negotiated with advice, expressly fixed the claim with finality, released further claims, allowed transfer of the admitted claim, and had been fully performed. The appropriate position was therefore “rectification or bust”; no rectification application was made.