Lehman Brothers International (Europe), Re

The Chancellor directed that the joint administrators of Lehman Brothers International (Europe) be at liberty to consent to a directors' request under paragraph 64 of Schedule B1 to distribute a cash surplus to the company’s sole shareholder. The court held that the administrators have statutory powers under Schedule B1 (notably paragraphs 14, 59, 63 and 64) to consent to the exercise of management powers and that paragraph 3(1)(a) (the objective of rescuing the company as a going concern) is to be read as an overall objective rather than requiring a specific causal link between every act and the rescue objective. The administrators' proposed consent was lawful, commercially appropriate and consistent with their duties; an objection based on US Chapter 11 arrangements was not a bar to the distribution from LBIE to its shareholder.

Background and parties. The joint administrators of Lehman Brothers International (Europe) (in administration) applied for a direction under paragraph 63 of Schedule B1 to the Insolvency Act 1986 that they be at liberty to consent to a request by LBIE's directors under paragraph 64 to distribute surplus funds to LB Holdings Intermediate 2 Limited (in administration) (LBHI2), LBIE's sole shareholder.

Facts and procedural posture. The administration had returned substantial assets, had discharged admitted creditor claims in full (with interest) and held a cash estate in which a sum of approximately 493 million was held as reserves; 29 million was accepted on the evidence as a true surplus available for immediate distribution and a further 145 million was likely to be distributable by the end of 2020. The administrators and directors had taken legal and accounting advice that the proposed distributions would comply with the Companies Act 2006 and the company’s articles. HMRC and the FCA indicated they did not oppose the application; one private objector raised a US-plan-based objection which the court rejected.

Nature of the application. The applicants sought judicial directions permitting the administrators to consent to the directors reducing capital and making distributions to the shareholder under paragraph 64 and related Companies Act procedures.

Issues framed by the court. (i) Whether the administrators may lawfully consent to the directors' request; (ii) whether consenting would constitute performance of the administrators' functions in accordance with the statutory purposes in paragraph 3 of Schedule B1, in particular the requirement to perform functions with the objective of rescuing the company as a going concern; and (iii) whether any objection (including that based on LBHI's Chapter 11 plan) prevented the consent.

Reasoning and outcome. The court analysed the relevant statutory provisions (Schedule B1 paragraphs 1(1), 3, 14 of Schedule 1, 59, 63, 64, 68, 74 and 111(1)) and authorities on the scope of an administrator's functions. The Chancellor accepted authorities recognising the broad and pragmatic scope of administrators' powers (including Denny v Yeldon and others) and concluded paragraph 3 is an overall objective: administrators need not show a direct causal link between every legitimate exercise of their powers and the rescue objective so long as they act lawfully and in furtherance of that overall objective. Applying that approach, consenting to the directors' request fell within the administrators' powers, did not conflict with the rescue objective and was commercially appropriate. The court therefore directed that the administrators be at liberty to give the consent requested.

The court granted the direction sought: the joint administrators were at liberty to consent to the directors' request to distribute surplus funds to LBHI2. The Chancellor reasoned that Schedule B1 vests broad powers in administrators (paragraphs 14, 59, 63 and 64) and that paragraph 3 imposes an overall statutory objective (rescue as a going concern) rather than requiring a specific causal link between every action and the rescue objective; consenting to the distribution was consistent with those powers and objectives and was commercially appropriate. The objection based on the US Chapter 11 plan did not prevent the distribution from LBIE to LBHI2.