UK: Lehman´s Terms

Last Updated: 27 February 2009
Article by Edward Davis and Sue Millar

In two recent decisions, the Companies Court has rejected attempts by creditors of Lehman Brothers to expedite certain aspects of the administration process.


On 10 September 2008, Lehman Brothers announced that it had lost $3.9bn (£2.21bn) in the third quarter of 2008, mainly due to a write down of $5.6bn in relation to the bank's commercial and residential property investments. The bank, then widely rumoured in the financial press to be the next victim of the credit crunch, stepped up its efforts in finding a buyer. However, rescue talks with Barclays and Bank of America broke down over the following weekend and, on 15 September 2008, Lehman Brothers Holdings Inc. ("LBHI"), the New York based parent company of the Lehman Brothers group, filed for Chapter 11 bankruptcy protection in the US. That same day, Lehman Brothers International (Europe) ("LBIE"), an unlimited company incorporated in England and Wales, an indirect subsidiary of LBHI (and which was reliant on LBHI for funding), entered into administration and Messrs Lomas, Pearson, Schwarzmann and Jervis of PwC were appointed as its Joint Administrators.

RAB Capital

A week later, on 22 September 2008, an application was brought before the Companies Court in London by the UK listed hedge fund manager, RAB Capital plc, and its master fund, RAB Capital Market (Master) Fund, in a claim they had initiated against LBIE. RAB Capital's claim concerned two US Treasury Bills that it had deposited with Lehman Brothers in its role as prime broker to RAB Capital's fund. The Treasury Bills in question, worth US$45mn and US$5mn, had maturity dates in mid-September 2008 and December 2008 respectively and RAB Capital sought an order that it be entitled to the redemption proceeds of the US$45mn Bill and the rights constituted by the US$5mn Bill.

RAB Capital had asked the Companies Court to determine, on an expedited basis, its rights in relation to the US Treasury Bills. The application brought by RAB Capital on 22 September 2008 was for directions as to the conduct of such an expedited determination. In particular, RAB Capital asked the Companies Court to fix a hearing for 26 September 2008 for the substantive hearing of its application. RAB Capital said that the matter was particularly urgent as it needed to publish details of its net asset value ("NAV") by 1 October 2008 and, if the redemption proceeds had not been recovered by then, then the NAV calculation would have to be suspended with severe consequences for RAB Capital and investors in its funds.

Mr Justice Morgan refused the application for the urgent fixing of a hearing to determine the substantive claim. He gave two reasons, namely: (1) that the Joint Administrators, as officers of the Court, had the job of appraising RAB Capital's claim, dealing with it and giving effect to such rights as were clearly established by it. He added that this was not a job for judges of the High Court, if only for the fear of there being a flood of similar applications; and (2) that, in any event, the substantive application was unlikely to be finally determined by 1 October 2008 as there was a preliminary issue as to which Lehman Brothers company actually had custody of the US Treasury Bills.

Four private investment funds

On 3 October 2008, four private investment funds ("the Funds"), all managed in the US, brought an application before the Companies Court against the Joint Administrators of LBIE. The Funds had been customers of Lehman Brothers Inc. ("LBI"), another indirect subsidiary of LBHI, based in New York, and had entered into prime brokerage and margin lending agreements with LBI and/or LBIE. As at the point of entering administration, LBIE had held certain securities belonging to the Funds. As part of the administration procedure, the Joint Administrators had provided the Funds with certain information as to those securities. However, in their application to the Companies Court, heard in mid-November 2008, the Funds sought further and better information from the Joint Administrators as to the state of those securities. The managers of two of the Funds said that the likely implication of such additional information not being provided by the Joint Administrators would be that the two Funds would be "wound down forthwith".

Mr Justice Blackburne refused the application. In his judgment he emphasised that the Joint Administrators should be given a wide measure of latitude to exercise their duties. He also said that it would be contrary to the "nature and purpose" of an administration if the Court were to interfere in the detailed day to day management of the administration in the manner sought by the Funds. He added that, in the absence of wrongful conduct on the part of administrators, it would be for them, rather than the Court, to decide where the balance lay between proceeding with the administration in the interests of all creditors and dealing with legitimate enquiries from individual creditors.

Practical implications

These two decisions provide creditors with a timely reminder that the Courts will be reluctant to intervene during the early course of administrations in the determination of creditors' rights.

This article was originally written for Stephenson Harwood's quarterly publication, Finance Litigation Legal Eye. If you would like to receive this publication, please contact Stephenson Harwood.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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