High Court Rejects Lehman Brothers Proposal For Scheme Of Arrangement

The latest decision in the administration of the UK arm of Lehman Brothers ("LBIE") was handed down in late August. The Chancery Division ruled that the court did not have the necessary jurisdiction to sanction the scheme of arrangement which the administrators had proposed for the return of trust assets.

The administrators at PwC have reported that one of the major obstacles to the completion of the administration process is the huge volume of securities held by LBIE in trust for clients. These include prime services clients, those who have deposited securities with LBIE under safe custody arrangements and market counterparties who have posted collateral with LBIE. Not only is there is a huge volume to be dealt with, but the problem is also said to be compounded by deficiencies in LBIE's records and a significant number of clients who have yet to respond to the administrators' requests for statements of what clients understand their own asset positions to be.

This led the administrators to propose a scheme of arrangement which would have provided a system for the resolution of each trust client's position and for analysing any shortfalls in securities over which more than one client had a claim. It would also have included a bar date by which trust client claims were to be submitted so that the scheme would then have been free to proceed.

It was argued for the administrators that the scheme would be confined to clients who not only had proprietary claims but also had pecuniary claims. This gave a potential hook whereby the clients in question could be said to be creditors and therefore covered by section 895 of the Insolvency Act 1986, the statutory provision enabling such a scheme.

However, this raised the fundamental question of whether the court could authorise such a scheme in respect of assets which were not the property of the company in administration but simply held in trust for clients. The arguments against the scheme being permitted were put by the London Investment Banking Association, whose members were particularly affected by the decision.

The judge identified three reasons in particular why the proposed scheme would interfere with the proprietary rights of trust clients. Firstly, clients in the scheme would have to renounce their rights to particular batches of securities which had been bought in their name and instead claim against a pool of identical securities, potentially resulting in a shortfall. Secondly, the bar date...