To Scheme Or Not To Scheme: The Key Issues Considered To Sanction The LBIE Scheme Of Arrangement

Case: Lehman Brothers International (Europe) (in administration) [2018] EWHC 1980 (Ch), Hildyard J (27 July 2018)

The High Court sanctioned a complex scheme of arrangement ("Scheme") under the Companies Act 2006 ("CA 2006") in relation to Lehman Brothers International (Europe) ("LBIE"). The Scheme had as its purpose the compromise of unresolved litigation so as to enable distribution of surplus funds remaining in the LBIE estate. The High Court examined issues relating to class composition, the fair representation of classes and the overall fairness of the Scheme.

This alert is relevant to companies in financial distress and their directors and creditors, as well as insolvency practitioners.

Key Takeaways

The Scheme affected the recoveries of creditors of, and shareholders in, LBIE. Key takeaways from the decision include:

1. Classes: a properly constituted class requires an assessment of legal rights (not commercial or other interests). A close association of creditors (e.g. where one member of a class is also a member of another class by virtue of a legal right) that may have a commercial incentive to vote in a certain manner cannot, in itself, fracture a class. However, had there been evidence of those creditors being considered "alter egos" of one another, the class may have fractured.

2. Voting in accordance with a 'lock-up agreement': where a lock-up agreement committed creditors within a class to one of two ways in which the class was invited to vote, that fact will not, itself, fracture a class, as it does not necessarily give the locked-up creditors different rights to the other members within the class.

3. Fair representation of a class (special interests): where creditors within a class have a special interest that influences their decision to vote in a certain way, unless the special interest is adverse to or opposes the interests of the remaining members of the class, it will not impugn fair class representation. Further, the Court held that the interest would need to be 'the dominant or causative reason' for the creditors to vote in a certain way.

4. Overall fairness of the scheme (consent fee): where one class of creditor receives a significant consent fee from creditors in other classes, payable upon the Scheme becoming effective, this will not, in itself, impugn the fairness of a Scheme. The Court's approach was to ask if the other creditors received consideration for supporting the Scheme. In this case, the accelerated payment of the Surplus, in itself, was consideration. Further, the commercial assessment of the Scheme was clearly positive as the Scheme was approved by a significant majority of creditors who were not receiving a consent fee; and their commercial assessment of the Scheme could not be called into question.

The Facts

LBIE, the main trading arm of the Lehman Group in Europe, had been in administration since September 2008. LBIE's administration was so successful that it yielded financial resources sufficient to repay the provable claims of creditors in full but also, beyond that, to create a substantial surplus - approximately £6.6 billion in liquid assets and a potential of £1.2 - 1.7 billion in future realisations (the "Surplus"). While the order of priority had been decided in Waterfall I1 (outlined briefly below), a number of issues, including the calculation of certain interest entitlements, remained undecided. Each of the undecided issues affected the calculation of each class of creditors' entitlement to the Surplus and was the subject of numerous ongoing court proceedings (the "Relevant Proceedings"). Until the Relevant Proceedings and any subsequent related appeals had concluded, the Surplus could not be distributed to the various stakeholders and therefore the administration could not be concluded. The Relevant Proceedings showed no prospect of early resolution; on the contrary, they were...