On what basis will the court accede to requests from creditors or parties with an interest in property to interfere with the day-to-day management of a company in administration? This was the question faced by Mr Justice Blackburne in the recent case of Re Lehman Brothers International (Europe) [2008] EWHC 2869 (Ch).
Facts
On 15 September 2008, Lehman Brothers Holdings Inc filed for bankruptcy protection in the US under Chapter 11 of the US Bankruptcy Code. This had catastrophic effects on other companies within the Lehman group, including Lehman Brothers International (Europe) (LBIE), an unlimited company incorporated in England and Wales that operated as the principal trading company of the Lehman group in Europe. LBIE relied on its ultimate US parent company for funding and its collapse into insolvency meant that LBIE had to go into administration on the same day.
As part of its services, LBIE had entered into prime brokerage and margin-lending contracts with its clients. Pursuant to those contracts, securities held by the clients were transferred to LBIE, which was authorised to make loans to the relevant client with the securities being used as collateral for their repayment. Under the terms of the relevant contractual arrangements, LBIE was also authorised to re-use the securities and to lend them to itself or to others.
The applicants in the proceedings were private investment funds managed in the US who were prime brokerage clients of the Lehman group, and on whose behalf LBIE held securities of ‘very considerable’ value as at the date that LBIE went into administration. Ultimately, the applicants sought a return of their property but first wanted to obtain further information from the administrators of LBIE as to the status of their securities. Having been faced with what the applicants described as a ‘marked reluctance’ on the part of the administrators to assist them in this regard, the applicants sought an order from the court requiring the administrators to provide a written statement setting out various items of information relating to their securities. In support of that application, it was asserted that the information must have been available to the administrators and that it was required to enable the applicants to be:
‘Properly informed about the state of their property to decide what, if anything, to do next in the bests interests of their investors.’
The applicants went on to state that some of their funds may have needed to be wound down if the respective managers were not provided with substantially more information regarding the securities than was currently being made available, so as to enable the applicants to give assurances to the funds as to the likelihood of the time by which the secured property was to be recovered.
The administrators opposed the application. LBIE had in excess of a thousand prime brokerage clients who had similar relationships with LBIE as each of the applicants. The process of investigating and obtaining definite information about the status of client securities was complicated, and the administrators had already obtained a separate court order giving them directions for identifying and returning assets belonging to brokerage clients. The administrators stressed that the arrangements for dealing with the return of property had to be considered in the context of the affairs of all clients generally and that devoting a disproportionate amount of resources to dealing with bespoke enquiries from one particular client would mean that the process of investigating and returning client property would be delayed as a whole.
Decision
The application for an order requiring the administrators to provide further information regarding the securities was made primarily on two grounds, namely under paragraph 74(1)(b) and under paragraph 68(2) of Schedule B1 to the Insolvency Act 1986.
Paragraph 74 relief
Paragraph 74(1)(b) of Schedule B1 states as follows:
1) A creditor or member of a company in administration may apply to the court claiming that:
a) the administrator is acting or has acted so as unfairly to harm the interests of the applicant (whether alone or in common with some or other members or creditors); or
b) the administrator proposes to act in a way that would unfairly harm the interests of the applicant (whether alone or in common with some or all other members creditors).
…3) The court may:
a) grant relief.
…4) In particular, an order under this paragraph may:
b) require the administrator to do or not to do a specified thing…’
The applicants contended that the decision of the administrators to refuse to provide the further information that they had requested would unfairly harm their interests in their capacity as creditors of LBIE. This argument was rejected by the court. While accepting that the refusal to supply the requested information would be harmful to one or more of the applicants, the court nevertheless held that the harm that would be caused was not unfair within the meaning of paragraph 74(1)(b). In this regard, Mr Justice Blackburne stated that the concept of unfairness needed to be considered in the context of the obligations on the administrator to perform his functions with the object of achieving the purpose of the administration. In the present case, that object was to achieve a better result for the creditors of LBIE as a whole rather than would be likely if LBIE were wound up. Given that there was no evidence that the administrators were not acting in good faith in carrying out those functions, Mr Justice Blackburne found that it was ‘exceedingly difficult’ to see how the unwillingness of the administrators to devote a disproportionate amount of time and resources to dealing with requests for information from a particular group of creditors could be said to be unfair. On this basis, the application made pursuant to paragraph 74(1)(b) failed.
Paragraph 68 relief
As an alternative, the applicants relied on paragraph 68(2) of Schedule B1 pursuant to which the court is given jurisdiction to give directions to an administrator in connection with any aspect of his management of the company’s affairs, business or property. As a preliminary point, Mr Justice Blackburne held that any person with a genuine and legitimate interest in the directions sought could apply under that paragraph and that no suggestion had been made that the applicants did not so qualify. However, he also held that:
- in addition to the need to deal with property to which the company was beneficially entitled, the powers and duties of the administrators extended to property which the company held on behalf of other parties and included a duty to ensure that such property was properly secured and accounted for to those entitled to it;
- the administrators were required to perform their functions in the interests of the creditors of the company as a whole; and
- within the confines of their duties, and subject to any proposals that had been approved by the creditors, the administrators had to be afforded a wide measure of latitude in the way they went about the exercise of their powers so as to achieve the statutory purpose of the administration. In this regard, Mr Justice Blackburne stated that the task to be performed by the administrators would:
‘Become quite unmanageable… if he is to be at the beck and call of each and every creditor and every asset claimant wishing to be informed about his claim or asset and who expects the administrator to turn aside from the general conduct of the administration and devote time and resources responding to his enquiries.’
Accordingly, and on the basis that there was no suggestion that there had been wrongful or improper conduct on the part of the administrators, it was held that it would be contrary to the nature and purpose of the administration for a court to interfere in the detailed day-to-day management of the administration as requested by the applicants. The application for directions under paragraph 68(2) also failed.
Conclusion
The process of obtaining information from, and the co-operation of, administrators can be frustrating, and creditors or parties with an interest in trust property may often seek to appeal to the jurisdiction of the court with a view to promoting the achievement of their personal objectives. However, it should be borne in mind that administrators are, first and foremost, officers of the court and the decision in Re Lehman demonstrates that, in the absence of wrongful or unfairly harmful conduct on the part of the administrators, the court will be reluctant to interfere with the day-to-day conduct of the administration. The imposition of the statutory moratorium is designed to afford administrators breathing space in which to achieve the purpose of the administration and the court will not normally allow that objective to be prejudiced by the demands of one particular creditor or third party.
By Steven Richards, senior associate, business restructuring and re-organisation, Jones Day.
E-mail: sdrichards@jonesday.com.
Re Lehman Brothers International (Europe) [2008] EWHC 2869 (Ch)
