In re Lehman Brothers International (Europe) (in administration) (No 2); [2009[ EWCA Civ 1161; [2009] WLR (D) 323

COMPANY — Scheme of arrangement — Sanction of court — Company in administration — Administrators proposing scheme of arrangement involving distribution of property held by company on trust — Whether scheme dealing with proprietary claims “a compromise or arrangement” between company and its creditors or any class of them — Whether within jurisdiction of court to sanction proposed scheme — Companies Act 2006, ss 895, 899

In re Lehman Brothers International (Europe) (in administration) (No 2)

[2009[ EWCA Civ 1161; [2009] WLR (D) 323

CA: Lord Neuberger of Abbotsbury MR, Longmore, Patten LJJ: 6 November 2009

The court had no jurisdiction under Pt 26 of the Companies Act 2006 to sanction a scheme of arrangement which extended to the release of rights over property held by the company under a trust since it did not constitute a compromise or arrangement between the company and its creditors within s 899 of the 2006 Act.

The Court of Appeal so held, dismissing an appeal by the administrators of Lehman Brothers International (Europe) (“the company”) against the decision of Blackburne J on 21 August 2009 ([2009] EWHC 2141 (Ch); [2009] WLR (D) 287) that the court had no jurisdiction to sanction a scheme of arrangement proposed by the administrators between the company and certain former clients with proprietary interests in the assets held by or on behalf of the company. The scheme was opposed by the London Investment Banking Association and supported by GLG Partners LP.

PATTEN LJ said that the question whether the court’s power to sanction a scheme of arrangement under Pt 26 of the Companies Act 2006 could extend to the release of rights over property held by the company under a trust was one of statutory construction. The current provisions had remained essentially unchanged since they first appeared in the 1870 Act and there was nothing to suggest that Parliament had recently intended to give them any different or wider meaning. Conceptually no statutory power could be unlimited and, in this case, the statutory jurisdiction was circumscribed by the requirement that the scheme should be an arrangement between the company and its creditors. A “creditor” consisted of anyone who had a monetary claim against the company, which, when payable, would constitute a debt. Contingent claims were included for that purpose. Someone with a purely proprietary claim against the company was not its creditor in any conventional sense. As a matter of ordinary language a creditor was someone to whom money was owed. The use of that word with that meaning was a long-established and essential part of English company law. The Companies Act (and now the Insolvency Act) regime for the administration of insolvent companies and their assets depended upon being able to identify creditors and not to confuse them with those whose property rights did not fall into the insolvent estate: see Barclays Bank Ltd v Quistclose Investments Ltd [1970 AC 567. Given that “creditor” was not defined in the legislation, it was inconceivable that Parliament should have used the word in the 2006 Act in any but its literal sense. An arrangement between a company and its creditors had to mean an arrangement which dealt with their rights inter se as debtor and creditor. That formulation did not prevent the inclusion in the scheme of the release of contractual rights or rights of action against related third parties necessary in order to give effect to the arrangement proposed for the disposition of rights and liabilities of the company to its own creditors. But it did exclude from the jurisdiction rights of creditors over their own property which was held by the company for their benefit as opposed to their rights in the company’s own property held by them merely as security. The reference to a creditor was not intended to act only as a gateway to the inclusion of that person in the scheme nor did s 895 leave the court with jurisdiction to sanction the compromise or removal of rights which the creditor did not hold as a creditor. That would be inconsistent with the express purpose of the legislation to allow the company to re-arrange its contractual or similar liabilities with those who qualified as its creditors. Parliament could not have intended to allow creditors to be compelled (if necessary) to give up not merely those contractual rights but also their entitlement to their own property held by the company on their behalf. A proprietary claim to trust property was not a claim in respect of a debt or liability of the company. The beneficiary was entitled in equity to the property in the company’s hands and was asserting its own proprietary rights over it against the trustee. The trust element in these arrangements could not be merged in some way into the general contractual framework and treated merely as ancillary when considering the limits of the scheme jurisdiction nor (which was more important) did Parliament ever intend to deal with it in that manner.

LONGMORE LJ agreed.

LORD NEUBERGER OF ABBOTSBURY MR delivered a concurring judgment.

Appearances: William Trower QC and Daniel Bayfield (instructed by Linklaters LLP) for the administrators. Richard Snowden QC and Andrew Thornton (instructed by Freshfield Bruckhaus Deringer LLP for the London Investment Banking Association. Anthony Zacaroli QC (instructed by Allen & Overy LLP) for GLG Partners LP by written submissions.

Reported by: Susan Denny, barrister