Creditors of Lehman Brothers are facing further delay after a radical plan designed to speed up the investment bank’s administration was shot down for a second time this morning.

The plan, masterminded by Lehman’s administrator, PricewaterhouseCoopers (PwC), and supported by creditors including hedge fund GLG Partners, was rejected by three judges at the Court of Appeal.

They agreed with a previous High Court ruling that said the plan, which must be rubber-stamped by the court, was unacceptable under UK insolvency law.

PwC said it was “disappointed by the ruling which restricts the options available to the administrators for the return of client assets.”

It had previously argued that the scheme would take “years” off the time Lehman creditors would have to wait for the return of their assets.

Steven Pearson, PwC’s lead partner on Lehman, said that while waiting for today’s decision the administrators had continued working with creditors to prepare an alternative plan that would be announced in the coming weeks.

The rejected plan was designed to speed up the return of assets that were frozen when Lehman collapsed on September 15, last year.

About 900 European investment funds that traded through Lehman Europe and held their portfolios at the bank had about $23 billion (£14 billion) of shares, bonds and other financial instruments frozen when the bank collapsed.

How and when these assets should be returned has become the thorniest issue of the Lehmans administration, with many hedge funds claiming that they cannot survive unless their property is returned.

Faced with more claims than there are assets left in Lehman Brothers, PwC devised a plan, structured as a scheme of arrangement, that would allow it to divide what is currently available among creditors. The creditors would receive some assets immediately and file other claims for the remainder.

The plan was controversial because although the assets were held in Lehman, they were held on trust and so are technically owned by the hedge funds.

Under insolvency law the hedge funds are therefore entitled to return of their assets in full unless they agree to accept less through individual consultation with the administrators.

PwC’s scheme asked hedge funds to surrender their ownership rights en-masse, which the court said was unacceptable even if the creditors supported the plan.

The Court of Appeal said the High Court judge “was right to [rule] that he had no jurisdiction to approve the scheme insofar as it was concerned with the distribution of property held or controlled by it on trust for any of its creditors.”

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