Court of Appeal

Published November 12, 2009

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

Before Lord Neuberger of Abbotsbury, Master of the Rolls, Lord Justice Longmore and Lord Justice Patten

Judgment November 6, 2009

A scheme of arrangement under Part 26 of the Companies Act 2006 required the arrangement to be made between the company and its creditors. Former clients of the company with proprietary interests held by the company in trust were not creditors, with the result that the court had no jurisdiction to sanction a scheme of arrangement which included those proprietary interests.

The Court of Appeal so held, dismissing an appeal by the administrators of Lehman Brothers International (Europe) against the decision of Mr Justice Blackburne ([2009] EWHC 2141 (Ch)) that the court had no jurisdiction to sanction a scheme of arrangement proposed by the administrators between the company and former clients who had proprietary interests in the assets held by the company or on its behalf. The London Investment Banking Association opposed and GLG Partners LP supported the scheme.

Mr William Trower, QC and Mr Daniel Bayfield for the administrators; Mr Richard Snowden, QC and Mr Andrew Thornton for the London Investment Banking Association; Mr Anthony Zacaroli, QC, for GLG Partners LP by written submissions.

LORD JUSTICE PATTEN said that whether the court’s power to sanction a scheme of arrangement under Part 26 of the Companies Act 2006 could extend to the release of rights over property held by the company under a trust was a question of one of statutory construction.

Since they first appeared in the Joint Stock Companies Act 1870, the current provisions had remained essentially unchanged and there was nothing to suggest that recently Parliament had intended to give them any wider or different meaning.

No statutory power could be conceptually unlimited and the statutory jurisdiction was circumscribed in this case by the requirement that the scheme should be an arrangement between the company and its creditors.

A “creditor” was anyone with a monetary claim against the company, which, when payable, would constitute a debt. For that purpose contingent claims were included.

Someone with a purely proprietary claim against the company was not in any conventional sense its creditor. As a matter of ordinary language a creditor was someone to whom money was owed.

The use of the word “creditor” with that meaning was an essential and long-established part of English company law. The regime for the administration of insolvent companies and their assets in the 2006 Act, and now the Insolvency Act 1986, 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).

As “creditor” was not defined in the legislation, it was inconceivable that Parliament should have used the word in any but its literal sense in the 2006 Act. The meaning of an arrangement between a company and its creditors had to be an arrangement which dealt with their rights inter se as debtor and creditor.

That formulation did not prevent the scheme from including the release of contractual rights or rights of action against related third parties necessary for the purpose of giving effect to the arrangement proposed for the disposition of rights and liabilities of the company to its own creditors.

However, it did exclude from the jurisdiction rights of creditors over their own property which the company held for their benefit as distinct from their rights in the company’s own property which they held merely as security.

His Lordship rejected the submission for the administrators that the reference to a creditor was intended to act as no more than a gateway to the inclusion of that person in the scheme and that section 895 left the court with jurisdiction to sanction the compromise or removal of rights which the creditor did not hold as a creditor.

That would not be consistent with the expressed purpose of the legislation which was to permit the company to re-arrange its contractual or similar liabilities with those who qualified as its creditors.

It could not have been the intention of Parliament 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 did not constitute a claim in respect of a debt or liability of the company. The beneficiary had an entitlement in equity to the property in the company’s hands and was asserting its own proprietary rights over that property against the trustee.

It was not possible to merge in some way the trust element in these arrangements into the general contractual framework and to treat them merely as ancillary when considering the jurisdictional limits of the scheme, nor, which was more important, did Parliament ever intend to deal with it in that way.

Lord Justice Longmore agreed. The Master of the Rolls delivered a concurring judgment.

Solicitors: Linklaters LLP; Freshfields Bruckhaus Deringer LLP; Allen & Overy LLP.

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