Lehman Brothers Australia Ltd v Lomas & Ors, Court of Appeal - Chancery Division, October 24, 2018, [2018] EWHC 2783 (Ch)

Resolution Date:October 24, 2018
Issuing Organization:Chancery Division
Actores:Lehman Brothers Australia Ltd v Lomas & Ors
 
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Case No: 7492 OF 2008

Neutral Citation Number: [2018] EWHC 2783 (Ch)

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

7 Rolls Building Fetter Lane

EC4A 1NL

Date: 24/10/2018

Before:

MR JUSTICE HILDYARD

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Between:

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Philip Gillyon (instructed by Norton Rose Fulbright LLP) for the Applicant

Daniel Bayfield QC, Ryan Perkins (instructed by Linklaters LLP) for the Respondents

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JudgmentMr Justice Hildyard:

The issue for adjudication

  1. The issue raised by this application is as to the ambit of (1) the Court's jurisdiction to prevent unfair harm pursuant to paragraph 74 of Schedule B1 to the Insolvency Act 1986 (``the Act'') and (2) the rule in Ex Parte James (1873-74) LR 9 Ch App 609.

  2. The issue arises in the context of the continuing process of the administration of Lehman Brothers International (Europe) (``LBIE''), and relates to a dispute between LBIE's administrators (``the LBIE Administrators'') and another body corporate in the worldwide Lehman Group, namely Lehman Brothers Australia Limited (``LBA'') acting through its joint liquidators (``the LBA Liquidators''). LBA is an unsecured net creditor of LBIE. Prior to their collapse, both companies were ultimately controlled by Lehman Brothers Holdings Inc. LBIE entered administration in England on 15 September 2008, and LBA entered liquidation in Australia on 2 October 2009.

  3. The particular question for determination is whether the LBIE Administrators should be directed to admit a claim by LBA in a greater sum than that which LBIE and LBA (acting through their respective office-holders) contractually agreed should be admitted for dividend in a Claims Determination Deed (``the LBA CDD'') dated 12 March 2014.

  4. Put shortly, LBA (the Applicant) contends that the sum stated in the LBA CDD (which is £23,355,508) was erroneously calculated and that LBA's claim, properly calculated, is £25,028,091.44. The error did not come to light until discovered by a prospective assignee of the claim following an auction process; but now that it has done so, and it being undisputed that it was the product of simple arithmetic miscalculation, LBA submits that it would be unfair for the LBIE Administrators to take advantage of it. LBA does not found its argument on the general principles of contract law and mistake: only on the statutory jurisdiction and judge-made rule above identified.

  5. The issue thus raises in acute form whether, and if so in what circumstances, the Court may direct its officers not to enforce contractual commitments freely entered into, requiring consideration of a number of authorities, including (in addition to ex parte James itself) Re Wigzell [1921] 2 KB 835, Re Clark [1975] 1 WLR 559, Re T.H. Knitwear (Wholesale) Ltd [1988] Ch 275 and most recently, Re Nortel GmbH [2014] AC 209 and Re LBIE (Waterfall IIB) [2015] BPIR 1162 (``Waterfall IIB''), as well as a decision of my own in Heis v Financial Services Compensation Scheme Ltd [2018] EWHC 1372 (Ch).

    Relevant background facts

  6. The relevant facts have helpfully been set out in a Statement of Agreed Facts. I can take a summary of the most salient for present purposes very largely from that and from summaries in the Skeleton Arguments lodged on behalf of the parties.

  7. There were significant intercompany dealings between affiliates in the Lehman Group. LBA and LBIE held securities on trust for each other, and engaged in various derivatives trades in a variety of different currencies. By the time of LBIE's administration the securities it held for LBA had been liquidated through clearing systems such as Euroclear and Clearstream, giving LBA a claim against LBIE for their value. Conversely, LBIE retained claims against LBA in respect of securities held by LBA on its behalf.

  8. On 25 March 2009, LBIE, acting through the LBIE Administrators, submitted a proof of debt in LBA's liquidation claiming some 109,904,780 Australian Dollars (``AUD''). The claim extended to certain intercompany balances and liabilities arising from certain failed trades, pending trades as well as securities held on its behalf by LBA.

  9. On 31 July 2012, LBA, acting through the LBA Liquidators, submitted a proof of debt in LBIE's administration via an online ``Affiliates Portal'' established by the LBIE Administrators for the submission of proof of debts by other companies in the Lehman Group.

  10. There were certain other claims between LBA and LBIE which have been resolved separately.

  11. The cross-claims between LBIE and LBA gave rise to complex questions of valuation, requiring agreement as regards relevant valuation dates, principles and the pricing sources to be applied.

  12. The LBIE Administrators and the LBA Liquidators sought to agree the claims arising between their respective estates. The office-holders also discussed claims relating to other Lehman Group companies, including Lehman Brothers Australia Finance Pty (``LBAF''). These claims are irrelevant for present purposes. This required the office-holders to carry out an accounting reconciliation exercise. The process began in June 2013, and involved a number of emails and telephone calls between the office-holders.

  13. As part of this process, in October 2013, the LBIE Administrators created an Excel spreadsheet (``the Model'') containing their suggested valuations of the parties' cross-claims. The currency of each claim is specifically identified in the Model, together with various valuation dates. The Model showed how claims denominated in a foreign currency would be converted into Sterling (pursuant to rule 2.86 of the Insolvency Rules 1986).

  14. The Model was a ``dynamic working document that was shared between the parties over a period of time from June to October 2013''. The LBA Liquidators reviewed the Model but did not suggest any changes to it so far as relevant for present purposes.

  15. The figures in the agreed Model can be summarised as follows:

    (1) The LBA Shortfall Claim was quantified in the sum of £28,881,600. This figure represents the value of securities which should have been held by LBIE on trust for LBA.

    (2) The LBIE Unsecured Claims were quantified in the sum of £5,526,092.

    (3) Accordingly, the Model calculated that LBA had a net unsecured provable claim against LBIE for £23,355,508. (There were separate calculations for certain other claims but these are not presently relevant.)

  16. On 30 October 2013, the LBA Liquidators confirmed (by e-mail) their agreement to the value of the unsecured claim to be filed in LBIE's administration, as generated by the Model, with the reservation that the LBA Liquidators were taking legal advice, and would need to seek the approval of their creditors' committee before signing a settlement agreement.

  17. The next step was to agree the formal terms of the settlement. It was agreed that the parties would enter into two settlement agreements known as Claims Determination Deeds (``CDDs''): one to deal with the LBA Shortfall Claims and the LBIE Unsecured Claims on a net basis (the LBA CDD); and one to deal with another claim called the LBA Grange Claim. The settlement of LBIE's proprietary claims was documented separately. For present purposes, the LBA CDD is the critical document.

  18. The LBA CDD was based on a standard form known as the Admitted Claims CDD. The Admitted Claims CDD fixes the ``Agreed Claim Amount'', which is admitted for dividend upon the execution of the deed (and described as an ``Admitted Claim''). Although the LBA CDD was based on a standard form, it was capable of being (and in fact was) negotiated between the parties. The LBA Liquidators have described the negotiation of the LBA CDD as a ``collaborative'' process, involving ``several rounds of comments by the parties'' and discussions with the LBA Liquidators' ``legal advisers''.

  19. CDDs have been used extensively in LBIE's administration in order to settle claims with creditors: see Waterfall IIB at [39] ff (David Richards J), which summarises the forms of CDDs used in the LBIE administration. Over 2,300 CDDs have been executed in total.

  20. CDDs were developed to ``provide finality and certainty ... [CDDs] allow creditors to agree, at this juncture, their total net claim against LBIE without the need for further substantial evidentiary documentation and interaction in support of their claim or to enter into what could become a protracted claims agreement process, especially with regard to the more complex claims.''

  21. Further, ``in recognition of creditors' desire for flexibility'', CDDs contain a mechanism whereby the creditor can transfer its claim to a third party without the need for LBIE's consent. Although LBIE's consent is not required, the LBIE Administrators do acknowledge the transfer using a stipulated form of Transfer Notice. Once the Transfer Notice is completed, the transfer is then recognised by LBIE and recorded in LBIE's records for dividend purposes. This has contributed to the creation of an active secondary market in LBIE debt trading. Of course, transferees will (at least ordinarily) acquire and pay for the transferred entitlement by reference to the amounts and terms as stated in the relevant CDD.

  22. Anthony Lomas, one of the LBIE Administrators, explained to the Court in Waterfall IIB that:

    ``The purpose of the CDDs was to provide an efficient process for agreeing the amount of a creditor's claim. The Joint Administrators also wanted to ensure that, once a claim amount had been agreed, it could not subsequently be reopened by the creditor. From a creditor's perspective, entering into a CDD gave it certainty as to the amount of its claim and, upon the claim becoming an Admitted Claim pursuant to the terms of the CDD, an entitlement to participate in such dividends as would be paid in the Administration. In addition, if the creditor wished to sell its claim, the transfer notice...

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