Lehman administrators to push consensual scheme as appeal is rejected

PricewaterhouseCoopers (PwC), the administrators for Lehman Brothers International (Europe) (LBIE), is set to go ahead with a consensual scheme of arrangement to expedite the return of assets to secured creditors.

"Following the original judgment, we recognised the proposed scheme was at risk, and in the meantime have worked with the creditors committee of LBIE to develop a credible alternative approach in order to return assets to clients using approximately the same framework of rules and timeline as was contained in the proposed scheme," says Steven Pearson, joint administrator for LBIE and partner at PwC in London.

PwC had an appeal for the approval of a scheme of arrangement rejected by the English Court of Appeal on November 6. Since the original ruling on August 21, PwC has been working on the launch of an alternative consensual plan based on the original scheme of arrangement. As only consenting parties would sign up and subsequently be bound by this scheme, it would not compromise the proprietary rights of secured creditors. It was this breach of proprietary rights that proved to be the major sticking point in the original judgement.

"Alternative proposals were outlined to affected clients during October and will be formally launched in an offer[ing] circular in the coming weeks. Unlike the proposed scheme, the alternative arrangements will only bind those clients who positively elect to sign up," says Pearson at PwC.

In a bid to woo secured creditors, the administrators have already given presentations to the Alternative Investment Management Association in the UK and the Managed Funds Association in the US to explain how the consensual scheme would work. Sources close to the deal say there has been "very positive feedback" so far from secured creditors. It is thought the administrators are aiming to roll out the consensual scheme before the end of November.

This original scheme had looked to expedite the return of trust assets to secured creditors by LBIE, the London-based broker-dealer arm of Lehman Brothers, which held $35 billion worth of client trust assets as of September 15, 2008. By September 20, 2009, PwC had returned around $13.5 billion of trust assets to trust clients via bilateral negotiations. However, returning the rest of the trust assets in such a fashion would be both time consuming and complex. Moreover, only the UK courts can set a deadline for claims against the LBIE estate, leaving those clients who have received trust assets potentially liable to return them in the event other secured creditors emerge from the woodwork at a later date.

Subject to court approval, the scheme of arrangement would have required a majority of 75% in value of the creditors to approve the scheme. Subsequently, a bar date for claims would be set and all claimants would be subject to the same uniform rights under the scheme. As a result, the arrangement would substitute the proprietary rights of creditors with new rights under the scheme, regardless of whether a creditor had voted in favour of it. However, the Royal Courts of Justice ruled that it did not have jurisdiction under Part 26 of the Companies Act 2006 to compromise these proprietary rights (Risk October 2009, pages 28-30).

"Upholding [the] decision that the return of trust assets to Lehman clients cannot be achieved through a scheme of arrangement reaffirms the protection English law gives to trust assets. This important judgment prevents what could have been far reaching and damaging implications for assets held on trust, including assets held under 'safe custody' arrangements," says Simon Orton, partner at Freshfields Bruckhaus Deringer in London.

Orton represented the London Investment Banking Association (Liba) in the proceedings. Liba had objected to the scheme on account of the unforeseen consequences it could have on financial law. Lawyers say approving the scheme could have set an undesirable precedent, which could have created uncertainty around trust assets in a host of other financial structures.