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In The Matter Of LB Holdings Intermediate 2 Ltd (In Admin) : In The Matter Of Lehman Brothers Ltd (In Admin) : In The Matter Of Lehman Brothers Ltd (Europe) (In Admin) :In The Matter Of Lehman Brother


Proposals to settle a number of inter-company claims in the Lehman Brothers group administration were approved where the outcome would be to expedite the distribution to unsecured creditors without any reserve having to be made for future contribution claims. Moreover, the administrator of each company had been able to form an independent view that the proposed settlement would benefit the estate in respect of which they had been appointed, so that there was no conflict of interest.


The joint administrators of four companies within the former Lehman Brothers group applied for directions in respect of a proposed settlement of inter-company claims.

Following the collapse of the Lehman Group in 2008, a substantial surplus arose in the administration of one of the companies (L1), which had been the group's principal trading company in Europe. L1 was wholly owned by L2 except for one ordinary share which was registered to L3. There were complex claims between the various companies in the group. In 2013, in proceedings known as Waterfall I, the administrators of L1, L2 and L3 applied for directions in relation to the surplus. The issues in dispute included the scope of contribution claims pursuant to the Insolvency Act 1986 s.74 and the ranking of L2's subordinated debt claim as against L1's obligation to pay statutory interest to unsubordinated creditors. In 2014, further proceedings known as Waterfall II were brought by L1's administrators. In 2016, by an application known as Waterfall III, they applied for directions as to whether the obligations of L2 and L3 extended to the making of a contribution to enable L1 to pay an unsecured subordinated claim. Judgment was given on Waterfall I and was adverse to L1's prospects of success in relation to its contribution claim. A settlement proposal was made to resolve the various inter-company claims and make a single composite distribution to the group's unsecured creditors without the need for L2 and L3 to make a reserve for any future contribution claims by L1. A number of the joint administrators of the companies participating in the proposed settlement were also administrators of other companies in the group. To mitigate the risk of a conflict of interest arising should a single administrator be asked to decide whether to accept the proposed settlement from the perspective of more than one administration, each of the parties to the proposed settlement authorised a single administrator to take primary responsibility for the negotiations and to determine whether the settlement benefited the creditors of that party separately.


Scope of powers - Schedule B1 para.60 and Sch.1 para.18 of the 1986 Act empowered administrators to enter into settlement agreements and compromises for the benefit of the companies over which they had been appointed and their creditors. It was not the court's function to become involved in the merits of the decision or to determine whether a proposed settlement was the best available; however, any proposed settlement had to be rational and free from conflicts of interest (see paras 27, 29-31 of judgment).

Conflicts of interest - The steps taken by the parties to minimise conflicts of interest enabled them to consider the global benefits of the proposed settlement. Each of the designated administrators had formed an independent view, with the benefit of legal advice, as to whether the proposed settlement would benefit the estate in respect of which they had been appointed and had been able to form an opinion free of any conflict of interest (paras 33, 35-36).

Rationality - The proposed settlement would give L1 certainty in relation to the contribution claims and would mean that many of the issues in Waterfall III would not require determination by the court, avoiding the need for further expenditure on costs. Moreover, the distribution to the unsecured creditors would be expedited. Although L1's administrators would be required to give up any right they might have to object to distributions by L2 and L3 without any reservation being made for a future contribution claim, that potential disadvantage was outweighed by the advantages of the proposed settlement. In any event, it was common ground that a contribution claim by L1 against L2 or L3 had become highly unlikely because the making of such a claim under s.74 was exclusively a liquidator's remedy and was not available to an administrator. Accordingly, L1's administrators lacked standing to object to the making of distributions by L2 and L3 to their creditors. It was also highly unlikely, in the light of the judgment in Waterfall I, that L1 would move into liquidation. Even if it did, any contribution claim that might be made by L1's liquidators would only have value if it were established in the pending appeal in Waterfall II that there was a non-provable claim to damages which exceeded the amount of L1's surplus. Moreover, no creditors had objected to the proposed settlement. It was apparent that considerable thought had been given to the proposals, which were within the administrators' powers, and that each of them genuinely believed that the settlement would benefit the relevant company and its creditors. Directions for the proposed settlement were therefore given (paras 38, 46-49, 52, 54-56).

Directions given

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03 Aug 2017

Chancery Division (Companies Court)
Hildyard J

LTL 29/8/2017 : [2017] 8 WLUK 50 : [2018] 2 BCLC 541

Rosanna Foskett