London court to hear £10bn Lehman v Lehman creditors’ claim
Creditors prepare claims as administrators look to distribute £8bn surplus[
A £10bn claim by the administrators of Lehman Brothers’ European operations will come before London courts on Monday, more than eight years after the US investment bank collapsed.
The case pits scores of businesses and thousands of former Lehman bankers, who claim they are still owed money, against the hedge funds and distressed debt investors that bought the investment bank’s European bonds after its collapse.
Lehman failed in 2008 mainly because of its lack of liquidity but its European operations were well capitalised. Since then its senior unsecured creditors have received more than £35bn and PwC, the administrator, is now looking at a potential surplus of between £7bn and £8bn to be distributed to creditors, who are still claiming missed interest and foreign exchange losses.
For an insolvency case this is extremely unusual. In most cases there is not enough money to pay creditors — and so the law in this area remains relatively untested.
On Monday, the London commercial court will hold its first case management hearing for the lawsuit brought by LBIE, which is seeking to recoup any claims it faces beyond its surplus from a separate entity called Lehman Brothers Ltd.
The crucial question for the court will concern the inter-estate legal relationship between the two entities. LBIE was converted into an unlimited liability company many years before its collapse, which it argues means it can claim back any losses against its shareholders — including Lehman Brothers Ltd.
Lehman Brothers Ltd, which has about £400m cash, was the target of a £10bn claim by LBIE in 2014. Philip Marshall, the QC representing Lehman Brothers Ltd, is expected to argue that it was a mistake that led to it owning a single share in LBIE and, as a result, it would be disproportionate to allow the claim against it to proceed.
Related article
UK faces £1.2bn tax loss after Lehman ruling
High Court rejects Revenue case over £5bn in payments to European arm’s creditors
A separate case due to start later this month will rule on Canary Wharf Group’s claim against Lehman Brothers Ltd for unpaid rent on the bank’s former European headquarters at 25 Bank Street.
The complex legal issues thrown up by the process have resulted in a number of cases being heard before the English courts.
Three linked court cases — nicknamed the “Waterfall” proceedings because of the sums of money cascading down to creditors — are now under way. They will help PwC, administrator for both Lehman divisions, determine which potential future claims are entitled to the billions of pounds.
The level of eventual payouts will partly depend on the outcome of the Waterfall 1 case. The Supreme Court is due to rule on the case which centres around whether creditors are entitled to claim against LBIE for any currency losses suffered by them as a result of the decline in sterling, as well as the order of such claims.
A second Waterfall case, due to be heard by the Court of Appeal in April, will decide whether certain agreements in effect release or modify the rights of creditors to interest on their currency conversion claims and whether further interest is payable.
But it is the outcome of a third trial, which is due to start at the end of the month, which will be of greatest interest to businesses such as IT companies, caterers, cleaning groups and law firms that once provided services to the bank through Lehman Brothers Ltd and are still owed money.
Related article
What Lehman Brothers staff did next
The ill-fated bank’s entrepreneurial culture survives in new businesses
So far these creditors, including about 1,000 former fixed-income bankers who were laid off with only the statutory minimum pay-off by administrators, are thought to be owed £100m and have been paid just 1p for each £1 they are owed.
Stuart McNeill, partner at Pinsent Masons, said it was highly unusual that litigation from an insolvency case would go on for so long.
“It’s not just the length of time but it is the sheer scale of legal issues and complexity of them. Lehman had a large number of assets at time of administration but it failed because of lack of liquidity and so it has taken a while to recover assets,” he said.
“The litigation is unusual in many ways because most insolvency cases don’t have surpluses and so the outcome of the lawsuits will have wider applications in future,” he added.
Lehman’s European assets were sold in the aftermath of its collapse, with Nomura taking on most of what remained of Lehman Brothers’ European staff. PwC is expected to work until 2020 on unwinding Lehman if the legal cases continue and are appealed through the courts.
