Lehman Brothers Financial SA (LEHNQ)

[cottonisking]

Wentworth Sons request to put LBIE into liquidation and grab UK surplus! Is this good or bad for the Global Lehman Brothers creditors estate? I do not think the UK courts will let it pass due to the requirements inside this document.

"3 There is one Respondent to the Application, being Wentworth Sons Sub-Debt S.à.r.l., (“Wentworth Sub-Debt” or the “Respondent”) which is part of the
“Wentworth” joint venture which also includes Lehman Brothers Holdings Inc. (“LBHI”) and LB Holdings Intermediate 2 Limited (in administration) (“LBHI2”).

4 LBHI2 is the holder of the following shares in LBIE:
4.1 2 million 5% redeemable Class A preference shares of $1000 each;
4.2 5.1 million 5% redeemable Class B preference shares of $1000 each; and
4.3 6,273,114,000 ordinary shares of $1 each,
representing 100% of the total issued share capital of LBIE.

5 LBHI was the ultimate parent company of the global Lehman Brothers group immediately prior to its bankruptcy in 2008. It remains (directly or indirectly) a shareholder in, and holds creditor interests in respect of, various of the Lehman
Brothers group companies. I understand that it is (directly or indirectly) the principal
creditor of LBHI2.

6 It is the Administrators’ understanding that the Wentworth joint venture, through
various special purpose vehicles, including Wentworth Sons Senior Claims S.à.r.l.,
Wentworth Sub-Debt and Wentworth Sons Equity Claims S.à.r.l., and those
associated with it, holds (i) an interest in ordinary unsecured claims, (ii) the
subordinated debt in the amount of £1.254 billion originally loaned by LBHI2 to LBIE
(the “Sub-Debt”) pursuant to three subordinated debt agreements dated 1
November 2006 giving rise to the Sub-Debt (the “Sub-Debt Agreements”) and (iii)
the preference shares in LBIE. TheWentworth joint venture is commercially focused
on enhancing the amount of the Surplus (as described below) and reducing the
claims of ordinary creditors, thereby seeking tomaximise the funds available to repay
the Sub-Debt and be paid in respect of the shares in LBIE. Wentworth Sub-Debt is
the holder of the Sub-Debt.
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35 The issues in the Application principally arise out of the Supreme Court’s ruling in
respect of the Statutory Interest Lacuna. As described in paragraph 22.4 above, the
Supreme Court ruled that entitlements to Statutory Interest pursuant to Rule 2.88 of
the 1986 Rules that arise in an administration but are unpaid at the end of that
administration cannot be claimed in a subsequent liquidation. In other words, while
a distribution of the Surplus (if it were possible) today would result in substantial
sums (in excess of £5 billion) being paid to LBIE’s admitted unsecured creditors by
way of Statutory Interest (and only thereafter to those ranking lower in the priority
waterfall), a distribution of the Surplus after LBIE was wound up would result in no
payment in respect of Statutory Interest for the period of the Administration, with such
sums instead being paid to the holder of the Sub-Debt and those sitting lower still in
that waterfall.
36 The LBIE Progress Report shows (subject to the caveats and qualifications set out
therein) that, should the Waterfall IIA Court of Appeal Judgment and Waterfall IIC
Judgment be upheld on appeal (or, in relation to the former, there is no further
appeal), the Administrators estimate that Statutory Interest claims on proved debts
will total approximately £5.29 billion (see page 11 of the exhibit). The Administrators
expect, in that event, the remaining Surplus to be sufficient to potentially cover all
liabilities falling to be paid lower in the distribution waterfall than Statutory Interest,
including the Sub-Debt and interest on the Sub-Debt, such that a distribution may
also be made to LBIE’s Shareholders. Based on this estimate, should LBIE be put
into liquidation, and the Statutory Interest Lacuna were to apply, the effect would be
that LBIE’s ordinary unsecured creditors could stand to lose their entitlements to£5.29 billion, which will instead flow down the waterfall to the holder of the Sub-Debt
and, thereafter subject to the quantum of interest on the Sub-Debt, the holder of
LBIE’s shares, i.e., in both cases, members of the Wentworth joint venture structure.
37 The Administrators consider that putting LBIE into liquidation at this stage would in
the circumstances not be in the interests of LBIE’s creditors as a whole. Having
considered the Supreme Court’s decision on the Statutory Interest Lacuna Issue,
and following queries from a number of LBIE’s creditors who were concerned about
that point, the Administrators posted an update to creditors on the LBIE website on
23 June 2017 stating that they would object to any attempt to force the premature
liquidation of LBIE. A copy of that update is at pages 71 to 74. The Administrators’
reasons for taking this position are set out in that update and are briefly as follows:
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38 On 30 June 2017, Wentworth Sub-Debt’s legal representatives (“Kirkland & Ellis”)
wrote to the Administrators’ legal representatives (“Linklaters”) stating that
Wentworth would be amenable to discussing a settlement of the Waterfall II
proceedings involving accelerated payments of Statutory Interest subject to a
discount for that acceleration and for the risk that LBIE may enter liquidation (i.e. in
respect of the potential adverse effect of the Statutory Interest Lacuna). Kirkland &
Ellis noted in that letter that paragraph 79(2)(c) of Schedule B1 to the Act requires
the Administrators to make an application to Court for their appointment to cease if
a creditors’ decision requires them to do so, and that the holder of 10% of the total
debts of LBIE could require the Administrators to seek such a decision (by reason of
paragraph 56(1) of Schedule B1 to the Act). Kirkland & Ellis went on to state
Wentworth Sub-Debt’s apparent belief that it would be able to cause the
Administrators to make an application under paragraph 79(2)(c) of Schedule B1 to
the Act.
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48 The first and most fundamental of these is whether the Administrators are obliged to
comply with Wentworth Sub-Debt’s purported paragraph 56(1) request in
circumstances where the Administrators consider that the request would frustrate
the achievement of the purpose of LBIE’s Administration and/or not further the proper
operation of the LBIE Administration (or the LBIE estate more generally) and that the
request would therefore not be conducive to the aim of doing justice as amongst all
parties interested in the LBIE estate.
49 The Administrators have been seeking to achieve the purpose of the Administration
with the objective of achieving a better result for LBIE’s creditors as a whole than
would be likely if LBIE were wound up without it first being in administration. The
Administrators believe that the distribution of the Surplus in payment of entitlements
to Statutory Interest on proved debts would further achieve this objective, and thatthe paragraph 56(1) request, which is designed to trigger the Statutory Interest
Lacuna, would not further the proper operation of the Administration; on the contrary,
it would run counter to it (not least where a liquidation at this stage would achieve a
worse outcome for LBIE’s creditors as a whole than concluding the distribution of the
Surplus in the Administration). The potential loss to senior creditors of £5.29 billion
of Statutory Interest entitlements, in the Administrators’ opinion, would amount to an
injustice which far outweighs any benefit to creditors which might arise from any
supposedly swifter resolution that a liquidation might be said to offer. There are other
disadvantages to putting LBIE into liquidation and, in the Administrators’ view, no
genuine advantage, and certainly none that justifies accepting the risks and
disadvantages of such a step.
50 It seems to the Administrators (and Wentworth Sub-Debt have not suggested
otherwise in their correspondence) that the only parties that might benefit from the
proposed steps are the members of the Wentworth joint venture in their capacities
as holders of the Sub-Debt and/or LBIE’s shares1. Indeed, triggering the Statutory
Interest Lacuna, in order to bring about those advantages that would benefit only
Wentworth Sub-Debt and its associated entities, appears to be the sole motivation
for the steps now being taken.
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64.1 based on a time estimate of one day (in respect of just the first issue identified
above) in February 2018 in the normal course or in January 2018 on an
expedited basis; or
64.2 based on a time estimate of two to three days (if determining all the issues
above) in late February or March 2018.
65 As mentioned above, the Court may wish to consider dealing with the first issue in
the Application first, on an expedited basis, given that it is the most important issue
and will, if decided in the Administrators’ favour, make it unnecessary for the Court
to determine the remainder of the issues in the Application."

https://www.pwc.co.uk/business-recovery/administrations/lehman/rd15-witness-statement-sealed.pdf