Lehman Brothers International (Europe) (in administration) announces an application concerning the claims of Barclays Capital Inc in its unsecured and Client Money estates – 7 September 2016

On 5 September 2016, the Joint Administrators of Lehman Brothers International (Europe) (in administration) (“LBIE”) issued an application to the Court for directions (the “Application”), pursuant to paragraph 63 of Schedule B1 of the Insolvency Act 1986, in relation to the treatment of claims received from Barclays Capital Inc (“BCI”).  BCI was named as the Respondent to the Application. 

BCI acquired claims against LBIE as a result of its purchase of the Lehman Brothers Inc (“LBI”) exchange traded derivatives (“ETD”) business in 2008.  This transaction was the subject of extensive litigation in the United States which was finally resolved between LBI and BCI in June 2015. 

The Application seeks the guidance of the Court in relation to the precise nature of BCI’s entitlements as regards the LBIE unsecured and Client Money estates. Once resolved, it will enable LBIE to settle BCI’s claims and determine what rights it has in respect of the surplus in LBIE’s estate (the “LBIE Surplus”).  The most recent LBIE progress report provides relevant details.

The issues to be considered include:

1. The extent to which BCI has a Client Money entitlement in respect of LBI’s ETD trading with LBIE. Certain issues arise from the fact that LBIE did not, prior to its entry into administration, segregate Client Money for LBI, nor indeed any other affiliate, in respect of its non-client ETD trades. A further issue arises from the fact that Korean ETD trades transferred from LBI to BCI were recorded in accounts maintained by LBIE’s branch in Seoul, South Korea, and as a result may not be subject to the CASS Client Money rules.
2. Whether BCI has an unsecured claim in respect of the ETD trades and, if so, on what basis the unsecured claim should be valued if BCI also has a Client Money entitlement in respect of those trades.
3. Whether, in the event that BCI has both an unsecured claim and a Client Money entitlement in respect of some or all of the ETD trades, it is able to elect to pursue its unsecured claim to the exclusion of the Client Money entitlement.
4. Whether, in what manner, and from what date, the $777m payment to BCI from LBI as part of the settlement between BCI and LBI falls to be applied towards the reduction of any of the claims available to BCI.
5. The extent to which BCI has potential entitlements to the LBIE Surplus, including in respect of statutory interest pursuant to rule 2.88(7) of the Insolvency Rules 1986 and other non-provable claims.

BCI will maximise its recovery from LBIE if its proof of debt relating to an unsecured claim for $930m attracts statutory interest and non-provable claims.  If BCI is able to bring such a claim, following the deduction of the $777m payment from LBI BCI’s recovery from LBIE and the LBIE Surplus (subject to certain assumptions and foreign currency exchange rates) may marginally exceed £400m.  There is a range of scenarios in which the estimated recovery is significantly less and could be nil (although the Joint Administrators consider this latter outcome as unlikely to materialise).

The Application and accompanying witness statement in support of the Application, are available by following the links on this page.  The witness statement provides further information as to the factual background to, and the issues in, the Application.  Copies of the exhibit to the witness statement can be provided on request.

• Application Notice
• Witness Statement of Russell Downs

The Application is intended to determine all issues in respect of BCI’s claims against LBIE and BCI is the only named Respondent. If any person wishes to be joined as a party to the Application, or has any comments that they would like the Joint Administrators to consider, please contact LBIE’s legal advisors whose details are on the Application Notice.

Should any party who does not request to be so joined and/or provide such comments subsequently seek to raise arguments relating to the existence or nature of BCI’s claims, there is a risk that such party may be estopped or otherwise precluded from raising such arguments in the future.