Client Money and Assets Update- High Court Application regarding post-administration money 17/07/09

On 16^th July 2009, the Joint Administrators made an application to the High Court seeking directions on the treatment of certain money received by LBIE after the time it entered administration.  A copy of the Application and the supporting Witness Statement of Andrew P Clark can be found by clicking the links.

The Application relates to money (for example, redemption proceeds, dividends or coupons) received by LBIE post-administration in respect of securities held by LBIE as custodian under certain versions of the International Prime Brokerage Agreement: Charge Version ("Charge IPBA").

Many of the Charge IPBA's LBIE entered into with clients contain language intended to ensure that all cash received by LBIE under the agreement is received under a total title transfer arrangement.  This means that, where this language is present, any cash received by LBIE will not benefit from client money protection or otherwise be held on trust and any recovery would be against the general estate.

The Application asks the extent to which this provision should apply to money received after the administration.  More specifically, the Application asks whether such money should be treated as:

1. held on trust for a client, either pursuant to the FSA client money rules or otherwise;
2. a liability of LBIE which is payable as an "administration expense".  This would mean that the repayment of this money would rank senior to unsecured creditors; or
3. LBIE money, therefore leaving the client solely with an unsecured claim on the general estate.

An affected client may want the court to direct that 1 or 2 above is the correct treatment of the money.  Conversely, a general creditor may want the court to direct that 3 is the correct treatment, since this may maximize the money available to unsecured creditors.

Since the administration, a significant amount of money has been received by LBIE in respect of securities held by LBIE as custodian and the Joint Administrators expect that this will continue.

The Application has been issued without any named respondents.  However, the Joint Administrators believe the active engagement of clients and creditors affected by the issues raised in the Application is important and would encourage clients and creditors with the relevant contractual documentation to review the Application and supporting evidence, and to consider making representations to the Court.

If you are interested in being a respondent to the Application please email clientpositionresponses@lbia-eu.com.  Please include "Post-Administration Client Money Application" in the subject line of your e-mail.

The Application has been listed to be heard in the week commencing 5^th October 2009.

FAQ's

Q:  How can I tell if the Application may be relevant to me?

A:  The Application may be relevant if LBIE held securities as custodian for you under a Charge IPBA which contains the relevant provisions.  The provision is only included in the "Charge Version" of the IPBA and not in the "Title Version".  Typically (but not always) the provision was set out in clause 5.2 of the Charge IPBA.

Q:  I have an IPBA which is a Title Version.  Is this Application relevant to me?

A:  Not directly, in that the relevant clause is only contained in some versions of the Charge IPBA.  However, as you may be a general creditor you may be interested in making representations in support of the general estate position.

Q:  I understand securities held for me were re-hypothecated by LBIE prior to its administration.  Does this make a difference?

A:  Yes.  The Application relates to money received by LBIE in respect of securities that were held by LBIE as custodian pursuant to the Charge IPBA.  If your securities were re-hypothecated title transferred to LBIE and they are no longer held by it as custodian.

Q:  How does this relate to the Joint Administrators High Court Application of 1^st May 2009 on pre-administration client money?

A:  It doesn't.  This application relates only to money received post administration.  The 1^st May application relates to pre-administration client money.

Q:  How does this relate to the Scheme of Arrangement proposed by the Joint Administrators on 14^th June 2009?

A:  One of the things that the Scheme of Arrangement seeks to address is the return of post-administration client money.  The scheme will be structured such that it is consistent with the directions obtained in connection with this Application.