Client money & assets update - Scheme of Arrangement - Scheme Jurisdiction Judgment: Overview and Q&A - 25/08/09

On 14 July, the Joint Administrators made an application to the High Court concerning the jurisdiction of the court to sanction a scheme of arrangement (the "Application") dealing with property held on trust by LBIE.  A public hearing of the Application took place before Mr Justice Blackburne at the Royal Courts of Justice on 29 and 30 July 2009.  Counsel for LBIE and the Joint Administrators and Counsel for GLG Partners LP, as a representative of the scheme working group of creditors, made representations in support of the Application.  Counsel for the London Investment Banking Association made representations in opposition of the Application.

The High Court handed down its judgment in relation to the Application on 21 August.  Mr Justice Blackburne concluded that, "Insofar as the scheme is concerned with the distribution by LBIE of property held or controlled by it on trust for its clients (and seeks to do so in ways that will vary or, in some cases, extinguish those rights), there is no jurisdiction to enable this to be done, so as to bind dissentients..." under Part 26 of the Companies Act 2006.  A copy of the full judgment is available here.

Mr Justice Blackburne has, however, given leave to appeal.  In his judgment he noted, "Given the exceptional problems that the administrators face in dealing with client assets and the very great effort that they have devoted to devising a means... to bring about speedy return of those assets, this is not a conclusion which I am happy to reach.  But I must set out the law as I see it, not as I wish it to be." 

The Joint Administrators, having consulted with their legal advisers and representatives of the creditors' working group, intend to appeal the decision. In parallel, the Administrators, their legal advisers and representatives of the creditors working group will be assessing whether the current scheme can be revised to eliminate the jurisdictional problem and still facilitate the return of assets to clients or whether an alternative approach incorporating many features proposed in the current scheme should be adopted.  The Joint Administrators are also continuing to return assets to clients through bilateral negotiations.

The return of client assets remains a core objective of the Joint Administrators.  The proposed scheme sought to materially reduce the time required to return assets to clients.  The judgment is a disappointment but does not affect our commitment to deliver the most effective solution.

Q&A;

1. Who is affected by this judgment?

Answer - Only creditors with segregated assets held by LBIE would have been covered by the scheme of arrangement.  We estimate this population to be approximately 600 clients.  Those clients with dormant accounts or flat positions were notified that they were not part of the scheme population.

2. Are the Administrators now giving up on the idea of a scheme of arrangement?

Answer - No.  The proposed scheme sought to reduce significantly the period clients have to wait before they get their assets back. This judgment is disappointing as it could create further delay for many of LBIE's clients.  We are considering the extent to which the structure of a Part 26 Companies Act 2006 scheme can be modified to address the issues highlighted by the ruling such that it would be within the Court's jurisdiction and still achieve this benefit.

3. Will the Administrators appeal against the judgment?

Answer - Yes, we intend to do so. Together with our legal advisors and creditors' working group, we are assessing thejudgment and developing the grounds for appeal.

4. Do the Administrators believe that an appeal would be successful?

Answer - We believe that the scheme of arrangement will benefit both trust property claimants and general creditors of the estate by significantly reducing the period creditors have to wait before they get their assets back and eliminating many of the outstanding uncertainties.  While it is not possible to say with any certainty whether an appeal will be successful or not, we are advised that there are appropriate grounds for an appeal.

5. Assuming the Administrators are successful in their appeal, how long will this delay implementation of a scheme?

Answer - Subject to the availability at court, we would hope that an Appeal hearing could be held on an expedited basis in November 2009.  However, if the appeal is successful, there remain a number of further steps.  We will seek court approval to convene meetings of the scheme creditors where they can vote upon the scheme.  There would then be a further court hearing at which we would ask the court to sanction the scheme.

Accordingly, if the appeal is successful, the earliest a scheme is likely to become effective is the first quarter of 2010 (i.e. a delay of at least three months).

6. What happens if the appeal is unsuccessful?

Answer - As mentioned above, we will be exploring alternative options in parallel with the appeal process.  If the appeal is unsuccessful we will in due course provide further information on the timing and consequences of pursuing an alternative asset distribution process.  We are actively considering alternatives in parallel to pursuing the appeal, so as to minimise, as far as is possible, further delay should the appeal not be successful.

7. Can the present proposed scheme be adapted so that it can be promoted irrespective of the adverse jurisdiction judgment?

Answer - Yes, this is possible but its effect would be narrower.  Many elements of the scheme are unaffected by the judgment and can be incorporated in a revised scheme for which the Court does have jurisdiction.  We are considering with our legal advisers how a revised scheme can be developed to work with alternative arrangements that deal with the proprietary rights elements.  This alternative approach is likely to result in the asset return process being more time consuming.

8. What will happen to trust property claims in the absence of a scheme of arrangement? 

Answer - As at the moment, the Joint Administrators will continue to engage clients in bilateral negotiations resulting, where possible, in the release of assets.  However, as referenced in Steven Pearson's witness statement (ref. SAP2) of 25 February 2009 beginning in paragraph 76, this will continue to involve indemnities being provided by clients to LBIE and client credit support, which the scheme would eliminate.  In addition, as noted above, we will be considering the extent to which the structure of the scheme can be modified to address the issues highlighted by the ruling as well as looking into alternative arrangements to facilitate the return of assets to clients.

9. What should I be doing to facilitate the return of my trust property?

Answer - If you believe you have assets or money held by LBIE and have not submitted a claim, please send your positions and balances by email only on a standardised MS Excel form (more information is provided in the client money and assets update 15/10/08). Please also provide electronic copies of any written contracts you have with LBIE as well as any other relevant documentation.  Where clients have derivative or financing arrangements with LBIE, they should provide valuations in line with the contractual terms.

10. Mr Justice Blackburne referred to the 'very great effort' that had been dedicated by the administration to the scheme of arrangement.  Will this effort be put to good use?

Answer - All of the effort expended on the scheme will still be of benefit as the scheme was simply the framework into which the various methodologies were packaged to speed up the process for the release of trust assets.  The work to date establishing client positions including implementing standard procedures, progressing failed trades, corporate actions and valuations, among other issues, is fundamental to the release of assets and forms an ongoing part of the asset return process whatever ultimate framework is used. 

11. Who will pay for the costs of developing the scheme?

Answer - The High Court previously ordered that the costs of the proposed scheme of arrangement will be paid either out of the trust assets or by the general estate.  The costs of the administration are reviewed regularly by the Creditors' Committee and are summarised in the Joint Administrators progress reports the next of which will be issued in October 2009.    

12. I continue to receive correspondence regarding client assets, client money and other matters.  What should I do with these?

Answer - You should continue to address all correspondence from the Administrators promptly to ensure that your claims are handled correctly and to avoid any further delays in dealing with your claim.

13. I have received recent correspondence asking for valuation statements.  Do I still need to deal with this?

Answer - Yes.  In order to close out positions the Joint Administrators still need to agree valuations on all financial contracts.  You should study all correspondence carefully and the Administrators encourage all creditors to provide LBIE with valuations in a timely fashion.  Where your contracts are terminated you should submit valuations in accordance with your contracts.  The Administrators are reviewing the basis of valuations and will contact you with more information in due course.

14. Will you still crystallise my unsecured claims in the absence of a scheme of arrangement?

Answer - The scheme would have required creditors to close out all open positions by a set deadline and agree claims against LBIE.  Irrespective of the timing of any scheme or alternative arrangements, this work continues to be necessary in order to return assets to clients.  We therefore encourage all clients to provide such future information to the company as is required to achieve this objective.  We will distribute any further updates on this matter in due course. 

15. LBIE has submitted an omnibus claim to LBI on behalf of LBIE's clients and it was intended that assets returned under SIPA would be returned through the scheme.  Will this process now be disrupted?

Answer - The judgment does not affect the relationship between LBI and LBIE.  We are continuing to work with LBI to recover assets custodied with LBI and it is the SIPA Trustee's intention to deliver assets to LBIE.  As part of our ongoing work we will develop mechanisms to enable such assets to be returned to you.

Further notifications:

We are conscious that the delay brought about by this judgment creates further uncertainty for clients.  We intend to share the details of our progress in dealing with this matter with you and your trade associations as we and your creditors' working group make decisions.  You are encouraged to regularly check this website for further updates over the coming weeks.  We will also distribute any updates through both the MFA and AIMA. Please direct any further questions to generalqueries@lbia-eu.com.