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Lehman Brothers International (Europe)

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Jennifer Marshall



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13 November 2014

Update from the joint administrators' twelfth progress report dated 10 October 2014 and webinar dated 29 October 2014

On 10 October 2014, the administrators of Lehman Brothers International (Europe) (LBIE) circulated their twelfth progress report (the Report) for the period from 15 March 2014 to 14 September 2014. On 29 October 2014, the administrators hosted a one-hour webinar, providing an update on the current progress of the administration, which included a question and answer session. This bulletin summarises some of the key issues raised in the Report and the webinar, and highlights other key recent developments.

Payment of interim dividends to unsecured creditors

A fourth unsecured creditor interim dividend of 7.8% was paid on 30 April 2014 totalling £0.80bn, with further ‘catch up’ dividends of £1.81bn being paid in the Report period. This brings the total cumulative dividend rate paid to 100%, and now leaves the surplus to be distributed. Many issues concerning entitlement to the surplus remain subject to litigation (see below for further details).

Clients who have not yet had their claim agreed and admitted in the LBIE administration will be able to receive catch up payments in due course once their claim is agreed and admitted. The administrators continue to make appropriate reserves for non-admitted claims and in respect of the issues concerning the surplus.

£0.78bn of unsecured claims (in respect of original Proofs of Debt (PoDs) of £1.11bn) were agreed and admitted for payment in the Report period. This brings the total admitted unsecured claims to £11.73bn. The administrators estimate that between 85-95% of claims have now been resolved. Approximately 330 other claims (approximately 5%) with PoDs totalling £1.83bn still remain to be agreed. The administrators made clear in the webinar that further litigation is expected in order to satisfactorily resolve these outstanding counterparties.


In our previous progress report bulletin, which can be accessed here, we highlighted that there may be a question as to whether claims might become time barred under the Limitation Act 1980 (the Limitation Act).

In order to address this issue on the creditor side the administrators entered into a deed poll on 23 July 2014 in relation to provable and non-provable claims (including any entitlement in respect of interest under rules 2.88(7) to 2.88(9) of the Insolvency Rules 1986) (Relevant Claims). The deed poll provides legal assurance to the holders of Relevant Claims (who have submitted a PoD in LBIE’s administration on or before 15 September 2014) that LBIE will not rely upon any defence or argument based on limitation, time bar, or other defence based on the expiry of the time period within which legal proceedings must be commenced in any proceedings relating to Relevant Claims. The deed poll can be found here.

Some uncertainty does, therefore, remain for those creditors who did not submit a PoD on or before 15 September 2014, as the deed poll does not apply to those creditors. There remains no hard bar date for filing claims against LBIE and it is, therefore, still possible to submit a PoD. However, due to issues arising under the Limitation Act, it is unclear whether there is an issue with the administrators accepting those PoDs.

On the debtor side, 11 standstill agreements have been entered into with various unsettled debtors to prevent any time barring of debtor claims. Furthermore, the administrators have commenced proceedings (within the limitation period) against a number of debtors as part of the process of recovering these claims.

Estimated outcome for unsecured claims

It is now certain that there will be a surplus and a revised indicative financial outcome in the Report now shows an increase in the estimated amount of the surplus in both the low and high case scenarios. However, as highlighted below, there remain a number of significant unresolved matters that may materially impact on the final level of the surplus.

The potential value range of the surplus, before post-administration interest, currency conversion claims and the subordinated debt, is now estimated to be between £4.94bn and £7.39bn.

This represents an increase of £1.44bn in the low case, and £0.40bn in the high case. The improvements in the indicative ranges mainly arise from:

  • higher estimates of future dividends to be paid to LBIE by affiliates (for which see below);
  • the release of unsecured claims reserves relating to client asset claimant creditors; and
  • the continued admission of claims at below PoD values.

The overall outcome will be affected by numerous outstanding factors, the most significant being:

  • the extent of recoveries from debtors, the largest debtor being AG Financial Products Inc. (AGR) (see AGR litigation below);
  • the amount at which claims of senior unsecured creditors are determined;
  • the future costs of the administration (which will be sensitive to how protracted any litigation may be); and
  • the outcome of any priority claims (these include the pension deficit claim (see below) and potential liability for certain indemnities given post-administration and other potential claims (including tax provisions) which could crystallise in certain circumstances).

The methodology to calculate entitlement to the surplus is yet to be determined and is subject to the waterfall court applications highlighted below - there are a number of complex issues to be resolved (notably in relation to entitlements to post-administration interest and currency conversion).

Clients should bear in mind that no further distributions beyond a rate of 100% will be made until the surplus entitlement question is resolved (either through litigation or a consensual settlement). It is understood that, the administrators are committed to taking all reasonable steps to be in the best position possible to promptly distribute the surplus when the method of calculating individual entitlements to share in the surplus is known. Individual entitlements are likely to depend on the timing of distributions made to the creditor in question, the nature of underlying contracts and the terms of any agreements with LBIE that were entered into by the creditor post-administration.

It is not possible to give an estimate as to the likely recoveries in respect of post-administration interest and currency conversion claims given the uncertainties referred to above and the fact that there is no estimate, in the progress report, regarding the value of claims to interest and other non-provable debts. As the waterfall litigation referred to below will determine how such claims are to be calculated, it would be premature at this stage for the administrators to give an estimate of the value of such claims.

Distributing the surplus

Waterfall I application

The Waterfall I application (Waterfall I) concerned a number of questions on the ranking of various claims to the surplus (together with LBIE’s shareholders’ obligations to contribute to the debts of LBIE). The judgment in Waterfall I was handed down on 14 March 2014. For details of this decision click here to see our bulletin on the eleventh progress report dated 8 May 2014. The judgment is being appealed by all parties, with the appeal listed to be heard by the Court of Appeal on 23 March 2015. It is too early to say with any certainty when the appeal judgment will be handed down, but it is unlikely to be handed down before mid-2015 (the administrators expect a judgment within three months of the hearing) and a further appeal to the Supreme Court remains a possibility.

Surplus entitlement proposal

The administrators published the Surplus Entitlement Proposal (the Proposal) on 28 March 2014 in the hope of facilitating a consensual agreement for the distribution of the surplus. For information on the Proposal click here to see a summary in our bulletin on the eleventh progress report.

Given the diverging views of the LBIE creditor community on a number of the key issues which impact on the distribution of the surplus, as expected, the Proposal did not obtain the necessary creditor support and the administrators concluded that a consensual solution would be difficult to achieve without further directions from the High Court. Therefore, as well as the appeal of the first waterfall judgment, a further court application has been made to determine a number of outstanding issues which resulted from Waterfall I. For details on this application see Waterfall II application below.

Interest-only proposal

The administrators estimate that there will be at least £4.94bn of surplus cash available for distribution by the end of 2014. In order to try to facilitate the payment to creditors of any post-administration interest as quickly as possible an interest-only proposal was developed and shared with creditors during June and July 2014. It was designed to allow the administrators to quantify the relevant reserves that would be needed (in particular in relation to ISDA claims) by putting a cap on ISDA interest claims and establishing a hard bar date for all unsecured claims by way of a company voluntary arrangement. The remaining issues would be determined under the Waterfall II application.

If accepted, it was anticipated that the proposal would have enabled the administrators to make a first interim distribution of around £0.50bn towards the end of 2014 or the beginning of 2015, with additional amounts becoming available as further progress was made in resolving outstanding issues. However, following discussion with relevant creditors, the administrators decided that there was insufficient support for the proposal (or any other limited compromise) and that they should focus their attention on resolution of the outstanding issues through court proceedings (the Waterfall I and the Waterfall II applications).

Waterfall II application

In light of the failure of the Proposal, the administrators decided to make a further application to the High Court on 12 June 2014 to address issues not covered by Waterfall I that impact upon the nature and extent of creditors’ entitlements to share in the distribution of the surplus. (Waterfall II). A case management hearing took place on 25 June 2014.

The following entities were selected as respondents:

  • Burlington Loan Management Limited;
  • CVI GVF (LUX) Masters SARL;
  • Hutchinson Investors, LLC;Wentworth Sons Sub-Debt SARL; and
  • York Global Finance BDH LLC.

The key issues covered by Waterfall II (and its 39 detailed questions) are:

  • how to calculate the rate and extent of a creditor’s entitlement to post-administration interest (including contractual entitlements under, among other agreements, the ISDA Master Agreement);
  • the date from which post-administration interest should accrue (in particular in relation to contingent and future debts);
  • how currency conversion claims are to be quantified and whether such claims will be reduced by receipt of post-administration interest; and
  • the effect of release clauses contained in Claims Determination Deeds and the Claim Resolution Agreement on a creditor’s entitlement to the surplus.

A number of position papers and witness statements have been filed with the court, some of which are available here.

A second case management hearing is due to take place on 21 November 2014 when the timing of the hearing of the application is likely to be set.

The administrators have indicated that ordinary unsecured creditors who feel that their views/interests have not been adequately represented in the positions taken by the respondents should contact the administrators at The administrators are keen to ensure that creditors have the opportunity to identify any relevant positions or arguments not currently adopted by any party to the application, so that they may consider whether those arguments should be put before the Court.

The administrators made clear in the webinar that court proceedings will not provide the final solution to the question of the surplus. For example, even once the court has provided guidance on the entitlements to the surplus, it is currently intended to utilise a scheme of arrangement or creditors’ voluntary arrangement to distribute the surplus. The court will provide answers to key questions but it will not provide the mechanism by which to distribute the surplus or necessarily all the practical answers. Essentially, the administrators have cautioned that the more protracted the issues concerning the surplus become, the greater the increase in the costs of the administration.

Client assets

LBI settlement and the arising omnibus trust

For background on the LBI settlement and omnibus trust click here. Two interim distributions have now been paid to consenting beneficiaries of the omnibus trust, providing for a cumulative interim distribution rate of 106% of total best claim value. With certain exceptions for US tax payers, LBIE reserved approximately 30% of the best claim value of each beneficiary from each distribution in order to account for potential US withholding tax liabilities. LBIE then requested guidance from the US Internal Revenue Service (IRS) with regard to the US withholding tax treatment of the first (100%) interim distribution and agreement with the IRS has now been reached. This has enabled the administrators to release the excess tax reserves held by the IRS and a ‘true up’ gross distribution of $0.92bn was paid on 12 June 2014.

In addition, a further catch up distribution will be paid on 31 October 2014. This means that catch up beneficiaries will be brought into the same position as if they had participated in all previous distributions (i.e. the sum total of all amounts paid, appropriated or reserved for them will be equivalent to 106% of their best claim amount).

The final distribution can only be made after the US withholding tax treatment of distributions in excess of 100% of best claim value is finally agreed by the IRS, claims of all non-consenting beneficiaries are concluded and the remaining reserves are settled. The final distribution is currently estimated to take place by mid-2015 with an estimated distribution of a further 4% (high case) taking the total distributions up to 110% of best claim value.

LBIE has now agreed the status of the omnibus trust for UK tax purposes with HM Revenue & Customs and no material tax liabilities are expected.

Other client assets

Client assets continue to be returned. In particular, following the resolution of the extended liens litigation in Hong Kong, client assets held by Lehman entities subject to insolvency proceedings in Hong Kong (LBHK) on behalf of LBIE’s clients have started to be returned. Issues however remain in respect of competing claims of Lehman Brothers Finance S.A. (Switzerland) (LBF) in respect of certain assets yet to be returned to LBIE from LBHK. An expedited resolution of this matter is expected, with the return of the impacted assets likely to be in the next six months.

To date, a total of 9,500 individual holdings have been returned to counterparties representing a total value of £14.1bn and it is expected that all remaining client asset positions will have been resolved by mid-2015, allowing for the client asset estate to be finally wound up and LBIE’s role as custodian to cease.  It remains unclear whether an application to court for directions is necessary in order to finally wind up the client asset estate.

Pre-administration client money

There has been further progress in resolving the client money estate and, in relation to client assets, the LBIE administration is very much winding down to completion. A second interim client money distribution was made on 27 June 2014 at a rate of 25% (bringing the total to 48.2% to date) totalling $0.54bn. The administrators do not plan to make any further client money distributions as yet and the timing of the next distribution remains unclear. Furthermore, the administrators have confirmed that a court application is necessary in order to close out the estate.

Future recoveries for the client money estate will arise from further distributions to LBIE: (i) under the Lehman Brothers Holdings Inc (LBHI) guarantee claim; and (ii) from the Lehman Brothers Bankhaus A.G. (LBB) estate (a first distribution is expected by LBB by the end of 2014) - this relates to the terms of a settlement agreement whereby 50% of LBIE’s client money claim was admitted as an unsecured claim in the LBB estate.

At the date of the last report, 55 counterparties had a retained client money entitlement (CME). A client money settlement offer was made in February 2014 to settle with those counterparties at 100% of their CME (plus, where applicable, a currency allowance) in exchange for an unsecured claim and an assignment of their CME to LBIE’s nominee. 54 of the 55 counterparties accepted the offer and payment was made on 10 April 2014. That offer is now closed. Progress has been made in engaging with counterparties with unresolved CMEs. While 188 CME claims (with a value of $0.15bn) have been resolved in the Report period, 132 claims remain outstanding, 89 of which, where engagement has not been possible, will require court directions to resolve. The amount expected to be paid into court for orphaned claims has reduced from $0.3bn to $0.1bn.

One remaining major obstacle to the resolution of the client money estate relates to the assertion by BarCap that it acquired LBI’s CME. While the US appeal judgment has been handed down (favouring BarCap) and LBI’s application for a retrial was denied, the next steps to be taken in the litigation are unclear. The ultimate impact for LBIE of this litigation therefore remains uncertain and, as LBIE is not a party to the litigation, out of LBIE’s control. (For further details on the BarCap litigation see below).

As has been the case for almost all pre-administration client money claims, the administrators expect the majority of further outstanding CMEs to be assigned to LBIE’s nominee in satisfaction of indebtedness due to LBIE or in exchange for the admission of an unsecured claim.

Key litigation and the resolution of disputes

14 creditor claims are subject to litigation (including damages or compensation claims) and these relate to PoDs totalling around £0.67bn. Excluding the AGR litigation, there remain three on-going actions in relation to debtor claims. Further litigation is expected to be needed in respect of both creditor and debtor claims in the next Report period.


The litigation before the New York court against AGR is still on-going. This concerns a disputed receivable and is currently the largest potential recovery action. Estimated recovery ranges from nil to £0.54bn and the eventual sum recovered could be anywhere within this range. The uncertainty surrounding this litigation accounts for more than 60% of the variable for the current indicative outcomes for unsecured creditors.

On 28 August 2014, the court appointed special referee’s report and recommendations were filed and can be found on the New York Supreme Court file. The timing of trial remains uncertain as does the eventual outcome of this litigation.

Subordinated debt and contribution claims against shareholders

There are inter-linking issues impacting on the determination of the claims relating to both LBIE shareholders (Lehman Brothers Limited (LBL) and Lehman Brothers Holdings Intermediate 2 Limited (LBHI2)), their ranking in the eventual returns to creditors and the rights between the shareholders themselves. Most of these issues will be considered in Waterfall I and Waterfall II and their eventual resolution is expected to coincide with the surplus entitlement question. Little progress has been made in relation to the subordinated debt claim brought by LBHI2 against LBIE and a reconciliation of the balances owed between LBIE and LBL has not yet been agreed.

Pension scheme deficit

The pension scheme deficit litigation has now been consensually settled. As set out in the our client bulletin on the eleventh progress report which can be found here, the Pensions Regulator’s Determinations Panel initially decided that LBIE (along with five other affiliates) should receive a Financial Support Direction (FSD) in connection with the pension scheme deficit. That decision was ultimately referred to the Upper Tribunal.

The main concern for LBIE was that, as the most significant and valuable entity to receive an FSD, it would become the primary target for recovery actions. Although LBIE could have sought contribution claims from the other affiliates, many of them had already put in place future settlement arrangements such that LBIE may not have been able to make a proper recovery.

Driven by these uncertainties LBIE reached an agreement with some of its affiliates under which LBHI has contributed £0.03bn to the pension scheme deficit, Lehman Brothers Europe Limited has contributed £0.05bn to the pension scheme deficit; and LBIE will pay the balance of around £0.12bn (negotiations are underway to purchase a bulk annuity policy with a third party insurance company, at which point the precise quantum of the LBIE contribution will be determined). This settlement has been approved by the Upper Tribunal.

LBIE’s contribution to the pensions deficit will be treated as a priority claim of the administration rather than as a senior unsecured claim.

LBI and BarCap

In August 2014, the US appeal court ruled in favour of BarCap and on 23 September 2014, LBI’s application for a re-trial was denied. BarCap alleges that it acquired LBI’s client money claim in accordance with a sale and purchase agreement entered into in September 2008, which affects the resolution of the client money estate. It is currently unclear what steps, if any, will now be taken in relation to the dispute. Accordingly, the effect on LBIE is uncertain at this stage.

Lehman affiliates

The Report highlights that further progress has been made with a number of affiliates:

  • Lehman Brothers (Luxembourg) S.A. (LB Lux)
    Following a supplemental settlement agreement executed in October 2013, LBIE has received a further £0.16bn from LBHI as its share of distributions from the LB Lux estate. LBIE will recover a further $0.12bn as its final share in the proceeds.
  • LBB
    Under the terms of a settlement agreement, 50% of LBIE’s €0.81bn client money claim has been admitted as an unsecured claim in the LBB estate. An agreement in principle has been reached with LBHI as a precursor to LBIE supporting an overall resolution of the LBB estate, including in relation to the LBIE Client Money-related unsecured claim into LBB such that distributions should now be accelerated from LBB to LBIE. Since the period end, this agreement was executed and a first distribution from LBB is expected by the end of 2014.
  • LBIE Seoul Branch
    The liquidators have now settled the majority of unsecured claims, with only two disputed affiliate claims (principally related to LBF). The completion of the liquidation is dependent on the resolution of regulatory compliance issues and receiving final local tax clearance.
  • LBIE Zurich Branch (LBZ)
    LBZ is in a liquidation process and surplus funds continue to be held in Switzerland pending local clearance. All known creditors have been paid in full, other than a single claimant from whom payment details are needed. The balance of funds will be repatriated to LBIE once the liquidation is complete.
  • Mable Commercial Funding Limited (MCF)
    LBIE is continuing to maximise value from this claim. A distribution of £0.02bn was received on LBIE’s £0.60bn claim. The timing and quantum of any further distributions depends on the realisation of value from assets controlled by MCF, over which LBIE has limited control.
  • LBHK
    345 holdings of LBHK Client Assets were returned to counterparties in the Report period with a value of £0.10bn. LBF has competing claims in respect of certain assets yet to be returned from LBHK. Outstanding recoveries are expected to be received by the end of the first half of 2015.
  • Taiwan
    The final amount due from LBIE’s operations in Taiwan ($0.2bn) has now been recovered.

Priorities of the administration

Given that the client asset and pre-administration client money estates are now almost finalised, the last six months have seen a noticeable shift in the priorities of the administration. The administrators have made clear that they intend to focus on agreeing and admitting the majority of the remaining unsecured claims with counterparties, together with the diligent legal defence of claims that the administrators view as invalid.

Given the issues surrounding the surplus, the progression of Waterfall I and Waterfall II will be key, with the administrators also regularly reappraising the viability of a consensual solution to avoid prolonged litigation. The likely duration of the two sets of court proceedings is, however, unknown and this will create uncertainty in terms of timing and planning for the distribution of the surplus and the finalisation of the administration. The administration has now, finally, reached its tail end and it is currently estimated that LBIE’s administration could be completed by 2020. With the administration operations now shifting in focus, and with many matters resolved, it is hoped that this will drive a cost reduction in the future costs of the administration. However, much will depend on the resolution of the surplus entitlement issues.

Administrators’ webinar

The administrators hosted a one-hour webinar on 29 October 2014 at 14:00 (London time), giving creditors an opportunity to hear a summary of the current circumstances of the administration and to participate in a question and answer session. The webinar can be accessed again here.

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