The High Court has held in the “Extended Liens” application that a “general lien” granted by a client of Lehman Brothers International (Europe) (“LBIE”) over financial collateral held by LBIE as security for obligations owed by the client to LBIE or any other Lehman entity was a valid floating charge, both in relation to the client’s debts to LBIE and its debts to LBIE’s affiliates.

The charge was not a security financial collateral arrangement under the Financial Collateral Arrangements (No.2) Regulations 2003 (the “Regulations”), since the collateral-provider was insufficiently dispossessed of the collateral, although the Judge believed that floating charges could come within the scope of the Regulations.

Re Lehman Brothers International (Europe) (In Administration) [2012] EWHC 2997 (Ch)


The administrators of LBIE sought directions in relation to security provisions in standard-form documents, including a "Master Custody Agreement" (the “MCA”) between LBIE and its affiliate Lehman Brothers Finance SA (the “Client”)). As the main street-facing Lehman company in Europe, LBIE held assets as custodian for both its clients and its affiliates.  The MCA provided that LBIE as custodian had “a general lien” on property held by it until the satisfaction of all obligations of the Client owed to LBIE or any Lehman Brothers entity. 

The vast bulk of the property of the Client to which the security related consisted of intangibles (mainly de-materialised securities and money).

The issues included:

  • What type of security the “general lien” was and whether it was valid in respect of debts owed by the Client both to LBIE and to its affiliates;
  • If the security interest was a charge, whether it was fixed or floating; and
  • Whether the Regulations applied to the security (which was important for considering whether the exceptions from certain insolvency and registration requirements contained in the Regulations might apply to the MCA).


  • Briggs J held that the “general lien” in the MCA was actually a floating charge.  Although the MCA did not strictly create a general lien because such a lien cannot apply to intangible securities, it was unreasonable to attribute an intention to create security rights which were incapable of applying to the overwhelming bulk of the property held as custodian by LBIE.  The “general lien” was therefore properly characterised as a floating charge.
  • The charge was valid not only between the Client and LBIE but between the Client and LBIE’s affiliates.  There was no reason why the Client could not confer a specifically enforceable right on LBIE to have the Client’s property appropriated towards the discharge of debts owed by the Client to LBIE’s affiliates. 
  • The charge in favour of the affiliates was valid even though MCA did not create a trust or fiduciary relationship between LBIE and the affiliates. When the MCA was created, the intention would have been that the enforcement of the security rights would be exercised by LBIE in the interests of the Lehman group as a whole.  The collapse of the group meant that creditors of each Lehman entity now had different interests, but such a collapse would not have been a significant consideration when the MCA was created.  In any event, it was not inherent in the nature of a charge for LBIE to be a trustee or fiduciary of the affiliates; such a relationship was irrelevant to the enforceability of the Client’s promise to LBIE.
  • The extended rights of the affiliates were not caught by the prohibition on multilateral set-off on insolvency (the British Eagle principle) because the MCA created a charge which therefore fell outside the scope of unsecured debts subject to insolvency set-off.
  • The Court considered whether the Regulations applied to the floating charge.  This was important since the Regulations could save the charge from invalidity for:
    • Being unregistered under section 395 of the Companies Act 1985 (“s.395”);
    • Being an invalid floating charge under section 245 of the Insolvency Act 1986 (“s.245”); or
    • The charge not being signed under section 53(1)(c) of the Law of Property Act 1925 (“s.53”).
  • The Regulations did not apply to any security interest created before 26 December 2003 when the Regulations were implemented.
  • The Court considered whether the charge created by the MCA was a "security financial collateral arrangement" for the purposes of the Regulations:
    • The Client’s argument that the charge failed to qualify because it was multilateral to the extent that it created security for the debts of LBIE's affiliates, rather than for LBIE alone, was rejected.  There was no "bilaterality test" in the Regulations and, even if there were, the MCA was a bilateral arrangement conferring no proprietary interest on, or rights directly enforceable by, anyone other than its two parties.
    • For the floating charge to be a “security financial collateral arrangement”, the assets subject to the charge had to be “in the possession or under the control of” LBIE; any rights of the Client to substitute equivalent collateral or withdraw excess collateral would not prevent LBIE having the requisite possession or control.  Briggs J held that the test was whether the collateral-provider had been dispossessed. 
    • The terms of the MCA provided that LBIE had the right to prevent the Client withdrawing assets beyond those which LBIE considered necessary to pay the Client’s debts to LBIE, but this right did not extend to the Client’s debts to the affiliates.  Therefore, with regard to the debts owed to LBIE, LBIE did have sufficient possession and control, but not with regard to the debts owed to the affiliates.  Leaving aside its debts to LBIE, the Client could do what it liked with the property pending crystallisation, regardless of its liabilities to LBIE's affiliates.
    • Although the security in favour of LBIE alone showed sufficient possession and control, the arrangement had to be looked at as a whole and since one part did not fall within the scope of the Regulations, the whole arrangement fell outside.
  • Since the Regulations did not apply to the charge, the Court further held that:
    • s.53 did not apply (i) as between the Client and LBIE because the MCA had been signed and (ii) as between the Client and the affiliates, in relation to collateral transferred to LBIE after the charge had been created, there was no disposition of the property by the affiliates because the charge arose simultaneously with the transfer of title of the collateral;
    • Non-registration at Companies House under s.395 did not affect the charge since the Client was a Swiss company which fell outside the registration requirements; and
    • s.245 did not apply to the MCA because it was not created within the relevant time.
  • The charge could apply to client money, so that money secured by the charge could reduce the amount of the client money pool.  The issue of whether the charge only affected money held by LBIE as custodian or also to money which LBIE ought to have held was beyond the scope of the judgment.


This is a wide-ranging and detailed judgment which is potentially helpful in resolving a number of questions concerning the LBIE administration and beyond.  However, this may not be the last word on the issues since the judgment has been appealed.

The judgment confirms that the concept of extended liens is valid under English law although in this case, they did not have the additional benefit of being financial collateral arrangements.  On different facts, the charge could have been invalid under s.395, s.245 or s.53.

Of particular interest is Briggs J’s views on the Regulations.  He reviewed the earlier decision of Vos J in Re F2G Realisations Ltd: Gray v GTP Group Limited [2011] BCLC 313.  In that case, Vos J had decided that “possession” had no relevance to intangibles and that the collateral-taker was required to show not only “administrative” control of the assets (e.g. where the collateral is credited to the name of the collateral-taker in the account of the depository), but also “legal control” (i.e. the right to prevent the withdrawal of the collateral), a view which many commentators regarded as making it difficult, if not impossible, for any floating charge to be caught by the Regulations. 

Unlike Vos J, Briggs J thought that possession was a relevant concept for intangible assets; he thought that both “possession” and “control” meant something more than custody.  Although he agreed with the judgment in Gray that “legal” control was likey to be required rather than “administrative” control, he did consider it possible for floating charges to be within the scope of the Regulations, (as the charge in the MCA would have if it had been restricted to the debts owed by LBIE).

Note that the Regulations which applied to this case have since been amended by new regulations which came into force in April 2011.  These provide that “possession” includes the case where financial collateral has been credited to an account in the name of the collateral-taker, provided that the rights of the collateral-provider are limited to rights to substitute equivalent collateral or withdraw excess collateral.  The amended regulations would still appear to allow Briggs J’s interpretation that “possession” is relevant to intangibles, but that full legal control is required.