The Joint Administrators (the “Administrators”) of Lehman Brothers International (Europe) (“LBIE”) announced on Oct. 5, 2009, that they are developing a contractual (i.e., non-judicial) alternative to their proposed Scheme of Arrangement, which is the subject of an appeal following a decision by the High Court in London that it lacks jurisdiction to implement the scheme.

The Prior Proposed Scheme of Arrangement

On July 14, 2009, the Administrators applied to the High Court in London for the sanctioning of a Scheme of Arrangement (the “Scheme”) (analogous to a Chapter 11 plan of reorganization), for the purpose of reaching an agreement with and returning client assets (“Trust Property”) to LBIE’s Trust Property creditors.

The High Court, however, decided on Aug. 21, 2009, that “[i]nsofar 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 . . . .” The Administrators appealed the High Court’s judgment, and a hearing on the Administrators’ appeal is expected to take place on Oct. 26, 2009. The Administrators hope, but cannot be certain, that the court will issue its decision on the appeal by mid-November.

The New Contractual Alternative to a Court-Approved Scheme

The Administrators announced on Oct. 5, 2009, that they are developing a contractual (i.e., non-judicial) alternative to the Scheme (the “Contractual Alternative”) to be implemented if they lose their appeal. The Administrators noted that the Contractual Alternative would have substantially the same terms as the Scheme, including a bar date, and would prescribe all aspects of the determination of the value of a creditor’s net equity as well as the allocation and distribution of Trust Property.

Only consenting Trust Property creditors would be bound by the terms of the Contractual Alternative. To minimize the impact non-consenting Trust Property creditors might have, both on the process and on consenting creditors, the Administrators stated that they plan to set a high acceptance threshold, set by value of those persons having eligible claims, that must be met for the Contractual Alternative to become effective.  

While the Administrators expect to seek to implement the Contractual Alternative only if they lose their appeal regarding the Scheme, they announced their intent to pursue the Contractual Alternative concurrently with the appeal, to minimize any potential delay in implementation if the appeal is denied.

The Administrators’ Proposed Action Plan

The Administrators are proposing the following action plan in connection with the Scheme and Contractual Alternative:

  • Bar Date Application. Seek a Jan. 31, 2010, bar date for proprietary claims to segregated property. The bar date would apply under either the Scheme or the Contractual Alternative.
  • Distribute Contractual Alternative. Send prime brokerage counterparties a document setting out the terms of the Contractual Alternative. LBIE expects to distribute this document during the week of Nov. 23, 2009.
  • • Prosecute Appeal. A hearing on the Administrators’ appeal is scheduled for Oct. 26, 2009, but, as noted above, the timing of a decision remains uncertain. If the Administrators succeed in the appeal, the Scheme could take several months to implement. If the Administrators lose the appeal, however, they expect to have already made significant progress toward implementing the Contractual Alternative.

The Administrators’ announcement concerning the Contractual Alternative and anticipated timing can be accessed here.