On 1 May 2009, PricewaterhouseCoopers LLP (the "Administrators") submitted an Ordinary Application to the High Court, seeking directions concerning the obligations of Lehman Brothers International (Europe) (In Administration) ("LBIE"), in relation to the handling of client money received by it prior to entering into administration (the "Application"). A copy of the Application can be found here.

Two procedural hearings were held on 15-16 July 2009 and 27 July 2009 before Mr Justice Blackburne (the "Hearings"), where the issues arising from the Application were considered. This briefing summarises the main submissions made by the various parties at the Hearings, and the main points arising from the Orders dated 16 July 2009 and 27 July 2009 (the "Orders"), which can be accessed here.

It is important to note that the Application discussed in this briefing is distinct from another application submitted by the Administrators to the same court on 14 July 2009. This separate application related to the jurisdiction of the High Court to sanction a scheme of arrangement as a method of distributing certain client assets held by LBIE. Further information on these proceedings can be found here.

Both this briefing and the Orders refer to a number of specific issues. These issues are set out in Schedule A to the Order dated 16 July 2009.

Summary of Orders made

  • Lehman Brothers Holdings Inc. ("LBHI"), Lehman Brothers Finance A.G. ("LBF") and Lehman Brothers Inc. ("LBI") (the "Affiliates"), were added as respondents to the Application, and were to participate at their own risk as to costs.
  • GLG Global Utilities Fund ("GLG") and Paragon Capital Management Fund Limited ("Paragon") were appointed as representative respondents for clients of LBIE for whom some client money was segregated at 7:56am on 15 September 2008 (the "Segregated Clients").
  • CRC Credit Fund, Limited ("CRC"), Chilton New Era Partners LP ("Chilton") and Claren Road Credit Master Fund Ltd ("Claren Road") were appointed as representative respondents for clients of LBIE for whom money arguably should have been segregated as client money at 7:56am on 15 September 2008 (the "Unsegregated Clients").
  • Hong Leong Bank Berhad ("HLBB") was appointed as a representative respondent for general creditors (i.e. clients or creditors for whom no client money was segregated at 7:56am on 15 September 2008 and for whom LBIE was not required and had not agreed to segregate client money) (the "General Estate").
  • The costs of the representative respondents would be met from the client money pool and/or the General Estate, in such proportions as shall be ordered by the court in due course.
  • The Financial Services Authority (the "FSA") would serve on the Administrators and each respondent its submissions in respect of the issues by 5pm on Tuesday 1 September 2009.
  • A case management conference (the "CMC") would be held on Thursday 24 September 2009, for a period of approximately two days, before Mr Justice Briggs.
  • The substantive hearing would start on Monday 9 November 2009, for a period of approximately 15-20 days, before Mr Justice Briggs.

Submissions of the Administrators

  • The administrators had a neutral role in the proceedings, except where:
  1. they were initially required to state of view as to whether a dispute arises at all and in what respect;
  2. views had been repeated to give the court a clearer picture of issues in dispute;
  3. arguments were advanced in relation to issues for which respondents had not currently been identified; and
  4. the administrators had advanced an argument at the hearing with the purpose of either achieving consistency in the interpretation of the FSA's Client Assets Sourcebook (the "CASS rules"), or demonstrating the practical consequences of an issue being determined in one way or another.
  • It was possible that one or more of the respondents would wish to remain anonymous during the proceedings.

Representative respondents

  • Each of the Affiliates had expressed an interest in making their own representations. None of the Affiliates wished to act as a representative of the others.
  • The Affiliates objected to being represented by another Affiliate because they were obliged by law to maximise their own recovery due to their own respective insolvency proceedings, and the sums at stake were very large.
  • As all of the Affiliates were trying to maximise their own recovery, the administrators submitted that their interests were aligned. Each respondent had a very large sum at stake.
  • There was no requirement under the Civil Procedure Rules (the "CPRs") or the Insolvency Rules for a representative to report to the class it represents. However, respondents could liaise with the representative respondent to improve their chances of success. Only representatives should be permitted to address the court on any issues without the court's permission.



  • Non-Affiliates had asked for a pre-emptive cost order ("PCO") on an indemnity basis from the client money pool. The administrators submitted that such an order would be inappropriate where:
    • the issue was between clients and did not affect the size of the client money pool itself;
    • the issue had already been clearly decided by the decision in Re Global Trader Europe Limited (In Liquidation)1 ("GTE"); or
    • the case (or any of the issues in the case) was to be appealed.
  • None of the parties were willing to be appointed as representatives unless a PCO was granted in their favour. However, consent was not necessary for a respondent to be appointed as a representative, and the court had discretion to appoint a representative.
  • The administrators also objected to a PCO being granted in favour of the members of the segregated clients working group (the "working group"), as such an order would defeat the purpose for which a representative was appointed.


  • LBI was seeking a PCO. This would not be appropriate unless LBI was a representative for any other issues except for issue 20, where it was the only respondent.
  • LBHI was not seeking a PCO but was seeking directions as to costs. It made 2 points:
  1. it accepted that no more than one set of costs should be recovered in respect of issue 26 (with which the administrators agreed); and
  2. LBHI should not be prevented from recovering costs in the ordinary way if they were able to address the court on issues other than issue 26. The administrators would view this as a luxury and LBHI should therefore bear such costs.
  • LBF was not seeking a PCO. They had agreed to bear their own costs, but submitted that they should be protected from cost orders being made against them.
  • LBIE was a net creditor of each Affiliate. If LBIE was ordered to pay costs, it would pay costs as an expense of the administration and pay in full. However, any costs that would be paid by the Affiliates to LBIE would not be paid in full. Therefore, if a PCO is made, it should not be for all costs. The court has discretion to make such an order.

Case management

  • The hearing should start on 26 October 2009, for a period of approximately 15-20 days.
  • The FSA was drafting submissions in relation to its own interpretation of the nature and scope of the relevant CASS rules, which were expected to be submitted by early September 2009. The administrators were of the opinion that the FSA's comments would not be determinative, and anything that could cause a narrowing of the issues was to be encouraged.
  • It had been proposed by counsel for the Unsegregated Clients that the hearing should be split, with the principal and subsidiary issues being heard at separate hearings. The administrators did not believe this to be practical for three reasons:
  1. the issues needed to be construed and considered as a whole to ensure consistency;
  2. it was inevitable that there would be an appeal on at least some of the issues and this would take double the time; and
  3. the identification of the main issues would be difficult, as different parties had different interests in the matter.

Submissions of the Unsegregated Clients

Case management

  • The administrators under-estimated the difficulties the court would face by hearing all 29 issues in one hearing. The Unsegregated Clients deemed the main issues for the administrators to be:
  1. What was the scope of client money?
  2. Which accounts and balances were required to be pooled on a primary pooling event?
  3. Which clients were entitled to share in the client money pool and in respect of which client money entitlements?
  4. If the client was not entitled to share in the client money pool, were they still entitled to claim client money?  
  • If the first stage of the hearing was restricted to the main principles only, the length of the hearing could be reduced to a period of approximately 5 days. Additionally, there would be many practical difficulties of having a judge decide all of the issues at one hearing.
  • The main issues should be heard in late October 2009 over a period of 5 days, with the judgement handed down in November or December 2009. The remaining issues would then be determined in early 2010.


  • A PCO should not apply to issues 10 and 15.
  • Caps on any orders made should be considered at the CMC.
  • It would not be fair to appoint respondent representatives without providing them with the benefit of a PCO. They should get the benefit of a PCOfor all of the issues, as most issues interlock.

Role of the FSA

  • The FSA intended to make submissions on the interpretation of the CASS rules, rules which they had written.
  • Submissions from the FSA would make the case more complicated, as some parties would have to make submissions in relation to the interpretation of the CASS rules and also in response to the FSA's submissions.

Submissions of GLG

  • GLG generally supported the submissions made by the administrators. It did not however accept the division of the main issues as suggested by counsel for the Unsegregated Clients, and in outline suggested that the issues were:
  1. What assets formed the client money pool?
  2. Who was entitled to claim against the client money pool?
  3. How were entitlements calculated between those clients?
  4. What was the position of those clients who could not make a claim against the client money pool?
  • GLG was seeking a PCO. There should be no carve-out for costs related to clients arguing against issues decided in GTE.

Submissions of Paragon

The segregated clients working group

  • Paragon was a member of the working group, which was a small informal group of Segregated Clients which was formulated to try and achieve a common position between the Segregated Clients. The working group had five members; Paragon, GLG, Goldman Sachs, Client A and Client B. It had held three meetings to date, two of which consisted of the members of the working group and the administrators, and one with just the members of the working group present.
  • Considerable common ground had been established in the previous meetings of the working group. This was a significant achievement given the size of the asset class in question, although there was not yet agreement on all issues. The working group members wanted to continue to work together, but would like costs incurred in doing so paid as incidental to the proceedings.
  • The costs relating to the meetings were not extensive, and it was argued that it would be cheaper to proceed in this manner rather than to not do so and increase the risk of fracturing the common position between the Segregated Clients.
  • The working group would like costs paid to cover the costs of attending such meetings historically, and similar future costs. They did not have a figure relating to the costs that had been incurred by the members of the group to date, but the amount was expected to be low. A cap would be accepted in relation to a cost order made for costs incurred by the working group. Paragon opposed the idea of a general cap on costs.

Role of the FSA

  • By allowing the FSA to make submissions, Paragon submitted that the proceedings would become longer and more complicated. It would rather the FSA was not involved in the proceedings.

Case management

  • Paragon did not support the proposal that the main issues in question should be distinguished from and heard separately to other subsidiary issues. They would prefer the issues to be considered at a single hearing as this would be cheaper and more efficient.
  • A hearing date of 17 November 2009 was suggested, which would allow more time for case preparation after the CMC.

Submissions of LBI

Preliminary observations

  • The factual background was incredibly complicated. Any hearing would have to be held on assumed facts so that the main issues could be determined. Questions of principle would have to be answered without being bound by questions of fact.
  • As an Affiliate, LBI had a very substantial amount of money at stake and therefore believed it was entitled to make submissions. LBI would also want to make submissions on more issues than merely issue 26.
  • LBI objected to being represented by another Affiliate, especially when that Affiliate had no obligation to protect LBI's interests.

LBI as a respondent

  • If LBI was to make submissions on issue 20 (which the administrators accepted affected LBI alone), it should also be heard on issue 26, as the two issues melted together.
  • LBI intended to argue that GTE was wrongly decided.
  • Even though LBI intended to act alone, it recognised that there was plenty of common ground between itself and the other Affiliates. LBI would be conscious to ensure that the Affiliates acted in a time efficient manner where this was the case.
  • The trustees of LBI's estate must act solely for the benefit of LBI's estate, and should not be seen to be acting for other parties. The appointor of the trustee could have concerns that the appointee was being directed by, or acting for, other parties.
  • Differences and disputes between the Affiliates, especially between LBI and LBHI, meant that there would be concerns that one representative would not fully represent the interests of both of these parties.
  • If LBI was not permitted to make representations on issues other than issues 20 and 26, their costs in instructing a representative respondent should be met. It could actually cost more to instruct another party to represent LBI than to pursue the matter itself.


  • LBI would be pursuing a PCO for issues 20 and 26. A PCO should not be applicable to issues 10 and 15.
  • LBI saw considerable force in the proposal that key issues should be primarily decided, as this could make the proceedings quicker, cheaper and easier, and potentially allow many of the subsidiary issues to fall away. LBI voiced concern that the judge in a single hearing could struggle to deal with all of the issues in their entirety and keep them separate.

Submissions of LBF

Representation of LBF

  • If there was scope for LBF to adopt the same position as other Affiliates on certain issues, it was happy to do so. However, LBF was still unclear as to its exact position and required further information from LBIE.
  • LBF did not support the use of representatives, as LBF would have no control over the proceedings. Given the size of LBF's claim against LBIE, LBF would find it extraordinary should it not be given a right of audience or joined as a respondent.
  • There was no suggestion that LBF's involvement in the matter would increase the length of the proceedings, and LBF had also made an open offer to pay itsown costs in putting forward arguments. On that basis, there was no reason not to allow LBF to be joined to the proceedings as a respondent.
  • It was pointed out that Affiliates were not invited to meetings between LBIE and other Unsegregated Clients. Additionally, the position of the Affiliates was much more complicated than that of the other third party creditors.
  • The administrators had informed LBF that they would provide further information to them in August 2009. If this was the case, LBF would hopefully be able to take a stance on more issues by the time of the CMC. To accept the administrators' submission to shut them out from the proceedings in the meantime would be grossly unfair.
  • In relation to GTE, LBF submitted that it could argue points during the proceedings which were not relevant to other respondents.

Role of the FSA

  • In relation to the FSA's submissions, LBF accepted that it would be useful to hear the FSA's views on this area, but also shared the concerns raised by the Unsegregated Clients. It was willing to see what the FSA produced, and allow the court to make a decision on the extent to which the FSA would participate at the CMC.


  • LBF did not seek a PCO. They would pay their own costs on issues on which they wanted to be heard, but on the basis that no cost orders would be made against them.
  • There should not be a special order in relation to issues 10 and 15, as it was clearly the case that these points would be considered by the court during the proceedings.
  • LBF did not accept that LBIE was a net creditor of LBF. LBF did not believe that a cap was appropriate, especially in the case of LBF, who was paying its own costs.

Case management

  • LBF did not support a division of the issues, as suggested by the Unsegregated Clients.
  • In relation to timing, LBF washappy to align with most of the other parties in relation to a hearing commencing on a date not earlier than 17 November 2009.

Submissions of LBHI

  • LBHI was the ultimate parent of the whole Lehman group and was in Chapter 11 proceedings in the US. It was the parent of various associate companies, all affiliates of LBIE.

LBHI as respondent

  • Some of the associate companies could have client money claims either for small amounts in segregated accounts, or for larger amounts in unsegregated accounts. They could argue for a right to share in the client pool or for a top up to be made.
  • LBHI was also a large unsecured creditor of LBIE. LBHI was probably the largest unsecured creditor with a claim estimated at $8 billion (or larger, if associated companies were included).
  • Accordingly, it might be sensible for LBHI to represent all of the unsecured creditors.
  • LBHI was having difficulty gathering information. It would be unfair to require LBHI to decide on its participation in abstract, as it needed facts relating to the application before it could make a decision.
  • If LBHI and/or associate companies only had a small interest in the client money pool but a large unsegregated claim, it did not want the other Affiliates to have access to the client money pool or receive a top up to the client money pool from the General Estate. Therefore, it could not undertake to represent other Affiliates or be represented by them if their interests were different.
  • The point of a party representing others was to make the administration more efficient. If there was a conflict however, parties should be able to appear in their own right.
  • LBHI submitted that it was entitled to be heard during the proceedings following the case of PNPF Trust Company Limited v Geoff Taylor and Others2 ("PNPF"). LBHI should be allowed to join in its own right at its own risk as to costs.
  • CPR 19 authorities showed that the representation order rules were flexible and not rigid. The court should exercise discretion in the balance of convenience and the interests of justice.
  • Any party that would be dissatisfied with being represented by another should be heard unless it was otherwise impractical. It should be inclusive rather than exclusive.
  • The Affiliates, as large interested creditors, should be heard unless there was good reason against it.
  • It would be an odd situation if the FSA had the right to be heard, but the Affiliates, as creditors, were shut out.
  • Arguments did not need to be duplicated, and this could be easily managed by the judge. If time is deemed to be wasted, the judge could exercise a costs sanction.

Role of the FSA

  • The FSA should be entitled to appear in the proceedings, but merely as a commentator. It must not overstep the boundary and be considered as giving evidence as such.

Case management

  • LBHI submitted that a trial date in early November 2009 would be better for all parties, so that cases could be prepared properly.

Submissions of the FSA


  • Pursuant to section 2(2) of the Financial Services and Markets Act 2000 ("FSMA"), the regulatory objectives included market confidence and the protection of consumers. This required the FSA to ensure large amounts of cash were not trapped in the system. They needed to help interpret the rules and protect consumersby helping to make prompt payments to clients and creditors.
  • Section 157(1) of FSMA allowed the FSA to give guidance on the appropriate operation of any rules made under FSMA.
  • Under section 362(2) of FSMA, the FSA is entitled to be heard at certain court hearings relating to the insolvency of a company which is, or has been, an authorised person.
  • Under paragraph 21 of the main Practice Direction in the White Book, the FSA could make representations to the court when there was a question in relation to any rules. It was in the interest of the market for the FSA to be involved.
  • It was in the public interest for the FSA to uphold market confidence, and it should therefore make a useful and sensible contribution to proceedings.

Case management

  • The CMC would be very important, particularly in relation to the sequencing of events. As there was no argument between the Administrators and the respondents, the sequence of written submissions should not be ordered in terms of the respondents replying to the Administrators' points solely. They should reply to one another's points, and a sensible programme to allow this must to be devised.

The FSA's contribution

  • The FSA was entitled to be heard. It would not be a respondent, but available to assist the court when necessary.
  • Submissions would be made by the FSA by 1 September 2009, in advance of the CMC. This would help to clarify issues before the respondents put pen to paper.
  • Participation would be carried out sensibly and responsibly without delaying proceedings.
  • If appropriate, an out of court mediator could be used to help narrow the issues with the assistance of the FSA if appropriate.
  • The issues reaching the substantive hearing should be only those that needed to be determined. This could be achieved by good case management and refinement along the way.
  • The FSA's submissions would be subject to revision if issues changed. The court may have questions for the FSA and it would be happy to oblige. The FSA's involvement meant that the court was not merely faced with adversarial argument fuelled by financial interests. Importantly, the FSA could help with ensuring consistency in the interpretation of the CASS rules.

Orders of Blackburne J

  • The formulation of the issues was a continuing process and there may be further refinements and reductions up to and during trial. This was welcomed by the court.
  • The issues would not be divided for the following reasons:
    • it was not obvious which issues should be dealt with first;
    • it was desirable to deal with the issues together, with all parties in court, when the judge was immersed in the case; and
    • it was always open to the judge to defer an issue to a later date if appropriate.

Respondent representation

  • Each Affiliate was to be made a respondent to the application for directions so it was bound by whatever the court decided. This was because:
  • they each had large sums of money at stake;
  • they (and associate companies) faced difficulties due to the LBIE global enterprise, which took little account of corporate structures in the different jurisdictions in which they operated; and
  • the PNPF case supported the view that the Affiliates should be included rather than excluded. Weight should be attached to the wish of the Affiliates to come to court and address arguments as they wished.

Representation of the FSA

  • The FSA had a right to appear at the hearing pursuant to section 362(2) of FSMA. The FSA had been very helpful and would continue to be useful. It must make its submissions by 1 September 2009.

Case management

  • The FSA must serve on the Administrators and each respondent its submissions in respect of the issues by 5pm on Tuesday 1 September 2009.
  • The Administrators, by 5pm on by Tuesday 1 September 2009, must serve on each representative respondent a synopsis outlining the relevant factual position of that representative respondent.
  • Each representative respondent, by 5pm on Tuesday 15 September 2009, must notify the Administrators of any respects in which it disagrees with the relevant synopsis, and provide suggested amendments.
  • Bundles must be served on each of the respondents and the FSA by the Administrators, by 10am on Thursday 17 September 2009. Any further witness statements to be used at the substantive hearing must be filed and served by 5pm on 17 September 2009.
  • By 10 am on Monday 21 September 2009, each respondent is required to indicate in a short position paper its stance on each issue to which it is a respondent. Therefore, it may be the case that at the CMC the need to allow the Affiliates to make representations at the substantive hearing would be reviewed.
  • The CMC would be held on Thursday 24 September 2009, for a period of approximately two days, before Mr Justice Briggs.
  • The Administrators must file and serve on each of the respondents and the FSA a skeleton argument by 10am on 26 October 2009, and the Administrators, the respondents and the FSA would be at liberty to deliver to the court and serve on each party a skeleton argument in reply by 10am on 2 November 2009.
  • The substantive hearing would start on Monday 9 November 2009, for a period of approximately 15-20 days, before Mr Justice Briggs.


  • A PCO was made for each of the represented respondents (where a representative had been appointed) in relation to the relevant issues in each case.
  • The PCO did not apply to the Affiliates, who would attend the substantive hearing at their own risk to costs. The trial judge would assess their costs in the usual way.
  • The PCO did not apply to the working group, as insufficient evidence had been provided. An application under CPR 51 could be made should such evidence be provided.
  • The PCO would not be capped.
  • The PCO would not exclude those seeking to argue that the GTE decision was incorrect. It would be too difficult to separate the issues and slice up costs.
  • The costs were not subject to set-off by LBIE against the respondents.
  • The PCO did not extend to any appeal. This would be addressed at the relevant time.
  • For the time being, the PCO would be considered an expense of the administration.