Lehman Creditor Claims Update

Transcription

1 Lehman Creditor Claims Update Tony Lomas (PricewaterhouseCoopers) Tony Bugg (Linklaters) Agenda LBIE current status Pension deficit expenses or unsecured claims? Client Money Unsecured claims and Determination Deeds Trust shortfalls Rules for Investment Firm failure UK and US LBHI Chapter 11 proceedings Distributing administration issues

2 LBIE - current status Trust Asset returns, mired by.. Client Money returns, frozen by.. Unsecured claims agreement, complicated by.. Claims v expenses Pension Deficit expenses or unsecured claim? Administration expense liabilities have a direct impact on creditor claims having priority to floating charge holders There are four main categories of administration expense : debts and liabilities arising out of contracts entered into by the company after its entry into administration (para.99(4)); certain liabilities (primarily wages and salary) arising under employment contracts adopted by the Administrator (para.99(5);

3 Pension Deficit expenses or unsecured claim? other administration expenses and the Administrator s remuneration (para.99(3) and Rule 2.67 which provides a list of such expenses and the order in which they are payable); and certain pre-administration liabilities which are treated as if they were administration expenses falling within Rule 2.67 under the principle in Re Lundy Granite (1871) LR 6 Ch App 462 Pension Deficit expenses or unsecured claim? Before Enterprise Act 2002 reforms, the court took a flexible, discretionary approach to administration expenses (Re Atlantic Computer Systems plc [1992] Ch 505 CA) Introduction of Rule 2.67, based on liquidation expenses in Rule 4.218, removed court flexibility: Re Trident Fashions (No.4) [2007] 2 BCLC 455

4 Pension Deficit expenses or unsecured claim? Examples of recent inflexible approach: rent as an administration expense (Goldacre Offices Ltd v Nortel Networks UK Ltd [2010] BCC 299) no apportionment for vacating part way through a rental quarter or for using only part of the premises liability under financial support direction or contribution notice issued against a company after administration not provable therefore an expense (Bloom v The Pensions Regulator [2010] EWHC 3010 (Ch)) Pension Deficit expenses or unsecured claim? Lehman/Nortel decision exposed a number of difficulties: general application: liability depending on exercise of discretion not yet exercised at the date of the administration will not be a contingent liability under Rule 13.12(1)(b) (unless the discretion could realistically only be exercised in one way)

5 Pension Deficit expenses or unsecured claim? limited application: anomaly for liquidations following administration due to changes in Rule applying only to post April 2010 administrations: pre April 2010: cut-off date (by which time liability must exist or obligation incurred) is date of liquidation so non-provable debt/expense in administration may become a provable debt in subsequent liquidation Pension Deficit expenses or unsecured claim? post April 2010: cut-off date is date of earlier administration so non-provable debt/expense in administration remains nonprovable/expense in subsequent liquidation

6 Pension Deficit expenses or unsecured claim? Reform? Law is a mess Insolvency Service held a stakeholder meeting in January to discuss possible changes to the administration expense regime Potential impact noted on lending, distributions, trading administrations, attractiveness of UK for restructurings Focus should be on amending Rule 2.67 and Rule 13.12: Pension Deficit expenses or unsecured claim? to support the purpose of administration by permitting court discretion ensuring that expenses resulting from benefit to the estate are proportionate to that benefit clarifying impact of discretion on contingent debt status No clear timeline for changes and unlikely to be retrospective

7 LBIE current status Some important numbers Ten $1bn issues affecting claims and dividends Assets Liabilities Bar date extension until when? Client Money FSA Client Money Rules as set out in Chapter 7 of the Client Assets Sourcebook ( CASS 7 ) 2.4 bn recovered by the Administrators as client money LBIE is facing pre-administration client money claims in excess of money held in segregated client accounts prior to administration

8 Client Money Court of Appeal held that: Client money protection arises on receipt of funds, not on segregation The client money pool should include all identifiable client money held by LBIE at the time of its administration whether in segregated client accounts or in-house accounts Client money should be distributed on a claims basis (not on a contributions basis) Client Money So we now have to: Identify all clients who had a contractual right to client money protection; Determine the quantum of claims from unsegregated and undersegregated clients We thought the segregated pool was the extent of client money that was immediately available to the clients for whom it had been segregated

9 Client Money Administrators are faced with the prospect that client money claims may be made against funds realised in the House Estate and the Court of Appeal requires them to identify this client money and add it to the client money pool All claimants to client money protection, whether or not it has actually been indentified, are entitled to share in the pool Client Money The Administrators now have to deal with the fact that the House Estate may be mixed with client money, and that is a clog on the ability to identify funds available for distribution Creditors may now be uncertain whether they have a claim against the client money pool, and cannot finalise their claim against the House Estate and participate in a distribution

10 Unsecured claims the search for a consensual approach The size of the problem Negotiation Mid market valuation Debtor or creditor? Need for finality Claim Determination Deeds Challenge of agreeing street side claims Valuation spreads termination dates Objective agree underlying net value of close out amount under all finance agreements with counterparty Provide a methodology for dealing with contingencies - initially client money Facilitate certainty of amount that could be admitted for dividend to enable liquidity and assignment

11 Claim Determination Deeds Accelerate admission of claims Route for distributions to creditors Trust shortfalls add to the population of Unsecureds Client Money Supreme Court outcome? Bankhaus recovery? Trust Assets Identifying and allocating the shortfall CRA (prescribed) v non CRA (not prescribed) Assume the worst? Impact of uncertainty

12 Rules for Investment Firm failure in the future The UK s new regime for investment firm insolvency what has changed from a creditor perspective Rules for Investment Firm failure in the future Why was a Special Administration Regime needed? The Insolvency Act 1986 is robust and flexible, but it does not specifically contemplate the collapse of large, complex, investment firms Particular challenges arose in Lehman in relation to returning money held on trust for clients and resolving complex counterparty and financing positions

13 Rules for Investment Firm failure in the future These challenges were addressed in the short term through the use of a Claims Resolution Agreement which: established standard procedures for terminating and valuing financial contracts, thereby speeding up the process of asset distribution; and facilitated the return of trust assets to clients Rules for Investment Firm failure in the future The Special Administration Regime (SAR) was introduced, following a consultation process, to provide a statutory framework for dealing with failed UK investment banks. The SAR, which has been effective from 8 February 2011, takes into account many of the lessons learnt from the Claims Resolution Agreement.

14 Rules for Investment Firm failure in the future Key features of SAR: SAR is a modified version of the conventional administration procedure The following three special administration objectives apply instead of the conventional administration objectives: One: to ensure the return of client property as soon as reasonably practicable; Rules for Investment Firm failure in the future Two: to ensure timely engagement with market infrastructure bodies and authorities; Three: to rescue the investment bank as a going concern, or else to wind it up in the best interests of its creditors The Administrators have a discretion as to how these special objectives are prioritised Administrators able to set a hard bar date for asset claims

15 Rules for Investment Firm failure in the future Rules governing losses for shortfalls of client securities clarified, with a pro-rata allocation of shortfall among affected clients No need for court permission to distribute client assets Suppliers of key services are obliged to continue to supply them to the Administrator Rules for Investment Firm failure in the future Does the SAR provide a complete framework for resolving creditor claims against investment banks? The new SAR regime does not specifically deal with: Rehypothecated assets; Title transfer arrangements, and Client Money

16 Rules for Investment Firm failure in the future There is still uncertainty regarding: The role of the court; and Applicability to suppliers outside the jurisdiction Much of the detail of SAR will follow in new insolvency rules But many of the lessons learnt from Lehman have now been incorporated into a statutory framework which keeps the UK at the forefront of development in insolvency regimes globally LBI SIPA Trusteeship current status Relevance to LBIE General v customer property SIPA rules, SIPC + law reform Claim Determinations and objections 100% dividend objective Facts before legal principles No Committee limited accountability?

17 LBHI Chapter 11 proceedings Consummation of a plan is principal objective of a chapter 11 case Attempt to achieve equality of treatment for similarly situated creditors with respect to distribution of assets In general, Chapter 11 plans: divide Claims into separate classes specify consideration that each class is to receive contain provisions necessary to implement the plan LBHI Chapter 11 proceedings Deal with Claims and equity interests rather than creditors and shareholders creditors and shareholders may hold claims in more than one class Claims or interests in a class must be substantially similar Plan must specify the treatment that each class will receive and state whether the class is "unimpaired" (i.e., paid in full) or "impaired" (i.e., paid less than in full or otherwise modified)

18 LBHI Chapter 11 proceedings Debtors must demonstrate that Plan satisfies the bankruptcy code confirmation tests, including Compliance with laws Good faith Feasibility Best Interests of Creditors Test Cramdown LBHI Chapter 11 proceedings Class acceptance is 2/3rds in amount and a majority in number of voting class members If an impaired class rejects the Plan, Plan may be crammed down on rejecting class if: (1) at least one impaired class has voted to accept the Plan and (2) the court finds that the treatment provided for objecting classes under the Plan does not "discriminate unfairly" and is "fair and equitable"

19 LBHI Chapter 11 proceedings Unsecured class can be crammed down if the Plan provides payment in full OR that junior classes receive nothing ( absolute priority rule ) Even if accepted by all classes, Debtors must demonstrate the Plan affords dissenting creditors a recovery no worse than they would obtain in a chapter 7 liquidation (the Best Interests of Creditors Test ) LBHI current status Synthetic subcon Claims valuation framework Proof of debt risk weighting Discovery and creditor influence on the process Competing plans

20 Distributing administration issues Para.65 of Schedule B1 of the Insolvency Act 1986 permits the Administrator to make a distribution to unsecured creditors with permission of the court Permission granted to Administrators of LBIE in December 2009 This order activates provisions of Chapter 10 Insolvency Rules 1986, Rules Distributing administration issues Rule 2.95 requires a notice from the Administrator to all creditors, specifying an intention to pay a dividend within 2 months of the last date for proving which must be specified and operates as a soft bar date This procedure effectively incorporates all liquidation rules into the administration Proof of debt, currency conversion, interest, with the relevant date for most purposes being the date of administration

21 Distributing administration issues Set-off Rule 2.85: The account is taken at the date of the notice this creates some uncertainty on exercise of contractual crossnetting Procedure should be modified by permitting the Administrator to serve a notice when he concludes that the company cannot be rescued and he believes there is a reasonable prospect of paying a dividend. Distributing administration issues New rules on bar dates should be prescribed We are still considering the efficiency of using a scheme of arrangement, CVA or other consensual structures to deal with the many outstanding issues that may require greater flexibility or compromise that the current state does not provide

22 Summary Still a long way to go Major lessons learned Trust + Affiliates = Volatility and Delay UK v USA = Major Process Differences