Lehman Decision Results in Practical Difficulties for Administrators: Lehman Brothers International (Europe) (In Administration) sub nom (1) CRC Credit Fund Ltd & Others  EWCA Civ 917
John O’Driscoll, Associate, and Michael Freeman, Paralegal, Orrick, Herrington & Sutcliffe (Europe) LLP, London, UK
On 2 August 2010 the Court of Appeal overturned the High Court decision in Lehman Brothers International (Europe) (in administration) v CRC Credit Fund & 8 Others1 on two significant issues. The case concerned the segregation of client money by Lehman Brothers International Europe (‘LBIE’) (an English company) at the date of its entry into administration. A key question was what money should be classed as client money to be distributed to the former clients of LBIE by the joint administrators. Arden J, in her decision in the Court of Appeal, considered the ruling by Briggs J in the High Court to be a masterful and comprehensive judgment regarding the issues surrounding the distribution of client money. This case note examines how the ruling of Briggs J was overturned on two key points and the impact it may have on the treatment of claims by former clients of LBIE.
The joint administrators (amongst others) have made an application to the Supreme Court seeking permission to appeal this most recent decision as it presents them with a number of practical difficulties. At the date of writing no date has been set for the Supreme Court to consider the application for appeal.
LBIE was the principal trading subsidiary of Lehman Brothers Holding Inc. ('LBHI'), a United States bank. LBIE held substantial amounts of money on behalf of its clients and its business was regulated by the Financial Services Authority ('FSA'). The money held was subject to a statutory trust imposed by Chapter 7 of the Client Asset Sourcebook ('CASS7') (issued by the FSA pursuant to s. 139 of Financial Services and Markets Act 2000 ('FSMA 2000')). CASS7 is a set of statutory rules for market participants and is designed to protect investors.
LBIE provided investment services for clients using the 'alternative approach', permitted under CASS7, for the handling of client money. Under this approach client money was initially deposited into the house accounts of LBIE instead of being directly deposited into segregated client accounts. LBIE would then segregate the money into the client accounts each day according to a reconciliation of client monies conducted at the close of business on the preceding day. This gave LBIE the ability, where appropriate, to net out a client’s positive and negative balances.
LBIE’s last segregation of client money into clients’ segregated accounts occurred on 12 September 2008, three days before the appointment of the joint administrators. This meant that substantial amounts of money deposited with LBIE on 13 and 14 September 2008 were not segregated and remained in LBIE’s house accounts. On 15 September 2008 joint administrators were appointed to LBIE under the Insolvency Act 1986 (as amended). This appointment triggered a 'primary pooling event' (the 'Primary Pooling Event') under CASS7 creating a client money pool (the 'Client Money Pool') under CASS7.9.6R. This Client Money Pool comprises all money deemed to be client money to be distributed to the former clients of LBIE by the joint administrators. The main issue raised in the High Court was whether the money that had been received by LBIE on 13 and 14 September 2008 and not segregated should form part of the Client Money Pool.
High Court decision
In the High Court Briggs J concluded that CASS7 imposed a statutory trust on the monies that LBIE received from or for its clients as soon as they were received.
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