Re Lehman Brothers Futures Asia Ltd (in Liquidation)

HCMP 2264/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2264 OF 2016

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IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2265 OF 2016

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____________________

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2266 OF 2016

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(HEARD TOGETHER)

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REASONS FOR DECISION

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The Application

1.On 21 December 2016 I sanctioned three schemes of arrangements (“Schemes”) between Lehman Brothers Asia Limited (“LB Asia”), Lehman Brothers Futures Asia Limited (“LB Futures”) and Lehman Brothers Securities Asia Limited (“LB Securities”) and their unsecured creditors (“Scheme Creditors”) introduced pursuant to Part 13, Division 2 of the Companies Ordinance, Cap 622 (“Ordinance”).  These are my reasons for doing so.

Introduction

2.Each of the Companies was incorporated in Hong Kong and is wholly owned by Lehman Brothers Pacific Holdings Pte Ltd (“LB Pacific”).  LB Pacific is a Singapore incorporated company, which is in creditors voluntary liquidation.  The joint and several liquidators of LB Pacific are members of KPMG Advisory Services Ptd Ltd in Singapore.  LB Pacific’s ultimate holding company is Lehman Brothers Holdings Inc (“LBHI”).  On 15 September 2008, in circumstances which are well known, LBHI filed for bankruptcy under Chapter 11 of the US Bankruptcy Code.  Petitions were presented for the winding up of LB Futures and LB Securities on 17 September 2008 and of LB Asia on 19 September 2008.

3.On 20 March 2009 in the case of LB Securities and 23 March 2009 in the case of LB Futures and LB Asia, Messrs Patrick Cowley, Edward Middleton and Paul Brough of KPMG were appointed joint and several liquidators (“Joint Liquidators”).  On 5 December 2011 in the case of LB Asia and LB Futures and 9 December 2011 in the case of LB Securities, on his resignation, Mr Brough was replaced by Ms Lui Yee Man. In each Petition the application is made by the Joint Liquidators.  Each Scheme is very similar.  Those differences, which are material I will identify later in this decision.

4.The Joint Liquidators have realised substantial Assets.  By September 2015, they had provided for the payment of all of the Companies’s proved and admitted preferred and ordinary claims in the liquidation.  As the following figures demonstrate the amount of the surplus in each case is very substantial. 

5.In the case of LB Asia the total realised assets is currently HK$3,468,742,008.93 and is anticipated ultimately to be between HK$3,502,686,502.86 and HK$3,514,448,929.95 (before deduction of relevant costs).  The Joint Liquidators have admitted to proof claims totalling HK$1,219,078,736.19. The Joint Liquidators have made distributions to preferential and general unsecured creditors totalling HK$1,635,290,447.30, equating to 134.14 cents in the dollar.  In aggregate these interim distributions represent the repayment of 100% of provable claims of all such creditors, together with interim payment of post liquidation interest (“PLI”) payable in accordance with section 264A of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32.  The Joint Liquidators after the implementation of the Scheme and the payment of Scheme expenses and liquidation costs anticipate that the amount available to members or contributories[1] will be between HK$1,417,655,921.66 to HK$1,508,081,580.33.

6.In the case of Lehman Futures, the Joint Liquidators have realised HK$1,270,318,062.58.  They expect ultimately to realise between HK$1,299,999,386.05 and HK$1,310,015,817.  The Joint Liquidators have admitted claims totalling HK$1,055,448,258.19 and have made distributions to general unsecured creditors, including interim payments of PLI, totalling HK$656,641,592.58, equating to 149 cents in the dollar of claims and to subordinated creditors totalling HK$400,000,000, equating to 65 cents in the dollar.  There will be no surplus available for distribution to members.

7.In the case of Lehman Securities, the Joint Liquidators have realised HK$4,869,563,885.78.  They expect ultimately to realise between HK$4,895,246,232.82 and HK$4,903,728,267.46.  The Joint Liquidators have admitted preferential and unsecured claims totalling HK$2,730,837,704.50 and subordinated claims of HK$103,244,249.41.  The Joint Liquidators have made distributions to preferential and general unsecured creditors totalling HK$3,384,448,040.33 equating to 124 cents in the dollar.  In aggregate these interim dividends represent the repayment of 100% of provable claims of all such creditors together with interim payment of PLI.  It is estimated that surplus is likely to be in the range of HK$410,169,959.78 and HK$461,855,881.07 after payment of Scheme expenses and liquidation costs. 

The Competing Claims

8.The Joint Liquidators understood there to be issues about the entitlement to PLI and other competing claims, which required legal clarification before PLI entitlements could be paid in full.  In summary they are as follows, although as I will explain in subsequent paragraphs not each claim arises in the case of each Company:

PLI

(1) whether distributions which have already been paid to Scheme Creditors should be treated as payments made on the basis of the interest-first approach (where distributions already paid are treated first as payments of accrued PLI, then in reduction of principal) or, alternatively, on the basis of the principal-first approach (where distributions are treated first in reduction of principal and then to payment of accrued PLI);

(2) whether any claim for PLI should accrue up until either: (i) the date that a distribution is declared by the Joint Liquidators; or (ii) the date on which such distribution is paid;

(3) whether PLI is payable on contingent or future debts (and if so, from what date PLI is payable);

Non-provable Claims

(4) whether non-provable claims (in particular currency conversion claims) are claims which can be validly established against any of the Companies under Hong Kong Law;

(5) whether PLI is payable on non-provable claims; and

Ranking and Order of Distribution

(6) what is the order of priority of distribution of assets in the liquidation of the Companies in respect of non-provable claims and PLI.

9.Unlike LB Asia, in the case of LB Futures there are no known non-provable claims to be compromised by its Scheme.  There are, however, subordinated claims to be compromised, but none in the case of LB Asia.  Further, unlike LB Asia, LB Futures may not have sufficient Scheme assets to discharge the full amount of its subordinated claims under its Scheme, and, therefore, as I have already mentioned it is unlikely to be in a position to distribute any assets to its contributories or members.

10.In the case of LB Securities one of its four non-provable claims is a US$11,552.15 claim for damages, rather than a currency conversion claim as they all are in the case of LB Asia.  There are also subordinated claims against LB Securities.  But, as with LB Asia, the Joint Liquidators anticipate that there will be sufficient assets to pay all the claims in LB Futures’s Scheme and there will be surplus assets available for distribution to members or contributories of LB Securities.

11.Similar uncertainties in the Lehman liquidations in England have led to substantial litigation, which is commonly referred to as the “Waterfall” litigation.  Although that litigation is advanced, given the difference between the Hong Kong insolvency regime and that in England, the determination of these issues in the Waterfall litigation in England (which may yet take some time given the various appeals in process) will not necessarily determine the uncertainties arising under the Hong Kong regime.  If the uncertainties were to be litigated in Hong Kong, apart from the inevitable expense, there might well be significant delays before creditors receive the balance of their entitlements.  These concerns led the Joint Liquidators to consider whether these costs and delays could be avoided by a scheme.  As the introduction of the Schemes demonstrates they believe that they have been successful.  One of the reasons it was possible to obtain in principle agreement to the terms of the Schemes, which I will describe later, is that the largest creditors are members of the Lehman group, which are in liquidation and controlled by insolvency practitioners, who have understood the desirability of agreeing the allocation of the surpluses rather than embarking on complex litigation to determine the creditors’ respective entitlements to the surplus that each of the Companies currently has.

Scheme Creditors

12.The profile of the Scheme Creditors of LB Asia is:

(1) 61.67%: members of the Lehman Brothers Group.  The majority of this debt is owed to Lehman Brothers Japan, which is in liquidation and under the supervision of the Tokyo District Court.

(2) 25.55%: Hong Kong Inland Revenue Department, which did not vote in respect of the Scheme and appears to have adopted a neutral position.

(3) 9.63%: investment banks, exchanges, custodians, brokers, professional investors and professional services providers such as law firms, accountancy firms or other financial services firms; and

(4) 3.15%: either:

(i) employees of LB Asia, all understood to be licensed individuals regulated by the Securities and Futures Commission; or

(ii) third party vendors and suppliers of LB Asia.

13.Given the Inland Revenue Department’s position Lehman Brothers associated companies’ debt represented more than 75% in value of the debt voted at the Scheme Meeting, although I was told by Mr Joffe, who appeared for the Liquidators at the hearing of the Petition, that they did not represent a majority in number of Scheme Creditors.

14.The profiles of the Scheme Creditors of LB Securities and LB Futures are:

LB Securities

(1) 80.81%: members of the Lehman Brothers Group;

(2) 12.14%: Inland Revenue Department;

(3) 7.04%: third party exchanges, professional investors and professional services providers such as law firms; and

(4) 0.01%: employees and third party vendors and suppliers of LB Securities.

LB Futures

(5) 97.18%: members of the Lehman Brothers Group;

(6) 2.71%: Inland Revenue Department;

(7) 0.05%: third party professional services providers such as law firms; and

(8) 0.06%: third party vendors and suppliers of LB Futures.

15.As can be seen from these figures members of the Lehman Brothers Group of companies hold the vast majority in value of the debt but in neither case do they represent a majority in number of Scheme Creditors.

Object of the Schemes

16.The Joint Liquidators have proposed the Scheme in order to achieve a fair, efficient and cost-effective means of finally bringing to an end the lengthy liquidation of the Companies.  In order to achieve that objective, the Schemes seek to:

(1) resolve the legal uncertainties mentioned above; and

(2) expedite the Final Distribution Date by setting a Bar Date (currently expected to be 3 January 2017) by which Scheme Creditors must come forward and submit any remaining claims in order to be entitled to receive distributions in the liquidation of the Companies.  This “cut-off” will provide certainty in respect of the population of creditors who are entitled to share in the assets of the Companies.

17.On the Scheme becoming effective, all obligations of the Companies in respect of the Scheme claims (and all other liabilities and any other claims against the Companies howsoever arising) will be released in exchange for the right of Scheme Creditors to receive distributions from Scheme assets in the prescribed amount and in accordance with the ranking and order of priority established by the Scheme.  For the purposes of the Schemes, Scheme Creditors are persons with the benefit of the following claims:

(1) provable claims and its PLI entitlement: these being any preferential or unsecured claims which are capable of being accepted and admitted to proof in the liquidation of a Scheme Company, which are not accepted liquidation claims, together with any corresponding PLI payable on such claims;

(2) claims to PLI entitlements on accepted liquidation claims: these being claims for PLI payable on all accepted liquidation claims; and/or

(3) non-provable claims: being those claims which are barred as a matter of Law from being accepted in the liquidation of the relevant Scheme Company but may have arisen as a result of the insolvency of the Scheme Company.  As I have explained in [9] and [10] this is only relevant to LB Asia and LB Securities.

18.Under the Schemes, the entitlements of each Scheme Creditor are to be determined in the same manner outlined in the Scheme.  In short, on the Schemes being implemented:

(1) Provable claims will be paid.

(2) PLI claims will be determined by means of the application of a defined methodology.

(3) Non-provable claims (including currency conversion claims) will be recognised, but:

(i) a discount of 50% will be applied to the face amount of the claim in order to represent the element of “litigation risk” that these claims may not exist as a matter of applicable Law; and

(ii) no PLI shall accrue on these claims because the express provisions of the underlying legislation in Hong Kong do not require the payment of PLI on such claims.

(4) Distributions will be made from Scheme assets in the following order of priority:

(i) first, to preferential creditors on a pari passu basis until they are discharged in full;

(ii) second, to pay unsecured provable claims on a pari passu basis until they are discharged in full;

(iii) third, to pay PLI entitlements on any accepted liquidation claims and any eligible provable claims on a pari passu basis until they are discharged in full; and

(iv) fourth, to pay all non-provable claims on a pari passu basis (subject to the 50% discount) until the non‑provable claims are discharged in full.

19.Accordingly, the rights which will be released under the Schemes are the rights of Scheme Creditors to have their claims determined by the Court under the Hong Kong winding up regime, which will be replaced by the rights which each Scheme Creditor is given under the Schemes to a predetermined payment.

Legal Principles

20.The principles by reference to which the Companies Court determines whether or not to sanction a scheme of arrangement are uncontroversial and well known.  They are conveniently summarised in The Law of Companies in Hong Kong (2^nd ed) at §19.064, which states (by reference to Buckley on the Companies Acts,14^th ed):

“The court will sanction a proposed scheme of arrangement only where:

(1) ‘the provisions of the statute have been complied with’,

(2) ‘the class was fairly represented by those who attended the meeting and that the statutory majority were acting bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent’ and

(3) ‘the scheme is such that an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve’.”

21.On 6 September 2016 I made orders (“Orders”) in respect of each company permitting them to convene a Scheme class meeting on 14 October 2016 at the offices of DLA Piper in Hong Kong.  I also made directions for the advertisement and service of the notices of the Scheme class meetings and explanatory statements.  I am satisfied that these directions were complied with.

22.In accordance with section 671(3) of the Ordinance, the explanatory statements set out the effect of the arrangement and compromise under the proposed Schemes.  I am satisfied that the explanatory statements contained in each document was sufficient to enable Scheme Creditors to make an informed judgment as to how to vote at the Scheme class meetings.

Constitution of Classes

23.The Orders provided for a single Scheme class meeting to be held for all of the Scheme Creditors of the Companies.  The applicable principles as to class meetings are explained by Lord Millett NPJ in [27] of his judgment in UDL Argos Engineering & Heavy Industries Co Ltd v Li Oi Lin[2]:

“…

(2) Persons whose rights are so dissimilar that they cannot sensibly consult together with a view to their common interest must be given separate meetings. Persons whose rights are sufficiently similar that they can consult together with a view to their common interest should be summoned to a single meeting.

(3) The test is based on similarity or dissimilarity of legal rights against the company, not on similarity or dissimilarity of interests not derived from such legal rights. The fact that individuals may hold divergent views based on their private interests not derived from their legal rights against the company is not a ground for calling separate meetings.

(4) The question is whether the rights which are to be released or varied under the Scheme or the new rights which the Scheme gives in their place are so different that the Scheme must be treated as a compromise or arrangement with more than one class.

…”

24.In the insolvency context a consideration of whether the rights which are to be released are sufficiently similar to justify a single meeting has to take into account the consequences of the insolvency itself and the purpose of the scheme, which it is intended to introduce to replace the rights of creditors to prove in a liquidation.  In the present case the purpose of the Schemes is to resolve the uncertainty that exists about how the surplus assets should be distributed.  I accept that it is, therefore, legitimate to have regard to the creditors’ common interest in establishing a workable scheme as an alternative to litigation when considering whether it is necessary to divide creditors into separate classes for voting purposes.  When considering in this context whether the rights to be released or varied are sufficiently dissimilar that they cannot sensibly be expected to consult together, it is thus necessary to consider not only what is to be replaced and what it is to be replaced with, but also why the compromise embodied in the scheme is proposed.  Consequently, even a material difference in rights is not necessarily sufficient to require creditors to be divided into separate classes if the circumstances of the case demonstrate that notwithstanding differences in existing rights there is sufficient commonality of interest in the commercial purpose and substance of the proposed compromise that they can deliberate on a scheme as one class.

25.This approach has been taken in a number of cases.  In Re Hawk Insurance Co Ltd [3] the Court of Appeal heard an appeal from Arden J who had dismissed a petition seeking sanction of a scheme on the grounds that wrongly only a single meeting of all unsecured creditors had been convened.  The scheme claims had been weighed depending on whether they were unsettled paid claims, claims reported but not paid and claims incurred but not at the material time reported.  Arden J had been of the view that separate class meetings should have been convened reflecting the weighting.  In overturning this decision Chadwick LJ says this at [50] and [51]:

“[50] It is now clear (in so far as it was not clear when the matter was before the judge) that the provisions for weighting in relation to dividends do not reflect any difference in the rights of scheme creditors. On a true understanding of the position, those provisions reflect the need to make a just estimate of those claims – that is to say, claims in respect of outstanding losses and IBNR claims which have elements of contingency and futurity – which are not of certain amount. It would have been possible to achieve the same result by introducing the differential (or discounting) at the valuation stage; so that the value at which the debt was agreed would reflect, in the case of claims in respect of outstanding losses and IBNR losses, those elements of contingency and futurity. It would then be seen, more clearly, that the scheme provided on a crude or ‘rough and ready’ basis – or, as its proponents would put it, on a ‘simplified and inexpensive’ basis – for the admission of claims only after a ‘just estimate’ had been made.

[51] Seen in that light, it becomes clear not only that the provisions of the scheme do not reflect any difference in the rights which are to be released or varied, but also that the new rights given in place of the pre-existing rights do not fall into distinct classes. Applying Bowen LJ’s test from the Sovereign Life case, neither the rights released or varied, nor the new rights given under the scheme, are so dissimilar as to make it impossible for the persons entitled to those rights to consult together with a view to their common interest. The common interest, in the present case, is in achieving a relatively simple, inexpensive and expeditious winding up of the company’s affairs outside a formal liquidation. It is a striking feature of this case that the creditors have, in fact, found it possible to consult together with a view to that common interest: there have been no dissentient voices.”

26.The scheme in In re Telewest Communications plc (No 1)[4] provided for the cancellation of scheme creditors rights in respect of bonds in exchange for new shares denominated in US dollars in a new holding company.  In order to determine the number of shares to which a scheme creditor was entitled it was necessary to convert all claims into a single currency: US dollars.  For that purpose the scheme provided for sterling claims to be converted into US dollars in accordance with a formula included in the scheme and described as an average rate rather than the spot rate on the date the scheme claims were valued.  The holders of sterling denominated bonds objected on the application to convene a single meeting of creditors on the grounds that this was unfair to them and the scheme should not be allowed to proceed in its current form; alternatively, there should be separate meetings of sterling and dollar bondholders.  Richards J (as he then was) rejected both arguments.  In respect of the second argument he explains his reasons in [37] to [40].

“[37] The issue therefore arises as to whether the use in the Telewest scheme of the average exchange rate means that the rights of the sterling bondholders under the scheme are so dissimilar from those of the dollar bondholders that they must form separate classes. As I have already said, this is a matter of judgment on the facts of each particular case. The cases in which the point has previously arisen have concerned different rights in very different circumstances. None the less, those cases do indicate that a broad approach is taken and that the differences may be material, certainly more than de minimis, without leading to separate classes.

[38] In Re Hawk Insurance Co Ltd, future and contingent creditors were included in the same class as present creditors even though their claims would be estimated on a basis described by Chadwick LJ as ‘crude or rough and ready’ rather than in accordance with the fuller procedures to which they were entitled in a liquidation. The right of such creditors to a proper determination of their claims in a liquidation is an important one, which may significantly affect the value of their claims, and adoption of the rough and ready basis for assessment may produce materially adverse results for them. None the less, although the Court of Appeal treated the scheme as involving different rights for the future and contingent creditors, they were not in the circumstances of that case so dissimilar as to require separate classes.

[39] In Re Equitable Life Assurance Society [2002] EWHC 140 (Ch), [2002] 2 BCLC 510, a separate class was constituted by policyholders in respect of their possible misselling claims. Apart from one distinction based in a rough and ready fashion between those whose claims would pre-date the commencement of the Financial Services Act 1986 and the remaining policyholders, all potential claims were to be treated as if they had the same strength. In fact, this was almost certainly not the position and it is likely that there was a wide disparity in the relative merits of claims. In particular it was argued that the so-called late joiners, who took out their policies shortly before the society ceased to write new business, had substantially stronger claims with the result that they should constitute a separate class. In rejecting this approach, Lloyd J pointed out that assessment of misselling claims on an individual basis would be incompatible with the aim of the scheme to achieve a final and speedy resolution. The ground for his decision to treat the class as one was that the late joiners were not in a fundamentally different position from all other members of the class.

[40] In the present case there is a great deal more which unites the bondholders than divides them. They are all creditors of Telewest with presently payable debts of very large amounts and they will all receive shares in the new holding company in place of their bonds, which will be cancelled. The distribution of the shares will be pro rata to their claims as bondholders. The average exchange rate will produce a single exchange rate for all sterling claims which will directly affect the proportions in which the new shares are distributed for all bondholders. Adopting the approach of Chadwick LJ in Re Hawk Insurance Co Ltd the scheme appears to be a single arrangement with all bondholders rather than separate but linked arrangements with the sterling and the dollar bondholders.”

27.A similar approach was taken by Kwan J (as she then was) in Re Perfect Sense Group Ltd [5].  The proposed scheme provided for an enhanced distribution to creditors of the company who were its suppliers (60%).  Other unsecured creditors, who appear to have been largely banks and intra‑group companies, received less (20%) on the grounds that maintaining a good relationship with the company’s suppliers was critical to the rehabilitation of the business.  The suppliers’ debt represented approximately 8% of the total debt and bank debt approximately 80%.  A significant amount of the intra-group debt represented debt purchased from suppliers on terms similar to that proposed by the scheme.  There appear to have been only two unsecured creditors who did not fall into either of these two categories, who were owed small amounts.  There was one class meeting of all unsecured creditors.  The scheme was overwhelming approved both in value and number.  It necessarily follows this was because the banks supported the scheme.  Kwan J considered that the class was properly constituted.  She says this in [28] and [34].

“28. The proposer of a scheme is free to select the creditors to whom a scheme should be put, provided that the rights of the creditors and the effect of the scheme on those rights are not so dissimilar as to make it impossible for those creditors to consult together with a view to acting in their common interest (Sea Assets Ltd v Perusahaan Perseroan (Persero) Pt Perusahaan Penerbangan Garuda Indonesia [2001] EWCA Civ 1696, paras.33-51 and 66).

…

34. Further, it was not thought necessary to treat the Suppliers as a separate class on account of their proposed enhanced distribution. The rights of the suppliers are not so dissimilar to those of the other creditors as to make it impossible for the creditors to consult. There is a single compromise between the Company and all of its admitted unsecured creditors, all based on the sale of the business to the Investor in the restructuring plan. Paying the suppliers a greater dividend ensured continuity of supply for the business and made it more saleable to the Investor.”

28.The facts of this case are relatively extreme. For that reason, it serves to emphasise the considerable importance that the court attaches to the commonality of interest in the beneficial result of scheme when determining classes.

29.It seems to me clear that in the present case the Scheme Creditors of each Company have a common interest in avoiding the expense and delay of litigation to resolve the technical legal issues that arise as a result of there being a sizable surplus in each liquidation. Although inevitably there will be winners and losers as a result of the Scheme, because some Scheme Creditors will end up receiving less than they would have if the matter were left to be determined by the court, it does not seem to me that this of itself is a reason to require them to vote in separate classes. Each Scheme Creditor is in the same position.  They are being asked to give up a right of uncertain value in return for the certainty, cost effectiveness and expedition provided by the Schemes.  Neither does it seem to me that it matters that the Joint Liquidators have had to make an assessment of how much should be allocated to each group of Scheme Creditors and this division will to some degree have involved a rough estimate of what is fair.  What is more important is that the Scheme was properly explained and that in my view it is realistic to expect the Scheme Creditors to understand the nature of the disputes that the Schemes are intended to resolve, how they impact on their rights and to be capable of assessing whether acceptance of the Scheme is preferable to protracted litigation.  This is a subject I address further in [32] and [33].

30.An issue which I raised at the hearing with Mr Joffe was whether LB Pacific should have been made a party to the LB Asia and LB Securities Schemes as they impact potentially on the amount of the surplus available for distribution to them and they, therefore, have an indirect economic interest in their effect.  I am satisfied that this was not necessary.

31.The parties to the Schemes (cl 2.2) are the Scheme Companies, acting through their respective liquidators, and the Scheme Creditors.  In substance the Schemes are an arrangement between creditors with provable claims, an entitlement to PLI and non‑provable claims (which are except in the case of LB Futures and one claim for damages[6] in the case of LB Securities, currency conversion claims), by which they agree to compromise those claims in return for payments calculated according to the terms contained in sections 7 and 8 of the Schemes.  Although the Schemes are likely to effect the amount of any surplus that might be available for distribution to LB Pacific it does not purport to alter the member’s rights.  The Liquidators on behalf of the Companies have agreed that the Companies be bound by the arrangement approved by Scheme Creditors and in my view it was not necessary for LB Pacific to be asked independently to approve the Scheme as part of the procedure specified in Division 2 of Part 13 of the Ordinance.

Information provided to Scheme Creditors

32.The notice of the Scheme class meeting sent to Scheme Creditors was accompanied by an explanatory statement; and the directed advertisements stated where and how the Explanatory Statement could be obtained.  In accordance with section 671(3) of the Ordinance, the explanatory statement sets out the effect of the arrangement and compromise under the Schemes.  In particular the explanatory statements:

(1) explain the background to, and current status of, the liquidation of the Companies, their Creditor profile and the aggregate value of known Scheme Claims;

(2) provide a detailed summary of the legal uncertainties which the Scheme seeks to address in respect of the calculation of PLI entitlements and the existence and ranking of certain other claims such as non-provable claims and subordinated claims;

(3) explain the nature and key provisions of the Scheme, including how Scheme Claims will be calculated and how entitlements will be distributed, instructions on how to vote at the Scheme meeting, a summary of key dates and answers to frequently asked questions;

(4) summarise the alternatives to the Scheme and the likely outcome should the Scheme not be approved, namely that the Scheme Creditors will continue to participate in the liquidation and any further distributions will be deferred for an indefinite period pending resolution of the legal uncertainties through proceedings in Hong Kong;

(5) explain that Scheme Creditors may ultimately receive a greater or smaller amount in respect of their Claim than would have been the case if they had awaited the outcome of any proceedings determining their entitlement;

(6) in compliance with section 671(3) and (4) of the Ordinance, confirm that there is no director of the Companies who has any material interest in any of the Companies, which will be effected by the Scheme differently to the way like interests of other Scheme Creditors will be effected by the Scheme; and

(7) explain that the costs, charges and expenses incurred by the companies and the Joint Liquidators in connection with the Scheme will be paid by the companies in full from assets which do not form part of the Scheme assets and as approved by the Committee of Inspection or the Court.

33.The Scheme deals with sophisticated matters.  It seems to me that the explanatory statements address these matters in a way that allows a Scheme Creditor to understand them and understand how it is proposed to address these issues sufficiently to allow Scheme Creditors to make an informed decision whether or not to support, whichever of the Schemes will affect the Scheme Creditor.

Are the Schemes ones which a Scheme Creditor could reasonably approve

34.In my view the Schemes are also such that an intelligent and honest person acting in respect of his interest might reasonably approve.

Required Majority

35.The Scheme class meetings were convened on 14 October 2016 in accordance with my Order.  The Order also required Mr Cowley of the Joint Liquidators to report the result of the Scheme class meeting to the Court.  Mr Cowly confirms that in each case the statutory majorities were obtained, namely, a majority in number representing 75% in value of Scheme Creditors present and voting, in person or by proxy, voted in favour of the Scheme: section 674(1)(a) of the Ordinance.  The precise result in respect of each company was as follows:

(1) In the case of LB Asia, Scheme Creditors representing HK$1,235,408,132.70 (representing 66.4% of total admitted liabilities of LB Asia) in value of admitted debt voted and all voted in favour of the Scheme.

(2) In the case of LB Securities, Scheme Creditors representing HK$3,675,507,120.57 (representing 85.8% of total accepted liabilities of LB Securities) in value of admitted debt voted and all voted in favour of the Scheme.

(3) In the case of LB Futures, Scheme Creditor representing HK$1,249,010,166.77 (representing 97.2% of total accepted liabilities of LB Futures) in value of admitted debt voted and all voted in favour of the Scheme.

36.I am satisfied that the provisions of the Ordinance have been satisfied.

Conclusion

37.For the above reasons I have sanctioned each of the three Schemes.

Mr Victor Joffe, instructed by DLA Piper Hong Kong, for the applicant & joint and several liquidators of Lehman Brothers Futures Asia Limited, Lehman Brothers Asia Limited and Lehman Brothers Securities Asia Limited

Mr Jeremy Bartlett SC, instructed by Kirkland & Ellis, for Lehman Brothers Holdings Inc