Moratorium upheld by Court in Lehman administration

A recent case considered whether a proprietary claim could be dealt with as a matter of urgency, in respect of assets held by a company in administration.

Facts

In this case, RAB Capital Plc and RAB Capital Market (Master) Fund (together, "RAB") claimed that they had a proprietary interest in two US treasury bills worth approximately $50 million. The bills were held for RAB, by Lehman Brothers International (Europe) ("Lehman"), pursuant to a prime brokerage agreement. Lehman had entered administration on 15 September 2008.

RAB sought the Court’s permission that its claim be dealt with as a matter of urgency, on the basis that the bills represented a substantial sum of money, equivalent to 95% of RAB’s assets. RAB argued that if it did not receive the bills or the proceeds at this time, this would lead to liquidity problems for a number of funds in the market.

The administrators for Lehman opposed RAB’s application, asserting that the purpose of the statutory moratorium was to give the administrators a ‘breathing space’ in which to resolve the company’s affairs.

Judgment

The judge refused RAB permission for its claim to be expedited. Whilst it was clear that the assets belonged to RAB, it was up to the administrators, not the Court, to deal with such matters in the course of the administration. Whilst the judge had sympathy for RAB, he was concerned not to set a precedent which could potentially open the floodgates for "very, very many" other applications.

Comment

Despite strong arguments from RAB, this case shows the Court’s reluctance to set aside, or to make exceptions to the statutory moratorium. The moratorium exists for a purpose, to preserve and protect the assets of a company while the administrators carry out their duties. It also prevents a creditor "leap frogging" ahead of other creditors’ claims.

Although this decision partly turned on the facts (in that the bills were held in the US by an American entity, as opposed to Lehman in the UK), this decision is likely to deter creditors of a company in administration in attempting to expedite their claims, unless it can be shown that there are wholly exceptional circumstances.

More generally, the Lehman situation has caused a fall in confidence in the UK prime brokerage market. The delay in failing to return assets to creditors has caused hedge funds to start transferring substantial assets out of prime brokers in London to the US, on the basis that regimes overseas provide greater protection. In connection with this, a group of large US hedge funds has called on the Bank of England to intervene to free an estimated £38 billion in assets frozen in London.

RAB Capital Plc and (2) RAB Capital Market (Master) Fund v Lehman Brothers International (Europe), 22 September 2008