Payment of interim dividends to unsecured creditors

A second unsecured creditor interim dividend of 43.3% was paid on 28 June 2013 and catch-up dividends (for late admitted creditors) were paid at the planned monthly payment dates. This brings the total cumulative dividend paid to unsecured creditors to 68.5%.

The administrators intend to pay a third interim dividend to unsecured creditors on or around 29 November 2013, with further catch-up dividends also planned (as outlined in Appendix C of the Report). The amount of the third interim dividend is not yet known. Further details on the third interim dividend are likely to be addressed in a webinar on 5 November 2013 (see below).

All unsecured creditors that have submitted Proofs of Debt (PoDs) will receive a written notice of the declaration of the third interim dividend prior to the distribution setting out certain matters including:

i. the dividend rate;
ii. the total amount of dividend being distributed in respect of admitted claims; and
iii. the level of reserves for unsettled claims.

For all compliant PoDs (and where the claim has not already been admitted or rejected) the administrators will make a reserve. Reserves will also be made for other contingencies.

In order to be able to take part in the third interim dividend creditors will need to have an agreed and admitted claim in the LBIE administration by 31 October 2013.

In order to have an agreed and admitted claim in the LBIE administration the following must have occurred:

• A valid PoD must have been submitted via the creditors' portal;
• The claim must have been assessed by LBIE;
• The claim must be agreed with the administrators (i.e. the creditor must have executed a Claims Determination Deed (CDD) or similar agreement); and
• Standard settlement instructions must have been provided for a GBP bank account.

In order to take part in the third interim dividend, those creditors whose claims have already been agreed and admitted in LBIE's administration (i.e. through a CDD or equivalent) and who have already provided standard settlement instructions need only confirm through the LBIE portal that: (i) the standard settlement instructions remain the same (or provide new details if they have changed); and (ii) they remain the owner of the claim.

Clients who are in a position to progress the admittance of their unsecured claim in the LBIE administration are strongly urged to do so prior to the 31 October 2013 deadline. Clients who are unable to agree their claim and have it admitted in the LBIE administration in time for the third interim dividend payment (i.e. by 31 October 2013) will, however, be able to receive catch up payments (for the first, second and third interim dividends) in due course once their claim is agreed and admitted. Appendix C of the Report sets out the timetable for catch up payments.

While the soft bar date for lodging PoDs has passed, there remains no hard bar date and it is, therefore, still possible to submit a PoD. Any clients yet to submit a PoD are strongly urged to do so as soon as possible. Further, clients who have submitted a PoD but are yet to agree their claim with LBIE are strongly urged to progress matters. While LBIE’s administration still has some time to run it is clear from the Report that the administration is entering into its more final stages (with many issues that were proving to be sticking points resolved) and therefore any negotiations with LBIE concerning claims admittance should now be prioritised (especially as there is a significant dividend available for unsecured creditors).

Estimated outcome for unsecured claims

A revised indicative financial outcome in the Report estimates an overall dividend level for unsecured, unsubordinated claims of approximately 93% - 100% (with a £5.25bn surplus at the high case estimate).  This excludes the claims of LBIE’s shareholders and claims for the payment of post-administration interest. This is once again a material improvement from past progress reports. The low case outcome has improved largely due to Lehman Brothers Inc (LBI) related benefits concerning certain shortfall claims that are now unlikely to crystallise and favourable variance created by realising the value of a general estate claim against LBI. The updated high case outcome has improved due to better than expected recoveries, an increase in the estimate of future recoveries and a reduction in claims largely facilitated by the LBI settlement (see below). However, the Report states that the estimated outcomes are based on, among other things, the assumption that no losses are suffered as a result of the credit risk to the LBIE unsecured estate and the success of (or assumed outcomes of) certain strands of litigation which are currently being conducted. Should any of the above not turn out as expected then the indicative financial outcome would alter from that set out in the Report. The Report also highlights that there continues to be significant matters which remain unresolved which could materially impact on the indicative financial outcome which for reasons of commercial sensitivity, confidentiality and/or legal privilege, detail is not provided for in the Report.

The improved financial position highlighted by the Report strongly suggests that there may be sufficient funds to settle all provable claims leaving a surplus to fund the payment of post-administration interest and/or the claims of LBIE’s shareholders. How any surplus would be applied is a matter of significant complexity and is subject to a court application known as the Waterfall Application – see below for further details.

Small claims settlement offer

In May 2012, the administrators launched the Small Claims Settlement Offer (SCSO) which provided creditors with the opportunity to receive a single payment in full and final settlement of their unsecured claims. To read more on the SCSO, click here for our client bulletin.

The SCSO had a high acceptance rate resulting in 759 counterparties receiving 90% on their agreed claims. On 28 June 2013, the administrators paid approximately £0.01 billion to settle a further 88 claims under the SCSO. The SCSO was closed to participants on 22 March 2013 and, accordingly, a total of 845 non-affiliate creditors have participated in the “full and final” settlement offer. 

The Consensual Approach and creditors' claims

The Consensual Approach is the process that the administrators have adopted for dealing with unsecured claims. Please click here for our bulletin on the 12 October 2012 progress report which contains further details on the Consensual Approach. Creditors’ claims continue to be agreed under the Consensual Approach.

In relation to the bilateral claims agreement process initiated with those creditors who formally rejected LBIE’s offer under the Consensual Approach, requests for additional evidentiary documentation has been sent to a number of claimants in order to substantiate their claims. On the basis of further evidence received, 72 revised offers were issued with 45 claims subsequently agreed as a result. The administrators intend to continue bilateral negotiations to agree or cap claims in order to reduce the reserves required for the third interim distribution. Where it is not possible to agree claims through bilateral negotiations litigation to resolve these claims may be needed which would extend the timescale for the resolution of such claims and the ultimate release of reserves for distribution.

The administrators have also continued to issue formal claim rejection notices. Over the last six months, 71 claims were formally rejected. In response to a rejection notice one claimant has commenced litigation proceedings disputing their claim's rejection. A further 92 claimants have withdrawn their PoD.

In respect of claims where LBIE’s administrators are yet to make an offer, absent a counterparty agreeing to withdraw its claim or providing substantive evidence in support of its claim, it is expected that the administrators will formally reject a significant number of such claims over the next 6 months.

LBI settlement

The LBI settlement heads of terms announced on 5 October 2012 were committed to a binding agreement on 21 February 2013. The US Bankruptcy Court approved the settlement on 16 April 2013 and the UK High Court, at a hearing on 1 May 2013, granted an order for the administrators to compel LBIE to perform its obligations under the LBI settlement agreement.

In parallel with negotiating the LBI settlement, a consensual proposal (the LBI Consensual Proposal) was developed to govern the allocation of this recovery between relevant LBIE counterparties. For further derails on the LBI Consensual Proposal and the LBI settlement click here. By June 2013, LBIE had accepted offers under the LBI Consensual Proposal, from around 95% of eligible beneficiaries which, coupled with the court approvals and a number of amendments to the claim resolution agreement (CRA), meant that the LBI settlement and LBI Consensual Proposal therefore became unconditional and effective as of 7 June 2013.

On 10 June 2013, cash was recovered from LBI and all securities were recovered on 13 June 2013. The transfer of the securities portfolio from LBI allowed LBIE to commence the liquidation process immediately on 13 June 2013, with realisations to date of $4.47 billion. The remaining securities of $0.14 billion are comprised of $0.13 billion of ring-fenced disputed claims from non-consenting beneficiaries and $0.01 billion which has yet to be liquidated.

A first gross distribution of $7.81 billion at 100% of best claim values (as calculated under the Consensual Approach principles and increased marginally following adjustments for disputes and certain other issues) was paid on 26 September 2013. $4.83 billion was distributed to beneficiaries, with the remainder being held in reserve for US withholding tax purposes and other permitted deductions. A resolution was reached with the largest non-consenting beneficiary at a claim value higher than the best claim value, but below its submitted claim, prior to the first distribution. 20 non-consenting beneficiaries remain, only 4 of which have claims of over $0.01 billion.

The report indicates that significant progress has now been made with the US Internal Revenue Service in resolving the manner in which settlement payments made under the LBI Consensual Proposal should be treated for US withholding tax purposes with an interim solution of a tax deposit mechanism agreed to facilitate the first distribution (LBIE reserved up to approximately 30% of the best claim value of each beneficiary). The Report indicates that the administrators are hopeful that the release of any excess reserves to beneficiaries may be completed by the end of 2013.

Pre-Administration Client Money

The first interim client money distribution took place on 23 April 2013 at the rate of 23.2% with a catch up dividend paid to 9 counterparties subsequently. As at 14 September 2013, 44 counterparties have retained their client money entitlements, of which 43 have received distributions of $0.02 billion. A significant number of other clients have elected, instead, to take an unsecured claim and assign their client money claims to LBIE’s nominee. Engagement with and client money determinations for remaining counterparties are on-going.

Following payment of the first interim client money distribution, the pre-administration client money pool was $1.20 billion as at 14 September 2013. The dispute concerning LBIE’s claim against LBB for $1 billion of pre-administration client money continues with the next hearing scheduled for November 2013. LBIE has stipulated a guarantee claim against LBHI to the extent that it is unable to recover all of the client money deposited with LBB pre-administration. Pending final legal advice there is also likely to be a transfer of $0.16 billion from the post-administration client money account into the pre-administration client money account.

There remain a number of complex matters to be addressed before the client money estate can finally be resolved. In order to avoid the need for lengthy and complex litigation, subject to the resolution of the majority of the remaining outstanding client money claimants, the administrators propose to make an application seeking confirmation from the UK High Court that, having made the final payment to all third party claimants and having deposited an appropriate amount with the UK High Court for uncontactable counterparties (and having returned any surplus to the general unsecured estate), LBIE has discharged its statutory trust obligations.

Further background information on pre-administration client money can be found in our bulletin on the 12 October 2012 progress report - please click here to access this.

Client Assets

The Report highlights that the administrators continue to make progress in returning client assets through the CRA and other bilateral processes.

Following the LBI settlement becoming effective (see above), the issues concerning the return of client assets which had been blocked by matters concerning LBI have been largely resolved. Subject to pre-conditions being met, these client assets are now being returned to counterparties. However, the continuing extended liens litigation continues to prevent the release of client assets held for LBIE's clients by Lehman entities subject to insolvency proceedings in Hong Kong (LBHK).

The Report also highlights that an exercise to agree allocations of securities that are in partial shortfall across non-CRA counterparties has also commenced. Subject to agreement with impacted counterparties, this programme will enable client assets affected by partial shortfalls to be returned and for the remaining asset shortfall claims against the general unsecured estate to be finalised.

The administrators are still working towards the resolution of over-claims (i.e. multiple claims to the same asset) against both assets held within and outside LBIE’s control. The Report indicates that over-claims of £0.59 billion were materially resolved or reconciled in the last six months. The US Bankruptcy Court order approving the LBI settlement dealt with the issue of duplicate claims against LBI by dismissing all such duplicate claims.

Litigation and the resolution of disputes

The administrators have announced that the settlements reached with affiliates have considerably narrowed the ongoing litigation focus, albeit litigation is expected to increase with non-affiliate counterparties, in particular relating to rejections of unsecured claims.

The Waterfall Application – shareholders’ claims and post-administration interest

LBIE and its two shareholders, LB Holdings Intermediate 2 Limited (LBHI2) and Lehman Brothers Limited (the Shareholders), have made a joint application to the High Court to seek a determination on issues relating to contribution rights and ranking priority. The hearing is scheduled for November 2013 and will:

• address the status of claims against LBIE filed by the Shareholders;
• in the event that LBIE's funds for distribution are sufficient to settle in full the provable claims of ordinary unsecured creditors, ascertain the relative order of ranking for: (a) interest accruing on LBIE's liabilities pursuant to rule 2.88 of the Insolvency Rules (rule 2.88 provides that post-administration interest will only be paid out of any surplus  once all provable debts have been paid) and (b) the claims of the Shareholders including LBHI2’s claim under three subordinated debt facility agreements; and
• identify, to the extent that LBIE's funds for distribution are insufficient to settle the claims of ordinary unsecured creditors in full, the obligations of the Shareholders to contribute and meet the shortfall and the respective rights between the Shareholders.

The administrators consider that the interest claims of the ordinary unsecured creditors should be paid in priority to the Shareholders’ claims, whereas the Shareholders hold the contrary position. LBIE has not yet made a contribution claim against either Shareholder but reserves the right to do so. No estimate of recovery has been assumed in the indicative financial outcome contained in the Report. LBIE has now though begun its review of the PoDs filed by the Shareholders against LBIE. LBHI has joined the application (supporting the position of the Shareholders) as has Lydian Overseas Partners Master Fund Limited (Lydian) which is an ordinary unsecured creditor of LBIE (and is supporting the position of the administrators). Lydian has also raised a further point for consideration by the court relating to the standing of claims subject to foreign currency losses during the period of administration.

As well as preparing for the Waterfall Application the administrators have also been considering a number of related issues surrounding post-administration interest, notably, the rate of such interest and from what date such interest accrues. In order to avoid referring these complex issues to the UK High Court the Report indicates that the administrators are exploring ways to implement a standard methodology to determine creditors’ post-administration interest claims which will be equitable to unsecured creditors as a whole. It is possible that a company voluntary arrangement or scheme of arrangement may be proposed. A number of factors (such as the outcome of the Waterfall Application, the timing and quantum of further unsecured distributions, the agreement or rejection of further unsecured claims and material changes to the indicative financial outcome) will contribute to whether questions concerning post-administration interest become live and, if they do (which we would expect them to), the ability of the administrators to resolve post-administration interest issues expeditiously.

Extended liens

The judgment, in LBIE’s favour, of the UK High Court in relation to extended liens in September 2012 was initially subject to appeals. These appeals were withdrawn on 17 May 2013 allowing the original judgment to stand. This has led to progress being made in making distributions to counterparties which were previously obstructed by this matter, together with the release of assets into the general unsecured estate which were previously ring-fenced.

LBIE's recovery of assets from LBHK still remains contingent on the outcome of the separate Hong Kong legal proceedings relating to extended liens. A court hearing was scheduled to take place on 8 October 2013 in order to obtain the court’s approval for an accelerated return of such assets and it remains possible that these assets may be recovered by LBIE early in 2014.

Pension scheme deficit

LBIE is one of six affiliates entitled to receive a financial support direction (FSD) as judged by the Pension Regulator’s determinations panel. The UK Supreme Court held, on 24 June 2013, that such a claim should be treated as a provable unsecured claim in the administration and not, as previously ruled, as an expense of the administration.

The administrators are liaising with other interested parties in order to determine how this liability should be allocated across the wider affiliate group subject to the FSD determination. In the interim, LBIE has assumed the quantum of the claim to be the liability as notified to the principal employer, Lehman Brothers Limited ($0.12 billion). Therefore, at the present, the full liability is being reserved for by LBIE.

Other Lehman entities in UK administration have applied to the UK High Court for directions on whether the maximum liability under their financial support directions is $0.12 billion or a higher figure and whether the maximum liability reflects an aggregate liability of all financial support direction targets or a separate maximum liability for each target individually. LBIE has joined this UK High Court application.

ISDA Section 2(a)(iii) and live derivative positions

The administrators continue to explore commercial solutions to resolve remaining live derivative positions.

Non-mutual set-off

LBIE continues to seek consensual resolutions to disputes over non-mutual set-off. Settlement has been reached with one counterparty on this issue and LBIE continues to progress dialogue with other counterparties where this issue remains live.

Asset recovery

The administrators have indicated that legal proceedings are being prepared against a number of debtor groups, but that litigation remains the last resort to all other reasonable settlement routes.

Lehman affiliates

The Report highlights the progress that has been made in seeking the return of client assets and money from various Lehman affiliates, with a reduction in continuing reserves for other affiliate claims in the indicative financial outcome. Key points include:

• the LBI settlement agreement became effective on 7 June 2013 (see above). As a result, LBIE’s exposure to LBI has been almost eliminated during the last six months. The settlement agreement enabled the liquidation of the general estate claim in three tranches during June 2013, generating net proceeds of £.1.11 billion;
• the LBIE and Lehman Brothers Finance S.A. (Switzerland) settlement became effective on 2 April 2013;
• following a settlement becoming effective on 4 October 2012 in respect of Lehman Brothers (Luxembourg) S.A. (LB Lux) creditors and the Luxembourg supervisory court, the majority of the inbound LB Lux claims were withdrawn. LB Lux’s outstanding trust claim against LBIE has now been agreed, with a settlement in principle reached. This will comprise of: (i) payment of £0.03 billion by LBIE to LB Lux together with the resolution of a number of disputes relating to underlying counterparties; and (ii) the admission by LBIE of an inbound unsecured claim of £0.06 billion. Once this settlement is completed this will resolve all remaining obstacles in the LB Lux estate;
• the return of assets to LBIE from LBHK is still contingent on the outcome of the extended liens litigation (see above for further information);
• extended liens issues have been resolved in respect of Lehman Brothers Japan Inc. (LBJ) and cash and assets of £0.6 billion were received by LBIE from LBJ on 25 September 2013. LBIE is in the process of liquidating these positions;
• the Lehman Brothers (Luxembourg) Equity Finance S.A. settlement agreed on 15 March 2013 has now received approval from the Luxembourg court and, therefore, LBIE’s inbound claim has been admitted at a value of £0.06 billion. Unfunded warrants within LBIE’s control are in the process of being cancelled; and
• efforts continue to negotiate a settlement with LBB's officeholders in respect of LBIE's client money and net unsecured claims into LBB as well as LBB's own counterclaim. LBB's counterclaim was dismissed on jurisdiction grounds by the German Appeal Court in December 2012. LBB have made a further appeal to the German Supreme Court, and a hearing is unlikely before 2014. A hearing in relation to LBIE's client money claim is scheduled for November this year.

Administrators’ webinar

The administrators will host a one-hour webinar on 5 November 2013, giving creditors the opportunity to hear a summary of the key issues raised in the Report, together with a question and answer session. We would also expect further details concerning the third interim distribution to be provided. ‎The webinar can be accessed on the PwC website on 5 November 2013. We expect there to be the ability to submit questions before 5 November and the facility to submit questions during the call. Further information in relation to the webinar is expected to be available on the PwC/Lehmans website in the near future.

Click here for a copy of the full Report.