Contrarian Funds Llc v Lomas & Ors

This is an application by Contrarian Funds LLC (Contrarian), claiming to be a creditor of Lehman Brothers International (Europe) (LBIE), for a further extension of time in which to apply to the court to challenge the rejection by the administrators of LBIE of its proof of debt.

LBIE has been in administration since 15 September 2008. On 4 December 2009, the administrators gave notice of their intention to make distributions among unsecured creditors. Persons claiming to be creditors were invited to submit proofs of debt. Distributions totalling some £10.788 billion have since been made among the general body of unsecured creditors, other than those whose debts are subordinated, resulting in the payment of 100p in the £ of their proved debts. There is a surplus which will enable further payments to creditors, for example of statutory interest, to be made.

The proof of debt lodged by Contrarian is based on a contract dated 11 September 2008 for the sale by Orange Capital LLC (Orange) of securities at a price of approximately $2.627 million. Orange claimed that the contract was with LBIE and that it had delivered the securities, giving rise to a claim for the purchase price. In May 2010, Orange assigned its claim to Contrarian. In December 2010, Contrarian as assignee of the claim filed a proof of debt in the sum of approximately £1.465 million (the sterling equivalent of the purchase price). In August 2012, the administrators set out in a letter their conclusion that the contract had been made not with LBIE but with a different company in the Lehman group, Lehman Brothers Inc (LBI), and that therefore they did not consider that Contrarian had a valid claim against LBIE. The letter requested Contrarian to provide any further documentation to support its claim.

No substantive response was received to that letter and, accordingly, on 16 August 2013, the administrators gave formal notice of their rejection of the proof filed by Contrarian. Under rule 2.78 of the Insolvency Rules 1986, Contrarian had a period of 21 days from the date of receipt of the notice in which to apply to the court to reverse or vary the decision of the administrators. That period expired on 6 September 2013.

At the request of Contrarian, the administrators agreed an extension of time to 30 September 2013. This was followed by two further agreed extensions, to 25 October 2013 and 24 January 2014. In the week commencing 6 January 2014, the administrators informed Contrarian that they did not consider that any further extension of time would be appropriate. Contrarian did not request a further extension of time until 24 January 2014, which was refused by the administrators on the same day. An application for an extension of time was issued by Contrarian. The application notice is stamped as received by the court on 4 February 2014, but it is not clear whether it was formally issued on that date or a later date.

The right to challenge the rejection of a proof arises under rule 2.78 of the Insolvency Rules 1986. Rule 2.78(1) provides:

“If a creditor is dissatisfied with the administrator’s decision with respect to his proof (including any decision on the question of preference), he may apply to the court for the decision to be reversed or varied. The application must be made within 21 days of his receiving the statement sent under rule 2.77(2).”

The power of the court to extend the time for an application to challenge the rejection of a proof is conferred in this case by rule 12.9(2), in force at the commencement of the administration of LBIE. It provided:

“The provisions of CPR rule 3.1(2)(a) (the court’s general powers of management) apply so as to enable the court to extend or shorten the time for compliance with anything required or authorised to be done by the [Insolvency] Rules.”

This rule was replaced in 2010 by rule 12A.55(2) in identical terms.

The power to extend or shorten the time for compliance with provisions of the Insolvency Rules extends to all the provisions of the Insolvency Rules, not just those concerned with the commencement or conduct of litigation. Applications for an extension of time made under this rule may therefore give rise to an issue as to whether and, if so, to what extent the other provisions of the CPR relevant to the exercise of a power to extend time, and in particular the provisions of CPR 3.9, and the authoritative guidance provided by decisions of the Court of Appeal, apply to an application for the extension of time made under this provision in the Insolvency Rules.

The approach to be adopted by the court to an application for an extension of time in which to challenge the rejection of a proof of debt was considered in In re Legal and Equitable Securities plc [2010] EWHC 2046 (Ch), [2010] BPIR 1151, [2011] BCC 354. Lewison J, dismissing an appeal from the Registrar, cited and had regard to the factors then listed in CPR 3.9. He also cited the judgment of HH Judge Norris QC (as he then was) in Warley Continental Services Ltd v Johal [2004] BPIR 353, in which the judge held that weight had also to be given to the need for certainty in a collective insolvency proceeding.

Since then, CPR 3.9 has been revised to give effect to the recommendations of Sir Rupert Jackson in his Review of Civil Litigation Costs. As explained in the judgment of the Court of Appeal given by Lord Dyson MR in Mitchell v News Group Newspapers Ltd [2013] EWCA Civ 1537, [2014] 1 WLR 795, the purpose of the reformulation of CPR 3.9 was to give effect to a tougher approach to delays in litigation and non-compliance with orders and rules. Although CPR 3.9 requires the court to consider, on an application for relief from any sanction, “all the circumstances of the case, so as to enable it to deal justly with the application”, only two factors are then specified: first, the need for litigation to be conducted efficiently and at proportionate cost and, secondly, the need to enforce compliance with rules, practice directions and orders. The Court of Appeal held that these considerations should now be regarded as of paramount importance and be given great weight. Where the non-compliance is not trivial and there is no good reason for it, the expectation generally will be that relief from sanctions will be refused. Inadvertent delay by the applicant or its solicitors will not be a good reason for these purposes.

In the later case of Chartwell Estate Agents Ltd v Fergies Properties SA [2014] EWCA Civ 506, the Court of Appeal affirmed a decision to grant relief from sanctions, having regard to all the circumstances of that case, in particular (but not exclusively) because a refusal to grant relief would deprive the claimant of its claim against the defendants.

In considering an application to extend time in the context of litigation brought under the Insolvency Act 1986 and governed by the Insolvency Rules, the approach set out in the current version of the CPR, as explained by the decisions referred to above and other decisions, applies by reason of rule 7.51A(2) (formerly rule 7.51(1)). In this respect, insolvency litigation is no different from any other type of litigation. This approach is, however, less obviously applicable to applications to extend time outside the context of litigation. The whole thrust of Sir Rupert Jackson’s review and the approach of the courts to extensions of time and relief from sanctions is driven by the important public interest in avoiding unnecessary delays in litigation and the need, therefore, to emphasise the importance of complying with time limits set out in rules, practice directions and orders. I am not aware of any similar review having been conducted into the conduct of insolvencies. In any event, the two matters specified in CPR 3.9 are by their terms applicable only to litigation.

The time limit for bringing an application to challenge the rejection of a proof of debt is concerned with litigation, in the sense that it is the step which initiates the litigation between the claimant and the office-holder. It may be that this is sufficient to bring into play the modern approach to litigation but, if so, that includes the need to have regard, as recognised by the Court of Appeal in Chartwell Estate Agents Ltd v Fergies Properties SA, to the fact that a refusal of an extension of time will deprive a claimant of its claim.

While the particular circumstances of litigation will not be relevant to all applications for extensions of time under the Insolvency Rules, there is nonetheless the clear public interest in ensuring as efficient and expeditious an administration of an insolvent estate as can reasonably be achieved. This suggests the need for all interested parties to comply with the time limits specified in the Rules, unless there are good reasons for requiring more time. Some minor delays may be tolerable but anything more will, in the absence of good reason, undermine the proper administration of the estate, to the detriment of the creditors generally and others with an interest in the estate.

Whether a good reason for an extension of time exists will depend on a careful analysis of the facts of the particular case and it is therefore to the detailed facts of this case that I now turn.

In December 2010, Contrarian filed a proof of debt for a claim of £1,464,907.18. The claim is said to be based on a contract dated 11 September 2008 for the sale by Orange of 50,000 shares of common stock of Boskalis Westminster NV (the securities) at a price of $2,627,604.26 (the trade). It is said by Contrarian that the trade was made with LBIE and that the securities were delivered to LBIE by Goldman Sachs acting as Orange’s broker on 16 September 2008, the settlement date under the trade. It is common ground that the purchase price was not paid.

By an agreement dated 5 May 2010, governed by New York law, Orange assigned its claim to Contrarian for $578,072.94 (representing 22% of the claim), on the basis that LBIE had been the counterparty to the trade and that a claim for the full price lay against LBIE. Contrarian has purchased a number of other, unrelated claims against LBIE.

The administrators and their advisers considered this claim, as indeed they considered all the many proofs of debt submitted by those claiming to be creditors of LBIE. The details of the trade, such as date, quantity and price, apparent from documents provided to the administrators in support of the proof showed that the trade had a Lehman trade reference YNXB2J. The records of LBIE showed that the trade had been made not with LBIE but with LBI. This conclusion was also evidenced by a trade execution report dated 11 September 2008 which stated on its face that “Lehman Brothers Inc acted as principal on this transaction”.

On 16 August 2012, the administrators wrote to Contrarian’s solicitors, setting out this conclusion and enclosing a copy of the execution report. They stated that based on the evidence available at that time, they did not consider that Contrarian had a valid claim against LBIE. The letter requested Contrarian to provide any further documentation which demonstrated that the designation of the trade as being with LBI was incorrect.

No substantive response to this letter was received within the following 12 months. Accordingly, on 16 August 2013, the administrators gave formal notice of their rejection of the proof filed by Contrarian. The notice of rejection dated 16 August 2013 referred to the reasons set out in the letter dated 16 August 2012, adding that Contrarian had been unable to provide any further evidence to substantiate a claim against LBIE. It gave notice that Contrarian had 21 days in which to apply to the court for the decision to be reversed or varied.

By a letter dated 2 September 2013, Contrarian’s solicitors requested the administrators to agree an extension of the period for an application to the court. The reason stated was that Contrarian was not currently in a position properly to apply to the court, because it had purchased the claim from Orange and was dependent on the provision of information by Orange in order to prove the validity and enforceability of the claim. In a witness statement in support of the application for an extension, it was stated that Contrarian was still waiting for information and documents from Orange. The administrators agreed an extension of time to 30 September 2013.

A further extension of time to 25 October 2013 was sought in a letter dated 25 September 2013. Contrarian’s solicitors explained that Contrarian had recently been provided with relevant documents and it needed further time in which to review the documents and take advice on the merits of an application to reverse the administrators’ rejection of the proof. Again, the administrators agreed this extension of time.

On 27 September 2013, Contrarian’s solicitors wrote to the administrators’ solicitors, saying that one of the documents they had recently seen was an execution report, which was attached, stating that “… LBIE have acted as principal in the facilitation of this order”. In fact, this was a document which Contrarian had supplied to the administrators in support of its original proof of debt and to which the administrators had referred in their letter dated 16 August 2012. The point made in that letter by the administrators was that this execution report stated that LBIE acted as principal in the facilitation of the order, not in its execution. As the administrators’ letter made clear, this execution report also referred to LBI acting in relation to payment or delivery of securities for the trade. The account reference given on the execution report is an LBI client account and the telephone number was for the New York office of LBI.

Contrarian’s solicitors went on to request from the administrators all documentation relating to the failed trade as at 11 September 2008, including documents within certain categories specified in the letter.

Continued investigations by the administrators indicated that the trade, which they maintained was with LBI, had in fact failed. No securities had been delivered pursuant to it and, accordingly, even if the trade had been with LBIE, the counterparty’s claim would be limited to a claim for loss of profits on the trade, which the administrators calculated as being about €90,000.

On 23 October 2013, Contrarian’s solicitors wrote to the administrators’ solicitors, stating they had received a document from the administrators dated 11 September 2008 “on the effect of which we shall need to take instructions and consider”. In fact, the document had been annexed to the joint administrators’ letter dated 16 August 2012 and had also been annexed to the formal rejection of Contrarian’s proof dated 16 August 2013.

In their letter, Contrarian’s solicitors requested a further extension of time for any application to the court to 24 January 2014. Although the document referred to in their letter had been in Contrarian’s possession since August 2012, the administrators were prepared to agree the proposed extension and a consent order to that effect was duly made.

The administrators continued their investigations and on 4 November 2013 they sent to Contrarian’s solicitors a copy of a SWIFT report confirming that no securities had been delivered in respect of the trade which was the subject of Contrarian’s proof. In the covering email, the administrators’ solicitors stated that, in the course of checking the position, the administrators had noted that on 16 September 2008 BNP Paribas, as Dutch custodian for Lehmans companies, had received 50,000 Boskalis shares from Goldman Sachs for the account of LBIE but pursuant to a different trade with Orange. They suggested that Contrarian should check whether this was the source of the confusion.

In a telephone call on 4 December 2013, Contrarian’s solicitors put various questions to the administrators’ solicitors in connection with the securities which had been delivered pursuant to this other trade.

The administrators’ solicitors set out in detail the administrators’ position in an email dated 11 December 2013. They repeated that the administrators’ primary position was that the trade on which the proof of debt was based was with LBI, not LBIE. They went on to say that even if that trade had been with LBIE, the evidence showed that it had failed and that accordingly Contrarian would be limited to a claim in damages in a sum of approximately €90,000. As regards details concerning the unconnected trade, they reiterated what had previously been said in a telephone conversation on 12 November 2013, that the administrators were not willing to disclose details of LBIE’s trades with third parties in the absence of consent from those third parties. It was understood that Contrarian had approached Orange to obtain consent to the provision of those details but that such consent had not, to date, been provided.

It was indeed the case that Contrarian had been corresponding with Orange in order to obtain more information concerning the trade on which the proof of debt was based and also to obtain Orange’s authority to permit the administrators to disclose details of other trades to Contrarian. That correspondence continued during December 2013 and January 2014.

In a telephone conversation in the week commencing 6 January 2014, the administrators’ solicitors told Contrarian’s solicitors that, in the circumstances, the administrators did not consider it appropriate for there to be a further extension of the period for an application to reverse or vary the rejection of Contrarian’s proof.

By an email sent on 24 January 2014, the day on which the agreed extension of time expired, Contrarian’s solicitors requested a further extension of time “to decide whether” to apply for a reversal or variation of the rejection of Contrarian’s proof. They stated that Orange had advised them that they were pursuing enquires with Goldman Sachs but had not authorised Contrarian to speak directly with the administrators concerning the unconnected trade for the same number of Boskalis shares “nor provided us with a satisfactory explanation regarding the securities LBIE acknowledges receiving”. The email continued:

“Contrarian is frustrated by the time it has taken to get a thorough response from Orange and intends to demand that Orange immediately provide us with information from Goldman Sachs and either allow us to speak with the Joint Administrators and Linklaters directly about the securities LBIE acknowledges receiving or provide us with a cogent explanation as to why those securities are not the subject of the claim assigned to Contrarian.”

The email continued that “Contrarian must obtain satisfactory answers before it can determine the appropriate response to the rejection of its proof of debt by the Joint Administrators.” They ended by requesting an additional extension of time.

The administrators’ solicitors replied on 24 January 2014, refusing an extension and pointing out that the 21-day period provided by the Rules had by consent become a period of 4 ½ months without the provision of additional material, information or evidence by Contrarian.

Contrarian issued an application notice seeking an extension of time to “38 March 2014” (sic). The application notice is stamped as received by the court on 4 February 2014. The draft order served with the application notice provided for an extension of time to 28 February 2014, but I was told by counsel for Contrarian that the extension was intended to be to 31 March 2014. As the hearing before me was not until 7 May 2014, an extension until 30 June 2014 is sought.

On 27 February 2014, Contrarian’s solicitors forwarded to the administrators’ solicitors a message from Orange whereby it confirmed its authorisation for LBIE to release to Contrarian details of the other trades with Orange in respect of Boskalis shares. This authority had in fact been given to the New York office of Contrarian’s lawyers on 30 January 2014.

On 25 March 2014, the administrators’ solicitors provided information regarding these trades, including details of the trade references and the purchase prices. This information appears to confirm that the trade which settled on 16 September 2008 was indeed unconnected with the trade on which Contrarian bases its claims, having both a different trade reference and a different purchase price.

In support of its application for an extension, Contrarian submits as follows. First, the position taken by the administrators as to the merits of Contrarian’s claim is open to doubt and, on the information presently available, Contrarian has a reasonable prospect of success in an application to challenge the rejection of its proof. It has sufficient merit that Contrarian should not be denied the opportunity of pursuing it, particularly because, if established, the administrators have sufficient assets to pay the claim in full. It is a substantial and valuable claim. Secondly, Contrarian is dependent upon information to be provided by third parties, particularly Orange which, it says, has been uncooperative. Thirdly, as recently as March 2014, the administrators provided an additional document, albeit relating to one of the unconnected trades which could not be released without Orange’s authority, which in turn was not provided to the administrators until late February 2014. Fourthly, Contrarian hopes that with further time it will be able to find more information, particularly from Orange and Goldman Sachs, to enable it to challenge the rejection of its proof. Fifthly, an alternative claim against LBI, which the administrators say was the counterparty to the trade, is out of time. Finally, there remain further substantial issues to be determined in the administration of LBIE and the administration is likely to continue for several more years. The resolution of Contrarian’s claim is unlikely to prolong completion of the administration and the sums involved, although substantial to Contrarian, are relatively small in the overall scale of the administration of LBIE.

The first and most important issue is whether Contrarian can demonstrate good grounds for a further extension of time. In my judgment, it cannot do so.

Contrarian knew as long ago as August 2012 that the administrators’ position was that the trade was with LBI, not LBIE. The administrators have not changed their position and they have produced further evidence to support it. There is no evidence before the court, and counsel was unable to provide any explanation, as to the failure to respond substantively to the administrators’ letter dated 16 August 2012. There is no evidence that Contrarian took any steps in the 12 months following that letter to rebut the conclusion to which the administrators had provisionally come. Since then, Contrarian has been corresponding with Orange with a view to obtaining information to support its claim but, as Contrarian itself submits, Orange has been uncooperative. Contrarian is asserting a claim against LBIE only because it took an assignment of the claim from Orange. Just as it would be the responsibility of Orange to supply relevant information to the administrators if it was asserting the claim, so it is the responsibility of Contrarian as the assignee to have made arrangements with Orange to enable it to provide such information, if required, to the administrators.

In fact, it would appear that the assignment agreement made between Contrarian and Orange does confer rights in this respect on Contrarian. Although the contract is governed by New York law, it appears to me that clause 10 confers relevant rights on Contrarian. Clause 10 provides in its second sentence:

“Seller [Orange] agrees that upon Buyer’s [Contrarian] reasonable request and at the sole expense of Buyer to cooperate with Buyer in connection with the prosecution of any claims, suits or causes of action that Buyer may have against any third persons in respect of the Claim (including, but not limited to, an agreement by Seller to segregate, preserve and, if necessary, make available its files, and to identify and make available, on a reasonable basis, its employees and agents who were originally involved in its decision to conduct business with Debtor [LBIE] as well as the Early Termination and determination of amounts owed there under).”

It appears that in the time since August 2012, Contrarian has taken no steps, whether by proceedings in the courts of New York or otherwise, to enforce the obligations of Contrarian to provide evidence, whether under clause 10 or otherwise.

It appears to me that Contrarian has been seriously dilatory in its attempts to support its claim. Moreover, there are no substantial grounds for believing that Orange or Goldman Sachs will be able to produce any further information or evidence to rebut the position taken by the administrators. While it is not for me on this application to form any final view on the merits of Contrarian’s claim, it has to be said that the evidence so far available appears to go all one way. This too seems to be the position of Contrarian. If it thought that it had good grounds for applying to vary or discharge the rejection of its proof, it would by now have made the necessary application. Its position expressly is that it needs more time to obtain more information to consider whether it is appropriate to make such an application. In my judgment, the time for making that decision has long passed.

I do not consider that there is anything in the point made on behalf of Contrarian that there remains still much to be done in the administration of LBIE. While that is undoubtedly true, it is important that any administration, and particularly an administration on this scale, should proceed as expeditiously as possible. The figures given earlier in this judgment as to the amount of distributions so far made shows the scale of the task which the administrators have faced and continue to face in dealing with claims and making distributions. It is vitally important to the conduct of the administration that the momentum in dealing with claims is maintained. The administrators are required to deal fairly as between all claimants. If they were to take a relaxed attitude towards Contrarian, they would be required to take a similar attitude towards other claimants. This would result in wholly unacceptable delays in dealing with the administration.

In their 11^th progress report issued on 11 April 2014 for the period of 6 months ending on 31 March 2014, the administrators stated as one of their objectives during 2014 to attempt to make determinations of remaining creditor claims and to progress the litigation which follows where challenges are made to the rejection of claims. The administrators are reducing LBIE’s workforce to match the requirements for the tasks remaining in the administration. Delays in dealing with claims will result in the need to retain staff longer than would otherwise be necessary. Further, until finality is reached in respect of any particular claim, the administrators have to reserve for it in full, thereby delaying the release of reserves to creditors. The need to reserve extends to reserving for statutory interest on such claims in view of the surplus over proved debts available in the administration.

In my judgment, the administrators have been generous to Contrarian in the extensions of time which they have agreed and no further extension is appropriate.

For the reasons given above, I dismiss the application of Contrarian.