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Lehman Brothers
Hong Kong Incorporated Entities - Latest Updates
Lehman FAQs
1. What should creditors do with regards to LBHI?
(August 2009)
Note: Creditors should seek their own independent professional advice with regard
to filing their specific claims against their debtors and guarantors.
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If a creditor submits a guarantee claim against a guarantor (e.g. LBHI), would the creditor's direct claim against the principal debtor be affected?
A creditor will not generally be entitled to receive aggregate dividends of more than 100 cents in the dollar in respect of successful claims arising from essentially the same debt (the "rule against double-proof or double-counting"), but the direct claim against the principal debtor would generally stand.
- If a creditor's guarantee claim is admitted by the guarantor (e.g. LBHI), would its claim against the principal debtor be admitted?
Generally speaking, yes. That the claim under the guarantee has been admitted is generally no bar to the filing of the direct claim against the principal debtor. The rule against double-counting would apply.
- If a creditor's guarantee claim against a guarantor (e.g. LBHI) is admitted in part, would the residual amount be considered by the principal debtor?
Generally speaking, yes, subject to the rule against double-counting.
- If the relevant guarantor (e.g. LBHI) admits the whole of a creditor's claim under a guarantee, but only part of the claim is actually paid, would the creditor be able to claim the balance from the principal debtor?
Generally speaking, yes, subject to the rule against double-counting.
"In general, under Hong Kong law, creditors are not entitled to receive aggregate dividends of more than 100 cents in the dollar in respect of successful claims arising from essentially the same debt (the "rule against double-proofs or double counting"). The point in time at, and manner in, which the rule operates will depend upon a variety of factors including, for example, as to the timing of lodging of proofs of claim by the various parties.
It is not possible for the liquidators to comment on a case by case basis, nor to comment on an individual creditor's legal position in any jurisdiction. Given that it is understood that claims not filed by the stipulated cut-off dates within the U.S. insolvency proceedings will be barred and therefore lost, creditors are urged to file within the appropriate timelines all claims that they consider, after taking such professional advice as seems appropriate, are valid and subsisting. Claims should also be filed promptly in Hong Kong and other jurisdictions to facilitate their consideration as early as possible. All such claims will then fall to be adjudicated by the insolvency practitioners in the relevant jurisdictions.
Creditors are requested to advise the liquidators upon receiving any amounts in respect of a claim or claims which have also been filed against an entity to which the liquidators have been appointed in Hong Kong."
2. What happened to Lehman Brothers and what is the Liquidators' involvement?
- Lehman Brothers Holding Incorporated (the ultimate parent company of the Lehman Brothers global group) filed for bankruptcy in the US courts on 15 September, 2008.
- The firm of Alvarez and Marsal (A&M) was appointed to handle the bankruptcy of LBHI, while PwC was appointed in the UK over a number of Lehman entities, but particularly LB International (Europe) Ltd.
- On 16 September, the Securities and Futures Commission ("SFC") issued Restriction Notices in respect of four regulated Lehman Brothers' entities in Hong Kong.
- On 17 and 19 September, three KPMG partners: Paul Brough, Edward Middleton and Patrick Cowley were appointed by the High Court as Provisional Liquidators of the eight Lehman HK Companies.
- The following entities were subject to Winding Up orders made against them in November 2008, and placed into liquidation:
i. Lehman Brothers Asia Holdings Limited
ii. Lehman Brothers Asia Limited
iii. Lehman Brothers Futures Asia Limited
iv. Lehman Brothers Securities Asia Limited
v. LBQ Hong Kong Funding Limited
vi. Lehman Brothers Nominees (H.K.) Limited
vii. Lehman Brothers Asia Capital Company
viii. Lehman Brothers Commercial Corporation Asia Limited
- In February 2009, the Provisional Liquidators held creditors' meetings for the above mentioned eight entities. During the meetings, they presented progress reports relating to the liquidations, including the sale of the Asian LB franchise to Nomura Holdings Inc.
Creditors also voted in favour of Paul Brough, Edward Middleton and Patrick Cowley continuing in office as liquidators, and approved the appointment of Committees of Inspection.
- In March 2009, the Provisional Liquidators were approved by the Hong Kong High Court to continue in office as Liquidators of the Hong Kong-incorporated Lehman Brothers' entities.
3. What is the role of the Committee of Inspection?
- The committee acts as a non-executive advisory board, and the general role of the committee of inspection is to assist the liquidator in the conduct of the liquidation. The committee is to be informed of all significant developments and their approval may be required for certain policy decisions and material transactions, as well as the approval of the liquidators' remuneration. Members are required to act impartially on behalf of all creditors.
4. What are the applicable principles relating to the administration of the liquidation?
The following guiding principles apply:
- To preserve and maximise the realisable value of the assets for the benefit of all creditors;
- Each legal entity must be treated separately;
- Creditors of the same type or class (e.g. unsecured) must be dealt with on a pari passu basis since the estate is insolvent;
- Assets and liabilities which are not owned by the Lehman Brothers companies in liquidation do not form part of the insolvent estates; and
- Trust assets must be dealt with for the benefit of the relevant beneficiaries.
5. What activities are currently being prioritized by the Liquidators?
- The initial phase of the Liquidation process involves the identification, preservation and gathering of the assets that will eventually be liquidated for the benefit of creditors. This process commenced in September 2008, and has necessarily focused on those assets which were either most significant in terms of their value, or most at risk in terms of value deterioration, for reasons relating either to the general market situation or to the specific circumstances of that asset.
- The next phase of the liquidation process can generally be described as the liquidation or sale of the assets in question. How and when this will be achieved would clearly depend on the specific circumstances of each case, and the Liquidators must recognise in this case, that market conditions are currently not favourable to wholesale asset disposals. Our strategy for disposing of the Lehman HK Companies' assets is therefore likely to take into account both market conditions and the specific issues pertaining to each asset. It may well be necessary to dispose of some Lehman assets in the short term, while others may benefit materially from being held until market conditions improve.
- The third stage of the Liquidation process (which can commence while the second stage is ongoing), is to adjudicate creditors' claims. In a case as complex as the Lehman insolvency, some claims will naturally take time to adjudicate properly, and it may be necessary to seek the Court's assistance in resolving issues arising from this process.
- Whilst the above processes are ongoing, the Liquidators are mindful of the need to make parallel progress in addressing former clients' proprietary claims to assets that were held by the Lehman HK Companies.
- Finally and not least, addressing the many enquiries from the various regulatory bodies in Hong Kong, particularly in so far as they relate to matters of public interest, is also being prioritised at this time.
6. What are the main challenges related to the Lehman Brothers insolvencies?
- Lehman Brothers was a substantial and complex global organisation, operating across multiple jurisdictions, legal systems and financial services.
- Separate insolvency proceedings relating to the global operations of Lehman Brothers are now being administered by as many as 18 independent insolvency practitioners around the world.
- Lehman Brothers has shifted from being a globally-focused group of inter-dependent companies prior to its failure, to now being a series of separate legal entities, focused on respective assets, liabilities and the local regulatory and legal environment.
- The day-to-day relations that existed prior to the Lehman Brothers Group's insolvency between the Hong Kong-based Lehman entities and their European and American counterparts have ceased. This increases the procedural and administrative challenges associated with reconciling both inter-company liabilities and those between the Lehman Brothers entities and third parties. Cooperation between the Administrators of the various Lehman entities around the world will therefore be key to the goal of maximising creditor value.
7. What is the situation with the Lehman Minibonds?
- Most of the Lehman HK Companies played no role in relation to Minibonds Series 1-36 issued by Pacific International Finance Limited ("Minibonds").
- Lehman Brothers Commercial Corporation Asia Limited (In Liquidation) acted as programme arranger and initial subscriber for Minibonds and Lehman Brothers Asia Limited (In Liquidation) acted as series arranger, calculation agent and market agent for Minibonds. The Lehman HK Companies were not issuers of Minibonds nor were they guarantors or counterparties under any derivatives contract or Minibonds themselves. Investors in Minibonds are not creditors of the Lehman HK Companies in respect of their Minibonds under the relevant legal documentation and therefore the investors do not have any claim in the insolvency proceedings taking place in Hong Kong.
- The Liquidators are assisting the relevant Lehman Brothers companies involved in Minibonds, including Lehman Brothers Holdings Inc., and also other relevant parties, including the Hong Kong Securities and Futures Commission, as they work to address the Minibonds' situation.
- Except as mentioned above, the Lehman HK Companies played no role in any other product issued or arranged by other financial organisations which may be commonly referred to as being a "minibond". Investors should be aware that each series of Minibonds is different and the status of the series in which they have invested may differ in some material respects from the general statements made here. The structure of Minibonds and the rights of the investors are explained more fully in the relevant prospectuses for the various series of Minibonds in the section of the documents entitled "Information about us and how our Notes are secured".
8. What are the Liquidators doing to claim assets back from other Lehman Brothers group companies?
- Resolving issues around inter-company balances will be one of the most complex challenges arising from the Lehman Brothers' collapse. To the extent that these balances relate to specific assets, work is ongoing to bring these assets under the control of the Liquidators. However a significant portion of these balances relate to inter-company trading and therefore in many of these instances, there are no underlying assets to recover. The Liquidators are pursuing claims via formal and informal procedures.
For example, LBAH has around US$12.6 billion of inter-company accounts receivable recorded on its statement of affairs, which will take some time to reconcile and resolve.
The largest of these inter-company receivables is from Lehman Brothers in Japan. LBAH is owed around US$6.7 billion from former Lehman Brothers Japan, now in Civil Rehabilitation. The Liquidators have been working in conjunction with Alvarez and Marsal for LBHI and the local supervisors of these entities, to ensure optimal realisations for Lehman HK Companies.
9. KPMG are the Liquidators in Hong Kong and have also been appointed in Singapore. Can the HK based PLs help me with any queries related to these entities? How will everything be coordinated globally?
- Partners of KPMG Singapore are appointed in a formal capacity over the following entities (All of which are in voluntary liquidation):
i. Lehman Brothers Finance Asia Pte. Ltd.
ii. Lehman Brothers Investments Pte Ltd.
iii. Lehman Brothers Pacific Holdings Pte. Ltd.
iv. Lehman Brothers Commodities Pte. Ltd.
v. Lehman Brothers Asia Pacific (Singapore) Pte. Ltd.
vi. Sail Investor Pte. Ltd.
It is important to note that insolvency appointments are appointments of the individuals concerned, not of the firms of which they are representatives. As such the Singapore appointments are being run separately from those in Hong Kong, and are being administered by separate local teams. The Joint and Several Liquidators of the six entities listed above are Peter Chay Fook Yuen, Bob Yap and Roger Tay.
- The Liquidators are conscious of the necessity for global coordination and the sharing of information. They are working with several insolvency practitioners to draw up a global protocol to address this issue.
10. I provided services to Lehman Brothers in Hong Kong and have filed my Proof of Debt (POD) in advance of the creditor meetings. When am I going to get paid and how much?
- Given the complexity of the Lehman Brothers insolvencies we are unable at this time to estimate the timing or quantum of any dividend that may be paid to unsecured creditors.
- The Liquidators will consider making interim dividend payments in due course but this will be subject to their future assessment. In the meantime, we appreciate that creditors may be owed large sums by the Lehman Brothers' Hong Kong entities and ask for your continued patience, as the Liquidators seek to maximise returns of the insolvent estates. The Liquidators will keep creditors apprised as these matters develop.
11. Can I make a claim for the return of my assets or cash that were held in trust?
- Work continues to identify which assets are trust assets and which are not.
- We would expect that trust assets would be returned, subject to any deduction of associated costs and any claims the bearer entity may have against the beneficial owner.
- Assets which are not held in trust will be available to all creditors generally. Any distribution of these assets will be subject to the Liquidators' final assessment and associated costs.
12. How long will the Hong Kong insolvencies last?
- It is not possible at this stage to predict how long the Hong Kong insolvencies will last.
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