Ex parte James jurisdiction broader than unconscionable conduct

Court of Appeal (Civil Division) A creditor of Lehman Brothers entered into a claims determination deed (“CDD”) with Lehman Brothers’ administrators. The deed was in full and final settlement of all claims between the two parties. The amount of the proof was understated as a result of a clerical error made by the administrators and not picked up by the creditor. The creditor applied for directions to the effect that the error should be reversed either under the court's inherent jurisdiction to control its officers (the administrators being officers of the court) as established in Ex parte James or under the court's jurisdiction to prevent unfair harm contained in para 74 of Schedule B1 to the Insolvency Act 1986. The court at first instance refused to make the directions sought and the creditor appealed.

On the Ex parte James jurisdiction, the court held that the first instance judge had been wrong in holding that the test was unconscionable rather than unfair conduct. Unconscionability carried connotations of oppression which did not reflect the circumstances in which the jurisdiction had been applied. The court also stated that fairness was an objective standard, the fundamental principle being whether the court would permit its officers to act in a way which would be clearly wrong for the court itself to act. This was to be judged by the standard of the right-thinking person. 

On the para 74 jurisdiction, the court held that the first instance judge had been wrong in limiting the para 74 jurisdiction to acts that either (i) cannot be justified by reference to the interests of the creditors as a whole or to achieving the objective of the relevant insolvency process; and/or (ii) is discriminatory in its effect.

More generally, there was no basis for the first instance judge’s holding that neither the jurisdiction in Ex parte James nor para 74 could be invoked to prevent an administrator from relying on rights under a contract freely entered into by both parties. While, this was a highly material factor against the grant of relief, it was not an absolute bar to relief.

The first instance court having incorrectly directed itself as to the law, the appeal court considered the issue afresh. The administrators submitted that it would undermine the purposes of the CDDs (being finality and cost effectiveness) if parties were allowed to re-open negotiations. The court stated that it did not disagree but held that the creditor was not in the circumstances seeking to re-negotiate the deal but to correct a common mistake of a purely clerical nature for which the administrators were as much responsible as the creditor. In the circumstances, the appeal was allowed in effect permitting the clerical error to be corrected.

Lehman Brothers Australia Limited (in liquidation) v Joint administrators of Lehman Brothers International (Europe) (in administration) [2020] EWCA Civ 321

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