ON APPEAL FROM THE HIGH COURT OF JUSTICE
MR JUSTICE BRIGGS
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE PATTEN
LORD JUSTICE TOMLINSON
| IN THE MATTER OF LEHMAN BROTHERS INTERNATIONAL (EUROPE)
(1) STEVEN ANTHONY PEARSON (2) ANTHONY VICTOR LOMAS (3) MICHAEL JOHN ANDREW JERVIS (4) DAN YORAM SCHWARZMANN
(5) DEREK ANTHONY HOWELL (joint administrators of Lehman Brothers International (Europe)
|- and -
|LEHMAN BROTHERS FINANCE S.A.
Iain Milligan Q.C. and Daniel Bayfield (instructed by Linklaters LLP) for the Respondents
Hearing dates: 11 to 13 October 2011
Crown Copyright ©
Lord Justice Lloyd:
The background to the dispute
"(i) They were applied to large classes of securities acquired by LBIE, acting as hub company, for the account of affiliates.
(ii) In each case the affiliate purported to confer upon LBIE its proprietary interest (if any) in the underlying security in exchange for monetary consideration in the form of a purchase price or the deposit of monetary collateral, leaving the affiliate with a contractual right against LBIE to recover its proprietary interest in equivalent securities, again for monetary consideration, at a future date.
(iii) The commercial intent (albeit not contractual obligation) of the processes was usually that they should apply for the whole or substantially the whole of the period between the acquisition of the security from the street by LBIE and its eventual re-sale to the street.
(iv) The intended effect of the processes (whether or not successful) was to replace an unsecured obligation by the affiliate to refund LBIE the purchase price for the acquisition of the security from the street with a secured obligation of the affiliate to pay for its re-acquisition from LBIE of an equivalent security under the Rascals processes, whether by paying the repurchase price under the off-leg of a repo [i.e. a sale and repurchase contract] or paying back the collateral lodged during the currency of a stock loan (repos and stock loans being the two types [of] transaction alternatively used by all the Rascals processes)."
"13. On the day of the settlement of LBIE's acquisition of the security from the street, LBIE and the affiliate entered into a repo contract, providing for the immediate sale of the security by the affiliate to LBIE for a fixed price in fact equivalent to its value that day ("the on-leg"), followed by a sale back of an equivalent security by LBIE to the affiliate on the following day at the same price plus an interest charge or fee ("the off-leg"), with LBIE having the right of use of the security in the meantime.
14. On the following day LBIE and the affiliate would enter into a replacement repo, in all respects identical to the first, save that the price would be fixed by reference to the marked to market value of the security on that day. This process would then be repeated on every subsequent day of the period during which the security (or its equivalent) was held, until and including the day before the settlement of the eventual sale of the security back to the street. Thus, the settlement of that sale would coincide with the off-leg of the last in the series of computer-generated repo transactions between LBIE and the affiliate.
15. Pursuant to master agreements between LBIE and each of its relevant affiliates, the repo transactions under Automatic Rascals were on industry standard terms, pursuant to which title to the underlying security was not to pass either under the on-leg or the off-leg of the repo until payment. …
16. It was not the intention of the designers of Automatic Rascals that the purchases and re-purchases constituted by the on and off-legs should be cash settled. Rather, payment and repayment was intended to be achieved, in form by what I shall loosely call book entries, but in substance by a series of successive offsets. Thus, the affiliate's debt to LBIE for the acquisition price of the security from the street was largely offset by LBIE's debt to the affiliate on the on-leg of the first repo. The affiliate's debt to LBIE under the off-leg of the first repo was in turn largely offset by LBIE's debt to the affiliate on the on-leg of the second repo. These offsets continued until the settlement of the sale of the security to the street, whereupon the affiliate's debt on the off-leg of the last repo was largely offset by LBIE's obligation to account to the affiliate for the proceeds of the sale of the security back to the street.
17. I have throughout that summary used the phrase "largely offset" to reflect the fact that the cross debts were not necessarily, or even usually, identical. Differences would arise from the constantly changing value of the underlying security, and the fixing of the repo prices by reference to its marked to market value from time to time. Thus for example, a rise in the value of the security between the trade date and the settlement date of the acquisition from the street would mean that LBIE's debt on the first on-leg would exceed the affiliate's debt in relation to the purchase price, and vice versa. Similar changes were caused by marked to market movements during the series of daily repos, and by any disparity between the sale price of the security on the trade date, and its marked to market value on the settlement date, back to the street. Other differences would arise from fees and interest charges arising under the repos being added to the amounts payable.
18. I have in the same phrase used "offset" rather than set-off to record the fact that, in the parties' accounting records, the nearly equal but opposite credits and debits between LBIE and each affiliate were not immediately cancelled by journals and replaced by a net balance. I shall describe in due course how the opposing entries were in due course dealt with. …"
"19. … They provided for transfer by the affiliate of its title to the security back to LBIE in exchange for monetary collateral, with a right in the affiliate to reacquire title to an equivalent security upon payment of the collateral back to LBIE, with small adjustments for a stock loan fee and/or an interest charge in relation to the collateral and provision for margining adjustments to the collateral during the life of the stock loan, to reflect changes in the marked to market value of the security. Manual Rascals therefore required no daily repetition of transactions between acquisition and resale of the security from and to the street. Furthermore, the evidence does not enable it to be said with confidence that Manual Rascals was invariably or even usually applied to a security on the day of the settlement of its acquisition from the street.
20. As with Automatic Rascals, it was not envisaged by the designers of the process that cash collateral would actually be delivered by LBIE on the making of the stock loan, or physically redelivered by the affiliate upon its termination. Rather, payment was, again, to be recorded in book entries, but achieved by offset. LBIE's obligation to lodge collateral was intended to be achieved by an offset against the affiliate's debt for the price of the acquisition from the street. Similarly, the affiliate's obligation to repay collateral at the end of the stock loan was to be offset against LBIE's obligation to account for the proceeds of the sale of the security to the street. Again, these offsets were not precise, due to movements in the value of the underlying security by reference to which the collateral was calculated, between the original trade date for the acquisition and the settlement of the sale, in each case with the street."
"49. The Group sought to present itself to the world, and to organise itself internally, as a single integrated business enterprise, rather than as a collection of separate legal entities all pursuing their own affairs in isolation from each other. Nor were its separate legal entities confined to trading only in their countries of incorporation. Many of them, including all but one of the parties to this application, carried on business activities on a global rather than merely national or regional basis.
50. Nonetheless, the tendency of financial services regulation to operate on national lines, the differences in national fiscal systems and the requirements of those dealing with the Group as clients, customers or trading counterparties meant that, for numerous purposes, the identity of Group companies as separate legal entities with principal places of business in particular jurisdictions was of unavoidable importance, both as a matter of internal organisation and external dealings."
"5.1 The book-keeping of the Lehman Group was largely automated.
5.2 The International Trading System ("ITS") was the Lehman Group's main securities trade settlement system for securities (both fixed income and equities) settled in Europe and Asia. Trades involving such securities were settled by LBIE for the Books of the Respondents and were recorded on ITS. ["Books" is a defined term – see below.]
5.3 ITS recorded trades and settlements. It generated trade tickets for acquisitions from the Street and included functionality to record the RASCALS process.
5.4 Following each business day, ITS would commence its overnight "batch cycle", the purpose of which was, amongst other things, to complete the processing and reporting of the trading activity booked during the day and to prepare ITS for the next business day. Activities carried out within the cycle included the processing of the transactions booked into the system during that day and the passing of the ITS entries to the general ledger for the Lehman Group, known as DBS.
5.5 At a certain point in the batch cycle, one business day would be effectively closed on ITS, and another one would be started. During its operation, ITS created a series of accounting debit and credit entries. In respect of any transaction, ITS would create entries relating to the trade date, the expected settlement date, and, finally, the actual settlement date. Both the trade tickets and the accounting entries generated in ITS were generally accessible by any ITS user. Each of the Respondents was an ITS user.
6.1 On the trade date of a trade to be settled by LBIE with the Street of a securities position for a Book of a Respondent, an entry was posted on the Respondent's inventory account in respect of the securities position. On the settlement date a corresponding entry was posted in the unsecured intercompany ledger which indicated that the Respondent was indebted to LBIE in respect of the purchase price for the securities position."
"3.2 The Lehman Group trading function was split across separate trading desks each of which specialised in trading a particular type of security or derivative product ("Desks"). The Desks were not structured or labelled on an affiliate-by-affiliate basis. Rather, each Desk was geared around investment expertise in a particular class of securities or derivatives.
3.3 Typically, each Desk would be further split into a number of specialist trading books ("Books"). Each Book was allocated to a company within the Lehman Group."
"7.2 LBHI NY sat at the top of a funding chain for the entire Lehman Group and acted as the central "banker" providing daily funding for the other affiliates' business activities across the globe in so far as required. Generally, but subject to exceptions, cash funding was sourced from, and available cash surpluses were returned to, a single USD-denominated bank account, held in the name of LBHI NY with Citibank in New York (the "LBHI NY Account").
7.3 The calculation and funding of cash requirements for affiliates transacting business in Europe were provided by LBHI UK, which in turn received funds to do so from the LBHI NY Account.
7.4 LBHI UK operated and maintained its own USD bank account with Bank of America in New York (the "LBHI UK Account"). In the event of available cash surpluses arising on the accounts in Europe at the end of each day, these were passed up the funding chain into the LBHI UK Account and from there to LBHI NY.
7.5 On a daily basis the LBHI NY Account would provide the required funding of the LBHI UK Account which, in turn, was used to fund part of the affiliates' cash requirements in Europe.
7.6 An estimated amount of the funding required by LBHI UK would be notified the preceding day, typically by email, from Cash and Collateral Management (CCM) in London to CCM in New York. Throughout the following business day, all of the expected and actual cash flows funded by LBHI UK Account would be aggregated in Global CCM. By the end of the day, and on a net accumulated basis, the LBHI UK Account would have built up either a surplus or a deficit which CCM in New York would fund to a (near) zero balance from the LBHI NY Account. In the event of an anticipated available surplus, typically such surplus would be transferred from the LBHI UK Account to the LBHI NY Account: if there were an anticipated deficit, there would be a transfer in the opposite direction.
7.7 To assist this process, excess liquidity would generally be passed back up through the Lehman Group's accounts towards the end of the European trading day: that is, available surplus cash amounts would be exchanged into USD amounts and transferred back to the LBHI UK Account, for subsequent transfer back to the LBHI NY Account."
The issues on the appeal
i) First, the issues arising on the Respondent's Notice, as to whether beneficial title ever reached LBF;
ii) Secondly, the question whether LBIE paid, or is to be treated as having paid, the price on the on-leg of the first repo; this includes LBF's argument that it never owed LBIE anything on the original acquisition, because of the 2000 agreement already mentioned, and the points as to estoppel;
iii) Thirdly, the issue as to continuity of title;
iv) Fourthly, the points arising specifically as to the final off-leg, which is affected both by the third point and also by the specific matters mentioned above as to the letter dated 16 September 2008 and as to what was done on 23 September 2008.
v) The first two of these apply to the product of manual Rascals as well as to that of automatic Rascals; the third and fourth only apply to automatic Rascals.
Issues of lien
"The Court shall not determine, on this Application, issues which would otherwise arise out of paragraphs 3 and 4 of the Application, going to whether or not LBIE or any other person has a lien over the securities which are the subject matter of the Application."
The relevant agreements
"WHEREAS each Party may settle securities transactions at the request of the other Party and, as a consequence of these transactions, may hold securities on behalf of the other Party;
WHEREAS all parties wish to ensure that security and monetary balances arising between them from such settlement are properly secured;
WHEREAS the parties are or may become subject to capital adequacy and other regulations under the various jurisdictions in which they operate;
WHEREAS the parties wish to ensure both that there can be no doubt about adherence to regulations relating to the custody of assets and that there is no doubt about their treatment for regulatory capital purposes of the inter-company balances arising from these settlements;
WHEREAS the parties consider that the most appropriate way in which to resolve this is to enter into repurchase, sell/buy-back or stock loan transactions in respect of securities held by one party but owned by another."
"Where a Party is holding securities (the "Holding Party") on behalf of the other Party (the "Owning Party"), the Holding Party may, in its discretion and by notice to the Owning Party buy or borrow the Securities, in which case the Owning Party shall pass full legal and beneficial ownership in the securities to the Holding Party against receipt by the Owning Party of purchase monies (in the case of repurchase or sell/buy-back transactions) or collateral (in the case of stock loan transactions). Both Holding Party and Owning Party agree that the Owning Party shall be obligated to repurchase or accept return of the Equivalent Securities, at a price to be agreed by the Holding Party and the Owning Party ..."
"All parties hereto agree on an ongoing basis that all obligations of the Owning Party to Holding Party and vice versa shall be calculated on a net aggregate basis. It is agreed that all securities and cash owed by Holding Party to Owning Party shall be set off against the obligations of Owning Party to Holding Party. For the purposes of calculating the net aggregate exposure pursuant to this section the value of any securities purchased, lent or provided as collateral shall be the value determined by the Lehman Brothers ITS system. The claims of the Owning Party to the Securities is to be set off against the claim of the Holding Party to the payment of money for the Securities."
"WHEREAS LBF is a Swiss Limited company trading in equity and other derivatives and investing in securities to hedge exposures arising from derivative transactions.
WHEREAS LBIE is a member of the Securities and Futures Authority and is authorized to carry on investment business in the United Kingdom under the Financial Services Act 1986.
WHEREAS LBIE acts as settlement agent for LBF in certain of the derivatives and securities transactions noted above.
WHEREAS LBHI can provide treasury services to any Lehman Brothers group company."
"1. Funding and Settlement
LBIE agrees to settle such securities transactions as LBF requests it to: and LBHI agrees to provide funding to LBF to permit LBF to provide funds to LBIE to effect settlement transactions on behalf of LBF. LBIE will hold funds provided by LBF on deposit for LBF as requested by LBF from time to time.
For the avoidance of doubt, any loans under this agreement are provided directly from LBHI to LBF and at no time will LBIE be regarded as lending to LBF."
"[LBIE says] that the objective common intention of both LBIE and its affiliates was that the affiliates should obtain the economic risks and benefits of an owner of the underlying securities not by the transfer of ownership (in the sense of a proprietary interest) but by the creation of purely contractual rights and liabilities between LBIE and the affiliates having the same economic effect, as it were, synthetically."
Dealings with the securities
The Rascals project
"First, it demonstrates, at least from LBIE's perspective, the problems which the Rascals processes were designed to address and at least LBIE's purposive intention in constructing and then operating the Rascals processes. Secondly, those documents demonstrate that LBIE's thinking in this regard was sufficiently ventilated within the Group for it to be improbable that any affiliate which subsequently participated with LBIE in Rascals processing could have been unaware of LBIE's purposive intention, or of the problems which the Rascals processes were designed to address. Thus, the purpose or intent behind the Rascals processes may properly be described as having been mutual, even if they were processes aimed at dealing with LBIE's particular problems as a hub company."
i) The documents display a clear underlying assumption that one effect of LBIE's settling the acquisition of a security from the street for the account of one of its affiliates was to confer upon the affiliate beneficial title to the security, even though LBIE invariably settled it into one of its un-segregated house depot accounts. Mr Bolland said he was of that view, though some colleagues considered that title would not pass to the affiliate except upon actual payment of the acquisition price by the affiliate to LBIE.
ii) A primary purpose of the Rascals processes was that the affiliate should thereby confer absolute title to the underlying security upon LBIE, to the exclusion of any continuing beneficial interest of the affiliate. This was perceived as essential if the problems thrown up by the global settlement practice were to be satisfactorily addressed. Full title to the underlying securities was necessary to give LBIE an effective security as against its affiliate so as to avoid the capital charge problem. Without it, neither the segregation problem nor the financing problem would be resolved. In fact, the latter two problems were probably less real than they were thought to be, not least because the segregation point was covered, until about 2007, by an exception for inter-group dealings. Capital adequacy had not been a problem, but it would become so at the beginning of 1996 when the European Capital Adequacy Directive came into effect. The objective behind Rascals was to bring about a continuous beneficial interest of LBIE in the underlying security, to the exclusion of the affiliate, for as long as the security was the subject matter of a Rascals process, whether by a stream of daily repos or by an open-ended stock loan.
iii) As a matter of purpose and intent, the Rascals processes were conceived of as effecting a transfer of beneficial title from the affiliate to LBIE despite payment for the first repo (or collateral for the stock loan) not being effected by cash settlement as between LBIE and the affiliate. Payment was to be effected by book entries, coupled with offset against the affiliate's unsecured debt to LBIE for the original acquisition price of the security from the street. That this was to be the method of payment is spelled out in the contemporaneous documents.
iv) The contemporaneous material provides no guidance as to subjective intent in relation to beneficial ownership in the event that the Rascals process should be terminated, not by the eventual resale of the security to the street, but by events triggered by the insolvency of one or both of the parties to the Rascals transactions. This is not surprising, but it is inherent in the capital charge problem, and in the solution that LBIE should become in effect a secured creditor of the affiliate, that a purpose of the Rascals process was to confer security upon LBIE in the form of beneficial title to the underlying stock in the event of the affiliate's insolvency.
"accounting entries were made to reflect the settlement of the off-leg of the first repo, the settlement of the on-leg of the second repo, together with the secured liability of LBF to pay LBIE for the settlement (on the following day) of the off-leg of the second repo. Any change in the marked to market value of the security would be reflected in the prices payable and repayable under the second repo and, again, the off-leg purchase price would have added to it a one day interest or financing charge payable by LBF."
"171. Thus, LBF's obligation to pay for the settlement of the off-leg of the first repo was transferred from secured to unsecured inter-company account, where it would be largely offset by LBIE's obligation to pay for the on-leg of the second repo, differences in marked to market values being reflected in a corresponding change in the unsecured inter-company balance between LBIE and LBF. LBF's secured liability to pay for the off-leg of the second repo would be recorded in the secured inter-company account. Viewed as at midnight at the end of the second day, LBF's secured liability to LBIE (in respect of the off-leg of the second repo) would therefore have changed from the amount shown as a secured liability at the end of day one, in line with any change in the marked to market value of the security.
172. Accounting entries reflecting daily repos of the type which I have described continued to be made throughout the period between the acquisition of the security from the street and its ultimate re-sale to the street. It is unnecessary to describe them in any detail. Their overall effect was to show LBIE as the secured creditor of LBF, albeit in constantly changing amounts, in respect of the continuous succession of off legs.
173. On the trade date for the re-sale to the street, a short position would be recorded in LBF's inventory account, off-setting the original long position recorded on the trade for the acquisition. Daily repos would continue between the trade date and the settlement date for the re-sale to the street. No new repo would be entered into between LBIE and LBF on the settlement date. Thus, on that day, LBF's secured liability to pay for the last off-leg would be transferred to unsecured inter-company account and largely off-set by LBIE's obligation to account for the proceeds of sale received from the street counterparty, subject to movements in the marked to market value of the security between trade date and settlement date."
"At the end of each month, temporary journal entries were made reflecting a netting, as between LBIE and LBF, of all unsecured inter-company balances, and the novation of the resulting net balance to LBHI. By that I mean that LBHI was interposed between LBF and LBIE, so that any net debt on the unsecured inter-company account owed by LBF to LBIE was replaced by a debt from LBF to LBHI, and a debt from LBHI to LBIE. If the net balance was owed the other way, LBIE would owe LBHI, and LBHI would owe LBF."
Did beneficial title to the securities remain vested in LBIE?
Certainty of subject-matter
"A trust of part of a fungible mass without the appropriation of any specific part of it for the beneficiary does not fail for uncertainty of subject matter, provided that the mass itself is sufficiently identified and provided also that the beneficiary's proportionate share of it is not itself uncertain."
"At the heart of Mr Milligan's submissions based upon subject matter uncertainty lay the undoubted fact that, at any moment in time, the supposed trust fund consisting of LBIE's house depot account in respect of a specific type of security (such as ordinary shares in ICI) might consist either of shares originally acquired, equivalent shares subsequently acquired by the exercise of rights under a repo or stock loan with the street, or simply shares subsequently acquired by LBIE to make good a shortfall caused by using shares to settle its own or other affiliates' short positions. Furthermore, the fund could (for reasons already explained) consist at a particular moment in time of no securities at all, where all had been used to settle short positions, or all had been lent to the street, so that the only identifiable trust property consisted of LBIE's personal rights to obtain equivalent securities in the future, for example by calling in stock loans or enforcing the off-legs of repos, as against street counterparties."
Did beneficial title to the securities pass back to LBIE under the first repo?
The effect of the ICFA
The position shown in the book-keeping records
"Q. When there was a repo or a stock loan, when the transaction was executed in the sense of when the trade was done, the books recorded that there was a secured payable due from LBF to LBIE in respect of either the repo repurchase price or the payable in respect of the return of collateral for the stock loan?
A. That is correct.
Q. Those secured payables were recorded in ITS?
A. They were.
Q. They fed through DBS and ultimately into the financial statements of LBF?
Q. Everybody proceeded on the assumption that those records were correct and that those sums were secure?
Did LBIE pay the price on the on-leg of the first repo?
"But that comes nowhere near displacing a conclusion that the parties intended that the offsetting of those two obligations should have the effect, pro tanto, of paying both debts. Where in a single account two parties record successive mutual credits and debits there is in reality only a net debt owing, one way or the other between them, at any particular moment in time: see Wood on English and International Set-Off at paragraph 3-3. This normal conclusion may of course be displaced by a contrary intention where for some reason the parties wished to preserve the opposing debts, but in the present case the evidence as to intention is all one way. Witness after witness agreed with Mr Moss in cross-examination that payment under the repo structure of Automatic Rascals was to be by book entry rather than by cash. A book entry which merely records an unpaid debt pays nothing. But book entries which record offsetting debts and credits sufficiently evidence payment if, but only if, there is an offsetting credit available for that purpose."
"(i) It is not enough that the common assumption upon which the estoppel is based is merely understood by the parties in the same way. It must be expressly shared between them.
(ii) The expression of the common assumption by the party alleged to be estopped must be such that he may properly be said to have assumed some element of responsibility for it, in the sense of conveying to the other party an understanding that he expected the other party to rely upon it.
(iii) The person alleging the estoppel must in fact have relied upon the common assumption, to a sufficient extent, rather than merely upon his own independent view of the matter.
(iv) That reliance must have occurred in connection with some subsequent mutual dealing between the parties.
(v) Some detriment must thereby have been suffered by the person alleging the estoppel, or benefit thereby have been conferred upon the person alleged to be estopped, sufficient to make it unjust or unconscionable for the latter to assert the true legal (or factual) position."
"The convention alleged by the Administrators has been variously put in written and oral submissions and in position papers, either that LBIE paid for the repo on-legs or that, in any event, the repo on-legs were effective to confer absolute title to the underlying securities on LBIE. Since the only challenge to the effectiveness of the repos for that purpose is the alleged absence of payment by LBIE for the on-legs, the two conventions amount in substance to the same thing."
"346. By the time that any of the securities the subject matter of this application were acquired from the street, LBIE and LBF had for many years been engaging in a Rascals process of daily repos in relation to eligible securities of the same type. The mutual book entries resulting from those repos uniformly describe their effect as making LBIE a secured creditor of LBF in respect of the off-leg purchase prices under every repo. To LBF's knowledge (and with its acquiescence) LBIE had constructed the Automatic Rascals process in relation to those securities as a way of legitimising, from a capital adequacy, regulatory and street lending perspective, the basis upon which it carried out its acquisition, holding, and exploitation of such securities for LBF's book, and on the express basis that this necessitated the conferral upon LBIE of absolute title to the underlying securities, to the exclusion of any proprietary interest of LBF. LBIE's status as LBF's secured creditor appeared both in LBIE's and LBF's accounts, and constituted the basis upon which LBIE considered itself able properly to satisfy compliance with the capital adequacy regime introduced pursuant to the Directive. Both LBIE and LBF benefited from the conduct of the Automatic Rascals process on that basis and, in so far as it was intended thereby to confer the requisite capital adequacy upon LBIE, so did LBIE's unsecured creditors stand to benefit in the event of its insolvency. The conduct of the Automatic Rascals process on an assumption that the on-legs thereby conferred absolute title on LBIE was part of a course of dealing which both preceded and followed the acquisition of the securities which are the subject matter of this application.
347. In those circumstances I consider that the legal requirements for the establishment of an estoppel by convention are satisfied. Having for many years obtained the benefit of LBIE's acquisition from the street for securities for its book, without paying cash up front but on the assumption that LBIE became by the Rascals process a secured creditor, I consider that it would now be unconscionable for LBF to resile from that convention as to the effect of the on-legs of the Automatic Rascals repos. The requirement that the conventional understanding was sufficiently shared between LBIE and LBF, and that LBIE assumed an element of responsibility for it seem to me fully satisfied by their adoption of a mutual system of book-keeping which recorded LBIE as a secured creditor, and by LBF's acquiescence in circumstances where, but for the effective transfer of beneficial title, LBIE would have been unable to satisfy itself that it could continue to act as LBF's agent or broker in the acquisition of securities from the street, consistent with its capital adequacy and regulatory obligations."
"The requirement that the conventional understanding was sufficiently shared between LBIE and LBF, and that LBF assumed an element of responsibility for it seem to me fully satisfied by their adoption of a mutual system of book-keeping which recorded LBIE as a secured creditor, and by LBF's acquiescence in circumstances where, but for the effective transfer of beneficial title, LBIE would have been unable to satisfy itself that it could continue to act as LBF's agent or broker in the acquisition of securities from the street, consistent with its capital adequacy and regulatory obligations."
"Issues as to whether a person alleged to be subject to an estoppel by convention has sufficiently "crossed the line" as to make itself responsible for the conventional understanding in question normally arise between persons dealing with each other at arm's length. In the exceptional circumstances constituted by the fact that all the potential parties to the convention estoppel here relied upon are co-subsidiaries or sub-subsidiaries of the same holding company, doing business for the benefit of common shareholders, using a common accounting and book-keeping system, and sharing the services of individuals employed on a non-exclusive basis, it seems to be that the necessary sharing or acquiescence is capable of being established by those features rather than, as would be necessary in an ordinary case, by some specific "crossing of the line" between persons dealing at arm's length. Accordingly, although with rather less confidence than in relation to LBF and LBSF, I have concluded that if it had been necessary for the Administrators to rely upon a convention estoppel for the purpose of preventing LBCCA now from denying that the Automatic Rascals on-legs were effective in relation to any proprietary interest of its own in the underlying securities (whether because of want of title or non-payment by LBIE), the Administrators' case in that regard ought to succeed."
"… intention is one thing, obligation is another. When creditors become involved, as they do in the present case, the separate legal existence of the constituent companies of the group has to be respected. In the absence of some contractual act or document they cannot be bound to the bank."
What happened next? The cradle-to-grave proposition
What happened at the end of the process?
"Please note that [LBF] terminates all intercompany agreements or arrangements with [LBIE] including all branches … to act on behalf of LBF or as an agent for LBF without the approval, in particular no transactions in cash or securities are allowed …"
Lord Justice Patten
Lord Justice Tomlinson