The “unruly horse” of unfairness: to what standard should Hong Kong insolvency officeholders be held?

The principle in ex parte James, under which the Court will not permit its officers (such as a liquidator) to act in a way which, although lawful, does not accord with the standards of right-thinking people, has recently been clarified by the English Court of Appeal in Lehman Brothers Australia Limited (in liquidation) v Edward John Macnamara & others (the joint administrators of Lehman Brothers International (Europe) (in administration)) [2020] EWCA Civ 321. Based on the ex parte James principle, the Court of Appeal held that a common mistake in the amount of a proof of debt agreed in a settlement agreement could not be relied upon by an officeholder.

Factual Background

Lehman Brothers International Europe (“LBIE”) entered administration by an order of the English High Court made on 15 September 2008.  There were significant intragroup dealings between LBIE and Lehman Brothers Australia (“LBA”). In March 2009, LBIE submitted a proof of debt in LBA’s liquidation and, in July 2012, LBA submitted a proof in the administration of LBIE.

In order to deal with the large number of creditors of LBIE (3,490) and the amount of claims (about £4.8 billion), the administrators of LBIE developed a standardised legal agreement, a “claims determination deed” (the “CDD”), which allowed creditors to trade agreed claims freely, without the need for LBIE’s consent.

On 12 March 2014, LBIE and LBA entered into a CDD which included a mutual release of claims for an unsecured amount of £23m. In fact, the figures inserted in the CDD were wrong as a result of a currency error, which meant it was undervalued by £1.6m.  After the error was spotted in early August 2016, LBA’s liquidators requested LBIE to vary the amount of LBA’s provable claim. The LBIE accepted that there was an error but refused to accede to the request.

LBA applied to the English High Court, relying on ex parte James, for an order that LBIE admit the claim for the higher correct amount.

The English Court of Appeal’s analysis

The English Court of Appeal unanimously reversed the decision of the lower court, with Lord Justice David Richards, delivering the lead judgment, holding as follows:

• The Court will not permit its officers (such as an administrator or liquidator) to act in a way which, although lawful and in accordance with enforceable rights, does not accord with the standards which right-thinking people or society would think should govern the conduct of the Court or its officers.
• The Court rejected the lower Court’s judgment that applying an “unfairness” test would become an “unruly horse”. The correct test is one of “unconscionability”  rather than “unfairness”.  Unconscionability carries connotations of oppression and the wrongful exploitation of one party by another which does not reflect the circumstances of ex parte James.
• Contractual rights are not a bar to seeking relief under ex parte James.
• There were no legitimate reasons for LBIE not to correct the common mistake made by them and by LBA.
• Correcting the common mistake would not undermine the purpose or value of the LBA CDD, and would not open the floodgates to attempt to re-open CDDs.
• There was no windfall to LBA and no true detriment to the estate if the error was corrected.

Comments

This judgment provides a helpful clarification on the standard and application of the ex parte James principle. The same principle applies to officeholders and liquidators in Hong Kong (see, for example, Re NG Shiu Fan [2009] 4 HKLRD 774). Although it is a tried and tested legal principle, it is worth practitioners keeping this in mind where contractual rights are in dispute involving an insolvency officeholder.