1. The Court of Appeal has overturned the decision at first instance and clarified the correct test to apply when exercising its control on Court officers under the principle set out in Re Cordon, Ex Parte James (1873 - 74) LR 9 Ch App 609 (Ex Parte James) and under para. 74 Schedule B1 Insolvency Act 1986 (IA 1986). The latter enables an administrator to be subject to a challenge by a creditor for acting in a way that unfairly harms its interest.
1.1 Insolvency practitioners are regarded as officers of the Court, and the Lehman Case concerned the conduct of the administrator. In summary, Lehman Brothers Australia Limited (LBA) agreed its proof of debt in the administration of Lehman Brothers International (Europe) (LBIE) by entering into a claim determination deed (CDD). Some two years later, it transpired that, due to a clerical error, a figure in the underlying calculation wrongly calculated it in AU$. The consequence of this meant that the proof of debt was undervalued by some £1.67 million. The administrators of LBIE refused to allow LBA to make an additional claim to recoup this amount. LBA then sought directions from the Court that LBIE's administrator should accept the additional claim and sought relief under:
1.1.1 the rule in Ex Parte James; and/or
1.1.2 para. 74 Schedule B1 IA 1986
2. At first instance, the Court found in favour of LBIE on the basis that the Court could not interfere with the agreed contractual arrangements under the CDD; a contract which the parties had freely entered into. The Court at first instance also stated that the rule under Ex Parte James required a Court officer to have acted unconscionably, not just unfairly. It was said that such an unfairness test would become an "unruly horse".
2.1 The Court of Appeal (CA) disagreed and reversed the first instance decision. There was nothing in Ex Parte James to suggest that the test was one of unconscionability, rather the correct approach is whether the conduct had been "unfair". The Courts are very familiar with applying the objective standard of fairness and so the comment that such test would become an "unruly horse" did not have merit. It was one they could grapple with through experience. As such, the Courts should consider the merits of each individual case when applying the standard of the right-thinking person. Similarly, the CA held that a test of "unfairness" applied to para. 74 Schedule B1 IA 1986.
3. It follows that the Court should not permit a Court officer to act in a way which it clearly would not do itself. The CA made clear that the standard of a Court officer is one that is "even more straightforward and honest than an ordinary person in the affairs of every-day life". In applying the unfairness test to the facts of the Lehman Case, no right-thinking person would think it fair that the administrators insist on the figure stated in the CDD. It was a shared mistake, and if the error had not been made at the time, the larger proof of debt would have been accepted by the administrators.
4. The CA's decision provides clarity that where an insolvency practitioner is acting "unfairly" in the view of a right-thinking person, the Court will intervene to control the actions of an insolvency practitioner to ensure that they do not conduct themselves in a way which the Court would not. The decision in the Lehman Case may be criticised by some for 'lowering the bar' given that acting in an 'unconscionable' manner carries an inference of oppression (a much higher bar). As a consequence, the unfairness test could give rise to an increase in claims from creditors who feel they have been unfairly treated. Whilst such criticism may have some merits, the test of unfairness is one that the Court is experienced in grappling with and will be applied strictly to the particular merits of each individual case.
