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The Supreme Court heard the appeal in this case between 17 and 20 October 2016, considering, among other things, the proper ranking of certain debt in an insolvency waterfall and the scope of liability of members in an unlimited company under the Insolvency Act 1986.

Background

nick_dyson_phLehman Brothers International (Europe) (LBIE) entered administration in September 2008 during the global collapse of the Lehman Brothers group. Perhaps surprisingly, LBIE has a large surplus following payment of or provision for unsubordinated proved debts in full. Various groups of creditors claim to be entitled to payments from the surplus including creditors claiming statutory interest, subordinated debt holders and foreign currency creditors. LBIE is an unlimited company with two members (LB Holdings Intermediate 2 Ltd (LBHI2) and Lehman Brothers Ltd, the second and third appellants). Both have filed ordinary unsecured claims against LBIE and LBH2 has filed a large claim as a subordinated loan creditor. The first appellant, Lehman Brothers Holdings Inc, is the ultimate parent company for the Lehman Brothers group.

High Court

The declarations made by David Richards J in the High Court are summarised below.

Subordinated loans

The claims of LBHI2 under its subordinated loan agreements with LBIE are subordinated to provable debts, statutory interest and non-provable liabilities and cannot be proved or the subject of set-off until these senior liabilities are paid in full.

Claims in foreign currency

Creditors of LBIE with claims denominated in a foreign currency, which were converted into sterling when LBIE went into administration for the purpose of proving, are entitled to claim for any currency losses resulting from a decline in the value of sterling as against the currency of the claim between the conversion date and the date of payment (currency conversion claims).

Currency conversion claims

Currency conversion claims rank in LBIE’s administration as non-provable liabilities, payable only after the payment in full of all proved debts and statutory interest.

Statutory interest

If the administration of LBIE is immediately followed by a liquidation, no unpaid statutory interest accruing during the administration is provable as a debt in the liquidation, nor will it be payable as statutory interest under either rule 2.88 of the Insolvency Rules 1986, SI 1986/1925 (IR 1986) or the Insolvency Act 1986, s 189 (IA 1986).

Contractual interest

Creditors of LBIE who are owed debts that carry contractual interest can claim unpaid interest that accrued due during the period of the administration in a liquidation of LBIE that immediately follows the administration. This claim will be a non-provable claim, payable after the payment in full of all proved debts and statutory interest on such debts.

Liability of members to contribute in liquidation

The obligation of the members of an unlimited company in liquidation to contribute to its assets under s 74(1) of the IA 1986 includes amounts sufficient to pay the company’s proved debts, statutory interest under s 189 of the IA 1986, and non-provable liabilities.

The contributory rule and the rule in Cherry v Boultbee

Neither the contributory rule nor the equitable rule in Cherry v Boultbee (1838) 2 Keen 319 applies in an administration so as to permit the administrator to refuse to admit a member’s proof of debt or to refuse to pay dividends on it on the grounds that, if the company went into liquidation, the member would or might become liable to calls under s 74(1) of the IA 1986.

Liability of members to contribute in a liquidation can be a contingent liability

Subject to set-off considerations, LBIE, acting by its administrators, will be entitled to lodge a proof in a distributing administration or a liquidation of LBIE’s members, in respect of the members’ contingent liabilities to contribute to LBIE’s assets under s 74(1) of the IA 1986. The value of such claims would need to be estimated in accordance with the IR 1986.

Court of Appeal

The Court of Appeal dismissed the appeal of the appellants, on the following grounds.

Subordinated loans

The Court of Appeal upheld the High Court’s finding that the subordinated loans were subordinated in right of repayment to provable debts, statutory interest and non-provable debts.

Claims in foreign currency and currency conversion claims

The majority upheld the High Court’s decision, with Lewison LJ setting out ten reasons for his dissent. The majority held that the provisions of the IR 1986 that deal with the conversion of claims denominated in a foreign currency, and convert them as at the start of the debtor’s insolvency proceedings, do so purely for the purposes of calculating the amount for which they should be admitted to proof, and for the purposes of set-off. This is emphasised by the words “for the purpose of proving a debt” in rules 2.86(1) and 4.91(1) of the IR 1986. These provisions do not amend the creditor’s original contractual right to receive payment in a foreign currency, and if there is a surplus after payment of provable debts and statutory interest, the balance of the creditor’s rights can be claimed as a non-provable debt.

Statutory interest

The Court of Appeal held that the right to recover statutory interest that accrues, but is not paid during a non-distributing administration, endures, and effectively burdens surplus funds that pass into the hands of a liquidator in an immediately subsequent liquidation. The interest should then be paid out first before those funds are used in any other way.

The Court of Appeal agreed with the High Court that the legislative anomaly to which it was attempting a limited solution would need the intervention of Parliament.

Liability of members to contribute to assets

The Court of Appeal agreed with the High Court that statutory interest and non-provable debts form part of a company’s liabilities, and therefore are within the scope of s 74(1) of the IA 1986. Members were expressly liable, under s 74(1), to contribute to the expenses of the liquidation, debts and liabilities and the adjustment of rights of members among themselves. There was no obvious reason why members should not contribute to intermediate categories of statutory interest and non-provable debts.

The contributory rule and the rule in Cherry v Boultbee

The Court of Appeal agreed with the High Court that the Contributory Rule should not be extended to apply in administration.

Liability of members to contribute in a liquidation can be a contingent liability

The Court of Appeal agreed with the High Court that an administrator could submit a proof in a contributory’s insolvency proceedings for a contingent claim under s 74(1).

Supreme Court

The Supreme Court will make findings on the following issues:

  1. The proper ranking of certain subordinated debt in the insolvency ‘waterfall’;
  2. Whether the creditors of a company in administration whose provable claims are denominated in a foreign currency are entitled to payment (as non-provable liabilities of the company) of the balance of such claims which remains outstanding following the process of proof as a result of a decline in value of sterling against the currency of the claim between the commencement of the administration of that company and the dates of dividend distributions and, if so, the proper ranking of such claims;
  3. Whether statutory interest accruing but unpaid during a company’s administration is payable in that company’s subsequent liquidation;
  4. The scope of liability of members in an unlimited company under s 74 of the IA 1986;
  5. Whether an unlimited company in administration can submit a proof of debt in a distributing administration or liquidation of one of its members, with respect to a contribution claim pursuant to s 74 of the IA 1986; and
  6. Whether the ‘contributory rule’ extends to administrations.