Insolvency and Lehman Brothers

Another Supreme Court hearing is due to commence next Monday 17 October 2016 into events surrounding the collapse of Lehman Brothers.  For lawyers and insolvency practitioners the much awaited Supreme Court hearing will provide an important decision regarding the ‘insolvency waterfall’.

A thumbnail recap

The collapse of Lehman Brothers (LB) in September 2008 sent shock waves round the financial world.  A subordinated debt issue arose into LB’s main trading company in Europe, Lehman Brothers in Europe (“LBIE”).  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.

Issues before the Court of Appeal

The decision in the Court of Appeal dealt with supplemental issues which arose from two previous judgments of David Richards LJ; the decisions in Waterfall IIA and Waterfall IIB concerning (i) generic issues regarding the entitlement of creditors to interest on their claims for periods after the commencement of an administration; and (ii) the effect of standard form agreements (often used by administrators) between LBIE and its creditors on their claims for interest.

Subordinated debt

The CA held that the subordinated debt was repayable on contingencies that include payment of statutory interest and payment of any non-provable liabilities.  The payment of statutory interest was payment of a sum payable or owing by the borrower within the meaning of the agreements.  Statutory interest and non-provable claims are to be payable or capable of being established or determined in the insolvency of the borrower (see Insolvency Act 1986, s 189 and Insolvency Rules 1986)

Currency conversion

There were creditors with foreign currency denominated debts which had appreciated in value between the date of conversion and the date of payment.  The majority, Briggs LJ and Moore-Bick LJ, held that there is nothing in the 1986 Act or 1986 Rules which prevents the foreign currency creditor reverting to his contractual rights where there is a surplus once the process of proof and payment of statutory interest has run its course.

Post-administration interest

The CA held that Rule 2.88(7) of the 1986 Rules and Section 189 of the Insolvency Act 1986 allowed for the payment of interest to the extent that a surplus remains after all proved debts have been repaid at a rate comprising the greater of (i) a contractual rate under any contract and (ii) the statutory rate under the Judgments Act 1838 in respect of Judgments unconnected with the administration or liquidation.

Liability under Section 74 Insolvency Act 1986

Issues regarding liability under Section 74 of the 1986 Act arose because LBIE is an unlimited company in administration and therefore has contributories who are potentially liable.  The CA held that a contributory’s liability under s.74 extended to all the liabilities of the company and encompasses the creation of a surplus out of which to pay statutory interest and un-provable liabilities.  The contributory rule applied only in a liquidation and did not apply in an administration, including the administration of LBIE. Further, the equitable rule in Cherry v Boultbee (1839) 4 My & Cr 442 also did not apply.

Appeal to the Supreme Court

The issues to be determined by the SC are:

  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 Insolvency Act 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 Insolvency Act 1986;
  6. Whether the ‘contributory rule’ (whereby a contributory of a company in liquidation could not recover anything in respect of any claims he might have as a creditor until he had fully discharged his obligations as a contributory) extends to administrations.

23ES Commercial

This much awaited decision is bound to have far reaching consequences.

Members of 23 ES Commercial have experts in the field of insolvency law and practice at all levels.  Members of chambers will be writing articles, providing seminars and advice on the implications of the Supreme Court decision once it is made public.  For details of seminars in this area of law please contact Colin Perrin, senior clerk at 23 ES Commercial.

Back to News »