Lehman Brothers International (Europe) & Ors, Re

In an unlimited company’s insolvency, members’ liability to contribute extends to all company debts and liabilities, including statutory interest and non-provable liabilities. Contractual subordination of regulatory capital may rank below statutory interest and non-provable liabilities. Foreign-currency creditors may claim post-insolvency exchange losses after proved debts and statutory interest have been paid in full.

The contributory rule and the rule in Cherry v Boultbee apply only in a liquidation, not in an administration. A company may prove for a member’s contingent liability to future calls. Mandatory insolvency set-off applies in the relevant administrations or liquidations.

The joint administrators of three Lehman companies sought directions concerning the ranking of claims against the anticipated surplus of Lehman Brothers International (Europe) (LBIE), an unlimited company, and the potential liability of its members, Lehman Brothers Limited and LB Holdings Intermediate 2 Limited.

The court considered the ranking of subordinated debt, statutory interest, non-provable liabilities and foreign-currency conversion losses. It also considered whether interest accruing during an administration remained recoverable after a subsequent liquidation, the scope of members’ liability under section 74 of the Insolvency Act 1986, contingent proofs for future calls, the contributory rule, and insolvency set-off.

1. Subordinated debt. The subordinated loan agreements were construed in their regulatory context. “Liabilities” was not confined to provable debts. The subordinated debt therefore ranked below statutory interest and non-provable liabilities. The contractual subordination was valid and did not impermissibly contract out of the insolvency legislation.
2. Foreign-currency claims. Rules 2.86 and 4.91 fixed conversion for the purpose of proving debts and achieving pari passu distribution. They did not extinguish the underlying contractual claim. After proved debts and statutory interest had been paid in full, creditors could claim exchange losses as non-provable liabilities.
3. Interest on a subsequent liquidation. Where an administration was immediately followed by a liquidation, interest accruing during the administration was neither provable in the liquidation nor payable as statutory interest under rule 2.88 or section 189. Creditors could nevertheless claim contractual or judgment interest for that period as non-provable liabilities.
4. Members’ liability. Section 74 imposed liability to contribute for debts and liabilities in their broad sense. It therefore extended to statutory interest and non-provable liabilities. The liability to future calls was sufficiently incurred through membership to be provable as a contingent debt in the administration or liquidation of a corporate member.
5. Contributory rule and set-off. The contributory rule, and the rule in Cherry v Boultbee, did not apply in an administration. In the administrations or liquidations of the members, their claims against LBIE were subject to mandatory set-off against LBIE’s claims for contingent calls. The same set-off applied in LBIE’s administration.
6. The court held that In re Auriferous Properties Ltd (No 1) was wrongly decided and should not be followed. The parties were invited to agree an order giving effect to the judgment.