The Joint Administrators of LB Holdings Intermediate 2 Ltd v Lehman Brothers Holdings Inc

Contractual subordination may postpone repayment of subordinated debt until statutory interest and non-provable liabilities have been paid. The subordinated debt remains provable, but its value must reflect those contingencies.

Accrued statutory interest under Insolvency Rules 1986 rule 2.88(7) survives a transition from administration to liquidation where the relevant surplus arose during the administration. By majority, foreign-currency conversion for proof does not extinguish the underlying contractual claim. Any unpaid currency loss may rank as a non-provable liability after proved debts and statutory interest. A contributory’s liability extends to statutory interest and non-provable liabilities, and the liability for future calls may be proved before a call is made. The contributory rule does not apply in an administration.

The administrators of Lehman Brothers International (Europe), Lehman Brothers Limited and LB Holdings Intermediate 2 Limited sought declarations concerning the ranking and proof of claims arising in the administrations and any subsequent liquidations. The issues included subordinated debt, statutory interest, foreign-currency claims, the liabilities of members of an unlimited company and the application of the contributory rule.

David Richards J made ten declarations in a judgment reported at [2014] EWHC 704 (Ch) and [2015] Ch 1. The parties appealed on several declarations. The central questions were whether statutory and non-provable liabilities ranked ahead of subordinated debt, whether currency conversion for proof was substantive, and whether future calls on contributories could be proved before liquidation.

1. Disposition. The court allowed the appeals against declarations (ii), (iii), (iv) and (v), and dismissed the appeals against declarations (i), (vi), (vii) and (viii). The issues concerning declarations (ix) and (x) were resolved by common ground. Briggs and Moore-Bick LJJ formed the majority on currency conversion. Lewison LJ dissented on that issue.
2. Subordination. The subordinated loan agreements made repayment conditional on the borrower’s solvency and regulatory financial resources. The debt was therefore contingent. The relevant contingencies included payment of statutory interest and non-provable liabilities. The lender could prove, but the claim had to be valued by reference to those contingencies and ranked behind them.
3. Statutory interest. Rule 2.88(7) imposed a statutory restriction on the use of a surplus arising during the administration. Accrued rights to interest in favour of creditors who had proved in the administration survived a later liquidation. The provision supplied a limited solution and applied only where a surplus arose, or could retrospectively be shown to have arisen, during a distributing administration.
4. Currency conversion. The majority held that rules 2.86 and 4.91 of the Insolvency Rules 1986 converted foreign-currency claims for the limited purposes of proof and set-off. They did not substitute a sterling obligation for the contractual foreign-currency obligation. A shortfall caused by exchange-rate movements could therefore be pursued as a non-provable claim after proved debts and statutory interest. Lewison LJ considered the conversion substantive and once-for-all, so that no such claim survived.
5. Contributories. Under section 74(1) of the Insolvency Act 1986, members’ liability extended to proved debts, statutory interest and non-provable liabilities. A future call could be proved as a contingent liability in the administration or liquidation of a contributory. Applying the three-stage approach in [2013] UKSC 52, membership created the necessary legal relationship, vulnerability and consistency with the insolvency regime.
6. Contributory rule. The judge-made rule preventing a contributory from recovering as a creditor until called sums had been paid did not apply in an administration. Extending it would risk injustice to solvent contributories. If liquidation protection were required, the company could be wound up so that a liquidator could make a call.

1. Court of Appeal (Civil Division): appeals allowed in part under [2015] EWCA Civ 485.
2. High Court, Chancery Division, Companies Court: David Richards J made ten declarations in the judgment reported at [2014] EWHC 704 (Ch) and [2015] Ch 1.