Lomas & Ors v Burlington Loan Management Ltd & Ors

Insolvency Rules 1986, rule 2.88 creates a complete code for post-administration interest on proved debts. The equitable approach in Bower v Marris does not permit dividends to be notionally reallocated first to interest. Interest is payable on proved future and contingent debts from the commencement of the administration. The rate applicable apart from the administration is the rate actually applicable at that date, not a hypothetical or later judgment rate. Rule 2.88 does not provide interest on statutory interest or a further non-provable claim for post-administration interest. Contractual interest may, however, form part of a non-provable currency conversion claim where the underlying obligation carried such interest.

The joint administrators of Lehman Brothers International (Europe) sought directions concerning creditors’ entitlement to post-administration interest from a substantial surplus remaining after admitted debts had been paid in full. The application raised issues under rule 2.88 of the Insolvency Rules 1986, including the calculation and rate of statutory interest, treatment of future and contingent debts, non-provable claims, and currency conversion losses.

The dispute principally concerned whether prior dividends should be treated as appropriated first to interest under Bower v Marris, whether interest ran from the administration date, and whether creditors could recover additional interest outside rule 2.88.

1. Rule 2.88 and appropriation. Rule 2.88(7) directs the administrator to apply any surplus remaining after payment of the debts proved in paying interest on those debts for the periods during which they were outstanding since the administration began. The rule assumes that the proved debts have been paid. The principle in Bower v Marris, under which dividends are notionally applied first to accrued interest and then to principal, is incompatible with that statutory scheme and does not apply.
2. Complete code. Rule 2.88 is a complete code for post-administration interest. It leaves no non-provable claim for a shortfall between statutory interest and contractual or other interest on proved debts, and no claim for interest on statutory interest. The statutory entitlement runs only to the relevant distribution dates.
3. Rates and calculation. The rate applicable apart from the administration includes the method of calculation, including compounding. The comparison under rule 2.88(9) is between the total amounts produced by the competing methods. The applicable rate is determined by the creditor’s rights at the commencement of the administration. A later or hypothetical judgment rate is excluded. Interest at judgment rate is calculated by reference to 365 or 366 days according to the relevant year, without an additional day’s interest in a leap year.
4. Future and contingent debts. Interest under rule 2.88(7) is payable from the commencement of the administration on the amount admitted to proof for future and contingent debts. A contingent debt which has matured before a dividend is not discounted merely because it was formerly contingent. Rule 2.105 provides the applicable discounting regime for unmatured future debts.
5. Currency conversion claims. Statutory interest is not taken into account in calculating a non-provable currency conversion claim. Such a claim is for the unpaid portion of the foreign-currency debt. Contractual interest on that unpaid portion may be recovered where the underlying obligation was interest-bearing.