Lomas v Burlington Loan Management & Ors

This is an application by the joint administrators of Lehman Brothers International (Europe) for directions as to the construction and effect of post-administration agreements (the multi-lateral Claims Resolution Agreement (CRA) and numerous bilateral Claims Determination Deeds (CDDs)). The central legal questions were whether those agreements released or modified (a) creditors’ statutory post-administration interest under rule 2.88 of the Insolvency Rules 1986 and (b) creditors’ currency conversion claims arising under rule 2.86. The court applied ordinary principles of contractual construction in the specific insolvency context, recognising that rule 2.86 is mandatory and that administrators act under statutory duties to creditors as a whole.

The judge held that, on proper construction and in context, neither the CRA nor any of the CDDs released creditors’ entitlement to statutory interest (creditors remain entitled to interest at the higher of judgment rate or the contractual rate) and neither released currency conversion claims. The CRA, while requiring conversion of Close-Out amounts into US dollars as a common currency of account (clause 24.1), did not itself create new currency conversion claims nor strip creditors of contractual foreign‑currency rights required by rule 2.86. Finally, the court said that, if the agreements had been construed to release those rights, it would have exercised its powers (by analogy with Ex parte James and under paragraph 74 of Schedule B1 to the Insolvency Act 1986) to direct the administrators not to enforce such releases because enforcement would be unfair and produce unintended and discriminatory outcomes.

Background and parties: LBIE entered administration on 15 September 2008. The joint administrators (applicants) and very large numbers of creditors entered into standard-form post-administration arrangements: the multi-lateral Claims Resolution Agreement (CRA) (effective 29 December 2009 for trust-asset offerees) and many bilateral Claims Determination Deeds (CDDs) (begun late 2010, various forms through 2014). The administrators applied for directions (Waterfall IIB) because the agreements were central to the return of trust property and to distributions, and questions arose about their effect on statutory interest and currency conversion claims. The respondents included major creditor groups with proved claims and a subordinated creditor.

Nature of the application: The administrators sought declaration(s) and directions on the construction and effect of the CRA and CDDs in relation to: (i) currency conversion claims; (ii) statutory post-administration interest under rule 2.88 Insolvency Rules 1986; (iii) whether, if the agreements did release such claims, the administrators should be directed not to enforce them (by analogy with Ex parte James or under paragraph 74 of Schedule B1); and (iv) a specific question about the CRA’s Part VII calculation in US dollars.

Issues for decision: The court framed five issues, principally whether the CRA or CDDs (by their terms and in context): (1) released currency conversion claims or other non-provable claims; (2) released statutory interest claims under rule 2.88; (3) if releases existed, whether the court should direct administrators not to enforce them (Ex parte James / para 74); (4) whether the CRA’s specification of US dollars for calculations could itself give rise to a currency conversion claim; and (5) ancillary construction questions.

Evidence and context: The court relied on agreed factual material and witness statements from administrators and respondents. The scale of LBIE’s estate, the raison d’être of the CRA (to return trust assets) and of the CDDs (to accelerate and simplify unsecured claim determination and distributions), and the administrators’ statutory duties (Schedule B1 objectives: achieve a better result for creditors as a whole; act in creditors’ interests and act quickly and efficiently) were central contextual features. The mandatory nature of rule 2.86 (foreign‑currency proofs converted to sterling at the administration date) was treated as dispositive for the construction of arrangements affecting currency denomination.

Reasoning and key holdings:

• General approach: ordinary contractual construction applied as a unitary exercise with full regard to background and commercial common sense (Rainy Sky; Bank of Credit and Commerce International v Ali and authority cited), but the insolvency context and the administrators’ statutory duties were material to interpretation.
• Statutory interest (rule 2.88): the CRA and CDDs did not, as a matter of construction, release statutory post‑administration interest. Creditors remain entitled to statutory interest at the higher of judgment rate or the contractual rate; releases in the agreements did not oust that statutory entitlement.
• Currency conversion claims (rule 2.86 and Waterfall I): the CRA’s instruction to convert Close‑Out amounts into US dollars for valuation/accounting (clause 24.1) was a choice of currency of account, not a substitution of a new currency of payment which would override mandatory rule 2.86. The CRA did not create new currency conversion claims nor did it, nor did the CDDs, release existing contractual foreign‑currency rights that give rise to currency conversion claims. To the extent payments are made in sterling, currency conversion claims remain available as non‑provable claims against any surplus.
• If contrary construction obtained: the court would have exercised its equitable/disciplinary powers (Ex parte James principle and paragraph 74 Schedule B1) to direct administrators not to enforce any unintended waiver of currency conversion rights, because enforcement would be unfair, produce unintended discrimination and be inconsistent with the administrators’ statutory duties.

Practical outcome: The court determined the construction issues in favour of preserving creditors’ statutory interest and currency conversion claims and rejected constructions that would have converted currency-of-account rules into new currency-of-payment rights or released statutory or non‑provable currency claims.

The application issues were determined in the administrators’ favour as follows: the Claims Resolution Agreement and the various Claims Determination Deeds do not, on proper construction, release or modify creditors’ rights to statutory post-administration interest under rule 2.88 of the Insolvency Rules 1986, nor do they release creditors’ currency conversion claims under rule 2.86. The CRA’s requirement to convert Close-Out amounts into US dollars operated as a common currency of account and did not create new foreign‑currency payment rights. If the agreements had been held to release such claims, the court would have directed the administrators not to enforce the releases by application of the Ex parte James principle and paragraph 74 of Schedule B1 to the Insolvency Act 1986 because enforcement would be unfair and would produce unintended discrimination between creditors.