Lomas & Ors (Joint Administrators of Lehman Brothers International (Europe)) v Burlington Loan Management Ltd & Ors

Under the ISDA Master Agreement, the contractual Default Rate is confined to the price of actual or hypothetical borrowing of the relevant amount for the relevant period. It does not include equity funding, weighted average capital costs, consequential losses, balance-sheet effects or other financial detriment. Certification is conclusive subject to good faith, rationality and manifest numerical or mathematical error. Following a permitted assignment, the relevant payee remains the original contractual counterparty. A contractual interest entitlement existing under a pre-administration contract may qualify under rule 2.88(9) even if it becomes operative only after administration. By contrast, under the German Master Agreement, no claim for further damages under section 288(4) BGB arose because the close-out amount was not due, and no default occurred, before administration.

The joint administrators of Lehman Brothers International (Europe) sought directions in the third tranche of the Waterfall II application. The issues concerned interest claimed under English- and New York-law ISDA Master Agreements and under a German-law master agreement, including the meaning of the contractual Default Rate, the effect of assignments, certification requirements, and the interaction with rule 2.88 of the Insolvency Rules 1986.

The court also considered whether a contractual rate which became operative after administration could be the rate applicable to the debt apart from the administration. The principal questions were the construction of the standard agreements and whether the claimed rights existed, or had a legal foundation, at the date of administration.

1. ISDA Default Rate. The words “cost ... if it were to fund or of funding the relevant amount” refer to the price required under an actual or hypothetical loan transaction to borrow the relevant amount for the period in question. Equity or risk-capital funding, weighted average cost of capital, costs of carrying a receivable, consequential losses and other non-interest costs fall outside the definition. Hybrid funding may qualify only to the extent that an identifiable interest element referable to borrowing the relevant amount can be separated.
2. The certifying party need not establish the lowest available borrowing rate. Certification is conclusive unless made otherwise than in good faith or irrationally, or unless affected by manifest numerical or mathematical error. The party challenging certification bears the burden of proof. A certificate may be given by the relevant payee or a person authorised by it.
3. Under section 7 of both ISDA forms, “relevant payee” means LBIE’s original contractual counterparty. An assignee receives the amount payable, and associated rights existing on transfer, but not a different rate calculated by reference to the assignee’s own funding position.
4. The answers were the same under New York law. The relevant contractual rate may be calculated by reference to the circumstances at a particular date or on a fluctuating basis, provided the certification is rational and in good faith. Hindsight may be used only insofar as it bears on what the payee actually did or could have done.
5. Under the German Master Agreement, the 2016 BGH Decision required the close-out claim to be calculated under section 104 of the German Insolvency Code. The claim therefore could not have become due before LBIE entered administration. No pre-administration default existed under section 286 BGB, and neither the administration application nor a proof of debt constituted a serious and definitive refusal or a warning notice. The answer to Issue 20(1) was therefore negative. The contingent issues on further damage and assignment were academic; alternatively, a further-damage claim would not be a rate applicable to the debt under rule 2.88(9).
6. A contractual right to interest existing under a pre-administration contract is different from a right arising only from a judgment obtained after administration. The former may qualify as the rate applicable to the debt apart from the administration even where the contractual conditions triggering interest are satisfied later. Supplemental Issue 1(A) was answered affirmatively.

Counsel were directed to prepare an order recording the answers.

The judgment records earlier directions and decisions in the Waterfall litigation, including Waterfall IIA at [2015] EWHC 2269 (Ch), but this was a first-instance directions judgment and no appeal from this decision is stated.