Lehman Brothers Luxembourg Investments S.A.R.L. v Lehman Brothers UK Holdings Ltd

Under a subordinated loan agreement, a repayment condition requiring the borrower to be solvent at the time of, and immediately after, payment is assessed by reference to liabilities known at that time, including known contingent liabilities. It does not ordinarily require the borrower to disprove the possibility of unknown liabilities arising in the future. A provision declaring an improper payment void and requiring it to be held on trust for repayment therefore operates only if the solvency condition is unsatisfied when payment is made. Where existing creditors have been paid and no further liabilities are known, the condition may be satisfied despite the theoretical possibility of a future creditor emerging. If a further liability becomes known before payment, it must be settled before the repayment is made.

The claimant, a Luxembourg company, was the sole ordinary shareholder of the defendant, an English holding company in administration. The claimant had advanced more than £1 billion under three subordinated loan agreements. The defendant’s administrators had made, and proposed to make, substantial repayments.

The agreements provided that repayment was conditional on the defendant being solvent at the time of, and immediately after, payment. A payment made when that condition was unsatisfied was void and had to be held on trust for return to the defendant. The claimant sought declaratory relief confirming that the repayments were not subject to that trust. The defendant supported the claim, and no party opposed it. The central issue was whether unknown or merely potential future liabilities had to be taken into account in assessing solvency.

1. Relief granted. The court held that the claimant was entitled to receive the repayments free from the trust, subject to any further liability becoming known before payment.
2. The contractual definition of “Liabilities”, although wide, could not sensibly include liabilities or obligations which were unknown and might never materialise. Treating the theoretical possibility of an unknown creditor as sufficient would make the contractual solvency condition practically incapable of satisfaction.
3. The words requiring solvency to be assessed “at the time of, and immediately after” payment required examination of the defendant’s liabilities as known at that time, including known contingent liabilities. The parties could not reasonably have intended the defendant to establish the negative proposition that no unknown creditor might emerge in the future.
4. The contractual machinery for a solvency report by the insolvency officer supported a commercially sensible assessment. The absence of provision for an ex hypothesi unknown future liability could not ordinarily amount to proven error under that machinery.
5. The defendant had only two relevant creditors apart from the claimant, both of whom had been paid in full, and no further creditors had emerged during more than seven years of administration. The solvency condition was therefore satisfied without reliance on a formal report under paragraph 5(4).
6. If a further liability came to light before a proposed repayment, it would have to be settled in full before payment. Otherwise the solvency condition would fail and the payment would be held on trust for return.