Burlington Loan Management Ltd & Ors v Lomas & Ors

Rule 2.88 of the Insolvency Rules 1986 is a complete code for statutory interest payable from a surplus in an administration. Once proved debts have been paid, dividends cannot be retrospectively allocated first to post-administration interest under Bower v Marris. Statutory interest is payable only for periods when the proved debt is outstanding. It does not compound after the principal has been paid in full.

A contingent provable debt earns statutory interest from the commencement of the administration, whether or not the contingency has then occurred. The alternative contractual rate under Rule 2.88(9) is determined by rights existing at the commencement date. It may reflect future or contingent contractual rights, including a close-out rate triggered later, but not a foreign judgment rate first created after that date or a hypothetical judgment rate.

LBIE entered administration in 2008. After payment or provision for proved debts and administration expenses, a substantial surplus remained. Representative senior and subordinated creditors appealed directions concerning the distribution of that surplus and, in particular, post-administration statutory interest.

The appeals arose from decisions of David Richards J, including [2015] EWHC 2269 (Ch) and [2015] EWHC 2270 (Ch), and from a decision of Hildyard J, [2016] EWHC 2417 (Ch). The Supreme Court's decision in Waterfall I, [2017] UKSC 38, had removed the issues concerning currency-conversion claims and non-provable contractual interest.

The remaining questions concerned the calculation, duration, rate and timing of statutory interest under Rule 2.88 of the Insolvency Rules 1986.

1. The court dismissed the entire appeal. Rule 2.88(7), read with Rules 2.88(8) and (9), provides a clear and complete statutory code for interest payable from a surplus after proved debts have been paid. The approach accords with Waterfall I, [2017] UKSC 38, which rejected a reversion to contractual rights after the statutory process.

2. The statutory interest calculation does not incorporate the rule in Bower v Marris. Rule 2.88(7) assumes that the principal and provable pre-administration interest comprising the proved debt have already been paid. Reallocating dividends first to post-administration interest would reopen that settled calculation and could eliminate the surplus from which statutory interest is payable. The historic rule filled a legislative gap; Rule 2.88 leaves none.

3. A contractual compounding rate may operate while a proved debt remains outstanding. It cannot cause statutory interest to compound after dividends have paid the principal in full. Rule 2.88(7) permits interest only for the periods during which the debt was outstanding.

4. No further interest, damages or compensation was payable for the time taken to pay statutory interest. Rule 2.88 fixes no due date for that payment. In the absence of unreasonable or culpable delay by the administrators, and therefore of a legal wrong or cause of action, there was no common-law basis for additional compensation.

5. Statutory interest on a contingent provable debt runs from the commencement of the administration until payment by dividend. The relevant debt is the provable debt, not the underlying claim. A contrary construction would treat contingent and future debts inconsistently and would undermine the single cut-off date used by the statutory scheme.

6. For Rule 2.88(9), the relevant alternative rate is derived from contractual or other interest rights existing at the commencement of the administration. Those rights may be current, future or contingent, and may include a post-administration close-out rate arising under a pre-existing contract. They do not include a rate under a foreign judgment obtained only after the cut-off date, nor a hypothetical foreign judgment rate. The statutory comparison may use hindsight to identify what the pre-existing rights would in fact have produced.

• Court of Appeal (Civil Division): Dismissed the consolidated appeals: [2017] EWCA Civ 1462.
• High Court, Chancery Division, Companies Court: David Richards J made the relevant directions in [2015] EWHC 2269 (Ch), [2015] EWHC 2270 (Ch) and [2016] EWHC 2131 (Ch). The Court of Appeal upheld the challenged rulings.
• High Court, Chancery Division, Companies Court: Hildyard J decided the close-out interest issue in [2016] EWHC 2417 (Ch). The Court of Appeal upheld that ruling.