Re Lehman Brothers International (Europe) (Nos 6 and 7) (Waterfall IIB)

This appeal concerned the interpretation and application of Rule 2.88 of the Insolvency Rules 1986 governing statutory interest on proved debts in a distributing administration. The Court of Appeal held that Rule 2.88 forms a complete code for post-administration statutory interest: (i) dividends are to be applied first to reduce principal (and proved pre-administration interest) and not to accrued post-administration statutory interest on a Bower v Marris basis; (ii) where the contractual rate “apart from the administration” is a compounding rate, accrued statutory interest does not continue to compound after principal has been paid by dividends; (iii) there is no general common-law remedy for compensation for delayed payment of statutory interest in the absence of a breach by the administrators; (iv) statutory interest under Rule 2.88(7) is payable in respect of provable contingent debts from the date of administration; (v) Rule 2.88(9) does not allow rates arising from foreign judgments obtained after the administration cut-off date to be treated as the “rate applicable to the debt apart from the administration”; and (vi) pre-existing contractual rights to interest that existed as at the cut-off date (including contingent or future rights and certain close-out-triggered rates) fall to be considered when ascertaining the alternative rate under Rule 2.88(9).

This appeal arose from an application for directions by the joint administrators of Lehman Brothers International (Europe) in relation to distribution of a substantial surplus in LBIE's administration. The principal parties were representative unsecured and subordinated creditors seeking clarity on the operation of statutory interest under the Insolvency Rules 1986. Procedurally the issues had been ventilated in a series of High Court decisions (including decisions of David Richards J and Hildyard J) and were influenced and substantially narrowed by the Supreme Court's decision in Waterfall I [2017] UKSC 38.

The relief sought was declaratory: construction of Rule 2.88(7) and (9) (inter alia) in relation to (i) sequencing of allocation between principal and post-administration statutory interest (the Bower v Marris question), (ii) whether compounding contractual rates survive after payment of principal, (iii) entitlement to compensation for delay in payment of statutory interest, (iv) whether contingent provable debts earn statutory interest from the date of administration, (v) whether foreign judgments obtained after the cut-off date can set the contractual rate in Rule 2.88(9), and (vi) whether contractual close-out-triggered rates that arise after the cut-off date are to be taken into account under Rule 2.88(9).

The Court analysed Rule 2.88 as a self-contained statutory code. It rejected a judge-made Bower v Marris allocation because that would reopen and disturb the ascertainment of the proved debt (principal and allowable pre-administration interest) and conflict with the clear statutory structure of Rule 2.88. It held that compounding does not continue once principal has been paid by dividends. The court refused to recognise a general common-law claim for compensation for late payment of statutory interest where administrators had not breached any duty and where the Rules contain no provision for interest on statutory interest. The court held that contingent provable debts are treated as proved debts for the purpose of statutory interest from the administration date. The court held that only rates actually applicable to the debt as at the cut-off date (or pre-existing contractual rights viewed from that date) fall within Rule 2.88(9): foreign judgments obtained after the cut-off date or purely hypothetical foreign-judgment rates are excluded. By contrast, pre-existing contractual rights (even if contingent or future as at the cut-off date), including some close-out-triggered rates, are to be considered in the comparative calculation required by Rule 2.88(9).

The court therefore dismissed the appeals on the remaining live items, explaining its reasoning with reference to the text, context and purpose of the 1986 Rules and the Supreme Court’s guidance in Waterfall I.

Appeal dismissed. The Court of Appeal concluded that Rule 2.88 of the Insolvency Rules 1986 is a complete statutory code for post-administration statutory interest. The rule requires application of the surplus after proved debts have been paid (including proved pre-administration interest) and therefore does not permit a Bower v Marris reallocation giving priority to accrued statutory interest. Compounding does not continue after principal has been paid. No general common-law remedy for delayed payment of statutory interest was recognised absent a breach. Contingent provable debts earn statutory interest from the date of administration. Only rates actually applicable to the debt as at the cut-off date (including pre-existing contractual contingent or future rights viewed from that date) are relevant under Rule 2.88(9); foreign judgments obtained after the cut-off date or hypothetical judgments are excluded.

This appeal arose from several High Court (Chancery Division, Companies Court) decisions: David Richards J ([2015] EWHC 2269 (Ch), [2015] EWHC 2270 (Ch), [2016] EWHC 2131 (Ch)) and Hildyard J ([2016] EWHC 2417 (Ch)). The Supreme Court decision in Waterfall I [2017] UKSC 38 significantly narrowed the live issues on appeal. The present judgment is [2017] EWCA Civ 1462 (Court of Appeal).