In re Lehman Brothers International (Europe) (No 4)

The Supreme Court considered multiple issues of insolvency law arising from the Lehman collapse, focusing on the ranking and provability of claims in a distributing administration and the interaction between contractual rights and the procedural machinery of the Insolvency Rules 1986. It held that (i) subordinated contractual claims were provable but subordinated to provable debts, statutory post-insolvency interest (rule 2.88/section 189) and non-provable liabilities; (ii) statutory post-insolvency interest and non-provable liabilities rank ahead of subordinated loans for repayment purposes; (iii) foreign‑currency debts are converted for proof by rule 2.86 to sterling at the administration (cut‑off) date and, on the primary analysis adopted by the Court, payment in full of the sterling proof (plus statutory interest) exhausts the provable claim so that no separate contractual currency shortfall can be claimed as a non‑provable debt; and (iv) interest accruing under rule 2.88(7) during an administration does not survive as a claim against a subsequent liquidator but contractual interest does not revive where the creditor has been paid in full under the administration rules. The Court also decided that non‑provable liabilities may be met from contributories under section 74 but statutory interest may not, and that a modified form of the contributory rule should be applied in distributing administrations to avoid unjust preference of contributories who are also creditors.

This appeal and cross‑appeal arose from declarations made in proceedings begun by the administrators of a number of Lehman group companies to determine ranking and quantification issues arising in LBIE's distributing administration.

Background and parties

• LBIE (an unlimited company) was in administration and in distributing administration; LBHI2 and LBL were LBIE shareholders and also creditors; LBHI is the ultimate parent, involved on related issues.
• The administrators sought declaratory relief on a range of issues including the ranking and provability of subordinated loan claims, treatment of foreign currency claims, treatment of statutory post‑insolvency interest when an administration is followed by liquidation, and the consequences of contributory liabilities (section 74) where a member is also a creditor.

Procedural history
David Richards J gave a first instance judgment (reported at [2015] Ch 1). The Court of Appeal ([2016] Ch 50) allowed parts of the appeals and varied others. The matter came to the Supreme Court on appeal and cross‑appeal ([2017] UKSC 38).

Issues framed

1. Whether subordinated loans to LBIE were provable and where they ranked in the insolvency waterfall (particularly in relation to statutory interest under rule 2.88/section 189 and non‑provable liabilities).
2. Whether foreign currency creditors who were paid on conversion at the administration cut‑off date could claim any subsequent currency shortfall as a non‑provable claim if sterling depreciated before payment.
3. Whether interest which an administrator ought to have paid under rule 2.88(7) but did not can be claimed in a subsequent liquidation.
4. Whether contributories may be called upon to meet statutory interest or non‑provable liabilities under section 74 and relatedly whether a company (or its administrator) may prove for a prospective contributory liability in the contributory’s own insolvency, or set it off; and whether the contributory rule applies in administration.

Court’s reasoning

• On subordination, contractual drafting in the Loan Agreements subordinated repayment to Senior Liabilities and excluded obligations not payable or capable of being established in the insolvency were considered; the Court concluded statutory interest (rule 2.88/section 189) and non‑provable liabilities rank ahead of the subordinated debt and therefore subordinated creditors cannot be paid until those categories are satisfied.
• On foreign currency claims the Court (by majority in the reasoning adopted by Lord Neuberger) accepted a primary and narrower analysis: rules 2.86 and 4.91 convert foreign currency debts into sterling for the purpose of proving at the administration/liquidation cut‑off date and, where proved and paid in full, exhaust the provable claim so that the creditor cannot claim the contractual shortfall as a non‑provable claim. This followed the statutory scheme and the Law Commission/Cork Committee approach. A dissenting view (Lord Clarke) accepted that where there is a surplus a creditor should be able to recover the contractual shortfall.
• On post‑administration interest, rule 2.88(7) is a direction to an administrator and ceases to apply once administration ends; a subsequent liquidator is not obliged to pay interest which accrued under the administration and contractual interest does not revive as a non‑provable claim where the proof has been paid in full.
• The Court held that non‑provable liabilities are liabilities within section 74 and may, in a liquidation, be met from contributories, but statutory interest could not properly be met by calls under section 74 in the absence of a surplus; the contributory rule can be adapted for distributing administrations by retaining relevant amounts pending final realisation so as to prevent unjust preference.

Appeal allowed in part. The Court restored and varied aspects of the first instance declarations: subordinated loans are provable but rank behind provable debts, statutory post‑insolvency interest and non‑provable liabilities; foreign currency claims were held (on the majority analysis adopted) to be converted for proof at the administration cut‑off date so payment of the sterling proof exhausts that part of the claim; rule 2.88(7) interest payable in administration does not carry over to a subsequent liquidation; non‑provable liabilities can be met from contributories under section 74 but statutory interest cannot; and a limited procedural adaptation of the contributory rule applies in distributing administrations to avoid unjust preference of contributories who are also creditors.

First instance: David Richards J ([2015] Ch 1). Appeal to Court of Appeal: [2015] EWCA Civ 485, reported at [2016] Ch 50. Appeal and cross‑appeal to the Supreme Court: [2017] UKSC 38 (this judgment).