The Joint Administrators of LB Holdings Intermediate 2 Limited v The Joint Administrators of Lehman Brothers International (Europe) and others

Modern insolvency legislation must be construed according to its language and scheme. Earlier authorities under materially different legislation do not necessarily govern. Established judge-made rules survive where they remain consistent with the legislation and reasonably necessary to achieve justice.

Foreign-currency debts are converted into sterling at the commencement of administration or liquidation. The creditor cannot recover a later exchange-rate shortfall as a non-provable debt. Statutory interest arising during an administration does not carry into a subsequent liquidation, and contractual interest does not revive.

A contributory may be called on for non-provable liabilities, but not to create the surplus required for statutory interest. A prospective liability to answer calls is neither provable nor available for insolvency set-off before liquidation. The contributory rule nevertheless extends, with appropriate retention arrangements, to a distributing administration.

Following the collapse of the Lehman Brothers group, the administrators of LBIE, LBL and LBHI2 sought directions on the distribution of a substantial anticipated surplus in LBIE's administration. The issues concerned subordinated loans, foreign-currency claims, post-administration interest and the liabilities of members of LBIE, an unlimited company.

David Richards J determined the questions in a judgment reported at [2015] Ch 1. The Court of Appeal, whose neutral citation was [2015] EWCA Civ 485 and whose decision was reported at [2016] Ch 50, upheld most of his declarations but varied others.

The appeals and cross-appeal required the Supreme Court to determine the order of distribution, the effect of the foreign-currency conversion rules, the treatment of interest when administration is followed by liquidation, and whether prospective contributory liabilities could be proved, set off or addressed through the equitable contributory rule.

1. Disposition. Lord Neuberger delivered the leading judgment, with which Lord Kerr and Lord Reed agreed. Lord Sumption agreed with the proposed disposition and gave additional reasons on foreign-currency claims. Lord Clarke agreed on every issue except foreign-currency claims. The court restored paragraph (i) of the first-instance order, discharged paragraphs (ii), (iii), (vii), (viii) and (ix), restored paragraph (iv), upheld the discharge of paragraph (v), and varied paragraph (vi).

2. Subordinated debt. The loan agreements placed LBHI2's subordinated debt behind proved debts, statutory interest and non-provable liabilities. Statutory interest was payable in the insolvency and was, for the contractual definition, payable or owing by LBIE. Non-provable liabilities also had to be discharged before assets could be returned to members. LBHI2 could not lodge a proof until those prior liabilities had been satisfied, or until it was clear that the subordinated proof, its statutory interest and the non-provable liabilities could all be met.

3. Foreign-currency claims. By a majority of four to one, rules 2.86 and 4.91 of the Insolvency Rules 1986 were held to provide the complete scheme for foreign-currency debts. Conversion occurred at the commencement of the administration or liquidation. A creditor paid in full on the resulting sterling proof could not claim a later exchange-rate shortfall as a non-provable debt. Lord Clarke dissented, considering that the conversion was only for proof and that the remaining contractual claim survived where a surplus existed.

4. Interest following administration. Interest under rule 2.88(7) could not be claimed from a liquidator appointed after the administration ended. Section 189(2) of the Insolvency Act 1986 and rule 4.93 left no provision for carrying that interest into the liquidation. The omission could not be repaired judicially. Nor did the contractual right to interest revive, because the statutory provisions formed a complete code for interest on proved debts.

5. Contributory liabilities. Section 74(1) permitted calls to meet non-provable liabilities. It did not permit calls to fund statutory interest, which was payable only from a surplus and could not itself justify creation of that surplus. A prospective liability under section 150 was not provable in a member's administration or liquidation. The right to make calls belonged to the liquidator and generated a statutory fund only upon winding up. The same considerations prevented the prospective liability from being set off, although the court disapproved the broader proposition that a set-off claim must always be provable.

6. Contributory rule. The judge-made contributory rule was extended to distributing administrations. An administrator should retain from a contributory's dividend a cautious but realistic estimate of the contributory's maximum potential liability. The retained money should later be paid to the contributory, secured, or transferred to a liquidator as the eventual circumstances require.

1. United Kingdom Supreme Court: In [2017] UKSC 38, allowed the appeals and cross-appeal in part, restoring, discharging or varying the first-instance declarations as specified in the judgment.
2. Court of Appeal: In [2015] EWCA Civ 485, reported at [2016] Ch 50, upheld most of David Richards J's declarations but varied several of them.
3. High Court: David Richards J determined the administrators' application and made nine material declarations in a judgment reported at [2015] Ch 1.