The Joint Administrators of Lehman Brothers Holdings Plc v LB GP No 1 Limited & Ors

Contractual subordination provisions determine priority between subordinated claims, subject to the insolvency rules as interpreted in their contractual context. Statutory interest under rule 14.23 is the starting point for the statutory waterfall, but it does not prevent a creditor from agreeing that its claim ranks behind statutory interest payable on another claim. The court must identify how far back each creditor agreed to stand in the queue by closely analysing the relevant instruments. Where a contract places one subordinated claim ahead of another, statutory interest on the senior claim may rank ahead of principal on the junior claim. A later issue is not barred merely because it could have been raised in earlier proceedings. Henderson v Henderson abuse requires a broad, merits-based assessment of all the circumstances.

The administrators of Lehman Brothers Holdings Plc sought directions concerning priority between two classes of subordinated claims in a distributing administration. Claim D, comprising subordinated notes, had previously been held by the Court of Appeal to rank ahead of Claim C, comprising subordinated debt, as to principal in the ECAPS1 Proceedings. The present issue was whether statutory interest payable on Claim D also ranked ahead of principal on Claim C.

Several other issues were withdrawn by consent. The respondents disputed the substantive issue and argued alternatively that it was barred by res judicata, issue estoppel or Henderson v Henderson abuse because it could have been raised in ECAPS1.

1. Substantive issue allowed in favour of Claim D. Statutory interest payable in respect of Claim D ranked ahead of principal payable under Claim C.
2. The Court of Appeal’s approach in ECAPS1 required close analysis of the contractual definitions of Senior Liabilities, Subordinated Liabilities and Excluded Liabilities. The absence of a regulatory imperative between subordinated creditors did not alter that approach. The essential question remained how far back each creditor had agreed to stand in the queue.
3. For Claim C, statutory interest was a Liability, but was neither a Subordinated Liability nor an Excluded Liability. It was therefore a Senior Liability. Claim C had agreed to stand behind Senior Liabilities.
4. For Claim D, statutory interest was not a Senior Liability or an Excluded Liability. It therefore fell within Subordinated Liabilities and ranked pari passu with principal. The words in respect of the Notes had their ordinary broad meaning and were not confined to liabilities whose source was contractual.
5. Rule 14.23(7) supplied the statutory starting point but did not impose an overriding ranking scheme. In the context of subordinated claims, surplus was assessed at each level of the waterfall after payment of proved debts at that level. The contractual priority provisions could require statutory interest on a higher-ranking claim to be paid before principal on a lower-ranking claim.
6. The issue was not res judicata or subject to issue estoppel. The priority of statutory interest had not been expressly decided, nor had it been necessary or fundamental to the earlier decisions. Nor was there Henderson v Henderson abuse. The Aldi Stores guidance did not create an inflexible rule requiring every potentially relevant point to be raised in earlier complex litigation. Applying a broad, merits-based and fact-sensitive assessment, the later issue had not been shown to be unfair, oppressive or abusive.
7. The application to preclude the issue was dismissed. The substantive directions were given on the basis that statutory interest on Claim D was payable before principal on Claim C.

The judgment describes earlier proceedings concerning the same Lehman estates, including a decision of Marcus Smith J and the Court of Appeal in the ECAPS1 Proceedings. Those decisions were treated as binding or materially relevant on the contractual approach to priority, but they had not determined the statutory-interest issue.