Supreme Court ruling sees £5bn additional Lehman insolvency payout

Creditors of Lehman Brothers International Europe (LBIE) are in line for an additional £5bn payout after a Supreme Court ruling determining the arrangement for payment of statutory interest and the rate of exchange to be used on foreign currency conversions

The case is one of a series of legal battles over the terms of the Lehman administration, which is being handled by PwC.

The Supreme Court was asked to consider appeals and cross appeals on a number of issues, including whether the statutory interest which had built up since the bank first went into administration in 2009 should be paid to LBIE, or whether a separate body, LB Holdings Intermediate 2 Ltd (LBHI2) which holds all LBIE’s ordinary and redeemable shares should receive the money.

LBHI2’s contention, which turned on the interpretation of the subordinated loan agreements, is that its claim as subordinated creditor ranked ahead of statutory interest and non-provable liabilities because they are ‘obligations… not payable… in the insolvency’ of LBIE or (in the case of statutory interest) it is not ‘payable and owing by [LBIE]’ within the meaning of the subordinated loan agreements.

The Supreme Court rejected these arguments, stating that statutory interest is plainly an obligation payable in LBIE’s insolvency. The judgment stated it is also ‘payable and owing by [LBIE]’, even though LBIE could not be sued for it.

The judgment says that the notion that a liquidator who meets a non-provable liability makes a payment ‘in the insolvency’ is implied by the provisions of the 1986 Act and by the practical realities, and the same applies to an administrator. Accordingly, statutory interest and non-provable liabilities must be met before any balance can be used for payment of the subordinated loans.

Foreign currency

The second issue under consideration arose from the fact that LBIE’s creditors with debts denominated in a foreign currency will be paid at the rate of exchange prevailing at the date LBIE went in to administration, and sterling may have depreciated on the foreign exchange markets between that date and the date of payment.

The foreign currency creditors claimed that they are entitled to receive any contractual shortfall as a non-provable claim, and were seeking £2bn as compensation for losses caused when they swapped their dollar claims into sterling. The pound has fallen in value since 2008, when the bank collapsed.

Disagreeing with the Court of Appeal, which previously considered the case, the Supreme Court concluded by a majority of four to one that the rule which provides that unsecured debts payable in foreign currencies are to be converted in to sterling at the official rate on the administration date, spells out the full extent of a foreign currency creditor’s rights.

As a result, foreign currency creditors cannot claim as a non-provable debt the difference between the sterling value of the debt at the administration date and that at the date the debt was paid. The Supreme Court pointed out that taking the opposite view would lead to a one-way option in favour of the foreign currency creditors.

The Supreme Court also considered four other issues which arose because LBIE is an unlimited company and so its members can be called upon to make contributions under section 74 of the 1986 Act to meet its liabilities if LBIE is in liquidation.

Rupert Reed QC, a commercial chancery barrister at Serle Court, said: ‘The court has generally taken a strict approach in applying the insolvency act and rules.  For example, it has identified a statutory lacuna in confirming that statutory interest accruing during an administration is not recoverable in a subsequent liquidation. 

‘It has also found that a section 74 claim for contribution from shareholders does not include a liability to meet statutory interest, that a section 74 claim is provable only by a liquidator, and that section 74 liabilities may not be set off against proofs filed by shareholders as creditors in administration.’

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

The Joint Administrators of Lehman Brothers Limited (Appellant) v Lehman Brothers International (Europe) (In Administration) and others (Respondents)

Lehman Brothers Holdings Inc (Appellant) v The Joint Administrators of Lehman Brothers International (Europe) and others (Respondents) is here.

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