Supreme Court hands down judgment in Lehman Waterfall I proceedings

On 17 May 2017, the Supreme Court handed down its judgment in the Lehman “Waterfall I” proceedings, following a 4-day appeal heard in October 2016. These proceedings raise a series of novel and important issues of insolvency law against the background of the administrations of entities within the Lehman group of companies.

Lehman Brothers International (Europe) ('LBIE') entered administration in September 2008 during the global collapse of the Lehman Brothers group. LBIE has a large surplus following payment of or provision for unsubordinated proved debts in full. Various groups of creditors claim to be entitled to payments from the surplus. They include creditors claiming statutory interest, subordinated debt holders and foreign currency creditors. LBIE is an unlimited company with (according to Companies House and LBIE's share register) two members (LB Holdings Intermediate 2 Limited and Lehman Brothers Limited, the second and third appellants). Both have filed ordinary unsecured claims against LBIE and LB Holdings Intermediate 2 Limited has filed a large claim as a subordinated loan creditor.

The issues arising in the appeal to the Supreme Court included:

1. The proper ranking of certain subordinated debt in the insolvency 'waterfall';
2. Whether the creditors of a company in administration whose provable claims are denominated in a foreign currency are entitled to payment (as non-provable liabilities of the company) of the balance of such claims which remains outstanding following the process of proof as a result of a decline in value of sterling against the currency of the claim between the commencement of the administration of that company and the dates of dividend distributions and, if so, the proper ranking of such claims (referred to as “Currency Conversion Claims”);
3. Whether statutory interest accruing but unpaid during a company's administration is payable in that company's subsequent liquidation;
4. The scope of liability of members in an unlimited company under s.74 of the Insolvency Act 1986;
5. Whether an unlimited company in administration can submit a proof of debt in a distributing administration or liquidation of one of its members, with respect to a contribution claim pursuant to s.74 of the Insolvency Act 1986;
6. Whether the 'contributory rule' (whereby a contributory of a company in liquidation could not recover anything in respect of any claims he might have as a creditor until he had fully discharged his obligations as a contributory) extends to administrations.

The administrators of Lehman Brothers Limited, represented by David Wolfson QC and Nehali Shah (instructed by DLA Piper), appealed against the decision of the Court of Appeal in relation to points (2)-(4). They were successful on each of these points, with the Supreme Court holding:

  • By a majority (Lords Neuberger, Kerr and Reed), and overturning the decision of the Court of Appeal and David Richards J at first instance, that there are no Currency Conversion Claims. Lord Clarke dissented on this point, and Lord Sumption’s judgment differs in its reasoning from that of Lord Neuberger (with whom Lords Kerr and Reed agreed).
  • Unanimously, that statutory interest accruing but unpaid during a company’s administration is not payable in that company’s subsequent liquidation, overturning the decision of the Court of Appeal.
  • Unanimously, that the liability of members in an unlimited company under s.74 of the 1986 Act does not extend to statutory interest (contrary to the decisions of the Court of Appeal and David Richards J at first instance). (However, the Supreme Court upheld the decisions below that the liability of the members under s.74 includes non-provable claims).

The Supreme Court’s decision provides important guidance on the application of the Insolvency Rules 1986 and the Insolvency Act 1986, and particularly the extent to which there is scope for the co-existence of Judge-made rules alongside the 1986 legislation. Lord Neuberger stated at [176] that “given the detailed and coherent nature of the 1986 legislation, a judge must think long and hard before laying down a new Judge-made rule to liquidations”. Further, the decision also clarifies that it is “dangerous to rely on judicial dicta as to the effect of an earlier insolvency code, given that the 1986 legislation amounts to what Sealy and Milman … describe as including “extensive and radical changes in the law and practice of bankruptcy and corporate insolvency, amounting virtually to the introduction of a completely new code”.”

David Wolfson QC and Nehali Shah appeared for the LBL administrators. 

You can view the full Judgment here and read the press summary here -