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LBHI v LBIE (2017) – Friendly fire over the insolvency waterfall

The Joint Administrators of LB Holdings Intermediate 2 Ltd v The Joint Administrators of Lehman Brothers International (Europe) & Others [2017] UKSC 38


The previous Court decided that the creditors who suffered a loss due to currency fluctuations between the administration date and the payment date were not able to claim the loss as a non-provable debt when their debts were converted into sterling. The Supreme Court upheld by majority decision. The judgment can be found here.

Facts of the case

  • This was a joint appeal by administrators involving the distribution to creditors in the wake of the administration of Lehman Brothers Intentional Europe (LBIE).
  • Under the umbrella of LBIE were two members LB Holdings Intermediate 2 Limited (LBHI2) and Lehman Brothers Limited (LBL).
  • LBIE and its two members were unsecured creditors and all three of them actually entered administration.
  • LBHI2 had made subordinated loans to LBIE which under the terms of the agreement would be repaid on the conditional basis of LBIE being able to pay its liabilities.
  • However, due to the insolvency, some of the obligations were either not payable or capable of being established and were therefore disregarded.
  • In addition, LBIE had a surplus of creditors who owed unsecured debts which were payable in foreign currencies.
  • LBHI2 and LBL were both unlikely to repay their creditors after falling into administration however LBIE were actually in a surplus.
  • This raised many questions about the ranking and the validity of LBIE’s surplus.

Judgement application

In terms of the ranking of LBHI2’s claim as holder of the subordinated loans, the first question asked to the court was whether it was subordinate to statutory interest or not. The judge viewed that yes it was based on the terms of the agreement the statutory interest was an obligation payable if insolvency occurs. Due to this the statutory interest could not be ignored and therefore it took precedence over the payment of the subordinated debt (Paras 48, 51-56).

The next issue the court was asked to dissipate was whether it was subordinate to non-provable liabilities. It was viewed that yes it was with the first justification being that the payment of non-provable liabilities was set out in the terms of the agreement if insolvency was to occur. Under the Insolvency Act 1986, it does not require the liquidator to pay its non-provable liabilities, however, in real terms the obligation to pay occurs if there is a surplus after paying statutory interest. Therefore, the burden of proof does not fall upon LBHI2 for the subordinated debt until the non-provable liabilities had been paid (Paras 58-61, 70).

Rule 2.86 of the Insolvency Rules 1968 sets out that foreign debts are to be converted into sterling at the official exchange rate on the day the administration took place. In this case, the legal issue was if the creditors who had suffered a loss due to the depreciation of sterling between the day the administration took place, and the day of payment were eligible to claim the total sum as a non-provable debt. The judge decided no it wouldn’t and therefore disapplied Miliangos v George Frank (Textiles) Ltd [1976] A.C. 443, Dynamics Corp of America (In Liquidation) (No.2), Re [1976] 1 W.L.R 757 and Lines Bros (In Liquidation), Re [1983] Ch. The justification for this was it would be dangerous to use judicial dicta in relation to an earlier insolvency code due to the significant change the 1968 legislation caused. The 1986 legislation was an attempt to deal with foreign currency creditors for the first time to attempt to clarify the surrounding area of law with Rule 2.86 intention being to set out the foreign currency creditor’s rights. The implementation of the rules provided a change to the proof of contingent debt and due to being no other alternative provisions involving foreign currency debt this strongly indicates that it is not meant to be adjustable (Paras 73-74, 83, 90-96, 112) (Obiter). Additionally, the Court decided that due to it being inconsistent with Chapter 10 of Part 2 of the 1986 legislation, it wasn’t needed to decide whether or not a contractual debt survived the payment of a proven debt (Paras 98-111).

The Court was then next asked whether when statutory interest wasn’t paid during the administration stage whether it could be claimed in a subsequent liquidation. The answer was no with the justification being that under the Insolvency Rules 1968 Rule 2.88(7) interest cannot be claimed from a subsequent liquidator however once the administration comes to end it would no longer apply. The reasoning behind this decision was it wouldn’t make sense for the judge to rewrite a statutory provision as well as the fact attempting to recover interest at a contractual rate for the duration of the administration period couldn’t revive where the creditor had received payment based on proving their debt (Paras 117-120, 124-127).

The subsequent legal issue involved LBIE asking whether they could rely on the contributions from members under s.74(1) for statutory interest and non-provable liabilities. It was viewed by the court that contributions could be used for non-provable liabilities, but they couldn’t be for statutory interest. The judge then went on and explained that under s.74(1) members were liable to contribute to the payment of both debts and liabilities and that there were no convincing grounds for limiting the expression of ‘liabilities’ to those who could be influenced by a proof. Subsequently, non-provable liability would fall within expression liabilities although the obligation to pay the statutory interest only occurs when there is a surplus. Also, it was viewed that an attempt to rely on Section 74 to create a surplus and therefore statutory interest could be paid would not be possible (Paras 130, 135-139, 146-147).

Bloom v Pensions Regulator [2013] UKSC 52 was the main authority in terms of application when the court was asked whether LBIE could prove in the administrators of its members for a potential contribution claim under s.150. The court decided no based on the justification that due to going into liquidation the obligation was no longer contingent and under the Insolvency Rules 1968 Rule 2.85 LBIE when attempting to prove liability it had to be a contingent obligation.

Moreover, Pyle Works (No.1), Re [1890] 44 Ch. D. 534 applied when the Court decided that due to money being paid to the liquidator and not the company pursuant to a call under s. 150 this formed a statutory fund when the company fell into liquidation. Due to this when a company seeks to prove future calls and is not in liquidation, there is no extant debt (Paras 152-158, 164).

The case of Bank of Credit and Commerce International SA (In Liquidation) (No. 8), Re [1996] Ch. 245, which set out that only a provable debt could be invoked to support a set-off was classed as not to be followed when the Court was asked whether the member’s potential liabilities under s.150 as contributors be set off against their claims as subordinated creditors. The case of Gye v McIntyre [1991] HCA 60 was also considered but the set-off of the s.150 liabilities would actually be impermissible (Paras 168-171).

Overend Gurney & Cp, Re [1865-66] L.R. 1 Ch. App. 528 was considered when the Court was asked to decide whether LBIE could rely on the contributory rule to resist paying members on their proofs until they met their liabilities as contributors. Subsequently, they viewed that yes they could due to the fact that:

  • The members were probably insolvent and therefore it wouldn’t be unfair to pay out against their proofs as they could be liable for a substantial sum under s.150.
  • It also wouldn’t align with the pari passu principle and that is not the purpose of the statute (the aim is to allow calls to be made in liquidation).
  • The contributory rule that usually applies when a liquidation occurs should be prolonged to administrations with some procedural modifications.
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