Despite the fact that almost a decade has now passed since the main European trading vehicle in the Lehman Brothers group of companies first entered administration, the legal ramifications continue to flow. On 17 May the Supreme Court delivered its judgment in the Waterfall I appeal, a dispute concerning the distribution of approximately £8 billion of surplus assets in Lehman Brothers International Group (Europe) (LBIE).
Those looking for an introduction to English Insolvency law will be well served by reading the leading judgment of Lord Neuberger in this case (a copy of which can be accessed by clicking here). It contains a useful summary of the administration procedure where an administrator gives notice of intention to distribute a dividend. Of course, it has been a surprise to many and is somewhat contrary to expectations, that LBIE has not only been able to repay its external creditors in full but also has a surplus of assets remaining.
A full summary of the case is beyond the scope of this note, but three of the main issues considered by the Court are dealt with in turn below (and in the order that they were considered in Lord Neuberger's lead judgment).
1. The ranking of subordinated debt in the Waterfall
LBIE's majority shareholder and immediate holding company, LB Holdings Intermediate 2 Ltd (LBHI2), advanced three separate unsecured subordinated loans to LBIE in November 2006. In relation to those loans, LBHI2 filed proofs of debt with LBIE's administrators for approximately £1.254 billion in aggregate. The Court considered whether LBIE should pay the subordinated debt amount to LBHI2 before or after the payment of statutory interest and non-provable debts. It concluded that the subordinated debt ranked behind both statutory interest and non-provable debts; accordingly LBHI2 would have to wait until all senior claims had been discharged or provided in full before being paid its subordinated claims.
2. Currency conversion claims
Many of LBIE's creditors were owed unsecured debts payable in foreign currencies. A large number of such creditors were adversely effected by the operation of Rule 2.86 of the Insolvency Rules, which (in summary) provides that foreign currency debts must be converted into sterling at the official exchange rate on the date a company enters administration. Those who had claims originally denominated in US Dollars, for example, have since suffered as the US Dollar has appreciated against the pound. GVF (Lux) Master SARL, effectively representing the foreign currency creditors, contended that the difference between the amount owing to them in the original contractual currency and the distributions they received in sterling converted back into that original currency should be recoverable as a non-provable debt.
Lord Neuberger expressed some sympathy for this contention, noting that "at first sight, it is hard to quarrel with the argument that, if it turns out that there is a surplus, it would be commercially unjust to distribute it to the members without first making good the shortfall suffered by the foreign currency creditor". However he and majority of the judges were unable to conclude in favour of the foreign currency creditors' contention, finding that Rule 2.86 provides a complete code for currency conversion, leaving no scope for a foreign currency creditor to have a second claim against a debtor for any such foreign currency shortfall on a non-provable basis.
3. Claims for post-administration interest in a subsequent liquidation
The Court also considered whether statutory interest which accrued but was not paid in LBIE's administration could still be claimed in a subsequent liquidation. The majority of the judges in the Supreme Court again felt compelled to comply with the provisions of the Insolvency Rules and concluded that Rule 2.88(7) does not provide any allowance for the payment of statutory interest once a company, previously in administration, subsequently enters liquidation.
It is interesting to note that Lord Neuberger expressed a lack of enthusiasm for this outcome, but concluded it was not appropriate for the courts to rewrite statutory provisions to correct what might otherwise appear to have been an oversight by Parliament.
4. Summary
As mentioned above, this is only a short summary of a case that will be of much interest generally to insolvency practitioners. Tim Carter, co-head of the restructuring and insolvency practice at Stevens & Bolton, commented that “This case deals with some quite novel issues by virtue of the unusual result of the administration/liquidation process producing a surplus of assets following the discharge of external creditor claims and also because of LBIE’s unusual status as an unlimited company”.
On the latter point, the Supreme Court determined that the liability of a shareholder of an unlimited company would not extend to statutory interest. Carter also added “On balance, the case has been initially well received, especially in terms of its clarification of the law, and is of course a welcome and favourable verdict for LBIE's shareholders and the ultimate parent company in the group, Lehman Brothers Holdings, Inc. (which itself emerged from Chapter 11 US bankruptcy proceedings in March 2012)”.
Tim Carter
Matthew Padian