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In the Matter of Lehman Brothers International (Europe) (In Administration) (2014)


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, did not extend to administrations.


The joint administrators of three companies in the Lehman Brothers group sought the determination of various issues arising from the fact that the group's main trading company in the UK and Europe (L1) was likely to have a significant surplus once all unsubordinated proved debts had been paid in full.

The three companies were L1, which was an unlimited company, and its two members (L2 and L3). L3's sole function had been to act as the immediate holding company of L1; it continued to be the holder of $2.225 billion of subordinated loan debt. The subordinated loans formed part of L1's regulatory capital. Both L2 and L3 had ordinary unsecured claims against L1, and L3 had a very large claim as a subordinated loan creditor. It was possible that the administrators would take steps to place L1 into liquidation, particularly with a view to making calls on L2 and L3 as members under the Insolvency Act 1986 s.74(1) and with a view to invoking 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. The purpose of the instant application was to determine the claims which could be made against the surplus before any return was made to L2 and L3 as members and the order in which such claims ranked for payment. Such claims included those of foreign currency creditors who had suffered a currency loss as a result of the conversion of their debts into sterling as at the date of the commencement of the administration. The court also had to consider whether interest accruing during an administration would be provable or payable in a subsequent liquidation. Issues also arose as to the existence and extent of the potential liability of L2 and L3 for the liabilities of L1 and the relationship between their liability, if any, as members and their claims as creditors.


(1) The claims of L3 under its subordinated loan agreements with L1 were subordinated not only to provable debts but also to statutory interest and unprovable liabilities; such a conclusion was consistent with the regulatory background to the subordinated debt agreements. (2) Creditors of L1 whose contractual or other claims were denominated in a foreign currency were entitled to claim against L1 for any currency losses suffered by them as a result of a decline in the value of sterling as against the currency of the claim between the date of the commencement of L1's administration and the date of payment of distributions to them in respect of their claims, Lines Bros (In Liquidation), Re [1983] Ch. 1 considered. Such currency conversion claims ranked as unprovable liabilities, payable only after the payment in full of all proved debts and statutory interest on those debts. (3) If L1's administration was immediately followed by a liquidation, any interest in respect of the period of the administration which had not been paid before the commencement of the liquidation would not be provable as a debt in the liquidation, nor would it be payable as statutory interest under either the Insolvency Rules 1986 r.2.88 or s.189 of the 1986 Act. (4) Those creditors of L1 with debts which carried interest by reason of contract, judgment or other reasons unconnected with L1's administration or liquidation would be entitled to claim in a liquidation of L1 for interest which accrued due during the period of the administration, as an unprovable claim against L1, payable after the payment in full of all proved debts and statutory interest on such debts, Humber Ironworks & Shipbuilding Co, Re (1868-69) L.R. 4 Ch. App. 643 applied. (5) Under s.74(1) of the 1986 Act, members' liability was to contribute to amounts sufficient for the payment of not only provable debts but also statutory interest on those debts and unprovable liabilities. (6) The contributory rule applied only in a liquidation. It did not apply in an administration; the important point was that there was no provision for calls on contributories to be made by administrators of the sort provided for in s.74(1). The equitable rule in Cherry v Boultbee 41 E.R. 171, allowing the netting-off of reciprocal monetary obligations, also did not apply, Cherry v Boultbee not applied. (7) L1, acting by its administrators, would be entitled to lodge a proof in a distributing administration or a liquidation of either L2 or L3 in respect of those companies' contingent liabilities under s.74(1) which might arise if L1 were to go into liquidation, Bloom v Pensions Regulator [2013] UKSC 52, [2014] 1 A.C. 209 considered. The valuation of such claims would be a matter of estimation under the provisions of the 1986 Rules. (8) In a distributing administration or liquidation of L2 or L3, the claims of those companies respectively as creditors of L1 would be the subject of mandatory set-off against the claims of L1 in respect of those companies' contingent liabilities as contributories, Auriferous Properties Ltd (No.1), Re [1898] 1 Ch. 691 not followed. (9) In the administration of L1, the contingent liabilities of L2 and L3 as contributories would be the subject of mandatory set-off against the admitted proofs of debt of those companies as creditors of L1.

Judgment accordingly

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14 Mar 2014

Chancery Division
David Richards J

[2015] Ch 1