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In The Matter Of Lehman Brothers International (Europe) (In Administration) : In The Matter Of Lehman Brothers Ltd (In Administration) : In The Matter Of LB Holdings Intermediate 2 Ltd (In Administrat


The Supreme Court held by majority that creditors who suffered loss because of currency fluctuations between the administration date, when their debts were converted into sterling, and the payment date, were not entitled to claim the loss as a non-provable debt.


In joined appeals by administrators the court was required to determine issues concerning distribution to creditors from a surplus in the administration of Lehman Brothers International (Europe) ("LBIE").

LBIE was an unlimited company. It had two members: LBHI2 and LBL. All three companies had entered into administration. LBIE's members were also unsecured creditors. LBHI2 had made subordinated loans to LBIE. Under the terms of the agreements repayment of the loans was conditional on LBIE being able to pay its "liabilities". Obligations which were "not payable or capable of being established in the Insolvency" of LBIE were to be disregarded. LBIE also had many creditors owed unsecured debts payable in foreign currencies. LBIE had a surplus in its administration, but LBHI2 and LBL were unlikely to be able to repay their creditors. The issues concerned the validity and ranking of various claims on LBIE's surplus.


(Lord Clarke dissenting on the currency conversion issue, Lord Sumption dissenting on the obiter part of issue 2)

(1) The ranking of LBHI2's claim as holder of subordinated loans -

(a)Was it subordinate to statutory interest? Yes. Under the terms of the agreement statutory interest was an obligation payable in the insolvency. Accordingly, the statutory interest could not be disregarded and it had priority over payment of the subordinated debt (paras 48, 51-56).

(b)Was it subordinate to non-provable liabilities? Yes. Payment of non-provable liabilities were also "in the insolvency" under the terms of the agreement. While the Insolvency Act 1986 did not specifically require the liquidator to pay non-provable liabilities, he was in practice obliged to pay any such claims if there was a surplus after paying statutory interest. That was a principle of judge-made law which survived the codification of insolvency law. It was not open to LBHI2 to lodge a proof for the subordinated debt until the non-provable liabilities had been paid in full (paras 58-61, 70).

(2) Currency conversion claims - Under the Insolvency Rules 1986 r.2.86 foreign debts were to be converted into sterling at the official rate on the administration date. The issue was whether creditors who had suffered a loss due to the depreciation of sterling between the administration date and the payment date were entitled to claim it as a non-provable debt. The answer to that question was no. It was dangerous to rely on judicial dicta as to the effect of an earlier insolvency code, given that the 1986 legislation amounted to a radical change in the law, 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. 1 not applied. The treatment of foreign currency creditors was expressly dealt with for the first time in the 1986 Rules. Accordingly, there had to be a presumption that the new r.2.86 was intended to spell out the full extent of a foreign currency creditor's rights, especially as the purpose of the 1986 legislation was to simplify and clarify the law. If it were otherwise, r.2.86 would operate as a one-way option on the currency markets in a foreign currency creditor's favour. The rules expressly provided for adjustments to a proof of a contingent debt, and the fact that there was no equivalent provision for a foreign currency debt indicated that it was not intended to be adjustable (paras 73-74, 83, 90-96, 112). (Obiter) It was not necessary to determine whether a contractual debt survived the payment of a proved debt based on it, but the Court's preliminary view was that it did not. It would be inconsistent with the general thrust of Chapt.10 of Pt 2 of the 1986 Rules for a component of such a debt to be capable of resurrection (paras 98-111).

(3) If statutory interest was not paid during an administration could it be claimed in a subsequent liquidation? No. Interest under r.2.88(7) could not be claimed from a subsequent liquidator. The rule was a direction to the administrator while he was in office, not a direction to a subsequent liquidator. When the administration ended, r.2.88(7) could no longer apply. That appeared to be an oversight in the statutory scheme, but it was not appropriate for a judge to rewrite a statutory provision to correct it. Further, the right to recover interest at a contractual rate for the period of the administration could not revive where the creditor had been paid on his proof of debt (paras 117-120, 124-127).

(4) Could LBIE seek contributions from members under s.74(1) for statutory interest and non-provable liabilities? Contributions could be sought for non-provable liabilities, but not for statutory interest. Under s.74(1) members were liable to contribute to payment of "debts and liabilities". There were no convincing grounds for limiting the expression "liabilities" to those which could be the subject of a proof. Non-provable liabilities would therefore fall within the expression "liabilities". However, the liability to pay statutory interest only arose if there was a surplus. Section 74 could not be invoked to create a surplus from which statutory interest could then be paid (paras 130, 135-139, 146-147).

(5) Could LBIE prove in the administrations of its members for a potential contribution claim under s.150? No. In order for that liability to be provable by LBIE in the members' administration, it had to be a contingent obligation under r.2.85. The obligation was contingent until the company went into liquidation, Bloom v Pensions Regulator [2013] UKSC 52 applied. However, any money paid pursuant to a call under s.150 was paid to the liquidator, not the company. It formed a statutory fund which only came into existence once the company had gone into liquidation, Pyle Works (No.1), Re (1890) 44 Ch. D. 534 applied. Therefore, where a company was seeking to prove future calls and it was not in liquidation, there was no extant debt. The potential creditor was a future liquidator, not the company (paras 152-158, 164).

(6) Could the members' potential liabilities under s.150 as contributories be set off against their claims as subordinated creditors? No. The comments in Bank of Credit and Commerce International SA (In Liquidation) (No.8), Re [1996] Ch. 245 that only a provable debt could be invoked to support a set off, should not be followed, Bank of Credit disapproved, Gye v McIntyre [1991] HCA 60 considered. However, set-off of the s.150 liabilities would be impermissible for the same reasons as indicated above (paras 168-171).

(7) Could LBIE rely on the contributory rule to resist paying the members on their proofs until they met their liabilities as contributories? Yes. Given that the members were probably insolvent, it would be unjust to pay out against their proofs when they might be liable under s.150 for a substantial sum. That would be inconsistent with the pari passu principle and would frustrate the statutory aim of enabling effective calls to be made in liquidation. The contributory rule which applied in liquidations should be extended to administrations with some minor procedural modifications, Overend Gurney & Co, Re (1865-66) L.R. 1 Ch. App. 528 considered (paras 172-178, 180-182).

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17 May 2017

Supreme Court
Lord Neuberger PSC, Lord Kerr JSC, Lord Clarke JSC, Lord Sumption JSC, Lord Reed JSC

[2017] 2 WLR 1497 : [2017] BCC 235 : [2017] 2 BCLC 149 : [2018] 1 All ER 205 : [2018] 1 All ER (Comm) 629 : [2018] AC 465 : [2017] 5 WLUK 397

Rosanna Foskett