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Joint Administrators of LB Holdings Intermediate 2 Ltd (In Admin) v Lomas & ors [2015]


By a majority the Court of Appeal held that foreign currency creditors who had suffered a currency loss as a result of the conversion of their debts into sterling at the start of the administration of an unlimited company were entitled to claim against the company, though their claims would rank only as unprovable liabilities.


The joint administrators of three companies in the Lehman Brothers group (LBIH2) appealed against a decision ([2014] EWHC 704 (Ch), [2015] Ch. 1) determining various issues arising from the fact that the group's main trading company in the UK and Europe (LBIE) was likely to have a significant surplus once all unsubordinated proved debts had been paid in full.

LBIE was incorporated as a company limited by shares but was subsequently re-registered as an unlimited company for US tax reasons. LBIH2 was LBIE's holding company and sought to recover subordinated loans of £2.225 billion made to LBIE and held as part of the latter's regulated capital. LBIE'sadministrators paid an interim dividend whereupon the administration became a distributing administration subject to the Insolvency Rules 1986 r.2.68 tor.2.105. Many of LBIE's creditors were owed debts payable in foreign currencies which, in accordance with the 1986 Act and r. 2.86(1) and r.4.91, had been converted to sterling as at the date of administration. The seven-year delay between LBIE entering administration and the payment of dividends meant a currency loss of more than £1 billion.

The subordinated lenders submitted that (i) subordinated debt should rank after unsecured provable debts, not after non-provable liabilities as the obligation to pay interest out of the surplus was not a sum "payable or owing by the Borrower" but only a direction to an administrator about how to deal with a fund; (ii) relying on Danka Business Systems Plc (In Liquidation), Re [2013] EWCA Civ 92, [2013] Ch. 506, both statutory interest and non-provable claims could be disregarded because neither was "payable or capable of being established or determined in the Insolvency of the Borrower"; (iii) relying on the theory of "reversion to contract", even where currency conversion claims had been satisfied in full in sterling, the shortfall could be advanced as non-provable claims against a company which had paid in full all proved claims and statutory interest.


(1) The effect of LBIE being an unlimited company was unusual so that old authorities had to be brought to bear. The rules for ranking of debts were contained in Lord Neuberger's "waterfall" in Bloom v Pensions Regulator [2013] UKSC 52, [2014] A.C. 209 but subordinated debt did not feature. A subordinated debt was a contingent debt, not because of its ranking but because the subordination agreement itself provided that repayment was not due until certain conditions had been satisfied. The rules about statutory interest in r.2.88 and s.189(2) operated independently of the bankruptcy regime so that statutory interest fell within the contractual definition of "Liabilities", Lines Bros (In Liquidation), Re [1983] Ch. 1 distinguished (see paras 45-48 ofjudgment). (2) The court in Re Danka had not been concerned either with non-provable claims or with statutory interest, Re Danka distinguished. Statutory interest was payable only because of s.189 or r.2.88 and therefore formed part of the insolvency code. Its quantification was also carried out inaccordance with the code, which meant that it was both payable "in the Insolvency of the Borrower" and capable of being established or determined "inthe Insolvency of the Borrower". It followed that repayment of the subordinated debt was postponed to the payment of statutory interest. Non-provable claims, once established or determined outside "the Insolvency of the Borrower", were nevertheless payable within it, T&N Ltd, Re [2005] EWHC 2870 (Ch), [2006] 1 W.L.R. 1728 approved (paras 50-58). (3) (Lewison, LJ dissenting (paras 64-101)) The conversion of the debts to sterling which was required for the purposes of proof did not have a substantive effect in substituting a sterling obligation for the original foreign currency obligation. A currency conversion claim was not a new claim arising from the effect of the conversion rules, but simply the balance of the creditor's original contractual claim which had not been discharged by the process of early conversion, proof and dividend. Satisfaction of the sterling debt did not, therefore, preclude a creditor from bringing a non-provable claim to recover a shortfall if there were sufficient assets available, Humber Ironworks & Shipbuilding Co, Re (1868-69) L.R. 4 Ch. App. 643 applied, Dynamics Corp of America (In Liquidation) (No.2), Re [1976] 1 W.L.R. 757, Re Danka and Re Lines Bros considered Miliangos v George Frank (Textiles) Ltd [1976] A.C. 443 and Bloom followed (paras 136, 154-166, 247, 251- 260).

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14 May 2015

Court of Appeal
Moore-Bick LJ, Lewison LJ, Briggs LJ

LTL 14/5/2015 : [2015] BCC 431

Practice areas
Banking & Financial Services
Insolvency & Restructuring