The Supreme Court has ruled on a number of legal issues stemming from the 2008 collapse of the Lehman Brothers group. The administrators of Lehman's European arm, Lehman Brothers International (Europe) (LBIE), made sufficient recoveries to be able to repay all its unsecured creditors in full. However, various groups of creditors claim to be entitled to payments from the surplus.
The court also confirmed that the company's foreign currency creditors were not entitled to additional funds to reflect the loss in value of sterling between the date of the company's administration and the date of payment. UK insolvency rules convert unsecured debts payable in foreign currencies into sterling at the official rate on the administration date.
Insolvency law expert Nick Gavin-Brown of Pinsent Masons, the law firm behind Out-Law.com, said that the decision clarified the law on a number of points. However, given the unusual circumstances of the Lehman Brothers case, it was unlikely that the decision would be referred to much in practice, he said.
"The Supreme Court's decision clarifies the position on certain claims in the lower echelons of the insolvency 'waterfall', particularly competing claims for subordinated debt, statutory interest, non-provable liabilities and contributions due from members of an unlimited company," he said. "It also clarifies that foreign currency claims do not get a second bite at the cherry where there has been a currency exchange loss between the date of administration and their payment."
"Although it settles the law in a complicated area, given the unique circumstances of the Lehman Brothers administration – and the surplus available after payment of unsecured creditors - it is not perhaps a judgment that will need to be referred to that often," he said.
LBIE, an unlimited company, was the Lehman Brothers Group's main trading company in Europe. Its share capital consists of a number of ordinary shares as well as a number of redeemable shares. All of these shares, except for one ordinary share, are held by LB Holdings Intermediate 2 Ltd (LBHI2), LBIE's holding company. The remaining ordinary share is held by Lehman Brothers Ltd (LBL), which was the service company for the group's operations in the UK, Europe and the Middle East.
LBIE and LBL have been in administration since September 2008, while LBHI2 has been in administration since January 2009. Both LBHI2 and LBL are unsecured creditors of LBIE. Lehman Brothers Holdings, Inc (LBHI), the ultimate parent company of the Lehman Brothers Group, is an indirect creditor of many companies in the group. Its interest in the assets of LBHI2 gives it the indirect right to recover subordinated loans made to LBIE.
The first issue to be settled in the case was the extent to which LBHI2 could recover three subordinated loans made to LBIE from the surplus. Although accepting that the subordinated debt ranked behind other provable debts, administrators for LBHI2 argued that the lower courts were wrong to find that it ranked behind statutory interest or non-provable liabilities. The Supreme Court rejected this argument.
"Given that the creditor is owed the debt until the date of repayment, and given that the company would normally expect to pay interest on the debt to the creditor until that date, it would … be surprising if the liability for this interest was not treated as that of the company," said Lord Neuberger, giving the court's unanimous judgment on the point.
"Looking at the issue from a broader, purposive, perspective, the conclusion that both statutory interest and non-provable liabilities have priority over the subordinated debt seems to me to accord both with the eponymous nature of the subordinated debt, and with what a reasonable reader would expect from the general thrust of the terms of the loan agreements. The purpose of the parties to those agreements was to ensure that all those with claims on LBIE would have priority over the holders of the subordinated debt. In summary terms, the perception of the reasonable reader would be that the holders of the subordinated debt were to be at the end of the queue - and, in the event of an insolvency, at the bottom of the waterfall," he said.
Later in the judgment, however, Lord Neuberger ruled that interest that should have been paid during an administration which was not in fact so paid could not then be claimed in a subsequent liquidation.
On the foreign currency debt, four of the five judges found that Insolvency Rule 2.86, which converts the debt into sterling using the rate in force on the date of administration, fully satisfied the claim of the creditor holding that debt. The notion that these creditors should have a "possible second bite" also seemed inconsistent with one of the stated purposes of the 1986 insolvency regime; "namely, to 'simplify' the insolvency process", Lord Neuberger said.
In a dissenting judgment, Lord Clarke disagreed, based on the common law principle that a creditor should be "repaid in aggregate the whole of the value of the debt inclusive of interest to the date of the repayment".
"I am not persuaded that there is any relevant rule or statutory provision that leads to any contrary conclusion and, absent such an intervention, it is sufficient to resolve the issue by an application of the common law," he said.