Re Lehman Brothers International (Europe); Administrators of LB Holdings Intermediate 2 (in administration) and others v Lomas

Corporate insolvency – non-provable debts – foreign currency claims – post-insolvency interest – unlimited companies

The recovery of sufficient sums to pay all external creditors of the main European Lehman Brothers service company has thrown up some obscure points of principle, all but one of which, the Court of Appeal held, were rightly decided at first instance by David Richards J.

David Richards J had dealt with issues arising between various Lehman Brothers companies and in particular: (a) Lehman Brothers International (Europe) (LBIE), the main European service company which employed staff, leased premises and provided the administrative support for the bank; and (b) its two members, Lehman Brothers Limited (LBL) and Lehman Brothers Holdings Intermediate 2 Ltd (LBHI2). All three companies were in administration.

LBIE was an unlimited company, set up for US tax reasons. All but one of its 6 billion shares were held by LBHI2; the other by LBL. LBHI2 was also a creditor of LBIE to the tune of some $2.2 Bn of subordinated debt.

Firstly, the Court of Appeal, agreeing with David Richards J, held that non-provable debts are payable within the winding-up scheme, after payment of provable debts and interest, notwithstanding the lack of a statutory mechanism. They can and must be dealt with by the liquidator, or in absence of agreement, by ascertainment by the Court. The class of non-provable debts is shrinking, as a matter of policy, but would still include, for example, a claim by a pedestrian injured by the negligence of an employee of a trading company in administration. Such a claim would fall to be paid before distribution were made to members.

Briggs and Moore-Bick LJJ agreed with David Richards J that foreign currency claims, which under r.2.86 have to be converted to sterling at the exchange rate when the company went into administration, were not exhausted by payment at a later date of a dividend equal to that sterling amount. So, if as in this case, the exchange rate later moves in the creditor’s favour so that the sterling payment, when made, was inadequate to settle his debt as expressed in the foreign currency, he might, in the event of a surplus after payment of all other provable claims and interest, claim for the difference as a non-provable liability. Lewison LJ dissented but the appeal on this issue was dismissed.

The only order of David Richards J that the Court of Appeal overturned was that relating to the payment of interest on claims that arose after the company went into administration. The Court of Appeal held that the rights of creditors to such interest (as might be otherwise payable) could be carried over, as a sort of charge on the estate, should LBIE move from administration to liquidation. That is obviously fair but a reading of the law which David Richards J had not considered open to him.

The court also considered points of principle arising out of the liability of a member to pay on calls made by an insolvent company. Almost all companies today are limited, but LBIE was not, for tax reasons, meaning that its administrator was entitled to make calls on the two members (both themselves also in administration), even if those calls were made to satisfy interest payments and non-provable debts, rather than just the principal of provable debts.

Many of the points of principle decided in this case will be of little significance to the vast majority of companies today but they will be relevant in cases involving unlimited companies and ones which find themselves solvent after a period in administration. Advisors should take care not to equate non-provable liabilities with unenforceable claims in insolvency, and note that foreign currency claims are not necessarily exhausted when paid out based upon a historic exchange rate. The historic analysis and the consideration of re Nortel GmbH [2014] AC 209 are also interesting.