The Court of Appeal has recently given detailed guidance on what happens to the surpluses available in the insolvency of companies after dealing with an appeal in relation to the so-called Lehman Waterfall Application dealt with in an earlier Update.
LBIE, an unlimited company, went into administration in 2008. A surplus of assets once unsubordinated creditors had been paid in full existed. LBIE shareholders were LBL and LBHI2. LBHI2 had made billions of dollars available to LBIE by way of subordinated loans. Directions on how the expected surplus should be distributed and the status of LBHI2's claim for the subordinated loans were sought.
In relation to the subordinated loan the Court of Appeal decided that it ranked just above the claims of shareholders but after payment of statutory interest on claims. LBHI2 had argued that this claim ranked for dividend immediately after all unsecured unsubordinated claims had been paid and before statutory interest was payable. The Court also decided that shortfalls on creditor claims caused by adverse movements in currency exchange rates were payable before the claims of LBHI2 under the subordinated loan agreement. The Court also held that because LBIE was an unlimited company both its shareholders were liable for both provable and unprovable claims.
The Court of Appeal has given detailed guidance on how a surplus should be treated in an insolvency. It has also dealt with a number of tricky issues surrounding the operation of section 74 of the Insolvency Act 1986 dealing with the liability of contributories and whether they must pay up before they can prove in an insolvency of a company where they hold shares.