The High Court in London gave judgment on parts A and B of the Lehman Waterfall II Application on 31 July 2015.  The application is part of the ongoing dispute as to the distribution of the estimated surplus of more than £7 billion in the main Lehman operating company in Europe, Lehman Brothers International (Europe) (LBIE).

LBIE entered administration on 15 September 2008 and has now paid its unsecured creditors 100p for every £1 owed.  The Waterfall II Application addresses some key issues as to who should receive the surplus, concerning: (a) how statutory interest should be calculated, and (b) the impact of contracts signed after the administration date.

Waterfall II, part A – the calculation of statutory interest

In his judgment on Waterfall II part A, Mr Justice David Richards made the following findings as to the way in which statutory interest should be calculated (albeit that the terms of the order have not yet been settled):

  1. where statutory interest is to be calculated at the judgment rate (currently 8%), it should be calculated as simple interest;
  2. Bower v Marris does not apply to the calculation of post-administration interest, so for these purposes distributions should be treated as having repaid the outstanding principal value of proved debts first, before interest accruing after the administration date;
  3. where statutory interest is payable at “the rate applicable to the debt apart from the administration”, it should be calculated on the basis of any compounding applicable to that rate, but the compounding stops when a creditor has been paid 100p in the £ (even if interest remains unpaid);
  4. for the purposes of establishing “the greater of” two rates, the comparison is between the total value of interest accrued on each basis, not just the numerical rates;
  5. where a proved debt is comprised of two or more separate debts, it should be disaggregated for the purposes of calculating statutory interest;
  6. “the rate applicable to the debt apart from the administration” does not include a foreign judgment rate, unless the creditor already had such a judgment at the administration date;
  7. statutory interest accrues on future and contingent debts from the administration date, not from the dates (if any) on which the debts fall due for payment;
  8. the same amount of statutory interest (at the 8% judgment rate) is payable in a leap year as any other year, so when calculating the interest due in part of a leap year the annual total should be divided by 366 days;
  9. rule 2.88 of the Insolvency Rules 1986 is a complete code for the payment of post-administration interest on proved debts, so creditors have no right to additional compensation for late payment of their debts;
  10. creditors are not entitled to compensation for the time taken to pay statutory interest;
  11. per the decision on Waterfall I, currency conversion claims should be calculated by reference to the difference in value between (i) the proved debt in its original currency, and (ii) dividends paid on that debt, converted to the original currency on the date of payment.  Currency conversion claims should not be reduced to reflect any benefit from receiving statutory interest at a rate higher than the contractual rate; and
  12. a creditor with a currency conversion claim is claiming for the unpaid part of a debt due to him. If that debt carries interest, the creditor is entitled to a non-provable claim for such interest on the unpaid part. Other non-provable claims, if they exist, should be treated in a similar way.

Waterfall II, part B – the impact of post-administration contracts

The issues in Part B centred on the impact of the Claims Resolution Agreement (CRA) and Claims Determination Deeds (CDDs) on creditors’ claims against LBIE and, in particular, whether they affect creditors’ currency conversion claims or claims for statutory interest.

The CRA and CDDs are post-administration contracts that were prepared by the LBIE administrators and signed by creditors, and the Judge gave a lot of weight to their purposes and context in interpreting their terms.

This guided his conclusions, which were as follows (again, the terms of the order have not yet been settled):

  1. the CRA does not limit claims to statutory interest to the 8% judgment rate, so CRA signatories can claim statutory interest at a contractual rate if it is higher than 8%;
  2. if non-provable claims for interest existed, they would be released by the CRA;
  3. the CRA does not release currency conversion claims and does not create currency conversion claims;
  4. Agreed Claims CDDs do not release claims to statutory interest under rule 2.88 in whole or in part but, if non-provable claims for interest existed, “it would be difficult to argue that such claims survived the express release” in the CDDs (Agreed Claims CDDs are the original CDDs, and are denominated in the currency of the underlying claim);
  5. Agreed Claims CDDs do not release currency conversion claims;
  6. Admitted Claims CDDs do not release claims to statutory interest under rule 2.88 in whole or in part but, if non-provable claims for interest existed, the Judge’s conclusion as to the effect of the express release would be the same as for Agreed Claims CDDs (Admitted Claims CDDs were developed after Agreed Claims CDDs, and are denominated in Sterling);
  7. Admitted Claims CDDs do not release currency conversion claims; and
  8. if the CRA or any of the CDDs had had the effect of releasing currency conversion claims, the administrators would have been directed not to enforce such releases pursuant to the rule in Ex parte James or paragraph 74 of Schedule B1 to the Insolvency Act.

Comment

The Waterfall II A judgment addresses several very high value issues that could arise in the event of a surplus in any insolvency.  The Judge considered that the Bower v Marris issue alone is worth £1.3 billion.  Importantly, many of the findings will be relevant in other cases even if the surplus is insufficient to pay statutory interest in full.

The Waterfall II B judgment also addresses high value issues, but they are specific to the LBIE administration and the terms of the contracts used in it.  Nevertheless, the Judge’s approach to construing those contracts will no doubt inform the drafting of contracts in future insolvency procedures.

The Judge has granted an extension of time for applications for permission to appeal until there is a hearing of matters consequential to the judgments. Further, certain fundamental issues remain open pending the applications for permission to appeal the Waterfall I Application to the Supreme Court. These include the existence of currency conversion claims.