Full reasoned judgment in Lehmans waterfall case

Full reasoned judgment in Lehmans waterfall case
  What's the reasoning behind the decision in Lehmans on the ranking of creditors and shareholders/members claims where there is a surplus of monies available for distribution? What obligations do members have to contribute to the assets of the company?


Original news

Re Lehman Brothers International (Europe) (in administration) [2014] EWHC 704 (Ch), [2014] All ER (D) 153 (Mar)

In the course of proceedings concerning the administration of companies connected to the Lehman Brothers group, the Companies Court made a number of rulings to determine the claims that might be made against a surplus of assets before any return to the creditors.

What did the court decide?

David Richards J gave a full reasoned judgment following his earlier statement of conclusions (see News Analysis: Lehmans waterfall decision):

  • LBIE's members (two other Lehman group companies, LBHI2 and LBL) have a very wide obligation to contribute on liquidation under the Insolvency Act 1986, s 74(1) (IA 1986) as LBIE is an unlimited company. He found it impossible to discern the policy reason for saying that members are liable to contribute assets for the payment of the principal amount of provable debts, but are not liable for the interest on those debts which is payable to compensate the creditors for being kept out of their money until a distribution is made in the liquidation (para [163]). Accordingly, the members must contribute to:
  1. proved debts
  2. statutory interest on the proved debts
  3. un-proved liabilities
  • the (i) contributory rule (that a contributory/member can't recover anything until he has fully paid any obligations as contributory) and (ii) equitable rule in Cherry v Boultbee (which produces a netting-off effect that is similar to set-off and applies in circumstances where set-off itself is not applicable, because there is not the necessary similarity in claims) do not apply in administration (only liquidation). The fundamental difficulty in applying the contributory rule in an administration is precisely because there is no statutory mechanism for making calls on contributories

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