Lehmans waterfall decision

Lehmans waterfall decision

Does the recent decision in Lehmans clarify the ranking of creditors and shareholders' claims (ie waterfall of payments) where there is a surplus of monies available for distribution?

In the matter of Lehman Brothers International (Europe) (in administration) (LBIE) and Lehman Brothers Limited (in administration) (LBL) and LB Holdings Intermediate 2 Limited (in administration) (LBHI2) Mr Justice David Richards announced on 21 February 2014 his decision in the Lehman waterfall application, which addressed a number of issues arising from the likelihood of a surplus in the estate of Lehman Brothers International (Europe) after payment of all proved debts.

What did the court decide?

David Richards J has issued a statement of conclusions stating that:

• LBIE's shareholders (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—the shareholders must contribute to:
◦ proved debts
◦ statutory interest on the proved debts
◦ un-proved liabilities
• the (i) contributory rule (that a contributory can't recover anything until he has fully paid any obligations as contributory) and (ii) equitable rule in Cherry v Boultbee do not apply in administration (only liquidation)

• LBIE can lodge a proof of claim in the distributing administration or liquidation of either of its shareholders, LBL or LBHI2 claiming those contingent liabilities under IA 1986, s 74(1) which may arise if LBIE went into liquidation, however the mandatory rules of set-off would apply

• creditors (whose contractual or other claims are denominated in a foreign currency) which suffered a loss due to currency movements between the date of commencement of the administration and the date of payment can claim that loss, but only as an unprovable debt (payable after all proved debts and statutory interest)

• if the administration of LBIE is immediately followed by a liquidation, interest falling in the period of the administration which has not been paid before the liquidation commences will not be provable as a debt in the liquidation nor as statutory interest—however, creditors whose contracts/judgments specify an interest rate (often higher than the sta

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About the author:
Kathy specialises in restructuring and cross-border insolvency. She qualified as a solicitor in 1995 and has since worked for Weil Gotshal & Manges and Freshfields. Kathy has worked on some of the largest restructuring cases in the last decade, including Worldcom, Parmalat, Enron and Eurotunnel.