The saga continues—post-administration interest and how to handle it (Re Lehman Brother International (Europe) v Burlington Loan Management)

Katherine Hallet, barrister at Three Stone, considers the latest decision in the Lehman Brother litigation in which the Commercial Court considered how administrators should handle post-administration interest in particular circumstances.

Original news

Re Lehman Brothers International (Europe) (In Administration); Lomas and others v Burlington Loan Management Ltd and others [2016] EWHC 2131 (Ch), [2016] All ER (D) 81 (Aug)

The Companies Court determined six supplemental issues arising out of two previous judgments raised by the administrators of Lehman Brothers International (Europe) on an application for directions.

What practical lessons can those advising in this area take away from this case?

The judgment gives very specific direction on how administrators should handle post-administration inter-est in particular circumstances. It is especially useful when read together with the earlier judgments in Waterfall IIA (Lomas v Burlington Loan Management Ltd [2015] EWHC 2269 (Ch), [2015] All ER (D) 11 (Aug)) and Waterfall IIB (Lomas and others v Burlington Loan Management Ltd and others [2015] EWHC 2270 (Ch), [2015] All ER (D) 20 (Aug)). In addition, part of the decision deals with post-administration interest pursuant to standard form agreements frequently made by administrators, which construction will therefore be applicable beyond this case.

What was the background to the case?

The judgment dealt with six supplemental issues which arose from two previous judgments of David Richards LJ—Waterfall IIA and Waterfall IIB. Waterfall IIA and Waterfall IIB concerned respectively:

  •  generic issues regarding the entitlement of creditors to interest on their claims for periods after the commencement of the administration, and
  •  the effect of agreements made in largely standard form between Lehman Brothers International (Europe) (by its administrators) and creditors on their claims for interest and non-provable currency conversion losses

The administrators sought directions on the six issues.

What were the issues before the court?

Supplemental issue 1b
How is an independent right to interest that ‘arises outside or other than from the administration’ to be determined when calculating interest on a non-provable currency conversion claim if such a rate would only accrue on a debt that was contingent or future at the date of administration if some action was taken after the date of administration? How are such rights to be assessed if the creditor did not in fact exercise such rights?
Supplementary issue 1c
In a case where contractual interest first starts to run on a provable debt at some point after the date of administration, is the ‘rate applicable’ for the period from the date of administration to the date when contractual interest first starts to run:

  • the rate of interest which is payable once the interest is running (so that such rate is treated as being applicable for the whole of the post-administration period), or
  • a zero rate

Further, for the purposes of rule 2.88(9) of the Insolvency Rules 1986, SI 1986/1925 (IR 1986) should statutory interest be calculated by assessing the greater of the ‘rate applicable’ and Judgments Act 1838 (JA 1838) rate separately for the periods prior to and post the commencement of contractual interest, or should such assessment be performed taking the periods together.

Supplemental issue 2
Whether and (if so) in what circumstances and in what manner a currency conversion claim can arise from the discharge of a debt by way of set-off pursuant to Rule 2.85(3) IR 1986.

Supplemental issue 3
Whether, and if so to what extent, a non-provable claim to interest on a currency conversion claim should be reduced by interest received by the creditor pursuant to IR 1986, r 2.88 on its proved debt.

Supplemental issue 4
Whether, to the extent that a creditor has a non-provable claim for interest, such non-provable claim has been released under the terms of the claims resolution agreement (CRA) and/or a claims determination deeds (CDD) (both defined in Waterfall IIB) and, if so, whether the administrators would be directed not to enforce such release(s).

Supplemental issue 5
Whether, to the extent that a creditor has a non-provable claim for interest on a currency conversion claim, such non-provable claim has been released under the terms of the CRA and/or CDDs and if so, whether the administrators would be directed not to enforce such release(s).

What were the main legal arguments put forward?

Supplemental issue 1b
Principally, a creditor argued that, if interest or a particular rate of interest would accrue only if some action (such as service of a close-out notice) were taken by the creditor after the date of administration, such interest is not interest that ‘may have accrued’, even if the creditor has taken the necessary action. It submitted that a creditor cannot improve its position after the date of administration by taking some step in an effort to gain a right to the payment of interest that was not payable on the date of administration.

Supplementary issue 1c
As regards the appropriate rate of interest, a creditor submitted that the contractual rate applying to contingent and future debts once they become payable should apply to the whole period from the date of administration. That would ensure that the creditors entitled to those debts received compensation for the time value lost as a result of a present value being given to those debts as at the date of administration for the purposes of proof (in the case of contingent debts) or for the purposes of dividends (in the case of future debts).

Supplemental issue 2
One creditor argued that a currency conversion claim could arise from the discharge of a debt by way of set-off, where sterling had depreciated between the date of administration and the account date, in the same way as a currency conversion claim could arise where sterling had depreciated between the date of administration and the date(s) of dividend payments. The administrators and another creditor submitted that no currency conversion claim arises as a result of set-off under IR 1986, r 2.85.

Supplemental issue 3
A creditor submitted that such claim for interest should be reduced by statutory interest received by the creditor on its proved debt, if and to the extent that the total interest, both statutory on the proved debt and contractual on the non-provable claim, exceeds the contractual interest that the creditor would have been entitled to receive on its total foreign currency debt. The administrators and another creditor submitted that it should not be so reduced.

Supplemental issue 4
A creditor submitted that it had non-provable claims for interest on such debts to the extent that it did not under IR 1986, r 2.88 recover the full amount of interest on such amount that it could have recovered out-side an administration.

Supplemental issue 5
The judgment does not record the parties’ (written) arguments on this issue.

What did David Richards LJ decide, and why?

Supplemental issue 1b
The judge rejected the creditor’s submissions. On its primary argument, the issue was not the proper construction of Insolvency IR 1986, r 2.88(9) or of the phrase ‘the rate applicable to the debt apart from the administration’. IR 1986, r 2.88 had nothing to say about claims for interest on non-provable claims. A non-provable claim was by definition a claim that existed independently of the administration and to which the creditor was remitted to the extent that the process of distribution of assets in the administration did not fully satisfy its total debt.

If, between the date of administration and the date of the final and full discharge of the creditor’s non-provable debt, there occurred an event that entitled the creditor, under the terms of the contract, to interest on the non-provable debt, the creditor had thereafter an accrued right to that interest for which it could claim against the company under the terms of the contract.

However, as to the creditor’s alternative submission, as this issue had been raised by the creditor and not the administrators in seeking directions, the judge declined to give directions regarding non-provable claims to interest on foreign judgments entered after the date of the administration.

Supplementary issue 1c
The judge concluded that the answer to sub-issue (1) here was a zero rate and to sub-issue (2) was that statutory interest under IR 1986, r 2.88(9) was to be calculated by comparing the two alternative dates for the whole period from the date of the administration to the date(s) of dividend payments. If no interest was contractually payable on a contingent debt until the contingency occurred, the judge could not see that interest at the contractual rate for any earlier period was interest at ‘the rate applicable apart from the administration’. During that period, there was no interest payable on the debt apart from the administration. That did not leave the creditor uncompensated, because it would be entitled to interest at the JA 1838 rate prevailing at the date of administration.

Supplemental issue 2
The judge held that no currency conversion claim arises from set-off. The effect of the Rules was that, although the set-off account is taken as at the date of the administrator’s notice, the creditor’s claim is discharged, to the extent of the set-off, as at the Date of Administration. Although the entire machinery for ascertaining and valuing claims was brought into operation by the giving of a notice of an intention to make a distribution, it had a retrospective effect.

Supplemental issue 3
The judge rejected the creditor’s case. As he held in Waterfall IIA, IR 1986, r 2.88 is a complete code for the payment of interest on proved debts. Its purpose is to compensate creditors for the delay occasioned by the insolvency in the payment of the proved debts which are all notionally payable as at the commencement of the insolvency. It is unconnected with any right to interest under the contract or to the lack of any such contractual right, save for the purpose of determining the rate at which statutory interest is to be paid. The essential point was that statutory interest was payable by law on the proved debt and was referable only to the proved debt. The proved debt was the sterling sum and it had been satisfied in full by the dividends.

Supplemental issue 4
The judge held that the express provisions relating to interest in the agreements had the effect of releasing any such putative claims to interest. As he had held in Waterfall IIB, the effect and purpose of the agreements was to deal fully and finally with provable claims. This was achieved by agreeing the amount of such claims and expressly or implicitly providing for the payment of interest on those claims under IR 1986, r 2.88. No further interest on such claims was to be payable, having been waived by the terms of the agreements. The administrators would not be directed to pay such interest.

Supplemental issue 5
The effect of the relevant provisions of the agreement was that the entire amount determined as due under a financial contract was calculated on the basis that it would not attract interest save in accordance with IR 1986, r 2.88. That left no room for contractual interest to be claimed on a currency conversion claim. The administrators would not be directed to pay interest on currency conversion claims arising out of claims subject to the agreement, because the evident intention was to release any purely contractual right to interest, leaving creditors only with their rights to statutory interest.

To what extent is the judgment helpful in clarifying the law in this area?

The judgment is useful is tying up some of the issues arising from Waterfall IIA and Waterfall IIB. It should be noted that further related issues will be the subject of a separate hearing in front of Hildyard J. Among other things, supplemental issue 1a will address post-administration interest under ISDA Master Agreements and other market standard agreements.

Interviewed by Diana Bentley.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

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Lehmans waterfall I case

Waterfall of payments in liquidation, administration and administrative receivership

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First published on LexisPSL Restructuring and Insolvency

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