Lehmans waterfall I case
Lehmans waterfall I case

The following Restructuring & Insolvency guidance note provides comprehensive and up to date legal information covering:

  • Lehmans waterfall I case
  • How did the problem arise?
  • What did the Court of Appeal decide?
  • What did the Supreme Court decide?
  • Order of priorities
  • Foreign currency claims
  • Interest claimed from a subsequent liquidator (IR 1986, r 2.88)
  • Liability of contributories (IA 1986, s 74(1))
  • Calls by liquidators (IA 1986, s 150)
  • Set-off
  • more

How did the problem arise?

Lehman Brothers International Europe (in administration) (LBIE) was (rather unusually) a private unlimited company and was the UK subsidiary of Lehman Brothers Holdings Inc (the ultimate parent of the Lehman group). It acted as its main European broker dealer and was placed into administration on 15 September 2008. Unlimited companies are often used in complex tax structures and LBIE was re-registered as an unlimited company for US tax reasons. It enabled LBIE to be treated as a branch of its then parent company for US tax purposes which allowed losses in LBIE to be set off against profits in the parent.

The issues arise due to the fairly unusual fact that a surplus was available after payment of LBIE's creditors in full. LBIE's members were other Lehman group companies which were themselves insolvent (Lehman Brothers Limited (in administration) (LBL) and LB Holdings Intermediate 2 Limited (in administration) (LBHI2)). The parties sought clarification on whether the surplus would be payable to the members and where their claims rank in the waterfall of payments in Re Lehman Brothers International (Europe) (in administration).

This ranking has a large effect on the amount of principal and interest unsecured creditors of LBIE obtain as LBL and LBHI2 claimed substantial amounts against LBIE as an unsecured creditor (£363m and £3m respectively).