*Re Lehman Brothers International (Europe) ((in Administration)); Lomas and Others v Burlington Loan Management Ltd and Others
| Jurisdiction | England & Wales |
| Judge | Lord Justice David Richards |
| Judgment Date | 24 August 2016 |
| Neutral Citation | [2016] EWHC 2131 (Ch) |
| Date | 24 August 2016 |
| Court | Chancery Division |
| Docket Number | Case No: 7942 of 2008 |
[2016] EWHC 2131 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
Royal Courts of Justice
Rolls Building,
London, EC4A 1NL
Lord Justice David Richards
Case No: 7942 of 2008
In the Matter of Lehman Brothers International (Europe) (In Administration)
And in the Matter of the Insolvency Act 1986
William Trower QC, Daniel BayfieldQC andAlexander Riddiford (instructed by Linklaters LLP) for the Applicants
Robin Dicker QC, Richard FisherandHenry Phillips (instructed by Freshfields Bruckhaus Deringer LLP, Ropes & Gray International LLP and Schulte Roth & Zabel International LLP) for the 1 st, 2 nd and 3 rd Respondents
Antony Zacaroli QC, David AllisonQC andAdam Al-Attar (instructed by Kirkland & Ellis International LLP) for the 4th Respondent
Tom Smith QC and Robert Amey (instructed by Michelmores LLP) for the 5 th Respondent
Introduction
This judgment deals with six supplemental issues arising out of two judgments that I gave in 2015: In re Lehman Brothers International (Europe) (No 5) [2015] EWHC 2269 (Ch); [2016] Bus LR 17 ( Waterfall IIA) and In re Lehman Brothers International (Europe) [2015] EWHC 2270 ( Waterfall IIB). Detailed written submissions on these issues were lodged by the parties but there have been no oral submissions.
The earlier judgments were concerned with generic issues as regards the entitlement of creditors to interest on their claims for periods after the commencement of the administration of Lehman Brothers International (Europe) (LBIE) (Waterfall IIA) and the effect of agreements made in largely standard form between LBIE (acting by its administrators) and a significant number of creditors on their claims for interest and non-provable currency conversion losses (Waterfall IIB). The existence and nature of currency conversion claims had been among the issues dealt with in an earlier judgment, upheld by the Court of Appeal: In re Lehman Brothers International (No 4) [2014] EWHC 704 (Ch); [2015] Ch 1, and [2015] EWCA Civ 485; [2016] Ch 50.
Of the supplemental issues covered in this judgment, four (supplemental issues 1b, 1c, 2 and 3) arise out of Waterfall IIA and concern various aspects of the entitlement to interest for periods after the commencement of the administration (post-administration interest), while the other two (supplemental issues 4 and 5) arise out of Waterfall IIB. One other issue (supplemental issue 1a) concerns post-administration interest under ISDA Master Agreements and other market standard agreements and was directed to be heard with other generic issues arising under those agreements at a separate hearing before Hildyard J. As with the earlier cases, all the issues are raised by the administrators on an application for directions, with various creditors with differing interests appearing as respondents and making submissions on the issues.
Post-administration interest
Central to some of the supplemental issues is Rule 2.88 of the Insolvency Rules 1986 which governs the payment of interest on proved debts in an administration. This was subject to detailed consideration in Waterfall IIA and reference should be made to that judgment.
It is necessary for the purposes of this judgment to set out only those parts of Rule 2.88 that deal with post-administration interest:
"(6) The rate of interest to be claimed under paragraphs (3) and (4) is the rate specified in section 17 of the Judgments Act 1838 on the date when the company entered administration.
(7) … any surplus remaining after payment of the debts proved shall, before being applied for any purpose, be applied in paying interest on those debts in respect of the periods during which they have been outstanding since the company entered administration.
(8) All interest payable under paragraph (7) ranks equally whether or not the debts on which it is payable rank equally.
(9) The rate of interest payable under paragraph (7) is whichever is the greater of the rate specified under paragraph (6) or the rate applicable to the debt apart from the administration."
Among the issues that I decided as part of Waterfall IIA are the following that are relevant to the supplemental issues. First, Rule 2.88 represents a complete code for the payment of post-administration interest on proved debts, leaving no room for any non-provable claim for further interest on such debts. Secondly, interest under Rule 2.88 (statutory interest) is payable on future debts and on the amount admitted to proof in respect of contingent debts from the date on which the administration commenced (the Date of Administration).
Currency conversion claims
A currency conversion claim arises where a foreign currency debt is converted into sterling for the purposes of proof at the rate of exchange prevailing on the Date of Administration, as required by Rule 2.86, but sterling has depreciated against the original currency by the time that a dividend is paid. I described it in rather fuller terms in Waterfall IIA at [168]:
"A currency conversion claim arises if (a) a creditor has a claim enforceable against the company denominated in a foreign currency; (b) that claim is converted into sterling at the prevailing rate as at the date of administration under rule 2.86; (c) between that date and the date or dates of the dividends, sterling depreciates against the foreign currency, with the result; that (d) the debt due to the creditor is not fully discharged by the dividend payments. The creditor has a claim for the shortfall, payable as a non-provable debt after the payment in full of statutory interest. It is a case where the creditor is remitted to his contractual rights. His claim is for the unpaid portion of the debt due to him."
Supplemental Issue 1b
This issue is as follows:
"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?"
This issue was included at the request of York Global Finance BDH LLC (York). It arises out of declaration (vi) of my Order dated 16 October 2015 in Waterfall IIA:
"If and to the extent that a creditor has a non-provable claim (including but not limited to a Currency Conversion Claim) in respect of a sum on which interest is payable apart from the administration at any time during the period after the Date of Administration (as defined in the Application Notice), the creditor has a non-provable claim in respect of such interest (if any) as may have accrued on that non-provable claim in that period."
York points out that this declaration does not specify what interest "may have accrued" or the applicable rate of interest for these purposes, although the words "such interest (if any)" contemplate that no interest may have accrued on at least some claims.
The issue postulates a debt that was contingent or future at the Date of Administration. It appears from the submissions lodged by the parties that they are focusing on liabilities under contracts, particularly under ISDA Master Agreements, that make calculation and payment of a liability, and interest on that liability, contingent on service of a close-out notice. In other words, after service of a close-out notice, an actual debt arises, and interest on that debt, at a rate determined in accordance with the agreement, starts to run.
The primary submission of York is 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 submits 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.
Reliance is placed on what I said in Waterfall IIA at [169] that the entitlement to interest on a non-provable debt
"is dependent on a remission to contractual or other rights existing apart from the administration and it follows that no interest is payable on a currency conversion claim where the underlying foreign currency obligation is not itself interest-bearing."
It is said that my reference to contractual and other rights existing "apart from the administration" echoes the reference in Rule 2.88(9) to the "rate applicable to the debt apart from the administration" and should be applied in the same way. Relying on my judgment at [178] – [181] it is submitted that for the purposes of Rule 2.88 a rate existing apart from the administration does not include a rate that would be applicable only if certain steps were taken by the creditor but had not in fact been taken as at the Date of Administration. Reliance is also placed on what I said at [177] that the applicable interest rate apart from the administration does not include "a hypothetical rate which would be applicable to a debt if the creditor took certain steps."
The secondary, alternative submission of York is that if the words "such interest…as may...
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