Re Lehman Brothers International (Europe) ((in Administration)) (No 4)

JurisdictionEngland & Wales
JudgeLord Neuberger,Lord Kerr,Lord Reed,Lord Sumption,Lord Clarke
Judgment Date17 May 2017
Neutral Citation[2017] UKSC 38
Date17 May 2017
CourtSupreme Court
The Joint Administrators of LB Holdings Intermediate 2 Limited
The Joint Administrators of Lehman Brothers International (Europe) and others
The Joint Administrators of Lehman Brothers Limited
Lehman Brothers International (Europe) (In Administration) and others
Lehman Brothers Holdings Inc
The Joint Administrators of Lehman Brothers International (Europe) and others

[2017] UKSC 38


Lord Neuberger, President

Lord Kerr

Lord Clarke

Lord Sumption

Lord Reed


Easter Term

On appeal from: [2015] EWCA Civ 485

Appellant (LBHI2 Joint Administrators)

Robert Miles QC

Louise Hutton

Rosanna Foskett

(Instructed by Dentons UKMEA LLP)

Appellant (LBL Joint Administrators)

David Wolfson QC

Nehali Shah

Ruth den Besten

(Instructed by DLA Piper UK LLP)

Appellant (LBHI)

Barry Isaacs QC

(Instructed by Weil, Gotshal and Manges (London) LLP)

Respondents (Anthony Victor Lomas and ors)

William Trower QC

Daniel Bayfield QC

Stephen Robins

(Instructed by Linklaters LLP)

Respondent (CVI GVI (LUX) Master Sarl)

Robin Dicker QC

Richard Fisher

Charlotte Cooke

(Instructed by Freshfields Bruckhaus Deringer LLP)

Heard on 17, 18, 19 and 20 October 2016

Lord Neuberger

( with whomLord Kerr and Lord Reed agree)


This appeal and cross-appeal raise a number of points of insolvency law, which arise out of the collapse of the Lehman Brothers group of companies ("the Group") in 2008.

The basic facts

The Group's main trading company in Europe was Lehman Brothers International (Europe) ("LBIE"), which is an unlimited company. Its share capital consists of a number of ordinary shares as well as a number of redeemable shares. All these shares, except for one ordinary share, are held by LB Holdings Intermediate 2 Ltd ("LBHI2"), whose sole function was to act as LBIE's immediate holding company. The remaining ordinary share is held by Lehman Brothers Ltd ("LBL"), which was the service company for the Group's operations in the UK, Europe and Middle East.


LBIE and LBL have been in administration since September 2008, and LBHI2 has been in administration since January 2009. The purpose of the administrations of these companies has been the realisation of their respective assets to best advantage, rather than the preservation of the companies as going concerns. Contrary to many people's expectations when LBIE went into administration, it now appears that it is able to repay all its external creditors in full.


Under the provisions of the Insolvency Act 1986 as amended ("the 1986 Act"), an administrator of a company is permitted to make distributions to creditors of the company. Once an administrator gives notice of an intention to make a distribution, the administration is commonly referred to as a distributing administration. Since 2 December 2009, LBIE has been in distributing administration, but LBHI2 and LBL have not been. In November 2012, the joint administrators of LBIE declared and paid a first interim dividend to LBIE's unsecured creditors of 25.2 pence in the pound, totalling some £1.611bn.


Lehman Brothers Holdings, Inc ("LBHI") is the ultimate parent of the Group. In September 2008, it began Chapter 11 bankruptcy proceedings in the United States Bankruptcy Court, and it emerged from those proceedings in March 2012. LBHI is an indirect creditor of many companies in the Group, and its primary interest relates to LBHI2's assets, including its right to recover subordinated loans made to LBIE and other issues relating to those subordinated loans.


The LBIE administrators received proofs of debt from various unsecured creditors including LBL and LBHI2. LBL's initial proof was for £363m, and LBHI2 submitted a proof for an unsecured claim of around £1.254bn in respect of sums advanced to LBIE under three subordinated debt agreements made in November 2006 (together with a separate unsecured claim of around £38m). The LBL administrators received proofs from LBHI2 in the sum of £257m, and from LBIE for £10.4bn. The proof from LBIE included £10bn, which was the LBIE administrators' estimate of LBL's contingent liability to LBIE as a contributory under section 74 of the 1986 Act. This claim led to LBL seeking leave to amend its proof in LBIE's administration from £363m to £10.934bn. It is also relevant to mention that some of the proofs submitted to LBIE's administrators were in respect of debts denominated in foreign currencies.


In February 2013, the administrators of LBIE, of LBL and of LBHI2 issued proceedings seeking the determination of the court on a number of questions arising out of the administrations. On 14 March 2014, David Richards J delivered a judgment (reported at [2015] Ch 1) dealing with those questions, and he subsequently made consequential declarations, which were set out in paras (i) to (x) of an order. The declarations in paras (i) to (ix) were challenged on appeal or cross-appeal, and the Court of Appeal (Moore-Bick, Lewison and Briggs LJJ) upheld most, but varied some, of them in a decision which is reported at [2016] Ch 50.


The order made by David Richards J is set out in an appendix to the judgment of the Court of Appeal, and the contents of paras (i) to (ix) have now been the subject of argument in this Court. It is sensible to address them in the same order as they were discussed in the judgments in the Court of Appeal. Before turning to the issues, however, it is right to set out the principally relevant legislative provisions. It is also right to pay tribute to the well expressed and illuminating judgments below, which helped to ensure that the arguments were developed in this Court in a disciplined and clear way.


Hereafter, unless the contrary is stated, all references to sections and Schedules are to sections of and Schedules to the 1986 Act, and all references to rules are to those in the Insolvency Rules 1986 ( SI 1986/1925) as amended ("the 1986 Rules"). (It is right to add that the 1986 Act was preceded by the Insolvency Act 1985 and the Companies Act 1985 which between them contained the great majority of the provisions now to be found in the 1986 Act. It was decided to repeal those 1985 statutes and consolidate all insolvency law in the 1986 legislation. For present purposes, the changes effected in 1985 can be elided with those in 1986, and accordingly I shall disregard the 1985 Act when describing the changes to insolvency law effected in the 1980s.)

The 1986 Act and the 1986 Rules: introductory

The 1986 Act and the 1986 Rules ("the 1986 legislation") were introduced following the publication of the 1982 Report of the Review Committee on Insolvency Law and Practice (Cmnd 8558) (the Cork Report), and a 1984 Government White Paper, A Revised Framework for Insolvency Law (Cmnd 9175). Para 1 of the White Paper acknowledged the "thorough analysis" contained in "the Cork Report", which is accurately characterised by Sealy and Milman in their Annotated Guide to the Insolvency Legislation, 19th ed (2016), vol 1, p 1, as "[t]he main inspiration for the reforms" contained in the 1986 legislation. Para 2 of the White Paper described the objectives of the proposed new legislation, which included "establish[ing] effective and straightforward procedures for dealing with and settling the affairs of corporate and personal insolvents in the interests of their creditors". In para 3 of the White Paper it was stated that the law of corporate insolvency had "altered very little over the past century", and that there was "an urgent need to reform, update and strengthen the insolvency legislation so that the objectives … set out in para 2 can be met". Para 4 set out six objectives for the proposed changes which became the 1986 Act and the 1986 Rules. The third of those objectives was "To simplify wherever possible corporate and personal insolvency procedures". And the fifth included "the introduction of a new insolvency mechanism, known as the administrator procedure, designed to facilitate the rehabilitation and re-organisation of companies faced by insolvency but where there are reasonable prospects for a return to profitability".


The 1986 legislation consolidated in a single statute and set of rules the legislative provisions regarding both personal insolvency and corporate insolvency. Until then, they had been dealt with in separate legislation — most recently the Bankruptcy Act 1914 ("the 1914 Act") and the Bankruptcy Rules 1952 ( SI 1952/2113), which covered personal insolvency, and the Companies Act 1948 ("the 1948 Act") and the Companies (Winding-Up) Rules 1949 ( SI 1949/330) ("the 1949 Rules"), which applied to corporate insolvency. Nonetheless, the 1986 legislation contains almost entirely separate regimes for personal insolvency and corporate insolvency. Thus, in the 1986 Act, sections 1 to 251 deal with "company insolvency", sections 251A to 385 with "insolvency of individuals", and the remaining sections, 386 to 444, while applicable to both types of insolvency, are concerned with matters such as insolvency practitioners and subordinate legislation. And this is reflected in the 1986 Rules: Parts 1 to 4 are concerned with "company insolvency", Parts 5 and 6 deal with "insolvency of individuals", and Parts 7 to 13 are of general application, being concerned with court procedures, notices, meetings and a few common definitions. In many ways, there was greater overlap between personal and corporate insolvency in the preceding legislative regimes, because section 317 of the 1948 Act provided that the principles applicable in bankruptcy "with regard to the respective rights of secured and unsecured creditors and to debts provable and to the valuation of annuities and future and contingent liabilities" applied "[i]n the winding up of an...

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