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Lehman Brothers International (Europe) (in Administration): Parts A and B of the Waterfall II Application
Alex Riddiford, Barrister, South Square, London, UKIntroduction
On 31 July 2015, David Richards J (as he then was) handed down two judgments in respect of two trials that took place before him earlier in the year, each relating to one of the three parts of the Waterfall II application (Parts A and B) (the ‘Part A Judgment’; the 'Part B Judgment'; together the 'Judgments'). The majority of the decisions set out in the Judgments are now in the process of being appealed to the Court of Appeal, with those appeals set to be heard in the early part of 2017.
The Waterfall II application was issued by the joint administrators of Lehman Brothers International (Europe) (in Administration) ('LBIE') (the 'JAs'), with a view to obtaining the Court’s guidance in respect of a variety of issues relating, in broad terms, to the following categories of issues: (a) issues concerning the entitlement of creditors to interest on their debts for periods after the commencement of LBIE’s administration (Part A); (b) the construction and effect of agreements made since the commencement of LBIE’s administration between LBIE, acting by the JAs, and a significant number of its creditors (the 'Post-Administration Contracts') (Part B); and (c) generic issues arising out of the construction and effect of ISDA Master Agreements and other market standard agreements entered into by LBIE and certain of its counterparties, in particular in relation to the calculation of interest under those master agreements (Part C). The trial of Part C of the Waterfall II application was heard before Hildyard J in November 2015 and, as at the date of writing, judgment has yet to be handed down.
The unusual context in which the issues for determination in the Waterfall II application arose was that, after paying or providing for all the debts proved in LBIE’s administration, there remained a substantial surplus in the LIBE estate which was estimated to reach or exceed some GBP 7.39 billion (the 'Surplus') (Part A Judgment, paragraph [3]). In the Waterfall I application, the High Court and Court of Appeal (see [2014] EWHC 704 (Ch), [2015] Ch 1; and [2015] EWCA Civ 485; currently being appealed to the Supreme Court) held, inter alia, that the Surplus was to be distributed in the following order: (a) statutory interest payable under rule 2.88 of the Insolvency Rules 1986 (as amended) (the 'Rules') ('Statutory Interest'); (b) non-provable claims of creditors, including claims arising in respect of currency conversion losses resulting from a depreciation of sterling against the currency in which creditors’ contractual claims were payable between the commencement of the administration and the date on which dividends were paid on such claims ('Currency Conversion Claims', or 'CCCs'); and (c) the USD 2.27 billion subordinated debt owed by LBIE to Lehman Brothers Holdings Intermediate 2 Ltd ('LBHI2'). The Waterfall II application was brought on the basis that, notwithstanding the Waterfall I application, there remained various unresolved questions relating to creditors’ entitlement to Statutory Interest and non-provable claims, as well as to the construction and effect of the Post-Administration Contracts and certain master agreements.
Since the majority the issues determined in the Judgments are now in the process of being appealed to the Court of Appeal, the present article limits itself to a neutral digest of David Richards J’s decisions on the various issues raised in Part A and Part B of the Waterfall II application.
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