Vol 12 (2015) - Issue 6

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Re Lehman Brothers International (Europe) (in administration) [2015] EWCA Civ 485

Introduction
Following the collapse of Lehman Brothers in September 2008, it now turns out that Lehman Brothers’ main trading company in Europe, Lehman Brothers International (Europe) (in administration) ('LBIE') is able to pay the proved debts of all external creditors in full. This has given rise to a number of novel issues as to the distribution of the surplus, particularly given that, somewhat unusually, LBIE is an unlimited company (its members being LB Holdings Intermediate 2 Limited ('LBHI2') and Lehman Brothers Limited ('LBL')). The administrators of the various Lehman entities sought directions from the Court and a number of these issues have now been addressed by the Court of Appeal in its judgment on the appeal against the first instance decision of David Richards J on the so-called 'waterfall' application.
The administrators’ application has come to be known as the 'waterfall' application as it concerns the order of priority of payment out of the assets of a company in a distributing administration or liquidation, the order of priority often being referred to as the 'waterfall'. The order of priority, or waterfall, was summarised by Lord Neuberger in Re Nortel GmhB [2013] UKSC 52 as follows:
(1) Fixed charge creditors
(2) Expenses of the insolvency proceedings
(3) Preferential creditors
(4) Floating charge creditors
(5) Unsecured provable debts
(6) Statutory interest
(7) Non-provable liabilities
(8) Shareholders

The issues which the Court of Appeal has been called on to address primarily concern what happens to a surplus in the event that unsecured provable debts (i.e. category (5) of Lord Neuberger’s list) are paid in full.

Subordinated debt
The first issue raised in the appeal concerns the ranking in the administration (and any subsequent liquidation) of the subordinated debt owed by LBIE to LBHI2, that debt being some USD 2.225 billion in respect of which a claim for GBP 1,254,165,598.48 has been lodged in LBIE’s administration. In short, the question for the Court of Appeal was whether that debt, which formed part of LBIE’s regulatory capital, was subordinated only to unsecured provable debts, or whether it was also subordinated to statutory interest and non-provable liabilities.