Vol 14 (2017) - Issue 3

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The Joint Administrators of Lehman Brothers International (Europe) (In Administration) v Burlington Loan Management Limited and Others [2016] EWHC 2417 (Ch) (Known as 'Waterfall IIC')

On 5 October 2016 Mr Justice Hildyard handed down judgment in the third tranche of the second of three major applications concerning the proper distribution of funds in the solvent administration of Lehman Brothers International (Europe) ('LBIE'), known as the Waterfall applications. This judgment deals with the application of statutory interest pursuant to r. 2.88 of the Insolvency Rules 1986 (the '1986 Rules') on debts under the 1992 and 2002 ISDA (International Swaps and Derivatives Association, Inc) Master Agreements (the 'ISDA MAs', the most commonly used standard-form documents used to govern over-thecounter financial derivatives transactions), and under another master agreement governed by German law (the ‘GMA’) proved in the administration of Lehman Brothers International (Europe) ('LBIE').


A. Background to the judgment: the collapse of Lehman Brothers and the Waterfall litigation
LBIE was the UK subsidiary of Lehman Brothers Holdings Inc., the fourth largest investment bank in the United States, which filed for Chapter 11 bankruptcy protection on 15 September 2008. Following its US parent’s collapse, LBIE was put into administration, also on 15 September 2008. However, the English bank had never been balance sheet insolvent and its administrators eventually found themselves charged with a surplus of around GBP 7 billion. As Hildyard J laconically put it in the introduction to his judgment, '[s]uch a situation is unusual' ([3]).
The excess of funds available for distribution generated argument over novel legal points concerning precisely how the surplus should be dealt with. The Waterfall litigation is the result of applications by the administrators of LBIE (the 'Administrators') to the court for guidance as to the correct interpretation of the rules governing the distribution of the surplus.
The first application, which came to be known as Waterfall I, concerned the order of payment of certain non-provable claims and ancillary issues regarding these. This application was dealt with by David Richards J at first instance, but aspects of his judgment were considered by the Court of Appeal and then the Supreme Court, whose judgment is pending.
David Richards J also initially had carriage of the Administrators’ second set of questions, the Waterfall II litigation. This he divided into three tranches. Waterfall IIA dealt with creditors’ entitlement to interest on their debts for periods after the commencement of the administration. Waterfall IIB, which, like IIA, was heard at first instance by David Richards J, dealt with the construction and effect of agreements entered into by LBIE and its creditors after the bank entered administration.
David Richards J was elevated to the Court of Appeal in July 2015. Tranche C of Waterfall II, with which this article is concerned, was therefore heard by Hildyard J.