The administrators of Lehman Brothers International (Europe) found themselves in the unexpected situation of having a surplus to distribute following the payment of provable debts. The Court’s guidance was sought as to the distribution of those monies according to the order of priority confirmed by the Supreme Court in Re Nortel GmbH [2013] in relation to statutory interest, non-provable debts and shareholders’ liabilities. The Court’s recent judgement (Re Lehman Brothers International (Europe) (in administration) and others [2014] EWHC 704 (Ch)) has helped shed some further light in this area.


The applicants were the administrators of Lehman Brothers International (Europe) (“LBIE”), an unlimited company, and the administrators of its two members, Lehman Brothers Limited (“LBL”) and Lehman Brothers Holdings Intermediate 2 Limited (“LBHI2”). LBIE and LBL had been in administration since September 2008 and LBHI2 since January 2009. Both LBL and LBHI2 have ordinary unsecured claims against LBIE and LBHI2 has a substantial claim for subordinated loans it made to LBIE as part of LBIE’s regulatory capital. At the same time, if LBIE went into liquidation, LBL and LBHI2 could be liable to contribute as members of LBIE. Additionally, there are claims being made by creditors who have suffered losses due to conversion (as required under the Insolvency Rules) of their claims from foreign currencies into sterling at the date of the insolvency.

The Court had to decide how these claims would be dealt with in the administration of LBIE after the payment of unsecured provable debts. According to the order for distribution in an administration and liquidation, statutory interest and then non-provable debts are paid before the final distribution to shareholders.

Key Findings

Mr Justice David Richards’s decision provided useful guidance on a number of points:

Non-provable Debts:
In Re Nortel GmbH, the Supreme Court had looked at non-provable debts in the context of statutory pension liability and therefore where legislation deems a liability is a non-provable debt. The Court held that non-provable debts are not so restricted and could include claims of creditors that fell outside the statutory definition of provable debts but which remained as liabilities of an insolvent entity, and were payable if there were sufficient assets. Therefore non-provable debts could include subordinated debt, the foreign currency conversion claims and potential claims for statutory interest.

Statutory Interest:
Where there are funds, statutory interest is payable on all provable debts at the statutory rate of 8% from the commencement of the administration until payment. This statutory interest should not be confused with interest payable on a debt prior to the administration and due by virtue of a contract, judgment or other reason unconnected with the insolvency. This interest can be claimed as a non-provable debt in any subsequent liquidation but statutory interest cannot.

Foreign Currency Conversion Claims

The Court held that the currency conversion claims rank as non-provable liabilities, payable only after the payment in full of all proved debts and statutory interest on those debts. The principle driving this decision is that whilst the legislation required the conversion of the claims into sterling at the date of the debtor’s insolvency, this does not destroy the creditor’s original contractual right to receive the full value of its debt in the currency of the contract. Therefore, after the payment of the statutory interest due (and if there are sufficient assets) the foreign currency creditors should receive payment.
Subordinated Debt

In respect of the subordinated loans from LBHI2 to LBIE, it was held that these loans were payable as non-provable debts. The Court examined the terms of the subordinated loans, which were in the forms provided by the Financial Services Authority (the regulator at that time) to ensure the loans could qualify as regulatory capital. Further, in the regulatory context it was clear that the subordinated debt should rank after the payment of the other creditors and effectively be treated as part of LBIE’s capital, save that it ranked for payment above share capital.
The terms in the subordinated loans themselves were a strong influence in the Court deciding this point and so in other circumstances the outcome may be different.

Contributories’ liabilities

The Court also considered LBL’s and LBHI2’s liabilities in LBIE’s administration as contributories. If LBIE was to go into liquidation, then as members of LBIE, LBL and LBHI2 may be required by the liquidator to contribute in the liquidation under section 74 of the Insolvency Act 1986. The Court decided that LBIE could make a claim in LBL’s or LBHI2’s administration or liquidation in respect of those company’s contingent liabilities under section 74 of the Insolvency Act. At the same time, the claims of LBL or LBHI2 as creditors of LBIE would be the subject of mandatory set-off against the claims of LBIE.


In reaching its judgment, the Court has helped to refine the order for payment of creditors’ claims in an administration and liquidation, namely:

Fixed charge creditors
Expenses of the insolvency proceedings
Preferential creditors
Prescribed part creditors
Floating charge creditors
Unsecured provable debts
Statutory interest on provable debts
Non-provable debts (including currency conversion claims)
Subordinate debt claims

The clarification as to statutory interest will be useful to creditors as will the determination that currency conversion claims are non-provable debts. The latter may enable foreign currency creditors to negotiate a better treatment in a restructuring given that such processes often consider the way in which a given claim would be treated in a liquidation as an important basis for negotiation.

For further information, please contact James Walton or the Partner with whom you usually deal.