Court of Appeal hands down judgment in the "Waterfall" appeal

Date: 14/05/2015

On 14 May 2015 the Court of Appeal handed down its judgment in the appeals against the decision of David Richards J in In re Lehman Bros International (Europe) (in administration) (No 4) [2014] EWHC 7004 (Ch), [2015] Ch 1.

In its judgment in what has become known as the “Waterfall Application”, an application for directions that has been made by the administrators of three Lehman entities, the Court of Appeal has clarified a variety of issues relating to a very unusual set of circumstances, namely: (a) one of the companies (LBIE) being an unlimited company with a surplus arising in its administration; and (b) that company’s members (LBHI2 and LBL) having unlimited liability as contributories.

In brief, the Court of Appeal's decision was as follows:

  1. LBHI2's claims under certain subordinated debt agreements are provable but rank to be paid, on the proper construction of those agreements, immediately after the payment in full of all non-provable liabilities;
  2. Currency conversion claims, i.e. claims for any shortfall suffered by a foreign currency creditor who receives less in sterling on its proved debt than it would have received in the foreign currency in which its claim was originally denominated (as a result of an adverse FX movement between the date of conversion to sterling and the date of payment of the proved debt), do exist and rank as non-provable claims (Lewison LJ dissenting);
  3. Where a company moves from administration into liquidation in circumstances where all debts proved in the administration have already been paid and there is a surplus in the hands of the administrator, the liquidator must apply that surplus (once received) first in satisfaction of any accrued but unpaid entitlement to statutory interest under rule 2.88(7) of the 1986 Rules in respect of the relevant period;
  4. The liability of a company’s members to contribute to the company’s assets under section 74(1) of the 1986 Act extends to statutory interest and non-provable liabilities;
  5. A company in administration can prove in the insolvencies of its contributories for the amount of the contingent liability to contribute under section 74(1) of the 1986 Act;
  6. The contributory rule, which prevents a contributory from recovering anything in a liquidation until it has fully discharged its liability, does not apply in administration.

Click here for a summary and analysis of the judgment.

Click here for the full judgment. 

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