In a judgment handed down on 29 November 2023, Hildyard J clarified an important question as to the relative ranking of statutory interest on subordinated debt in an insolvency.
The issue arose from an application for directions by the joint administrators of Lehman Brother Holdings PLC (“PLC”) in the most recent phase of a long-running dispute between PLC’s subordinated creditors, namely Lehman Brothers Holdings Inc. (“LBHI”, the ultimate parent company of the former Lehman group) on the one hand, and LB GP No. 1 Limited (“GP1”, in its capacity as general partner of English limited partnerships that issued securities (known as the “ECAPS”) and Deutsche Bank (“DB”), a significant investor in ECAPS.
The relative priority for payment between GP1’s claim and LBHI’s claim had been the subject of a previous directions application by PLC’s administrators (the “ECAPS 1”). In that case, GP1 and DB succeeded in the Court of Appeal ([2021] EWCA Civ 1523) (reversing Marcus Smith J ([2020] EWHC 1681 (Ch))), establishing that GP1’s claims ranked in priority.
The issue that arose in the instant application (“ECAPS 2”) was whether statutory interest on GP1’s claim was payable in priority to principal on LBHI’s claim (as GP1 and DB contended) or after principal on LBHI’s claim (as LBHI contended). Hildyard J agreed with GP1 and DB that statutory interest on GP1’s claim was payable in priority.
This decision confirms that there is no difference in principle between the subordination of debt to unsubordinated debt and the relative subordination between different tiers of subordinated debt. The former issue had been addressed by the Supreme Court in Re Lehman Brothers International (Europe) (In administration) (No 4) [2017] UKSC 38, [2018] AC 465 (“Waterfall I”), and GP1 and DB successfully argued that the same approach should be followed where there was competition between different tiers of subordinated debt.
The decision also confirms that while IR 14.23 (Insolvency Rules 2016) requires that all amounts payable in respect of Claims duly proved, including statutory interest, “must be satisfied before any Claim further down in the queue can be proved at all” ([70]), it is open to the parties by contractual subordination to specify whether any liabilities are or are not “further down in the queue”.
Sonia Tolaney KC and Tim Goldfarb acted for Deutsche Bank, together with Richard Fisher KC, instructed by Alston & Bird (City) LLP.
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