Court Of Appeal Judgment: Waterfall IIA Case

Court of Appeal judgment: Burlington Loan Management and others v Lomas and others (as the joint administrators of Lehman Brothers International (Europe) (in administration)) [2017] EWCA Civ 1462

Summary and background

Today's Court of Appeal judgment in the so-called "Waterfall IIA1" case signals the English Courts' reluctance to impute established equitable principles in aid of construing English insolvency legislation. The Court of Appeal's judgment, in giving the words of the Insolvency Rules 1986 (UK) a strictly literal meaning, has, on the issue at stake, resulted in shareholders obtaining a significantly better financial return than would have been the case had the company not gone into an insolvency process.

The case is of interest not only to the stakeholders directly affected by this decision, but also to all investors in companies that are susceptible to an English administration or liquidation. It evinces a strict "four corners of the statute" approach by the English court to statutory interpretation of insolvency law, with little to no room for long-standing equitable principles. The case signals an important opportunity for the legislature to now revisit the insolvency statute book so as to restore commercial common sense and fairness unless the case is successfully appealed.

This decision is the result of one of several pieces of ongoing litigation involving the question of the proper distribution amongst the various stakeholders2 in the Lehman Brothers International (Europe) (in administration) ("LBIE") estate of circa £7.5bn surplus funds ("Surplus") remaining following payment by the administrators in 2014 of all provable claims. The administrators, faced with a surplus of such unprecedented size, have sought the directions of the Court to inform their task. The number of questions requiring answers of the Court has resulted in the case being divided into three primary sections, known as Waterfall I, Waterfall II and Waterfall III. Waterfall III has reached a settlement and Waterfall I has recently been decided by the Supreme Court.3

Before diving into the Court of Appeal's decisions, it is worth reminding readers of the Supreme Court's recent approach (excerpted below from Waterfall I) to statutory construction in the context of whether a currency conversion claim4 exists as a head of claim under the Insolvency Rules. While in itself uncontroversial, Lord Neuberger's iteration of the well accepted principle of statutory construction, and application of it in the context of determining the non-existence of currency conversion claims, has no doubt informed the Court of Appeal's decisions:

Under the United Kingdom's constitutional arrangements, it is not normally appropriate for a...