Supreme Court Judgment In The Long-Running Lehman Waterfall Litigation

On 17 May 2017, the UK Supreme Court handed down judgment in proceedings - commonly known as the Waterfall I litigation - to determine claims with regard to the estimated £8 billion surplus arising in the estate of Lehman Brothers International (Europe) (LBIE).

These proceedings raised complex issues around the rights of creditors, some of which have not been examined for more than 100 years. More generally, this appeal and cross-appeal considered key points of insolvency arising from the collapse of the Lehman Brothers Group in 2008 and has been keenly watched by the financial services industry.

In particular, the Supreme Court agreed with submissions made by the Dentons legal team that currency conversion claims do not exist as a specie of non-provable claims and that any claim for statutory interest is limited to the actual surplus arising in the administration estate.

A summary of the key decisions is as follows:

Currency conversion claims

Under English insolvency law, creditors' debts in foreign currency must be converted into sterling as at the date the debtor goes into administration or liquidation. A "currency conversion claim" was asserted by certain creditors for any loss suffered as a result of the fall in the value of sterling between the date of conversion and the actual date of payment.

By a majority of 4:1, it was held that currency conversion claims did not exist. This was because the statutory scheme spells out the full extent of the rights of a creditor with a debt in a foreign currency. This result was a key win for Dentons' client, LB Holdings Intermediate 2 Limited (In Administration) (LBHI2), and overturned the decisions of the High Court and the Court of Appeal.

Shareholder's liability for statutory interest

The contributory liability of a shareholder of an unlimited company did not extend to statutory interest. Statutory interest could only be recovered from the actual surplus in the insolvent estate, and the surplus could not be created by a call on the contributories. This was another key win for LBHI2, and also overturned the decisions of the High Court and the Court of Appeal.

The statutory interest "lacuna"

Statutory interest which accrued but remained unpaid in an administration could not be claimed from a subsequent liquidator.

Ranking of subordinated debt

Subordinated debt fell to be repaid after both statutory interest and non-provable liabilities.

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