Supreme Court in UK awards European Lehman clients £5bn

July 2017 | DEALFRONT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

July 2017 Issue

Claimants against Lehman Brothers’ European trading unit will receive at least £5bn following a Supreme Court judgement on issues relating to the bank’s 2008 collapse.

Those creditors who are owed statutory interest from the bank’s debt to them will be first in line for payouts from a possible £8bn surplus remaining in Lehman Brothers’ European operation.

In May, the Supreme Court panel upheld a lower court ruling which stated that the investment bank’s junior creditors holding unsecured debt from Lehman Brothers International (Europe) (LBIE) ranked behind secured creditors who have already been paid back but who are still owed 8 percent statutory interest on their loans. The surplus, believed to be between £7.5bn and £8bn, is left after the bank’s unsecured creditors were paid in full over the last eight years. LBIE’s junior creditors group, which includes Elliott Management and King Street, holds LBIE’s $2.225bn of subordinated notes.

Lord David Neuberger, the lead judge in the five judge Supreme Court panel, rejected an argument from the junior creditors that statutory interest was not payable in the insolvency of LBIE under UK insolvency legislation passed in 1986. “As a matter of ordinary language, it is hard to see any satisfactory basis for this contention,” Lord Neuberger said in his ruling. “It is common ground that statutory interest is payable by a liquidator pursuant to the provisions of [1986 rules], and it is in respect of interest on debts which have been indubitably proved and paid in the insolvency.”

As a result of the ruling, LBIE’s creditors will receive at least the statutory interest rate of 8 percent and share at least £5bn before junior creditors receive any monies. However, legal battles remain about whether even higher rates of interest should be payable.

In a statement, Tony Lomas, PwC’s lead administrator, said: “We are continuously focused on resolving the issues that prevent us from distributing the £7.5bn surplus so we welcome the…Supreme Court judgment. The judgment clarifies some high-value and important matters concerning claims for currency loss, subordinated debt and shareholder contributions, all of which will help determine who is entitled to the LBIE surplus and how large that surplus will be.”

Though the bank’s insolvency was nine years ago, Lehman is still entwined in a number of ongoing legal battles between a number of different creditor groups, all of which claim to be entitled to payments from the surplus. PwC, the administrator of LBIE, has been seeking guidance from the courts as to where the extra money should go. The company’s Chapter 11 filing in September 2008 triggered bankruptcy proceedings the world over, as well as many disputes, and was one of the catalysts for the onset of the global financial crisis. To date, LBIE has paid creditors around £12bn.

The Supreme Court ruling marks the end of the first of three major so-called “waterfall” applications, which have been submitted to decide how LBIE’s remaining assets should be divided. The Waterfall I application was primarily to decide the order in which those owed money by Lehman should be paid back. This application has already gone to the UK Supreme Court, with a decision due soon. The Waterfall II application is concerned with three main issues and was divided into three trials, covering the entitlement of creditors to interest on their debts for periods after Lehman went into administration; contractual claims between creditors and PwC; and contractual claims that existed before PwC’s administration of the Lehman unit.

The third application is split into two trials. The first trial was heard in the High Court at the start of January, while the second part of the trial is scheduled for September. One of the key issues to be resolved in the third application is whether a unit of Lehman, which was set up to pay the bank’s contractors and UK employees, is liable for £10bn in claims against other bank units.

Richard Summerfield