The United Kingdom Court of Appeal ('UKCA') has found that once a company has gone into administration (a form of insolvency/restructuring process not available in the Cayman Islands ('Cayman')) interest on a creditor's (proven) debt is governed by a statutory regime under s.2.88 of the Insolvency Rules 1986 ('s.2.88'). The regime provides that in the event that there are still assets left after payment of all the proved debts ('Surplus') at the end of the administration then that Surplus should be used to pay creditors' statutory interest for the period the debt has been outstanding after the commencement of the administration. Although this relates to an administration under UK legislation, the s.2.88 is analogous to the Cayman Companies Winding Up Rules ('CWR') Order 16 rules 11 and 12, and this UKCA decision would be considered persuasive authority in Cayman courts as to the treatment of interest in a liquidation.

Case: Burlington Loan Management Ltd & Ors v Lomas & Ors [2017] EWCA Civ 1462

What happened here?

The case concerned the winding up of Lehman Brothers International (Europe) ('Lehman') where at the end of the administration there was a Surplus of over £7 bn. The UKCA was asked to determine the extent of creditors' entitlements to interest on their debts for periods after the commencement of the administration, and the correct approach to calculating those entitlements. A previous decision of the UK Supreme Court arising out of Lehman's administration (Waterfall I [2014]) had found that interest on debts which had been proved in administrations and in liquidations fell within the statutory regime set out in s.2.88, but there were some issues on the way it should be paid.

What does the UK's.2.88 provide?

Under s.2.88 (1) if a debt proved in the administration bears interest then that interest is provable as part of the debt up to the time the company entered administration. Under s.2.88 (7), if there is a Surplus remaining after the proven debts have been paid then that Surplus is to be applied first in paying interest due on those debts during the time they have been unpaid in the administration and under s.2.88 (9) the interest rate payable is the greater of the rate applicable to the debt (for example the contractual rate) or the rate set in section 17 of the Judgments Act 1838.

What does Cayman's Order 16 provide?

Under Order 16 Rule 11 a creditor who has a contractual right to claim interest against an insolvent company may prove for the amount of the interest accrued up to the date of the commencement of the liquidation, but not prove for any interest after the liquidation has begun. Instead, under Order 16 Rule 12 , where there is a Surplus remaining after payment of the debts proved in the liquidation that Surplus should first be applied in paying interest on those debts (of over $500) for the period during which they have been outstanding since the commencement of the liquidation. The rate of interest will be the higher of the contractual rate of the debt or the prescribed rate under the Judgement Debts (Rates of Interest) Rules.

What did the UKCA decide?

In dismissing the appeal, the UKCA touched on various issues raised in legal claims arising out of the administration of Lehman. Of the twelve issues it saw as remaining, in its analysis of the alternatives put before it the UKCA took the view that the clear and simple code for statutory interest established by Rule 2.88 applied and not the earlier methods of how to apply any Surplus to the payment of interest. The Surplus should be applied first to payment of the proven debt and then to interest under s.2.88 (7), at the rate in 2.88 (9) (which was not to be compounded), and that no common law liability to pay compensation for late payment of that interest can arise unless that late payment amounts to some form of legal wrong which gives rise to a cause of action.

How would that apply in Cayman?

Like the UK, Cayman has a simple statutory regime for applying a Surplus at the end of a liquidation to the payment of statutory interest. This judgment considered various common law arguments to vary the UK statutory regime which might equally be raised in a case based on similar facts in Cayman. The UKCA's rejection of those alternatives adds strength to the application of the Cayman statutory regime where there is a Surplus and provides a degree of certainty and simplicity on how to apply Surpluses to paying statutory interest.

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