UK: Lehman Brothers Administration: Court Considers What To Do With The £8 Billion Surplus

Last Updated: 29 August 2017
Article by Rick Brown and David Chalcraft

The English Supreme Court has considered various new categories of creditor claims against a company with unlimited liability in administration where, unusually, there was enough money to pay all creditors and a surplus existed.

In proceedings commonly referred to as the Waterfall I litigation, the Supreme Court considered issues relating to the distribution of funds from the estate of Lehman Brothers International Europe (in administration) (LBIE), in circumstances where there was a surplus of assets amounting to approximately £8 billion.

Unsurprisingly, various unsecured creditors, including another Lehman group company, Lehman Brothers Holdings Intermediate 2 Limited (LBHI2), sought a recovery against the surplus. The Waterfall I litigation was intended to resolve certain lacunas in UK insolvency legislation relating to currency conversion claims, statutory interest, and the ranking of subordinated debt, in addition to other issues concerning LBIE's, somewhat unusual, structure as an unlimited company.

The issues:

Ranking of subordinated debt

The court first considered where subordinated debts ranked in the order of payments. LBHI2 was the holder of subordinated loans made to LBIE. LBHI2 contended that its claims should rank ahead of statutory interest payable under the Insolvency Rules 1986 and other non-provable liabilities. In contrast, the LBIE administrators argued that LBHI2 was not entitled to prove for the subordinated debt until all liabilities, including statutory interest and non-provable liabilities, were paid in full. LBHI2 was effectively arguing that it should be paid before claims for statutory interest and non-provable liabilities.

Currency conversion claims

Many unsecured creditors of LBIE originally had claims denominated in US dollars. It is a principle of UK insolvency legislation that foreign currency debts are exchanged into pounds sterling as at the date of the insolvency, in this case the administration. Accordingly, unsecured creditors' claims were converted to sterling on 15 September 2008. Since that date however, the pound has depreciated as against the US dollar causing unsecured creditors to suffer currency conversion losses, totalling in the region of £1.3 billion. As a result, the creditors sought to recover the difference.

How does this work in practice? By way of example, if a creditor (C) with a claim of US$100 had its claim converted to £65 as at the date of the administration but, due to currency fluctuations in the period between the date of administration and the date of payment, that £65 claim would now be worth US$80 when payment is made; C would have lost US$20. It is that US$20 shortfall that the creditors in Waterfall I sought to claim.

Payment of statutory interest

In accordance with the Insolvency Rules 1986, unsecured creditors are entitled to statutory interest on the debts proved in the administration. Statutory interest accrues from the date of the administration until the date of repayment of the debt. Whilst the Insolvency Rules 1986 applied to the case at hand, the analogous provision for payment of interest in the event of a surplus is now contained within rule 14.23 of the Insolvency (England and Wales) Rules 2016.

The question that arose in this case was whether the statutory interest from the date of administration could be claimed once LBIE was then put into liquidation - could this interest only be claimed whilst LBIE was in administration?

The Supreme Court judgment

In respect of the above issues, the Supreme Court held that:

  • Statutory interest and non-provable liabilities must be satisfied before any of the surplus monies can be used to pay subordinated debts.
  • It is not open to foreign currency creditors to claim for any currency exchange shortfall as a non-provable debt of an administration.
  • The payment of statutory interest accruing whilst a company is in administration is only payable during the period of the administration, and cannot for example be claimed during subsequent liquidation proceedings.

The Supreme Court recognised that a number of gaps exist in UK insolvency legislation, but declined to either give guidance on or rewrite the statutory provisions on the basis that the legislation had not intended for these gaps to be filled. In so doing, the court has left this task for the legislature.

HFW perspective

The judgment is noteworthy insofar as it addresses a number of gaps in the UK insolvency regime, however whether it has wide application is yet to be seen especially given the rarity of administrations resulting in a surplus to creditors and the fact that unlimited companies are not commonly utilised. It also remains to be seen how such issues will be dealt with under the Insolvency (England and Wales) Rules 2016, which have now superseded the Insolvency Rules 1986.

There are a range of options available to potential creditors which may help mitigate the risk of losing money when a counterparty becomes insolvent and is unable to pay its debts:

  • Depending on the value at stake, potential creditors may wish to take security in the form of a fixed charge over an asset(s) of the counterparty. This way, if the counterparty does become insolvent, the asset over which the fixed charge exists will not fall into the insolvent estate.
  • Retention of title provisions can be very effective, especially with the sale and purchase of goods. These provisions usually provide that the seller will retain legal ownership of the goods until they have been paid for in full by the buyer.
  • Small and medium sized enterprises may also choose to insure against the risk of a counterparty's insolvency by taking out insurance. Trade credit insurance will insure against accounts receivable losses should a counterparty enter into insolvency.
  • Larger enterprises may also be able to hedge their potential exposure, especially in relation to currency fluctuation losses.

As the Waterfall I name suggests, there is further litigation in the pipeline, aptly named Waterfall II and Waterfall III, which will focus on interest on debts, set-off, and contributory claims. These cases are expected to further shape the UK's insolvency legislation so watch this space for further changes to the legislative landscape later this year.

The judgment is available at

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.