This Statement provides a guide to the rules concerning interest
on debts in a surplus liquidation case and the effect of the Late
Payment of Commercial Debts (Interest) Act 1998.
Interest pursuant to the Insolvency Act 1986
Interest post liquidation only becomes payable if the
estate's costs and expenses are paid in full, and also the
capital and pre-liquidation interest of the proven debts have been
paid. Thereafter section 189 IA86, reads as follows:
"(3) All interest under this section ranks equally,
whether or not the debts on which it is payable rank
(4) The rate of interest payable under this section in
respect of any debt ("the official rate"
for the purposes of any provision of this Act in which that
expression is used) is whichever is the greater of:
(a) the rate specified in section 17 of the Judgments Act
1838 on the day on which the company went into liquidation,
(b) the rate applicable to that debt apart from the winding
The rate specified by the Judgments Act 1838
("Statutory Interest") is 8%. The rate
applicable to the debt apart from the winding up
("Contractual Interest"), usually
relates only to a contractual ability to charge interest on the
debt. This contractual entitlement to interest may be significantly
higher than 8%.
For instance, most banks have provision in their facilities for
a much higher rate for defaulting debtors.
Late Payment of Commercial Debts (Interest) Act 1998
The scope of the LPCDA has been gradually increased, so that
after 7 August 2002 it implies a term into all contracts for the
"supply of goods or services where the purchaser and supplier
are each acting in the course of business" which, in summary,
entitles the supplier to interest.
This interest term will only be implied if there are no interest
provisions already present in the contract. However, section 8(1)
LPCD Act prevents avoidance of its terms by providing that
"any contract terms are void to the extent that they
purport to exclude the right to statutory interest in relation to
the debt, unless there is a substantial contractual remedy for late
payment of the debt."
Interest payable pursuant to the LPCDA is calculated by
reference to the 'reference rate'. The 'reference
rate' is presently set at 8% above the Bank of England's
Monetary Policy Committee 'official dealing rate' (also
known as its 'official Bank rate') as set at six monthly
intervals. The liquidator would use the official dealing rate in
force on 30 June in respect of interest which starts to run between
1 July and 31 December, and the official dealing rate in force on
31 December for interest that starts to run between 1 January and
30 June. On 31 December 2011 the official dealing rate was 0.5%,
the rate payable pursuant to the LPCDA is presently therefore,
8.5%. The LPCDA also entitles the creditor to
"compensation" for late payment, calculated on a sliding
scale but is only Ł100 at most. There is no case law to
suggest whether this should be paid as "interest" or
should form part of the capital of the debt.
In a surplus case, interest is payable to the creditors at the
higher of the Statutory Interest rate of (presently) 8%, or the
Contractual Interest rate (ie whatever the creditor is entitled to
"apart from the winding up"). If the insolvent
entity was trading, it is likely the LPCDA will apply, and that a
term is implied into its trade contracts to pay interest at a rate
of (presently) 8.5%.
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.
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A commentary on the UK Supreme Court judgment in the joined cases of Rubin and another v Eurofinance SA and others and New Cap Reinsurance Corporation (in liquidation) and another v A E Grant and others  UKSC 46, which has been anxiously awaited by the UK's restructuring and insolvency community.
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