Easter Term [2017] UKSC 38 On appeal from: [2015] EWCA Civ 485

The Joint Administrators of LB Holdings Intermediate 2
Limited (Appellant) v The Joint Administrators of
Lehman Brothers International (Europe) and others
The Joint Administrators of Lehman Brothers Limited
(Appellant) v Lehman Brothers International (Europe)
(In Administration) and others (Respondents)
Lehman Brothers Holdings Inc (Appellant) v The Joint
Administrators of Lehman Brothers International
(Europe) and others (Respondents)
Lord Neuberger, President
Lord Kerr
Lord Clarke
Lord Sumption
Lord Reed
17 May 2017
Heard on 17, 18, 19 and 20 October 2016
Appellant (LBHI2 Joint
Respondents (Anthony
Victor Lomas and ors)
Robert Miles QC William Trower QC
Louise Hutton Daniel Bayfield QC
Rosanna Foskett Stephen Robins
(Instructed by Dentons
(Instructed by Linklaters
Appellant (LBL Joint
Respondent (CVI GVI
(LUX) Master Sarl)
David Wolfson QC Robin Dicker QC
Nehali Shah Richard Fisher
Ruth den Besten Charlotte Cooke
(Instructed by DLA Piper
(Instructed by Freshfields
Bruckhaus Deringer LLP
Appellant (LBHI)
Barry Isaacs QC
(Instructed by Weil,
Gotshal and Manges
(London) LLP)
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LORD NEUBERGER: (with whom Lord Kerr and Lord Reed agree)
1. This appeal and cross-appeal raise a number of points of insolvency law,
which arise out of the collapse of the Lehman Brothers group of companies (“the
Group”) in 2008.
The basic facts
2. The Group’s main trading company in Europe was Lehman Brothers
International (Europe) (“LBIE”), which is an unlimited company. Its share capital
consists of a number of ordinary shares as well as a number of redeemable shares.
All these shares, except for one ordinary share, are held by LB Holdings
Intermediate 2 Ltd (“LBHI2”), whose sole function was to act as LBIE’s immediate
holding company. The remaining ordinary share is held by Lehman Brothers Ltd
(“LBL”), which was the service company for the Group’s operations in the UK,
Europe and Middle East.
3. LBIE and LBL have been in administration since September 2008, and
LBHI2 has been in administration since January 2009. The purpose of the
administrations of these companies has been the realisation of their respective assets
to best advantage, rather than the preservation of the companies as going concerns.
Contrary to many people’s expectations when LBIE went into administration, it now
appears that it is able to repay all its external creditors in full.
4. Under the provisions of the Insolvency Act 1986 as amended (“the 1986
Act”), an administrator of a company is permitted to make distributions to creditors
of the company. Once an administrator gives notice of an intention to make a
distribution, the administration is commonly referred to as a distributing
administration. Since 2 December 2009, LBIE has been in distributing
administration, but LBHI2 and LBL have not been. In November 2012, the joint
administrators of LBIE declared and paid a first interim dividend to LBIE’s
unsecured creditors of 25.2 pence in the pound, totalling some £1.611bn.
5. Lehman Brothers Holdings, Inc (“LBHI”) is the ultimate parent of the Group.
In September 2008, it began Chapter 11 bankruptcy proceedings in the United States
Bankruptcy Court, and it emerged from those proceedings in March 2012. LBHI is
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an indirect creditor of many companies in the Group, and its primary interest relates
to LBHI2’s assets, including its right to recover subordinated loans made to LBIE
and other issues relating to those subordinated loans.
6. The LBIE administrators received proofs of debt from various unsecured
creditors including LBL and LBHI2. LBL’s initial proof was for £363m, and LBHI2
submitted a proof for an unsecured claim of around £1.254bn in respect of sums
advanced to LBIE under three subordinated debt agreements made in November
2006 (together with a separate unsecured claim of around £38m). The LBL
administrators received proofs from LBHI2 in the sum of £257m, and from LBIE
for £10.4bn. The proof from LBIE included £10bn, which was the LBIE
administrators’ estimate of LBL’s contingent liability to LBIE as a contributory
under section 74 of the 1986 Act. This claim led to LBL seeking leave to amend its
proof in LBIE’s administration from £363m to £10.934bn. It is also relevant to
mention that some of the proofs submitted to LBIE’s administrators were in respect
of debts denominated in foreign currencies.
7. In February 2013, the administrators of LBIE, of LBL and of LBHI2 issued
proceedings seeking the determination of the court on a number of questions arising
out of the administrations. On 14 March 2014, David Richards J delivered a
judgment (reported at [2015] Ch 1) dealing with those questions, and he
subsequently made consequential declarations, which were set out in paras (i) to (x)
of an order. The declarations in paras (i) to (ix) were challenged on appeal or crossappeal, and the Court of Appeal (Moore-Bick, Lewison and Briggs LJJ) upheld
most, but varied some, of them in a decision which is reported at [2016] Ch 50.
8. The order made by David Richards J is set out in an appendix to the judgment
of the Court of Appeal, and the contents of paras (i) to (ix) have now been the subject
of argument in this Court. It is sensible to address them in the same order as they
were discussed in the judgments in the Court of Appeal. Before turning to the issues,
however, it is right to set out the principally relevant legislative provisions. It is also
right to pay tribute to the well expressed and illuminating judgments below, which
helped to ensure that the arguments were developed in this Court in a disciplined
and clear way.
9. Hereafter, unless the contrary is stated, all references to sections and
Schedules are to sections of and Schedules to the 1986 Act, and all references to
rules are to those in the Insolvency Rules 1986 (SI 1986/1925) as amended (“the
1986 Rules”). (It is right to add that the 1986 Act was preceded by the Insolvency
Act 1985 and the Companies Act 1985 which between them contained the great
majority of the provisions now to be found in the 1986 Act. It was decided to repeal
those 1985 statutes and consolidate all insolvency law in the 1986 legislation. For
present purposes, the changes effected in 1985 can be elided with those in 1986, and
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accordingly I shall disregard the 1985 Act when describing the changes to
insolvency law effected in the 1980s.)
The 1986 Act and the 1986 Rules: introductory
10. The 1986 Act and the 1986 Rules (“the 1986 legislation”) were introduced
following the publication of the 1982 Report of the Review Committee on Insolvency
Law and Practice (Cmnd 8558) (the Cork Report), and a 1984 Government White
Paper, A Revised Framework for Insolvency Law (Cmnd 9175). Para 1 of the White
Paper acknowledged the “thorough analysis” contained in “the Cork Report”, which
is accurately characterised by Sealy and Milman in their Annotated Guide to the
Insolvency Legislation, 19th ed (2016), vol 1, p 1, as “[t]he main inspiration for the
reforms” contained in the 1986 legislation. Para 2 of the White Paper described the
objectives of the proposed new legislation, which included “establish[ing] effective
and straightforward procedures for dealing with and settling the affairs of corporate
and personal insolvents in the interests of their creditors”. In para 3 of the White
Paper it was stated that the law of corporate insolvency had “altered very little over
the past century”, and that there was “an urgent need to reform, update and
strengthen the insolvency legislation so that the objectives … set out in para 2 can
be met”. Para 4 set out six objectives for the proposed changes which became the
1986 Act and the 1986 Rules. The third of those objectives was “To simplify
wherever possible corporate and personal insolvency procedures”. And the fifth
included “the introduction of a new insolvency mechanism, known as the
administrator procedure, designed to facilitate the rehabilitation and re-organisation
of companies faced by insolvency but where there are reasonable prospects for a
return to profitability”.
11. The 1986 legislation consolidated in a single statute and set of rules the
legislative provisions regarding both personal insolvency and corporate insolvency.
Until then, they had been dealt with in separate legislation – most recently the
Bankruptcy Act 1914 (“the 1914 Act”) and the Bankruptcy Rules 1952 (SI
1952/2113), which covered personal insolvency, and the Companies Act 1948 (“the
1948 Act”) and the Companies (Winding-Up) Rules 1949 (SI 1949/330) (“the 1949
Rules”), which applied to corporate insolvency. Nonetheless, the 1986 legislation
contains almost entirely separate regimes for personal insolvency and corporate
insolvency. Thus, in the 1986 Act, sections 1 to 251 deal with “company
insolvency”, sections 251A to 385 with “insolvency of individuals”, and the
remaining sections, 386 to 444, while applicable to both types of insolvency, are
concerned with matters such as insolvency practitioners and subordinate legislation.
And this is reflected in the 1986 Rules: Parts 1 to 4 are concerned with “company
insolvency”, Parts 5 and 6 deal with “insolvency of individuals”, and Parts 7 to 13
are of general application, being concerned with court procedures, notices, meetings
and a few common definitions. In many ways, there was greater overlap between
personal and corporate insolvency in the preceding legislative regimes, because
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section 317 of the 1948 Act provided that the principles applicable in bankruptcy
“with regard to the respective rights of secured and unsecured creditors and to debts
provable and to the valuation of annuities and future and contingent liabilities”
applied “[i]n the winding up of an insolvent company”.
12. As anticipated in the White Paper, the 1986 legislation represents a
comprehensive overhaul of the insolvency legislation, adding new procedures and
new rules and rewriting many of the established procedures and rules. Most, indeed
probably all, fundamental principles apply just as they always have done – the pari
passu principle is an obvious example. However, when it comes to less fundamental
procedures and rules, it cannot be assumed that judicial decisions, even at the highest
level, relating to previous insolvency legislation necessarily hold good in relation to
the 1986 legislation. Where the wording of a provision in the 1986 legislation has
not changed from that of a provision in previous legislation, then, at least prima
facie, it may normally be assumed that the effect of the provision was intended to
be unaltered, but where the language has been significantly changed, such an
assumption may easily lead to error.
13. Further, despite its lengthy and detailed provisions, the 1986 legislation does
not constitute a complete insolvency code. Certain long-established Judge-made
rules, albeit developed at a time when the insolvency legislation was far less
detailed, indeed by modern standards sometimes positively exiguous, nonetheless
survive. Recently invoked examples include the anti-deprivation principle (see
Perpetual Trustee Co Ltd v BNY Corporate Trustee Services Ltd [2012] 1 AC 383),
the rule against double-proof (discussed in In re Kaupthing Singer & Friedlander
Ltd (in administration) (No 2) [2012] 1 AC 804, paras 8 to 12), the rule in Cherry v
Boultbee (1839) 4 My & Cr 442 (also discussed in Kaupthing (No 2) [2012] 1 AC
804, paras 13 to 20), and certain rules of fairness (alluded to in In re Nortel GmbH
[2014] AC 209, para 122). Provided that a Judge-made rule is well-established,
consistent with the terms and underlying principles of current legislative provisions,
and reasonably necessary to achieve justice, it continues to apply. And, as Judgemade rules are ultimately part of the common law, there is no reason in principle
why they cannot be developed, or indeed why new rules cannot be formulated.
However, particularly in the light of the full and detailed nature of the current
insolvency legislation and the need for certainty, any judge should think long and
hard before extending or adapting an existing rule, and, even more, before
formulating a new rule.
14. One of the reforms introduced by the 1986 legislation and foreshadowed by
the White Paper is the administration procedure. It was introduced as part of the socalled “rescue culture” which has been described as “a philosophy of reorganising
companies so as to restore them to profitable trading and enable them to avoid
liquidation” – Goode, Principles of Corporate Insolvency Law, 4th ed (2011), para
11-03. The procedure was less successful than had been hoped. Accordingly, the
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provisions of the 1986 legislation relating to administration were substantially
amended as a result of the Enterprise Act 2002 (“the 2002 Act”). Among the changes
introduced by the 2002 Act were the conferring of a power on an administrator to
make distributions to unsecured creditors and a greater flexibility of exit routes from
15. Schedule B1 to the 1986 Act contains provisions dealing with administration.
Para 53 of that Schedule provides for a creditors’ meeting to approve the proposals
of an administrator following his appointment. Paras 65 and 66 empower an
administrator to make distributions to creditors, normally only with the prior consent
of the court. Para 67 requires an administrator to take custody of the company’s
assets, and para 68 enables him to carry on the company’s business in accordance
with proposals approved under para 53. Para 69 states that “[i]n exercising his
functions under this Schedule the administrator of a company acts as its agent.”
Paras 76 to 86 of Schedule B1 provide for various routes by which the company can
exit from administration. Paras 76 to 81 set out a number of different ways in which
the company can, in effect, be restored to its pre-administration status. Para 82
provides for a public interest winding-up. Para 83 entitles an administrator to move
the company from administration to creditors’ voluntary liquidation where, in
summary terms, there are sufficient assets to pay the company’s liabilities in full.
And para 84 enables the company to pass straight from administration to dissolution,
but only where it “has no property which might permit a distribution to its creditors”
(a potentially narrower restriction, which should probably be construed widely).
16. The provisions of the 1986 Rules governing distributing administrations were
introduced by the Insolvency (Amendment) Rules 2003 (SI 2003/1730) (“the 2003
Amendment Rules”). In a distributing administration, as in a liquidation, the duty of
the office-holder, whether administrator or liquidator, is to gather in and realise the
assets of the company and to use them to pay off the company’s liabilities (see
sections 107 and 143 in relation to liquidators and paragraphs 65 to 67 of Schedule
B1 in relation to administrators).
17. I summarised the priorities in relation to such payments by a liquidator or a
distributing administrator in the following terms in In re Nortel GmbH [2014] AC
209, para 39:
“In a liquidation of a company and in an administration (where
there is no question of trying to save the company or its
business), the effect of insolvency legislation …, as interpreted
and extended by the courts, is that the order of priority for
payment out of the company’s assets is, in summary terms, as
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(1) Fixed charge creditors;
(2) Expenses of the insolvency proceedings;
(3) Preferential creditors;
(4) Floating charge creditors;
(5) Unsecured provable debts;
(6) Statutory interest;
(7) Non-provable liabilities; and
(8) Shareholders.”
This description of what is known as the waterfall is a generalised summary of the
distribution priorities in an insolvency. It was not intended to be treated as some sort
of quasi-statutory statement of immutable legal principle, and it would have been
better if I had said so at the time.
The centrally relevant provisions of the 1986 Rules
18. I turn then to describe provisions of the 1986 Rules which apply to
administrations, and which play a part in relation to the issues which have to be
resolved on this appeal.
19. Part 2 of the 1986 Rules is concerned with “Administration Procedure”, and
Chapter 10 of that Part (“Chapter 10 of Part 2”), which includes rules 2.68 to 2.105,
deals with “Distributions to Creditors”. The rules in Chapter 10 of Part 2 are very
similar indeed to, and were no doubt based on, the rules concerned with “proof of
debts in a liquidation”, which are to be found in Chapter 9 of Part 4 of the 1986
20. Rule 2.68(1) provides that Chapter 10 applies “where the administrator
makes, or proposes to make, a distribution to any class of creditors …”. Rule 2.69
provides that provable debts rank equally between themselves and are paid in full
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unless the assets are insufficient to meet them, in which case they abate in equal
proportions between themselves. This embodies the fundamental principle of
equality, which applies similarly to liquidations – see rule 4.181. Rules 2.72 to 2.80
set out the machinery for proving debts, including the submission of a proof, its
admission or rejection by the administrator and appeals against the administrator’s
21. Rule 2.72 (which is in very similar terms to rule 4.73, which applies in a
liquidation) is headed “Proving a debt”, and it provides:
“(1) A person claiming to be a creditor of the company and
wishing to recover his debt in whole or in part must (subject to
any order of the court to the contrary) submit his claim in
writing to the administrator.
(2) A creditor who claims is referred to as ‘proving’ for his
debt and a document by which he seeks to establish his claim
is his ‘proof’.”
The remaining paragraphs of this rule set out the machinery by which a debt should
be proved. Rule 2.77 provides that a proof may be admitted for payment of a
dividend in whole or in part, and rule 2.78 contains appeal procedures where a proof
is refused or not admitted in its full amount. Rule 2.79 permits a proof to be
withdrawn or varied by agreement with the administrator, and rule 2.80 enables the
court to “expunge a proof or reduce the amount claimed” on the application of the
administrator “where he thinks the proof has been improperly admitted, or ought to
be reduced” or “on the application of the creditor, if the administrator declines to
interfere in the matter”. The equivalent provisions applicable in a liquidation are
rules 4.82 to 4.85.
22. Rules 2.81 to 2.94, 2.102, 2.103 and 2.105 are concerned with quantifying
claims made in paying administrations. With one exception, namely rule 2.88
(whose equivalent is to be found in the 1986 Act rather than the 1986 Rules, as
explained in para 28 below), these rules are very similar indeed in their language to
(and were no doubt based on) rules 4.86 to 4.99, which relate to claims in
23. Rule 2.81 requires the administrator to “estimate the value of any debt which,
by reason of its being subject to a contingency or for any other reason, does not bear
a certain value”, and the rule goes on to provide that “he may revise any estimate
previously made … by reference to any change of circumstances or to any
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information becoming available to him”. He is also required to “inform the creditor
as to his estimate and any revision to it”. (Rule 4.86 is the equivalent provision in
24. Rule 2.83 entitles a secured creditor, who has realised his security, to prove
for such part of his debt which remains unsatisfied. And rule 2.90 entitles a secured
creditor who has proved for his debt on the basis of putting a value on his security
to amend that value with the agreement of the administrator or the court. (Rules 4.88
and 4.95 have similar effect in liquidations.)
25. Rule 2.85 provides for mutual credits and set-off of debts as at the date that
the administrator gives notice that he proposes to make a distribution, and such a
notice is provided for in rule 2.95. Rule 2.85(3) read together with rule 2.85(2)
provides that, as at the date on which an administrator gives notice of his intention
to make a distribution, there should be a set-off in respect of what is owing “between
the company and any [proving] creditor of the company” in respect of “mutual
dealings” between them. “Mutual dealings” are defined in rule 2.85(2) as “mutual
credits, mutual debts or other mutual dealings”, subject to exceptions all of which
relate to events which arise after the administration date. Rule 2.85(4) states that rule
2.85 applies, inter alia, to future, contingent or other quantifiable liabilities, and rules
2.81, 2.86, 2.88 and rule 2.105 apply for the purposes of rule 2.85. (Rule 4.90, which
applies in liquidations, is in very similar terms to rule 2.85, save that the date by
reference to which set-off is to be effected is the liquidation date.)
26. Rule 2.86 provides:
“(1) For the purpose of proving a debt incurred or payable in
a currency other than sterling, the amount of the debt shall be
converted into sterling at the official exchange rate prevailing
on the date when the company entered administration or, if the
administration was immediately preceded by a winding up, on
the date that the company went into liquidation.”
Rule 2.86 is virtually identical in its terms to rule 4.91, which applies to proving a
debt incurred or payable in a foreign currency in a liquidation.
27. Rule 2.88 deals with interest. Rule 2.88(1) provides that “Where a debt
proved in the administration bears interest, that interest is provable as part of the
debt except in so far as it is payable in respect of any period after the company
entered administration”. Para (1) was amended by the Insolvency (Amendment)
Rules, 2005 (SI 2005/527) (“the 2005 Amendment Rules”) by adding the words “or,
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if the administration was immediately preceded by a winding up, any period after
the date that the company went into liquidation”. Rule 2.88(7) states that:
“Any surplus remaining after payment of the debts proved
shall, before being applied for any purpose, be applied in
paying interest on those debts in respect of the periods during
which they have been outstanding since the company entered
Para (8) states that all interest so payable “ranks equally”, and para (9) provides that
the rate of such interest is to be the higher of the judgment debt rate or the rate
applicable to the debt apart from the administration.
28. Virtually identical provisions to rule 2.88(7) to (9) are contained in section
189(2) to (4) which applies to post-liquidation interest on debts proved in a
liquidation. Section 189(2) plays a significant part in some of the arguments on this
appeal, and it should be set out in full:
“Any surplus remaining after the payment of the debts proved
in a winding up shall, before being applied for any other
purpose, be applied in paying interest on those debts in respect
of the periods during which they have been outstanding since
the company went into liquidation.”
29. Rule 2.89 permits a creditor whose debt is not yet due for payment to prove
“subject to rule 2.105”. Rule 2.105 provides that, in the case of such a debt, “[f]or
the purpose of dividend (and no other purpose) the amount of the creditor’s admitted
proof … shall be reduced by applying [a specified] formula”, which basically
represents a discount for early payment, calculated by reference to the date of
administration (or, if relevant, the date of any preceding liquidation). In practice this
means that the debt is reduced by 5% for each year between the administration and
the contractual due date. Similar provisions for future debts in liquidations are to be
found in rules 4.94 and 11.13.
30. Rule 2.95 provides that an administrator who is proposing to make a
distribution should give “28 days’ notice of that fact”. Rule 2.97 permits, indeed it
enjoins, an administrator thereafter “to declare the dividend to one or more classes
of creditor”. Rule 2.98 deals with notification, and rule 2.99 with payment. Rule
2.101 applies where “the amount claimed by a creditor is increased” after a dividend
has been paid, and rule 2.102 applies where “a creditor re-values his security” after
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a dividend has been declared. There are fairly similar rules for liquidations in Part
11 of the 1986 Rules.
31. Reference should also be made to two rules which contain definitions
applicable generally to the 1986 Rules. Rule 13.12(1) states that “in relation to the
winding up of a company”, the word “debt” means:
“(a) any debt or liability to which the company is subject at
the date on which it goes into liquidation;
(b) any debt or liability to which the company may become
subject after that date by reason of any obligation incurred
before that date; and
(c) any interest provable as mentioned in rule 4.93(1).”
Rule 13.12(4) defines “liability” as meaning “[in] any provision of the [1986] Act
or the Rules about winding up”:
“… a liability to pay money or money’s worth, including any
liability under an enactment, any liability for breach of trust,
any liability in contract, tort or bailment, and any liability
arising out of an obligation to make restitution.”
Rule 13.12(3) explains that a debt or liability for this purpose can be “present or
future, … certain or contingent, … fixed or liquidated, … capable of being
ascertained by fixed rules or as a matter of opinion”. Rule 13.12(5) applies these
definitions to a case “where a company is in administration”, so the references in
these definitions to winding up and rule 4.93(1) must respectively be taken to be to
administration and rule 2.88(1).
32. Rule 12.3(1) provides:
“Subject as follows, in administration, winding up and
bankruptcy, all claims by creditors are provable as debts
against the company or, as the case may be, the bankrupt,
whether they are present or future, certain or contingent,
ascertained or sounding only in damages.”
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33. There are certain specified exceptions to this definition, but rule 12.3(3)
makes it clear that they are not exhaustive. However, as is clear from the strikingly
wide words of rules 13.12(1) and (3) and 12.3(1), the statutory policy, which Briggs
J rightly identified at first instance in In re Nortel GmbH [2011] Bus LR 766, paras
102-103, and which is supported by the Supreme Court in the same case at [2014]
AC 209, paras 92-93, is that claims should, if at all possible, be admitted to proof
rather than being excluded from proof. Nonetheless, some non-provable liabilities,
not specified in rule 12.3, still survive. The most obvious examples are claims which
only arise after the date a company goes into administration or liquidation (see In re
Nortel GmbH at [2014] AC 209, para 35), such as damages for personal injury in an
accident which occurred after that date.
The issues on this appeal
34. The first issue on this appeal concerns the ranking in the waterfall
summarised in para 17 above which can be claimed by LBHI2 in its capacity as
holder of the three subordinated loans made to LBIE. The second issue arises from
the fact that LBIE’s creditors who have debts denominated in foreign currency, will
be paid out on their proofs at the rate of exchange prevailing at the date LBIE went
into administration (“the administration date”), and, in some cases, sterling
depreciated on the foreign exchange markets between that date and the date of
payment. Those foreign currency creditors contend that they are entitled to claim the
shortfall. The third issue raises the question whether, if interest which should have
been paid during an administration under rule 2.88(7) was not in fact so paid, it can
nonetheless be claimed in a subsequent liquidation.
35. The remaining four issues arise because LBIE is an unlimited company and
therefore its members can be called upon to make contributions pursuant to section
74 of the 1986 Act to meet liabilities if LBIE is in liquidation. The fourth issue is
whether such contributions can be sought in respect of liability for interest under
rule 2.88(7) and for liabilities of LBIE which are not provable. The other three issues
arise because LBHI2 and LBL are not only creditors of LBIE, but are also members
of LBIE and liable to contribute as such. The fifth issue is whether LBIE can prove
in the administrations of LBHI2 and of LBL in respect of those respective
companies’ contingent liabilities to make contributions in LBIE’s prospective
liquidation. If they can, it is conceded that LBIE can set off its provable claims for
contributions against the proofs lodged by LBHI2 and LBL in LBIE’s
administration. If LBIE cannot so prove, the sixth issue is whether LBIE can
nonetheless exercise such a right of set-off. The seventh issue, which only arises if
LBIE loses on the fifth and sixth issues, is whether LBIE can nonetheless invoke the
so-called contributory rule which applies in a liquidation, namely that a person
cannot recover as a creditor of a company in liquidation until he has discharged his
liability as a contributory.
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36. I turn now to address these issues.
The ranking of the subordinated debt
37. As mentioned above, there were three subordinated loan agreements (“the
Loan Agreements”) made by LBHI2 to LBIE, under which a substantial sum of
money remains outstanding. As recorded in para (i) of the order which he made,
David Richards J decided that the aggregate debt due under the Loan Agreements
(“the subordinated debt”) was provable, but that it was “subordinated to provable
debts, statutory interest and non-provable liabilities, all of which … must be paid in
full before … LBHI2 is entitled to prove and require the LBIE administrators to
admit such proof in respect of its claims under [the Loan]”. The Court of Appeal
upheld this order in so far as it decided that the subordinated debt was provable and
subordinated to provable debts, statutory interest and non-provable liabilities.
However, they disagreed with the Judge’s view that LBHI2 was not entitled to prove
until all other proving creditors had been paid in full.
38. On this appeal, while accepting that the subordinated debt ranks behind other
provable debts, the LBHI2 administrators argue that the courts below were wrong
to hold that the subordinated debt ranked behind statutory interest or non-provable
liabilities. By contrast, the LBIE administrators contend that the Court of Appeal
ought to have concluded that the Judge was right to hold that LBHI2 was not entitled
to prove for the subordinated debt until all liabilities, including statutory interest and
non-provable liabilities, had been paid in full.
39. The Loan Agreements were revolving credit facilities made under
agreements which contained certain “Variable Terms” and certain “Standard
Terms”. Clause 9 of the Variable Terms provided for repayment “subject always to
[clause] … 5 … of the Standard Terms”.
40. Clause 1 of the Standard Terms (“clause 1”) contained some definitions.
“Insolvency Officer” meant “any person duly appointed to administer and distribute
[LBIE’s] assets in the course of [its] Insolvency”, and the term “Insolvency”
extended to administration as well as liquidation. “Liabilities” were defined as “all
present and future sums, liabilities and obligations payable or owing by [LBIE]
(whether actual or contingent, jointly or severally or otherwise howsoever)”, a wide
definition. “Excluded Liabilities” were “Liabilities which are expressed to be, and
in the opinion of the Insolvency Officer of [LBIE], do, rank junior to the
Subordinated Liabilities [defined in turn as liabilities under the Loan] in any
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Insolvency of [LBIE]”. “Senior Liabilities” were “all Liabilities except the
Subordinated Liabilities and Excluded Liabilities”.
41. Clause 4 of the Standard Terms (“clause 4”) dealt with repayment, and it was
expressed to be “subject in all respects” to clause 5. Clause 4(4) provided that in the
event of certain defaults in repayment LBHI2 could, subject to giving prior notice,
“enforce payment by instituting proceedings for the Insolvency of [LBIE]”. Clause
4(7) stated that:
“No remedy against [LBIE] other than as specifically provided
by this [clause] 4 shall be available to [LBHI2] whether for the
recovery of amounts owing under this Agreement or in respect
of any breach by [LBIE] of any of its obligations under this
42. Clause 5 of the Standard Terms (“clause 5”) contained two sub-clauses of
relevance which provided as follows:
“(1) Notwithstanding the provisions of [clause] 4, the rights
of [LBHI2] in respect of the Subordinated Liabilities are
subordinated to the Senior Liabilities and accordingly payment
of any amount (whether principal, interest or otherwise) of the
Subordinated Liabilities is conditional upon –
(a) (if an order has not been made or an effective
resolution passed for the Insolvency of [LBIE] …)
[LBIE] being in compliance with not less than 120% of
its Financial Resources Requirement immediately after
payment by [LBIE] …; and
(b) [LBIE] being ‘solvent’ at the time of, and
immediately after, the payment by [LBIE] and
accordingly no such amount which would otherwise fall
due for payment shall be payable except to the extent
that [LBIE] could make such payment and still be
(2) For the purposes of sub-[clause] (1)(b) above, [LBIE]
shall be ‘solvent’ if it is able to pay its Liabilities (other than
the Subordinated Liabilities) in full disregarding –
Page 15
(a) obligations which are not payable or capable of
being established or determined in the Insolvency of
[LBIE], and
(b) the Excluded Liabilities.”
43. Clause 7 of the Standard Terms (“clause 7”) included undertakings by LBHI2
not without the consent of the Financial Services Authority (now the Prudential
Regulatory Authority) to:
“(d) attempt to obtain repayment of any of the Subordinated
Liabilities otherwise than in accordance with the terms of this
(e) take or omit to take any action whereby the
subordination of the Subordinated Liabilities or any part of
them to the Senior Liabilities might be terminated, impaired or
adversely affected.”
44. As explained above, the LBHI2 administrators contend that the subordinated
debt ranks ahead of statutory interest and non-provable liabilities (ie categories (6)
and (7) in the waterfall set out in para 17 above). Their case in relation to nonprovable liabilities is that, although they are “Liabilities” within clause 1, they are
“not payable or capable of being established or determined in the Insolvency of
[LBIE]” within the meaning of clause 5(2)(a), and therefore their existence does not
prevent repayment of the subordinated debt. So far as statutory interest is concerned,
the LBHI2 administrators’ primary case is that it is not one of the “Liabilities” within
clause 5(2)(a), because, although very widely defined, the term “Liabilities” in
clause 1 is limited to obligations “payable or owing by [LBIE]”, and statutory
interest is payable and owing by LBIE pursuant to rule 2.88(7), which does not
render its payment the responsibility of the company in administration. The LBHI2
administrators alternatively contend that, if statutory interest is nonetheless within
“Liabilities”, it is excluded from clause 5(2)(a) for the same reason as non-provable
45. I turn first to deal with statutory interest, and will then deal with non-provable
liabilities. Finally, I will discuss the question of proving for the subordinated debt.
Page 16
Subordination to statutory interest
46. It is convenient to discuss this issue in relation to liquidations, although the
analysis that follows in paras 47 to 55 below is equally applicable to administrations
– unsurprisingly, given that, as explained in para 28 above, rule 2.88(7), (8) and (9)
are in effectively the same terms as section 189(2), (3) and (4) respectively.
47. The effect of section 189 is that a company in liquidation ceases to be liable
for contractual interest which falls due after it goes into liquidation, and instead, in
the event of a surplus, there is a liability for statutory interest.
48. LBHI2’s first contention is that statutory interest is not payable “in the
Insolvency” of LBIE within the meaning of clause 5(2)(a) – ie in an insolvency
process of LBIE, as the LBHI2 administrators put it in argument. As a matter of
ordinary language, it is hard to see any satisfactory basis for this contention. It is
clear, indeed it is common ground, that statutory interest is payable by a liquidator
pursuant to the provisions of section 189, and it is in respect of interest on debts
which have been indubitably proved and paid “in the Insolvency”. Briggs LJ rightly
said in the Court of Appeal, at [2015] Ch 50, para 190, that “payment of statutory
interest” is “plainly” a “part of the winding-up scheme”, and that it is therefore not
easy to see why statutory interest is not payable “in the Insolvency”.
49. The LBHI2 administrators, however, argue that the expression “obligations
which are not payable … in the Insolvency” in clause 5(2)(a) effectively means
obligations which are not capable of being the subject matter of a proof. That does
not seem to me to accord with the natural meaning of the expression “in the
Insolvency”. Further, I can see no good commercial reason to exclude statutory
interest from the “obligations” which fall within clause 5(2)(a). Contractual interest
on provable claims falling due before the administration date or liquidation date (ie
the date on which the company concerned goes into administration or liquidation as
the case may be) would undoubtedly be such an obligation, and it is hard to see any
business sense in excluding interest which falls due after that date from the
expression, bearing in mind the overall commercial purpose of the Loan. The fact
that interest falling due after the liquidation date is treated somewhat differently in
the insolvency legislation, and therefore in the waterfall, does not seem to me to be
a good reason for treating it differently for the purposes of clause 5. Of course, clause
5 could have been expressed in a way which had such an effect, but my point is that
given that, as drafted, it does not naturally read as having that effect, there is no
commercial reason for rejecting its natural meaning.
50. The LBHI2 administrators also argue that the need for consistency in the
application of clause 5(2) supports its contended interpretation, because statutory
Page 17
interest would, as it were, be excluded from any solvency test if LBIE was not
subject to insolvency proceedings. I accept that factual premise, but I do not accept
that it assists the LBHI2 administrators’ argument. The fact that an expression has a
single meaning self-evidently does not prevent it from producing different outcomes
in different circumstances. There are inevitable and often substantial differences
between a company which is in insolvency proceedings and a company which is not.
The conclusion reached by the courts below did not involve giving a different
meaning to clause 5(2) when applied to a company in insolvency proceedings from
that which it would have when applied to a company not in such proceedings. If
LBIE, not being in such proceedings, had failed to pay interest on a debt due, its
liability for interest would be an “obligation”; and it seems consistent with this that,
if LBIE is in insolvency proceedings, any interest payable on a sum due until
payment is also an “obligation”. Nor do I consider that the LBHI2 administrators
derive any assistance from the fact that “Insolvency” includes a foreign insolvency.
51. The second contention raised by the LBHI2 administrators is that any
statutory interest is not “payable or owing by [LBIE]” within the definition of
“Liabilities” in clause 1. Statutory interest cannot give rise to a provable debt, as it
is only payable out of a surplus after payment of proven claims in full, but that would
not prevent it being within the expression “Liabilities”. More powerfully, the LBHI2
administrators argue that section 189(2) (which is set out in para 28 above) is worded
in such a way as to make it clear that the liability to pay statutory interest is not an
obligation on the part of the company concerned, and that any such obligation is
imposed on the liquidator. The LBHI2 administrators point to the fact that, when a
company is in liquidation, its assets are under the custody, control and management
of the liquidator, who has statutory duties, including the duty to comply with section
52. It is true that the company in liquidation cannot be sued for the purpose of
enforcing section 189, and indeed that no claim can be made against the company if
section 189 is infringed, because the relevant claim should be made against the
liquidator: see the discussion in In re HIH Casualty & General Insurance Ltd [2006]
2 All ER 671, paras 115-121. However, in my judgment, that does not mean that
statutory interest is not “payable or owing by” the company concerned, at least so
far as the meaning of the contractual definition of “Liabilities” in clause 1 is
53. Section 189(2) effectively confirms that interest, which would, in the absence
of the liquidation, normally be expected to be contractually payable by the company
from the liquidation date until repayment of the principal, is payable in the
liquidation, but only if there is a surplus. Possibly because the effect of a liquidation
is thought to be like that of a judgment in that it stops contractual interest running,
or possibly as compensation for such interest ranking below unsecured provable
debts, section 189(4) gives a creditor the option of claiming such interest at the
Page 18
judgment debt rate rather than the contractual rate. Given that the creditor is owed
the debt until the date of repayment, and given that the company would normally
expect to pay interest on the debt to the creditor until that date, it would, as
mentioned in paras 49 and 50 above, be surprising if the liability for this interest was
not treated as that of the company.
54. Further, the LBHI2 administrators’ case proves too much. If payment of
interest pursuant to section 189(2) is not treated as “payable and owing” by the
company, because it is payable and owing by the liquidator, then it would appear to
follow that even provable debts are not “payable and owing” by a company in a
winding-up. As Millett LJ explained in Mitchell v Carter, In re Buckingham
International Ltd [1997] 1 BCLC 673, 684, the making of a winding-up order
“divests the company of the beneficial ownership of its assets”, and those assets
become “subject to a statutory scheme for distribution among the creditors and
members”, who have the right to have them administered by the liquidator “in
accordance with the statutory scheme”. When a company goes into liquidation and
a creditor proves in respect of a debt, it seems to me that the logic of the case
advanced by the LBHI2 administrators would be that the debt is no longer “payable
and owing” by the company: there is a proof which is payable and owing out of the
assets got in by the liquidator. If, as it must be, that argument is rejected, it would
be on the basis that a payment out of the assets of the company by the liquidator of
a proof which statutorily replaces a debt of the company should be treated as
satisfying a liability “payable and owing” by the company. If that is so, it seems to
me very hard to justify a different conclusion in relation to payment of statutory
interest by a liquidator under section 189.
55. If payment of interest under section 189(2) involves paying a “sum” or
meeting a “liabilit[y]” which is “payable or owing by” the company concerned
within the meaning of clause 1, payment of interest by an administrator under rule
2.88(7) seems to me to be a fortiori. As Lewison LJ pointed out at [2016] Ch 50,
para 45, when paying the interest, the administrator acts as agent of the company
pursuant to paragraph 69 of Schedule B1, and, as in the case of a company in
liquidation, legal title to the assets from which the interest is paid remains vested in
the company.
56. Accordingly, I consider that under the terms of the Loan Agreements
statutory interest enjoys priority over the repayment of the subordinated debt. In any
event, in the light of my conclusion in para 63 below as to the priorities as between
the non-provable liabilities and the subordinated debt, it seems to me that statutory
interest must take priority over the subordinated debt as explained in paras 65 and
66 below.
Page 19
Subordination to non-provable liabilities
57. In the Court of Appeal at [2016] Ch 50, para 60, Lewison LJ accepted that a
non-provable liability was “neither determined nor established in the Insolvency of
[LBIE]”. However, he said that, as a “liquidator’s duties continue until the moment
comes to make a distribution to members [and] non-provable liabilities rank higher
than members”, “the liquidator must pay those claims before making a distribution
to members”, and accordingly those claims are “payable in the Insolvency”. MooreBick and Briggs LJJ not only agreed that non-provable liabilities were “payable”,
but also considered that they were “established or determined”, “in the Insolvency”
of LBIE.
58. In my judgment, a liquidator who meets a non-provable liability of the
company is making a payment “in the Insolvency”, in the sense in which those words
are used in clause 5(2)(a). It is true that there is no express reference to non-provable
liabilities, and therefore inevitably no mention of any duty to meet such liabilities,
in the 1986 legislation. However, section 107 states that, in a voluntary liquidation,
the liquidator must apply the company’s assets “in satisfaction of the company’s
liabilities” prior to distributing them to members; and section 143 requires a
liquidator in a winding-up by the court to distribute “the assets of the company …
to the company’s creditors, and, if there is a surplus, to the persons entitled to it.”
As Briggs LJ pointed out at [2016] Ch 50, paras 185 to 189, these stipulations,
properly interpreted, require a liquidator to meet the company’s non-provable
liabilities out of any assets remaining after paying proven debts and statutory interest
in full, before paying over any outstanding sum to the members of the company.
59. In In re T & N Ltd [2006] 1 WLR 1728, paras 106 and 107, David Richards
J explained that, although there was no express reference in the 1986 legislation to
non-provable liabilities, once all liabilities for which statutory provision has been
made have been met by a liquidator, anyone with a non-provable claim would no
longer be precluded from enforcing it by proceedings. Accordingly, a liquidator will
in practice have to pay off non-statutory liabilities out of the company’s remaining
assets before distributing to shareholders any surplus remaining after payment of
provable debts and statutory interest.
60. Thus, while it is true that there is no provision in the 1986 legislation which
specifically requires a liquidator to pay non-provable liabilities, he is in practice
obliged to pay off any such claims. Otherwise, if there would still be a surplus after
paying off non-provable liabilities in full, he could not distribute that remaining
surplus to members, and, even if there would be no such remaining surplus, he would
be in an impossible position, able neither to pay the money he held to satisfy the
non-provable liabilities nor to pay it over to members. Support for that conclusion
may be found in a number of first instance cases, including Gooch v London Banking
Page 20
Association (1886) 32 Ch D 41, 48, per Pearson J, In re Fine Industrial Commodities
Ltd [1956] Ch 256, 262, per Vaisey J, and In re Islington Metal & Plating Works
Ltd [1984] 1 WLR 14, 23-24, per Harman J, and also in the Court of Appeal in In re
Lines Bros Ltd (In Liquidation) [1983] Ch 1, 21, per Brightman LJ.
61. At [2016] Ch 50, para 185, Briggs LJ said that, although “the statutory
scheme provides no detailed machinery for dealing with” non-provable liabilities,
“they have always been dealt with in accordance with Judge-made principles”.
Given that the company concerned remains in liquidation, that the duties of the
liquidator have not been completed (as payment to members of any final surplus is
part of his express duty), and that, before they can be completed, he must in practice
satisfy any non-provable liability by making a payment, it appears to me that such a
payment would be effected “in the Insolvency” even if sections 107 and 143 did not
have the effect described in para 58 above. The proposition that a liquidator is liable
to pay off non-provable liabilities if there is a surplus after paying statutory interest
is an example of a principle of Judge-made law which survives despite the
increasingly full codification of insolvency law. Not merely is there nothing
inconsistent with the principle in the 1986 legislation: the principle is effectively
necessarily implied by the provisions of the legislation, and those responsible for
drafting the legislation must have been well aware of the long-standing and
consistent judicial approval of the principle.
62. The same conclusion must apply to a distributing administration, although it
is fair to say that an administrator would not necessarily face the quandary identified
in para 60 above. Whether a person to whom a company in administration has a nonprovable liability would be a “creditor” for the purposes of paragraph 65 of Schedule
B1 was not argued, and I prefer to leave the point open. It is unnecessary to decide
the point because it seems to have been accepted in argument that, if non-provable
liabilities are “payable in a liquidation”, they are “payable in the Insolvency of
[LBIE]” within the meaning of clause 5(2)(a). In my view, that is plainly right.
“Insolvency” in clause 5(2)(a) would appear to be a generic expression. In any event,
if an administrator cannot pay off non-provable liabilities, then, where there is a
surplus once he has paid off all proofs and all statutory interest, he would have to
put the company into liquidation, whereupon the liquidator would have to pay off
any non-provable liabilities.
63. Accordingly, in agreement with the Court of Appeal and the Judge, I consider
that the non-provable liabilities are payable “in the Insolvency”. It is unnecessary to
resolve the small difference between Moore-Bick and Briggs LJJ and Lewison LJ
as to whether they are also “established or determined” in the insolvency.
Page 21
Conclusion as to priorities
64. Looking at the issue from a broader, purposive, perspective, the conclusion
that both statutory interest and non-provable liabilities have priority over the
subordinated debt seems to me to accord both with the eponymous nature of the
subordinated debt, and with what a reasonable reader would expect from the general
thrust of the terms of the Loan Agreements. The purpose of the parties to those
agreements was to ensure that all those with claims on LBIE would have priority
over the holders of the subordinated debt. In summary terms, the perception of the
reasonable reader would be that the holders of the subordinated debt were to be at
the end of the queue – and, in the event of an Insolvency, at the bottom of the
waterfall. As to the two categories over which LBHI2 claims priority, the only
difference between non-provable liabilities and statutory interest in the present
connection is that statutory interest is specifically provided for in the 1986
legislation, whereas non-provable liabilities are not. However, they are both
categories of liabilities which have to be met after paying out proofs in full and
before any balance can properly be used for another purpose (ie paid over to the
members, or rendered subject to a liquidation). It would therefore be surprising if
they were treated differently for the purposes of a provision such as clause 5(2)(a).
65. Even if (contrary to my conclusion in para 56 above) statutory interest were
not “payable or owing by [LBIE]”, then, because non-provable liabilities rank ahead
of the subordinated debt, I would nonetheless have concluded that statutory interest
should rank ahead of the subordinated debt. It would not, in my view, be legally
possible for the subordinated debt to rank ahead of statutory interest but behind nonprovable liabilities. The legislative provisions (as interpreted and, arguably, as
extended, by judges) make it clear that statutory interest must be paid off before
non-provable liabilities; and the terms of the Loan Agreements, as contractual
documents, cannot vary the order in which statutory interest and non-provable
liabilities are payable in accordance with the waterfall (unless all those who would
thereby be prejudiced have agreed, and there is no public policy reason against
giving effect to the variation).
66. Although it may at first sight appear to be equally arguable in terms of
narrower logic that the subordinated debt should, in these circumstances, rank ahead
of statutory interest and non-provable liabilities, I do not consider that that could
possibly be right. Once it is accepted that the terms of the Loan Agreements mean
that the subordinated debt ranks behind non-provable liabilities, it must necessarily
follow that it ranks behind statutory interest. In agreement with all the parties on this
appeal, I can see no objection to giving effect to a contractual agreement that, in the
event of an insolvency, a contracting creditor’s claim will rank lower than it would
otherwise do in the “waterfall”. James LJ’s dictum in Ex p McKay, Ex p Brown; In
re Jeavons (1873) LR 8 Ch App 643, 647 that a person “is not allowed, by stipulation
with a creditor, to provide for a different distribution of his effects in the event of
Page 22
bankruptcy from that which the law provides” is correct, albeit that it should be
treated as subject to two qualifications. First, that it does not apply where the
“different distribution” involves the creditor in question ranking lower in the
waterfall than the law otherwise provides. Secondly, even if the “different
distribution” involves him ranking higher than he otherwise would, the dictum
would not apply if all those who are detrimentally affected by his promotion have
agreed to it (unless there was some public policy reason not to accede to the
“different distribution”).
67. Finally, it is right to acknowledge that this conclusion involves giving little,
if any, meaning to the expression “in the Insolvency” in clause 5(2)(a); the argument
that it was intended to exclude claims which were unenforceable as a matter of
general law (eg statute-barred claims or foreign tax demands) is not very attractive.
However, the fact that an expression in a sentence, especially in a very full
document, does not, on analysis, have much, if any, effect if it is given its natural
meaning is not, at least on its own, a very attractive or a very convincing reason for
giving it an unnatural meaning. As Lord Hoffmann put it in Beaufort Developments
(NI) Ltd v Gilbert Ash NI Ltd [1999] AC 266, 274, “the argument from redundancy
is seldom an entirely secure one. The fact is that even in legal documents (or, some
might say, especially in legal documents) people often use superfluous words”. And,
if one has to choose between giving a phrase little meaning or an unnatural meaning,
then, in the absence of a good reason to the contrary, the former option appears to
me to be preferable.
When can LBHI2 lodge a proof?
68. The LBIE administrators contend that it would not be open to LBHI2 to lodge
a proof in LBIE’s administration for the subordinated debt until all “Senior
Liabilities” have been paid in full. David Richards J accepted that contention, on the
ground that clause 7(d) and/or (e) had the effect of precluding the lodging of a proof.
The Court of Appeal disagreed, and considered that LBHI2 could prove for the
subordinated debt at any time. However, they said that, until the Senior Liabilities
had been paid in full, the subordinated debt would be a contingent debt, and because
of the terms of the Loan, the correct value to ascribe to such a proof before the Senior
Liabilities have all been paid would be nil, as nothing could be paid on the proof. If
and when the Senior Liabilities were met in full, the Court of Appeal said that the
proof in respect of the subordinated debt would be revalued pursuant to rule 2.79 –
see at [2016] Ch 50, para 41.
69. In my judgment, David Richards J’s view on this point is to be preferred. The
Court of Appeal’s view appears to me to raise a logical problem. If, at the time such
a proof was lodged, there was a chance that the Senior Liabilities would be paid in
full, then, as with any other debt which rests on a contingency that may occur, a
Page 23
valuation of that proof would not be nil: it would have to be a figure which
discounted the sum due, in order to allow for the contingency not occurring.
However, if the proof is ascribed a valuation greater than nil, it would have to be
paid out on any distribution made prior to the satisfaction in full of other proved
claims (unless there was one payment of 100%). As David Richards J said, that
would appear to fall foul of clause 7. Further, any dividend would be paid out before
any statutory interest or any non-provable liabilities had been paid off, which would
be inconsistent with the conclusions I have just expressed.
70. It therefore follows that, in my view, it would not be open to LBHI2 to lodge
a proof in respect of the subordinated debt until the non-provable liabilities have
been paid in full, or at least until it is clear that, after meeting that proof in full and
paying any statutory interest due on it, the non-provable liabilities could be met in
full. As soon as that has happened, there would, subject to what I say in the next
paragraph, be nothing to stop LBHI2 lodging a late proof.
71. On the face of it at any rate, it seems a little strange that a proof can be, or
has to be, lodged for a debt which ranks after statutory interest (which can only be
paid out of a “surplus”) and non-provable liabilities. It may be that the proper
analysis is that the subordinated debt is a non-provable debt which ranks after all
other non-provable liabilities. It is unnecessary to decide that point, and, as it was
not argued, I say no more about it.
72. Accordingly, I would restore para (i) of the order made by David Richards J,
because, although I agree with the Court of Appeal that he was right as to the ranking
of the subordinated debt, I disagree with the Court of Appeal, and agree with the
Judge, as to when the subordinated creditors can prove for the subordinated debt
(assuming that they can prove).
The currency conversion claims
73. Many of LBIE’s creditors were owed unsecured debts payable in foreign
currencies. Rule 2.86 applies to such debts and it is set out in para 26 above. In
effect, it provides that such debts are to be converted into sterling at the official rate
on the administration date. As also explained in para 26 above, rule 4.91 is in
effectively identical terms in relation to proving foreign currency debts in
Page 24
74. Given that LBIE is able to pay all external creditors in full, it is rightly
common ground that its foreign currency creditors must be paid in full on proved
claims, which have to be converted into sterling by reference to the exchange rates
prevailing at the date LBIE went into administration. However, in a case where
sterling has depreciated against the relevant foreign currency between the
administration date and the date (or dates) on which the proved debt is paid, CVI
GVF (Lux) Master SARL (“CVI”), effectively representing the foreign currency
creditors of LBIE, contends that there would be a contractual shortfall, which they
should be able to recover as a non-provable debt. The LBHI2 administrators, on the
other hand, contend that there is no room for any such claim, on the ground that the
foreign currency debts should be treated as satisfied when the proved claims based
on those debts have been paid in full.
75. CVI argues that there is a distinction between the rights of creditors inter se
and the rights of creditors as against the company. The purpose of the regime
contained in Chapter 10 of Part 2, runs the argument, is to ensure that the creditors
of a company (or, to be more precise, those creditors falling in category (5) in the
waterfall described in para 17 above) in a distributing administration are treated
equally, and that distributions to them are effected in an orderly and equitable
manner. In particular, it is said that, as between the creditors it is important to have
a date by reference to which all debts and claims are valued, and that is the reason
for rule 2.86. According to CVI’s argument, at least in the absence of express words
or necessary implication, the provisions of Chapter 10 of Part 2, and in particular of
rule 2.86, do not impinge on the underlying contractual debt between the company
and a creditor. If this is right, then so long as an administrator is unable to meet the
creditors’ proofs in full, no question of an effective claim for the currency shortfall
could arise as there would be no money to meet it, but, if there is money left over
after all the creditors and all statutory interest have been paid in full, the foreign
currency creditors should be entitled to claim for any shortfall.
76. By contrast, the LBHI2 administrators contend that payment in full of a proof
based on a foreign currency debt in accordance with rule 2.86 (as with rule 4.91)
satisfies the underlying debt. That contention may be advanced on two bases. The
primary, narrower, basis simply relies on the effect of rule 2.86, or rule 4.91, read in
its context in the 1986 Rules. Thus, the primary contention is that rule 2.86
mandatorily converts the foreign currency debt into sterling, and renders the sterling
equivalent of the debt provable in the administration, so that payment in full of the
proved, sterling, sum, together with statutory interest, satisfies the claim of the
creditor, who has no further claim against any surplus.
77. The alternative, wider, basis for the LBHI2 administrator’s case is that
payment in full of a proved debt, as assessed in accordance with any of the
provisions of Part 10 of Chapter 2, or Chapter 9 of Part 4, of the 1986 Rules, satisfies
the underlying contractual debt. The resolution of this alternative contention raises
Page 25
the rather fundamental question whether the payment in full of a proved debt, as
assessed in accordance with the 1986 Rules, satisfies the underlying contractual debt
or whether the underlying contractual debt survives the payment in full of the proved
claim based upon it (except where the Rules expressly provide otherwise).
78. David Richards J agreed with CVI on this point essentially on the wider of
these two contentions, and that is reflected in paras (ii) and (iii) of the order which
he made. The majority of the Court of Appeal (Moore-Bick and Briggs LJJ) agreed
with this conclusion and held that the foreign currency creditors could claim any
contractual shortfall as a non-provable liability. Lewison LJ dissented on this point
and would have found for the LBHI2 administrators.
79. I propose to address this issue by considering first the narrower basis for the
LBHI2 administrators’ case, and then the wider basis.
The narrower issue: foreign currency claims and rules 2.86 and 4.91
80. Where sterling has depreciated relative to the relevant currency since the
company went into administration or liquidation, a foreign currency creditor who is
paid out on his proof will have received less at the time of payment than he would
have been contractually entitled to receive. Accordingly, at any rate at first sight, it
is hard to quarrel with the argument that, if it turns out that there is a surplus, it
would be commercially unjust to distribute it to the members without first making
good the shortfall suffered by the foreign currency creditor. CVI relies on Miliangos
v George Frank (Textiles) Ltd [1976] AC 443, where it was decided that a court
could award damages in foreign currency. In that case, Lord Wilberforce said at p
465 that “justice demands that the creditor should not suffer from fluctuations in the
value of sterling”, as “[h]is contract has nothing to do with sterling: he has bargained
for his own currency and only his own currency”.
81. Nonetheless, CVI’s case seems to me to be at odds with the provisions of rule
2.86 read in the context of the 1986 Rules. Before turning to those Rules, it is
appropriate to consider some judicial dicta and policy statements which preceded
the 1986 legislation.
82. As the courts below recognised, there are relevant judicial observations in
two cases relating to foreign currency claims in liquidations under the insolvency
code prevailing immediately before the 1986 legislation (namely the 1948 Act and
the 1949 Rules). In In re Dynamics Corporation of America [1976] 1 WLR 757,
Oliver J in passages at 764H-765A, 767E-G and 786D-F, quoted by Lewison LJ at
[2016] Ch 50, para 66-68, said that he considered that the correct analysis was that
Page 26
the contractual debt was converted into the right to prove, and that “the obligation
of the company … is to pay whatever is the sterling equivalent [of the foreign
currency debt] at [the date of liquidation]”. Although the issue in that case was not
the same as that in this case, it appears to me that the observation just quoted was
part of the ratio of the decision, and it accords with the LBHI2 administrators’ case.
On the other hand, in In re Lines Bros Ltd (In Liquidation) [1983] Ch 1, 21F-G,
Brightman LJ said that he had “not heard any convincing objection” to the notion
that, in a solvent liquidation, the liquidator should “make good the shortfall before
he pays anything to the shareholders”. That was a tentative obiter observation, but
it indicates at least a leaning in favour of what is CVI’s case. The other members of
the Court, Lawton and Oliver LJJ, do not seem to have directly addressed the point,
although Lewison LJ may well be right in suggesting that Lawton LJ tended towards
the contrary view, ie that adopted by Oliver J in Dynamics Corporation [1976] 1
WLR 757.
83. It is in my opinion dangerous to rely on judicial dicta as to the effect of an
earlier insolvency code, given that the 1986 legislation amounts to what Sealy and
Milman op cit describe as including “extensive and radical changes in the law and
practice of bankruptcy and corporate insolvency, amounting virtually to the
introduction of a completely new code”. Accordingly, while the dicta in Dynamics
Corporation [1976] 1 WLR 757 and Lines Brothers [1983] Ch 1 are in point, they
are of limited value in themselves both because they are not mutually consistent and
because they are based on different legislative provisions under a different code.
However, they can be said to suggest that there are principled grounds for supporting
either conclusion contended for in this case, and that there is no judicially
established practice or understanding on the issue raised by the foreign currency
84. Turning to reports produced shortly before the 1986 legislation, in its 1981
Working Paper No 80 on Private International Law Foreign Money Matters, the
Law Commission discussed in some detail the question of the date of conversion of
foreign currency debts in insolvencies. The purpose of the Working Paper was to
indicate the Law Commission’s “provisional conclusions” on a number of legal
issues involving foreign currencies (see para 1.4 of its Final Report mentioned in
para 87 below). Paras 3.39 to 3.47 of the Working Paper discussed the specific issue
of foreign currency claims in insolvencies. Paras 3.39 to 3.45, which included
reference to Miliangos [1976] AC 443, Dynamics Corporation [1976] 1 WLR 757,
and Lines Brothers [1983] Ch 1, contained a fairly full analysis of the arguments. In
particular, para 3.43 expressed agreement with Oliver J’s explanation in Dynamics
Corporation [1976] 1 WLR 757 as to why the reasoning in Miliangos [1976] AC
443 should not apply to foreign currency creditors’ claims in liquidations, namely
(i) “the form of judgment approved in Miliangos did not relate to a creditor’s
substantive right”, and (ii) the company’s “obligation … in relation to a foreign
money debt … was an obligation to pay the sterling equivalent of that sum in
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question at [the date of the winding-up order]”. Para 3.43 also explained that
adjustment of claims by foreign currency creditors as argued for by CVI in this case
“would extend to the field of liquidation and bankruptcy the difficult problems
connected with set-off” which had been discussed earlier in the Working Paper.
85. In para 3.46 of the Working Paper, the Law Commission went on to consider
and reject the suggestion that, where “the company is found to be solvent”, “foreign
currency creditors should be compensated from the assets of the company or the
bankrupt for adverse exchange rate fluctuations between the date of the relevant
order and the date of actual payment”. In rejecting that suggestion, the Law
Commission made the point that this would produce an “unacceptable …
discrimination between foreign currency debts depending on whether the exchange
rates have moved to the advantage or disadvantage of the creditors”. The provisional
conclusion expressed in para 3.47 was that “we support the view of Oliver J. in the
Dynamics Corporation case that the date of the winding up order is the appropriate,
once-for-all, date for the conversion of every foreign currency debt on the windingup of both solvent and insolvent companies”.
86. In para 1308 of the 1982 Cork Report (referred to in para 10 above), the
Committee explained that “a primary purpose of the winding up of an insolvent
company [is] to ascertain the company’s liabilities at a particular date”, and
accordingly the reasoning in Miliangos [1976] AC 443 had no part to play on the
issue of the date as at which foreign currency debts should be converted into sterling
in a liquidation. In para 1309, the Cork Report “strongly recommend[ed] that any
future Insolvency Act should expressly provide that the conversion of debts in
foreign currencies should be effected as at the date of the commencement of the
relevant insolvency proceedings”. Importantly for present purposes, the Report then
stated that “we take the same view as the Law Commission (Working Paper No 80)
that conversion as at that date should continue to apply, even if the debtor is
subsequently found to be solvent”, and adding that “[t]o apply a later conversion
date only in the case where the exchange rate has moved to the advantage of the
creditor, but (necessarily) not where it had moved against him, would, in our view,
be discriminatory and unacceptable”.
87. The Law Commission adhered to the provisional view expressed in the
Working Paper when it published its Final Report on Private International Law
Foreign Money Liabilities, Law Com No 124, in 1983 (Cmnd 9064). At para 3.34
of its 1983 Report, the Law Commission identified the conclusion reached in para
1309 of the Cork Report, and emphasised that that conclusion applied “whether [the
company] is or is not solvent”. At para 3.35, the Law Commission referred to the
alternative suggestion that “conversion of a foreign currency obligation into sterling
… be effected at the latest practicable date – which would seem to be each occasion
on which it is decided to declare and pay a dividend”. And at para 3.36, the Law
Commission, while accepting that there were arguments both ways, rejected that
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alternative suggestion and stated that it “remain[ed] of the view which [was]
expressed in the working paper”.
88. Accordingly, it is quite clear that the “Cork Committee” and the Law
Commission each carefully addressed this very issue during the five years leading
up to the 1986 insolvency legislation, and reached the clearly expressed and firmly
held conclusion that foreign currency claims should be dealt with in solvent, as well
as insolvent liquidations, in the manner contended for by the LBHI2 administrators
in these proceedings. It is fair to say that the White Paper referred to in para 10 above
did not specifically refer to this issue, and that it stated that it did not agree with a
number of expressly identified recommendations in the Cork Report, but there is
nothing in it to suggest disagreement with the carefully considered and very recently
expressed views on the instant topic by the Law Commission and the Cork
Committee. Indeed, the very fact that rule 4.91 (which was in the 1986 Rules from
their inception, and applies to liquidations) is and was expressed as it is (ie
effectively the same as rule 2.86) strongly suggests that the 1986 legislation was
intended, on this aspect, to follow the views expressed in the Cork Committee and
the Law Commission.
89. In addition, the notion of foreign currency creditors having a possible second
bite also appears to be inconsistent with one of the purposes of the 1986 legislation
described in the White Paper, namely to “simplify” the insolvency process. Given
the general understanding as expressed in the reports referred to in paras 84 to 87
above was that the view expressed by Oliver J in Dynamics Corporation [1976] 1
WLR 757 represented the law before the changes embodied in the 1986 legislation,
it is scarcely consistent with the drive for simplicity that this simple one-stage
approach to conversion should be replaced by a potential two-stage process,
particularly when there is no provision in the 1986 legislation which can possibly be
said even to hint at such a process.
90. The 1949 Rules were silent so far as the treatment of foreign currency
creditors were concerned, and, at least until the decision in Dynamics Corporation
[1976] 1 WLR 757, the authorities seemed to suggest that a foreign currency debt
should be converted into sterling at the date it fell due. Given that the treatment of
foreign currency creditors in corporate insolvencies was expressly dealt with for the
first time in the 1986 Rules, it appears to me that there must be a presumption that
the new rule 2.86 was intended to spell out the full extent of a foreign currency
creditor’s rights, particularly, when one bears in mind the fact just mentioned that
the purpose of the 1986 legislation was to simplify and clarify the law.
91. The LBHI2 administrators’ argument is also supported by the fact that it is
common ground that, if sterling appreciates against the foreign currency in which
the debt is denominated after the date of administration, rule 2.86 would work to the
Page 29
benefit of the foreign currency creditor. I consider that it tells quite strongly against
CVI’s case that, if it is right, rule 2.86 would in effect operate as a one-way option
on the currency markets in a foreign currency creditor’s favour: a classic case of
“heads I win, tails I don’t lose”. This is a point which weighed heavily with the Law
Commission and the “Cork Committee” as explained in paras 84 to 87 above.
Further, it demonstrates that CVI’s argument would mean that foreign currency
creditors are treated more favourably than partly secured creditors or contingent
creditors, in respect of whom the 1986 Rules provide for post-proof adjustments
either way. The point is, I think, another reason which substantially undermines
CVI’s reliance on Lord Wilberforce’s observations in Miliangos [1976] AC 443,
465 cited in para 80 above, whose applicability to foreign currency claims in
liquidations was in any event, as explained above, rejected by Oliver J, the Cork
Report and the Law Commission.
92. Turning to rules which apply to other types of debts, the revaluation
provisions in rule 2.81 (and rule 4.86) appear to me to point against CVI’s case.
First, they are inconsistent with CVI’s argument that the rules in Chapter 10 of Part
2 (like the distribution rules in liquidations under Chapter 9 of Part 4 of the 1986
Rules) proceed on the basis that, as between the creditors, there is a date by reference
to which all debts and claims are valued (as explained in para 75 above). On the
contrary: I consider that that the clear implication of the second part of rule 2.81 is
that a contingent creditor should be able to be paid out on a distributing
administration by reference to the contractual value of his claim as at the date of
93. Quite apart from that, and perhaps more centrally for present purposes, given
that the 1986 Rules expressly provide that adjustments can be made to a proof for a
contingent debt if the contingency varies, it can be said with force that the natural
implication of there being no equivalent provision for a foreign currency debt is that
it was not intended to be adjustable. CVI’s argument thus appears to me to be
questionable because it effectively infers a non-provable back-door for a foreign
currency debt when there is no express provable front door to accommodate external
changes, in circumstances where there is an express provable front door to
accommodate external changes in relation to another type of debt.
94. There are other provisions of the 1986 Rules which are inconsistent with
CVI’s contention that the scheme of the 1986 legislation is to have a single date by
reference to which all debts and claims are valued, and which demonstrate that,
where the legislature wishes to revalue a claim by reference to the date of payment,
it so provides. Thus, rules 2.83 and 2.90 enable a creditor with security who proves
for the unsecured balance of his debt to vary the amount for which he proves in the
event of the creditor realising the security, or in the event of a change in the value
of the security, on a date subsequent to that on which he proved for his debt. And
Page 30
the set-off provisions of rule 2.85(3) which mandate setting off as at the date of the
declaration of a dividend are also inconsistent with CVI’s argument.
95. While the point has some limited force, I am not much impressed by CVI’s
argument that, on the LBHI2 administrators’ case, a company with foreign currency
debts could be put into voluntary liquidation for the sole purpose of benefitting from
rule 4.91. In the first place, although I accept that it is not a fanciful notion, it would
require very unusual facts before a voluntary liquidation, with its inconveniences
and costs, would be a sensible course for a company to take simply to crystallise its
foreign currency debts. Secondly, such a course would be very much of a gamble.
Foreign currency movements, especially in the short and medium term are
notoriously very unpredictable. Thirdly, any creditor could protect himself by
covering his position, albeit at a cost and with a degree of uncertainty.
96. For these reasons, as well as those expressed by Lord Sumption in para 194
below, I would allow the LBHI2 administrators’ appeal in relation to the foreign
currency claims issue on the basis of the primary, narrower, way in which they put
their case, namely the effect of rule 2.86 in its context. I should perhaps add that I
am not wholly convinced that there is a good reason for not having a provision
(similar to that in the second part of rule 2.81) which enables a proof in respect of a
foreign currency debt to be adjusted to take account of currency fluctuations either
way between date of proof and date of payment. While my conclusion means that is
not necessary to consider the wider, alternative way in which the LBHI2
administrators’ case is put, it may be helpful to express a preliminary view on the
issue, not least because it was the basis on which the Court of Appeal and David
Richards J reached a different conclusion from that which I have reached on the
foreign currency claims issue.
The wider basis: the effect of payment in full of a proof on a debt
97. The wider basis for the LBHI2 administrators’ case involves challenging the
correctness of a proposition which was well expressed by David Richards J at [2015]
Ch 1, para 110, namely that creditors’ contractual rights generally are “compromised
by the insolvency regime only for the purpose of achieving justice among creditors
through a pari passu distribution”, and are not affected by payment in full of a proof
in respect of the contract under which those rights arise (unless of course the 1986
Rules expressly so provide, as we are agreed that they do in relation to foreign
currency debts).
98. While I accept that there is much to be said for the view which the majority
of the Court of Appeal and David Richards J reached on this issue (and with which
Lord Sumption is inclined to agree), my current inclination is to the opposite effect.
Page 31
99. It is true that there are statements of high judicial authority which can be cited
to support the notion that a contractual claim can survive the payment in full of a
proof based on that claim. Thus, in In re Humber Ironworks and Shipbuilding Co
(1869) LR 4 Ch App 643, 647, having said that “when the estate is insolvent [the
Rule then in force] distributes the assets in the fairest way”, Giffard LJ explained
that “where the estate is solvent …, as soon as it is ascertained that there is a surplus,
the creditor … is remitted to his rights under his contract”. More recently, Lord
Hoffmann discussed the effect of proving for a contractual debt on the underlying
debt in the Privy Council case Wight v Eckhardt Marine GmbH [2004] 1 AC 47,
paras 26 and 27, as quoted by Lord Sumption in para 198 below. In particular, Lord
Hoffmann said that “[t]he winding up leaves the debts of the creditors untouched. It
only affects the way in which they can be enforced” and that “[t]he winding up does
not either create new substantive rights in the creditors or destroy the old ones”. In
the later Privy Council case Parmalat Capital Finance Ltd v Food Holdings Ltd (in
liquidation) [2008] BCC 371, para 8, Lord Hoffmann said that “a winding up order
does not affect the legal rights of the creditors or the company”.
100. Even ignoring the fact they were based on different insolvency codes, I do
not consider that the observations of Giffard LJ in Humber Ironworks LR 4 Ch App
643, 647 or of Lord Hoffmann in Wight [2004] 1 AC 147, paras 23 to 29 and
Parmalat Holdings [2008] BCC 371, para 8 can safely be treated as applying to the
wider issue raised on the LBHI2 administrators’ case. Humber Ironworks LR 4 Ch
App 643 was concerned with a creditor’s claim for interest between the date of
winding-up and payment of the principal, for which the Companies Act 1862 made
no provision. Accordingly, the court had to decide what Judge-made rule to adopt
in relation to such a claim, and it was decided that, in the case of a solvent company,
after payment of all principal debts, the liquidator should pay interest at the
contractual rate for the period in question. The court was concerned with the effect
of the absence of any rule for payment, not with the effect of a rule which stipulated
for payment.
101. The dicta in Wight [2004] 1 AC 147 must, as Lewison LJ said at [2016] Ch
1, para 94, on any view be no more than a broad generalisation, as they are selfevidently subject to important exceptions, including statutory set-off, disclaimer of
onerous property, and the treatment of future and contingent debts. Over and above
that, the case was concerned with a very different issue from that in this case. Lord
Hoffmann was making the point that the fact that a creditor proved for his debt did
not mean that the legal incidences of his underlying debt were affected. Thus, as the
proof was based on a contract whose benefit was subsequently lawfully transferred
by legislation from the proving creditor to a third party, the liquidators were held
entitled to reject the creditor’s proof. The case was therefore concerned with the
effect on the right to prove of a subsequent event which affected the creditor’s rights
under the underlying contract, not with the effect on the underlying contract of the
payment of a dividend in respect of a proof. In Parmalat Capital [2008] BCC 371,
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Lord Hoffmann was describing the effect of a winding-up order, not the effect of
proving for a debt, let alone the effect of payment of a dividend on a proof.
102. It is right to mention Financial Services Compensation Scheme Ltd v Larnell
(Insurances) Ltd (in liquidation) [2006] QB 808, where the Court of Appeal was
concerned with the current legislation, and the reasoning in Wight [2004] 1 AC 147
was followed. However, no consideration appears to have been given as to the
possibility of the law having changed, and in any event, the case was not concerned
with the effect on the underlying debt of payment of a proof. (While it is strictly
unnecessary to express a view on the point, it is right to add that, at any rate as at
present advised, I consider that the actual outcome of those three cases was correct,
and, through the medium of rules 2.79 and 2.80 and rules 4.84 and 4.85, the outcome
would respectively have been the same in an administration and a liquidation under
the 1986 legislation.)
103. I accept that the dicta in Humber Ironworks LR 4 Ch App 643, Wight [2004]
1 AC 147 and, arguably, Parmalat Capital [2008] BCC 371, at least if read out of
their context, suggest that paying a 100% dividend in respect of a proof does not
necessarily discharge the underlying contractual debt. However, as explained above,
in none of those cases was that question being addressed or even considered, and I
do not think it is safe to proceed on the basis that the dicta were intended to apply to
it. It cannot be doubted that the dividend must at least in part satisfy the underlying
contractual debt, and therefore it does affect the creditor’s rights. In any event, it
seems to me that the issue arising from the LBHI2 administrators’ wider contention
must be resolved by considering the relevant provisions of the applicable insolvency
code, namely the 1986 legislation, in their context.
104. It appears to me that there is a strong case for saying that it would be
inconsistent with the general thrust of Chapter 10 of Part 2 (or indeed Chapter 9 of
Part 4) of the 1986 Rules that a debt, which has been the subject of a proof that has
been met in full, nonetheless includes a component which is somehow capable of
resurrection. There are provable debts and non-provable debts, but I consider that it
is inherently rather unlikely that the legislature intended that there could be a class
of debts which, while wholly provable, may nonetheless transpire to have a nonprovable element. In other words, the notion of a category of hybrid debt with a
presently provable element and a contingently unprovable element seems
improbable, particularly bearing in mind that the 1986 legislation was intended to
simplify and that its policy was to render as many debts as possible provable (see
paras 10 and 33 above).
105. Many of the rules contained in Chapter 10 of Part 2 (and the equivalent rules
relating to liquidations in Chapter 9 of Part 4 of the 1986 Rules) appear to me to
support the notion that a proving creditor should be treated as having had his
Page 33
contractual rights fully satisfied once he is paid out in full on his proof. I have in
mind the provisions for revaluation of underlying contingent claims up to the date
of payment of the proof in rule 2.81, the allowance for adjusting partly secured
claims up to the date of payment in rules 2.83 and 2.94, the rules regarding set-off
in rule 2.85 the provisions relating to interest in rule 2.88(9), as well as the 5%
discount rate on future debts in rule 2.105 – and of course rule 2.86 as discussed
above (and the equivalent rules in Chapter 9 of Part 4).
106. There is a powerful case for saying that the fundamental rule 2.72(1) appears
to me to be expressed in terms which support the notion that, where a creditor proves
for a debt, his contractual rights as a creditor are satisfied if his proof is paid in full.
By submitting a proof, a creditor is seeking “to recover his debt in whole or in part”.
The words “or in part” plainly refer to a case where part of the debt is protected by
security, a possibility which is specifically catered for in rules 2.83, 2.93 and 2.94.
107. The suggestion that an unsecured foreign currency creditor who proves for
the totality of the sum which he is owed at the time of his proof is seeking to recover
only “part” of his debt appears to me to be self-evidently wrong. Accordingly, I
would have thought that the natural import of rule 2.72 (and the similarly worded
rule 4.73 in the case of liquidations) is that, save where the debt is partially secured,
a creditor is treated as seeking to recover his debt “in whole” when he proves. If that
is right, it would seem to me to follow that, if and when a foreign currency debt,
which has been converted into a sterling-denominated proof in accordance with rule
2.86, is paid in full, the debt has been recovered “in whole”. On that basis, I consider
that it may be said to follow that there is no basis upon which the foreign currency
creditors can base their claims for a contractual shortfall.
108. The notion that a creditor who proves in a liquidation is “wishing to recover
his debt in whole or in part” was first introduced in the 1986 legislation. The
equivalent provision to rule 4.73 of the 1986 Rules in the 1949 Rules was rule 91,
which provided that, subject to certain exceptions, “every creditor shall … prove his
debt”. This change in wording makes it unsafe to cite judicial decisions or
observations as to the effect of proving under the previous insolvency legislation, or
indeed under insolvency legislation in other jurisdictions, as a reliable guide as to
the effect of proving under the 1986 Rules. Indeed, the change in wording is
consistent with the notion that a change in substantive law was contemplated. I doubt
that this analysis can be answered by characterising rule 2.72(1) as a purely
administrative provision: it is a provision which should be given its natural meaning,
at least in the absence of good reason to the contrary.
109. The way in which rule 2.72 is expressed is significant not just in itself, but
also because weight is put by CVI on the opening words of rule 2.86, namely “[f]or
the purpose of proving …” (see eg per Briggs LJ in the Court of Appeal at [2016]
Page 34
Ch 50, para 148). Yet, if, as appears to me to be the position, the effect of rule 2.72
is that proving for a debt involves the creditor seeking to recover the debt in whole,
and this means that payment in full of the proof satisfies the debt, then the opening
words of rule 2.86 take the instant debate no further. In any event, I do not agree
with the suggestion that, on the view I incline to favour, the opening words of rule
2.86 are “otiose” (as Briggs LJ put it at [2016] Ch 50, para 150). The rule would
have been oddly expressed if the opening words had been omitted.
110. In support of the contrary view, some reliance has been placed on the
contrasting legislative provisions relating to bankruptcy. Bankruptcy is different
from liquidation not least because (i) the bankrupt normally survives the bankruptcy
through discharge, whereas the liquidation of a company is usually followed by its
dissolution, and (ii) the statutory history of the two codes is different, and many of
the differences have survived into the 1986 legislation. It is true that rule 6.96, which
applies in bankruptcy, is expressed in the same way as rules 2.72 and 4.73, but I do
not consider that takes matters any further. If a creditor who proves in a bankruptcy
is paid 100p in the pound, I know of no reason why his debt should not be treated as
having been satisfied in the same way as a creditor in a liquidation or administration.
Sections 279 to 281 do not appear to me to be in point because, as I read them, they
are concerned with releasing a bankrupt from liabilities which have not been
111. The absence of any provision dealing with joint obligors or sureties where a
creditor of a company is paid 100p in the pound seems to me to take matters little
further. On any view, the rights of such parties would have to be assessed by the
court in a case where a creditor is paid less than 100p in the pound, as has been the
position in relation to disclaimers by liquidators under section 181, where the courts
have had to work out the consequences for sureties – see Hindcastle Ltd v Barbara
Attenborough Associates Ltd [1997] AC 70. It is true that section 281(7) deals with
joint obligors and sureties of a bankrupt, but that section, which re-enacts a statutory
provision in the 1914 Act, appears to be intended to apply to cases where the creditor
of a bankrupt has not been paid 100p in the pound. Quite apart from this, section
281(7) only applies where the bankrupt is discharged, a situation which has no
equivalent in corporate insolvency. Just as in the case of joint obligors or sureties of
an insolvent company, there is no provision dealing with joint obligors and sureties
of a bankrupt where the bankrupt has not been discharged. The same points apply to
section 251I, which in any event cannot be of any assistance as it was only added by
the Tribunals, Courts and Enforcement Act in 2007.
112. In these circumstances, based on what I have referred to as the narrower or
primary contention raised by the LBHI2 administrators, I conclude that it is not open
Page 35
to the foreign currency creditors to seek to claim as a non-provable debt, the
difference between the sterling value of the debt at the administration date and the
sterling value of that debt when paid, where the latter exceeds the former. It therefore
follows that I would discharge paras (ii) and (iii) of the order made by David
Richards J.
The claim for post-administration interest in a subsequent liquidation
Can rule 2.88(7) interest be claimed from a subsequent liquidator?
113. As explained in para 27 above, rule 2.88(1) provides that, when a company
is in administration, creditors can only prove for contractual interest on their debts
up to the date of administration, but para (7) provides for payment of interest at the
rate specified in para (9) out of any surplus in the hands of the administrator, ie once
all proving creditors have been paid in full. The question to be addressed is this: if,
after LBIE has been in administration, it is then put into liquidation before such
statutory interest has been paid to a creditor (whose principal debt will have been
paid in full), can the creditor claim such interest from the LBIE liquidator, or prove
for it in the LBIE liquidation? David Richards J held that it could not and so directed
in para (iv) of the order which he made. The Court of Appeal disagreed.
114. There are, of course, legislative provisions which deal with interest on debts
owed by a company in the winding-up context. As explained above, section 189 of
the 1986 Act is concerned with “interest on debts” in a winding-up of a company,
and section 189(2) (which is set out in para 28 above) is in very similar terms to
Rule 2.88(7), which was no doubt based upon it.
115. Rule 4.93 is concerned with the payment of interest on a debt proved for in a
liquidation, and para (1), as originally drafted, provided that “[w]here a debt proved
in a liquidation bears interest”, such interest is “provable as part of the debt except
in so far as it is payable in respect of any period after the company went into
liquidation”. Following the introduction of distributing administrations, rule 4.93(1)
was amended by the 2005 Amendment Rules, by the addition of new final words
“or, if the liquidation was immediately preceded by an administration, any period
after the date that the company entered administration”.
116. The LBL administrators contend that, if interest payable under rule 2.88(7)
was not paid by the LBIE administrators while LBIE was in administration and
LBIE then goes into liquidation, such interest cannot be claimed from the LBIE
liquidator or proved for in LBIE’s liquidation. They rest this contention on two
propositions. First, rule 2.88(7) is a direction to an administrator of a company, and
Page 36
applies so long as the company is in administration and not thereafter. Secondly,
section 189(2), which gives a right to claim interest on debts from a company in
liquidation, only applies to interest which has accrued since the date of liquidation,
and therefore there is no room for a creditor to claim interest which accrued before
that date, and in particular during a pre-liquidation administration. In addition, even
disregarding the amendment made to it in 2005, rule 4.93 only applies to debts which
are proved for in the liquidation – and a creditor who was entitled to interest under
rule 2.88(7) cannot prove for his debt in a subsequent liquidation, because his debt
will have been paid out in full by the administrator. With no enthusiasm, David
Richards J accepted the LBL administrators’ contention, but the Court of Appeal
117. I agree with David Richards J’s conclusion that the interest provided for in
rule 2.88(7) cannot be claimed from a subsequent liquidator, and I share his lack of
enthusiasm in reaching that conclusion. As to the conclusion, rule 2.88(7) plainly
only applies so long as there is an administration in existence. It is, in my view, an
accurate characterisation to describe it as a direction to the administrator of a
company while he is in office: thus, it seems to me that he would be susceptible to
a claim by the proving creditors if he distributed a surplus to members without first
paying statutory interest (see the discussion in HIH Casualty [2006] 2 All ER 671
referred to in para 52 above). On no view, can it be read as a direction to a potential
or actual subsequent liquidator, acting in a liquidation taking place after an
administration has ended. Rule 2.88(7) is in Chapter 10, and, as mentioned above,
rule 2.68(1) provides that that Chapter applies to a distributing administration. So,
when the administration ends, rule 2.88(7) can no longer apply. And the effect of
section 189(2), supported by rule 4.93, is clear: there is no room for rule 2.88(7)
interest to be proved for, or to be paid, once a company, which was formerly in
administration, is then put into liquidation.
118. As to the lack of enthusiasm, there seems to be no reason why a creditor of a
company in administration should lose what would otherwise be his right to
statutory interest provided for by rule 2.88, simply because the company goes into
liquidation before that interest has been paid. All the more so given that, as
mentioned in para 27 above, rule 2.88 itself was amended in 2005 so that, in an
administration following a liquidation, the interest which can be claimed under the
rule dates back to the liquidation date, rather than the date of administration, but this
underscores the force of the point that no similar amendment has been made to
section 189(2). And the 2005 amendment to rule 4.93, which dealt with interest
which would otherwise accrue after the administration date in the case of a company
which subsequently goes into liquidation, further underscores the point.
119. It seems likely that there was an oversight on the part of those responsible for
revising the 1986 Act and the 1986 Rules when they were amended to provide for a
distributing administration by the 2002 Act and the 2003 Amendment Rules. Two
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amendments were subsequently made to the 1986 Rules, explained respectively in
paras 115 and 27 above: rule 4.93 was amended appropriately by the 2005
Amendment Rules and, even more in point, rule 2.88 was appropriately amended by
the same 2005 Amendment Rules. However, section 189(2) was not amended, quite
possibly because it is more difficult to amend primary, than secondary, legislation.
120. Under the United Kingdom’s constitutional arrangements, it is not normally
appropriate for a judge to rewrite or amend a statutory provision in order to correct
what may appear to have been an oversight on the part of Parliament. That would
involve a court impermissibly usurping the legislative function of Parliament. As
Lord Nicholls of Birkenhead said in Inco Europe Ltd v First Choice Distribution
[2000] 1 WLR 586, 592 when discussing the judicial approach to statutes, “[t]he
courts are ever mindful that their constitutional role in this field is interpretative”
and “[t]hey must abstain from any course which might have the appearance of
judicial legislation”. For this reason, it would be impermissible to have recourse to
an entirely new Judge-made rule to fill the gap in the present case. There has been
no such rule nor any similar rule in the past (unsurprisingly, as administration is a
new concept and a distributing administration is even newer), and the invention of
such a rule would be inappropriate for the reasons discussed in paras 117 to 120
121. The Court of Appeal appreciated this problem, but they considered that they
could arrive at a commercially sensible conclusion on various grounds. While I
sympathise with their wish to avoid the unattractive conclusion arrived at by the
Judge, none of those grounds is supportable. The notion that a liquidator in a
subsequent liquidation would be obliged to pay the interest which had accrued
during the previous administration under rule 2.88(7) would be inconsistent with the
fact that rule 2.88 only applies during the administration. Further, it would be
inconsistent with the liquidator’s duties as set out in the 1986 Act and the 1986 Rules
if the liquidator was required to pay out money for which there was no warrant in
the relevant legislative provisions. He does not stand in the shoes of the former
administrator: he is the holder of a different statutory office with its own, different,
statutorily imposed duties. And the notion that payment of statutory interest could
be said to be a liability of the company concerned (as discussed in paras 49 and 53
above) takes matters no further. It would only be such a liability to the extent that
the 1986 Act and the 1986 Rules provide, and that brings one back to the fact that
rule 2.88 only applies while the company is in administration, and there is no “carry
over” provision.
122. Further, the principle laid down in Quistclose Investments Ltd v Rolls Razor
Ltd [1970] AC 567, on which Briggs LJ relied, is not in point. It applies where
money is transferred by one party to another party for a specific purpose. In this
case, there would be no transfer, and there would be no purpose. No transfer because
the administrator would simply relinquish office and the liquidator would assume a
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different office, albeit in relation to the same company and the same assets. No
purpose, because, in relation to the company’s assets, the administrator would have
been responsible for them for his statutorily imposed purposes, and the liquidator
for his.
123. Quite apart from this, while the solution adopted by the Court of Appeal deals
with the lacuna as it applies on the facts of the present case, it would not provide a
complete answer. Thus, the solution would only apply to any surplus which had been
in the hands of the administrator, and it could only be invoked by creditors who had
lodged proofs in the administration. Accordingly, the Court of Appeal’s solution
would not help in a case where the administration preceding a liquidation had not
been a distributing administration, a situation in which the unfairness of a lacuna
would be even more marked. Lewison LJ thought, at paras 108 and 109 of his
judgment, that “a limited solution is better than no solution at all”. I would agree
with that approach if the court had been simply seeking to arrive at as reasonable
and commercial a result as possible: a partially unreasonable and uncommercial
outcome would be preferable to a generally unreasonable and uncommercial
outcome. However, when it comes to deciding the meaning of a legislative
provision, judges are primarily concerned with arriving at a coherent interpretation,
which, while taking into account commerciality and reasonableness, pays proper
regard to the language of the provision interpreted in its context. David Richards J’s
conclusion produced a coherent, if unattractive and quite possibly unintended,
outcome, which paid proper, if reluctant, regard to the applicable provisions of the
1986 Act and the 1986 Rules.
Does the right to contractual interest revive?
124. As just explained, David Richards J rightly concluded that a creditor of LBIE
who had been entitled to, but had not been paid, interest under rule 2.88(7), could
not claim such interest from a subsequent liquidator or prove for such interest in the
subsequent liquidation. However, he went on to hold that such a creditor could
nonetheless recover interest at the contractual rate for the period of the
administration as a non-provable debt from any surplus, and so directed in para (v)
of the order which he made. The Court of Appeal allowed the LBHI2 administrators’
and LBHI’s appeal on this point, on the very limited ground that the holding must
be wrong in the light of their conclusion that such a creditor could claim the rule
2.88(7) interest from the liquidator. However, given my view that the Court of
Appeal was wrong on that issue, it is necessary to consider whether the Judge was
right in holding that a creditor’s contractual right to interest revived.
125. In my judgment, contrary to the conclusion reached by David Richards J, the
contractual right to interest for the post-administration period does not revive or
survive in favour of a creditor who has proved for his debt and been paid out on his
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proof in a distributing administration. As already mentioned in In re Humber
Ironworks LR 4 Ch App 643, 647, Giffard LJ, having held that a creditor could only
prove for contractual interest up to the liquidation date, explained that “[t]hat rule
… works with … fairness”, because “where the estate is solvent …, as soon as it is
ascertained that there is a surplus, the creditor … is remitted to his rights under his
contract”. However, as I have also explained, that observation was made in the
context of a decision which was wholly based on what Giffard LJ expressly
described as “Judge-made law”, because the contemporary statutory provisions gave
no guidance as to how contractual interest was to be dealt with in a winding-up. The
position is, of course, very different now, especially in relation to interest on proved
debts in liquidations and administrations. In that connection, I consider that the
legislative provisions discussed above, namely rules 2.88 and 4.93 and section 189
provide a complete statutory code for the recovery of interest on proved debts in
administrations and liquidations, and there is now no room for the Judge-made law
which was invoked by Giffard LJ. It seems to me that this view is consistent with
what David Richards J said in In re Lehman Brothers International (Europe) (in
administration) [2016] Bus LR 17, para 164, although the point which was there
being considered was more limited.
126. This issue has some echoes of the currency conversion claim issue. In each
case, I consider that the contractual right (in this case to recover interest and in the
case of currency conversion claims, to be paid at a particular rate of exchange) has
been replaced by legislative rules. On that basis, there is no room for the contractual
right to revive just because those rules contain a casus omissus or because they result
in a worse outcome for a creditor than he would have enjoyed under the contract.
127. To put what may ultimately be the same point in somewhat different terms,
it strikes me as rather bold to suggest that interest which accrues due between the
date of administration and the date of liquidation can be claimed as a non-provable
debt, when section 189(2) specifically gives the right to make such a claim for
interest only when it accrues after the liquidation, and rule 4.93 as amended
specifically deals with interest accruing during an administration in the case of a
company which subsequently goes into liquidation.
128. In these circumstances, without enthusiasm, I would reverse the Court of
Appeal’s decision and restore the direction given by the Judge in para (iv) of his
Order, and, albeit for very different reasons, I would uphold the Court of Appeal’s
allowance of the appeal against para (v) of the order made by David Richards J.
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The issues concerning contributories: general
129. As explained in para 35 above, the remaining issues arise from the provisions
of the 1986 Act and the 1986 Rules which are concerned with the liability of
contributories. In recent years, these provisions and their legislative predecessors
have been relatively rarely invoked. This is because the great majority of modern
companies are limited by shares, and the provisions dealing with contributories can
only come into play in relation to such companies where there are shares which are
not paid up, and that is a relatively infrequent state of affairs. However, in the present
case, LBIE is an unlimited company, and so the provisions have a potentially
substantial part to play.
130. Section 74(1) provides:
“When a company is wound up, every present and past member
is liable to contribute to its assets to any amount sufficient for
payment of its debts and liabilities, and the expenses of the
winding up, and for the adjustment of the rights of the
contributories among themselves.”
131. As Briggs LJ explained in [2016] Ch 50, para 172, subsequent subsections of
section 74 contain limitations, and they include a provision that no contribution is
required from any member exceeding the amount unpaid on shares, where the
company is limited by shares. In this case, because LBIE is an unlimited company,
section 74 has, at least potentially, an unusually substantial effect.
132. Section 148 provides that, “[a]s soon as may be after making a winding-up
order, the court shall settle a list of contributories”. By section 150(1):
“The Court may, at any time after making a winding-up order
… make calls on all or any of the contributories for the time
being settled on the list of the contributories to the extent of
their liability, for payment of any money which the court
considers necessary to satisfy the company’s debts and
liabilities, and the expenses of winding up, and for the
adjustment of the rights of the contributories among
themselves, and make an order for payment of any calls so
Section 154 provides that the Court shall adjust the rights of the contributories
among themselves and distribute any surplus among the persons entitled to it.
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Pursuant to section 160(1), rules 4.195 to 4.205 delegate the powers and duties of
the Court in relation to contributories to the liquidator subject to the court’s control.
Hence it is the liquidator who settles the list of contributories and makes calls from
contributories, but he does so on behalf of the court.
133. Unlike the contents of the 1986 Rules, which, as explained above, are almost
all either new provisions or rewritten versions of their legislative predecessors, the
provisions of the 1986 Act relating to contributories are largely unchanged from
their predecessors. Thus, section 74, section 148, and sections 150 and 154 are
respectively expressed in virtually identical terms to section 38, section 98, section
102 and section 109 of the Companies Act 1862 (25 & 26 Vic c 89); and similar
provisions are to be found in successive Companies Acts up to the Companies Act
134. Four issues arise out of LBIE’s administration in relation to contributories.
The first is self-contained, and it is whether contributories can be liable to contribute
towards liability for statutory interest and/or non-provable liabilities. The other three
issues arise from the facts that (i) as explained in para 2 above, LBHI2 and LBL, as
shareholders of LBIE, are both potentially liable as contributories, and (ii) as
explained in para 6 above, LBHI2 and LBL are also both unsecured creditors of
LBIE, and they have each lodged proofs in the administration of LBIE in respect of
substantial sums.
Liability of contributories for statutory interest and non-provable liabilities
135. The issue to be addressed is whether the phrase “debts and liabilities” in
section 74(1) extends to statutory interest and non-provable liabilities, as the LBIE
administrators contend. David Richards J held that the phrase does extend to
statutory interest and non-provable liabilities, and this was recorded in para (vi) of
the order which he made. The Court of Appeal agreed. In this connection, it was
common ground below, and accepted by the Court of Appeal, that statutory interest
and non-provable liabilities were not “debts” because that expression is limited to
provable debts (in the light of the terms of rules 12.3 and 13.12). However, the LBIE
administrators argued, and the courts below accepted, that statutory interest and nonprovable liabilities constituted “liabilities” within section 74(1). That proposition is
challenged by the LBHI2 administrators on this appeal.
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Non-provable liabilities
136. It is convenient to take non-provable liabilities first. I find it difficult to see
why they are not within the expression “liabilities” in section 74(1). A non-provable
liability of a company is ex hypothesi, as a matter of ordinary language, a liability
of the company, albeit that it would appear to be a contingent liability, at least until
it is clear that there is a surplus after all provable debts (and, at least normally, any
statutory interest) have been paid in full. Despite the argument of the LBHI2
administrators to that effect, there do not appear to be any convincing grounds to
support the argument that the expression “liabilities” in section 74(1) is limited to
liabilities which can be the subject-matter of a proof. Neither section 74 nor rules
12.3 or 13.12 appear to contain anything in them to support such a reading. Indeed,
in rule 13.12(4), “liability” is widely defined and in particular in such a way as not
to limit it to provable liabilities.
137. The LBHI2 administrators nonetheless argue that, because section 74 only
applies after a winding-up and the liquidator has no liability to pay non-provable
liabilities, such claims cannot be liabilities under section 74(1). I cannot accept that
argument. In my view, section 74(1) refers to the “debts and liabilities” of the
company, and therefore it can be invoked to ensure that non-provable liabilities are
paid by the contributories. Further, the liability of contributories under section 74(1)
and 150(1) is to the court, and, as explained in para 132 above, the liquidator is
acting effectively on behalf of the Court when seeking payments under that section:
it is an additional function to his more familiar role, which is concerned with
provable debts and liabilities.
138. More importantly in the present context, as discussed in paras 58 to 61 above,
although there is no legislative provision requiring a liquidator to pay non-provable
liabilities, he is, and has always been regarded by the courts as being obliged to pay
off any such claims. I cannot in these circumstances see any basis for acceding to
the contention that non-provable liabilities against a company are not within the
scope of section 74 so far as its members are concerned.
Statutory interest
139. The position with regard to statutory interest is in my view very different.
Statutory interest is due under rule 2.88(7), and that provision states that the liability
to pay such interest is only out of any “surplus remaining after payment of the debts
proved”. The contrary view was taken in the courts below, and I accept that their
conclusion is more consonant with what one would expect. Nonetheless, it seems to
me that there is no answer to the simple proposition advanced by the LBHI2
administrators that, as section 74 only requires payment from contributories of an
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“amount sufficient for payment of [a company’s] … liabilities”, the section cannot
be invoked to create a “surplus” from which statutory interest can then be paid. If
there is a deficit, there is no liability for statutory interest, and, if there is a surplus,
there is only a liability for statutory interest to the extent of the surplus. Accordingly,
in the absence of a sufficient surplus to pay all the statutory interest, there is no
obligation to pay all the statutory interest, and therefore there can be no “liabilit[y]”
which a contributory could be called on to meet under section 74(1). In effect, the
LBIE administrators’ argument to the contrary involves them pulling themselves up
by their own bootstraps.
140. Moore-Bick and Briggs LJJ concluded, in agreement with David Richards J,
that they could defeat this analysis by relying on the proposition that the right under
section 74 to make calls on contributories is itself an asset of the company.
Accordingly, they reasoned, “where the aggregation of that right with the other
assets of the company disclosed a surplus, then the making of the call, together with
payment by contributories in response to it, merely enabled statutory interest to be
distributed, rather than created the surplus in the first place” (to quote Briggs LJ at
[2016] Ch 50, para 197).
141. In my view, that attractively expressed analysis does not answer the simple
logic of the argument set out in para 139 above. Section 74(1) can only be invoked
in order to pay off “liabilities”, and, while I accept that that expression extends to
contingent liabilities, it involves circuity of reasoning to say that the section can be
invoked in relation to a liability which is contingent on the section being invoked.
We were referred to observations of Lord Hatherley LC and Lord Chelmsford in
Webb v Whiffen (1872) LR 5 HL 711, 718 and 724, which emphasised the broad
scope of the power conferred by section 38 of the 1862 Act, but they cannot justify
interpreting section 74(1) in a way which is inconsistent with the wording of the rule
which is said to found the basis of the particular exercise of the power.
142. The majority of the Court of Appeal also thought that LBHI2 and LBL
administrator’s argument relied too much on the way in which rule 2.88(7) is
expressed. To quote Briggs LJ at [2016] Ch 50, para 198, “the use in section 189,
rule 2.88 and elsewhere in the statutory code of the concept of payment out of a
surplus is merely a convenient way of identifying liabilities which fall lower than
other liabilities in the priorities encapsulated in the waterfall”. It seems to me that
this analysis involves re-writing the legislative provision to enable it to achieve a
more instinctively likely result than if the actual words used in the provision are
construed according to the normal principles of interpretation. Briggs LJ could well
be right if one was concerned with identifying what the drafters of rule 2.88(7)
thought that they were doing, although, because I believe that his re-writing of the
rule would only make a difference in the rare case where section 74 applies, it may
be more a matter of oversight than wrongly expressed intention. However, Briggs
LJ’s analysis does not, with respect, fairly reflect what the drafters of rule 2.88
Page 44
actually wrote. The result of interpreting the words used in rule 2.88(7), unless one
departs in a significant way from their natural meaning, may be counter-intuitive,
even surprising, in a case where section 74 applies, but it is not absurd or
unworkable, and therefore it should be adopted.
143. Unlike Moore-Bick and Briggs LJJ, Lewison LJ was not persuaded by the
arguments so far discussed. However, he agreed in the outcome, as he considered
that, if (as I have concluded) non-provable liabilities can be the subject-matter of a
section 74 claim from contributories, it must follow that statutory interest is in the
same position because it ranks above non-provable liabilities in the waterfall
summarised in para 17 above. Apart from the fact that one could equally well argue
for the converse, it seems to me that that argument wrongly treats the statement
quoted in para 17 above as some sort of fundamental principle of law. It is not. If
money can be sought from contributories to pay non-provable liabilities, it does not
follow that money can also be sought, or that the money obtained can be used, to
pay otherwise irrecoverable statutory interest. It merely means that any statutory
interest is, as it were, by-passed in favour of non-provable liabilities. Statutory
interest is payable out of “any surplus” which arises after payment of provable debts;
if there is no surplus, but the liquidator can invoke section 74 to obtain money to
pay other non-provable liabilities, it seems to me that, given that the money so
obtained has been extracted for a specific purpose, it cannot be treated as a “surplus”
which can be used for another purpose.
144. It is true that the cases mentioned at the end of para 60 above underline the
importance of a liquidator paying off the company’s indebtedness before
distributing any surplus to members. However, I do not think that they help the LBIE
Administrators’ case that statutory interest can found a section 74 claim (although
they provide support for their case on non-provable liabilities). So long as there are
assets to distribute to members, there is a surplus, and section 74 does not come into
play, and once there is no surplus, there is nothing to distribute to shareholders. For
the same reasons, I cannot see how the argument of the LBIE Administrators on this
issue is assisted by the fact that section 74(1) can be invoked “for the adjustment of
the rights of the contributories among themselves”.
145. It may be that the LBHI2 administrators are right for another reason, namely
that statutory interest is not a liability of the company in question, but of its
administrator or its liquidator. That was an argument which concerned Lewison LJ
in the light of In re Pyle Works (1890) 44 Ch D 534, where it was held that the power
to call on contributories is not part of the capital of the company – see at pp 575, 584
and 588, per Cotton, Lindley and Lopes LJJ respectively. The point has some echoes
of the argument considered in relation to the subordinated debt in paras 51 and 52
above, but we do not need to decide it and I do not think we should do so.
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146. Having said that, I accept that my conclusion does produce the anomalous
result that, where section 74 applies, there will be circumstances when one type of
creditor who normally has priority over another type will receive nothing when the
other type of creditor will be paid in full. It is therefore readily understandable why
the courts below tried hard to find a way round this conclusion. However, the
conclusion does not lead to any practical or even any conceptual difficulty (see paras
143 and 144 above). Further, if one rejects my conclusion, one is left with the
unpalatable choice of holding that a payment for statutory interest is recoverable
under section 74 despite the wording of the section and the provisions for statutory
interest as discussed in paras 139 to 142 above, or of holding that a payment for
other non-provable liabilities is irrecoverable under section 74 despite the argument
discussed in paras 136 to 138 above.
147. It is perhaps right to add that the conclusion that section 74 can be relied on
to meet non-provable liabilities but not statutory interest may appear, at any rate at
first sight, to conflict with what is said in paras 65 and 66 above in relation to the
priority of the subordinated debt. In those paragraphs, I was concerned to explain
that, while a party could validly contract to be in a worse position in the waterfall
than he would normally be, he could not validly contract to improve his position in
the waterfall (unless all those who are thereby disadvantaged have agreed). That is
because, unless he agrees otherwise, a person is entitled to insist on his legal rights,
which includes priorities in the waterfall. However, it is a different matter where the
effect of a statutory provision purports to have the effect of changing or by-passing
such priorities: the priorities are statutory (with some Judge-made additions), and
therefore there is no reason why any statutory variation or modification cannot be
148. Accordingly, albeit without enthusiasm, I would allow the LBHI2
administrators’ appeal on the issue whether section 74 can be invoked in order to
pay statutory interest, but I would dismiss their appeal on the issue whether that
section can be invoked in order to meet other non-provable liabilities. I would
therefore allow the appeal in part against para (vi) of David Richards J’s order.
Contributories who are also creditors of LBIE
149. As explained above, LBHI2 and LBL are each both creditors of, and potential
contributories to, LBIE. Three questions arise from this. The first is whether the
Page 46
LBIE administrators are, as they argue, entitled to prove in the potential distributing
administrations (or liquidations) of LBHI2 and LBL in respect of each company’s
respective potential liability to contribute in a future liquidation of LBIE. The second
and third questions arise from the argument pursued by LBHI, effectively on behalf
of LBHI2 and LBL, that those two companies are entitled to be paid in LBIE’s
distributing administration in their capacity as creditors of LBIE, even though in due
course they may very well be liable as contributories under section 74. The LBIE
administrators meet this argument with two contentions. Their first contention is that
the potential liability of LBHI2 and LBL as contributories can be set off as a
contingent debt in the administration of LBIE pursuant to rule 2.85, which gives rise
to the second question. Alternatively, and this gives rise to the third question, the
LBIE administrators contend that they are entitled to rely on the so-called
contributory rule, and so can resist paying LBHI2 and LBL on their proofs until they
have met their liabilities as contributories (or it is clear that they will have no such
150. I shall take these three questions in turn.
Can the LBIE administrators prove for contributories’ potential liability?
151. Both the Judge and the Court of Appeal held that the LBIE administrators
were entitled to prove in the administrations of LBHI2 and LBL in respect of the
potential prospective liabilities of those companies as contributories of LBIE (which
I will refer to as a “prospective section 150 liability”). This is recorded in para (viii)
of the order made by the Judge.
152. In order for a prospective section 150 liability to be provable in the
administrations of LBHI2 and LBL, it is accepted by the LBIE administrators that it
would have to be a contingent obligation under rule 2.85. At any rate on the face of
it, such a liability would appear to be contingent, as it could arise in the event of
LBIE going into liquidation, and its liquidator being unable to meet all claims and
making one or more calls under section 150. The more difficult question would seem
to be whether the prospective section 150 liability constitutes an “obligation” within
rule 13.12. In that connection, it was accepted in the courts below and by the parties
that the guidance given in In re Nortel GmbH [2014] AC 209, para 77 applies. That
guidance is as follows:
“… [T]he mere fact that a company could become under a
liability pursuant to a provision in a statute which was in force
before the insolvency event, cannot mean that, where the
liability arises after the insolvency event, it falls within rule
13.12(1)(b). It would be dangerous to try and suggest a
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universally applicable formula, given the many different
statutory and other liabilities and obligations which could exist.
However, I would suggest that, at least normally, in order for a
company to have incurred a relevant ‘obligation’ under rule
13.12(1)(b), it must have taken, or been subjected to, some step
or combination of steps which (a) had some legal effect (such
as putting it under some legal duty or into some legal
relationship), and which (b) resulted in it being vulnerable to
the specific liability in question, such that there would be a real
prospect of that liability being incurred. If these two
requirements are satisfied, it is also, I think, relevant to consider
(c) whether it would be consistent with the regime under which
the liability is imposed to conclude that the step or combination
of steps gave rise to an obligation under rule 13.12(1)(b).”
153. In my view, that approach is apt in connection with a prospective section 150
liability. It is true that any claim against a contributory can be said to arise from
contract, in that the basis of such a claim is contractual in origin. Thus, Lord
Cranworth LC said in Williams v Harding (1866) LR 1 HL 9, 22 that a not dissimilar
obligation under section 90 of the Bankruptcy Act 1861 (24 & 25 Vict c 134) “be
referred back to the year … when he became a shareholder” – and see at pp 27-28
per Lord Kingsdown to the same effect. However, as each of them went on to say,
the obligation in question was nonetheless “cast on [the contributory] by law” or
“made under the statute”. In relation to section 150, such an approach is supported
by section 80, which describes the liability of a contributory as a debt “accruing due
from him at the time when his liability commenced, but payable at the times when
calls are made”. Accordingly, it is ultimately a statutory obligation, albeit that
exposure to such an obligation arises as a result of contract. I can therefore see no
reason not to follow the approach suggested in Nortel GmbH [2014] AC 209, para
154. In my opinion, application of that approach to a prospective section 150
liability justifies a different conclusion from that reached by the courts below. This
view is based on a combination of two propositions. First, the effect of section 150
and rule 4.195 is that the liquidator is the person entitled to make a call, and he
possesses that entitlement for the purpose of performing his statutory duties.
Secondly, the nature of the liability to contribute is such that it should not be capable
of being the subject matter of a proof unless the company concerned is in liquidation,
even bearing in mind the wide provisions of rules 2.85 and 13.12.
155. It is clear from section 150 that the right to make calls on contributories only
arises when a company is being wound up by the court. There are many judicial
dicta which emphasise that a contributory has no liability until the company
concerned is wound up (eg per Sir George Jessel MR in In re Whitehouse & Co
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(1878) 9 Ch D 595, 599 and per Cotton, Fry and Bowen LJJ in Whittaker v Kershaw
(1890) 45 Ch D 320, 326 and 328-329), and it is consistent with section 80.
However, those dicta, like section 80 itself, appear to me to take matters no further
for present purposes, at least on their own, as they are consistent with the notion that
a contributory has a liability for calls under section 150 which is contingent at least
until the company concerned goes into liquidation, and probably until the liquidator
makes a call.
156. More to the point, however, it appears to me that any money paid pursuant to
a call made under section 150 is not paid to or for the company, but to the liquidator,
in order to enable him, as subsection (1) provides, to “satisfy the company’s debts
and liabilities, and the expenses of winding up”. The point is underscored by
comparing this wording with that of section 149(1) which empowers the court, after
it has made a winding-up order, to require “any contributory … to pay … any money
due from him … to the company”. As was explained in In re Pyle Works 44 Ch D
534, per Cotton LJ at pp 574-575 and Lindley LJ at pp 582-583 (quoted at [2016]
Ch 50, paras 113-119), any money paid under section 74 cannot be treated as part
of the property of the company concerned: it forms a statutory fund which can only
come into existence once the company in question has gone into liquidation. A
similar point was more recently made in In re Oasis Merchandising Services Ltd
[1998] Ch 170, 182, where Peter Gibson LJ giving the judgment of the Court of
Appeal, drew a “distinction … between the property of the company … (and
property representing the same) and property which is subsequently acquired by the
liquidator through the exercise of rights conferred on him alone by statute and which
is to be held on the statutory trust for distribution by the liquidator”. The importance
of distinguishing some statutory rights of a liquidator from the rights of the company
in liquidation is also apparent from the judgments of Millett J in In re MC Bacon
Ltd [1991] Ch 127, 136-137, and of Knox J in In re Ayala Holdings Ltd (No 2)
[1996] 1 BCLC 467, 470-484.
157. As Lewison LJ said at [2016] Ch 50, para 126, the effect of the reasoning in
Pyle Works is:
“(i) that capital capable of being raised only in a winding up
is not part of the capital of the company in the ordinary sense;
(ii) that the liquidator is the only person empowered to make
the call;
(iii) that the statutory fund created by the call comes into
existence only when the company is in liquidation;
Page 49
(iv) that when paid the call is payable to the liquidator as an
officer of the court, and not to the company;
(v) that there can be no anticipation of future calls.”
158. Thus, where the company seeking to prove possible future calls is not in
liquidation, there is not merely no extant debt: there would appear to be no existing
person who could be identified as a potential creditor, merely a person who may (or
may not) in due course exist, namely a possible future liquidator. There are therefore
obvious problems with the notion that the company or its administrator could prove.
In this connection, I do not accept the argument that, because section 80 states that
a contributory is a debtor from the time he acquires his shares, there must be a
creditor at that time, and therefore the company is the creditor. Section 80 identifies
the contractual source of a liability on a call (which is described as a debt, even
though it is not actually payable until there is a call) and the person entitled to make
the call, namely a liquidator – see in this connection the observations in Williams v
Harding LR 1 HL 9 cited in para 153 above.
159. If this were the only problem with the LBIE administrators’ case, it may
conceivably have been appropriate to conclude that LBIE or its administrators, as
some sort of agent for a future liquidator of LBIE, could prove for the potential
section 150 liability of LBHI2 and LBL in their respective administrations. It is
unnecessary to consider whether that would have been possible because of the other
problems faced by the LBIE administrators’ case on this issue.
160. Thus, quite apart from the fact that he is not a creditor in respect of the
potential section 150 liability, it appears to me that there would be serious
difficulties if an administrator of a company could prove for such a liability. If the
LBIE administrators could prove for such a liability in the administrations of LBHI2
and LBL, it would seem to follow that LBIE could prove in respect of such a liability
even if it was in good financial health. I find it difficult to accept that a company
which is not insolvent and is trading should be able to prove for and recover sums
representing payments in respect of calls, which are only capable of being made by
a liquidator on behalf of the court in order to meet statutory liabilities which arise in
the event of that company’s winding-up.
161. Perhaps on the assumption that a proof based on a contributory’s potential
liability would only be likely to lead to a substantial sum if the proving creditor was
in poor financial health, Briggs LJ said at [2016] Ch 50, para 231, that the directors
of the proving creditor “may reasonably be expected to use the fruits of that proof
to keep the wolf from the door”. In the first place, there is no reason, at least as a
matter of law, which justifies that assumption. Secondly, even where it did apply, it
Page 50
would mean that the contributory’s money was being used for a very different
purpose from that for which it is statutorily intended. I am unconvinced by the
argument that this point could be met by limiting the right to prove for a prospective
section 150 liability to a case where the creditor company is in administration: some
administrations result in the company being revived, and carrying on business.
Further, the suggestion by Briggs LJ at para 233 that the sum paid by the insolvent
contributory pursuant to such a proof could be used by the company “to put it back
on its feet” is, again, inconsistent with the purpose of section 150.
162. In addition, the notion that a company could prove for a prospective section
150 liability leads to this quandary. If a contributory pays out on a proof in respect
of such a liability, it is unclear whether that would put an end to his liability as a
contributory. If it would do so, then the whole point of section 150 would be
thwarted: the contributory would be contributing towards putting the company on
its feet (or keeping the wolf from the door) and could not then be called on again if
the company became insolvent, which is the reason for being a contributory.
Alternatively, if (as has been assumed in argument by all parties, and may be
supported by the fact that there is no limit on the number of calls which a liquidator
may make) paying on a proof in respect of a prospective section 150 liability would
not put an end to the contributory’s liability, he could sometimes find himself paying
out twice – once for the costs of putting a company back on its feet (or keeping the
wolf from the door), and if the company then falls over (or the wolf then gets in) for
the more normal liabilities of a contributory.
163. Other difficulties would arise if a company, which is solvent and viable, was
entitled to prove in respect of a prospective section 150 liability in the insolvency of
a contributory. Thus, sections 74(1) and 154 envisage that contributories should be
entitled to “adjust” their rights “amongst themselves”. It is difficult to see how that
could be done, in the absence of any applicable statutory provision, in a case where
a contributory is liable to pay out for a potential section 150 liability. Further, in
most cases, it would also be very difficult to estimate the value of the right to invoke
a call under section 150 if the company in question was a going concern. Apart from
the inherently wholly speculative nature of the exercise of assessing the extent of
the possible future insolvency, there would be the problem of allowing for settling
the notional future list of contributories. Additionally, as Briggs LJ accepted at
[2016] Ch 50, para 226, if a contributory could be held liable to a company in
administration, he could find himself contributing towards the costs and expenses
of the administration (as well as those of any subsequent liquidation), which is
plainly not intended by section 74.
164. Taking all these problems together, I conclude that it would not be open to
LBIE to prove in the distributing administrations or liquidations of LBHI2 or LBL
in respect of their potential respective liabilities to contribute under section 150 in
the event of LBIE being wound up. I would accordingly allow the appeal of LBHI2
Page 51
and LBL on this point and set aside para (viii) of the order made by David Richards
165. As both Briggs and Lewison LJJ said, this is not an easy point, not least
because of the wide words of rule 13.12, the general principle that all potential
liabilities should if possible be provable, and the practical consequences of my
conclusion. In relation to this last point, I acknowledge that, at least where the
company to which it is liable to contribute is not itself in liquidation, this conclusion
would enable a potential contributory to escape liability to contribute, at least in
some cases, by going into administration or liquidation. I also acknowledge that, in
some cases, this conclusion would operate to induce a company to be wound up
rather than to go into administration, or to induce an administrator to move a
company into winding up. It may be that this raises a particularly acute problem for
an administrator in the light of my conclusion in para 128 above in relation to
statutory interest. However, I am unable to accept that these points can undermine
the conclusion I have reached. They are ultimately attributable to the fact that
distributing administrators have, either for good reason or through oversight, not
been given all the powers of liquidators, and in particular have not been given the
power to call on contributories.
Can the LBIE administrators set off the contributories’ potential liability?
166. The Judge and the Court of Appeal considered that the LBIE administrators
were right to contend that they could set off against the proofs lodged by LBHI2 and
LBL in respect of their claims as subordinated creditors, their respective prospective
section 150 liabilities. This was declared to be the position in para (ix) of the order
made by David Richards J. As Briggs LJ said, this followed from their conclusion
that the prospective section 150 liabilities were provable. However, in the preceding
section of this judgment, I have concluded that they are not provable, and it is
therefore necessary to address the question of set-off.
167. I do not accept the first line of argument advanced by LBHI, namely, that,
simply because the prospective section 150 liabilities are not provable, that of itself
means that they cannot be invoked by way of set-off by the LBIE administrators
against the proofs lodged by LBHI2 and LBL. I can see no good reason why a debt
owing by the creditor to the company which is or would be non-provable in the
creditor’s insolvency should thereby be disqualified from being set off under rule
2.85 against a proof lodged by the creditor in the company’s administration.
168. It is true that there is direct support for the notion that only a provable debt
can be invoked to support a set-off, in the judgment of Rose LJ in In re Bank of
Credit and Commerce International SA (No 8) [1996] Ch 245, 256, where he said
Page 52
“a claim is not capable of set-off unless it is admissible to proof … To qualify for
set-off, therefore, the creditor’s claim must be capable of proof … This is true of
both sides of the account”. In his speech in the appeal to the House of Lords, [1998]
AC 214, 228, Lord Hoffmann said that he was “not sure that this is right”, and
mentioned the decision of the High Court of Australia, Gye v McIntyre (1991) 171
CLR 609 as reaching the opposite conclusion.
169. In my view, Lord Hoffmann’s doubts were justified, the decision on this point
in Gye was correct, and Rose LJ’s observation should be disapproved. There is
nothing in rule 2.85 which, at least expressly, stipulates that the set-off liability has
to be provable, and it is inappropriate to imply limitations into a legislative provision
unless it is strictly necessary. In any event, the general purpose of insolvency set-off
appears to me to point against implying any such restriction. As Parke B explained
in Forster v Wilson (1843) 12 M & W 191, 204, the purpose of insolvency set-off is
“to do substantial justice between the parties”, which is reflected in the more recent
analysis of Lord Hoffmann in Stein v Blake [1996] AC 243, 252-255. Gye was a
clearly reasoned judgment of a powerful court, which included the observations at
(1991) 178 CLR 609, 628-629 that there was “nothing at all” in the relevant
legislation which required the set-off claim to be provable, that there was no “reason
in fairness or common sense why such an additional test should be imposed”, and
“considerations of justice and fair dealing which underlie” the set-off provisions
“require that a set-off be allowed in such circumstances”. Further, the only case cited
by Rose LJ to support his view, Graham v Russell (1816) 5 M & S 498 does not,
with respect, appear to be in point.
170. Accordingly, the mere fact that the prospective section 150 liabilities of
LBHI2 and LBL are non-provable does not mean that, for that reason alone, they
cannot be relied on by the LBIE administrators to set off against the respective
proofs of LBHI2 and LBL in their capacities as creditors of LBIE. Nonetheless, I
consider that LBHI is right to contend that such a set off would be impermissible.
171. The various reasons set out in paras 152 to 165 above explaining why I
consider that the prospective section 150 liabilities are not provable also serve to
explain why they cannot be set off. Once one analyses who is entitled to make calls
under section 150, what those calls are for, and the problems which would arise if
the right to call could be raised as a contingent claim by the company concerned or
its administrator, it seems to me that they are outwith the scope of rule 2.85 as well
as rule 2.72. Thus, while it may appear somewhat casuistic, although the fact that
the LBIE administrators cannot prove for the prospective section 150 liabilities does
not of itself mean that they cannot invoke those liabilities by way of set-off, the
reasons why the LBIE administrators cannot prove for those liabilities also justify
the conclusion that they cannot invoke them by way of set-off.
Page 53
Does the contributory rule apply in distributing administrations?
172. In view of my conclusion that the LBIE administrators cannot set off the
prospective section 150 liabilities of LBHI2 and LBL against their proofs, LBHI
contends that those companies are entitled to be paid out on their proofs like any
other unsecured creditor. Given that LBHI2 and LBL are probably insolvent, the
potential injustice of such an outcome is plain: although LBHI2 and LBL may each
turn out to be liable under section 150 for a substantial sum (indeed, a sum which
may be greater than their proved claims), they would have to be paid those claims
in full, leaving a future liquidator of LBIE to receive nothing or a mere dividend in
respect of any calls under section 150. Such an outcome would seem to me to be
plainly inconsistent with one of the fundamental principles underlying the statutory
corporate insolvency regime, namely the pari passu principle. It would also frustrate
the statutory aim of enabling effective calls to be made in a liquidation.
173. It is common ground that this problem would not arise if it was a liquidator,
rather than administrators, of LBIE who was effecting a distribution because of the
contributory rule, which is an aspect of a wider equitable principle known as the rule
in Cherry v Boultbee (1839) 4 My & Cr 442. The contributory rule (“the Rule”) was
first applied in a corporate insolvency case 150 years ago in In re Overend Gurney
& Co; Grissel’s Case (1866) LR 1 Ch App 528, and it was more recently discussed
by Lord Walker in Kaupthing (No 2) [2012] 1 AC 804. As he pithily expressed it at
para 20, a “claimant could recover nothing as a creditor until all his liability as a
contributory had been discharged”. As he later explained, at para 53, when
discussing the wider principle, the Rule “may be said to fill the gap left by
disapplication of set-off, but it does not work in opposition to set-off. It produces a
similar netting-off effect except where some cogent principle of law requires one
claim to be given strict priority to another”.
174. The Rule applies in liquidations, although it is not provided for in the 1986
Act or the 1986 Rules, and is one of the surviving Judge-made rules of the
insolvency code, as alluded to in para 17 above. The question is whether it can and
should be applied in administrations, and, if so, how it should be so applied. In para
(vii) of his Order, David Richards J held that the Rule did not have “any application
in an administration (including the administration of LBIE)”. The Court of Appeal
175. A liquidator is statutorily authorised to make calls on a contributory, whereas
an administrator is not, and the Rule has only ever been applied in liquidations.
However, it does not necessarily follow from this that the Rule cannot be extended
to administrations. Neither David Richards J nor the Court of Appeal thought it right
so to extend it, but that was, in each case, after having concluded that the prospective
Page 54
section 150 liability of a contributory could be set off against its proved claim in the
administration, a conclusion with which, as explained above, I disagree.
176. As I have already indicated, given the detailed and coherent nature of the
1986 legislation, a judge must think long and hard before laying down a new Judgemade rule to liquidations. However, in this case, the course being contemplated does
not involve inventing an entirely new rule. It involves extending an existing rule so
that it can apply to what is an analogous, albeit not identical, situation to that to
which it previously applied, and doing so in order to achieve precisely the same end
for which it was conceived.
177. A more difficult question is whether taking such a course would involve
extending the contributory rule in a way which is inconsistent with the provisions or
principles of the current legislation. There is, at least at first sight, a strong argument
that such an extension would be inconsistent with rule 2.69 (which requires debts to
be paid in full unless the assets are insufficient to meet them), and rule 2.88(7)
(which requires any surplus remaining after payment of the debts proved to be
applied in paying statutory interest “before being applied for any purpose”) – see
paras 20 and 27 above. The answer to this argument is to be found in the fact that
the contributory rule undoubtedly applies in a liquidation – see per Lord Walker in
Kaupthing (No 2) [2012] 1 AC 804, para 20 and per Briggs LJ in this case, [2016]
Ch 50, para 243. Yet if the argument is correct, the contributory rule could not apply
in a liquidation, as rule 4.181 and section 189(2) are expressed in effectively
identical terms to rules 2.69 and 2.88(7) respectively. The true analysis is that the
contributory rule is an aspect of a “general equitable principle” which operates as a
qualification to the 1986 Rules regarding distributions in liquidations, and is needed
to ensure compliance with the overall purpose of those rules (as discussed in
McPherson’s Law of Company Liquidation, 3rd ed (2013), paras 10.036, 13.097 and
13.099). Precisely those reasons justify the extension of a slightly modified version
of the contributory rule to administrations.
178. In these circumstances, I have come to the conclusion that it is permissible
and appropriate for the LBIE administrators to apply the Rule to the proved claims
of LBHI2 and LBL, provided it can be effected in a way which is practical,
principled and in harmony with the applicable legislative provisions and principles.
179. David Richards J rejected this conclusion, on the ground that:
“The fundamental difficulty in applying the contributory rule
in an administration is precisely because there is no statutory
mechanism for making calls on contributories in an
administration. While LBIE remains in administration, there
Page 55
can be no calls and therefore nothing that LBHI2 and LBL as
members could do to put themselves in a position where they
could prove as creditors in respect of their subordinated and
unsubordinated claims. Yet this would be the result of applying
the contributory rule to a company in administration” – [2015]
1 Ch 1, para 188.
Briggs LJ expressed much the same view in the Court of Appeal:
“It would … be a serious injustice to a solvent contributory to
be disabled from ever proving in a distributing administration
because, in the absence of a call, there was nothing which he
could pay to free himself from the shackles of the rule. The
company might (and usually would) distribute all its assets to
its creditors without ever going into liquidation, leaving the
contributory high and dry, even though its liability as a
contributory might be very small, and its claim as a creditor
very large – [2016] Ch 50, para 239.”
180. I readily accept that, if the Rule was simply applied to a distributing
administration in its existing terms, it could easily lead to injustice in the way
described in those passages. However, in my view, a potential contributory can be
protected if the Rule is applied with minor procedural modifications to distributing
administrations. When making a distribution, the administrators should retain any
sum which, if the Rule had not applied, would otherwise have been distributed to a
contributory, in his capacity of a proving creditor. Thus, assuming a 100% dividend,
if the administrator considers that a creditor’s reasonable maximum potential
liability as a contributory, A, is greater than his proved claim, B, then B must be
retained. If A is less than B, then he can be paid (B-A), and A is retained. If the
dividend is not 100% (as presumably almost by definition will be the case), then the
position is a little more complex. The administrator would have to assess the likely
level of dividend, C, and the same exercise would have to be carried out with (C x
B) rather than B. Any such exercise would inevitably be speculative, and the
administrator should be cautious but realistic. Any such retention would be kept safe
and ready to be paid out appropriately when the final accounts were drawn up, and
(save perhaps in these unusual days) the retained money would earn interest.
181. What subsequently happens to that retained sum would depend on the
outcome of the distributing administration. If it transpired that there were sufficient
funds to meet all claims (other than statutory interest) payable under Chapter 10 of
Part 2 (or if the contributories provided security for any potential liability they could
have as contributories), then the retained sum could simply be paid to the
contributories to meet their proved claims. If there were insufficient funds to meet
Page 56
all Chapter 10 claims (other than statutory interest), then, unless none of the potential
contributories was good for any contributions, the administrators would, I think, be
bound to have the company wound up, for the very purpose of enabling a liquidator
to make calls on the contributories, in which case the retained sum would be paid
over to the liquidator. The liquidator would then proceed in accordance with the
Rule, and would make calls on the contributories to enable any outstanding liabilities
not met by the administrators to be met in so far as that was legally and practically
possible, and the liquidator would apply the Rule in the normal way.
182. If all sums payable (other than statutory interest) in the liquidation were duly
paid without recourse to the retained sum, then the retained sum could be paid to the
contributories. Otherwise, the retained sum would be dealt with in accordance with
the duties of the liquidator. Referring back to paras 121 and 122 above, the liquidator
would be obliged to deal with the retained sum in that way as it will have been held
by, and been passed to him by, the administrator for that purpose.
183. LBHI’s objections to this course have force, but I do not consider that any of
them represents a fatal objection either in law or in practice. It is perfectly fair to say
that there is no legislative mechanism which provides for a reserved fund in an
administration, let alone one which is liable to be handed over to a subsequent
liquidator. However, it is scarcely surprising that there is no such mechanism, given
that there is no legislative mechanism for the application of the Rule in the first
place, even in liquidations. If, as I consider, justice requires extension of the Rule to
administrations, I see no good reason why it should not be permissible to add a
relatively simple procedural step which is needed to give effect to that extension,
provided, as I say, that it is not inconsistent with any legislative provision.
184. It is also true that, where it turns out that section 150 does not need to be
invoked, a contributory may be kept out of the money which would have been
distributed to him. However, in many such cases, the administrator will be able to
be certain that section 150 need not be invoked when, or shortly after, the
distribution is made; anyway, the reserved sum will attract interest. It is also true
that it has been held that the Rule is not, at least normally, applicable to a contingent
liability – see eg In re Abrahams [1908] 2 Ch 69. However, that was a decision on a
will, and I do not consider that the same limitation is appropriate to a liquidation,
not least in the light of the treatment of contingent liabilities in the 1986 Rules. Even
assuming (which I doubt) that the same limitation would normally apply to section
150 claims, I do not see it as being so fundamental that it stands in the way of my
185. I was at one time attracted by Briggs LJ’s point at [2016] Ch 50, para 243,
that the courts did not need to devise an extension to the Rule as there would be
nothing to prevent an administrator from moving the company into liquidation
Page 57
simply in order to enable the Rule to be invoked against a contributory. However, if
it would otherwise be right to continue the administration, it strikes me as involving
a waste of time and money, as well as representing a potential inconvenience, to
force an administrator to end the administration prematurely in such a way.
Furthermore, given my (reluctant) conclusion in relation to statutory interest in para
128 above, effectively forcing an administrator to move the company into
liquidation would potentially wreak real unfairness on all the other creditors of the
186. Accordingly, I would allow the appeal of the LBIE administrators on this
point, and set aside para (vii) of the Order made by the Judge. I draw support for this
conclusion from Lord Walker’s description of the Rule quoted in para 173 above.
He said that it is intended to “fill the gap left by disapplication of set-off”; it seems
to me that if the Rule is not extended to administrations, there would be a gap.
Similarly, for the reasons just given, I do not consider that “some cogent principle
of law requires” the Rule not to be extended to administrations.
187. For these reasons, I would restore para (i), discharge paras (ii) and (iii),
restore para (iv), uphold the discharge of para (v), vary para (vi), and discharge paras
(vii), (viii) and (ix), of the order made by David Richards J. No doubt, counsel can
agree a form of order which reflects the contents of this judgment.
188. I agree with the disposition of this appeal proposed by Lord Neuberger. I add
a judgment of my own only in order to address some of the particular difficulties
raised by the so-called currency conversion claims.
189. The obligation of a foreign currency debtor is to pay the debt in the designated
foreign currency. As a matter of contract, the only sterling sum which will satisfy
that obligation is the sterling equivalent of the debt at the time of payment. This was
the essential reason why, in Miliangos v George Frank (Textiles) Ltd [1976] AC
443, the House of Lords discarded the old rule of procedure that an English court
could not give judgment in a foreign currency, but only in sterling at the rate of
exchange prevailing when the debt fell due. Instead, it was held that unless
previously paid in the contractual currency or its equivalent, the debt would be
converted to sterling at the date of enforcement. Lord Wilberforce observed that
circumstances had changed. In the world, then relatively new, of fluctuating
currency values, the old rule had given rise to problems whose resolution was
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“urgent in the interests of justice”: see p 463G (Lord Wilberforce). This, he said at
p 465G-H, was because
“… justice demands that the creditor should not suffer from
fluctuations in the value of sterling. His contract has nothing to
do with sterling: he has bargained for his own currency and
only his own currency. The substance of the debtor’s
obligations depends upon the proper law of the contract (here
Swiss law): and though English law (lex fori) prevails as
regards procedural matters, it must surely be wrong in principle
to allow procedure to affect, detrimentally, the substance of the
creditor’s rights. Courts are bound by their own procedural law
and must obey it, if imperative, though to do so may seem
unjust. But if means exist for giving effect to the substance of
a foreign obligation, conformably with the rules of private
international law, procedure should not unnecessarily stand in
the way.”
190. The application of the Miliangos principle to a liquidation was considered by
Oliver J in In re Dynamics Corporation of America [1976] 1 WLR 757, a judgment
subsequently approved by the Court of Appeal in In re Lines Brothers Ltd [1983]
Ch 1. He held that foreign currency debts should be converted to sterling at the rate
prevailing at the commencement of the winding up. The result was to shelter the
creditor from the risk of a decline in sterling between the date when the debt fell due
and the commencement of the liquidation. But the creditor remained exposed to the
risk of a decline of sterling between the commencement of the liquidation and the
payment of a dividend. This difference between the position of a judgment creditor
and a creditor seeking to prove in a liquidation was, however, a necessary incident
of any scheme for the distribution of an insolvent estate, because debts had to be
expressed in a common unit of account valued as at a common date if creditors were
to rank pari passu in their claims to the deficient pool of assets: see the judgment of
Oliver J at pp 761-765.
191. In both In re Dynamics Corporation of America and In re Lines Brothers Ltd,
it was argued by analogy with the result in Miliangos, that the correct date of
conversion should be the date of payment, the sterling value of the debt being
restated at that date. The difficulty about this argument, as Brightman LJ pointed out
in In re Lines Brothers (p 16) was that where there was a deficiency it was not
consistent with pari passu distribution, because any upward restatement of the value
of the foreign currency creditors’ debts would have been at the expense of the
sterling creditors:
Page 59
“The policy behind the decision, as … was recognised by
counsel in argument before us, was that the foreign currency
debtor should not be entitled to impose on the foreign currency
creditor the risk of a fall in the value of sterling. Justice
demands that the risk shall be borne by the debtor, who is the
party in default. Hence the justice of the re-interpretation of the
law, that the debtor in default is not to be excused from his
contractual obligation by payment of anything less than the
sterling equivalent of the money contractually due at the date
of payment.”
192. At the time when in In re Dynamics Corporation of America and In re Lines
Brothers Ltd were decided, there was no specific provision in the Companies Acts
or the Winding-up Rules for the conversion of foreign currency debts. The mode of
valuing them was determined by Judge-made law. Since 1986, it has been statutory.
Rule 2.72 of the Insolvency Rules 1986 provides that a person claiming to be a
creditor of a company must submit a proof to the administrator. Rule 4.73, which
deals with liquidation, is in substantially the same terms. In both cases, a proof must
state the value of the debt at the commencement of the administration or liquidation.
I shall refer to this as the “cut-off” date. Rules 2.86 and 4.91 provide that “for the
purpose of proving a debt incurred or payable in a currency other than sterling”, the
debt must be valued in sterling at the exchange rate prevailing on the cut-off date.
The combined effect of these provisions is that a creditor with a foreign currency
debt can prove only for its sterling equivalent at the cut-off date. The currency
conversion claims made by the LBIE creditors arise from a fall in the value of
sterling between the cut-off date and the date of payment of the dividend. The result
is that at the date when the dividend comes to be paid, its amount will be based on
a sterling valuation of the debt which is less than its actual sterling value on that
date. The dividend will not therefore represent his pro rata share of the full amount
which he was entitled by contract to be paid. Even if the company proves to be
solvent and a dividend of 100 pence in the pound is paid on his proved debt, this
will represent less than his contractual entitlement. Although described as currency
conversion claims, the claims of the LBIE creditors are in reality simply claims for
the unsatisfied balance of the original foreign currency liability. David Richards J
and the majority of the Court of Appeal held that although a foreign currency
creditor’s proof was limited to the sterling equivalent of the debt at the cut-off date,
the unsatisfied balance claimed by the LBIE creditors was recoverable as a nonprovable debt in a case where there was a surplus available for that purpose after the
satisfaction in full of provable debts.
193. Non-provable debts are a necessary anomaly in the law of insolvency.
Although successive statutory schemes have broadened the range of provable debts,
some liabilities are still not provable. These are generally liabilities arising after the
commencement of the liquidation or administration, but which are not expenses of
Page 60
the office-holder because they arise from matters occurring while the company was
a going concern. At the relevant time for the purposes of these proceedings (ie before
the Rules were amended in 2006), they included liabilities in tort arising from
breaches of duty before the cut-off date but giving rise to loss thereafter: In re T &
N Ltd [2006] 1 WLR 1728, at paras 106-107. They still include statutory liabilities
arising after the cut-off date by virtue of events occurring before: In re Nortel GmbH
[2014] AC 209. As these examples demonstrate, non-provable debts are in principle
payable out of any surplus remaining after the satisfaction of provable debts,
notwithstanding the absence of express provision for them in the Act or the Rules.
This is because the alternative would be to pay the surplus over to shareholders,
something which is contrary to the fundamental principle that the assets of a
company may not be returned to shareholders while there remains an outstanding
unsatisfied liability. As Pearson J observed in Gooch v London Banking Association
(1886) 32 Ch D 41, 48, the liquidators would be “guilty of a dereliction of duty if
they were to distribute the assets without providing for this liability.”
194. I have no difficulty with the concept that non-provable debts may be
recoverable from a surplus, but I do not accept the conclusion of David Richards J
and the majority of the Court of Appeal that the unsatisfied balance of a foreign
currency debt can be recovered on that basis. The reason can be shortly stated. It is
axiomatic that where the Insolvency Rules deal expressly with some matter in one
way, it is not open to the courts to deal with it in a different and inconsistent way.
The recoverability of non-provable debts out of a surplus means that that the
statutory rules for recovering a dividend on provable debts cannot be regarded as a
complete code of the creditor’s rights of recovery. But rules 2.86 and 4.91 must be
regarded as a complete code for the specific case of foreign currency debts. Nonprovable debts are normally debts for which no provision is made in the statutory
mechanism of proof and distribution. But the Insolvency Rules do provide for
foreign currency debts. Rules 2.86 and 4.91 provide that they are to be valued at the
cut-off date and that distributions are to be made in accordance with that valuation.
The limitations of these provisions are as much part of the statutory scheme as their
positive enactments. It follows that if a debt is provable but the limited character of
these provisions nonetheless leaves part of it unsatisfied, the creditor cannot recover
more in respect of the same debt by reference to the Judge-made rules governing
non-provable debts. A foreign currency debt is a provable debt. It is both inherently
implausible and inconsistent with the language of the Rules to suppose that the
legislator envisaged that the same debt could at one and the same time be
recoverable as to part as a provable debt and as to the rest as a non-provable,
conditionally on there being a surplus. That this limit on the recoverability of such
debts was deliberate is strongly suggested by the fact that both the Law Commission
and the Cork Committee, whose reports were the basis of the 1986 legislation,
concluded that the unsatisfied balance of a foreign currency debt should not be
recoverable, even if there was a surplus from which to pay it. For my part, I have
some misgivings about their reason for this conclusion, which was that since a
creditor could not be required to account for a foreign currency gain arising from an
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appreciation of sterling, he should not be entitled to recover a loss arising from its
fall. But that is beside the point. What matters is that, whether or not their reasons
were good, their recommendation was on the face of it adopted by the legislator.
195. This makes it unnecessary to determine the nature of insolvency proceedings
as applied to debts in general. There are two possibilities. The first is that the
statutory scheme for corporate insolvency works by discharging the creditor’s legal
right and replacing it by a right to receive a distribution from the insolvent estate in
accordance with the Rules. In that case, there is no continuing contractual obligation
which can be said to remain partially unsatisfied once the creditor has received all
that the Insolvency Rules entitle him to. The second possibility is that insolvency
proceedings merely operate as an administrative procedure for distributing the
debtor’s assets pari passu among its creditors when there is a deficiency, without
abrogating or altering the creditor’s pre-existing legal rights save in so far as the
legislative scheme so provides. As David Richards J put it (para 110), the creditor’s
contractual rights are “compromised by the insolvency regime only for the purpose
of achieving justice among creditors through a pari passu distribution.” In that case,
the creditor’s claims survive and remain enforceable against any surplus assets,
unless the legislation otherwise provides. On the view which I take, even if this latter
analysis is correct, it will not avail the LBIE creditors, since in the case of foreign
currency debts the legislation does otherwise provide.
196. These fundamental questions about the nature of insolvency proceedings
have arisen in the case law in a wide variety of legal contexts. It may well be
necessary to answer them at some point in the future. In the meantime, I merely
express the provisional view that there is much to be said for the way in which David
Richards J and the majority of the Court of Appeal answered them.
197. In the first place, the view that insolvency proceedings are in principle purely
administrative, is consistent with the way that the law has developed historically.
The origins of English insolvency law lie in statutory provisions governing personal
insolvency which date back to the 16th century. The Companies Act 1862, which
provided for the creation of the first modern limited liability companies, also
provided for winding them up in accordance with a distinct regime for corporate
insolvency. But the principles applied to personal and corporate insolvency were
always closely related. Throughout their history, a cardinal feature of both has been
that the effect of bankruptcy, winding up or administration on the company’s
existing liabilities is procedural, not substantive. Subject to any contrary order of the
court, the commencement of insolvency proceedings suspends the creditor’s right to
proceed against the debtor or his property for the recovery of his debt, and stays
litigation already in progress. In other words, it suspends the creditor’s remedies,
but not his rights. The current statutory provisions are section 130 of the Insolvency
Act 1986 (for a winding up by the court), section 285 (for personal bankruptcy), and
Schedule B1, paras 43-44 (for administration). They are no different in their general
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approach from those which applied before 1986. The purpose of the procedural
moratorium was to allow the insolvent’s assets to be realised and distributed to his
creditors in proportion to their justified claims. That process was also procedural. In
the law of personal insolvency, a bankrupt remained personally liable for his prebankruptcy debts, for which he could be sued (and under the old law even
imprisoned) for an indefinite period after his assets had been distributed to his
creditors. The concept of discharge, which was first introduced into English
insolvency law by the Bankruptcy Act 1705 (4 & 5 Anne c 17), was designed to
mitigate that indefinite liability. By statute, the bankrupt might be discharged by an
authority on whom powers were conferred for that purpose, originally the Lord
Chancellor but ultimately the Chancery Division. This remains the position.
Sections 279-281 of the Insolvency Act 1986 provide for automatic discharge a year
after the bankruptcy order, but the time may be extended by the court. It will be
apparent that the whole basis of the procedure for discharge was and is that the
process of proof of debt and pari passu distribution of assets had not itself
discharged the bankrupt. Discharge at the conclusion of the insolvency proceedings
or at a specified time after their inception was never a feature of corporate
insolvency, even on the limited basis on which it applied in personal insolvency. It
was unnecessary, because a corporate insolvency ended with the dissolution of the
company, as indeed with limited exceptions it still does.
198. Secondly, English corporate insolvency law has from its inception adopted
the principle which had always been fundamental to bankruptcy that liquidation was
a mode of collective enforcement of debts, which operated procedurally and
administratively rather than substantively and did not itself extinguish the creditors’
liabilities. The point was first articulated by Lord Cranworth in Oakes v Turquand
(1867) LR 2 HL 325, 364, in the context of the Companies Act 1862. For the same
reason, Sir George Giffard stated, in In re Humber Ironworks and Shipbuilding Co
Ltd (1869) LR 4 Ch App 643, 647, that upon a surplus being ascertained, so that
pari passu distribution of a deficient estate is no longer relevant, “the creditor whose
debt carries interest is remitted to his rights under his contract.” A tentative
statement to the same effect was made by Brightman LJ in In re Lines Brothers Ltd,
at p 20. But the clearest modern statements of the principle are due to Lord
Hoffmann. In Wight v Eckhardt Marine GmbH [2004] 1 AC 147, para 21, he rejected
an argument that
“the right to share in a liquidation is a new right which comes
into existence in substitution for the previous debt and is
governed by the law of the place where the liquidation is taking
place, rather in the way that obtaining a judgment merges the
cause of action in the judgment and creates a new form of
obligation, namely a judgment debt, governed by its own rules
of enforceability.”
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His reason was as follows:
“26. … It is first necessary to remember that a winding up
order is not the equivalent of a judgment against the company
which converts the creditor’s claim into something juridically
different, like a judgment debt. Winding up is, as Brightman LJ
said in In re Lines Bros Ltd [1983] Ch 1, 20, ‘a process of
collective enforcement of debts’. The creditor who petitions for
a winding up is ‘not engaged in proceedings to establish the
company’s liability or the quantum of the liability (although
liability and quantum may be put in issue) but to enforce the
27. The winding up leaves the debts of the creditors
untouched. It only affects the way in which they can be
enforced. When the order is made, ordinary proceedings
against the company are stayed (although the stay can be
enforced only against creditors subject to the personal
jurisdiction of the court). The creditors are confined to a
collective enforcement procedure that results in pari passu
distribution of the company’s assets. The winding up does not
either create new substantive rights in the creditors or destroy
the old ones. Their debts, if they are owing, remain debts
throughout. They are discharged by the winding up only to the
extent that they are paid out of dividends. But when the process
of distribution is complete, there are no further assets against
which they can be enforced. There is no equivalent of the
discharge of a personal bankrupt which extinguishes his debts.
When the company is dissolved, there is no longer an entity
which the creditor can sue. But even then, discovery of an asset
can result in the company being restored for the process to
Similar observations were made by Lord Hoffmann with the support of this court or
the Judicial Committee of the Privy Council in Parmalat Capital Finance Ltd v Food
Holdings Ltd (in liquidation) [2008] BCC 371, and Cambridge Gas Transportation
Corpn v Official Committee of Unsecured Creditors of Navigator Holdings Plc
[2007] 1 AC 508, at para 15; and by Lloyd LJ with the support of the rest of the
Court of Appeal in Financial Services Compensation Scheme Ltd v Larnell
(Insurances) Ltd (in liquidation) [2006] QB 808.
199. Third, there is no reason to believe that the position, well established before
1986, was altered by the insolvency legislation of that year. The 1986 legislation
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achieved some important changes in United Kingdom insolvency law. The
provisions governing proof of debt and the distribution of assets became more
elaborate and more comprehensive than the corresponding legislation in force before
1986. But these were incremental changes, many of which in effect codified earlier
Judge-made law. The purpose and character of the process of proof of debt and
distribution did not change. There are, as there always have been, specific
circumstances in which the current scheme of corporate insolvency does provide for
a discharge. The most significant of them is mutual set-off, which occurs
automatically under rules 2.85 and 4.90, in circumstances when set-off would not
necessarily be available at common law. Set-off by its very nature brings about a
pro tanto discharge of the liability. The disclaimer of onerous obligations under
section 178 of the Act is another example. But in neither case is the creditor’s right
affected, except by its pro rata abatement where there is a deficiency of assets. So
far as the creditor’s debt is discharged by set-off, he receives full value. So far as it
is disclaimed, the debtor’s obligation is transmuted into a claim for the full amount
of the resultant loss, for which the creditor may prove just as he could have proved
for the liability disclaimed. All of this was equally true of the pre 1986 legislation
in force when most of the cases which I have cited were decided. The critical point,
however, is that where the legislation effects a discharge of a liability, as it does in
these special cases, it does so expressly. An implied discharge is of course
conceptually possible. But there is a strong presumption against the implied
legislative abrogation of existing rights, and nothing in the Act or the Rules from
which such an implication could be thought necessary.
200. Fourth, in every respect relevant to the present question, the provisions of the
Insolvency Act and Rules governing proof of debt and distribution are the same for
liquidation or administration on the one hand and bankruptcy on the other. As I have
pointed out, it is and always has been the position in personal insolvency that the
underlying liabilities of the bankrupt are not discharged by the bankruptcy order or
by the subsequent bankruptcy proceedings, save in so far as they are satisfied by the
resultant distribution. There is no discharge of the unsatisfied balance until the
bankrupt is discharged, either by the court or automatically subject to the discretion
of the court. The statutory provisions for the discharge of the bankrupt in personal
insolvency are qualified by express provisions preserving the liability of persons
jointly or secondarily liable with the bankrupt, who might otherwise be released by
the latter’s discharge: see section 281(7) of the Insolvency Act, which substantially
re-enacts section 28(4) of the Bankruptcy Act 1914. This is an important safeguard
for the rights of and liabilities of third parties. By comparison, with limited
exceptions (see above), the law of corporate insolvency has never expressly
provided and still does not expressly provide for the discharge of underlying
liabilities at any stage, short of payment in full or dissolution. Moreover, there are
no corresponding provisions relating to joint obligors and sureties in those parts of
the Act which relate to corporate insolvency, as there surely would have been if the
legislator had intended that a liquidation or distributing administration should
discharge the liabilities of the insolvent company.
Page 65
201. I am not persuaded that such a radical transformation of the basis of our law
of insolvency is achieved by Rule 2.72(1) of the Insolvency Rules, which was the
only provision relied upon as expressly having that effect. Rule 2.72(1) provides that
a person claiming to be a creditor of the company and “wishing to recover his debt
in whole or in part” must submit a proof. The argument is that once the amount for
which the creditor has proved has been satisfied by the payment of a dividend, the
creditor is treated as having recovered the debt “in whole”, or at any rate the whole
of the part of the debt for which he proved. In my opinion, this reads too much into
the words. Rule 2.72(1) is a purely administrative provision. It appears under the
rubric “Machinery of Proving a Debt”. The accuracy of this description is borne out
by the remaining sub-rules. The reason why the rule refers to a person “wishing to
recover his debt in whole or in part” is that he may not wish to prove for a debt so
far as it is wholly or partly secured. If he did, he would have to surrender his security
and allow the property to which it related to be added to the insolvent estate. As a
matter of ordinary English, the natural meaning of rule 2.72(1) is simply that a
creditor must prove for any claim or part of a claim in respect of which he wishes to
receive a dividend. Moreover, rule 2.72(1) is in the same terms as rule 6.96, which
is the corresponding provision governing proof of a bankruptcy debt in personal
insolvency. Yet it is clear that in personal insolvency the underlying liability is not
discharged by proof and survives the payment of a dividend.
LORD CLARKE: (dissenting)
202. On every issue but one I agree with Lord Neuberger. The exception relates
to the currency conversion claims.
203. So far as claims made in foreign currencies are concerned, the position at
common law was radically changed by the decision of the House of Lords in
Miliangos v George Frank (Textiles) Ltd [1976] AC 443. Since then it has been
recognised that a debt contractually payable in a foreign currency must be
discharged in that currency or, if discharged in sterling, at the relevant rate of
exchange at the date of payment in order to ensure that it is fully repaid in the
contractual currency. It follows that, at any rate in the absence of an administration
or liquidation, where the debtor is solvent, the debtor must pay the whole amount so
calculated. The obligation to pay is a common law obligation.
204. Where a company goes into administration or liquidation, a creditor must
submit a proof to the administrator or liquidator under rules 2.72 and 4.73 of the
Insolvency Rules respectively. The combined effect of rules 2.86 and 4.91 is that
the proof must state the value of the debt at the cut-off date and the debt must be
converted into sterling at the exchange rate on that date. If the value of sterling falls
between that date and the date on which the debt would be due at common law, and
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if the debtor is solvent at that time, the creditor will make a currency conversion loss
unless he is entitled to recover the difference from the debtor.
205. The question is whether he can recover that difference in order to ensure that
he is repaid in aggregate the whole of the value of the debt inclusive of interest to
the date of the repayment. In my opinion, he should in principle be entitled to recover
that whole amount in order to ensure that he recovers the full amount to which he is
entitled at common law under the contract. I am not persuaded that there is any
relevant rule or statutory provision that leads to any contrary conclusion and, absent
such an intervention, it is sufficient to resolve the issue by an application of the
common law.
206. As I see it, the point was clearly and accurately put by Briggs LJ in the Court
of Appeal in this very case. In para 136 he expressed disagreement with Lewison LJ
that currency conversion claims do not constitute, or therefore rank as, non-provable
liabilities. In his view they do. He added that the conversion into sterling of foreign
currency debts as at the cut-off date is, as both rule 2.86 and rule 4.91 make clear,
for the purpose of proof and, under rule 4.90(6), for the purpose of set-off. Apart
from that, he said, there is nothing in the Insolvency Act or in the Rules which
prevents the foreign currency creditor from reverting to his contractual rights, once
the process of proof (and payment of statutory interest) has run its course, if there is
then a surplus. I agree. In my opinion, this is a critical point.
207. I further agree with Briggs LJ when he accepted (at para 137) counsel’s
submission that a currency conversion claim is not a separate or new claim arising
from the effect of the two conversion rules. He then in effect harked back to
Miliangos in saying that it is simply the balance of the creditor’s original contractual
claim which has not been discharged by the process of early conversion, proof and
dividend under the relevant part of the insolvency scheme. The creditor bargained
for payment in the specified currency. What he received was payment in sterling, by
reference to a conversion date years earlier than payment. Briggs LJ identified the
injustice as arising entirely from his exposure to currency risk during the potentially
long period between conversion and payment, contrary to the contract, which placed
that risk squarely on the company in liquidation or administration. He added that it
was not a risk against which the creditor can easily hedge, since (even if while
unpaid he has the financial resources) he does not know when, or how much, he will
eventually be paid.
208. I agree with Briggs LJ at para 138 that the starting point is to focus on
insolvency law as it was immediately prior to 1986, some ten years after Miliangos
and before the Insolvency Act 1986. He considered two particular circumstances: a
liquidation might affect a company which was solvent; or, it might begin on the
basis of insolvency but turn out to be solvent as the realisations of assets exceeded
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provable liabilities, as in the case of LBIE’s administration. He noted in para 139
that in either case non-provable liabilities still had to be settled before distributions
could be made to members. The basic principle upon which non-provable liabilities
were dealt with was by reference to the creditor’s full claim, whether under contract
by reference to the concept of “reversion to contract” used in that case, or in tort,
where the liability was not provable. He added, at para 140, that the rules were
almost entirely judge made.
209. In para 142 he explained that In re Dynamics Corporation of America [1976]
1 WLR 757 and In re Lines Bros Ltd [1983] Ch 1 need to be understood in that
context. Both cases sought to fashion a judge-made rule to deal with the
establishment in Miliangos of the principle that English law both could and should
recognise the injustice of converting a foreign currency obligation into sterling at
the date of the commencement of proceedings. They did so as an adjunct to the law
of bankruptcy, which was applicable to the winding-up of insolvent companies, by
requiring that, as an exception to the Miliangos principle, proof of the debt
constituted by a foreign currency obligation required conversion into sterling at the
cut-off date, so that all proving creditors could be treated equally, in a single unit of
account. In particular, that adjunct was a Judge-made part of the legal process of
proof of debts. It had no wider purpose. I agree with Briggs LJ that neither
Brightman LJ nor Oliver LJ was deciding anything about how to deal with foreign
currency liabilities in a solvent winding up. In so far as Lewison LJ expressed a
different view, I respectfully disagree.
210. As Briggs LJ explained in para 144, the 1986 insolvency legislation made
significant changes to the insolvency structure, but it was not comprehensive and
important judge made principles continued to be applicable. The new legislation did
not purport to deal with non-provable claims. Having set out a number of classes of
non-provable claims, Briggs LJ dealt with non-provable claims in this way at the
end of para 145:
“While it may be assumed that Parliament specifically intended
them not to be provable liabilities in a liquidation, there can be
no basis for inferring a legislative intent that they could not be
pursued in a liquidation in the event of a surplus after payment
of provable debts and statutory interest. In short, the 1986
legislation simply passed them by, leaving them to be pursued,
in the rare event of a surplus, by reference to the pre-existing
judge-made law.”
I agree.
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211. In paras 146 and 147 Briggs LJ expressed these conclusions:
“146. Thus, although the legislation provided for the first time
that, in a solvent liquidation, a pari passu process of
distribution against proved claims would be the first stage,
distribution of any surplus (after statutory interest) would
continue to require the liquidator to treat non-provable
claimants as having an entitlement ranking prior to that of the
members, applying legal principles not to be found set out in
detail anywhere in the legislation.
147. Against that background it is of course a question of
construction whether or not the Insolvency Rules provide that
claims in foreign currency can only be pursued by the process
of conversion and proof set out in rules 2.86 and 4.91, so that
proof followed by payment leaves them wholly exhausted, or
whether, as the judge concluded, those rules merely provide a
means of quantifying the amount of the proof, for the purposes
of proof, but leave any residue of the original contractual
entitlement intact, and capable of being pursued in the event of
a surplus.”
Again, I agree.
212. Briggs LJ then considered the language of the rules, which he thought pointed
firmly in the direction identified by the judge. In particular rules 2.86 and 4.91 both
used the same formula, namely “for the purpose of proving …”. I agree with him (in
para 148) that the effect of each rule is simply to provide an exchange rate for the
necessary conversion of the face value of the foreign currency debt into sterling so
that the creditor can prove for a specific sterling amount. This was exactly what the
judge-made rule had done, also (and only) for the purpose of proof.
213. Briggs LJ expressed his conclusion on this part of the case thus in para 153:
“The potential for injustice caused by the permanent
conversion of a foreign currency debt into sterling is entirely
the result of the inevitable gap in time between the conversion
date and the payment of dividends, during which the risk of
depreciation in sterling is thrown, contrary to the contract, on
the creditor. But absent set-off there is no reason why the
conversion for the purpose of proof should be anything more
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than a means of part-payment which is fair as between all
proving creditors, leaving the foreign currency creditor with a
remedy against a surplus if (but only if) sterling has depreciated
in the meantime, and after all proving creditors have been paid
in full with statutory interest.”
I agree.
214. Briggs LJ then noted in para 154 that Lewison LJ had given ten reasons for
his preference for a permanent substantive effect as the true construction of the two
conversion rules. He then gave his reasons for reaching a different conclusion. He
did so in paras 154 to 161 which I find convincing but which it is not necessary to
repeat here, save as follows.
215. In para 161 Briggs LJ recognised that the currency conversion rules apply,
like all the other rules about proof of debts, both to solvent and insolvent windings
up. He added:
“This was a major change wrought by the 1986 legislation, as
I have described. The statutory part of the insolvency scheme
is now applied to all companies in liquidation. It is by no means
confined to the currency conversion rules, but applies also to
the whole body of rules which focus on the cut-off date, to the
exclusion from proof of post cut-off date liabilities, as well as
to set-off.”
I agree.
216. Briggs LJ expressed his overall conclusions in paras 162, 163 and 166 in this
“162. In the context of an undoubtedly solvent company it is not
easy to see why any of those rules should be applied, where the
undoubted consequence is that there has then to be a two stage
process, first of proof and then of the satisfaction of non-provable
liabilities. But there are equally unsatisfactory aspects of the old
regime, in which bankruptcy law was applied only to insolvent
companies. Parliament had a choice to make between two
alternatives, neither of which can be said to have been ideal.
Perhaps the main justification (apart from uniformity) of the
choice actually made is that companies may move into and out of
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insolvency during a liquidation or distributing administration, so
that it is better to deal by a single process first with the claims of
all those entitled on insolvency, leaving until later the just
distribution of any surplus, if there turns out to be one in fact. A
second obvious reason is that insolvent liquidation or
administration is overwhelmingly the main target of the
legislation, as the name of both the Act and the Rules makes clear.
163. However that may be, I do not regard that choice as
saying much about the construction of the currency conversion
rules, all the more so because they are prefaced by the phrase
‘for the purpose of proving’. They are merely one provision
which, (like the cut off-date itself) is not the end of the story if
there is a relevant surplus to be distributed to those entitled to

166. The result is that, in respectful disagreement with
Lewison LJ, I consider that the judge was correct to regard
currency conversion claims as non-provable liabilities falling
to be dealt with as such in the event of a surplus after payment
of provable debts and statutory interest. The language of both
relevant rules contains a clear direction to treat conversion as
being for the limited purpose of proof of debts, and a separate
sub-rule applies the conversion rules for the additional purpose
of set-off. Great injustice will be caused in ultimately solvent
liquidations if those rules are given a wider effect than
expressly prescribed, and there is in my view no convincing
reason why that should be so. I would therefore dismiss the
appeal against paragraphs (ii) and (iii) of the judge’s order.”
I found that reasoning wholly convincing.
217. Moore-Bick LJ’s reasoning was to much the same effect. I was struck in
particular by his quotation of paras 26 and 27 of the judgment of Lord Hoffmann in
the Privy Council in Wight v Eckhardt Marine GmbH [2003] UKPC 37; [2004] 1
AC 147, where he stressed that a winding up order is not the equivalent of a
judgment against the company. He pointed to the statement of Brightman LJ in In
re Lines Bros Ltd [1983] Ch 1, 20 that winding up is “a process of collective
enforcement of debts”. Lord Hoffmann stressed that a winding up does not either
create new substantive rights in the creditors or destroy old ones. He added:
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“Their debts, if they are owing, remain debts throughout. They
are discharged by the winding up only to the extent that they
are paid out of dividends. But when the process of distribution
is complete, there are no further assets against which they can
be enforced.”
218. So, on the facts here the obligation upon the debtor to discharge its obligation
to pay interest at the contract rate in dollars remained so long as the company was
solvent. There is a good deal of support for this principle: see eg the (albeit obiter)
statements of Brightman and Oliver LJJ in In re Lines Bros Ltd [1983] 1 Ch 1, 21
and 26 respectively quoted by Moore-Bick LJ in the Court of Appeal at paras 255
and 256. As I see it, any other view would have the effect of allowing shareholders
to recover claims against the company ahead of creditors with valid claims at
common law. In my opinion that would be wrong in principle.
219. In short, there is no common law principle which supports the view that a
creditor is not entitled to recover sums in a foreign currency owed to it by a solvent
company. Such a conclusion would be to prefer the interests of a debtor company
(and its shareholders) to those of the creditor.
220. Such a conclusion could only be justified by statute or statutory instrument.
To my mind clear words would be required to deprive the creditor of its common
law rights. As I see it, there is no provision in the 1986 Act which has that effect.
Reliance is placed upon rule 2.72(1) of the Insolvency rules quoted by Lord
Sumption in para 201. I agree with him that the words relied upon in rule 2.72(1),
“wishing to recover his debt in whole or in part” do not have that effect.
221. I am bound to say that for my part I am not persuaded by the points made by
Lord Neuberger in his discussion of the reports leading up to the 1986 legislation.
In short, I prefer the reasoning of David Richards J at first instance and of MooreBick and Briggs LJJ in the Court of Appeal to that of those who have taken a
different view. I would dismiss the appeal on this point on the simple ground that
there is no statute, statutory rule or common law principle to deprive creditors of a
solvent company of a common law right to recover a debt in a foreign currency. As
I see it, to conclude otherwise would be to permit shareholders to be preferred to
creditors of a solvent company, which would be wrong in principle.
222. I appreciate that the conclusion which I have reached above as to the true
construction of rules 2.86 and 4.91 differs from that reached by the majority. I note
that in para 194 Lord Sumption has expressed some misgivings about the reasons
for the conclusion that the effect of those Rules is that the unsatisfied balance of a
foreign currency debt should not be recoverable, even if there is a surplus from
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which to pay it. I share those misgivings, but I would go further. I do not think that
the Rules are clear enough to give the shareholders a windfall at the expense of
creditors where there is a surplus which could satisfy the whole or part of the
company’s liability to the creditors. However, I am pleased to note that the majority
have left open the broader questions identified by Lord Sumption at paras 195 et
seq. As matters stand at present I agree with his approach, which is essentially the
same as I have tried to describe above. It is, as I understand it, agreed that these are
questions for final determination on another day.