On 24 October 2017 the Court of Appeal handed down its decision in what has become known as the Waterfall IIA and B litigation (Burlington Loan Management Limited and others v Lomas and others  EWCA Civ 1462). The decision also covered an appeal of one point from the High Court Waterfall IIC decision. A number of the issues originally intended to be covered in the appeal fell away following the earlier Supreme Court decision in Waterfall I (see the joint administrators of LB Holdings Intermediate 2 Ltd v the joint administrators of Lehman Brothers International (Europe)  UKSC 38). The remaining issues concerned the calculation of, and the entitlement of creditors to, statutory interest, in accordance with Rule 2.88 under the Insolvency Rules 1986. By way of background, as it relevant for a number of the issues forming the subject of the appeal, under Rule 2.88(9) statutory interest accrues either at the rate specified in s.17 Judgments Act 1838 or the “rate applicable to the debt apart from the administration”, whichever is the higher.
Litigation over statutory interest is rare because statutory interest is only payable once all provable debts have been paid in full. However, following the payment in full of all provable debts, there remains in the LBIE estate a surplus of c.£7.9bn. There are, accordingly, significant amounts at stake in the litigation.
The issues and the decisions can be summarised as follows:
- the rule in Bower v Marris had no application in the payment of statutory interest. The legislation provided a “complete and clear code for the award of statutory interest”. Statutory interest should be calculated on the basis that dividends were applied first to payment of the provable debt and then to statutory interest.
- Where the relevant interest rate under Rule 2.88(9) is a compounding rate (as being “the rate applicable to debt apart from the administration”), statutory interest ceases to be compounded once the provable debt has been repaid in full.
- creditors could not claim compensation for late payment of statutory interest.
- statutory interest accrues on the provable debt from the date of the administration. As it is possible to prove for future and contingent debts, there was no reason to treat those debts differently from debts which were due at the commencement of the administration. Statutory interest therefore accrues on contingent debts from the commencement of the administration and not from the date the debt ceases to be contingent.
- any foreign judgment rate of interest which arose or would arise after the commencement of the administration could not be the “rate applicable to a debt apart from the administration”.
- where, in relation to a provable debt that was a close-out sum under an ISDA derivative contract, the contractual rate of interest began to accrue only after the close-out sum became due and payable due to action taken by the creditor after the commencement of the administration, the right to interest was a contingent right which existed at the commencement of the administration, even though the event that triggered the accrual of such interest didn’t occur until after the commencement of the administration. In the same way that future and contingent debts were included by a creditor when submitting a proof of debt, future and contingent rates of interest had to be taken into account when assessing the level of statutory interest payable to a creditor.