Lehman Brothers - Case Update

The High Court has released another decision in the Lehman Brothers saga, this time on the issue of whether statutory interest on a subordinated claim is to be paid in priority to principal on another subordinated claim ranking lower in the queue.

The dispute related to the subordinated debt of Lehman Brothers Holdings PLC (“PLC”), an intermediate holding company within Lehman’s UK group structure, which has been in administration since May 2014. On the one side were LB GP No. 1 Limited, an entity within the Lehman group, and Deutsche Bank, which have an interest in the “PLC Sub-Notes”. They were pitted against Lehman Brothers Holdings Inc (“LBHI”), PLC’s ultimate parent company, which has an interest in the “PLC Sub-Debt”.

The issue of priority as between the PLC Sub-Notes and the PLC Sub-Debt in respect of principal had already been determined in 2021, with the Court of Appeal ruling that the PLC Sub-Notes (Deutsche Bank and LB GP No. 1) have priority over the PLC Sub-Debt (i.e., LBHI). The Supreme Court had also already ruled that both statutory interest and non-provable liabilities had priority over subordinated debt.

LBHI argued that the Supreme Court decision had no direct application to the issue in this case, in that it concerned a competition between unsubordinated debt and subordinated debt. It also argued that the Court of Appeal decision was not determinative, since it only dealt with priority between the PLC Sub-Notes and the PLC Sub-Debt as regards the repayment of principal only.

The Court accepted that there were differences between the nature of the priority dispute in this case and the previous decisions. However, the Court found that “the process of determining whether a lender has agreed to stand behind another in the queue … is substantially the same whether the competition is between unsubordinated creditors and subordinated creditors or between subordinated creditors inter se.” What is required is “intense focus on the definitions which provide the mechanism for determining priority between different claims/debts.”

The Court ultimately concluded, on the basis of the language used in the notes and the loan agreements, that statutory interest on the PLC Sub-Notes (Deutsche Bank and LB GP No. 1) fell to be paid before principal on the PLC Sub-Debt (LBHI).

The decision can be found HERE, and the Joint Administrators’ most recent progress report can be found HERE. Counsel are listed below:

• Sonia Tolaney KC of One Essex Court, Richard Fisher KC of South Square and Tim Goldfarb of One Essex Court (instructed by Alston & Bird) for Deutsche Bank

• Lexa Hilliard KC and Tom Roscoe of Wilberforce Chambers (instructed by Charles Russell Speechlys) for LB GP No.1 Limited

• Adrian Beltrami KC and Kate Holderness of 3 Verulam Buildings (instructed by Hogan Lovells) for the Joint Administrators, Edward Macnamara, Gillian Bruce and David Kelly of PwC

• David Allison KC, Adam Al-Attar and Edoardo Lupi of South Square (instructed by Weil, Gotshal & Manges) for Lehman Brothers Holdings Inc.