The Commissioners for HMRC v Lomas & Ors (Administrators of Lehman Brothers International (Europe))

The administration of Lehman Brothers International (Europe) (“LBIE”) began on 15 September 2008. Contrary to initial expectations, the administration has resulted in a substantial surplus (estimated to be between £6.6bn and £7.8bn) being available for creditors after payment of proved debts. This has given rise to a variety of issues in relation to post-administration interest and currency conversion claims which have been determined recently by the decisions of the Supreme Court and subsequently of this court in what have been referred to as the Waterfall I and Waterfall IIA applications: see Re Lehman Bros International (Europe) (in administration) (No 4)[2017] UKSC 38; Burlington Loan Management Limited v Lomas & Ors [2017] EWCA Civ 1462.

The existence of a surplus in the administration entitles creditors to the payment of statutory interest on their debts. Prior to 6 April 2017 and at the time of the hearing and judgment below, such interest was payable under Rule 2.88(7) of the Insolvency Rules 1986 (“the 1986 Rules”) which provided as follows:-

The rate of statutory interest payable under Rule 2.88(7) was prescribed by Rule 2.88(9) and for present purposes the rate of statutory interest payable under Rule 14.23(7)(a) is prescribed by Rule 14.23(7)(c) as the greater of the rate specified in s.17 of the Judgments Act 1838 on the date when the company entered administration and the rate applicable to the debts apart from the administration. In the present case, the Judgments Act rate at the relevant time was “8 pounds per centum per annum”.

The issue on this appeal is whether the statutory interest payable on the proved debts is “yearly interest” within the meaning of s.874(1) of the Income Tax Act 2007 (“s.874”). If it is then the joint administrators will be required, subject to certain exceptions, to deduct basic rate income tax from the payments and to account for the tax to HMRC. Since the amount payable by way of statutory interest is estimated to be in the region of £5bn the amount of tax in issue is considerable. Hildyard J held on the administrators’ application for directions that statutory interest did not constitute yearly interest pursuant to s.874(1). HMRC now appeal against that determination.

So far as material s. 874 provides as follows:

The compulsory deduction of the tax gives HMRC the assurance that it will be collected and in most cases imposes on recipients of the statutory interest who are non-resident for UK tax purposes an obligation to pay tax which they would not otherwise have. That is a significant factor in the present case where many of the original creditors and subsequent purchasers of their debt are based abroad. In their cases recovery of the tax deducted will depend on their own domestic tax position and on whether there is a double taxation treaty in their country of residence.

Provisions for the deduction of tax at source have a long history. They can be traced back to Addington’s Income Tax Act of 1803 which established a statutory scheme of taxation by reference to schedules of income and profits that remained a feature of income tax legislation for the next two hundred years. Interest of money was not included as a source of income in the schedules to the 1803 Act but “yearly Interest of Money” was charged to tax under s.208 of the Act.

Unlike the earlier Income Tax Act of 1799 introduced by Pitt, there was no provision in the Act of 1803 which allowed “annual interest” payable out of profits and gains to be deducted from those profits for the purpose of calculating taxable income. But the taxpayer was entitled under s.208 of the 1803 Act to deduct and retain from the yearly interest which he paid out of taxable profits an amount equal to the tax chargeable on the sum in question. The tax due on the yearly interest would be treated as discharged thereby enabling the Exchequer to obtain tax on the taxpayer’s gross taxable income but leaving him able to recover the tax paid by deducting it from the interest which he paid.

These are not of course provisions of the same type as s. 874 which is concerned only to provide a collection mechanism in respect of tax payable by the recipient of the statutory interest. Throughout the history of income tax legislation deductions of tax from payments of yearly interest have been employed for at least two purposes: the deduction of tax from the interest and its recovery for the benefit of the Revenue and the deduction of tax from yearly interest by a taxpayer for his own benefit in circumstances (such as under the Act of 1803) where he has no other means of reducing his own taxable income by reference to the interest payment. But in all these cases the deductibility of the tax has depended upon the interest in question being “annual” or “yearly” interest and Mr Gardiner QC for the administrators submits that this indicates that the rationale for deduction was that it was only intended to apply to contractual and other arrangements with some degree of permanence.

This distinction between annual and other forms of interest runs throughout the subsequent legislation. The Income Tax Act of 1805 included in Case III of Schedule D the profits on “all interest of money not being annual interest” and charged annual interest to tax under s.192 with a concomitant right for the taxpayer to deduct tax at source from annual interest payable out of taxable profits. The legislation was consolidated in the Income Tax Act of 1806. Income tax was then abolished in 1816 but re-introduced by Sir Robert Peel in 1842 with provisions on interest similar to those in the 1805 Act. Deduction at source in relation to payments of yearly interest continued in the Income Tax Act 1853 but all interest of money became taxable without distinction under Schedule D.

In none of this legislation was the phrase yearly or annual interest defined but some indication of its necessary characteristics can be found in s.15 of the Revenue (No. 1) Act of 1864 which authorised deduction of tax from payments of annual interest at the “Rate or a proportionate Amount of the several Rates of Income Tax which were chargeable ….. during the Period through which the same was accruing due….”. The administrators rely on these provisions as indicating that yearly interest must accrue over the period to which it relates.

Under s.24(3) of the Customs and Inland Revenue Act 1888 tax was deductible from and accounted for to the Revenue in respect of any kind of interest that was not wholly paid out of taxed income. The deduction was made at the rate of tax applicable at the date of payment. But for yearly interest that was wholly paid out of taxed income, the taxpayer still had the right to deduct and retain the tax as the quid pro quo for not being able to deduct the interest payment in the calculation of his taxable profits and tax was deductible at the rates prevailing over the period of accrual. This remained the position until s.39 of the Finance Act 1927 changed the rate of interest to the one applicable at the time the payment became due.

This legislation up to 1918 was consolidated in the Income Tax Act 1918 which preserved the separate treatment of interest not wholly paid out of taxed income and yearly interest that was paid wholly out of taxed income and this continued to be the position under the Income Tax Act 1952 (see ss.169-170). The Finance Act 1965 introduced corporation tax and removed the right of companies to deduct and retain tax from payments of annual interest made wholly out of taxable profits. Further changes were made by the Finance Act 1969 which allowed annual interest to be deducted in computing chargeable profits or gains but also required tax to be deducted at source and accounted for to the Revenue in respect of yearly interest paid by companies or paid by any person to someone whose usual place of abode was outside the UK: see s.26(1) and (4). These provisions are the forerunner of what is now s.874 of the 2007 Act. The only differences in wording between s.874 and the earlier legislation are the omission of the words “of money” from the phrase “interest of money” and the use of the word “arising” in place of the phrase “arising or accruing” in the charging provisions of Schedule D. These changes were made as part of the re-write of the tax legislation preceding the 2007 Act but it is not suggested by either side in this appeal that the changes have affected the substance of the relevant provisions for the purposes of determining what constitutes “yearly interest”.

The judge’s view that statutory interest does not constitute yearly interest within the meaning of s.874 was based on the need, as he saw it, to identify a payment in the nature of interest which has accrued from day to day and is payable from year to year. Statutory interest, he held, did not have this quality of recurrence because it was paid retrospectively as compensation for the time value of money attributable to the period between the commencement of the administration and the payment of the proved debts. For this purpose he relied upon and adopted the analysis of rule 2.88(7) contained in the judgment of David Richards J (as he then was) in Re Lehman Brothers International (Europe) (No. 5)[2015] EWHC 2269 (Ch) at [149] where he said:

At [16]-[17] of his own judgment Hildyard J said:

There is no doubt at all that statutory interest, as David Richards J explained, is not a continuing liability which accrues from day to day on a prospective basis over the period to which it relates. It is paid, as I have said, as statutory compensation for the loss which the creditors have suffered by being kept out of their money for the period of the administration. As this Court said in its judgment in Waterfall IIA, the calculation involved is made ex post facto and should be straightforward:

The case for the administrators, which the judge accepted, was that the right to statutory interest was entirely dependent on the existence of an eventual surplus in the administration. Rule 2.88(7) did not create a right to the payment of interest which accrued or arose from the commencement of the administration even on a conditional basis. The relevant tax legislation talked for two centuries of interest “arising or accruing” and was looking at a source of payment which flowed forward in real time throughout the relevant period. In the case of yearly interest, the payment must from its inception have a prospect of continuance for a significant period of time.

In the case of statutory interest, there is no obligation in existence at the outset which, to use the language in one of the authorities relied on, has the prospect of continuing over a tract of future time. The statutory entitlement to interest under rule 2.88(7) lacks any quality or capability of recurrence and is a one-off retrospective payment to be made once the proved debts have been paid. It cannot therefore constitute “yearly interest”.

In support of these propositions we were taken to a number of decided tax cases in which the question of what constitutes “yearly interest” has arisen. It is important to emphasise at the outset that what we are called upon to decide on this appeal is the application of those words in s.874 to the payment of the particular statutory interest and not to any more abstract consideration of what might constitute yearly interest in any other statutory context. But, as I shall explain later in this judgment, the argument about the meaning of “yearly interest” has been conducted by reference to cases in which other forms of retrospective payments have been considered and it has not been suggested that the present appeal requires us to apply any different or special principle in applying the provisions of s.874 to statutory interest payable under the Insolvency Rules.

Mr Gardiner QC began with the question of what was meant by “interest”. He referred us to the decision of Rowlatt J in Bennett v Ogston15 TC 374 where the issue was whether repayment instalments to a moneylender under various loans were or included “interest of money” so as to be taxable under Case III of Schedule D to the Income Tax Act 1918. The decision confirms that interest means payment for the use of money. This is not controversial. But it is also clear that “interest” can become payable and be paid in a number of different circumstances. Interest is conventionally payable in respect of and during the period of a loan. In such cases it falls due at specified intervals according to the terms of the contract. But it may also become payable retrospectively as compensation for the time value of money which the claimant was entitled to but not paid. One could give numerous examples of this but two obvious ones come to mind. There is power under s.35A of the Senior Courts Act (“SCA 1981”) for the court to award simple interest on a debt in respect of which judgment is given for any part of the period between the date when the cause of action arose and judgment. As part of its equitable jurisdiction, the court may also award interest in respect of any sums found due on the taking of an account. At common law interest on a debt was not recoverable absent a contractual entitlement to it: see London, Chatham and Dover Railway Company v South-Eastern Railway Company[1893] AC 429. But even this position has been ameliorated by the decision of the House of Lords in Sempra Metals Ltd (formerly Metallgesellschaft Ltd) v IRC[2007] UKHL 34, [2008] 1 AC 561 that there is jurisdiction to award both simple and compound interest as damages for the non-payment of debts or as a restitutionary remedy in claims such as those for the recovery of money paid under a mistake.

The use of the word “interest” to describe the sums payable in both sets of circumstances indicates that, as a matter of language and common legal usage, it is not confined to cases in which the payment accrues due prospectively as it would do under a loan. It is therefore common ground on this appeal that statutory interest is “interest” within the meaning of s.874 and that the administrators’ argument that it is not “yearly interest” turns on the meaning and effect of the word “yearly”. The point is in any event concluded by authority because in Riches v Westminster Bank Ltd[1947] AC 390 the House of Lords decided that a sum of money awarded as interest under s.3(1) of the Law Reform (Miscellaneous Provisions) Act 1934 (now re-enacted as s.35A SCA 1981) as part of a judgment sum was “interest of money” within Schedule D of the Income Tax Act 1918 so as to be payable under deduction of tax under rule 21 of the All Schedules Rules of the Act.

The argument for the taxpayer in Riches was that the sum awarded by way of statutory interest under the 1934 Act was in reality damages for the wrongful detention of the money. The judgment had been obtained in proceedings for an account of the profits made by the deceased defendant from a sale of shares which he was contractually obliged to pay to the judgment creditor. That argument derived some support from an obiter dictum statement of Wright J in Re National Bank of Wales[1899] 2 Ch 629 at page 651 but it was rejected by the House of Lords. The analysis in the speeches in the Appellate Committee is instructive and I will return to them later in this judgment when I come to the question of what constitutes “yearly” interest. For the moment, however, the following extracts explain why a compensating payment could nonetheless be “interest of money” for the purposes of Schedule D.

Viscount Simon dealt with the point at page 398:-

Lord Wright (beginning at page 399) said:-

Finally, there is Lord Simonds (beginning at 406):

The administrators rely upon what Lord Simonds said in that last passage about “yearly” interest. Mr Gardiner says that it is important to bear in mind that the issue in Riches was whether the interest awarded under the 1934 Act was “interest of money” so as to form part of the payee’s income rather than a capital payment which would not be taxable under Schedule D at all. This was because the deduction of tax had been made under rule 21 of the All Schedules Rules which applied to all forms of interest. If the payment was “interest of money” then tax was deductible at source either under rule 19 of the All Schedules Rules which allowed the payee to deduct and retain the tax on “yearly interest” if paid out of taxable profits or under rule 21 which would apply if the interest payment was not made wholly out of taxable profits or gains. In the latter case the payee would be obliged to account for the tax to the Revenue just as under s.874 in the present case. It was not therefore necessary to decide whether the payments would have been yearly or annual interest for the purposes of rule 19 and there is disagreement between Mr Gardiner and Mr Gammie QC for HMRC as to how much assistance can be derived from Riches on that issue. I propose to return to these speeches later in this judgment once I have considered the other authorities which are relied on in relation to what constitutes yearly interest. I merely pause to observe at this stage that there is certainly no support in any of the speeches in Riches for the proposition that interest paid retrospectively as compensation cannot be treated as having accrued de die in diem over the period to which it relates even though it was not a current liability during that period.

The administrators’ case turns on the use of the word “yearly”. Mr Gardiner submitted that no case has ever been decided that “yearly interest” includes interest which does not accrue prospectively over at least one year. The judge was therefore right to say that it has to have this quality of recurrence at the commencement of and during the period to which it relates. As mentioned earlier, yearly interest was taxed between 1864 and 1925 at the rates applicable to the whole period over which it accrued. This, the administrators say, is a further indication that Parliament must have intended there to be an annual real time accrual. The essential nature of yearly interest has not changed since then.

I can start my survey of the authorities relied on with the decision of the Vice-Chancellor, Sir William Page Wood, in Bebb v Bunny (1854) 1 K & J 216. The issue was whether interest paid by a purchaser for late completion of a contract for the sale of some property was “yearly interest of money” within the meaning of s.40 of the Income Tax Act 1853. The argument before the Vice-Chancellor seems to have centred on whether there was any relevant distinction to be made between interest due under a mortgage and the interest on the purchase price payable under a contract for sale. One distinction relied on was that in the case of interest on purchase money the interest accrued from the contractual date of completion but was only payable once completion finally took place. The Vice Chancellor said:-

Mr Gardiner relies on this decision about the meaning of “yearly” interest of money as providing a definition which is not complied with in the present case. The requirement that yearly interest must not only accrue from day to day but also be payable annually requires the payments, he says, to accrue prospectively and not retrospectively. HMRC’s case by contrast is (and has to be) that statutory interest does accrue daily in the sense explained in the speeches in Riches and is yearly interest simply because in the case under appeal it covers and relates to a period of more than a year.

One obvious issue of some practical importance in the context of deduction of tax is that the taxpayer’s obligation to deduct basic rate tax under s.874 arises when the payment is made and not, for example, at the end of a financial year as part of the calculation and payment of his own tax liabilities. In the case of statutory interest, this does not create a problem because the payment is made in respect of a past period and if the length of that period is the governing factor then the obligation to deduct the tax will be apparent and readily ascertainable as at the date of the payment. But the position is more complicated where the payments are made periodically and prospectively during the period to which they relate. Mr Gammie gave the example of a short-term bank deposit which in fact lasted for more than a year. He suggested that the interest it accrued would not amount to yearly interest because of the nature of the deposit and what must have been assumed to be the intention of the depositor at the inception of the arrangement. Mr Gardiner submits that this demonstrates that the issue of whether interest is yearly cannot simply depend on whether it covers a period of more than a year.

There is some authority about how to treat interest on short-term deposits of this kind. In Goslings and Sharpe v Blake(1889) 23 QBD 324 the Court of Appeal held that interest on a loan for a specified period of less than a year was not “yearly interest of money” under s.40 of the Income Tax Act 1853 even if the rate of interest was expressed as a “per annum” rate. Lord Esher MR indicated that the passage from the judgment of Wood VC in Bebb v Bunny quoted above should not be read as meaning that the adoption of a per annum rate of interest was sufficient in itself to make the interest yearly or annual interest within s.40. A short-term loan for a fixed period differed from a mortgage under which although the debt would usually become payable after six months, it would in most cases remain unpaid in return for interest over a prolonged period. Bowen LJ (at page 331) said:

The exclusion of short-term liabilities (even when calculated by reference to a per annum rate of interest) from tax provisions governing “yearly interest” has been followed by the Court of Appeal in In Re T. Cooper[1911] 2 KB 550; Corinthian Securities Ltd v Cato [1970] 1 QB 377; and Cairns v MacDiarmid [1983] STC 1778. In Corinthian Securities Lord Denning MR said (at page 382):

The same test was applied by Sir John Donaldson MR in Cairns v MacDiarmid but with a qualification about the reference to “investment”:

An intention-based test may be relatively easy to apply when considering an ongoing contractual liability such as a mortgage or loan. The court can have regard to the nature and terms of the arrangement as well as the parties’ expectation of how long the indebtedness will last. The more difficult cases are where a liability to pay interest is imposed usually by statute in relation to an unpaid debt and the timescale for repayment (and therefore for the continuation of the payment of interest) is not prescribed but remains in the discretion of the enforcing authority. An example of this is Gateshead Corporation v Lumsden[1914] 2 KB 883 which concerned interest due from a property owner on the unpaid amount of his liability for street improvements carried out by a local authority under the powers contained in the Public Health Act 1875 and the Gateshead Improvement Act 1867. Section 32 of the 1867 Act permitted the local authority to allow time for the repayment of the expenses with interest being payable on the amount from time to time outstanding. In this particular case the expenses had remained unpaid for a number of years. Notwithstanding this, the Court of Appeal held that the interest paid was not “yearly interest of money” under s.40 of the Income Tax Act 1853 so as to entitle the defendant to deduct income tax from the payments.

In his judgment Lord Sumner said that it might have been possible to treat the case in the same way as mortgage interest had there been evidence of a regular practice by the corporation of, in effect, investing their funds by giving the frontagers time to pay in return for the payment of interest. But no such facts had been established. He went on:

The administrators contend that the same analysis can be applied to statutory interest. The period which it will cover is indeterminate at the commencement of the administration and (aside from the question of whether there will be a surplus) will depend on how quickly the proved debts come to be paid. The decision in Gateshead confirms, they say, that the mere fact that the indebtedness and therefore the liability for interest subsists over a period of more than a year is insufficient to make the interest paid yearly interest.

It is convenient to turn now to the cases which consider interest payable as compensation for the time value of money either under some form of statutory regime or in relation to the court’s equitable jurisdiction referred to earlier. The common feature in all these cases is that the liability for interest is not the product of some consensual process such as a mortgage or loan agreement in relation to which resort can be made to the presumed intention of the parties. The liability for interest is imposed on the taxpayer and (as in the case of statutory interest) is calculated retrospectively having regard to the period in question.

I can begin with the decision of the Court of Appeal in IRC v Barnato[1936] 2 All ER 1176, 20 TC 455. It concerned the liability of Captain Barnato for super-tax on the sums which he received under a judgment for an account against his former partners in the dissolved firm of Barnato Brothers. The sums found due on the taking of the account included an award of interest on the capital sums due down to payment. In order to be assessable to tax they had to constitute interest within the meaning of Schedule D of the Income Tax Act 1918. The argument for the taxpayer (as in Riches v Westminster Bank Ltd) was that the interest was in substance damages or compensation and was not therefore taxable as “interest of money”. Reference was made in the judgment of Lord Wright MR to the court’s equitable jurisdiction to award interest and to the judgment of James LJ in Vyse v. Foster (1872) LR 8 Ch App 309 (at page 333) where he said:

The Court of Appeal distinguished the facts in Barnato from those considered by Wright J in Re National Bank of Wales (where the defaulting trustee had been fraudulent) without therefore having to decide whether the latter decision was correct. As mentioned earlier, Wright J’s decision was eventually overruled by the House of Lords in Riches. They adopted the reasoning of the Court of Session in Schulze v Bensted 7 TC 30 in relation to interest awarded on monies for which a trustee had failed properly to account. The Lord President had said in Schulze (at page 33):

Case III Rule 1 of Schedule D taxed “(a) any interest of money, whether yearly or otherwise…” so that it was not necessary for the Court of Appeal in Barnato to decide whether the award of interest made to the taxpayer would also have been “yearly interest” within the meaning of the statute. But in Barlow v CIR21 TC 354 the issue did arise in a case where a defaulting trustee who had misappropriated trust property entered into a deed dated 27 March 1930 by which he covenanted to pay a principal sum which was made up of the amount of the trust monies he was obliged to account for together with compound interest at 5 per cent per annum up to 1 January 1930. The deed also provided for the payment of interest from 1 January 1930 until payment of the principal sum. The question arose as to whether the interest element of the principal sum was yearly interest and therefore deductible by the taxpayer under s.24 of the Finance Act 1923 (as amended by the Finance Act 1927). It was not in dispute that the continuing interest was deductible but the Special Commissioners decided that the interest element included in the principal sum was either a capital sum or, if interest, was not yearly interest.

Finlay J followed the decision of the Court of Appeal in Barnato and held that the amount of interest comprised in the principal sum fell to be treated as interest rather than a capital payment. That left him to consider whether it was also yearly interest and, again, he differed from the Special Commissioners:

The same issue arose in Regal (Hastings) Ltd v Gulliver(1944) 24 ATC 297. The company successfully sued its former directors for breach of fiduciary duty in order to recover the profit which they had made from the allotment to themselves and subsequent sale of shares in a subsidiary company. The House of Lords held that the directors were liable to account for and to pay the amount of the profits to Regal together with interest: see [1967] 2 AC 134n. The directors sought to deduct tax from the interest payments which Regal resisted. Having referred to the decision of the Court of Appeal in Barnato, Cassels J turned to the question whether the interest awarded was yearly interest:

Mr Gammie relies upon these decisions as indicating that interest calculated retrospectively and payable as part of a compensatory award can amount not only to interest as held in cases like Barnato and Riches but also yearly interest. If Hildyard J is right and interest can only be yearly interest for the purposes of s.874 if it accrues prospectively from year to year then these cases must, he submits, have been wrongly decided.

The judge sought to avoid that conclusion by treating the payments of interest as having accrued over the period to which they related rather than becoming payable retrospectively as from the date of the judgment and Mr Gardiner in his own submissions said that they represented an obligation to pay interest which accrued on the principal amount in real time. But in my view this analysis is untenable.

The usual remedies for a breach of trust or breach of fiduciary duty are the taking of an account or the award of what is now commonly referred to as equitable compensation. Both are personal remedies which require the defaulting trustee or fiduciary to make compensation for the breach of duty complained of. The process of taking an account (whether in common form or on the basis of wilful default) requires the court to scrutinise the defendant’s management of the trust property in order to determine the deficit in or loss to the claimant or the trust estate. This includes a consideration of any relevant questions of causation which the defendant seeks to raise. But the taking of an account does not of itself result in an enforceable order for compensation in favour of the claimant. It is still necessary for the claimant to obtain a judgment for the sum due on the taking of the account in order to become entitled to his money. The point can be illustrated by what Lord Browne-Wilkinson said in Target Holdings Ltd v Redfern[1996] AC 421 at page 437; a case in which the claimant had argued that its loss fell to be calculated at the date of the breach of trust without regard to subsequent events:

This principle is also reflected in the relief granted by the House of Lords in Phipps v Boardman [1967] 2 AC where although the trustees were required to account for the profits made from the acquisition of shares with the benefit of information which had come to them in their capacity as trustees, a generous allowance was made for the skill and work which they had employed in making the acquisition a profitable one.

We were taken by Mr Gardiner to the decision of this court in Vyse v. Foster which is referred to in many of the tax cases as setting out the obligations of a trustee or executor in relation to a breach of trust. James LJ (at page 329) said:

As a statement of general principle this is incontrovertible. But the obligation of the defaulting trustee to make good the loss he has caused with interest is not to be treated as an ongoing obligation to pay in the same sense as a contractual obligation. It is an obligation to make good the loss (just as a tortfeasor is liable in damages) but the quantum and the amount of any interest are matters to be calculated on the taking of the account and are converted into an enforceable liability by the judgment which follows.

This has a particular relevance to the award of interest. The court’s power to award interest in the exercise of its equitable jurisdiction is discretionary although interest will usually be awarded on the basis that the trustee is treated as having retained the money or trust property in his own hands regardless of whether he has in fact disposed of it. In Wallersteiner v. Moir (No. 2) [1975] QB 373 at page 388 Lord Denning MR explained the theoretical basis behind the court’s power to award interest (including compound interest) in order to compensate for the loss suffered by the breach of trust. It is, however, clear from the judgment that this is the court awarding interest as compensation and not the defaulting trustee paying interest on the basis of a continuing obligation accruing periodically in real time from the date of the breach of trust:

I do not therefore accept the argument of the administrators that the award of interest in cases like Regal (Hastings) Ltd v Gulliver can properly be treated as the payment of an ongoing liability no different from the mortgage loan cases referred to in the authorities mentioned earlier. The point applies a fortiori to other cases of retrospectively assessed interest under a statutory regime the most obvious example of which is s.35A SCA 1981. In such cases the liability is entirely the creature of the award made by the court under the statute and cannot be attributed to a pre-existing liability on the part of the defendant.

This brings me back to Riches and to the subsequent decision of the Court of Appeal in Jefford v Gee [1970] 2 QB 130, [1970] 1 All ER 1202. As I explained in the earlier part of this judgment, it is not open to the administrators in the light of the decision in Riches to contend that statutory interest is not interest for the purposes of s.874. But in my view the decision goes beyond this. It is clear from the passages quoted earlier that the House of Lords considered that interest awarded under s.3(1) of the 1934 Act did have the quality of recurrence necessary to make it interest rather than damages. Both Viscount Simon and Lord Simonds adopted the approach which one can trace through into the later cases like Regal (Hastings) Ltd v Gulliver of in effect treating as irrelevant the fact that the interest is payable from the date of judgment and is calculated retrospectively. Instead they concentrate on the duration of the liability if looked at hypothetically at the start of the period to which it relates. Viscount Simon talks (at page 398) of interest as the fruit which a tree produces regularly until payment and Lord Simonds (at page 410) says that interest awarded under the 1934 Act has the essential quality of recurrence because it is calculated as accruing from day to day.

In Jefford v Gee the Court of Appeal was required to decide a number of issues relating to the payment of interest under s.3 of the 1934 Act in relation to an award of damages for personal injury. The trial judge had awarded interest on damages for a period of almost 3 years between the date of the accident and the date of the trial. The tax consequences of the award were not directly in issue but were referred to in argument in relation to the purpose of the award and the appropriate rate of interest.

Lords Denning MR said (at page 149):

The judge said that this passage was based on a misreading of the decision in Riches because that case was concerned only with the deduction of tax under what was then rule 21 which depended on whether the sums in question were “interest of money” rather than yearly interest. That is, I think, right so far as it goes. But Viscount Simon did not in terms confine his analysis to rule 21 and I read the passage from Lord Simonds’ speech quoted at [25] above as also indicating that an award of interest under s.3 was capable of being both interest of money and yearly interest. Lord Maugham in Moss' Empires Ltd v IRC[1937] AC 785 at page 795 had said that for a payment to be an “annual payment” within the meaning of rule 21 it “must be taken to have, like interest on money or an annuity, the quality of being recurrent or being capable of recurrence”. Lord Simonds considered that an award of interest under s.3 of the 1934 Act did have that quality of recurrence for the reasons which he and the other members of the Appellate Committee give.

The judge’s approach to what can constitute yearly interest seems to me inconsistent with this line of reasoning. If statutory interest cannot be yearly interest because it does not accrue prospectively in real time then, on one view, it is difficult to see how it can be interest at all. But the need for it to accrue de die in diem has been held in Riches to be satisfied even where there is no real time accrual. The same test applies equally to the type of statutory interest which we are concerned with on this appeal.

Mr Gardiner’s principal submission is that statutory interest under the Act, even if interest, is not yearly interest because it does not accrue from year to year. The mere fact that it covers a period of several years is not, he says, in itself conclusive. The answer to this question does not, I accept, depend exclusively on the length of the period to which the interest relates. It is necessary to focus on the purpose of the relevant provisions of the Insolvency Rules and on whether the administrators’ obligation to pay interest in the event of a surplus should be treated as essentially a short-term liability (as in the case of short-term loans) regardless of how long the administration in fact lasts.

In my view it would be wrong to treat such statutory interest under the Insolvency Rules as a short-term liability of this kind. Unlike, for example, the indebtedness under the local Act in Gateshead Corporation v Lumsden which could have been called in at any time, the obligation of the administrators to pay interest on the proved debts was unlimited in point of time under rule 2.88(7) (and now rule 14.23(7)), was calculated (where the Judgment Act rate applies) by reference to a per annum rate of interest, contemplated a period of administration which could in many cases last over a prolonged period of time and did in fact endure for a number of years. It did therefore satisfy the definition in Bebb v Bunny in that it was payable from year to year whilst accruing from day to day. Unless the fact that it did not accrue prospectively in real time is fatal to the contention that it is yearly interest which, in the light of the authorities, it is not, I can see nothing in the Insolvency Rules or the other relevant surrounding circumstances which prevents it from being treated as the long-term liability which it in fact was.

For these reasons, I would allow the appeal.

I agree.

I also agree.