The Joint Administrators of Lehman Brothers Holdings Plc v LB GP No 1 Limited & Ors

This judgment relates to a further instalment of the Lehman saga arising out of the collapse of the Lehman Brothers group in 2008. More particularly, it arises out of the unusual circumstance of the process of administration having resulted, not in deficiency, but in considerable recoveries in excess of the claims of unsubordinated creditors. It concerns the priority as between subordinated creditors in the distributing administration of Lehman Brothers Holdings Plc (“PLC”) after payment of or provision for unsubordinated liabilities in full (including statutory interest). The particular issue raised is whether a subordinated creditor having priority as to principal is entitled to be paid statutory interest in priority to repayment of principal on another subordinated claim ranking lower in the queue.

PLC, which is an intermediate holding company within Lehman’s UK group structure, has been in a distributing administration since 2 May 2014. Its administrators (“the PLC JAs”) have declared and paid a number of dividends totalling approximately £1,074.7 million, which have now discharged 100% of the principal value of unsecured, non-preferential, unsubordinated creditors. In addition, the PLC JAs have paid 44.6% (or £354.1 million) of the accrued statutory interest on claims to the unsubordinated creditors.

An updated estimated outcome statement published by the PLC JAs on the PLC website as of June 2023 indicated a base case recovery for subordinated creditors of some £233 million and a high case recovery of some £490 million. It is common ground that, though considerable, these funds are not enough to satisfy all subordinated claims. Issues of priority as between different classes of subordinated debt have arisen accordingly.

PLC’s subordinated debt comprises the following:

The Respondents are all holders of, or otherwise economically interested in, PLC’s subordinated debt. The contest between them which is the subject of this application is essentially between those interested in the PLC Sub-Debt (Claim C) and those interested in the PLC Sub-Notes (Claim D). They are:

As to DB, under the structure summarised in paragraph [4(2)] above, the economic interest in the PLC Sub-Notes lies in the ECAPS. DB’s skeleton argument described its interest as being an economic one in the distributions to be paid by PLC to GP1; and DB is (so the PLC JAs understand it) the beneficial owner of a quantity of ECAPS. In the ECAPS1 Proceedings, DB participated as an informal representative of the beneficial owners of the ECAPS, and the PLC JAs remain content for them to continue to do so. DB has been joined and participated in this application accordingly.

The ECAPS1 Proceedings, which eventually resulted in a decision of the Court of Appeal which is of considerable continuing relevance in this application, concerned two applications for directions (Footnote: ¹): (a) an application by the joint administrators of LB Holdings Intermediate 2 Ltd (“LBHI2”) as to the relative priority of the subordinated debt in the LBHI2 estate; and (b) an application by the PLC JAs as to the relative priority of the subordinated debt in the PLC estate. The applications were heard together because of the commonality of issues and parties.

LBHI2’s subordinated creditors were (i) PLC under 3 subordinated debt agreements (the LBHI2 Sub-Debt, sometimes referred to as “Claim A”); and (ii) Lehman Brothers Holdings Scottish LP3 (“SLP3”, an LBHI entity) under a subordinated note issuance (the LBHI2 Sub-Notes, sometimes referred to as “Claim B”).

In the ECAPS1 Proceedings, there was a single issue for determination in the LBHI2 estate, namely as to the respective priority of those debts, within which SLP3 also advanced a claim for rectification. The initial parties to the application were the joint administrators of LBHI2, SLP3 and PLC. By Order dated 24 July 2018, Mann J permitted the joinder of DB, on condition that DB bore its own costs of participating and avoided duplication of submissions.

The applications in the two estates were made by the respective joint administrators following a lengthy process of engagement with the interested parties. The scope of the applications reflected the issues expressly raised by the parties as matters in dispute, and the drafting itself was finalised after consultation with them. Although GP1 and DB initially contended that, given the need for resolution of the prior dispute in the LBHI2 estate, it was premature to seek directions at the PLC level, the PLC JAs considered it appropriate and in the interests of creditors as a whole for the PLC application to be made alongside the LBHI2 application. Ultimately, this was not actively opposed by any party.

It was common ground, and ultimately ordered, that the PLC Sub-Debt and the PLC Sub-Notes were senior to the ECAPS Guarantees. In the PLC estate, that left for determination the issue of the respective priority between the PLC Sub-Debt and the PLC Sub-Notes, together with a number of further issues which had been raised by the parties.

Following the judgments of Marcus Smith J ([2020] EWHC 1681 (Ch)) and the Court of Appeal ([2021] EWCA Civ 1523), and the refusal of the Supreme Court to grant permission to appeal, the answers provided to the issues in the ECAPS1 Proceedings were as follows:

The Court of Appeal’s determination that “Claim D must be paid in priority to Claim C” (see paragraph [90]) is, of course, binding on the parties, and in any event, binding on this court as a matter of precedent.

I shall return to the Court of Appeal’s detailed analysis in ECAPS1 later; for the present it is sufficient to note Lewison LJ’s summary of his reasoning and conclusions as follows (at [90]):

As with the process that led to the ECAPS1 Proceedings, the present Application (“the Statutory Interest Application”) followed a period of consultation with the interested parties, in which those parties were encouraged to identify and explain issues which they considered to be in dispute and to comment on the drafting of the Statutory Interest Application Notice.

After such input, the Statutory Interest Application identified 5 issues, as follows:

However, a few days before the commencement of the hearing of the Statutory Interest Application, the parties informed the court that it was likely that they would be in a position to achieve by consent resolution of issues (2) to (5) above; and on the first day of the oral hearing a Consent Order was sent to the court providing for the PLC JAs to withdraw their application in respect of those issues, which I approved.

Thus, only Issue (1) is extant and requires determination. Its context and importance is that the PLC JAs anticipate that the funds available within PLC’s estate for distribution will be insufficient to discharge both the statutory interest on Claim D (the PLC Sub-Notes) and principal of Claim C (the PLC Sub-Debt) in full. The priority between them must be determined.

It was common ground that the analysis of the provisions of Claim C and Claim D in the decision of the Court of Appeal in ECAPS1, which (as explained above) determined priority as between Claim D and Claim C in respect of principal, is of central importance in the determination of Issue (1). Indeed, in that context DB also contends (with the support at the Hearing of GP1) (Footnote: ²) that the issue is already res judicata (on the basis of the decision in ECAPS1) or an abuse of process (since even if not res judicata in its strict sense, it is an abuse of process for LBHI to raise it now, having had the opportunity to do so in the course of the ECAPS1 Proceedings but not done so).

However, although both sides of the argument (GP1 and DB on one side, and LBHI on the other side) embraced the approach of the Court of Appeal, they reached opposite conclusions as to its application to the issue whether Claim D has priority in respect of statutory interest as well as in respect of principal (which GP1 and DB contended was clearly the case, whereas LBHI contended it was not). In the circumstances, the PLC JAs have concluded that they require directions from the court as to whether statutory interest should be paid on Claim D before the payment of principal on Claim C.

The determination of Issue (1), and thus what directions should be given to the PLC JAs, requires the analysis of (a) the respective provisions of the PLC Sub-Debt (Claim C) and the PLC Sub-Notes 18 June 2018 (Claim D); (b) the relevant IR and (c) the rationale of the judgments both of the Court of Appeal in ECAPS1 and of the Supreme Court in In re Lehman Brothers International (Europe) (in administration) (No 4) [2018] AC 465, [2017] UKSC 38 (often, and below, referred to as “Waterfall I”) (Footnote: ³).

The subordination provisions of Claim C are contained in Clause 5 of the PLC Sub-Debt. This clause provides: (Footnote: ⁴)

The following defined terms are relevant to the subordination provisions in Claim C:

Claim D’s relevant subordination provision is Condition 3 of the PLC Sub-Notes, which provides:

The following defined terms are relevant to that subordination provision in Claim D:

In ECAPS1 at first instance,Marcus Smith J noted a “significant difference” between the definition of Subordinated Liabilities in Claim C and the definition of the same phrase in Claim D. The difference then identified was that the definition in Claim C makes no reference to “Liabilities of the Issuer which rank or are expressed to rank pari passu with the Notes.” Marcus Smith J nevertheless concluded that the definitional difference made “no difference to the outcome.” On appeal, however, the Court of Appeal concluded in the ECAPS1 Proceedings that the difference was determinative in reaching its conclusion as to the priority of Claim D to Claim C, at least in terms of principal. The importance of the first difference was explained by the Court of Appeal in ECAPS1.

Another difference which is possibly significant in this case (though not in ECAPS1) is the extension of the definition in Claim D to all “Liabilities to Noteholders in respect of the Notes”, whereas the definition in Claim C is confined to “all Liabilities to the Lender in respect of each Advance made under this Agreement and all interest payable thereon”. I return to this latter difference later.

I have already set out Lewison LJ’s summary of his conclusions: see paragraph [14] above.

The Court of Appeal’s more detailed reasoning was elaborated as follows:

Before addressing the application of that contractual analysis to Issue (1), it is necessary in this case to consider also the terms of the IR.

As previously noted, in the ECAPS1 Proceedings, the Court of Appeal focused exclusively on the effect of the contractual provisions in determining the real question as to how far back in the queue each Claim had agreed to stand. In that case, there was no need or reason to consider the effect (if any) of any Insolvency Rules. The provisions of the IR were not relied on either by the parties or the court in determining that issue. The position is different in the present case.

In the present case it is common ground that the IR, and in particular IR 14.23 (which regulates the payment of interest), are also relevant. Indeed, IR 14.23 underpins the submissions of all parties, though each ‘side’ culls a different conclusion from it in their application.

IR 14.23(7) provides:

It will be necessary to elaborate the contesting parties’ respective submissions on IR 14.2, but a brief summary may be convenient at this stage and assist understanding of the interconnection between the contractual terms and the provisions of the IR in the parties’ respective submissions.

In summary, therefore:

Before turning to discuss in greater detail the parties’ respective submissions on the contractual provisions and the provisions of IR 14.23, it is convenient to complete this description of the relevant material by explaining in broad terms the relevance to the present issue of the decision of the Supreme Court in Waterfall I (and see paragraph [21] above).

Waterfall I concerned the question whether statutory interest, even if correctly described as a ‘Liability payable or owing by [PLC]’ (which was in issue there but is now common ground in these proceedings), ranked before or after subordinated liabilities; and a further but related question whether a proof for subordinated debt could be lodged validly before payment in full of statutory interest in respect of unsubordinated debt and payment (or provision) in full of any non-provable liabilities.

The Supreme Court concluded that both statutory interest and non-provable liabilities had priority over subordinated debt (see [64] in the speech of Lord Neuberger of Abbotsbury PSC), and (disagreeing with the Court of Appeal but agreeing with David Richards J (as he then was) at first instance) that it was not open to the holder of subordinated debt to lodge a proof in respect of that debt until statutory interest in respect of the unsubordinated debt had been paid in full and any ‘non-provable’ liabilities had either been paid in full or fully provided for (see [70] ibid.).

Noting that the subordinated loan agreements (for revolving credit facilities) in issue in Waterfall I contained subordination clauses in exactly the same terms as those in Claim C, Ms Lexa Hilliard KC for GP1 submitted that the conclusions of the Supreme Court in Waterfall I that statutory interest on unsubordinated debt is payable in priority to the payment of principal on subordinated debt, and that no proof could be lodged in respect of subordinated debt unless and until any liabilities in respect of unsubordinated debt had been paid in full, was applicable by the same reasoning to the issue in this case.

Mr Allison KC for LBHI, on the other hand, submitted that (a) Waterfall I was concerned with an issue of priority between unsubordinated claims and subordinated claims, and was not concerned with, did not address and has no application to, the question here raised of ranking as between subordinated liabilities themselves; and (b) whereas in Waterfall I the unsubordinated debt was, as such, a ‘Senior Liability’ ranking prior to any other liabilities, that is not so in this case; and in any event (c) even though (admittedly) statutory interest is a ‘Liability’, it is nevertheless not a Liability ‘in respect of the Notes’ within the definition of Claim D, because it is not a liability having the Notes as its legal source.

These submissions were considerably elaborated; and I turn next to a more detailed analysis of the parties’ competing submissions.

At the hearing, and after a helpful introduction of the context and issues by Mr Beltrami KC for the PLC JAs, I acceded to Mr Allison speaking first, since the burden appeared to be on him to show why Claim D’s priority as to principal should not carry with it the right to payment of statutory interest prior to any distributions in respect of Claim C.

LBHI’s case, in the round, is:

By reference to the provisions of Claim C and Claim D in more detail, Mr Allison’s submissions were elaborated to the following effect:

Mr Allison characterised the broader interpretation advanced by GP1 and DB as misconceived. He submitted that the premise of their argument “necessarily assumes that the draftsperson of Claim D departed from the statutory starting point (i.e., that statutory interest ranks junior to proved debts) and has subsumed statutory interest at the same level of subordination as the Subordinated Liabilities (i.e., subordinating it at the same level as the Notes and Liabilities ranking pari passu with them)”. He dismissed this premise as making no commercial or regulatory sense: and that no commercial or regulatory reason has been identified by DB and GP1 as to why a regulatory subordinated instrument should include within the scope of its subordination provision a Liability which (a) does not have the subordinated instrument as the legal source of the obligation, and (b) is already deeply subordinated by statute, such that it already ranks below the subordinated instrument as a matter of law. Whilst claims to principal and contractual interest arise under the Notes and therefore need to be subordinated to fulfil a clear regulatory purpose, statutory interest does not arise under the Notes, and is already subordinated by statute to all proved debts, including the Notes themselves.

Further, Mr Allison submitted, it is “impossible” for statutory interest to rank at the same level as principal on Claim D, given that statutory interest can only be paid if there is a surplus after proved debt, and inexplicable and “inherently improbable” that “the draftsperson of a regulatory subordinated debt would structure Claim D in such a way as to subordinate statutory interest to the same level as principal, when statutory interest would otherwise be more deeply subordinated by the express terms of statute”. He suggested that “the absurdity of subsuming statutory interest on Claim D as a Subordinated Liability” is underscored by the “commercial oddity” that on the wider interpretation contended for by GP1 and DB, statutory interest on Claim D would rank above statutory interest on other subordinated debts, even where those debts are expressed to rank pari passu with Claim D.

He submitted also that a contextual and semantic analysis of the phrase demonstrates the inaptness, incongruity or internal inconsistency of including statutory interest within the definition, and that the broader (and usual) meaning of the phrase “in respect of” is displaced by the particular context and a reading of the provisions of Claim D as a whole:

Neither GP1 nor DB accepted LBHI’s analysis. In particular, neither accepted that statutory interest on Claim D fell within the definition of Excluded Liabilities for the purposes of Claim C. Rather, statutory interest constituted, as the Court of Appeal in ECAPS1 had already held in the case of principal, a liability “in respect of…the Notes” ranking pari passu with principal. If, as is clear, statutory interest cannot be classified as an Excluded Liability for the purposes of the definition in Claim C, it is of no avail for LBHI to resort to and pray in aid the subordination provisions of Claim D: LBHI cannot succeed if Claim C has agreed to stand behind Claim D in respect of statutory interest as well as principal; and Claim C must be taken so to have agreed if statutory interest is not an Excluded Liability. But even if resort is made to the subordination provisions of Claim D, there is no inaptness, incongruity or violence done to the language or scheme of the subordination provisions in Claim D to characterise statutory interest as within the definition of Subordinated Liabilities, so that on that basis too it is to be treated as having the same priority over Claim C as has Claim D’s entitlement to repayment of principal.

In more detail, GP1 and DB submitted that as a matter of contractual interpretation:

Further, on behalf of GP1 (and with the support of Ms Tolaney KC on behalf of DB), Ms Hilliard KC put forward the following “routes” to the conclusion that statutory interest falls to be paid out of the available ‘surplus’ in priority to the principal of Claim C (I have slightly altered the sequence in which they were advanced so as to follow on from the previous analysis):

Ms Tolaney KC adopted all of Ms Hilliard’s submissions. Although she chose herself to focus primarily on the issues of res judicata and abuse of process (which I address later), she also emphasised the following on the substantive issue of contractual interpretation:

As is apparent, the issues raised concern (a) the proper interpretation of the subordination provisions of Claim C and Claim D in the light of preceding authority (including authority involving a dispute between the same parties where the same provisions were considered, albeit in relation to priority as to capital repayment without regard to any entitlement to statutory interest) and (b) their interrelationship with, and the meaning and effect of, IR 14.23(7).

Pausing at the latter, that is, the interrelationship between the contractual and the statutory provisions, I think it is important to note that all of the parties accepted that the provisions of IR 14.23(7) might inform the approach to the contractual arrangements, but none contended that they should be read as overriding any contractually agreed priority or as mandating that statutory interest be paid only out of any ‘surplus’ remaining after payment of all debts which are ultimately proved. That is so notwithstanding that Mr Allison drew my attention to certain passages (especially in the judgment of David Richards J (at [134]–[135] and [144]-[149]) in Waterfall 2A, in the judgment of Gloster LJ on appeal (at [27]) and the observation of Lord Briggs JSC in Revenue and Customs Commissioners v Joint Administrators of Lehman Brothers International [2019] 2 All ER 559at 576b-c that “Statutory interest is never due until all proving creditors have been paid in full”) which might suggest that IR 14.23(7) provides an exclusive and overriding scheme for the payment of statutory interest pari passu from any surplus remaining after payment of all Claims ultimately proved.

In my judgment, the parties correctly proceeded on the basis that (as Ms Tolaney put it) IR 14.23(7)(a) is “simply the starting point when one is considering subordinated claims”. It is clear from the reasoning and conclusion reached in Waterfall I in the Supreme Court that a lender may validly agree that repayment of principal on its debt should stand behind payment of statutory interest to another lender. Further, although Mr Allison sought otherwise to confine the effect of that decision to priority between statutory interest on unsubordinated debt and principal on subordinated debt (Footnote: ⁶), and as not determining any issue of priority as between subordinated creditors, he does appear to have accepted (in my judgment, correctly) that a contractual provision for priority is to be given effect in both contexts, notwithstanding what appears to me to be one possible reading of IR 14.23(7).

Equally important, I consider that it is inherent, and likewise follows from the decision in Waterfall I,that in the context of IR 14.23(7)(a) ‘surplus’ does not, in the context, mean what remains after all debts have been proved; it means the amount left in the hands of the Administrators after paying proved debts at each level of the ‘waterfall’. In other words, surplus is quantified as each layer of debt is proved, without taking into account provable debts at lower levels of the waterfall which must wait their turn in the queue before being proved (even though in due course these may be permitted to be proved and thereupon move from being ‘provable’ to become proved debts).

Mr Allison’s submissions were crafted to tread the narrow path which he contended was left open as regards subordinated claims notwithstanding the decisions in Waterfall I and ECAPS1. He contended that Waterfall I should be distinguished because “the context for the ‘how far back in the queue’ question is entirely different when dealing with subordinated debts”; and that once this difference was appreciated, and when then the instruments in question in Claim C and Claim D were interpreted objectively in accordance with the approach of ECAPS1, it is clear that although Claim C ceded priority to Claim D in respect of principal and contractual interest, it had not done so as regards a payment pursuant to a statutory direction dehors the contracts.

I accept that there are plainly differences in the nature of the competition between this case and both Waterfall I and ECAPS1. I accept, of course, that in Waterfall I, the contest was between unsubordinated debt (as a class) and subordinated debt (as a class). In that context, the principal purposes of subordination are to protect unsubordinated creditors by ensuring that subordinated claims cannot compete with unsubordinated claims in the event of insolvency, thereby enabling subordinated debt to qualify as regulatory capital. The regulatory considerations and concerns which require that unsubordinated claims should be insulated in all respects from subordinated claims, and thereby signal and require that no payments should be made to subordinated claims unless and until any entitlements relating to unsubordinated claims have been satisfied in full, have no application in the context of subordinated claims. I accept also that in ECAPS1,there was no issue raised before the court about statutory interest, or the application or wider effect of IR 14.23(7).

However, as it seems to me, the regulatory driver was an important but not exclusive factor in Waterfall I. The fact that there are no regulatory considerations to signal priority between subordinated claims does not answer the question raised in this case, just as the fact that they were in play in Waterfall I was only one factor in the conclusions of the Supreme Court in that case. The process of determining whether a lender has agreed to stand behind another in the queue, or to borrow the words of the subordination provisions under scrutiny in this case, for determining what one lender is prepared to acknowledge as being “Senior Liabilities”, is substantially the samewhether the competition is between unsubordinated creditors and subordinated creditors or between subordinated creditors inter se.

It also seems to me inescapably to follow from the judgment of Lewison LJ and the decision of the Court of Appeal in ECAPS1 that even where the regulatory imperative of subordination of debt for the purpose of insulating unsubordinated claims and enabling subordinated debt to qualify as regulatory capital is not applicable, the definitions and provisions of each of the Claims apply likewise to determine priority as between one subordinated Claim and another subordinated Claim (in that case the payment of principal in respect of Claim C being subordinated to the payment of principal in respect of Claim D). In short, the absence of any regulatory imperative is part of the background; but, as in the case of a competition relating to principal, it is not “of any real moment” (per Lewison LJ in ECAPS1 at [76]). What is required, as explained by Lewison LJ, is intense focus on the definitions which provide the mechanism for determining priority between different claims/debts.

Although in ECAPS1,there was no issue raised before the court about statutory interest, or the application or wider effect of IR 14.23(7), the analysis in ECAPS1, which led to the conclusion that as between the two subordinated Claims, Claim C had ceded to Claim D priority as to principal, must be adopted here. The question is whether, by reference to the same definitions which mandated priority as regards principal, Claim C has also contractually ceded priority in respect of other potential payments to Claim D.

In that regard, I do not agree with Mr Allison’s principal submission that, once regulatory concerns and requirements are set aside, there is nothing in the language of the instruments respectively creating Claim C and Claim D which evinces an intention to depart in this regard from that which he submitted is otherwise prescribed by the insolvency code (and, in particular, IR 14.23(7)) in its application to subordinated claims. I do not agree that, correctly interpreted, none of the provisions of those Claims touch upon or affect the payment of statutory interest under IR 14.23(7) and neither Claim ceded priority to the other in respect of statutory interest.

In my view, and reflecting the approach of both GP1 and DB, the starting point is the subordination provisions in Claim C, and the correct allocation of statutory interest to one of the categories of Liability identified in those provisions, being (as in all these cases) “Senior Liabilities”, “Subordinated Liabilities” and “Excluded Liabilities”. It is in the subordination provisions that any agreement on behalf of Claim C to cede priority is primarily to be found.

I consider that for the purposes of the subordination provisions in Claim C, statutory interest is not to be categorised as an Excluded Liability, cannot be categorised as a Subordinated Liability and must be treated as a Senior Liability. That is because in my view, and consistently with the submissions of Ms Hilliard and Ms Tolaney:

Turning then to the subordination provisions in Claim D, to check to see whether there is any inconsistency (as would arise, for example, if such provisions evince an intention to cede priority in respect of statutory interest), the issue is again as to the correct allocation of the relevant liability as between the three identified categories.

As to this, I consider that for the purposes of the subordination provisions in Claim D, statutory interest is plainly not a Senior Liability, is not an Excluded Liability and is (as indeed it must be since that is the only remaining category) a Subordinated Liability ranking pari passu with principal. That is because, again consistently with the submissions of Ms Hilliard and Ms Tolaney:

Further to my conclusion as to the meaning of “Liabilities …in respect of the Notes”,which was accepted by all parties to be a crucial point, and was the subject of detailed submissions by Mr Allison (which I have summarised in paragraph [47] above):

I agree with Ms Hilliard and Ms Tolaney that the phrase “Liabilities to the Noteholders in respect of the Notes” in the definition of Subordinated Liabilities in Claim D encompasses statutory interest. The phrase “in respect of” ordinarily denotes a very broad category of qualifying association. I do not read any of the terms of Claim D as cutting down its ambit. I do not accept Mr Allison’s submissions that it denotes and is limited to a liability which has its source in contract, nor his submission (to the same effect) that it is limited to claims “under” the Notes. I see no sufficient reason not to accord the phrase its usual broad meaning, and to proceed on the basis that the draftsman’s choice of that phrase (rather than the word ‘under’) should be respected and given effect.

That, as I see it, is enough to determine the issue. However, I should for comprehensiveness address Ms Hilliard’s submission that an alternative route leading to the same conclusions as to the priority of Claim D’s entitlement to statutory interest was that, since it had been decided and was now common ground that Claim C could not be proved until after Claim D had been satisfied as to principal, IR 14.23(7) required also the payment of statutory interest on Claim D before Claim C could be proved at all.

For the reasons already given, I accept what seems to me to be the lynchpin of Ms Hilliard’s argument that IR 14.23(7)(a) in effect directs a sequence of assessments of ‘surplus’ and the payment of statutory interest after proof and payment of each level of debt after each such assessment.

In summary, whilst I prefer to base my decision on their analysis of the subordination provisions in Claim C and (if necessary) Claim D, which I have in substance accepted, I also accept the arguments of Ms Hilliard (who put this as her first “route” to her desired conclusion) and Ms Tolaney that IR 14.23 does, consistently with their submissions as to the contractually agreed order of priority, make clear that all amounts payable in respect of Claims duly proved must be satisfied before any Claim further down in the queue can be proved at all. My reservation, which underpins my preference for the contractual solution, is that in another case, there might be inconsistency with the contract: that is not this case and I need not decide what should then be done; but the parties having all accepted that IR 14.23(7) may be modified in its effect by contractual provision suggests that the contract would prevail.

I have reservations about Ms Hilliard’s “second route”. She presented the conclusion she sought as a “straightforward application of the ratio of Lord Neuberger PSC’s judgment in the Supreme Court in Waterfall I”, in which she contended it was “established that statutory interest on Senior Liabilities, such as Claim D, is payable in priority to the principal on the subordinated debt of Claim C.” That is beguiling, but to my mind, simplistic.

Certainly, the conclusions in Waterfall I to the effect that (a) statutory interest is a Liability payable and owing by the relevant company (which, as I have made clear before, was common ground in this case), (b) the IA 1986 and IR are consistent with and require payment of statutory interest on unsubordinated claims before payments on subordinated debts and non-provable debts, and (c) statutory interest must be paid on all proved debts before non-provable debts, and non-provable debts must be paid out of any assets remaining before any distributions to a company’s members (see [58D] in Lord Neuberger’s judgment). However, and as I have also previously noted, Lord Neuberger did not have to and did not consider any issue arising in the different context of a competition between subordinated but provable claims inter se. The emphasis of his judgment is on the necessity of according priority to unsubordinated debts over subordinated debts, such priority being inherent in their descriptions (what Lord Neuberger called their “eponymous nature”), clear from the terms of each as considered in Waterfall I, and necessary to fulfil regulatory objectives.The position when the competition is between subordinated claims is more nuanced.

All that said, it does seem to me to follow from Lord Neuberger’s judgment in Waterfall I that in any competition between provable debts, including as to the priority between a claim to statutory interest on a debt standing (by virtue of contractual subordination provisions) before another in the queue and principal on the lower ranking claim, the priority must be decided according to what was contractually agreed (in particular, under the subordination provisions of the lower ranking claim). The common ground between the parties that IR 14.23(7) does not override and must be read subject to contractual subordination provisions, supports the same conclusion.

Put another way, and in summary, I consider that the decision in Waterfall I supports the conclusion sought on behalf of GP1 (and DB) but ultimately that conclusion is dependent on the contractual analysis which is explained in ECAPS1. It follows that Ms Hilliard’s “second route” is not an alternative solution, but an exposition of the support in authority for the primacy of contractual subordination provisions, leading to the conclusion that, albeit without the regulatory overlay which contextualised Waterfall I, statutory interest on Claim D comes before the repayment of principal on Claim C.

In what she presented as a third “route” to that same conclusion, Ms Hilliard posed the question as to why, it being common ground that statutory interest on unsubordinated debts ranks ahead of the principal on Claim D, there should be any difference as regards the payment of statutory interest on Claim D and the payment of principal on Claim C. She submitted, in answer, that there should be no difference, since “Claim C stands in precisely the same position vis-à-vis Claim D as Claim D stands vis-à-vis the unsubordinated creditors. There is, and LBHI has identified, no principled point of distinction.” She noted that LBHI had sought to reach a different conclusion in reliance on the subordination provisions in Claim D: but that is an erroneous approach because (a) it has already been determined in ECAPS1 that Claim D ranks ahead of Claim C, and that is “the end of the matter”, and (b) the subordination provisions in Claim D do not refer to statutory interest, do not say anything expressly about where statutory interest on Claim D ranks, but do on their true interpretation provide for the entitlement to statutory interest in respect of Claim D to be subordinated only to the same extent as Claim D itself (and no further). She also made again her submission that in the Claim C subordination provisions, which primarily and (she contends) exclusively determine Claim C’s position in the queue, Claim C is expressed to rank junior to all of PLC’s Liabilities except “Excluded Liabilities”; and since on no possible construction of Claim D is statutory interest “expressed” to be junior to Claim C, it cannot fall within that definition.

It seems to me that this third “route” does not on analysis add more than the contractual analysis in the light of Waterfall I and ECAPS1 already undertaken. It is not really a third “route” but another way of expressing the same conclusion, with which I agree.

Accordingly, in my judgment, statutory interest in respect of Claim D falls to be paid before the principal payable under Claim C. That conclusion also accords with the decisions in Waterfall I and ECAPS1.

Standing back, I do not regard this result as counter-intuitive; nor as contrary to any regulatory requirement, or undermining of any regulatory objective or concern. On the contrary, I think it would be more counter-intuitive to dissociate and relegate the payment of statutory interest on a proved debt in order to give priority to that extent to a debt, possibly a whole series of debts, lower down in a long queue, which have not yet been proved or permitted to be proved. All the more so, to my mind, given the function of statutory interest which is to serve as compensation for the delay after the commencement of the administration until paying out on proved debts “for the periods during which they have been outstanding since the relevant date (Footnote: ⁷)” (IR 14.23(7)(a)). Statutory interest may not be the fruit of the tree; but it is paid in respect of the tree nonetheless.

That conclusion makes strictly unnecessary determination of the question raised by DB (with GP1’s support at the Hearing) (Footnote: ⁸) as to whether the issue raised now was res judicata or otherwise an abuse of process on the ground that it could and should have been raised in the context of ECAPS1. However, I turn to consider that issue as well because (a) it was argued at some length, (b) the question of how the principles apply to applications by Administrators seems to me to be of some novelty and interest, (c) I need to explain why I did not address this as a preliminary point, given the objective of and the policy underlying res judicata and the broader principles established in Henderson v Henderson;and (d) last but not least, in case my judgment on the substantive issue (in favour of the position advocated by GP1 and DB) is later reversed.

First, a word on process, and in particular why I heard and have dealt first with the substantive legal issues, rather than determining first (as might ordinarily seem logical) whether the argument proposed to be put forward should be precluded by either res judicata or the broader principles in Henderson v Henderson.

As to this, DB (by Application Notice dated 27 April 2023) formally applied to strike out each of the Issues numbered (1), (4) and (5) on the basis that:

“the bringing or pursuing of those issues is precluded by the doctrines of cause of action estoppel, issue estoppel and/or abuse of process in circumstances where Priority Issues 1, 4 and 5 seek the determination of issues that were either decided and/or could and should have been raised for determination in a previous application made by the Joint Administrators dated 16 March 2018.”

GP1 supported this position in its Position Papers, but stated that, “to avoid duplication”, it would leave it to DB to advance those arguments.

However, at a Directions Hearing before me on 4 May 2023, and subsequently in their respective Position Papers which I required to be exchanged, all parties agreed that it would be sensible to determine the merits of each of the identified Issues in the alternative, especially bearing in mind the possibility of an appeal. That being so, it became the consensus between the parties that any arguments under the general portmanteau of estoppel or abuse of process should be heard as part and parcel of and subsumed within the submissions on the substantive legal points. I agreed with and indeed encouraged that approach in the particular circumstances of this case. That was in part informed by my preliminary views that (a) this was not a case of res judicata in its strict sense, (b) quite apart from the possibility of an appeal, the issues would have, in any event, to be addressed carefully once the argument became based on issue estoppel or abuse of process, and (c) I would be reluctant to refuse the PLC JAs the guidance they sought in accordance with the Act, and unlikely also to regard myself as bound to consider that principles of issue estoppel or abuse of process required the court not to give the directions indicated by its assessment of the substantive issues raised.

There was, at the outset of the substantive hearing, some discussion whether it was nevertheless necessary for DB to pursue its strike out application or whether (as DB and GP1 were quite content should be the position) it would suffice for all matters to be treated as open for argument and to be determined. Mr Beltrami, for the PLC JAs, was especially keen that this be clarified, largely to avoid a peripheral argument as to whether it could ever be right to strike out the PLC JAs’ own application and if not, what would be the proper relief. Suffice it to say, that after some consideration all parties agreed to my considering all aspects together, as I did.

One further point on process is this: in light of the agreement between the parties as to the disposition of Issues (2) to (5), the arguments relating to estoppel and abuse of process were confined to Issue (1).

Turning to the competing arguments, the essence of GP1 and DB’s case in this regard is simple: that the arguments they advanced and the solutions they proposed on the substantive issues were the corollary of and flowed inexorably from earlier decisions in Waterfall I and/or the ECAPS1 Proceedings and thus res judicata; and/or that arguments to the contrary were barred or an abuse of process under broader principles established long ago in Henderson v Henderson (1843) 3 Hare 100.

LBHI rejected any such suggestion as “wholly devoid of merit”. Its position was that the priority issues now raised (a) could not be said to involve the re-litigation of identical causes of action to those already determined; nor (b) could they be said to raise issues decided in a previous case which were necessary or fundamental to the decision; and it followed that there could be no question of true res judicata. Even if such issues could have been raised in ECAPS1, there was no sufficient basis for concluding that they should have been: so it was not a proper case for the application of the broader principles in Henderson v Henderson.

The PLC JAs’ position was carefully nuanced. They disagreed with any assertion, if put forward, that their making the Application for directions pursuant to paragraph 63 of Schedule B1 to the Insolvency Act 1986 could itself be the subject of an estoppel or amount to an abuse of process. However, they sought to be neutral on any contested submission that there is a cause of action estoppel or an issue estoppel which determines any, or any element, of the priority issues now before the court. Likewise they sought to be neutral on any submission that it is an abuse of process for any interested party to run an argument or take a position on the legal issues raised that the party could or should have run or taken in the ECAPS1.

The parties’ respective submissions were considerably elaborated by reference to numerous authorities. However, in the course of the hearing it became clear, and although I consider more briefly the issue of estoppel, I took it to be accepted, that the real battleground was whether LBHI’s conduct amounted to an abuse of process.

It is necessary to distinguish (as DB’s Application Notice did) between three distinct doctrines sometimes compendiously referred to under the portmanteau ‘res judicata’: (a) cause of action estoppel, (b) issue estoppel and (c) abuse of process. That is so even though, as Lord Bingham of Cornhill stated in Johnson v Gore-Wood & Co [2002] 2 AC 1 (at page 31):

“The underlying public interest is the same: that there should be finality in litigation and that a party should not be twice vexed in the same matter. This public interest is reinforced by the current emphasis on efficiency and economy in the conduct of litigation, in the interests of parties and the public as a whole.”

Despite that shared objective, Res judicata and abuse of process are ‘juridically very different’: Virgin Atlantic Airways Ltd v Zodiac Seats UK Ltd [2014] A.C. 160, at [25] per Lord Sumption. In that case, Lord Sumption explained that:

InAllsop v Banner Jones Ltd [2021] 3 W.L.R. 1317, Marcus Smith J (giving the judgment of the Court of Appeal) explained the essential difference between cause of action estoppel and issue estoppel:

As to abuse of process:

I did not understand DB to contend that Issue (1) is subject to res judicata in the strict sense of the cause of action having been determined in a previous decision. LBHI’s legal claim to priority as regards principal was that statutory interest fell within the definition of ‘Excluded Liabilities’ in Claim C and that accordingly Claim C had not agreed to stand behind payment of statutory interest on Claim D. That was not determined in ECAPS1 nor in Waterfall I.

Indeed, my understanding was and is that Ms Tolaney accepted in her oral submissions on the second day of the substantive hearing that the point was not expressly argued or determined in either case,and that she instead relied on issue estoppel or abuse of process. In my judgment, her concession that this is not a case of res judicata or cause of action estoppel was correct.

In DB’s skeleton argument it had been submitted that “there can be no doubt that [the Court of Appeal’s determination in ECAPS1]gave rise to an issue estoppel binding on all parties to the ECAPS 1 Proceedings, including LBHI and the PLC Administrators” given that the Court of Appeal had determined in ECAPS1 that (quoting from their order):

“The claims of […] (“GP1”) under […] (the “PLC Sub-Notes”) rank for distribution in priority to the claims of LBHI under the PLC Sub-Debt”. (Footnote: ⁹)

However, in her oral submissions, and after further reflection, Ms Tolaney conceded that as the point had not been expressly argued or decided, and although she maintained that the answers to Issue (1) were clear from the judgments of the Court of Appeal in ECAPS1 and the Supreme Court in Waterfall I, she would not press her case on issue estoppel either.

Again, I think she was right not to do so. The fact that the approach of the court on an issue arising in one case may be determinative of a different issue in another case between the same parties does not, without more, establish an issue estoppel. The issue in the later case must be one which was expressly decided, or a necessary and fundamental part of or step in the decision in the earlier case. Parity of reasoning or confluence in the reasoning in the two cases is not enough. In the decision of the High Court of Australia in Blair v Curran (1939) 62 CLR 464, 531-533, (Footnote: ¹⁰) Dixon J stated as follows (by reference to Lord Shaw’s judgment in Hoystead v. Commissioner of Taxation [1926] AC 155):

There was no need to decide, and it was not decided, in ECAPS1 whether statutory interest on Claim D fell within the definition of ‘Excluded Liability’ in Claim C; nor was the meaning in that context of the contested and crucial phrase “in respect of…” addressed.

Similarly, GP1’s argument in its Position Paper that “Claim C is in exactly the same position vis-à-vis Claim D as Claim D is vis-à-vis the unsubordinated creditors’, and that there is a direct analogy with the reasoning in Waterfall I is flawed for the same reason. It is a deduction from the earlier decision; but that earlier decision did not decide the issue, nor was the issue contested now a fundamental part or stepping stone to that earlier decision.

In my judgment, therefore, no issue estoppel has been shown such as to preclude the argument that LBHI has raised in this case. I accept, however, that the confluence between the issues raised and the approach of the Court of Appeal in ECAPS1, and the issue and the approach I have adopted to it in this case, is marked; and the question whether LBHI’s argument now is Henderson v Henderson abuse is more arguable.

As set out in LBHI’s skeleton argument in these proceedings, the burden of establishing Henderson v Henderson abuse is on the person who says it applies; and it is not sufficient to show that because a matter could have been raised in earlier proceedings, it should have been, so as to render the raising of it in later proceedings necessarily abusive.

To quote again Lord Bingham’s speech in Johnson v Gore Wood & Co (at page 90, supra):

“The bringing of a claim or the raising of a defence in later proceedings may, without more, amount to abuse if the court is satisfied (the onus being on the party alleging abuse) that the claim or defence should have been raised in the earlier proceedings if it was to be raised at all. I would not accept that it is necessary, before abuse may be found, to identify any additional element such as a collateral attack on a previous decision or some dishonesty, but where those elements are present the later proceedings will be much more obviously abusive, and there will rarely be a finding of abuse unless the later proceeding involves what the court regards as unjust harassment of a party. It is, however, wrong to hold that because a matter could have been raised in earlier proceedings it should have been so as to render the raising of it in later proceedings necessarily abusive. That is to adopt too dogmatic an approach to what should in my opinion be a broad, merits-based judgment which takes account of the public and private interests involved and also takes account of all the facts of the case, focusing attention on the crucial question whether, in all the circumstances, a party is misusing or abusing the process of the court by seeking to raise before it the issue which could have been raised before. As one cannot comprehensively list all possible forms of abuse, so one cannot formulate any hard and fast rule to determine whether, on given facts, abuse is to be found or not”.

Clarke LJ (as he then was) identified the following proposition in Dexter Ltd (In Administrative Receivership) v Vlieland-Boddy [2003] EWCA Civ 14 at [49]:

In adopting the “broad merits-based approach” required in determining whether or not a matter which could have been raised in the earlier proceedings “should” have been raised, the court may take into account such factors as whether raising the issue in the former proceedings would have been premature, or unduly hypothetical, or likely to raise issues which might distract from the main point, or for any reason better left for subsequent decision if and when it arose (see, for example, Barrow v Bankside Members Agency [1996] 1 W.L.R. 257, at p. 268 per Saville LJ (as he then was) in a case forming part of the complex Lloyd’s litigation of the early 1990s).

Plainly, if in retrospect an issue seems to have been both obvious and important, the court will inevitably have in mind, especially in the case of sophisticated and well-advised parties, why it did not appear so at the time and/or why it was not taken at the time. Of course, if it is established that a party deliberately contrived to hold back a point in one case ‘pour mieux sauter’ in the next or to mount (in effect) a collateral attack on the result, that would be likely to be a paradigm case of abuse. But even a logical decision by the party that raising the point at the earlier stage would be premature or distracting or hypothetical or the like might not be a justification accepted by the court.

Ms Tolaney advanced this under the banner of what she referred to as “the Aldi Stores rule”, after the decision of Thomas LJ (as he then was) in Aldi Stores Ltd v WSP Group Plc [2007] EWCA Civ 1260, [2008] 1 WLR 748. In that case, although (reversing the judge at first instance) the Court of Appeal concluded that Aldi’s decision to proceed with a cause of action in a subsequent and separate claim was not a misuse or abuse of the process of the court, Thomas LJ ended his judgment with the following prescription for the future, with which the rest of the Court (Wall and Longmore LJJ), agreed:

“…for the future, if a similar issue arises in complex commercial multi-party litigation, it must be referred to the court seised of the proceedings. It is plainly not in the interests of the parties, but also in the public interest and in the interest of the efficient use of court resources that this is done. There can be no excuse for failure to do so in the future.”

Ms Tolaney sought to establish on that basis a rule that if at the time of the earlier proceeding, a party has identified a point which could be dealt with at that proceeding, the court will need to consider whether the party should have placed it before the court to enable the court to decide whether it should be dealt with, rather than for the party to make that determination itself; its purpose being to give the court an opportunity to consider how the resources of the court may be utilised in the most cost effective and efficient way and to allow the other parties to take an informed view of their position (for example, in relation to costs and settlement). Moreover, Ms Tolaney submitted that if the party did identify the point at the earlier stage, the Aldi Stores rule is mandatory, and failure to comply will constitute an abuse of process: she relied on Clutterbuck v Cleghorn [2017] EWCA Civ 137, at [81].

As to that latter factor, Ms Tolaney submitted that the point now in issue was “an obvious construction point” and was “not the sort of issue that one might not have had in mind if you were LBHI…”, as if to float the suggestion that LBHI had kept the point back. She went on to submit that perhaps having not found much success in the previous cases, LBHI had simply concluded that the point was worth a run as a “last roll of the dice”, and that taking such a late point as a final expedient was an abuse. She submitted that this was especially so where (as was the case here) the PLC JAs had asked all concerned before the ECAPS1 Proceedings to consider carefully whether there were any other points to raise. When I pressed her on this, Ms Tolaney clarified that she did not need to go so far as to suggest and was not suggesting, that there was any deliberate decision by LBHI to hold back the point; she submitted that all she needed to establish was that “they are [were] aware of the point and therefore could and should have brought it.”

Both the Aldi Stores case and Clutterbuck v Cleghorn are, of course, decisions of the Court of Appeal and thus binding on me. However, I do not consider that they (and indeed other cases in the Court of Appeal cited in Clutterbuck v Cleghorn such as Stuart v Goldberg Linde [2008] EWCA Civ 2, [2008] 1 WLR 823 and Gladman Commercial Properties v Fisher Hargreaves Proctor [2013] EWCA Civ 1466, [2014] PNLR 11) should be elevated to the status of an inflexible overriding rule (which is what it seemed to me Ms Tolaney was suggesting). That would not be consistent with the decision and guidance given by the Supreme Court in Johnson v Gore Wood (which Thomas LJ cited as the principal authority) and Lord Bingham’s emphasis in that case (a) that it was wrong “to adopt too dogmatic an approach to what should in my opinion be a broad, merits-based judgment” and (b) that “there will rarely be a finding of abuse unless the later proceedings involve what the court regards as unjust harassment of a party” (see the passage cited more fully in paragraph [102] above).

I note also that in Clutterbuck v Cleghorn, the Court again emphasised (a) the need to evaluate all the circumstances, (b) that even an “inexcusable” failure to comply was not dispositive (see [91]) but simply “a relevant factor”. It is also apparent from the review of authority in Clutterbuck v Cleghorn that the Aldi Stores guidelines had been engaged only in cases where it was clearly demonstrated that the party said to be abusing the process had intentionally “[kept] a second claim against the same defendant up his sleeve” (Stuart v Goldberg at [77]) or had “sought to pursue a second claim in which they made essentially the same allegations as those they made in an earlier claim which they had settled” which would have been “a shocking consequence” (see Gladman at [66]).

In short, therefore, the court must undertake what is often referred to as a “multi-factorial” review of all the circumstances with what Buxton LJ described in Taylor Walton (a firm) v Laing [2007] EWCA Civ 1146, [2008] PNLR 11 at [12] as “an intense focus on the facts of the particular case…” with a view to determining “whether in broad terms the proceedings that it is sought to strike out can be characterised as falling under one or other, or both, of the broad rubrics of unfairness or the bringing of the administration of justice into disrepute.”

Always bearing in mind Lord Bingham’s overall prescription that “it is preferable to ask whether in all the circumstances a party’s conduct is an abuse than to ask whether the conduct is an abuse and then, if it is, to ask whether the abuse is excused or justified by special circumstances”, I propose, for the purpose of the intense focus on the facts which is required, to consider all the circumstances with particular attention to the following questions:

As to (a), the parties’ respective witness statements and Position Papers addressed at some length the context and purpose of the ECAPS1 Proceedings. DB’s evidence (in the 1^st witness statement of Phillip Denis Taylor, a partner in the restructuring and insolvency department of Alston & Bird (City) LLP), went into considerable detail about their genesis, purpose and ambit, and the genesis of these proceedings after the decisions at first instance and in the Court of Appeal. LBHI’s evidence in reply was provided in the 3^rd witness statement of Ronald John Geraghty, the Managing Director of LBHI.

It is not necessary to rehearse every point and counter-point in that evidence. The following uncontested points of particular importance seem to me to emerge:

The process of the Lehman administrations as a whole, and the gradual emergence and refinement of issues previously not identified but which are thrown into higher relief by the emergence of unanticipated or unlikely flows of funds, support the common conclusion that hindsight is a dangerous guide. What might seem an obvious point at an earlier stage might well, at the time, have been thought spectral or unlikely to arise, if indeed it occurred to anyone in a defined way at all. This has certainly been my experience as the assigned Lehman judge for the past six or so years.

Taking the evidence as a whole, I do not consider that what Ms Tolaney referred to as the Aldi Stores rule is engaged; and, in any event, I do not consider that DB has demonstrated that LBHI adopted the sort of tactic or arrogation by one party to itself of a procedural decision which should have been put before the court. Of course, with hindsight, and with the benefit of knowing the flow of funds after the many uncertainties were resolved, it might have been more efficient for Issue (1) to have been dealt with as part of the ECAPS1 Proceedings. But that is, in my judgment, a long way from any conclusion that the matter should have been canvassed before such matters had been resolved. At the very least, the fact that it was not put forward is not inexcusable.

Turning to (b) in paragraph 112 above and the question whether, if the point had been identified and raised, the Court would have directed it to be heard as part of the ECAPS1 Proceedings, I consider that DB’s submissions overlook the following very important factors present in the particular circumstances of this case:

Standing back to consider all the circumstances, I do not consider that LBHI’s conduct has been shown to amount to misusing or abusing the process of the court. I do not accept that there is anything smacking of unjust harassment, or what might be termed playing “ducks and drakes” with the court. It would be altogether too harsh to label it in any such way.

It follows that, in my judgment, no abuse of process has been established. That renders it unnecessary to consider whether to strike out the Statutory Interest Application: it is to be dealt with on the merits.

It also renders it strictly unnecessary to consider whether it would ever be right to strike out an application made by Administrators for directions in order to ensure finality between contesting claimants in the estate. The PLC JAs did deal with this, and in explaining why they did not consider that DB’s strike out application was an appropriate or available tool, submitted that:

These seem to me to be cogent points. However, beyond adding that unlike in ordinary litigation, the court is usually content, in the context of an administration, to rely on the good sense and professionalism of professional administrators in determining whether issues require to be referred to the court for decision and in what sequence it is best to determine them having regard to the exigencies of the efficient realisation and distribution of the estate, I do not think it is necessary or advisable to reach any final determination of this point.

In the circumstances, therefore, I would dismiss the application based on principles of res judicata, cause of action estoppel and Henderson v Henderson abuse.