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England and Wales High Court (Chancery Division) Decisions |
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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Lehman Brothers Holdings Plc, Re [2023] EWHC 3056 (Ch) (29 November 2023) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2023/3056.html Cite as: [2023] EWHC 3056 (Ch) |
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BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST (ChD)
IN THE MATTER OF LEHMAN BROTHERS HOLDINGS PLC
(in Administration)
AND IN THE MATTER OF THE INSOLVENCY ACT 1986
Fetter Lane London, EC4A 1NL |
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B e f o r e :
____________________
| THE JOINT ADMINISTRATORS OF LEHMAN BROTHERS HOLDINGS PLC (in Administration) |
Applicants |
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- and – |
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| (1) LB GP NO.1 LIMITED (in Liquidation) (2) LEHMAN BROTHERS HOLDINGS INC. (3) DEUTSCHE BANK A.G. (London Branch) |
Respondents |
____________________
Lexa Hilliard KC, Tom Roscoe (instructed by Charles Russell Speechlys LLP) for the 1st Respondent
David Allison KC, Adam Al-Attar, Edoardo Lupi (instructed by Weil, Gotshal & Manges (London) LLP) for the 2nd Respondent
Sonia Tolaney KC, Richard Fisher KC, Tim Goldfarb (instructed by Alston & Bird (City) LLP ) for the 3rd Respondent
Hearing dates: 9 and 10 October 2023
____________________
Crown Copyright ©
The Honourable Mr Justice Hildyard:
Introduction
The subordinated debt and the contesting parties
(1) The PLC Sub-Debt, sometimes also referred to as "Claim C":
(a) These are liabilities of approximately US$1.9 billion (£1.059 billion) under 3 subordinated loan facility agreements dated (in two cases) 30 July 2004, and (in one case) 31 October 2005.
(b) The original lender under the PLC Sub-Debt was Lehman Brothers UK Holdings Ltd, but the debt is now held by Lehman Brothers Holdings Inc. (the second Respondent, "LBHI").
(2) The PLC Sub-Notes, sometimes also referred to as "Claim D":
(a) These are liabilities with an aggregate face value of approximately €790 million under subordinated note issuances pursuant to offering circulars dated 29 March 2005, 19 September 2005, 26 October 2005 and 20 February 2006.
(b) The notes were issued, variously, to one of three limited partnerships, Lehman Brothers Capital Funding LP, Lehman Brothers Capital Funding II LP and Lehman Brothers Capital Funding III LP ("the Partnerships").
(c) The General Partner of each of the Partnerships is LB GP No 1 Limited (in Liquidation) ("GP1"), now acting by its liquidators.
(d) The PLC Sub-Notes were long-dated instruments, falling due in 2035 or 2036, and which did not include acceleration provisions in the event of a PLC insolvency. The Court has confirmed (see further below) that these obligations are future debts which are subject to discounting under rule 14.44 of the Insolvency (England and Wales) Rules 2016 ("IR"). On the PLC JAs' current calculations, discounting reduces the claim on the PLC Sub-Notes to approximately £188 million.
(e) The PLC Sub-Notes were funded by external investors through the issue by the Partnerships of further sets of securities through 3 separate offering circulars. Some of those securities were entitled Enhanced Capital Advantaged Preferred Securities, and they have all been referred to generally as "ECAPS". Under this structure, the economic interest in the PLC Sub-Notes lies in the ECAPS.
(3) The ECAPS Guarantees, sometimes also referred to as "Claim E":
(a) The offering circulars for the ECAPS made reference to the provision of a subordinated guarantee to be given by PLC to the Holder of the securities.
(b) The front page and signed execution pages for two of the three ECAPS Guarantees have been located. The third has not been located, notwithstanding an extensive disclosure process in previous Court proceedings described below ("the ECAPS1 Proceedings"), though the PLC JAs have no reason to believe that the guarantee was not in fact executed.
(1) LBHI, which is PLC's ultimate parent company, and is interested in Claim C;
(2) LB GP No. 1 Limited ("GP1"), which is interested in Claim D; and
(3) Deutsche Bank A.G. (London Branch) ("DB"), which is also interested in Claim D.
The ECAPS1 Proceedings
(1) In the LBHI2 estate, the LBHI2 Sub-Debt is senior to the LBHI2 Sub-Notes (and the application for rectification failed).
(2) In the PLC estate, the PLC Sub-Notes are senior to the PLC Sub-Debt and both the PLC Sub-Notes and the PLC Sub-Debt are senior to the ECAPS Guarantees.
(3) Also in the PLC estate:
(a) The PLC Sub-Debt has not been released under the terms of a Settlement Agreement within the Lehman estates entered into as of 24 October 2011.
(b) The PLC Sub-Notes are future debts, subject to discounting under IR 14.44.
(c) The value of the PLC Sub-Debt falls to be partially reduced to the extent that guarantee payments were made (by LBHI) on that debt.
'…There are three possible categories of claim by unsecured creditors: senior claims, pari passu claims and junior claims. Claim D subordinates itself to claims which are senior to it. It does not subordinate itself to claims which rank pari passu with it. It takes its place in the queue alongside other creditors whose claims rank pari passu with it. Claim C on the other hand has agreed to stand even further back in the queue. It has agreed to subordinate itself to claims other than those that are junior to it. In other words, it has agreed to stand in the queue behind creditors whose claims would otherwise rank pari passu with Claim C.'
The present application
(1) Whether the principal amount of the PLC Sub-Debt (Claim C) falls to be paid in priority to statutory interest payable on the claim in respect of the PLC Sub-Notes (Claim D), or whether statutory interest payable on Claim D falls to be paid in priority to the principal amount of Claim C.
(2) Whether statutory interest payable on the claim in respect of the PLC Sub-Notes falls to be calculated by reference to the face amount of the PLC Sub-Notes, or by reference to the discounted sum payable on that claim in accordance with IR 14.44.
(3) Whether the applicable period for the purposes of the calculation of statutory interest on the claim in respect of the PLC Sub-Notes begins with the date on which PLC entered administration, or on the date on which, in accordance with the subordination provisions of the PLC Sub-Notes, the holder of the PLC Sub-Notes became entitled to submit proofs of debt in PLC's administration in respect of that claim (and, if so, what that date is).
(4) Whether clause 2.11 of the ECAPS Guarantees imposes upon the Holder (as defined therein) a trust in respect of any proceeds which have been distributed by PLC, which takes effect on receipt of those proceeds and requires such proceeds to be turned over to PLC. If so, what are the circumstances in which such trust arises and in respect of what proceeds.
(5) If PLC makes distributions on the PLC Sub-Notes but proceeds are thereafter turned over to PLC by the Holder pursuant to clause 2.11 of the ECAPS Guarantees, what is the resultant order of priority, as between the PLC Sub-Debt (Claim C) and the PLC Sub-Notes (Claim D), in respect of such sums received by PLC?
Ambit of Issue (1)
The subordination provisions of Claim C and Claim D respectively
'(1) Notwithstanding the provisions of paragraph 4, the rights of the Lender in respect of the Subordinated Liabilities are subordinated to the Senior Liabilities and accordingly payment of any amount (whether principal, interest or otherwise) of the Subordinated Liabilities is conditional upon –
(a) (if an order has not been made or an effective resolution passed for the Insolvency of the Borrower and, being a partnership, the Borrower has not been dissolved) the Borrower being in compliance with not less than 120% of its Financial Resources Requirement immediately after payment by the Borrower and accordingly no such amount which would otherwise fall due for payment shall be payable except to the extent that –
i. paragraph 4(3) has been complied with; and
ii. the Borrower could make such payment and still be in compliance with such Financial Resources Requirement; and
(b) the Borrower being "solvent" at the time of, and immediately after, the payment by the Borrower and accordingly no such amount which would otherwise fall due for payment shall be payable except to the extent that the Borrower could make such payment and still be "solvent".
(2) For the purposes of sub-paragraph (1)(b) above, the Borrower shall be "solvent" if it is able to pay its Liabilities (other than the Subordinated Liabilities) in full disregarding–
(a) obligations which are not payable or capable of being established or determined in the Insolvency of the Borrower, and
(b) the Excluded Liabilities.'
(1) 'Liabilities' is defined to mean 'all present and future sums, liabilities and obligations payable or owing by the Borrower (whether actual or contingent, jointly or severally or otherwise howsoever)'.
(2) 'Senior Liabilities' are 'all Liabilities except the Subordinated Liabilities and Excluded Liabilities'.
(3) 'Subordinated Liabilities' are 'all Liabilities to the Lender in respect of each Advance made under the Agreement and all interest payable thereon'.
(4) 'Excluded Liabilities' are 'Liabilities which are expressed to be and, in the opinion of the Insolvency Officer, do, rank junior to the Subordinated Liabilities in any Insolvency of the Borrower'.
'(a) The Notes constitute direct, unsecured and subordinated obligations of the Issuer and the rights and claims of the Noteholders against the Issuer rank pari passu without any preference among themselves. The rights of the Noteholders in respect of the Notes are subordinated to the Senior Liabilities and accordingly payment of any amount (whether principal, interest or otherwise) in respect of the Notes is conditional upon:
(i) (if an order has not been made or an effective resolution passed for the Insolvency of the Issuer) the Issuer being in compliance with not less than 100 per cent of its Financial Resources Requirement immediately after such payment, and accordingly no such amount which would otherwise fall due for payment shall be payable except to the extent that (a) Condition 3(d) or Condition 3(g), as the case may be, has been complied with; and (b) the Issuer could make such payment and still be in compliance with such Financial Resources Requirements; and
(ii) the Issuer being solvent at the time of, and immediately after, such payment, and accordingly no such amount which would otherwise fall due for payment shall be payable except to the extent that the Issuer could make such payment and still be solvent.
(b) For the purposes of Condition 3(a) above, the Issuer shall be "solvent" if it is able to pay its Liabilities (other than the Subordinated Liabilities) in full disregarding (i) obligations which are not payable or capable of being established or determined in the Insolvency of the Issuer, and (ii) the Excluded Liabilities.'
(1) 'Senior Liabilities' is defined as 'all Liabilities except the Subordinated Liabilities and Excluded Liabilities';
(2) 'Liabilities' are 'all present and future sums, liabilities and obligations payable or owing by the Issuer (whether actual or contingent, jointly or severally or otherwise howsoever)';
(3) 'Subordinated Liabilities' are 'all Liabilities to Noteholders in respect of the Notes and all other Liabilities of the Issuer which rank or are expressed to rank pari passu with the Notes'; and
(4) 'Excluded Liabilities' are 'Liabilities which are expressed to be and, in the opinion of the Insolvency Officer do, rank junior to the Subordinated Liabilities in any Insolvency of the Issuer'.
The Court of Appeal's analysis in ECAPS1 of the contractual provisions of Claim C and Claim D
(1) In the insolvency regime, all debts must be ranked to determine the order in which they may be proved; and the "question is when a particular creditor is entitled to prove and whether he is entitled to be paid in priority to or pari passu with another creditor…[and]…that is a question of interpretation of the various contractual instruments involved, rather than a question for the rules. The rules are there to give effect to an order of priority that has been contractually agreed as between subordinated debts" (see paragraph [13]). As to that:
(2) First, in determining the issue as to the relative ranking between Claim C and Claim D in respect of principal ("the PLC Ranking Issue"), the overarching question for the Court was how far back in the queue each of Claims C and D had agreed to stand (see paragraph [78]). The subordination provisions in each Claim were to be read as a whole, having regard to their common objective; being to identify the creditor's place in the queue (see [26]).
(3) Second, when considering how far back Claim D had agreed to stand in the queue, the effect of the Subordinated Liabilities definition was that: 'The clear intention behind the exclusion is that Claim D has not agreed to stand further back in the queue than claims which rank pari passu with it. In relation to such claims it will share in a distribution pari passu' (emphasis added, at [82]). By so holding, the Court of Appeal accepted the submission that, contrary to the view of the judge at first instance, the difference in Claim C's and Claim D's Subordinated Liabilities definitions made all the difference to the outcome of the PLC Ranking Issue.
(4) Third, and as to the difference in definition, when considering where Claim C had agreed to stand in the queue, the effect of its Subordinated Liabilities and Excluded Liabilities definitions was that: 'Claim C expresses itself to be junior to all claims except those which are themselves junior to Claim C. If a claim would otherwise rank pari passu with Claim C, Claim C has subordinated itself to that claim' (at [83], emphasis added). Accordingly, the Court of Appeal held that Claim C had not subordinated itself to junior claims but that it was subordinated to claims that would otherwise rank pari passu with it.
(5) Fourth, applying those conclusions to determine the relative priority of Claims D and C, it followed that:
(a) From the perspective of Claim D's subordination provision, the principal on Claim C was an Excluded Liability.
(b) From the perspective of Claim C's subordination provision, the principal on Claim D was a Senior Liability. To reach that conclusion, it had been 'necessary to look at Claim D to see what is expressed' (at [86]).
(c) For this purpose, one had to look at the Subordinated Liabilities definition in Claim D. As to this: 'The clear thrust of this definition is that Claim D is not subordinated to claims which have an equal ranking with Claim D… Whatever else may be said about the clarity of the drafting, it is not possible to regard Claim D as "expressing" itself to be "junior" to Claim C' (at [88], emphasis supplied).
(d) Accordingly, given that Claim D was not an Excluded Liability from Claim C's perspective, Claim D was necessarily, as regards Claim C, a Senior Liability.
Relevance and application of the IR as to payment of interest: IR 14.23
'(7) In an administration—
(a) any surplus remaining after payment of the debts proved must, before being applied for any other purpose, be applied in paying interest on those debts in respect of the periods during which they have been outstanding since the relevant date;
(b) all interest payable under sub-paragraph (a) ranks equally whether or not the debts on which it is payable rank equally; and
(c) the rate of interest payable under sub-paragraph (a) is whichever is the greater of the rate specified under paragraph (6) and the rate applicable to the debt apart from the administration.'
(1) LBHI submit that statutory interest is not a Liability "in respect of the Notes" for the purposes of Claim D nor a Liability "in respect of each Advance" for the purposes of Claim C and is not a Subordinated Liability within the definition of that term in each Claim. Rather, it falls within the definition of 'Excluded Liabilities' in both Claim D and Claim C, ranking behind a claim to principal under Claim C notwithstanding Claim D's priority in respect of principal. Further, the provisions of IR 14.23(7) reinforce the conclusion that statutory interest should not be payable on either Claim until after payment in full of the principal on both.
(2) Against this, both GP1 and DB submit that statutory interest does not fall within the definition of Excluded Liabilities in Claim C but rather for the purposes of Claim C is a Senior Liability; and for the purposes of Claim D, it falls within the definition of Subordinated Liabilities ranking pari passu with principal. Accordingly, as a matter of contractual interpretation, Claim D is entitled to payment of statutory interest in priority to any repayment of principal on Claim C. Further or alternatively, and indeed GP1's primary case, which DB adopted and which is elaborated later, is that the provisions of IR 14.23(7)(a) demonstrate that the priority accorded to principal (as determined by the Court of Appeal in ECAPS1) also mandates priority in respect of statutory interest.
The decision of the Supreme Court in Waterfall I
The parties' submissions on contractual interpretation and IR 14.23 in more detail
LBHI
(1) The decision of the Supreme Court in Waterfall I has no direct application to the issue in this case. Waterfall I concerned a competition between unsubordinated debt and subordinated debt. In that context, the requirement for regulatory capital in the form of subordinated debt carries with it the strong implication or corollary that no payments are to be made to subordinated creditors unless and until all unsubordinated claims and entitlements have been satisfied in full. No such regulatory considerations inform a competition between subordinated claims[5]. Moreover, the Supreme Court certainly did not address any issue relating to statutory interest on subordinated debt.
(2) The decision in ECAPS1 illuminates the required approach of the court in determining an issue of priority in a competition between subordinated claims, but that case dealt only with priority between Claim C and Claim D as regards repayment of principal. There was no consideration in that context of the question in this case as to the priority between Claim D's claim to statutory interest and Claim C's claim to repayment of principal. It is for this court to determine that question in accordance with the approach prescribed by the Court of Appeal in ECAPS1 and against the background that debts (other than preferential debts) rank pari passu unless the instrument creating the debt in question evinces a contrary intention (and see ECAPS1 at [14]).
(3) The overarching question for the court is how far back in the queue, and relative to each other, have Claims C and D agreed to stand. As Lewison LJ put it in ECAPS1 at ([17]):
"Given that a creditor cannot, by agreement with the debtor, advance his position in the queue from where it would otherwise have been, the question that arises in relation to each instrument is how far back in the queue the creditor has agreed to stand."
(4) Accordingly, it is necessary to consider in turn the detailed contractual provisions of each Claim to determine whether one claim has ceded priority to the other, and in what respects. There is in this context neither the regulatory requirement to insulate unsubordinated claims nor the mandate to do so inherent in the distinction between unsubordinated debt and subordinated debt that drove the decision in Waterfall I.
(5) In this case, there is nothing in the terms of either Claim C or Claim D to denote that Claim C has agreed to stand behind Claim D in the queue save in respect of principal and other contractually-sourced liabilities.
(6) It follows that, in accordance with the approach in ECAPS1, Claim C should be paid principal after payment of principal on Claim D but before Claim D or Claim C are paid statutory interest on a pari passu basis out of any surplus remaining after payment of such contractual claims.
(1) In both Claim C and Claim D, liabilities are defined, and their priorities are determined, by the three exclusive categories of "Senior Liabilities", "Subordinated Liabilities", and "Excluded Liabilities". In the context of both instruments, all claims must be categorised by reference to one or other of those three categories, as explained by Lewison LJ in ECAPS1 at [80] to [91]. It is stipulated that no payment can be paid in respect of any liability unless the Borrower/Issuer will be solvent before and after the payment.
(2) In Claim C, "Subordinated Liabilities" comprise the rights of the lender "in respect of each Advance made under this Agreement and all interest payable thereon" and by clause 5 those rights "are subordinated to the Senior Liabilities…". "Senior Liabilities" are all liabilities except the Subordinated Liabilities and Excluded Liabilities. Thus, Claim C is subordinated to claims that would otherwise rank pari passu with it, but not to Excluded Liabilities, which are liabilities expressed to be junior to it. In Claim C, "Excluded Liabilities" are defined to mean, in effect, liabilities which "rank junior to the Subordinated Liabilities…" Statutory interest is, for the purposes of Claim C, neither a Senior Liability nor is it a Subordinated Liability; and accordingly, and also because by dint of IR 14.23(7)(a) it is not payable until after payment of principal on Claim D, it must be an Excluded Liability which Claim C has not agreed to stand behind in the queue. As such, although it was determined in Waterfall1 that it is a "liability payable or owing by the company", it is not a liability which Claim C has agreed to stand behind in the queue or 'waterfall'; rather, it ranks for payment after payment of principal on Claim C. Indeed, statutory interest is an axiomatic example of an Excluded Liability, viz., a Liability which in Claim C is 'expressed to be…junior to the Subordinated Liabilities in any Insolvency of the Issuer'. This follows from:
(a) the terms of IR 14.23(7)(a). By its terms, the liability to pay statutory interest arises after the payment of the proved debts: see In re Lehman Bros International (Europe) (in administration) (No 6) [2015] EWHC 2269 (Ch), [2016] Bus LR 17, which is often referred to as "Waterfall 2A", in which David Richards J so held in the context of rejecting the submission that dividends were first to be appropriated to 'accrued' statutory interest (see at [134]-[135] and [144]-[149]); and on appeal [2017] EWCA Civ 1462, [2018] Bus LR 508 at [27], where Gloster LJ noted that the Rules 'contain a built-in assumption that the whole of the principal of the relevant debts will already have been paid by dividend since, otherwise, there will be no relevant surplus'. Thus, the obligation to pay statutory interest only arises after the payment of proved debts and it does not 'accrue' in the meantime from the date of the administration. By reason of this statutory definition, the obligation to pay statutory interest in relation to Claim D arises after the payment of the proved debt that is Claim D. Indeed, if Claim D were not a proved debt that was paid in full, Claim D would not enjoy any right to statutory interest at all;
(b) the definition of Excluded Liabilities [in Claim C] and its role in Condition 3(a), envisages an insolvency context, referring to the 'opinion of the Insolvency Officer' as to whether the liabilities in question are expressed to rank junior to the Subordinated Liabilities 'in any Insolvency of the Issuer'. Statutory interest under the IR is an example of a liability subordinated by statute that would reasonably be known to the insolvency officeholder as being junior to Claim D in an insolvency of PLC.
(3) That conclusion is likewise entirely consistent with the provisions of Claim D. Claim D has not agreed to stand further back in the queue than claims which rank pari passu with it, and in relation to such claims (including repayment of principal), therefore, it will share in any distribution pari passu (and see ECAPS1 at [82]). The question becomes whether, for the purposes of the definitions in Claim D, statutory interest is a Liability "in respect of the [Claim D] Notes" [my emphasis], so that it is to be treated as a claim which ranks pari passu with Claim D. As to this:
(a) Statutory interest is a liability created by statute and not by contract (and see section 189 of the Insolvency Act 1986 ("IA 1986") and Waterfall I at [47]). It is the product of a statutory direction to a liquidator or administrator in respect of a surplus against proved debts, and it is by reason of that direction that a right arises, albeit one not enforceable by suit against the issuer: see, in addition to the paragraphs of Lord Neuberger's judgment in Waterfall I referred to above, the first instance judgment of David Richards J (as he then was) in Waterfall I ([2015] Ch 1), at [70]-[71]. As such, it is a claim separate to the claim in respect of principal which arises by statute in respect of 'the debts proved' that are paid (see IR 14.23(7)(a). A good illustration of this is that the obligation to pay statutory interest arises irrespective of whether the underlying debt is interest-bearing.
(b) On its true interpretation, the phrase "Liabilities…in respect of the Notes" is confined to liabilities which have their source in the contractual terms, and not liabilities arising dehors the contractual provisions and only by virtue of statutory provisions and rules providing for payment of statutory interest on 'the debts proved'.
(c) Accordingly, although (as previously noted) it is no longer disputed that statutory interest is a Liability, it is not a Liability "in respect of the [Claim D] Notes" [my emphasis] for the purposes of the definition therein of "Subordinated Liabilities". Rather, it forms part of the statutory process for proof and dividend which replaces and extinguishes creditors' contractual rights, including as to interest (as Gloster LJ held in Waterfall 2A [2018] Bus LR 508 at [77]). In other words, it is not payable in respect of the Notes, but rather by statutory direction on the debt proved, whether interest bearing or not. The phrase "Liabilities…in respect of the Notes" must be interpreted and given a confined meaning accordingly.
(1) A narrower meaning is required to give the words any sensible import. If the broader view is adopted the words have no function, in that the meaning of the first part of the 'Subordinated Liabilities' definition would, on GP1's and DB's reading, be the same even if one omitted the words 'in respect of the Notes/Advance.' The court should assume their inclusion was considered necessary and strive to give those words a sensible meaning according to their context.
(2) As a matter of language, there is a built-in assumption to Condition 3(a), which is that the relevant Liabilities 'in respect of' the Notes rank pari passu with each other. The first two sentences of Condition 3(a) provide that "The Notes constitute direct, unsecured and subordinated obligations of the Issuer and the rights and claims of the Noteholders rank pari passu without any preference among themselves. The rights of the Noteholders in respect of the Notes are subordinated to the Senior Liabilities and accordingly payment of any amount (whether principal, interest or otherwise) in respect of the Notes is conditional upon…)". The function of the subordination language in the opening words of Condition 3(a) is to ensure the subordination of sums 'in respect of the Notes' to Senior Liabilities. The rights of the Noteholders 'in respect of the Notes' described in the second sentence refer back to the 'rights and claims of the Noteholders against the Issuer' described in the first sentence, which are expressly said to 'rank pari passu without any preference among themselves'. The function of the latter phrase is simply to clarify that rights under the different Notes, which were tradeable, rank pari passu among themselves.
(3) The pari passu assumption is carried through into the definition of Subordinated Liabilities, where the second part of the definition ('…and all other Liabilities of the Issuer which rank or are expressed to rank pari passu with the Notes') [emphasis supplied] plainly informs the words preceding it, which include the 'in respect of the Notes' wording. What the draftsperson had in mind were Liabilities under the Notes which rank pari passu with each other, and other Liabilities of PLC which rank or are expressed to rank pari passu with Claim D, thus creating a single pari passu layer of 'Subordinated Liabilities.'
(4) The phrase concerned is used repeatedly in the PLC Sub-Notes and each time it is inapt to describe statutory interest and/or contemplates an obligation which has the PLC Sub-Notes as its legal source. For example,
(a) Condition 4(a)(i) refers to the requirement of FSA written consent where a person purports to retain or set off any amount payable by it 'to the Issuer against any amounts due in respect of the Notes'. That use of the 'in respect of the Notes' expression is not apt to apply to statutory interest. Similarly, by Condition 4(a)(v) FSA consent is required for a person to 'take or enforce any security, guarantee or indemnity from any person for all or any part of the liabilities of the Issuer in respect of the Notes', where that phrase envisages liabilities under the Notes, in respect of which a security, guarantee or indemnity might be taken or enforced, which cannot be done with respect to statutory interest.
(b) By Condition 4(b)(vi), the Issuer was also not permitted (without the FSA's written consent) to 'arrange or permit any contract of suretyship…relating to its liabilities under these Conditions in respect of the Notes to be entered into' [emphasis supplied]. This Issuer covenant mirrors the covenant at Condition 4(a)(v), which applies to any person. Importantly, it unpacks the phrase 'in respect of the Notes' to mean the 'liabilities under these Conditions in respect of the Notes', which would plainly disqualify statutory interest. [Emphasis supplied]
(c) The detailed provisions in relation to the payment and calculation of interest at Condition 5 of Claim D are directed only at contractual interest having the PLC Sub-Notes as its legal source.
(5) As, for the purposes of both Claim C and Claim D, statutory interest does not fall within the definition of Subordinated Liabilities, it must fall within one of the other two categories. Being payable (under the terms of IR 14.23(7)) only after proof and payment of principal on Claim D, it does not fall within the definition of Senior Liabilities. It must therefore be treated within the definition of Excluded Liabilities. Whilst Claim C has agreed to subordinate itself to Claim D in respect of liabilities which are Subordinated Liabilities for the purposes of Claim D, it has not agreed to subordinate itself to Excluded Liabilities.
(6) Thus, whilst the Court of Appeal's reasoning in the ECAPS1 Proceedings resolved the PLC Ranking Issue in favour of the principal amount under Claim C ranking junior to the principal amount under Claim D (because the two are claims which would otherwise rank pari passu), when applied to Issue (1), the same reasoning results in the conclusion that statutory interest on Claim D is junior to the principal amount under Claim C. This is because statutory interest would not otherwise rank pari passu with Claim C but would rank junior to it.
(7) This conclusion fits with IR 14.23(7)(b) which applies the pari passu principle to statutory interest payable on Claim C and Claim D irrespective of the ranking of the proved debts inter se.
GP1 and DB
(1) Statutory interest is not within the definitions of Subordinated Liabilities and Excluded Liabilities in Claim C. Only Advances under the Claim C agreements themselves fall within the definition of Subordinated Liabilities in Claim C. "Excluded Liabilities" are defined in Claim C as "Liabilities which are expressed to be, and in the opinion of the Insolvency Officer of the Borrower do, rank junior to the Subordinated Liabilities in any insolvency of the Borrower". There is no such express provision in either Claim C or Claim D. LBHI's attempt to relegate statutory interest to being an Excluded Liability because statutory interest can be paid only after a creditor's proved debt has been paid out of any surplus then remaining is manifestly incorrect: the stipulation in the statutory rules as to sequence of payments on one claim does not signify subordination as regards Claim C or other claims.
(2) Like Claim D's claim to principal, statutory interest on Claim D falls within the definition of "Senior Liabilities" in Claim C which Claim C had agreed to stand behind in the queue. "Senior Liabilities" are defined in Claim C's provisions as "all Liabilities except the Subordinated Liabilities and Excluded Liabilities". Not falling within either excepted category, Claim D must be a "Senior Liability" for the purposes of Claim C's subordination provisions, in just the same way as the unsubordinated debts were "Senior Liabilities" for the purposes of the identical subordination provisions in Waterfall I. In Waterfall I, the Supreme Court had already established that statutory interest on Senior Liabilities is payable in priority to principal on (relatively) junior debt in the 'waterfall'.
(3) The subordination provisions in Claim D lead to the same conclusion. Contrary to Mr Allison's submissions, the phrase "all Liabilities…in respect of the Notes" in the definition of Subordinated Liabilities in Claim D connotes a very broad range of association: and statutory interest is plainly a Liability "in respect of" the Notes within that broader range. Thus, under the terms of Claim D, statutory interest ranks pari passu with the Notes, which have already been determined to rank as to principal in priority to Claim C.
(1) The decision in Waterfall I is determinative of this case. In Waterfall I, the subordination clauses in the loan agreements concerned (revolving credit facilities) were in exactly the same terms as those in Claim C (see [40]). Lord Neuberger PSC concluded (at [56]) that statutory interest (a) was a Liability payable by the company, which (b) fell within the definition of Senior Liabilities which (c) "under the terms of the loan agreements…enjoys priority over the repayment of subordinated debt". That makes clear that (i) statutory interest need not all be paid at the same time, irrespective of how the underlying claims rank, (ii) it is perfectly possible for the terms of a loan agreement to accord priority in respect of statutory interest, and (iii) the effect of the provisions was to do just that. Ranking is to be determined as between two claimants by reference to the subordination provisions governing their lending, not according to whether they are subordinated or unsubordinated as a matter of composite description. Just as Claim D could not be proved before payment in full of "Senior Liabilities" in the form of unsubordinated debt (including statutory interest and non-provable liabilities) so too Claim C could not be proved until Claim D, as a "Senior Liability" had likewise been paid in respect not only of principal, but the other liabilities due to be satisfied. In this case, Claim D is a Senior Liability for the purposes of Claim C's subordination provisions, in just the same way that the unsubordinated debts were Senior Liabilities for the purposes of the identical subordination provisions considered in Waterfall I. Ms Hilliard concluded (taking this from her skeleton argument) that
"Accordingly, the Supreme Court has already established that statutory interest on Senior Liabilities, such as Claim D in comparison to Claim C, is payable in priority to the principal on the subordinated debt of Claim C."
(2) Further, IR 14.23(7) requires the same conclusion. ECAPS1 established that the principal of Claim D ranks ahead of the principal of Claim C. It is clear, therefore, that Claim C will not be able to prove until the principal on Claim D has been proved and paid: that is a direct application of Waterfall I at [68] to [72]. As soon as principal on Claim D has been paid, IR 14.23(7) applies, and IR 14.23(7)(a) unambiguously mandates that surplus remaining after payment of proved debts "must" be applied in paying "interest on those debts" (i.e. on Claim D), "before being applied for any other purpose" (e.g. paying the principal on Claim C). On that basis, there is no need, for the purposes of determining the priority issue in this case, to consider the subordination provisions in Claim D: IR 14.23(7) provides a complete answer to the effect that (subject to solvency and the availability of surplus immediately afterwards) statutory interest is mandated to be paid next and immediately after principal on Claim D has been proved and paid.
(3) Standing back, and given that it was established in Waterfall I and is common ground that statutory interest on unsubordinated debts ranks ahead of the principal on Claim D, there is no principled point of distinction, and certainly none had been identified, for treating statutory interest on Claim D as subordinate to principal on Claim C. Claim C stands in the same position vis-à-vis Claim D as Claim D stands vis-à-vis unsubordinated creditors. There is nothing in LBHI's argument that, on analysis, Claim D expresses statutory interest to rank "junior" to the principal of Claim D: there is no such "expression" in Claim D of juniority to Claim C. Further, the requirement in IR 14.23(7) that statutory interest can be paid on Claim D only out of surplus following the payment of the principal on Claim D (which reverses the ordinary rule that a creditor may apply any payment first to outstanding interest) at most stipulates that on the same claim principal has priority over statutory interest, and does not in any way denote subordination to payment of principal on a separate and subordinated claim (here, Claim C).
(1) For the purposes of the subordination provisions in Claim C, statutory interest on Claim D is a Liability payable or owing by PLC which does not fall within either of the categories of Liabilities which are excluded from being Senior Liabilities (that is to say, Subordinated Liabilities or Excluded Liabilities). That is because in Claim C:
(a) the term "Subordinated Liabilities" means "all Liabilities to the Lender in respect of each Advance made under this Agreement and all interest payable thereon". The definition of Subordinated Liabilities in Claim C is thus confined to Advances comprising Claim C and interest thereon and does not extend to any other liability;
(b) the phrase "Excluded Liabilities" in Claim C means "Liabilities which are expressed to be and, in the opinion of the Insolvency Holder of the Borrower, do, rank junior to the Subordinated Liabilities in any Insolvency of the Borrower". Statutory interest on Claim D is not expressed to be junior to the PLC Sub Debt, and so it is also not within the definition of Excluded Liabilities in Claim C.
(2) She described as "the fundamental error" in LBHI's case its disregard of the language actually used in the Claim D subordination provisions and its construction of "in respect of the notes" in the definition of Subordinated Liabilities in Claim D as meaning "a liability that arises under the notes". That is not what the language of the relevant provisions says and, to the extent it is suggested that a payment of statutory interest is not "in respect of the notes" in the required sense, it is wrong, in light of both the language of Clause 3(a) and the reasoning of the Supreme Court in Waterfall I (see above). Furthermore:
(a) there is nothing in the point that the usual broader interpretation of the phrase would render the disputed words redundant or meaningless since the interpretation of the definition would be the same even if the disputed words were omitted. The phrase serves to restrict the ambit of the definition to a Liability to Noteholders in that it excludes Liabilities unconnected with the Notes other than "other Liabilities which rank or are expressed to rank pari passu with the Notes".
(b) the fact that the regulator is not concerned with a competition between subordinated creditors is no reason for not according the contractual subordination provisions their true effect;
(c) contrary to Mr Allison's submission, Condition 3 of Claim D does not restrict the meaning of the disputed phrase to a claim under the Notes. Mr Allison's argument was premised on treating IR 14.23(7) as having the effect that statutory interest could not be treated as pari passu with principal because it could not be paid until after payment of principal. That argument was mistaken for the reason previously given: a prescribed sequence of payment in respect of one claim does not signify subordination in respect of another, nor does the sequence denote ranking between the noteholders inter se. More particularly:
(i) Neither the content of Condition 3(a) as a whole, nor the juxtaposition of its first two sentences (see paragraph [47(2)] above), signifies that statutory interest falls outside the definition of Subordinated Liabilities because, by dint of IR 14.23(7), it sits behind principal in the waterfall or queue. The first sentence simply provides for the claims of all Noteholders "in respect of the Notes" to rank pari passu and does not provide for any ranking between the noteholders inter se. Its purpose and effect is simply to ensure that, as Ms Tolaney put it, "their rights and claims as noteholders have no internal priority over each other". The second sentence does not assist LBHI either: on the contrary, its provision for "the rights of the Noteholders in respect of the Notes" to be subordinated to the Senior Liabilities, and for any payment "whether principal, interest or otherwise" [emphasis supplied] to be conditional on certain criteria supports a broad and not a confined interpretation.
(ii) Mr Allison's reliance on Condition 3(d) as contemplating only contractual interest, and thereby restricting the ambit of the disputed phrase to that, is misplaced: Condition 3(d) does not mention the disputed phrase, and Condition 3(d)'s focus on payments of interest as provided for in Condition 5(a) does not signify any confinement of that ambit.
(d) Mr Allison's reliance on Condition 4 in Claim D is misplaced also. The principal purpose of those provisions, which impose a requirement of the FSA's prior consent in respect of certain identified actions which might have a regulatory impact, is to regulate how the Notes are dealt with while the Issuer is a regulated entity. More particularly, clause 4(b)(iv), which provides that without the prior written consent of the FSA the Issuer shall not "repay any amounts in respect of the Notes otherwise than in accordance with these Conditions", cannot bear the weight placed on it by Mr Allison: it does not limit or confine the meaning of "in respect of" more generally, and simply confines the manner and timing of any repayment by the Issuer of a particular kind. Similarly, clause 4(b)(vi), in requiring prior FSA consent to any contract of suretyship (or similar agreement) relating to the Issuer's "liabilities under these Conditions in respect of the Notes" simply identifies particular transactions which require such consent and does not confine the disputed phrase for any other purpose or context. The provisions provide no assistance in determining the correct interpretation of the disputed phrase.
(3) LBHI's argument that IR 14.23(7), in providing for payment of statutory interest after proof of the debt, is to be taken as an expression of junior ranking for the statutory interest on Claim D is wrong:
(a) IR 14.23(7)(a) provides the unsurprising statutory starting point for the ranking and payment of statutory interest, i.e. that it must be paid after the payment of proved debts. It is the counter-part of IR 14.23(1), which provides that where a debt proved in insolvency proceedings bears interest, the interest is provable as part of the debt, save insofar as it is payable in respect of any period after the commencement of the administration. IR 14.23(7(a)) reflects the long-standing approach to the "cut-off" date for proof of interest, and establishes that, in terms of the insolvency waterfall for distributions, statutory interest sits below the payment of unsecured provable debts: see Waterfall I in the Supreme Court at [17] per Lord Neuberger.
(b) IR 14.23(7)(a) is, however, simply the starting point when one is considering subordinated claims. It is entirely possible to subordinate the payment of a provable debt to the payment of statutory interest on other provable debts. That was the issue raised and conclusion reached in Waterfall I by the Supreme Court: see [46] onwards under the heading "Subordination to statutory interest" generally, and [66] confirming that there is no objection to giving effect to a contractual agreement that a claim will rank lower than it would otherwise do in the "waterfall".
(c) IR 14.23(7)(a) is not (and cannot be) the required "expression of juniority" for the purpose of that definition. Any other conclusion would be contrary to the Supreme Court's conclusion in Waterfall I and is simply wrong: IR 14.23(7)(a) is, as explained above, the rule which provides the starting point for the waterfall ranking but is not an immutable ranking or expression of juniority. If statutory interest is otherwise within the scope of the liabilities which are conferred with contractual seniority (which is the case in this instance), statutory interest is not removed from that category simply by reason of IR 14.23(7)(a).
(d) In short, it makes no difference that, absent subordination, statutory interest on a proved debt would be paid after the proved debts (i.e. principal claims) by reason of Rule 14.23(7)(a), because there is contractual subordination which in this instance requires payment of statutory interest on Claim D before the principal on Claim C.
(4) Further and in any event, she submitted that LBHI's argument is flawed by circularity. IR 14.23(7)(a) provides that statutory interest must be paid "after payment of debts proved". But Claim C will be a debt proved only once PLC's more senior ranking liabilities have been satisfied. That is the effect of the contractual subordination of Claim C to Claim D. This then begs the question: is statutory interest on Claim D to be paid before Claim C? If it is, then Claim C cannot be proved and the statutory interest on Claim D must be paid. If it is not, Claim C can be proved. But the answer to the question of whether statutory interest on Claim D ranks for payment before Claim C must be answered before IR 14.23(7)(a) can apply. LBHI's argument can only work by assuming the answer that it wants to arrive at; and is inherently circular. In short, IR 14.23(7)(a) does not contain an expression of junior ranking for statutory interest generally because its effect is always subject to contractual subordination.
My approach and conclusions on the substantive issue
(1) Claim D does not fall within the definition of Subordinated Liabilities in Claim C: only advances under the Claim C agreements themselves do so.
(2) Excluded Liabilities are defined in Claim C as "Liabilities which are expressed to be, and in the opinion of the Insolvency Officer of the Borrower do, rank junior to the Subordinated Liabilities in any insolvency of the Borrower". There is no such express provision in Claim C.
(3) Senior Liabilities are defined in Claim C's provisions as "all Liabilities except the Subordinated Liabilities and Excluded Liabilities". "Accordingly, and on the same analysis as in Waterfall I, Claim D must be a "Senior Liability" for the purposes of Claim C's subordination provisions, in just the same way as the unsubordinated debts were "Senior Liabilities" for the purposes of the identical subordination provisions in Waterfall I. In Waterfall I, the Supreme Court has already established that statutory interest on Senior Liabilities is payable in priority to principal on (relatively) junior debt in the 'waterfall' or queue.
(1) There is no question of statutory interest coming before principal on Claim D: it would not be open to Claim D to specify that in any event; so statutory interest can only be categorised as either a Subordinated Liability or an Excluded Liability.
(2) Excluded Liabilities are defined in Claim D (as in Claim C in the same terms) as "Liabilities which are expressed to be, and in the opinion of the Insolvency Officer of the Issuer do, rank junior to the Subordinated Liabilities in any insolvency of the Issuer". There is no such express provision in Claim D (just as there is not in Claim C).
(3) Subordinated Liabilities is the only remaining category. But that is not the only reason for allocating statutory interest on Claim D to this category. Contrary to the argument of Mr Allison and in agreement with the submissions of Ms Hilliard and Ms Tolaney, I consider that in the definition of Subordinated Liabilities in Claim D, the phrase "Liabilities in respect of…the Notes" connotes a very broad range of qualifying association: and statutory interest is plainly a Liability "in respect of" the Notes within that definition. I do not agree with Mr Allison that the usual meaning of the phrase is displaced by the particular context and a reading of the provisions of Claim D as a whole, and in the context denotes and is limited to a liability which has its source in, or "under" the contract. 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 it (rather than the word 'under') should be respected and given effect.
(1) I do not accept that the usual wide meaning of the disputed words would render them redundant (as adding nothing to "all Liabilities to Noteholders" in the first part of the relevant definition). Whether on that approach or on Mr Allison's, their purpose is to identify the universe of Liabilities as those "to Noteholders…in respect of the Notes" and as not extending beyond that. Different views as to the extent of Liabilities thus identified does not render the phrase redundant.
(2) Whether or not the draftsman actually had statutory interest in mind, the status of payments due by way of statutory interest as Liabilities is clearly established by Waterfall I. Mr Allison asserted that "by its very nature" statutory interest is nevertheless not aptly described as a Liability "in respect of the Notes" because (he submitted) it is, rather, "a Liability in respect of proved debts as ascertained in accordance with IR 16". He sought to support this by distinguishing statutory interest from interest payable on a liability because (a) there is nothing which can be said to accrue from time to time "in respect of the Notes", (b) a right to statutory interest only arises by reason of a direction to a liquidator or administrator to pay it out of surplus, and not pursuant to any provision in the debt instrument and (c) the obligation to pay statutory interest applies irrespective of the terms of the loan in question and irrespective of whether the underlying debt is interest-bearing. But whilst these characteristics distinguish statutory interest from contractual interest payable under the Notes, it does not seem to me that they necessarily disqualify statutory interest from being a liability in respect of the Notes. A payment made to satisfy a liability arising in right of the Notes and calibrated as to its amount according to the value of the Notes and payable to Noteholders seems to me likely to have been captured within the definition, even if the source of the Liability is not contractual.
(3) Mr Allison's contention that "no commercial or regulatory reason has been identified…as to why a regulatory subordinated instrument should include within the scope of its subordination provision a Liability" for which the source is not contractual and which already "ranks below the subordinated instrument as a matter of law" seems to me to beg the question, and in any event is disposed of by the considerations I have outlined in (2) above.
(4) Mr Allison subjected to specific analysis the provisions of Condition 4 and Condition 5 of the Notes with a view to demonstrating that in each case where it appears the expression "in respect of the Notes" is used to contemplate an obligation of which the source is contractual. The examples he provided are summarised in paragraph [47(4)] above. He particularly emphasised Condition 4(b)(vi), which he suggested equated the phrase "in respect of" with the subsequent phrase "liabilities under these Conditions in respect of the Notes". However, the fact that these Conditions, which in the case of Condition 4 are in each case directed to restricting the exercise of certain contractual rights without the prior written consent of the FSA, are confined to such contractual rights is hardly surprising: and it seems to me nothing to the point that this sequence of Conditions does not address statutory interest, and the Conditions do not appear to me to be required to be read as restricting the meaning of "in respect of" in other contexts. Similarly, the fact that the detailed provisions in Condition 5 in relation to the calculation and payment of contractual interest do not accommodate statutory interest seems to me even more unsurprising, and nothing to the point.
(5) I do not accept what Mr Allison described in his oral submissions as "the key point", that "statutory interest on Claim D cannot reasonably be characterised as ranking pari passu with the other liabilities which rank pari passu with the notes because, of course, statutory interest is only payable if and when proved debts have been paid in full…" I have already explained that this can only be a reference to debts proved at each level of the waterfall; and though I accept that IR 14.23(7) provides for the payment of statutory interest only after a debt has been proved, that does not seem to me to constitute a provision for subordination to another claim in the queue, but rather a prescribed sequence of payments in respect of the same Claim.
My conclusion on the substantive question in Issue (1)
Res judicata or abuse of process?
"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.
Cause of action estoppel, issue estoppel and abuse of process distinguished
"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."
'Res judicata is a rule of substantive law, while abuse of process is a concept which informs the exercise of the court's procedural powers. In my view, they are distinct although overlapping legal principles with the common underlying purpose of limiting abusive and duplicative litigation.' (Ibid.)
'A res judicata is a decision pronounced by a judicial or other tribunal with jurisdiction over the cause of action and the parties, which disposes, once and for all, of all the fundamental matters decided, so that, except on appeal, they cannot be relitigated between persons bound by the judgment. A party to a res judicata will be estopped, as against any other party, from disputing the correctness of the decision, except on appeal. This is known as "cause of action estoppel". The same is true—save to a narrower extent—of "issue estoppel". A final decision will create an issue estoppel if it determines an issue in a cause of action as an essential step in its reasoning.'
(1) In Hunter v Chief Constable of the West Midlands Police [1982] AC 529, at 536, Lord Diplock defined abuse of process in general as involving:
'misuse of [the court's] procedure in a way which, although not inconsistent with the literal application of its procedural rules, would nevertheless be manifestly unfair to a party to litigation before it, or would otherwise bring the administration of justice into disrepute among right-thinking people. The circumstances in which abuse of process can arise are very varied … It would, in my view, be most unwise if this House were to use this occasion to say anything that might be taken as limiting to fixed categories the kinds of circumstances in which the court has a duty (I disavow the word discretion) to exercise this salutary power'.
(2) One form of such abuse was identified long ago by Wigram V-C in Henderson v Henderson (1843) 3 Hare 100, 115: it is an abuse for a party to raise in subsequent proceedings matters which were not but could and should have been raised in the earlier ones ("Henderson v Henderson abuse").
Res judicata
Issue estoppel
"The claims of […] ("GP1") under […] (the "PLC Sub-Notes") rank for distribution in priority to the claims of LBHI under the PLC Sub-Debt".[9]
'A judicial determination directly involving an issue of fact or of law disposes once for all of the issue, so that it cannot afterwards be raised between the same parties or their privies. The estoppel covers only those matters which the prior judgment, decree or order necessarily established as the legal foundation or justification of its conclusion, whether that conclusion is that a money sum be recovered or that the doing of an act be commanded or be restrained or that rights be declared.
[…]
Nothing but what is legally indispensable to the conclusion is thus finally closed or precluded. In matters of fact the issue estopped is confined to those ultimate facts which form the ingredients in the cause of action, that is the title to the right established…But in neither case is the estoppel confined to the final legal conclusion expressed in the judgment, decree or order. In the phraseology of Coleridge J in R v Inhabitants of the Township of Hartington Middle Quarter the judicial determination concludes, not merely as to the point actually decided, but as to a matter which it was necessary to decide and which was actually decided as the groundwork of the decision itself, though not then directly the point at issue. Matters cardinal to the latter claim or contention cannot be raised if to raise them is necessarily to assert that the former decision was erroneous.
[…]
In the phraseology of Lord Shaw, "a fact fundamental to the decision arrived at in the former proceedings and "the legal quality of the fact" must be taken as finally and conclusively established (Hoystead v. Commissioner of Taxation [1926] AC 155). But matters of law or fact which are subsidiary or collateral are not covered by the estoppel…Decisions upon matters of law which amount to no more than steps in a process of reasoning tending to establish or support the proposition upon which the rights depend do not estop the parties if the same matters of law arise in subsequent litigation.'
Abuse of Process
"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".
'(i) Where A has brought an action against B, a later action against B or C may be struck out where the second action is an abuse of process.
ii) A later action against B is much more likely to be held to be an abuse of process than a later action against C.
iii) The burden of establishing abuse of process is on B or C or as the case may be.
iv) It is 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.
v) The question in every case is whether, applying a broad merits-based approach, A's conduct is in all the circumstances an abuse of process.
vi) The court will rarely find that the later action is an abuse of process unless the later action involves unjust harassment or oppression of B or C.'
"…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."
(a) what was the context and purpose of the ECAPS1 Proceedings, and had LBHI identified and determined to keep back the issue as to the priority between statutory interest on Claim D and principal on Claim C at the time of the ECAPS1 Proceedings;
(b) whether, if the point had been put forward at that time for the court to direct whether it should be determined as part of the ECAPS1 Proceedings, the court would probably have thought it appropriate for it to be determined at that earlier stage, rather than at a later stage; all with a view to determining the ultimate question, which is
(c) whether in all the circumstances and applying a broad merits approach, LBHI's conduct is to be characterised as unfair, oppressive and an abuse.
(1) There was, at the time of both ECAPS1 proceedings, considerable legal and economic uncertainty as to the quantum of prospective funds in the PLC estate, and correspondingly, as to whether any funds would be available for any subordinated claims. That depended upon whether there would be any amounts paid to PLC by LBHI2 and thus upon the outcome of LBHI2's application. Put shortly, PLC had to win on the issue raised in the LBHI2 Application in order to be able to pay anything at all to its subordinated creditors. If PLC had not won on that issue, the outstanding substantive issue in these proceedings would not have arisen. This was graphically illustrated in the Lehman Funds Flow Chart dated 15 November 2019 ("the Funds Flow") which was handed up at first instance in the ECAPS1 Proceedings (and is appended to this judgment as Appendix 1); the range was summarised in the PLC JAs' Progress Report dated 10 October 2019 where it was stated that:
"PLC currently estimates that it may make no significant recoveries (in which case its unsecured unsubordinated creditors will not receive full statutory interest) or may have up to £600m as a surplus after payment in full of unsecured unsubordinated creditors plus statutory interest."
(2) All parties acknowledged that there was a possibility that PLC's subordinated creditors might receive nothing at all. Such was the uncertainty and the range of possible outcomes that there was a debate among the parties in early 2018 as to whether the issues raised by PLC in ECAPS1 should be raised for determination at all at that time or whether the proceedings should be confined to an application by the administrators of LBHI2 to determine priority between Claim B and Claim A. Ironically, both DB and GP1 argued at the time that the ranking of subordinated debt at PLC should not be determined at all in ECAPS1 but rather should await determination of the ranking at LBHI2. Furthermore, DB argued in ECAPS1 that Claim C had been released in its entirety: and, had it been successful, that would have rendered Issue (1) moot even if funds flowed from LBHI2 to PLC.
(3) In fact, it was not, for some time at least, the preferred approach of the respective JAs of LBHI2 and PLC that the PLC issues be adjudicated at the same time as the LBHI2 issues. It was principally LBHI which argued that the claims of PLC's subordinated creditors should be determined together with the LBHI2 issues, given similarities between the ranking issues at LBHI2 and PLC. Their inclusion in the menu was the result of negotiation. It is clear from evidence filed by the PLC JAs that they ultimately agreed to the inclusion of the issue in light of the clearly delineated disagreement between the parties on the substantive issue as to the priority ranking of PLC's subordinated obligations. Mr Geraghty, on behalf of LBHI, described this as follows:
"The menu of issues covered in Sub-Debt1 was the result of negotiation and consideration between the parties, which sought to ensure that a number of issues, time and cost of the application was proportionate, at a time when the economic outcome of each estate was still uncertain, while being comprehensive enough to facilitate distributions and progress in the administration of the LBHI2 and PLC estates."
(4) It was inherent in all these legal and economic uncertainties, that it would not have been feasible or proportionate to try to address every possible permutation of issues that might have arisen from the potential outcomes with respect to any subsequent distributions that might or might not take place within the PLC estate.
(5) The parties never debated statutory interest on subordinated debts, nor was any thought given to its inclusion on the 'menu' of issues for determination. There was no mention of IR 14.23(7). The focus as to the PLC estate was on priority of claims to principal: even these were uncertain to arise, and any potential for payment of statutory interest on subordinated debts was even more uncertain. The point could have been raised by any of the parties, but none did so. As stated in the PLC JAs' skeleton argument in these proceedings:
"Both applications [ECAPS1 and this application] reflected the issues which the interested parties specified at the time as being in dispute. It was not for the JAs in the ECAPS1 Proceedings to ask the Court to determine issues which nobody had brought forward."
(6) There is no suggestion in the evidence, still less anything approaching a demonstration, that LBHI had the point in mind and kept it back for later determination. Although DB and GP1 seek now to portray the issue as one which LBHI must have thought of, there is no evidence that they did so.
(1) However clear (comparatively, at least) the flow of funds may now appear to be, the court would at the time have had to be satisfied that it was appropriate and proportionate to bolt on to an already expanded and long menu, which already included some spectral or uncertain issues, another issue which was even more spectral and uncertain and raised an issue of statutory interpretation which was not required to be addressed for the purposes of the existing 'menu'.
(2) All these issues arise for determination in the context of applications by professional administrators. It cannot be known for certain what the PLC JAs would have recommended; but it is perhaps more likely than not, in light of their sceptical attitude to the inclusion of 'the PLC Ranking Issue', that they would have resisted this further extension to the ambit of ECAPS1.
(3) Reflecting the point I have already made in paragraph [115] above, the Lehman administrations have given rise not only to complex commercial disputes but, to an extreme degree, to a cascade or cats' cradle of economic consequences which are extremely difficult to unravel and may not fully be discerned or emerge until sequential decisions determine the flow of funds in the 'waterfall'. Like the parties and the JAs of the various Lehman companies, the emergence of other issues has always been a known possibility, which has been accommodated by responsible use of a series of Applications under the specific statutory provisions enabling them and the adoption in respect of those applications of efficient and proportionate procedures for defining and confining the issues raised. Of course, this is not to say that the process is infinite; and I would hope and expect this round to be the last. However, I would have expected the court, as matters stood at the time of the ECAPS1 Proceedings, to have had in mind that there would be consequences which would throw up new issues which would have to be determined subsequently, as indeed the parties all expected.
(1) The PLC JAs' application seeking directions is not a "statement of case" within the definition in CPR 3.4(2), or anything approaching a statement of case, even with all sensible modifications (see IR 21.1).
(2) In any event, the seeking of directions to resolve an issue which is disputed, and which the JAs concerned cannot responsibly take to be beyond sensible argument, cannot realistically be characterised as an abuse of process.
Note 1 It is possible that other parties have used the term “ECAPS 1” to mean only that part of the prior proceedings that concerned the application in the PLC estate. Nothing is understood to turn on this distinction. [Back] Note 2 Though this point was not in GP1’s skeleton argument, and GP1 specifically left it to DB to advance it. [Back] Note 3 The order of priority for payment out of the company’s assets is often referred to as the insolvency ‘waterfall’ (see In re Nortel Networks UK Ltd (No 2) [2018] Bus LR 206 at [25]). The various sequentially numbered ‘Waterfall’ cases referred to in this judgment all concerned the proper application of surplus in Lehman Brothers International (Europe), an unlimited company, which was the Lehman Group’s main trading company in Europe. [Back] Note 4 As noted above, there are three subordinated loan facilities making up Claim C, three subordinated note issuances making up claim D, and three ECAPS series, with certain immaterial (save to the extent set out here) differences between their terms. [Back] Note 5 Cf Lewison LJ’s judgment in ECAPS1 at [29] to [31], where he stated that the judge at first instance, in determining that “the rules regarding regulatory capital, and their potential breach, have no bearing on the questions of subordination that I must address” had “put the point too high”. Lewison LJ went on that though “ultimately, the meaning of a contract depends on its own terms….I do not think that it can be said that the regulatory background has “no bearing” on questions of interpretation.” However, it is also to be noted that in that case, the regulatory background did not materially affect the semantic interpretation of the words of the contracts. [Back] Note 6 As Mr Allison put it in his oral submissions, “…we say what Waterfall I doesn’t do at all is consider the position of ranking as between subordinated liabilities themselves. So it tells one that statutory interest is a liability in LBIE’s insolvency, but it doesn’t tell you anything more”. [Back] Note 7 Defined in IR 14.1(3), and in this context meaning the date on which the company entered administration. [Back] Note 8 See footnote 2 above. [Back] Note 9 Paragraph 4 of the Order of the Court of Appeal [Back] Note 10 The case was referred to with approval in Kirin-Amgen Inc v Boehringer Mannheim GmBH [1997] F.S.R. 289 by Aldous LJ. [Back]
