Another lesson from Lehman

Lehman entered administration in September 2008.  The administrators have realised sufficient funds to pay unsecured creditors in full and have an estimated surplus of c.£7 billion, of which c.£5 billion is payable as statutory interest.

At first instance, the judge found that the interest payable did not meet the definition of “yearly interest” because it was in a class of its own.  The Court of Appeal overturned the decision.

The administrators appealed to the Supreme Court, which agreed with the Court of Appeal, finding that:

1. the obligation to deduct tax from interest under Section 874 is not dependent on whether the interest was in the hands of the recipient;

2. whilst payable on the realisation of a surplus and the administrators' decision to pay it, the administrators lack discretion regarding interest payments;

3. the statutory interest replaces the creditor’s former contractual rights; and

4. proving creditors are (involuntary) investors.  It was “no mere irony” that Lehman’s unsecured debt had been a satisfactory long-term investment.

Consequently, statutory interest is subject to income tax.

Joint Administrators of Lehman Brothers International (Europe) (In Administration) v Revenue and Customs Commissioners: [2019] UKSC 12