Double proof rule amended

In partially allowing appeals from companies in the Lehman Brothers group, the Court amended the double proof rule.

Lehman Brothers UK Holdings Ltd (Holdings) had lent monies to Lehman Brothers Holding PLC (PLC) pursuant to various facility agreements. Repayment under those facilities was guaranteed by Lehman Brothers Holding Inc (Inc.). PLC entered Administration and Holdings claimed against Inc. pursuant to the guarantee. Inc. part-paid the debt under a settlement agreement with Holdings in which Inc. also released PLC of its indemnity to Inc.

Inc. subsequently took assignment of PLC’s debt to Holdings and therefore became PLC’s creditor. Inc. sought to claim in PLC’s Administration for 100% of debt owed by PLC under the facility agreements, despite 36% of the debt having been repaid (albeit by Inc.).

The double proof rule in insolvency processes prevents more than one distribution being made in respect of the same debt. Further, the rule prevents a surety from receiving a distribution (where that surety has part paid the debt owed by the principal debtor), until the creditor has been paid in full. The creditor may in turn prove in the insolvency process for the full debt and does not have to account for prior part-payment by the surety. 

The court held that the double proof rule was a judge-made rule capable of development. Resultantly, the court held that, where a surety has part-paid a debt of the principal debtor and given up any indemnity from the principal debtor, then the creditor must give credit for the part-payment and can only prove in the insolvency process for the unpaid element of the debt. 

Lehman Brothers Holdings Scottish LP 3 v Lehman Brothers Holdings Plc (In Administration) [2021] EWCA Civ 1523

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