High Court Rules on Priority of Subordinated Debt in Administration Surplus Funds Distribution

Citation: [2023] EWHC 3056 (Ch)
Judgment on


The High Court’s decision in the case of The Joint Administrators of Lehman Brothers Holdings Plc v LB GP No.1 Limited & Ors addresses a complex issue regarding the priority of different classes of subordinated debt in the context of the distribution of surplus funds in a corporate administration. The key question before the court was whether a subordinated creditor, which has priority in respect of the principal, also holds entitlement to payment of statutory interest before any payment of principal to a creditor with lower-ranking subordinated claims.

Key Facts

The factual matrix revolves around the Lehman Brothers Holdings Plc (PLC) administration and the distribution of surplus assets following the payment of unsubordinated liabilities, including statutory interest. The principal issue pertained to the priority between claims for statutory interest on higher-ranking subordinated debt (Claim D) and the principal on lower-ranking subordinated debt (Claim C).

The subordination provisions of the competing claims, the interpretation of ‘Senior Liabilities,’ ‘Subordinated Liabilities,’ and ‘Excluded Liabilities,’ as well as the provisions relating to statutory interest under IR 14.23(7), formed the crux of the dispute. The High Court was tasked with resolving whether or not statutory interest on Claim D should be prioritized above Claim C, in light of prior judgments, contractual terms, and statutory rules for insolvency proceedings.

The decision explored multiple legal principles:

  1. The Contractual Interpretation of Subordination Clauses: The court analyzed the precise language of the subordinated debt instruments, noting the distinctions between ‘Senior Liabilities,’ ‘Subordinated Liabilities,’ and ‘Excluded Liabilities.‘

  2. The Priority of Claims in Insolvency: How the claims were classified as per the instruments’ terms critically determined their priority in administration.

  3. Interrelation with Insolvency Rules: The Insolvency Rules, particularly IR 14.23(7), considered alongside contractual terms, provided the framework for paying statutory interest.

  4. Precedent in Prior Judgments: The court applied the analysis from Waterfall I and ECAPS1 to statutory interest as opposed to just principal repayment.

  5. Abuse of Process under Henderson v Henderson: The court undertook a “broad, merits-based” assessment to determine whether LBHI’s conduct in raising the issue amounted to re-litigation or was otherwise abusive.


The High Court concluded that statutory interest pertaining to Claim D is to be paid before the principal of Claim C, upholding the contractual intent and hierarchy established under the subordination provisions between the classes of subordinated debt.

Moreover, the court did not recognize the application as an abuse of process, despite being presented with the argument that the instant issue could and should have been raised during the previous proceedings (ECAPS1). The court emphasized the high barrier to proving abuse and the importance of assessing each case on its specific facts.


The judgment offers clarity on the application of subordination clauses, the computation of statutory interest in insolvency scenarios, and reinforces the notion that the procedural powers of the court cannot override substantively agreed priorities in contracts. The court’s decision affirms the contractual rights and obligations defined by parties and exemplifies the judiciary’s commitment to uphold these terms, provided that they don’t contravene statutory guidelines or result in the misuse of the court’s procedure.
The case is also instructive in reinforcing the boundaries of abuse of process, especially in sophisticated multiparty litigations stemming from administrations while affirming a flexible, merit-based approach rather than a strict rule. This judgment is an essential precedent for legal professionals dealing with corporate insolvency and the interpretation of subordination agreements within the UK’s legal framework.