Commissioners for Her Majesty’s Revenue and Customs (Respondent) v Joint Administrators of Lehman Brothers International (Europe) (In Administration) (Appellants)

Cite as:[2019] UKSC 12
Hand-down Date:March 13, 2019
 
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Hilary Term [2019] UKSC 12 On appeal from: [2017] EWCA Civ 2124

JUDGMENT

Commissioners for Her Majesty's Revenue and Customs (Respondent) v Joint Administrators of Lehman Brothers International (Europe) (In

Administration) (Appellants) before

Lord Reed, Deputy President Lord Carnwath

Lord Hodge

Lady Black Lord Briggs JUDGMENT GIVEN ON 13 March 2019 Heard on 12 February 2019 Appellants Respondent David Goldberg QC

Malcolm Gammie CBE QC Catherine Addy QC (Instructed by HMRC Solicitor's Office and Legal Services) Daniel Bayfield QC

(Instructed by Linklaters LLP)

LORD BRIGGS: (with whom Lord Reed, Lord Carnwath, Lord Hodge and Lady Black agree)

Introduction

  1. This appeal concerns the relationship between two statutory provisions, one very old and the other very young. The old provision, which dates back to the inception of Income Tax during the Napoleonic Wars, but is now to be found in section 874 of the Income Tax Act 2007, requires a debtor in specific circumstances to deduct income tax from payments of "yearly interest" arising in the United Kingdom. The young provision, first made the subject of legislation in 1986 (and replacing previous judge-made rules) but now to be found in rule 14.23(7) of the Insolvency Rules 2016, requires a surplus remaining after payment of debts proved in a distributing administration first to be applied in paying interest on those debts in respect of the periods during which they had been outstanding since the commencement of the administration. The short question, which has generated different answers in the courts below, is whether interest payable under rule 14.23(7) is "yearly interest" within the meaning of section 874, so that the administrators must first deduct income tax before paying interest to proving creditors.

  2. The question arises in connection with the administration of Lehman Brothers International (Europe) ("LBIE") which, although it commenced at a time when LBIE was commercially insolvent due to the worldwide crash of the international group of companies of which it formed an important part, has nonetheless generated an unprecedented surplus after payment of all provable debts, in the region of £7 billion, of which some £5 billion is estimated to be payable by way of statutory interest (before any deduction of income tax). LBIE went into administration on 15 September 2008. It became a distributing administration in December 2009. A final dividend was paid to unsecured proving creditors (bringing the total dividends to 100p in the pound) on 30 April 2014. After the coming into effect of a scheme of arrangement, interest slightly in excess of £4 billion was paid to creditors, after deduction of a sufficient amount on account of tax to abide the outcome of these proceedings, on 25 July 2018. Thus the time which elapsed between the commencement of the administration and the payment of interest to creditors was slightly under ten years. The periods in respect of which interest was payable under rule 14.23(7) (and its predecessor) ranged from a little over four years (which expired when the first interim distribution to proving creditors was made in November 2012) and little over five and a half years, when the final dividend to creditors was made, as described above.

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    Statutory Interest in Administration

  3. Rule 14.23(7) of the Insolvency Rules 2016, which replaced substantially identical provisions in rule 2.88(7) of the Insolvency Rules 1986, provides as follows:

    "(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 rates specified under paragraph (6) and the rate applicable to the debt apart from the administration."

  4. Rule 14.23(6) provides that the relevant rate of interest is that specified in section 17 of the Judgments Act 1838 (1 & 2 Vict c 110), which was, at the material time, 8% per annum. The "relevant date" referred to in rule 14.23(7)(a) is the date upon which the company entered administration; see rule 14.1(3).

  5. In In re Lehman Brothers International (Europe) (in administration) (No 6) [2015] EWHC Civ 2269 (Ch); [2016] Bus LR 17, para 149, David Richards J said this about statutory interest payable under the predecessor of rule 14.23(7):

    "The right to interest out of a surplus under rule 2.88 is not a right to the payment of interest accruing due from time to time during the period between the commencement of the administration and the payment of the dividend or dividends on the proved debts. The dividends cannot be appropriated between the proved debts and interest accruing due under rule

    2.88, because at the date of the dividends no interest was payable at that time pursuant to rule 2.88. The entitlement

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    under rule 2.88 to interest is a purely statutory entitlement, arising once there is a surplus and payable only out of that surplus. The entitlement under rule 2.88 does not involve any remission to contractual or other rights existing apart from the administration. It is a fundamental feature of rule 2.88, and a primary recommendation of the Cork Committee that all creditors should be entitled to receive interest out of surplus in respect of the periods before payment of dividends on their proved debts, irrespective of whether, apart from the insolvency process, those debts would carry interest."

  6. In the present case, in the Court of Appeal [2018] Bus LR 730, after citing that passage in full, Patten LJ continued, at para 16:

    "There is no doubt at all that statutory interest, as David Richards J explained, is not a continuing liability which accrues from day to day on a prospective basis over the period to which it relates. It is paid, as I have said, as statutory compensation for the loss which the creditors have suffered by being kept out of their money for the period of the administration."

    I agree.

  7. In In re Lehman Brothers International (Europe) (in administration) (Nos 6 and 7) [2017] EWCA Civ 1462; [2018] Bus LR 508, para 26, giving the judgment of the Court of Appeal, Gloster LJ said of the simple words of rule 2.88(7), when aggregated with the following two paragraphs (all in substantially the same terms as are now to be found in rule 14.23, as set out above):

    "... this simple formula constitutes, in our view, a complete and clear code for the award of statutory interest on provable debts. As [counsel] put it, it contains all you need to know."

    In the present case, at first instance, Hildyard J said at para 16:

    "In my judgment, the statutory right to interest is sui generis and is not to be equated with a right to interest which accrues over time."

    Again, I agree with both those dicta (and was a party to the first of them).

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    Yearly Interest under the Income Tax Legislation

  8. Section 874 of the Income Tax Act 2007 provides (so far as is relevant) as follows:

    "(1) This section applies if a payment of yearly interest arising in the United Kingdom is made -

    (a) by a company,

    (b) by a local authority,

    (c) by or on behalf of a partnership of which a company is a member, or

    (d) by any person to another person whose usual place of abode is outside the United Kingdom.

    (2) The person by or through whom the payment is made must, on making the payment, deduct from it a sum representing income tax on it at the basic rate in force for the tax year in which it is made."

    There is no definition of the phrase "yearly interest" anywhere in the 2007 Act. Nonetheless there is this deeming provision in section 874, added by Schedule 11 to the Finance Act 2013:

    "(5A) For the purposes of subsection (1) a payment of interest which is payable to an individual in respect of compensation is to be treated as a payment of yearly interest (irrespective of the period in respect of which the interest is paid)."

  9. This is unfortunately another case in which the full meaning of an apparently innocent-looking simple statutory phrase can only be addressed by reference to the historical deployment of that phrase, or equivalent phrases seeking to express the same concept, in early legislation.

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  10. Hildyard J set out in an Appendix to his judgment an admirable brief summary of the history of the statutory provisions about deduction of yearly interest, beginning with the introduction of income tax by Pitt's Income Tax Act 1799 (39 Geo 3 c 13). In the present case, the main reason for needing an understanding of the statutory history is so that important decisions about the underlying concepts behind yearly interest can be reliably interpreted, by reference to the particular context of the use of the phrase in the statute then in force. As would appear, the earliest of those authorities was decided in 1854, and the latest in 1981.

  11. The concept of "yearly interest" first appeared within the income tax legislation in section 208 of Addington's Income Tax Act 1803 (43 Geo 3 c 122). It appeared as part of the phrase:

    "Annuities, yearly Interest of Money, or other annual Payments ... whether the same shall be received and payable half-yearly, or at any shorter or more distant Periods."

    Section 208 both charged yearly interest to tax and authorised the payer to deduct an amount equal to the tax chargeable on the interest.

  12. When income tax was reintroduced by Sir Robert Peel in the Income Tax Act 1842 (5 & 6 Vict c 35), section 102 charged to tax:

    "Annuities, yearly Interest of Money, or other annual Payments."

    And, as in 1803, provided for deduction at source by the payer, where paid out of taxed profits or gains.

  13. Deduction of...

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