Court of Appeal
Published January 24, 2018
In re Lehman Bros International (Europe) (in administration) (No 7)
Lomas and Others v Revenue and Customs Commissioners
Before Lady Justice Gloster, Lord Justice Patten and Lord Justice David Richards
[2017] EWCA Civ 2124
Judgment December 19, 2017
Statutory interest payable to creditors under the Insolvency Rules ranked as “yearly interest” for the purposes of section 874 of the Income Tax Act 2007 and administrators were, therefore, under an obligation to deduct basic rate income tax on making any payments to creditors.
The Court of Appeal so stated when allowing the appeal of the revenue against a decision of Mr Justice Hildyard ([2017] Bus LR 520) on an application by Anthony Victor Lomas, Steven Anthony Pearson, Russell Downs and Julian Guy Parr, being the joint administrators of Lehman Brothers International (Europe), for directions on the issue.
Mr Malcolm Gammie, QC, and Ms Catherine Addy, QC, for the revenue; Mr John Gardiner, QC, and Mr Daniel Bayfield, QC, for the joint administrators.
Lord Justice Patten said that contrary to initial expectations the administration had resulted in a substantial surplus being available for creditors after payment of proved debts. The existence of a surplus entitled creditors to the payment of statutory interest on their debts. At the time of the judgment below such interest was payable under rule 2.88(7) of the Insolvency Rules 1986 (SI 1986 No 1925).
Subsequently, the Insolvency Rules (England and Wales) 2016 (SI 2016 No 1024) came into force and the payment of such statutory interest from any surplus in an administration was now governed by rule 14.23(7) of the 2016 Rules. For present purposes, that rule was not materially different from the former rule 2.88(7).
The judge’s view that that statutory interest did not constitute “yearly interest” within the meaning of section 874 of the Income Tax Act 2007 was based on the need, as he saw it, to identify a payment in the nature of interest that had accrued from day to day and was payable from year to year.
Statutory interest, he held, did not have that quality of recurrence because it was paid retrospectively as compensation for the time value of money attributable to the period between the commencement of the administration and the payment of the proved debts.
There was no doubt at all that statutory interest was not a continuing liability that accrued from day to day on a prospective basis over the period to which it related. It was paid as statutory compensation for the loss which the creditors had suffered by being kept out of their money for the period of the administration and the calculation involved was made ex post facto and should be straightforward.
The judge’s approach to what could constitute “yearly interest” was inconsistent with the line of reasoning in Riches v Westminster Bank Ltd ([1947] AC 390) and Jefford v Gee ([1970] 2 QB 130). If statutory interest could not be yearly interest because it did not accrue prospectively in real time then, on one view, it was difficult to see how it could be interest at all. But the need for it to accrue de die in diem had been held in Riches to be satisfied even where there was no real time accrual.
The same test applied equally to the type of statutory interest that the court was concerned with on the present appeal. Unless the fact that statutory interest did not accrue prospectively in real time was fatal to the contention that it was yearly interest which, in the light of the authorities, it was not, there was nothing in the Insolvency Rules or the other relevant surrounding circumstances that prevented it from being treated as the long-term liability which it in fact was.
Lady Justice Gloster and Lord Justice David Richards agreed.
Statutory interest payable in insolvency is ‘yearly interest’
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