Rules 13.12(1) and 13.12(3) of the Insolvency Rules 1986 (SI 1986/1925) (1986 Rules) define the terms debt and liability. Lehman highlights that these terms have different meanings. Within the meaning of the Insolvency Act 1986 (1986 Act), a debt of a company is one that is provable in its administration or liquidation, whereas a liability might be provable or non-provable but the company remains subject to that obligation.

Lehman therefore expands on the reasoning in Re Nortel Companies and others to illustrate that there are three categories of liability:

This third category means that a "black hole" of liabilities can exist, although Lehman illustrates that it is conceivable that those liabilities could be paid.

Lehman follows the decision in Arm Asset Backed Securities SA (both were decided by Mr Justice David Richards), in which the High Court held that limited recourse language (limiting liability to available assets) did not mean that the company in question was not insolvent ([2013] EWHC 3351). Both of these decisions make it critical to determine, especially when looking at limited recourse arrangements or declarations of solvency, whether a company is actually solvent, or is insolvent but is capable of meeting only the liabilities that it is required to pay in an insolvency process.

It was argued in Lehman that it would be inconsistent to find that contingent and future liabilities can be valued but that, for example, claims to debts in a foreign currency continue despite the payment mechanism imposed by the 1986 Act and 1986 Rules. The court considered, and dismissed, this suggestion. In doing so, it has provided useful clarification on the mechanisms for determining a future or contingent claim in the 1986 Act and 1986 Rules. These mechanisms determine the quantum of the contingent or future claim: the creditor has no other right or claim.

By contrast, in respect of a claim in a foreign currency or a claim for interest, an insolvent debtor always has, and continues to have, this liability to a creditor: it is simply that the creditor might not be entitled to prove for, and recover, this liability unless there is a surplus.

The court in Lehman was asked to consider the meaning and extent of the Financial Services Authority-approved subordination arrangements and, in particular, whether they were effective to subordinate the relevant debt not only to provable debts but also to statutory interest and all non-provable liabilities.

The decision highlights several important points; for example, that it is critical in drafting subordination arrangements that purport to subordinate the rights of one unsecured creditor to another unsecured creditor to consider the following questions:

Regarding the payment of statutory interest, Lehman principally established:

Other questions remain; for example, rule 2.88(9) of the 1986 Rules refers to the "greater of" the statutory rate and the contractual rate. Is this the headline rate that applies or does this also take into account the basis of calculation (that is, whether it is simple or compound interest)? This is a question that might need to be considered further by the courts, given the sums involved.

Lehman highlights the fact that, while the 1986 Act and the 1986 Rules require foreign debts to be valued by reference to a conversion to sterling at the time that the relevant insolvency proceedings begin, any continuing shortfall to the creditor arising through later fluctuations in the exchange rate remains in existence as a non-provable liability. This is, perhaps, unlikely to be of practical effect in many cases. However, it does suggest that it is contrary to a creditor's interests to provide contractually for a conversion to sterling in the event of insolvency (as is sometimes seen in commercial contracts) as it would extinguish this potential future claim.