In HMRC v Joint Administrators of Lehman Brothers International [2019] UKSC 12 (13 March 2019), agreeing with the Court of Appeal, the Supreme Court found that statutory interest paid under the Insolvency Rules 2016 rule 14.23(7) is yearly interest subject to a deduction of tax at source under ITA 2007 s 874.
The administration of Lehman Brothers had generated an unprecedented surplus after payment of all provable debts, amounting to approximately £7bn, of which about £5bn was estimated to be payable by way of statutory interest under rule 14.23(7). The periods in respect of which interest was payable ranged from just over four years (which expired when the first interim distribution to creditors was made in November 2012) and just over five and a half years, when the final dividend to creditors was made. The issue was whether this interest was ‘yearly interest’ for the purpose of s 874, so that the administrators should deduct income tax before paying it to creditors.
After reviewing both the statutory and the judicial history of the meaning of the phrase ‘yearly interest’, in particular the test established in Hay (1924) VIII TC 636, the court noted that the statutory interest in this case shared many of the relevant features with the contractual provision for interest in Chevron [1981] STC 689. In both cases, it could not be known during the period, in respect of which interest was calculated, whether it would in fact be payable at all. And in both cases, there was no liability to pay interest during the period in respect of which it was calculated as it was rolled up and payable in a single lump sum. The question was therefore: ‘what period of durability is to be identified for interest payable in a single lump sum as compensation for the payee being out of the money in the past, for the purpose of deciding whether it is to be treated as yearly interest, under the Hay principles?’ The court’s answer was that the relevant period was the period in respect of which the interest was calculated, because that was the period during which the loss of the use of money had been incurred, for which the interest was compensation.
The court also rejected the contention that the interest could not be yearly interest, as it derived from the combination of a realised surplus and a decision by the administrators, and those elements did not have the quality of durability over time required to make the interest yearly interest, applying the Hay tests. The court noted that there is no requirement to identify the source of the interest but that an ‘obvious candidate’ was the status of the recipient as creditor during the period between the commencement of the administration and the payment of the principal amount by dividend. This period precisely coincided with the period in respect of which the statutory interest was calculated and ‘amply’ fulfilled the necessary quality of durability over time.
Why it matters: The Supreme Court opened its judgment with the following comment: ‘This appeal concerns the relationship between two statutory provisions, one very old and the other very young.’ It observed that the full meaning of ‘yearly interest’, ‘an apparently innocent-looking simple statutory phrase’, could only be found in its history, which started with the Income Tax Act 1803. The court identified two groups of cases on yearly interest: those relating to interest accrued over time; and those relating to interest paid as compensation for the payee being kept out of money. It was this second group, to which Chevron (see above) belonged, which provided the answer ‘albeit only by analogy’. The court concluded that the status of a proving creditor was akin to that of an investor, so that Lehman’s unsecured debt had turned out to be a ‘very satisfactory long-term investment’.
In HMRC v Joint Administrators of Lehman Brothers International [2019] UKSC 12 (13 March 2019), agreeing with the Court of Appeal, the Supreme Court found that statutory interest paid under the Insolvency Rules 2016 rule 14.23(7) is yearly interest subject to a deduction of tax at source under ITA 2007 s 874.
The administration of Lehman Brothers had generated an unprecedented surplus after payment of all provable debts, amounting to approximately £7bn, of which about £5bn was estimated to be payable by way of statutory interest under rule 14.23(7). The periods in respect of which interest was payable ranged from just over four years (which expired when the first interim distribution to creditors was made in November 2012) and just over five and a half years, when the final dividend to creditors was made. The issue was whether this interest was ‘yearly interest’ for the purpose of s 874, so that the administrators should deduct income tax before paying it to creditors.
After reviewing both the statutory and the judicial history of the meaning of the phrase ‘yearly interest’, in particular the test established in Hay (1924) VIII TC 636, the court noted that the statutory interest in this case shared many of the relevant features with the contractual provision for interest in Chevron [1981] STC 689. In both cases, it could not be known during the period, in respect of which interest was calculated, whether it would in fact be payable at all. And in both cases, there was no liability to pay interest during the period in respect of which it was calculated as it was rolled up and payable in a single lump sum. The question was therefore: ‘what period of durability is to be identified for interest payable in a single lump sum as compensation for the payee being out of the money in the past, for the purpose of deciding whether it is to be treated as yearly interest, under the Hay principles?’ The court’s answer was that the relevant period was the period in respect of which the interest was calculated, because that was the period during which the loss of the use of money had been incurred, for which the interest was compensation.
The court also rejected the contention that the interest could not be yearly interest, as it derived from the combination of a realised surplus and a decision by the administrators, and those elements did not have the quality of durability over time required to make the interest yearly interest, applying the Hay tests. The court noted that there is no requirement to identify the source of the interest but that an ‘obvious candidate’ was the status of the recipient as creditor during the period between the commencement of the administration and the payment of the principal amount by dividend. This period precisely coincided with the period in respect of which the statutory interest was calculated and ‘amply’ fulfilled the necessary quality of durability over time.
Why it matters: The Supreme Court opened its judgment with the following comment: ‘This appeal concerns the relationship between two statutory provisions, one very old and the other very young.’ It observed that the full meaning of ‘yearly interest’, ‘an apparently innocent-looking simple statutory phrase’, could only be found in its history, which started with the Income Tax Act 1803. The court identified two groups of cases on yearly interest: those relating to interest accrued over time; and those relating to interest paid as compensation for the payee being kept out of money. It was this second group, to which Chevron (see above) belonged, which provided the answer ‘albeit only by analogy’. The court concluded that the status of a proving creditor was akin to that of an investor, so that Lehman’s unsecured debt had turned out to be a ‘very satisfactory long-term investment’.
