Previous Page  9 / 16 Next Page
Show Menu
Previous Page 9 / 16 Next Page
Page Background



Lomas and others v Burlington Loan

Management Limited and others [2016]

EWHC 2417

This is the latest instalment in the Lehman "Waterfall"

litigation arising out of the collapse of Lehman

Brothers and looks at interest provisions on sums due

following early termination and close out of


The case centred on a surplus of approximately £7

billion that Lehman Brothers International Europe had

generated, despite having gone into administration

eight years previously. Various creditors were,

unsurprisingly, eager to obtain a share in this

surplus. A key issue was the interest payable on

debts owed by Lehman following close out of the

ISDA Master Agreement.

Section 9(h)(ii)(2) of the 2002 Master Agreement

provides for "interest" to be paid on a past-due Early

Termination Amount at the Default Rate. The Default

Rate is defined in section 14 as "a rate per annum

equal to the cost (without proof or evidence of any

actual cost) to the relevant payee (as certified by it)

if it were to fund or of funding the relevant amount

plus 1% per annum". The Default Rate may apply

both where a party pays a close-out amount late and

also on any defaulted payments.

The Court was asked to decide whether this cost of

funding was a borrowing cost or whether it could also

take into account the (higher) cost of raising equity.

It held that:

"cost of funding" means the cost of borrowing

the relevant amount under a loan transaction.

This did not include costs associated with wider

types of funding such as equity funding, which

was unfortunate as, following Lehman's collapse,

many banks raised equity at a cost well above

the 8% simple interest rate.

"cost" means the "transactional costs", i.e. the

price which is required to be paid in return for

the funding for the period it is required. Such

cost is effectively the rate of interest which was

incurred or would have been incurred by the

relevant payee for borrowing the close-out sum

over the period during which it remained

outstanding, at a daily compounding rate.

Accordingly, when the ISDA Master Agreement

refers to interest, it is referring to interest as the

price of borrowing money and it follows that the

cost of funding must be the cost of borrowing the

relevant amount.

the Default Rate should be calculated only by

reference to Lehman's original contractual

counterparty's cost of funding, not by reference

to a third party to whom that original

counterparty has transferred its rights pursuant

to Section 7 of the 2002 ISDA Master

Agreement. As a matter of contractual

interpretation, only the original counterparty was

the "relevant payee". The Lehman debt,

including ISDA claims, had been heavily traded

following Lehman's entry into administration.

So transferees were entitled to the interest based

on the transferor's cost of borrowing, but not

interest based on its own costs.

In light of this decision, it is important for creditors to

think about what rate of interest they can certify (the

judgment sets out detailed guidance on this).

Sue Millar

Partner, London

T + 44 20 7809 2329


Jeremy Livingston

Associate, London


+44 20 7809 2086