Jurisdiction(s):
United Kingdom

Lehman Brothers: England and Wales Court of Appeal modifies rule against double proof; surety settlement with indemnity release/assignment requires creditor credit; contractual subordination, pari passu and priority clarified

Published on: 02 November 2021

Published by a LexisNexis Restructuring & Insolvency expert

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Article summary

Lehman Brothers Holdings Scottish LP 3 v Lehman Brothers Holdings plc (in administration) and others; Joint liquidators of LB GP No 1 Ltd (in liquidation) and another v Joint administrators of Lehman Brothers Holdings plc (in administration) and another [2021] EWCA Civ 1523

What are the practical implications of this case?

The effect of the court’s adjustment to the rule against double proof is that a surety who makes a part payment under a settlement and, in doing so:

waives its right of indemnity against the insolvent principal debtor; and
obtains an assignment from the creditor of the principal debtor’s liability,

will be confined to proving for the remaining unpaid amount. In its capacity as assignee, it cannot rely on the general double proof rule that allows an unpaid creditor to prove in full without setting off any part payment made by a surety. Parties should therefore ensure that such settlements and assignments are negotiated and drafted with this outcome in mind. The judgment also carries further drafting consequences for subordination terms in financial instruments, derived from other elements of the court’s analysis: (1) although the pari passu principle is a...

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