Statutory interest in an insolvency can be yearly interest

Thu 18 Jan 2018

The Court of Appeal has overturned the High Court on whether statutory interest to be paid to creditors in the Lehman Brothers liquidation is ‘yearly interest’ (requiring deduction of tax at source).  In the Court of Appeal’s view, the statutory insolvency interest was to be regarded as yearly interest, requiring the consideration of deduction of income tax at source.  The issue of deduction of tax was important as many of the creditors were non-UK resident.

The case has a useful summary of the other cases considering whether something is ‘yearly interest’ or not.  The concluding paragraph of the decision (which was unanimous) was:

“In my view it would be wrong to treat such statutory interest under the Insolvency Rules as a short-term liability of this kind [one that does not accrue from year to year, regardless of how long the administration in fact lasts]. Unlike, for example, the indebtedness under the local Act in Gateshead Corporation v Lumsden which could have been called in at any time, the obligation of the administrators to pay interest on the proved debts was unlimited in point of time under rule 2.88(7) (and now rule 14.23(7)), was calculated (where the Judgment Act rate applies) by reference to a per annum rate of interest, contemplated a period of administration which could in many cases last over a prolonged period of time and did in fact endure for a number of years. It did therefore satisfy the definition in Bebb v Bunny in that it was payable from year to year whilst accruing from day to day. Unless the fact that it did not accrue prospectively in real time is fatal to the contention that it is yearly interest which, in the light of the authorities, it is not, I can see nothing in the Insolvency Rules or the other relevant surrounding circumstances which prevents it from being treated as the long-term liability which it in fact was.”

Implications

For the present, the possible application of the deduction of income tax at source rules for statutory interest paid in an insolvency should always be considered. It is not yet known whether the case concerning interest payable to creditors of the Lehman insolvency will be heard at the Supreme Court, but there is a significant amount of tax at stake as the statutory interest in this case is in the region of £5bn.

To discuss the implications of deduction of tax at source on statutory interest, please get in touch with a member of the  tax team.