After the collapse of Lehman Borthers administrators were appointed to wind down the UK companies. This administration generated a significant surplus. After the collection of amounts owed and the payment of amounts due a surplus in the region of £7 billion was left to distribute to the creditors as statutory interest, being compensation for having to wait to receive amounts owed during the administration. The question to the Supreme Court (SC) was whether this statutory interest was “yearly interest” as if it was then the administrators would then be required to withhold income tax from the payment of interest. Where the interest was considered “short interest” then no such income tax withholding requirement would arise.
As there was no prior case law about how to treat statutory interest the SC had to decide the matter by way analogy. They reviewed one line of case law being cases centred around commercial loans and whether those loans generated yearly or short interest, these loans typically paid interest in regular amounts. The other line of cases was those related to lump sum payments of interest, such as where a judge had ordered someone to pay interest on amounts due. Under this line of case law, where the period that a recipient was out of funds was longer than a year then the interest was considered yearly and therefore the obligation to withhold income tax arose.
The SC found that statutory interest was more analogous to the second line of cases where a lump sum amount would be paid. It would have been impossible for the creditors to calculate how much statutory interest would be at the start of the administration process and since the period from proving they were creditors to payment of their principal was far greater than a year then the interest was to be considered yearly interest and the administrators had a requirement to withhold income tax, where applicable, from the payment of statutory interest.
The SC further held that discussions about the source of the interest were in conflict with the second line of cases and that discussion about the source of the interest was wrong in principle.
The decision can be found at: Commissioners for Her Majesty’s Revenue and Customs (Respondent) v Joint Administrators of Lehman Brothers International (Europe) (In Administration) (Appellants) – The Supreme Court
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