Summary

Statutory interest payable on proven debts in an administration under the Insolvency (England and Wales) Rules 2016 r.14.23(7) amounted to "yearly interest" under the Income Tax Act 2007 s.874. The interest was therefore subject to deductions of basic rate income tax.

Facts

HMRC appealed against a decision that statutory interest payable on debts in the administration of Lehman Brothers International (Europe) was not "yearly interest".

The administration had a substantial surplus. Under the Insolvency (England and Wales) Rules 2016 r.14.23(7), interest was therefore payable on proved debts from the date the company entered administration. The rate of interest was determined by the Judgments Act 1838 s.17, namely, "eight pounds per centum per annum". The issue was whether the interest was "yearly interest" under the Income Tax Act 2007 s.874. If it was, basic rate income tax had to be deducted and paid to HMRC. The statutory interest amounted to approximately £5 billion, and the amount of potential tax was therefore considerable. The judge concluded that in order to amount to yearly interest, the interest had to accrue from day to day and be payable from year to year. He found that statutory interest did not have that quality of recurrence as it was paid retrospectively in compensation for the time value of the money between commencement of the administration and payment of the proved debt.

The administrators submitted that: the right to statutory interest was dependent on the existence of an eventual surplus in the administration; the period which it covered was indeterminate at the commencement of the administration; and the fact that the liability had subsisted for more than a year was insufficient to make the interest "yearly interest".

Held

(1) Statutory interest was paid as compensation for the loss which the creditors had suffered by being kept out of their money for the period of the administration. A compensating payment could nevertheless be "interest of money" under schedule D of the Income Tax Acts, Riches v Westminster Bank Ltd [1947] A.C. 390 followed. Whether the interest was "yearly interest" therefore turned on the meaning and effect of the word "yearly" (see paras 16, 21-22 of judgment).

(2) A number of cases concluded that interest calculated retrospectively and payable as part of compensatory award, for example for breach of trust or fiduciary duty, could amount to yearly interest, Inland Revenue Commissioners v Barnato [1936] 2 All E.R. 1176, Barlow v Commissioner of Internal Revenue unreported and Regal (Hastings) Ltd v Gulliver [1967] 2 A.C. 134 followed. The obligation of a defaulting trustee to make good the loss with interest was not an ongoing obligation to pay in the same sense as a contractual obligation. It was an obligation to make good the loss, but the quantum and amount of interest were calculated on the taking of the account and converted into an enforceable liability by the judgment which followed. That had particular relevance to an award of interest. The court's power to award interest in those circumstances was as compensation, Wallersteiner v Moir (No.2) [1975] Q.B. 373 applied. The court therefore rejected the administrators' argument that the award of interest in cases like Regal (Hastings) Ltd could be treated as the payment of an ongoing liability no different from mortgage loan cases. The point applied even more strongly to other cases of retrospectively assessed interest under a statutory regime (paras 48-49).

(3) In Riches, the House of Lords clearly considered that interest awarded under the predecessor to the Senior Courts Act 1981 s.35A had the quality of recurrence necessary to make it interest rather than damages. The House of Lords treated as irrelevant the fact that the interest was payable from the date of judgment and was calculated retrospectively. Instead, it concentrated on the duration of the liability if looked at hypothetically at the start of the period to which it related. Its decision indicated that such an award of interest was capable of being both interest of money and yearly interest, Riches and Jefford v Gee [1970] 2 Q.B. 130 followed (paras 51, 54).

(4) The judge's approach in the instant case was inconsistent with that line of reasoning. If statutory interest could not be yearly interest because it did not accrue prospectively in real time, then it was difficult to see how it could be interest at all. The need for it to accrue from day to day was held in Riches to be satisfied even where there was no real time accrual. The same test applied equally to the type of statutory interest in the instant appeal. It was necessary to focus on the purpose of the relevant provisions in the Rules and on whether the administrators' obligation to pay interest should be treated as a short-term liability, akin to the case of short-term loans, regardless of how long the administration lasted, Gosling & Sharpe v Blake (Surveyor of taxes) (1889) 23 Q.B.D. 324 considered. It would be wrong to treat statutory interest under the Rules as a short-term liability of that kind. The administrators' obligation to pay interest on the proven debts was unlimited in point of time under r.14.23(7). It was calculated by reference to a per annum rate of interest under the 1838 Act, and contemplated a period of administration which often lasted over a prolonged period of time, and had endured for a number of years in the instant case. It therefore satisfied the definition in Bebb v Bunny 69 E.R. 436 as it was payable from year to year whilst accruing from day to day, Bebb applied (paras 55-57).

Appeal allowed