What’s going on here?
A Supreme Court ruling means that HMRC (the government body responsible for collecting taxes) is set to receive £1 billion in taxes over the Lehman Brothers collapse back in 2008.
What does this mean?
Following the collapse of the American investment bank Lehman Brothers in 2008, administrators from PWC were brought in to wind up the European arm of the bank and pay off creditors. The administrators paid off all secured creditors by 2014, leaving a surplus of £7 billion. HMRC brought an action against PWC over this £7 billion surplus. They claimed that £5 billion was taxable as “statutory interest” which was to be taxed at 20%. Until late 2015, HMRC had taken the position that any statutory interest accrued was not taxable. However, this position has changed and HMRC now expects administrators to withhold the tax.
But this is not the end of the legal saga. Some of Lehman Brothers’ creditors have brought actions against HMRC hoping to keep more of the money themselves. These defences are relying on arguments based on “double tax treaties”. These are agreements between countries that are designed to ensure individuals and companies avoid being taxed in two different countries on one payment.
What’s the big picture effect?
The collapse of Lehman Brothers in 2008 was the largest bankruptcy in history. The debts were in excess of £391 billion, and the collapse was a major contributor to the 2008 recession. The fact that the administrators are only just finishing winding down the company demonstrates the dangers creditors can face in bankruptcy - even when the money is available, it can take years to be repaid.
It should also be noted that with the largest bankruptcy comes the largest fees. PWC had earned £322m in fees by 2012, and the combined fees of PWC and Linklaters have totalled almost £1 billion as of this ruling.
Another area that should be highlighted is how many investment companies have managed to make significant profits by buying up Lehman Brothers debt during the financial crisis. In 2008 much of the debt was bought at a significant undervalue. Debts were bought as low as 20% of its face value as creditors were desperate to unload what they saw as worthless debt. Due to the surplus mentioned, those who bought the debt are set to receive back 140% of the debts face value.
Although Lehman Brothers had declared bankruptcy, this bankruptcy was a result of limited cash flow. The bank still had lots of assets. The administrators did not need to sell all of those assets to repay the debt, and chose to hold on to them. This proved to be a shrewd move as they saw significant increases in value, providing a huge return for Lehman Brothers’ creditors.
Sometimes, it pays to be patient.
Report written by Harry B.
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