CR-2018-009110 - [2025] EWHC 2115 (Ch)

The challenge to the BTI PoD is a two-stage one. The first stage is an argument that contractual payments which are calculated pursuant to a formula which involves a reference to LIBOR should be recharacterized as interest. The second stage is that such payments, even though not falling within Rule 14.23, should as a matter of common law not be recoverable in an insolvency.

The provisions of the Funding Agreement which give rise to the Company’s liability to BTI arose as follows. It was agreed that, in respect of the amounts to be paid to NCR, BAT would provide funds to BTI, BTI would pay those funds to NCR, and the Company (which was ultimately liable for those payments through the network of indemnities) would pay BTI the cost of funds of the amounts paid.

It is important to note that the Company did not borrow any money from anyone, and the payments which it was due to make did not constitute interest on any amount borrowed by anyone. Neither were they a pass-through of interest incurred on borrowings by BTI (or any other party). The use of LIBOR in the payment formula was intended to include a generic indicator of cost of money, but the amount to be paid was simply a payment calculated by reference to a formula. The Administrators say that this is “in substance” interest (and it is true that it is described as such in the Funding Agreement). However, I think that there is a very clear distinction between a payment which is in substance interest and a payment which is calculated by reference to the cost of the time value of money incurred by a third party. If this were not the case, transactions such as interest rate swaps (which reference a hypothetical third party borrowing cost) would be rendered partially unenforceable under this rule, with unfortunate and potentially far-reaching consequences.

The Applicants make the (perfectly correct) point that, even if these payments were interest, they would not be debarred from being proved by the Insolvency Rules 2016, Rule 14.23(1) of which provides that:

“Where a debt proved in insolvency proceedings bears interest, that interest is provable as part of the debt except in so far as it is payable in respect of any period after the relevant date.”

This does not apply to the Section 6 payment obligation, because what is being claimed is not interest on a debt proved on insolvency.

This position is supported by the authorities. The Administrators rely on Re Humber Ironworks and Shipbuilding Co (1869) 4 Ch App 643 (CA) to establish the proposition that it is a general principle of common law that interest should cease to accrue to a creditor on a provable debt after the onset of an insolvency. However, there is nothing in the decision which causes me to think that it is anything more than a prefiguring of the rule set out in Rule 14.23 above. In order to convince me that Re Humber Ironworks had any wider scope than this, I would have to be convinced that there was a common law interpretation of the term “interest” which was wider than that set out in Rule 14.23.

I am satisfied that there is not. It seems clear from the authorities that an arrangement is only properly described as interest per se where (a) an amount of money is due from A to B, and (b) the payments which are to be characterised as interest are due from A to B and are calculated by reference to that sum.

This point was made by Megarry J in Re Euro Hotel (Belgravia) Ltd [1975] 3 All ER 1075. In that case a financier had advanced a sum of money to a developer for the erection of a hotel in the form of a single payment. However the agreement contained provisions to the effect that if there was a delay after the scheduled completion date and the opening of the hotel, the financier would receive payments (described in the agreement as “interest”), in effect to incentivise the developer to adhere to the prescribed timetable. Megarry J had this to say about this arrangement:

“Such payments do not seem to me to be 'interest', and certainly not 'interest of money', within the statute. There are indeed sums of money from which the 'interest' will be ascertained, but I cannot see that those sums of money are anything more than units of calculation. What the company has to do is to make certain payments, the amount of which has to be calculated from the sums of money in question: but the payments do not seem to me to be 'interest' on those sums in any true sense of the word. The sums of money have been paid to the company once and for all, and are not due to the petitioning creditor in any way. They are not debts or obligations of the company, and they are not sums which belong to the petitioning creditor in even the most colloquial sense.” (at 1085 a-c.)”

Mr O’Connell raises a number of issues in his Witness Statement as regards the detailed calculation of the amounts due to BTI under Section 6. I do not propose to go into these here. However, I gather that the conclusion of these points is that, if he is wrong in relation to the interest issue (as I have found that he is), Mr O’Connell’s estimation of the actual value of the claim is £27.9m plus some further indeterminate sum representing a future contingent claim, subject to an assertion of an equitable set-off, addressed below.