Kaupthing Singer & Friedlander Ltd ((in Administration)) (no. 2)
| Jurisdiction | England & Wales |
| Judge | Lord Justice Etherton,Lord Justice Hughes,Lord Justice Mummery |
| Judgment Date | 11 May 2010 |
| Neutral Citation | [2010] EWCA Civ 518 |
| Docket Number | Case No: A2/2009/2314 |
| Court | Court of Appeal (Civil Division) |
| Date | 11 May 2010 |
[2010] EWCA Civ 518
Companies Court (Mr Justice Norris)
Before : Lord Justice Mummery
Lord Justice Hughes
and
Lord Justice Etherton
Case No: A2/2009/2314
88052 of 2008
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
Robin Dicker QC and Tom Smith (instructed by Freshfields Bruckhaus Deringer)
Richard Fisher (instructed by CMS Cameron McKenna)
Hearing dates : 15 th April 2010
Lord Justice Etherton :
Introduction
This appeal arises out of directions given by Norris J to the administrators of Kaupthing Singer & Friedlander Limited (“KSF”) by an order dated 2 October 2009. The appeal raises a short but important point on the provisions of the Insolvency Rules 1986 (“IR”) as to the set-off, in a company administration, of future debts owed by the company to its creditors and by those creditors to the company. The point, briefly stated, is whether the effect of those provisions is that, after the future debts are discounted to a present value for the purpose of set-off, leaving a balance due from the creditor to the company to be paid at the contractual date for repayment, the balance is to be paid in the discounted amount or alternatively in an equivalent undiscounted amount.
Factual background
KSF is a bank. It was authorised to carry on deposit-taking and other regulated activities under the Financial Services and Markets Act 2000. It was placed in administration on 8 October 2008 by order of Floyd J on the application of the Financial Services Authority. The appellants were appointed joint administrators (“the Administrators”). The administration is presently being conducted with the objective of achieving a better result for KSF's creditors as a whole than would be likely if KSF were wound up.
The creditors of KSF include individual, corporate and institutional depositors. Some 180 of those depositors are themselves indebted to KSF. The total value of their outstanding deposits is approximately £15.5 million, €3 million and US$5.7 million. The total value of their outstanding loans is approximately £678.4 million, €147.3 million and US$164 million, that is to say substantially in excess of their deposits. About half of those loans are repayable after August 2010. Some of them are not repayable until 2018.
On 20 May 2009 the Administrators gave notice in the London Gazette of their intention to declare a first interim dividend to preferential and unsecured creditors pursuant to IR 2.95. Creditors were required to submit their proofs of debt on or before 18 June 2009. The Administrators declared and paid a first interim dividend on 22 July 2009.
By ordinary application dated 24 June 2009 the Administrators applied to the Court for directions in respect of four issues concerning, broadly speaking, the way in which claims and cross-claims between KSF and its depositors are required to be calculated and set off against each other, and the treatment of KSF's right to payment of the balance of any loans. That application was heard by Norris J, who gave judgment on, and made an order dated, 2 October 2009. This appeal is by the Administrators in respect of one aspect only of the applications and the directions, namely the proper treatment of the balance of any loan owed by a depositor to KSF after the set-off of cross-claims. By virtue of IR 2.85(8) such balance is not payable by the depositor until the contractual date for repayment has arrived. Before the Judge, it was not disputed by KSF that the balance payable by the depositor was the discounted amount (that is to say, present day value), even though not repayable until the contractual (future) date for repayment. It was argued by KSF, however, that, in discounting the outstanding loans to the depositors to present value for the purpose of set-off, contractual interest due up to the contractual date for repayment should be included in the amount to be discounted. The Judge rejected that argument. On this appeal, the Administrators no longer advance that argument, but they contend that the balance outstanding in favour of KSF after set-off should be the amount that would have been due if the balance had not been discounted to present value. This turns on the inter-relationship between, and the proper meaning and effect of, IR 2.85(7), which incorporates IR 2.105, and IR 2.85(8). The former deals with the discounting of future claims to their present value, for the purpose of calculating the amount of any set-off; and the latter deals with the payment to the company of any balance after set-off.
On 29 June 2009 Peter Smith J gave directions that the Administrators should instruct counsel to make submissions to the Court in support of their preferred construction in relation to each of the four issues on which they sought directions, and that they should instruct separate counsel to argue for any alternative construction to the extent that any such alternative construction would be in the best interests of those creditors affected and was properly arguable. Mr Robin Dicker QC (before this Court) and Mr Tom Smith (before the Judge and this Court) were appointed to act on behalf of the Administrators, and Mr Richard Fisher (before the Judge and this Court) was appointed to advance arguments on behalf of depositors who are themselves indebted to KSF. We are grateful for their excellent skeleton arguments and admirable concise oral submissions.
The statutory setting
The administration procedure was first introduced by the Insolvency Act 1986 (“ IA 1986”). Broadly speaking (and subject to certain exceptions with the consent of the administrator or the leave of the Court), on the making of the administration order the rights of creditors to enforce the company's obligations are suspended until the conclusion of the administration. Until the Enterprise Act 2002 (“ EA 2002”) the administration was typically concluded by, and the assets were distributed pursuant to, a scheme of arrangement, or a company voluntary arrangement, or a creditors' voluntary liquidation, or a compulsory liquidation on the discharge of the administration order. Among the changes made by EA 2002 was the introduction of a procedure under which a distribution could be made by an administrator to creditors in much the same way as in a liquidation. This was achieved by the introduction of the present paragraph 65 of Schedule B1 to IA 1986 (“Schedule B1”), which enables an administrator to make a distribution to creditors directly (but, in the case of unsecured creditors, only with the permission of the Court); and then to proceed under paragraph 84 of Schedule B1 to a dissolution of the company without the intervening step of a liquidation.
In order to facilitate this change, a new Chapter 10 of IR Part 2 was introduced, modelled on the equivalent rules applicable to liquidations, to provide the necessary machinery to enable such a distribution to be made. As the Judge explained in paragraphs [6] and [7] of his clear and careful judgment, Chapter 10 in essence adapts the language, concepts and mechanics of the payment of a dividend within a liquidation to the payment of a distribution within an administration. So a creditor claiming to participate in a distribution is referred to as “proving” his debt, and the document by which he seeks to establish his claim is referred to as his “proof”; and, if he so “proves”, then that will suffice if the company proceeds from administration into creditors' voluntary liquidation. Further, the rules in Section C of Chapter 10 relating to quantification of claims for the purposes of the distribution are substantially similar to the rules which apply in a winding up and which are to be found in IR 4.86 to IR 4.99, including provisions for set-off where there have been mutual credits, mutual debts or mutual dealings between the company and any proving creditor. In the case of liquidation, those provisions as to set-off are contained in IR 4.90; and, in the case of administration, they are contained in IR 2.85.
Following amendments by the Insolvency (Amendment) Rules 2005, S.I. 2005/527 (“the 2005 SI”), IR 2.85 is as follows:
“(1) This Rule applies where the administrator, being authorised to make the distribution in question, has pursuant to Rule 2.95 given notice that he proposes to make it.
(2) In this Rule “mutual dealings” means mutual credits, mutual debts or other mutual dealings between the company and any creditor of the company proving or claiming to prove for a debt in the administration but does not include any of the following –
…
(3) An account shall be taken as at the date of the notice referred to in paragraph (1) of what is due from each party to the other in respect of the mutual dealings and the sums due from one party shall be set off against the sums due from the other.
(4) A sum shall be regarded as being due to or from the company for the purposes of paragraph (3) whether —
(a) it is payable at present or in the future;
(b) the obligation by virtue of which it is payable is certain or contingent; or
(c) its amount is fixed or liquidated, or is capable of being ascertained by fixed rules or as a matter of opinion.
(5) …
(6) Rules 2.86 to 2.88 shall apply for the purposes of this Rule in relation to any sums due to the company which —
(a) are payable in a currency other than sterling;
(b) are of a periodical nature; or
(c) bear interest.
(7) Rule 2.105 shall...
To continue reading
Request your trial
-
Brazzill and Others v Willoughby and Others
...Ltd (KSF), have kept lawyers busy. Already this court has considered an appeal from a decision of Norris J on a question of set-off: [2010] EWCA Civ 518, the Chancellor has had to rule on issues concerning the rule in Cherry v Boultbee: [2009] EWHC 3377 (Ch), and an appeal from that decis......
-
Anthony Victor Lomas and Others v Burlington Loan Management Ltd and Others
...as in other fields, should be construed so as to give effect to basic principles and sensible policy objectives: see Re Kaupthing Singer & Friedlander Ltd (No.2) [2010] EWCA Civ 518, [2011] 1 BCLC 12 at [32]–[33]. 106 In the absence of clear words excluding the effect of the principle in B......
- Bresco Electrical Services Ltd ((in Liquidation)) v Michael J Lonsdale (Electrical) Ltd
-
Bresco Electrical Services Ltd ((in Liquidation)) v Michael J Lonsdale (Electrical) Ltd
...19 Some useful guidance as to the analysis in Stein v Blake can be found in the decision of this court in Re Kaupthing Singer and Friedlander Limited (in administration) [2010] EWCA Civ 518; [2011] B.C.C. 555. There, the argument that the underlying claims were extinguished for all purpose......
-
Hugh Beale, Michael Bridge, Louise Gullifer and Eva Lomnicka, THE LAW OF SECURITY AND TITLE-BASED FINANCING Oxford: Oxford University Press (www.oup.com), 2nd edn, 2012. lxiv+821 pp. ISBN 9780199608720. £245.
...and its relation to the Financial Collateral Arrangements (No 2) Regulations 2003; the case of Re Kaupthing Singer and Friedlander Ltd [2010] EWCA Civ 518, which develops the law on insolvency set-off; and the instructive Australian case of Beconwood Securities Pty v Australia and New Zeala......