Re Kaupthing Singer and Friedlander Ltd: Newcastle Building Society v Mill and Others
| Jurisdiction | England & Wales |
| Judge | THE CHANCELLOR OF THE HIGH COURT,The Chancellor |
| Judgment Date | 08 April 2009 |
| Neutral Citation | [2009] EWHC 740 (Ch) |
| Court | Chancery Division |
| Date | 08 April 2009 |
| Docket Number | Case No: GLC 228/08 |
[2009] EWHC 740 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Before: The Chancellor of the High Court
Case No: GLC 228/08
In the Matter of Kaupthing Singer and Friedlander Ltd
(in Administration)
In the Matter of the Insolvency Act 1986
MR S MORTIMORE QC & MR D BAYFIELD (instructed by Addleshaw Goddard LLP) for the Applicant
MR R DICKER QC & MR T SMITH (instructed by Freshfields Bruckhaus Deringer LLP) for the 1 st to 4th Respondents
MR L TAMLYN (instructed by Nabarro LLP) for the 5th Respondent
Hearing date: 26 March 2009
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
The Chancellor:
Introduction
On three days between 12th August and 25th September 2008 the Newcastle Building Society (“NBS”) acquired three instruments of deposit issued by Kaupthing Singer & Friedlander Ltd (“KSF”), a wholly owned subsidiary of Kaupthing Bank hf the biggest bank in Iceland, in respect of the aggregate sum of £11m repayable with interest at varying rates on three maturity dates between 20th November and 17th December 2008 (“the KSF Instruments”). On 29th September 2008 KSF bought a certificate of deposit issued by NBS in the principal sum of £10m repayable with interest on 6th January 2009 “without set-off, counterclaim or other deduction, save as required by law..” (“the NBS CD”). On 4th November 2008 NBS was informed that such acquisition had been made by KSF on behalf and at the expense of, as it subsequently emerged, its indirect subsidiary Kaupthing Singer & Friedlander (Isle of Man) Ltd (“KSF(IoM)”).
On 8th October 2008 KSF went into administration and four partners in Ernst & Young LLP, the first four respondents, were appointed the administrators. On 9th October 2008 a provisional liquidator was appointed in respect of KSF(IoM). The KSF Instruments were not repaid on their respective maturity dates. Thus, as of 17th December 2008, KSF owed NBS £11m together with interest at the rates and for the periods provided by the respective KSF Instruments. NBS was concerned that as of 6th January 2009 it would be liable to KSF in respect of the NBS CD for £10m with interest but, seemingly, without the benefit of set-off or counterclaim. On 15th December 2008 NBS issued the application in the administration of KSF now before me seeking a declaration that KSF was not entitled to payment or to enforce payment under the NBS CD because NBS had a legal right of set-off and a defence to any such claim arising out of the liability of KSF under the KSF Instruments.
The application first came before the court on 17th December 2008. The parties agreed a modus vivendi pending determination of the application on its merits. Accordingly NBS paid the sum of £10,170,334 into a joint account in the names of the parties' respective solicitors on terms that:
“…so far as possible the sum shall represent [the NBS CD] without prejudice to (a) the rights (if any) that KSF would have had to recover payment from [NBS] under the NBS CD and (b) the rights (if any) that [NBS] would have had to refuse to make any payment to KSF under the NBS CD.”
Thus, the issue for my determination is whether NBS had any right to refuse to pay to KSF on 6th January 2009 the sum of £10,170,334 then due to KSF under the NBS CD. If the answer to that question is in the affirmative the money in the joint account should be paid back to NBS. If it is in the negative the money in the joint account should be paid to KSF.
CREST
The NBS CD was a dematerialised security issued and to be settled under CREST. Accordingly it is necessary to explain the features of CREST which impinge on the issues I have to decide. S.207 Companies Act 1989 authorised the Secretary of State to make regulations for enabling title to securities to be evidenced and transferred without a written instrument. Those regulations are The Uncertificated Securities Regulations 2001 SI 2001 No:3755 as amended from time to time. The securities to which they apply include eligible debt securities (“EDS”). The regulations enable such securities to be 'uncertificated' and transferable under a system run by an operator approved by the Treasury. CREST is such a system. It is operated by Euroclear UK and Ireland Ltd which is approved by the Treasury. Both KSF and NBS are members of CREST.
The rules of CREST provide that any security transferable in accordance with its rules
“…. must be transferable free from any equity, set-off or counterclaim between the issuer and the original or any intermediate holder of the security.” (rule 7 para 3.2)
and that
“Any provisions in…. any agreement, instrument, deed or record relating to payments to be made to or by an issuer…must be compatible with the CREST payment mechanisms set out in the agreements entered into by CREST users and participants and in the CREST Manual.” (rule 7 para 5)
The agreement required by Rule 7 para 5 is, in the case of NBS, a deed dated 10th October 2005 (“the Deed”). The Deed recites the intention of NBS to issue EDS in uncertificated form in respect of which the holder will acquire the rights against NBS constituted or acknowledged by and under the Deed. The payment obligations of NBS are set out in clauses 2 and 3. By clause 3.2 each payment of principal by NBS is to be by means of a CREST payment, as defined, and, by virtue of clause 3.5(a), “shall be made without set-off, counterclaim or other deduction, save as required by law.” Clause 6 deals with the constitution, issue and transfer of units. Clause 6.4(c) reflects CREST rule 7 para 3.2 in requiring units to be transferable free from any equity, set-off or counterclaim between the issuer and the first or any intermediate holder. The definition of a CREST payment in clause 1 requires a payment which is made by means of the CREST relevant system. It thereby brings in all the relevant provisions of the CREST rules for payments, including Rule 7 paras 3.2 and 5 quoted above.
Thus, as counsel for NBS frankly recognised, to obtain the relief his clients seek it is necessary to displace the prima facie operation of both the CREST payment system and clause 3.5(a) of the Deed. He seeks to do so by drawing a distinction between legal set-off, equitable set-off and the mandatory set-off in companies' administration or winding up for which Insolvency Rules 2.85 and 4.90 provide.
Legal set-off
Given the starting point of counsel's argument it is appropriate shortly to describe the nature of the set-off on which he relies. The mandatory set-off for which Insolvency Rules 2.85 and 4.90 provide cannot be applicable even if, in the case of the latter KSF were in liquidation, because the equitable interest of KSF(IoM) precludes the dealings between KSF and NBS being mutual. Equally equitable set-off could not apply because the KSF Instruments and the NBS CD are not connected the one with the other.
Legal set-off originated in the Insolvent Debtors Relief Acts 1729 and 1735. S.13 of the former provided that, for the ensuing five years, where there were mutual debts between plaintiff and defendant “one debt may be set against the other”. That provision was made permanent by s.4 of the latter Act. S.5 extended the availability of such set off and expressly provided that
“.. judgment shall be entered for no more than shall appear to be truly and justly due to the plaintiff after one debt being set against the other as aforesaid.”
It is common ground that the rights originally conferred by those provisions have been continued in subsequent statutes and are now enshrined in s.49(2) Supreme Court Act 1981 and CPR Rule 16.6.
In Lechmere v Hawkins (1798) 2 Esp.626 the defendant had promised to pay the plaintiff without regard to the debt due by the plaintiff to the defendant and “without affecting to set one demand against the other”. Lord Kenyon considered that the terms of the original statutes as to mutual debts being satisfied gave the defendant power to set off the plaintiff's debt to him against his debt to the plaintiff, notwithstanding their agreement to the contrary. Despite the identity of the reporter (see Megarry, a Second Miscellany-at-Law p.118/119) this case was followed by Lord Erskine in Taylor v Okey (1806) 13 Ves.Jun.181. The two cases together were regarded by the editors of Halsbury's Laws of England 4th Ed. Vol.42 para 434 as establishing that the legal right of set-off could not be waived.
The correctness of that conclusion was considered by Hirst J in Hong Kong and Shanghai Banking Corporation v Kloeckner & Co AG [1990] 2 QB 514. In that case Hirst J considered the availability of a legal set-off in two distinct contexts arising from dealings between the Bank, Gatoil and Kloeckner. There had been substantial crude oil dealings between Gatoil and Kloeckner in both wet and dry cargoes. The Bank had financed Gatoil's acquisition of oil by paying its suppliers in return for a pledge of the relevant bill of lading. Kloeckner gave an undertaking to the Bank to pay the debt of Gatoil against delivery of the bill of lading “without any discount, deduction, offset or counterclaim whatsoever..”. The claim of the Bank under that undertaking was $8m. The second context was in relation to unconnected dry cargo transactions in connection with which the Bank provided a standby letter of credit to Kloeckner in respect of the liabilities of...
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