Re Kaupthing Singer & Friedlander Ltd (No 2)

JurisdictionEngland & Wales
JudgeLORD WALKER,Lady Hale,Lord Clarke,Lord Collins,LORD HOPE
Judgment Date19 October 2011
Neutral Citation[2011] UKSC 48
Date19 October 2011
CourtSupreme Court
In the matter of Kaupthing Singer and Friedlander Limited (in Administration) and In the matter of the Insolvency Act 1986

[2011] UKSC 48


Lord Hope, Deputy President

Lord Walker

Lady Hale

Lord Clarke

Lord Collins


Michaelmas Term

On appeal from: [2009] EWHC 3377 (Ch)


Gabriel Moss QC

Richard Fisher

(Instructed by Allen & Overy LLP)


Robin Dicker QC

Tom Smith

(Instructed by Freshfields Bruckhaus Deringer LLP)

Heard on 13 and 14 July 2011

LORD WALKER (with whom Lady Hale , Lord Clarke and Lord Collins agree)


This appeal is concerned with the long-standing principle of insolvency law known as the rule against double proof. It originated in the law of individual bankruptcy but has since the Companies Act 1862 applied to the winding up of companies. It now extends to distributions made by administrators under para 65 of Schedule B1 to the Insolvency Act 1986 as substituted by the Enterprise Act 2002. Like the anti-deprivation rule recently considered by the Supreme Court in Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2011] UKSC 38, [2011] 3 WLR 521, the rule against double proof is implicit in the Insolvency Act 1986. In the words of Neuberger J in In re Glen Express Ltd [2000] BPIR 456, 461, it "remains good law. It is an overarching principle which still applies to insolvency, and nothing in Stein v Blake [1996] AC 243 calls it into question."

The facts

The appeal is concerned with distributions made and to be made by the administrators of Kaupthing Singer & Friedlander Ltd ("KSF"), a bank which went into administration during the financial crisis in October 2008. The disputed issues as to the rule against double proof arise, as is generally the case, in the context of suretyship. KSF has a wholly-owned subsidiary named Singer & Friedlander Funding plc ("Funding"), which is also in administration. Funding's sole function was to raise funds for use by KSF and other group companies. In 2005 Funding issued £250m floating rate notes repayable in 2010. They were constituted under a trust deed dated 9 February 2005 made between Funding, KSF (then named Singer & Friedlander Ltd) and HSBC Trustee (CI) Ltd ("the Trustee"). By clause 7 of the trust deed KSF guaranteed payment of principal and interest on the notes and performance of Funding's other obligations under the trust deed. The correct construction of clause 7 (and in particular the non-competition provisions in clause 7.7) is one of the issues in the appeal.


The net proceeds of the notes (approximately £249.5m) were advanced by Funding to KSF by way of unsecured loan. When KSF went into administration on 8 October 2008 it owed Funding approximately £242.6m. When Funding went into administration on 15 October 2008 the amount of principal prospectively due on the notes was (following the buyback and cancellation of some of the notes during 2008) approximately £240.3m. On 23 March 2009 the Trustee gave notice that an event of default had occurred in respect of the notes. The effect of this was that the notes became immediately due and payable, and the obligations of Funding (as principal debtor) and KSF (as guarantor) came into immediate effect.


On 28 April 2009 the Trustee submitted to Funding's administrators, and also to KSF's administrators, proofs of debt for principal and interest in respect of the loan notes in the sum of approximately £248.1m in each case. Those proofs have been admitted. On 8 May 2009 Funding submitted a proof in respect of its loan to KSF in the sum of approximately £242.6m. KSF's administrators have indicated that, subject to the issues raised in this appeal, they intend to admit Funding's proof.


On 20 May 2009 KSF's administrators gave notice of their intention to make distributions in the administration, including distributions to ordinary unsecured creditors. This notice was given under rule 2.95 of the Insolvency Rules 1986 ( SI 1986/1925) as amended, and with the permission of the court granted by an order of Henderson J made on 24 April 2009. KSF has numerous creditors who have already received dividends amounting to 58p in the pound (or in the case of Funding, had provision made for payment, subject to this appeal). By contrast Funding has only one creditor other than the Trustee, that is HM Revenue and Customs, which has proved for the relatively trivial sum of £2,654.10. Funding has no assets other than its loan to KSF. It has an issued capital, fully paid up, of only £12,500. The administrators of Funding have not given notice of an intention to make distributions in their administration. Mr Dicker QC, for the administrators of KSF, drew attention to this fact but did not take any point on it.

The proceedings

This is a leapfrog appeal to the Supreme Court under section 12 of the Administration of Justice Act 1969 as amended. The administrators of KSF applied to the Chancery Division for directions. The matter came before Sir Andrew Morritt C. At the hearing the Trustee recognised that the Chancellor was bound by the decision of the Court of Appeal in In re SSSL Realisations (2002) Ltd [2006] EWCA Civ 7, [2006] Ch 610 (" SSSL"), in which the Court of Appeal had in comparable circumstances applied the equitable principle known as the rule in Cherry v Boultbee (1839) 4 My & Cr 442. The only issue argued before the Chancellor was whether clause 7.7 of the trust deed excluded that rule. But the Trustee made clear its intention to argue in the Supreme Court, if granted permission to appeal, that SSSL was wrongly decided. Funding's administrators were joined in the proceedings but were not represented.


The Chancellor's order dated 18 December 2009 declared that the rule in Cherry v Boultbee was not excluded and directed that the administrators of KSF might rely on it unless and until KSF's right to indemnity (as a surety) had been satisfied in full. He granted a certificate under section 12 of the 1969 Act that there was a point of law of general public importance on which he was bound by a fully-considered judgment of the Court of Appeal. The Supreme Court gave the Trustee permission to appeal. Both sets of administrators are respondents to the appeal but, again, Funding's administrators have not been represented.

The rule against double proof

The expression "the rule in Cherry v Boultbee" suggests a technical rule of some complexity. Any such impression would be misleading. It is basically a simple technique of netting-off reciprocal monetary obligations, even where there is no room for legal set-off, developed and used by masters in the Court of Chancery in giving directions for the administration of the estates of deceased persons. Complication arises only in a situation of insolvency, where the equitable rule produces a different outcome from that produced by statutory set-off (see para 43 below).


This appeal ultimately turns on what function, if any, the equitable rule has to perform in the operation of the rule against double proof as it applies in suretyship situations. The appellant Trustee, on behalf of the noteholders, submits that it would be irrational and unfair to apply it in circumstances in which there is clear House of Lords authority ( Secretary of State for Trade and Industry v Frid [2004] UKHL 24, [2004] 2 AC 506) that statutory set-off does not apply. The active respondents, the administrators of KSF, submit that its application is required by two decisions of the Court of Appeal, In re Melton [1918] 1 Ch 37 and SSSL [2006] Ch 610, and that they were rightly decided. The starting point in understanding and resolving this issue must be, not Cherry v Boultbee, but the rule against double proof as it applies to suretyship.


One of the earliest judicial expositions of that rule was by Mellish LJ in In re Oriental Commercial Bank (1871) LR 7 Ch App 99, 103–104:

"But the principle itself—that an insolvent estate, whether wound up in Chancery or in Bankruptcy, ought not to pay two dividends in respect of the same debt—appears to me to be a perfectly sound principle. If it were not so, a creditor could always manage, by getting his debtor to enter into several distinct contracts with different people for the same debt, to obtain higher dividends than the other creditors, and perhaps get his debt paid in full. I apprehend that is what the law does not allow; the true principle is, that there is only to be one dividend in respect of what is in substance the same debt, although there may be two separate contracts."


The function of the rule is not to prevent a double proof of the same debt against two separate estates (that is what insolvency practitioners call "double dip"). The rule prevents a double proof of what is in substance the same debt being made against the same estate, leading to the payment of a double dividend out of one estate. It is for that reason sometimes called the rule against double dividend. In the simplest case of suretyship (where the surety has neither given nor been provided with security, and has an unlimited liability) there is a triangle of rights and liabilities between the principal debtor (PD), the surety (S) and the creditor (C). PD has the primary obligation to C and a secondary obligation to indemnify S if and so far as S discharges PD's liability, but if PD is insolvent S may not enforce that right in competition with C. S has an obligation to C to answer for PD's liability, and the secondary right of obtaining an indemnity from PD. C can (after due notice) proceed against either or both of PD and S. If both PD and S are in insolvent liquidation, C can prove against each for 100p in the pound but may not recover more than 100p in the pound in all.


The primary purpose of the rule has been described as the protection of other creditors of PD against unfair treatment by an arrangement...

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