Re Kaupthing Singer & Friedlander Ltd (No 2)
| Jurisdiction | England & Wales |
| Judge | The Chancellor |
| Judgment Date | 18 December 2009 |
| Neutral Citation | [2009] EWHC 3377 (Ch) |
| Date | 18 December 2009 |
| Court | Chancery Division |
| Docket Number | Case No: 8805 of 2008 |
[2009] EWHC 3377 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Before: The Chancellor of the High Court
Case No: 8805 of 2008
MR R DICKER QC & MR T SMITH (instructed by Freshfields Bruckhaus Deringer LLP) for the Claimant
MR G MOSS QC & MR R FISHER (instructed by Allen & Overy LLP) for the Defendant
Hearing dates: 8 & 9 December 2009
The Chancellor:
Introduction
In Re SSSL Realisations (2002) Ltd [2006] Ch. 610, 647 para 79 Chadwick LJ, with whom Jonathan Parker LJ and Etherton J agreed, described the rule in Cherry v Boultbee (1839) 4 My & Cr.442, as developed by the Court of Appeal in Re Melton [1918] 1 Ch. 37, in the following terms:
“(1) The general rule applicable in the distribution of a fund is that a person cannot take an aliquot share out of the fund unless he first brings into the fund what he owes. Effect is given to the general rule, as a matter of accounting, by treating the fund as notionally increased by the amount of the contribution; determining the amount of the share by applying the appropriate proportion to the notionally increased fund; and distributing to the claimant the amount of the share (so determined) less the amount of the contribution….
(2) That general rule is applicable not only where the claimant (X) is indebted to the fund but also where the fund has a right to be indemnified by X against a liability which the fund may be required to meet in the future, as surety for a debt owed by X to a creditor (Y). It is not necessary that the liability to Y has been satisfied out of the fund: it is enough that it may have to be satisfied in the future….
(3) The general rule—as applicable to a case where the fund has a right to be indemnified by X—is not displaced in a case where the claimant (X) is in bankruptcy….”
Kaupthing Singer & Friedlander Ltd (“KSF”) was incorporated in January 1966 to carry on the business of banking originally established in 1907. Its subsidiary Singer & Friedlander Funding plc (“Funding”) was incorporated as a public company in March 2004 for the purpose of raising capital for use in the Singer & Friedlander Group. On 26th January 2005 Funding issued £250m of floating rate guaranteed bearer notes 2010 at 99.625%. The guarantor was KSF and the trustee for the benefit of the note-holders (“the Trustee”) HSBC Trustee (C.I.) Ltd. The capital so raised, net of expenses, came to £249,515,000 all of which was advanced by Funding to KSF. Between April and 4th July 2008 £9.67m notes were redeemed by Funding and cancelled.
On 8th October 2008 an administration order was made in respect of KSF on the application of the Financial Services Authority under s.359 Financial Services and Markets Act 2000 and four insolvency practitioners were appointed the administrators (“the KSF Administrators”). On that date KSF owed Funding the aggregate sum of £242,568,988 on a mixture of deposit and current accounts, interest and management and audit fees, being the balance due in respect of the original capital raised by Funding and advanced to KSF. A week later, on 15th October 2008, Funding appointed administrators (“the Funding Administrators”) under paragraph 22(2) Schedule B1 Insolvency Act 1986. On that date £240,330,000 was prospectively due by Funding to the Trustee in respect of the amount due to holders of the notes.
On 23rd March 2009 the Trustee gave notice of default to both Funding and KSF. The effect of the notice was to make immediately due and payable (1) the amounts due under the outstanding notes to their holders, (2) the amount due by Funding to the Trustee for redemption of the outstanding notes and (3) the equivalent amount due by KSF to the Trustee as the guarantor of the notes. On 28th April 2009 the Trustee lodged proofs for £240,330,000 plus interest in the administration of both Funding and KSF. On 8th May 2009 Funding lodged a proof of debt in the administration of KSF for £242,568,988 due in respect of the net proceeds of the outstanding notes advanced by Funding to KSF.
On 20th May 2009 the KSF Administrators gave notice under Insolvency Rule 2.68 of their intention to declare and distribute dividends to creditors proving in the administration of KSF before 18th June 2009. They declared and paid a dividend of 20p in the £1 on 22nd July 2009; another dividend of 10p in the £1 has been paid recently. It is common ground that as and from the giving of this notice the assets of KSF became distributable amongst its creditors. As the fund of assets of KSF had become distributable the rule in Cherry v Boultbee became relevant, see Re Peruvian Railway Construction Company Ltd [1915] 2 Ch 144.
The KSF Administrators had received proofs from the Trustee for £240,330,000 being the sums due under KSF's guarantee of the notes and for £242,568,988 from the Funding Administrators in respect of the balance of the proceeds of the note issue advanced by Funding to KSF. The Funding Administrators had received the proof for £240,330,000 from the Trustee in respect of its liability under the notes but had no other creditors of significance and had submitted its proof for £242,568,988 in the administration of KSF. Accordingly any amounts the Funding Administrators received in respect of its proof from the KSF Administrators would provide another fund from which to pay the Trustee amounts due to the noteholders. This would afford to the Trustee what counsel for the KSF Administrators described as a ‘double dip’ into the assets of KSF.
But if KSF had discharged its liability to the Trustee as guarantor of Funding it would have had a claim against Funding for an indemnity. Such claim could have been set off against the liability of KSF to Funding in respect of the amounts advanced to it by Funding from the proceeds of the note issue. In the light of the figures I have given above such a set-off would reduce the claim of Funding against KSF to £2,238,988. If, as is anticipated, the KSF Administrators pay dividends of not less than 50p in the £1 the secondary fund in the hands of the Funding Administrators would be reduced by £120,175,000.
The KSF Administrators contend that the rule in Cherry v Boultbee, as developed in SSSL, should apply to Funding's claim against KSF. Thus the fund of assets available for distribution to creditors would be notionally increased by the amount of the debt contingently due by Funding to KSF, but the dividend due from KSF to Funding would be reduced by the same amount. It would follow that the amount of the fund in the hands of the Funding Administrators available for the ‘double dip’ would be reduced to the figure of £2,238,988 explained above.
As Funding has virtually no creditors apart from the Trustee the Funding Administrators have no interest in the point separate from that of the Trustee and have taken no part in these proceedings. The Trustee accepts that I am bound by the decision of the Court of Appeal in SSSL (but reserves the right to contend on any future appeals that it was wrongly decided) and that if the rule in Cherry v Boultbee is applicable it has the result indicated above. Before me the Trustee contended only that the rule was inapplicable because it had been excluded by clause 7.7 of the Trust Deed regulating the note issue. The clause provides:
“If any moneys shall become payable by the Guarantor under this guarantee the Guarantor shall not, so long as the same remain unpaid, without the prior written consent of the Trustee:
(a) in respect of any amounts paid by it under this guarantee, exercise any rights of subrogation or contribution or, without limitation, any other right or remedy which may accrue to it in respect of or as a result of any such payment; or
(b) in respect of any other moneys for the time being due to the Guarantor by the Issuer, claim payment thereof or exercise any other right or remedy;
(including in either case claiming the benefit of any security or right of set-off or, on the liquidation of the Issuer, proving in competition with the Trustee). If, notwithstanding the foregoing, upon the bankruptcy, insolvency or liquidation of the Issuer, any payment or distribution of assets of the Issuer of any kind or character, whether in cash, property or securities, shall be received by the Guarantor before payment in full of all amounts payable under these presents shall have been made to the Noteholders, the Couponholders and the Trustee, such payment or distribution shall be received by the Guarantor on trust to pay the same over immediately to the Trustee for application in or towards the payment of all sums due and unpaid under these presents in accordance with Clause 10.”
In these circumstances the KSF Administrators have issued the application now before me seeking the directions of the court whether by reason of that provision of the Trust Deed they are prevented from relying on the rule in Cherry v Boultbee in respect of the proof of debt submitted to them by Funding. They also seek further directions as to how the rule should be applied if, contrary to their position before me, SSSL was wrongly decided, I am only concerned with the four grounds relied on by the Trustee for its contention that the rule is excluded altogether by the provisions of clause 7.7. Before I deal with them it is convenient to describe in greater detail the terms of the note issue, the development of the rule and the principles of construction relied on by the...
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