Stein v Blake (No.2)
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE BALCOMBE |
| Judgment Date | 05 May 1993 |
| Judgment citation (vLex) | [1993] EWCA Civ J0505-11 |
| Date | 05 May 1993 |
| Court | Court of Appeal (Civil Division) |
[1993] EWCA Civ J0505-11
(Mr T. Morison QC Sitting as a Deputy Judge)
Before: Lord Justice Balcombe Lord Justice Staughton and Lord Justice Waite
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
MR HOSER (instructed by Messrs MAISLISH & CO, London WC1) appeared for the Appellant
MR MARKS (instructed by Messrs BRAY WALKER, London EC4) for the Respondent
(AS APPROVED)
This appeal by the Plaintiff, with the leave of the judge, from an Order made on 11 June 1992 by Mr. T. Morison, Q.C. sitting as a deputy judge of the High Court (Chancery Division), raises a difficult question as to the effect of section 323 of the Insolvency Act 1986. I take the facts from the judgment below:-
"In February 1987 the plaintiff commenced proceedings against the defendant in the Queen's Bench Division. The essence of the claim was that the defendant had broken an agreement with the plaintiff to equalise his shareholding in various companies. The defendant put in issue the terms of the agreement and counterclaimed against the plaintiff for damages for misrepresentation. Separate proceedings were commenced by the plaintiff against the defendant in the Chancery Division in June 1988. In this action the plaintiff alleged that by the same agreement the defendant impliedly agreed to procure the various companies and/or their auditors to do certain things whereby the plaintiff would have been able to have received 25% of the companies' net profits. It was further alleged by the plaintiff that, pursuant to the agreement, the defendant should have allotted or transferred to him a proportion of shares in a company which the defendant had caused to be incorporated. The defendant denied that the agreement had the effect contended for.
In May 1989 the Queen's Bench action was transferred to the Chancery Division and in October 1989 the two actions were consolidated.
On July 16 1990 the plaintiff was adjudicated bankrupt and a Trustee of his estate was appointed on October 19 1990. On April 4 1991 the bankrupt, the Trustee and a third party as surety entered in to a deed of assignment whereby the Trustee purported to assign to the bankrupt his claims in the consolidated action. After deductions for costs, any proceeds recovered by the bankrupt in the action would be split with the Trustee: 51% to the bankrupt 49% to the Trustee.
The bankrupt has received legal aid to pursue the Action."
The defendant then issued a summons to stay the action on the grounds that it was an abuse of the process of the court. Before the Deputy Master he contended that, after the plaintiff became bankrupt, his claims against the defendant and the defendant's counterclaim against the plaintiff fell to be dealt with in the bankruptcy and that until an account had been taken by the Trustee under section 323 there was nothing to assign. In support of that contention the defendant relied upon the decision of Neill, J. in Farley v. Housing and Commercial Developments [1984] B.C.L.C. 442. He succeeded in that contention both before the Deputy Master and, on appeal by the plaintiff, before the judge.
The question for our decision is whether, after a bankruptcy but before a balance of account has been ascertained under section 323, a trustee in bankruptcy may assign to a third party the bankrupt's claims against a person who entitled to avail himself of the statutory right of set-off. Ancillary to that question is whether Farley's case (supra) was rightly decided.
Section 323 of the 1986 Act is in the following terms:-
"323. (1) This section applies where before the commencement of the bankruptcy there have been mutual credits, mutual debts or other mutual dealings between the bankrupt and any creditor of the bankrupt proving or claiming to prove for a bankruptcy debt.
(2) An account shall be taken 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.
(3) Sums due from the bankrupt to another party shall not be included in the account taken under section (2) if that other party had notice at the time they became due that a bankruptcy petition relating to the bankrupt was pending.
(4) Only the balance (if any) of the account taken under subsection (2) is provable as a bankruptcy debt or, as the case may be, to be paid to the trustee as party of the bankrupt's estate."
The section is similar in effect, although not in identical terms, to section 31 of the Bankruptcy Act 1914, which in turn replaced earlier provisions to the like effect —section 38 of the Bankruptcy Act 1883; section 39 of the Bankruptcy Act 1869; Section 171 of the Bankruptcy Law Consolidation Act 1849 (12 & 13 Vict. c. 106); 6 Geo. 4, c. 16, s.50; 5 Geo. 2, c. 30, s.28; and 4 and 5 Anne c. 17, s.11.
In order to appreciate the purpose of the section it is necessary to look at it, as did the judge, in its statutory context. It forms part of Chapter IV of the 1986 Act, of which the Chapter title is "Administration by Trustee". The first section in the Chapter is section 305, which defines the general functions of the trustee, and of which the operative part is subsection (2) which provides as follows:
"The function of the trustee is to get in, realise and distribute the bankrupt's estate in accordance with the following provisions of this Chapter; and in the carrying out of that function and in the management of the bankrupt's estate the trustee is entitled, subject to those provisions, to use his own discretion."
If an asset of the bankrupt's estate is a cause of action (other than one of a personal nature) then that vests in the trustee in bankruptcy, and his statutory duty under section 305(2) is to realise that asset. One way in which he may do so is by assignment by way of sale. The discretion as to the manner of realisation belongs to the trustee and will not be interfered with by the court except on well-established principles (e.g. if the trustee has acted in bad faith). This is all trite law and was not the subject of contention before us.
The next section to which I refer is section 322. This and the following ten sections are preceded by the sub-title "Distribution of bankrupt's estate." It provides, so far as relevant, as follows:-
"Proof of debts
322. —(1) Subject to this section and the next, the proof of any bankruptcy debt by a secured or unsecured creditor of the bankrupt and the admission or rejection of any proof shall take place in accordance with the rules……
(3) The trustee shall estimate the value of any bankruptcy debt which, by reason of its being subject to any contingency or contingencies or for any other reasons, does not bear a certain value.
(4) Where the value of a bankruptcy debt is estimated by the trustee under subsection (3) or by virtue of section 303 in Chapter III, by the court, the amount provable in the bankruptcy in respect of the debt is the amount of the estimate."
Bankruptcy debt is defined by section 382:-
"382. —(1) 'Bankruptcy debt,' in relation to a bankrupt, means (subject to the next subsection) any of the following -
(a) any debt or liability to which he is subject at the commencement of the bankruptcy.
(b) any debt or liability to which he may become subject after the commencement of the bankruptcy (including after his discharge from bankruptcy) by reason of any obligation incurred before the commencement of the bankruptcy…..
(3) For the purposes of references in this Group of Parts to a debt or liability, it is immaterial whether the debt or liability is present or future, whether it is certain or contingent or whether its amount is fixed or liquidated, or is capable of being ascertained by fixed rules or as a matter of opinion; and references in this Group of Parts to owing a debt are to be read accordingly."
That being its statutory context, I turn to consider the purpose of section 323. Set-off in bankruptcy rests on a different principle to the right of set-off between solvent parties. The purpose of the latter is to prevent cross-actions, and the right is limited to the categories listed in the well-known judgment of Morris, L.J. in Hanak v. Green [1958] 2 Q.B. 9, 23. The object of set-off in bankruptcy is not to avoid cross-actions, but to do substantial justice between the parties —see Forster v. Wilson (1843) 12 M. & W. 191, 204 —since it would be obviously unjust if the solvent party had to discharge his debt to the bankrupt's estate in full while being left only with the right to prove, and thereby receive only a dividend, in respect of the of the bankrupt's debt to him. In order to achieve this object of substantial justice section 323 is not limited to the categories as defined in Hanak v. Green (supra), but applies to all cross-claims provided that they are mutual and are measurable in money terms. The operation of the section is mandatory in that it cannot be excluded by agreement—see National Westminister Bank v. Halesowen Presswork [1972] A.C. 785.
The opposing arguments may be summarised as follows:-
1) For the appellant plaintiff. Nothing in the wording of section 323 changes the nature of set-off as it operates between solvent parties: it merely widens the categories of claim capable of being, and which must be, set-off. The section contemplates a 3-stage procedure.
(i) An ascertainment of what is due from A to B, and from B to A —the first part of section 323(2);
(ii) A setting-off of the sums found so to be due —the second part of section 323(2); and
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