The Secretary of State for Trade & Industry v Trevor Frid
| Jurisdiction | England & Wales |
| Judgment Date | 06 December 2002 |
| Judgment citation (vLex) | [2002] EWHC J1206-3 |
| Docket Number | No 7758 of 2001 |
| Court | Queen's Bench Division (Administrative Court) |
| Date | 06 December 2002 |
[2002] EWHC J1206-3
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
David Mackie Qc
Sitting As A Deputy High Court Judge
No 7758 of 2001
IN THE MATTER OF WEST END NETWORKS LIMITED (IN LIQUIDATION) AND IN THE MATTER OF THE INSOLVENCY ACT 1986
Mr Richard Ritchie instructed by the Treasury Solicitor for the Applicant
Mr Richard Ascroft instructed by [ ] for the Respondent
Hearing: 18th October 2002 Draft Judgment: 13th Novemer 2002|J
DECISION
This appeal from the decision of Mr Registrar Jaques affects only a small amount of money and is brought because of the wish of the Department of Trade & Industry for a test case to decide an issue which apparently arises very frequently in practice. Can the Crown set off a debt which it owes to a company in liquidation against money due to the Crown for payments it has made after (as opposed to before) the date of the liquidation – in this case to former employees of the company under the statutory guarantee contained in the Employment Rights Act 1996? The Registrar answered no, with regret, on the grounds that he was bound by the decision of the Court of Appeal in In Re a Debtor (No 66 of 1955) Ex parte the Debtor v. Waite's Trustees [1956]1 WLR 1226. That decision binds this court. The issue in this case therefore is not whether In Re a Debtor is right or wrong but whether it is to be distinguished as applying only to claims by, as opposed to against, the Insolvent or his Estate.
FACTS
On 10th March 1999 the company was placed in creditors' voluntary liquidation with a debt of £7,185.77 due to it from Customs & Excise. Between April and June a company acting for the Applicant paid £11,574.49, to the company's former employees in redundancy payments and notice pay under Section 167 and Part XII of the Employment Rights Act 1966 (" ERA"). On 29th March 2000 the Respondent Liquidator rejected the Applicant's proof which had set off £2,344.03 of these payments under the ERA against the VAT debt. On 29th March 2000 the Liquidator formally rejected the proof on grounds discussed below. The Applicant applied to the court under Rule 4.83 of the Insolvency Rules 1986 to set aside the liquidator's decision. That application was refused by the Registrar on 31st May 2002. Relevant statutes and rules
The cases refer to Section 31 of the Bankruptcy Act 1914, to Section 323 of the Insolvency Act and, applicable here, to the Insolvency Rules all of which are in substantially the same terms.
I first set out relevant extracts from three of the Insolvency Rules.
Paragraph 4.90: -
"(1) This Rule applies where, before the company goes into liquidation there have been 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 liquidation.
(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 sums due from the other.
(3) Sums due from the company to another party shall not be included in the account taken under paragraph (2) if that other party had notice at the time they became due that a meeting of creditors had been summoned under section 98 or (as the case may be) a petition for the winding up of the company was pending.
(4) Only the balance (if any) of the account is provable in the liquidation. Alternatively (as the case may be) the amount shall be paid to the liquidator as part of the assets."
Paragraph 12.3: -
"(1) Subject as follows, in both winding up and bankruptcy, all claims by creditors are provable as debts against the company or, as the case may be, the bankrupt, whether they are present or future, certain or contingent, ascertained or sounding only in damages.
…
(3) Nothing in this Rule prejudices any enactment or rule of law under which a particular kind of debt is not provable, whether on grounds of public policy or otherwise."
Paragraph 13.12(1): -
"(1) The "Debt", in relation to the winding up of a company, means (subject to the next paragraph) any of the following-
(a) any debt or liability to which the company is subject at the date on which it goes into liquidation;
(b) any debt or liability to which the company may become subject after that date by reason of any obligation incurred before that date; and
(3) For the purposes of any references in any provision of the Act or the Rules about winding up 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 any such provision to owing a debt are to be read accordingly."
By Sections 166 and 167 of the ERA the employee of an insolvent employer may apply to the Secretary of State for payment of certain unpaid redundancy and notice payments. Where the Secretary of State makes a payment under ERA, "all rights and remedies of the employee with respect to the employer's payment are transferred to and vest in the Secretary of State." Similar provisions under Sections 182 to 190 provide for other payments to be made and on this happening "any rights and remedies of the employee in respect of that debt become the rights and remedies of the Secretary of State."
SUBSIDIARY ISSUES
It would, but for two other short points taken in argument by Mr Ascroft, be common ground that if the Secretary of State had made the employee payments before the insolvent liquidation, the Crown could have set the outstanding VAT off under 4.90 of the Insolvency Rules, the two debts arising out of mutual dealings between the Crown and the company. So I will first decide those two points.
Mr Ascroft contends, though not strongly, that the Appellant did not have a contingent claim against the company at the date of liquidation. He argues that in the context of provable debts in bankruptcy there cannot be a contingent liability without an existing or underlying obligation, a point left open in Glenister v. Row [2000] Ch 76 (C.A.). He also argues that the operation of statutory obligations under the ERA cannot properly be said to be a "dealing" within Rule 4.90. The Appellant's claim did not originate in a prior transaction, even between the Appellant and the employee, which would naturally end in debt, as would be the position with a conventional guarantor. No guarantee was given at the request of the company.
In reply Mr Ritchie submitted that the position of the Crown under the ERA is essentially the same as that of any other guarantor. In Secretary of State for Employment v. Mann [1999] ICR 898 the speech of Lord Hoffmann illustrates this unequivocally describing the Secretary of State as "guarantor" pursuant to a Directive that requires member states to take measures to ensure the existence of guarantees of employees' claims. Moreover, at 904e, in another context, the Secretary of State is said not to need a power of set off because he "is a guarantor liable only for whatever the employee was entitled to be paid by his employer " Furthermore, it is well established see D. H Curtis (Builders) Ltd [1978] 1 Ch 162 and Re Cushla Ltd [1979] 3 All ER that mutual dealings are not limited to those arising out of contract and extend to set off tax repayments due to a company against money owed by the company to other Government departments.
Like the Registrar I agree that mutual dealings do not have to arise out of contract, this being clear on the cases. The fact that mutual dealing has been imposed by statute does not stop it being dealing. Furthermore, the fact that a statutory guarantee is different from a conventional one does not mean that it is not a contingent liability. As I read the Rules and their effect as explained by the authorities a statutory guarantee is a contingent liability for the purpose of the rules.
CASE LAW BACKGROUND
This judgment will be clearer if before addressing the decision of the Registrar and the arguments of the parties, I first explain the case law background. There has been a long established and consistent approach to the provisions which I have mentioned and to their equivalents under the law of personal bankruptcy and in Australia. Counsel lucidly examined not only In Re a Debtor but also and explained Re Daintrey [1900] 1 QB 546,Re Fenton [1931] 1 Ch 85 and the Australian cases of Hiley v Peoples Prudential Assurance Co. Ltd (1938) 60 C.L.R. 468 and Day & Dent Construction Proprietary Limited (in liquidation) (198 1–2) 150. In Day & Dent the High Court of Australia both criticised In Re a Debtor and took a different path. There is an extensive discussion of these and earlier cases in Chargecard and, like Hoffmann LJ in MS Fashions v. CCI [1993] Ch 425 at 435 I refer to but do not repeat this here. I will however summarise the general principles of the cases before In Re a Debtor.
I start with the frequently approved passage in the judgment of Dixon J in Hiley, a decision of the High Court of Australia.
"In the first place the general rule does not require that at the moment when the winding up commences there should be two enforceable debts, a debt provable in the liquidation and a debt enforceable by the liquidator against the creditor claiming to prove. It is enough that at the commencement of the winding up mutual dealings exist which involve rights and obligations whether absolute or contingent of such a nature that afterwards in the events that happen they mature or develop into pecuniary demands capable of set off. If the end contemplated by the transaction is a claim sounding in money so that, in the phrase employed in the cases, it is commensurable with the...
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