Secretary of State for Trade and Industry v Frid
| Jurisdiction | UK Non-devolved |
| Judge | LORD BROWN OF EATON-UNDER-HEYWOOD,LORD PHILLIPS OF WORTH MATRAVERS,LORD NICHOLLS OF BIRKENHEAD,LORD HOFFMANN,LORD HOPE OF CRAIGHEAD |
| Judgment Date | 13 May 2004 |
| Neutral Citation | [2004] UKHL 24 |
| Court | House of Lords |
| Date | 13 May 2004 |
(Civil Appeal from Her Majesty's High Court of Justice)
[2004] UKHL 24
The Appellate Committee comprised:
Lord Nicholls of Birkenhead
Lord Hoffmann
Lord Hope of Craighead
Lord Phillips of Worth Matravers
Lord Brown of Eaton-under-Heywood
HOUSE OF LORDS
My Lords,
I have had the advantage of reading in draft the speech of my noble and learned friend Lord Hoffmann. I agree that, for the reasons he gives, this appeal should be allowed.
My Lords,
On 10 March 1999 West End Networks Ltd ("the company") resolved to go into creditors' voluntary liquidation. Its assets included a credit of £7,185.77 with HM Customs and Excise in respect of overpaid VAT. Its liabilities included compensatory notice pay and redundancy payments due to nine former employees under sections 88 and 135 of the Employment Rights Act 1996. The company did not make these payments and the Secretary of State accordingly became liable under sections 166(1)(b) and 167(1) of that Act to pay all or part of them out of the National Insurance Fund. Pursuant to this obligation the Secretary of State paid the employees £11,574.49 and by virtue of section 167(3) all the rights and remedies of the employees against the company thereupon vested in her. The question of principle raised by this appeal is whether in determining the company's claims against the Crown or the Crown's right to prove in the liquidation of the company, the VAT credit must be set off against the Crown's subrogated claim under section 167(3).
The procedure by which this question has been brought before the House is somewhat unusual. Besides the claim of the Secretary of State under section 167(3), there were claims against the company for PAYE and National Insurance contributions which even by themselves exceeded the VAT credit. HM Customs and Excise allocated the credit rateably between the three Crown claimants and paid £2,344.03 to the Secretary of State (for the account of the National Insurance Fund) as her share. The Secretary of State submitted a proof in the liquidation for £9,230.46, giving credit for the £2,344.03 as having been set off against the VAT credit. The liquidator rejected the proof on the somewhat paradoxical ground that it was too low. He said that it should have been for the full sum of £11,574.49. The purpose of the rejection was to raise the question of principle without requiring the liquidator to bring proceedings against HM Customs and Excise. The matter has since been litigated on this basis.
The Secretary of State appealed to Mr Registrar Jacques, who upheld the liquidator's decision on the ground that he was bound by the decision of the Court of Appeal in In re A Debtor (No 66 of 1955), Ex p The Debtor v Trustee of Waite (A Bankrupt) [1956] 1 WLR 1226. A further appeal to Mr David Mackie QC, sitting as a deputy High Court judge, was dismissed for the same reason. Both the registrar and the judge expressed regret over their decisions, saying that they appeared to be contrary to justice and principle. As it appeared likely that the Court of Appeal would also consider itself bound by the earlier case, Mr Mackie gave leave for an appeal to be brought directly to your Lordships's House.
Set-off between an insolvent company and its creditors is currently governed by rule 4.90 of the Insolvency Rules 1986 ( SI 1986/1925):
"(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 the sums due from the other.
If the requirements of paragraph (1) are satisfied, the account and set-off required by paragraph (2) are mandatory and apply whenever it is necessary to ascertain the net amount owing by one party to the other: Stein v Blake [1996] AC 243. Such an ascertainment is necessary for the purpose of determining the amount for which the Secretary of State is entitled to prove in the liquidation. So the question in this appeal is whether the requirements of paragraph (1) are satisfied.
The rule requires that there should have been "mutual credits, mutual debts or other mutual dealings" between the company and the Secretary of State before the company went into liquidation, that is to say, before the date of the resolution to wind it up. I shall call this "the insolvency date". In considering whether this requirement was satisfied, I shall put aside two matters for later consideration. One is the question of whether the Customs and Excise is the same party as the Secretary of State and the second is the effect of the words "or other mutual dealings". I shall consider first whether "mutual debts" existed at the relevant time between the company and the Crown, treating HM Customs and Excise and the Secretary of State as both being manifestations of the Crown.
There is no doubt that the liability to repay VAT was a debt which existed at the relevant time. It was quantified, due and payable. But nothing was yet due under section 167(3). The liability arose by virtue of the payment made by the Secretary of State under section 167(1) and her liability to make that payment had in turn arisen because the company had become insolvent: see section 166(1)(b). So Mr Davies QC, who appeared for the liquidator, says that there was no debt owing under section 167(3) at the insolvency date. There was only a possibility that such a debt would come into existence afterwards.
It not however necessary for the purposes of rule 4.90(2) that the debt should have been due and payable before the insolvency date. It is sufficient that there should have been an obligation arising out of the terms of a contract or statute by which a debt sounding in money would become payable upon the occurrence of some future event or events. The principle has typically been applied to claims for breach of contract where the contract was made before the insolvency date but the breach occurred afterwards (In re Asphaltic Wood Pavement Co Ltd (1885) 30 Ch D 216) or claims for indemnity by a guarantor where the guarantee was given before the insolvency date but the guarantor was called upon and paid afterwards ( Jones v Mossop (1844) 3 Hare 568; In re Moseley-Green Coal and Coke Co Ltd, Ex p Barrett (1865) 12 LT (NS) 193.)
The effect of these and similar cases was summed up by Millett J in In re Charge Card Services Ltd [1987] Ch 150, 182:
"By the turn of the [20th] century, therefore, the authorities showed that debts whose existence and amount were alike contingent at the date of the receiving order, and claims to damages for future breaches of contracts existing at that date, were capable of proof and, being capable of proof, could be set off under the section provided that they arose from mutual credits or mutual dealings. The only requirement was that they must in fact have resulted in quantified money claims by the time the claim to set off was made."
I agree that this principle was firmly established, but in view of the reasoning in In re A Debtor (No 66 of 1955), Ex p The Debtor v Trustee of Waite (A Bankrupt) [1956] 1 WLR 1226, which the registrar and the judge held to require a rejection of a set-off in this case, I should give some examples of its application to claims by guarantors under pre-insolvency guarantees. In Jones v Mossop (1844) 3 Hare 568 Mr Reed was holder of a bond for £500 given by Mr Jones, who had also guaranteed some loans to Mr Reed by third parties. Mr Reed died insolvent and Mr Jones was called to pay £377 to the lenders under the guarantees. When Mr Reed's assignee Mr Mossop sued Mr Jones on the bond, he brought proceedings in equity claiming to be entitled to set off the £377 he had paid. Because Mr Reed had never actually been made bankrupt, the then equivalent of rule 4.90 did not apply and Sir James Wigram V-C gave relief under general equitable principles, but he said, at p 571: "if Richard Reed had been bankrupt, I should have had no difficulty in deciding this case."
The same principle was applied to a winding up in In re Moseley-Green Coal and Coke Co Ltd, Ex p Barrett 12 LT (NS) 193. Mr Barrett owed the company money on his partly-paid shares for which calls were made after it went into insolvent liquidation. He had also guaranteed the company's liability for the purchase price of a coal mine, for which the vendor held security in the form of a mortgage and the company's promissory note. After the winding up Mr Barrett's sister paid off the vendor and took over the mortgage and promissory note. Mr Barrett then entered into an arrangement which was treated as a payment of the company's debt and he took over the promissory note. Lord Westbury LC held that he was entitled to set off the debt on the promissory note against his liability to pay calls on his shares. The facts give rise in my mind to some doubt about whether Mr Barrett could truly be said to have paid under his guarantee but, assuming that he had, the application of the principle of contingent liability is clear enough.
In re Fenton [1931] 1 Ch 85 was another case of a surety under a pre-insolvency guarantee, but this time he had not actually paid. Nor could he pay, because he was bankrupt and his assets had vested in his trustee. The creditor was still owed the money and entitled to prove in the liquidation. The Court of Appeal held, first, that one could not have more than one proof in respect of the same debt ("the rule against double proof");...
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