Set-Off In Administrations – Clarification From The High Court

 

The High Court has clarified how the set-off provisions which come into play when an administrator makes a distribution to creditors are to be applied.

In Kaupthing singer & Friedlander Ltd (in Administration) [2009] EWHC 2308 (Ch) the High Court gave guidance on how the set-off provisions contained in Rules 2.85-2.88 of the Insolvency Rules 1986 should be applied where an administrator makes a distribution to creditors.

Kaupthing Singer & Friedlander was an insolvent bank which went into administration. The bank’s main assets were the funds that it held for depositors. Some of the bank’s depositors had also borrowed money from the bank. The amount owed to the bank by those depositors substantially exceeded the amount which the bank owed to them in the form of deposits. A number of loans advanced by the bank were not repayable until some time in the future. The depositors had no proprietary interest in the funds held by the bank, and as a result were unsecured creditors.

The administrators obtained the court’s permission to distribute the funds held by the bank to the depositors, and gave notice of the intention to make a distribution to creditors in accordance with rule 2.95. The administrators applied to the court for directions on how the set-off provisions were to apply. The court held as follows:

• Future debts – For the purpose of set-off, a sum is regarded as due to or from the company whether it is payable at present or in the future. In the case of a distribution in administration, a debt is ‘future’ if it is not due for payment at the date of the notice intention to make distribution. This is a date at which the account of mutual dealings is struck and on which it has to be determined what was due from and to each party. Future debts are subject to the further proviso that they must be discounted, but this only applies to debts payable after the date of the actual distribution. Therefore, for the set-off purposes, future debts payable before the date of distribution are to be taken at full value, while debts payable after the date of distribution are to be discounted in accordance with the formula set out in Rule 2.105. This applies both to sums due from the company and sums due to the company.

• Sums payable in a foreign currency and payments of a periodic nature – Rule 2.85(6) provides that Rules 2.86-2.88 shall apply for purposes of set-off in relation to any sums due to the company which are payable in a foreign currency, are payments of a periodic nature or bear interest. With regard to the first two categories, the court held that, although the rules are only expressed in terms of sums due to the company, the effect of the rules read as a whole is to make the same valuation principles apply on each side of the account. Accordingly, they applied as much to sums due from the company as they did to sums due to the company.

• Interest – For the purpose of trying to ascertain the balance arising from the mutual dealings between creditor and company, post-administration interest is ignored on each side, but the company can claim interest on the resulting balance from the date of administration.

• Interest-bearing future debts – in striking the balance on insolvency set-off in relation to interest-bearing debts which are also future debts, the discount formula is applied to the debt (ascertained in accordance with the other provisions of Rule 2.85) as it stands at the date of the notice of distribution, and the company cannot add in interest arising between that date and the maturity date of the loan.

The full text of the decision is available on the British and Irish Legal Information Institute web site at:

http://www.bailii.org/ew/cases/EWHC/Ch/2009/2308.html

It is understood that the administrators have lodged an appeal against the decision in the respect of interest-bearing future debts (the fourth of the items enumerated above) as the decision would produce anomalous commercial results to the detriment of the estate. The appeal is on the basis that the formula in Rule 2.105 should only apply to so much of the debt owed by the bank as to extinguish the borrower’s debt to the bank.

Reference: R3 Technical Bulletin Issue Nunmber 89 December 2009 Article 89.6