Administration – Creditors – Debtors

In the matter of Kaupthing Singer & Friedlander Ltd (In Administration): CA (Civ Div) (Lords Justice Mummery, Hughes, Etherton): 11 May 2010

The appellant joint administrators (X) appealed against a decision ([2009] EWHC 2308 (Ch)) giving directions in relation to provisions of the Insolvency Rules 1986 as to the conduct of the administration.

X had been appointed as administrators of an authorised deposit-taking bank (K). Various depositors, who were the creditors of K, were themselves indebted to K, with many of the loans not repayable for several years. X applied for directions in respect of issues concerning the way in which claims and cross-claims, between K and its depositors, were required to be calculated and set-off against each other and the treatment of K’s right to payment of the balance of any loans. The judge directed that, for the purposes of the insolvency set-off in administration, a debt was ‘future’ if it was not due for payment at the date of the notice of intention to make a distribution and the effect of rule 2.105 was that, for the purpose of taking the account of mutual dealings under rule 2.85, a future debt payable before the date of the distribution was taken at full value, but a future debt payable after the date of distribution was taken at its discounted value.

Held: The judge’s conclusion produced a result that was extraordinarily beneficial to the creditor in question and highly detrimental to the general body of creditors. The judge’s reasoning gave a creditor the significant advantage that any balance due to K did not have to be paid until the contractual date for repayment, but then only in an amount which had been discounted, for notional acceleration, to the value as at the date of administration. It was not a policy objective of the procedures for administration, or the liquidation of an insolvent company, to remove or diminish the indebtedness of those liable to the company. One of the principal objectives was to preserve, and where possible maximise, the value of the company and its assets. The provisions for insolvency set-off were intended to promote fast and efficient administration of the assets so as to enable distribution as soon as possible in a manner that achieved substantial justice between the parties to the set-off and, so far as practicable, equality in the treatment of creditors. There was no coherent or rational policy reason to release a creditor from a substantial part of its indebtedness to K when such release was not necessary to achieve a set-off of cross-claims, Stein v Blake (No2) [1998] 1 All ER 724 CA (Civ Div) considered.

Appeal allowed.

Robin Dicker QC, Tom Smith (instructed by Freshfields Bruckhaus Deringer) for the appellants; Richard Fisher (instructed by CMS Cameron McKenna) for the respondent.