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Mr Justice Norris has handed down his judgment in Kaupthing Singer & Friedlander Ltd  EWHC 2308 (Ch). The case deals with issues of set-off and mentions, inter alia, Professor Sir Roy Goode QC's work on corporate insolvency law (Goode, RM. Principles of Corporate Insolvency Law. 3rd edition. Sweet & Maxwell, London, 2005). The judgment is interesting for a number of reasons. This short blog entry can in no way analyse the judgment properly, a few points can only be made here. First, the judgment contains a judicial opinion of the purposes of administration post the Enterprise Act 2002. Mr Justice Norris observes:
"The administration might conclude in a variety of ways, some of which might permanently alter or bring to an end the contractual and other arrangements between the creditors and KSF. The joint administrators might formulate proposals for a scheme of arrangement under section 899 of the Companies Act 2006 or for a company voluntary arrangement: or they may place KSF into creditors' voluntary liquidation under paragraph 83 of Schedule B1 or otherwise, or they might seek a compulsory liquidation on the discharge of the administration order. These were the usual means of distributing the assets realised in the administration until the advent of the present paragraph 65 of Schedule B1. The introduction of this paragraph enabled an administrator, with the permission of the Court, to make a distribution to an unsecured creditor directly (and then to proceed under paragraph 84 of Schedule B1 to a dissolution of the company without the intervening step of a liquidation)."
As already mentioned, Professor Sir Roy Goode QC's work is cited in the judgment in a short passage on the history of set-off. The paragraph (9) notes:
"The general and long established rule in liquidations was that where, before a company went into liquidation, there had been mutual credits, mutual debts or mutual dealings between the company and any proving creditor then an account was to be taken of what was due to each party from the other in respect of those dealings, the sums due from one party being set-off against the sums due from the other, and only the balance being provable in the liquidation or being recoverable by the liquidator as part of the assets (depending on how the balance was struck). In Re M.S. Fashions  Ch 425 Hoffman [sic] LJ (at 432F ff) noted three established features of the rule. (a) Its application was mandatory ("the mandatory principle"). In the Court of Appeal Dillon LJ noted (at 446B) that this principle meant that secured and unsecured debts were set-off. (b) The account was taken at the date of the winding up order (being an application of the wider principle that the realisation and distribution of assets are treated as notionally taking place simultaneously with the date of the order) ("the retroactivity principle"). Dillon LJ noted that this rule supplanted an earlier rule that the set-off took place at the date of presentation of the petition (ibid at p. 446G). (c) In taking the account the court has regard to events which have occurred since the date of the winding up ("the hindsight principle"). In Stein v Blake  1 AC 243 at 252E Lord Hoffman [sic] explained that this required the Court to take into account everything that had actually happened between the insolvency date and the moment when it becomes necessary to ascertain what, on that date, was the state of account between the creditor and the insolvent. In that same case at 251E Lord Hoffman drew attention to three further features of insolvency set-off. (d) Unlike legal set-off insolvency set-off affects the substantive rights of the parties, enabling the creditor to set-off pound-for-pound what he owes the insolvent and to prove for or pay only the balance. A creditor with relevant mutual dealings is thus treated much more favourably than an unsecured creditor with none. As Professor Roy Goode commented in "Principles of Corporate Insolvency Law" at para 7-22
"Set-off on insolvency represents a major incursion into the pari passu principle, for its effect is that a creditor who owes money to the company on a separate account may resort to self–help by setting off the debt due to him against his own indebtedness to the company, thus [ensuring] payment of his claim pro tanto ahead of other creditors""
"This is the ultimate statement of where the law on IVAs is to be found in our great common law...