UK: Insolvency Set-Off in Administration

Last Updated: 24 May 2010
Article by Duncan Aldred and Rebecca McMillan

Case: Re Kaupthing Singer and Friedlander Limited (In Administration)

A recent case in the Court of Appeal ("CA") has provided some useful guidance on the interpretation of rules 2.85 and 2.105 of the Insolvency Rules 1986 ("IR") in the context of insolvency set-off. Specifically, the CA ruled that, where cross-claims exist as between a company in administration and one of its creditors in respect of a future debt, once insolvency set-off has taken effect, the balance due to the company is not also to be discounted to present value, but instead, must be paid at its full value.

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Full Article

Case: Re Kaupthing Singer and Friedlander Limited (In Administration)

A recent case in the Court of Appeal ("CA") has provided some useful guidance on the interpretation of rules 2.85 and 2.105 of the Insolvency Rules 1986 ("IR") in the context of insolvency set-off. Specifically, the CA ruled that, where cross-claims exist as between a company in administration and one of its creditors in respect of a future debt, once insolvency set-off has taken effect, the balance due to the company is not also to be discounted to present value, but instead, must be paid at its full value.

The Law

In brief, Rule 2.85 applies where an administrator has given notice to make a proposed distribution in the administration. It states that an 'account' shall be taken as at the date of the notice of the amounts that are due from each party in respect of 'mutual dealings' and that any sums due from one party shall be set-off against sums due from the other.

Rules 2.105 applies where any sum (due to or from the company) is payable in the future and sets out a formula which is to be applied to discount the sums accordingly.

The Facts

The appellants were the Joint Administrators ("JAs") of the Icelandic Bank, Kaupthing Singer and Friedlander Limited ("KSF"). A number of KSF's depositors had also borrowed money from the bank in the form of loans, several of which were not repayable until some time in the future. The JAs applied to Court for directions in respect of issues concerning:

  1. the way in which claims and cross-claims between KSF and its depositors were required to be calculated and set-off against each other for the purposes of making a distribution; and
  2. the treatment of KSF's right to payment of the balance of any loans after the set-off had taken place.

Mr Justice Norris ruled that, for the purposes of insolvency set-off, a debt was a 'future debt' if it was not due as at the date when a notice of intention to make a distribution was made. Following on from this, he stated that, when the discount formula (as set out in R 2.105) is applied (for the purposes of making a distribution) to a future debt subject to a cross-claim, the balance to be paid on the net debt at the date it eventually becomes payable should be the discounted value of the debt rather than its original and full value.

Norris J therefore ordered that where monies are owed to the company (here, KSF), the discount formula is to be applied to a debt payable in the future, but excluding interest accruing from the date of the administration. This point formed the basis for the JAs appeal. They argued that this approach could not be correct, as it would lead to a windfall for the creditor concerned and that a creditor with a deposit with the bank, no matter how small, would receive a benefit relative to other borrowers who did not.

The Decision

The CA unanimously allowed the JAs appeal on the basis that Norris J's conclusion had produced a result that was "extraordinarily beneficial to the creditor in question and highly detrimental to the general body of creditors". In arriving at this decision, the Court considered the intention behind the provisions and concluded that it was not a policy objective to remove or diminish the indebtedness of those liable to the company but instead, the contrary, i.e. to preserve and where possible, maximise, the value of the company and its assets for the general body of creditors.

The CA ruled that the balance of a future debt owed to the insolvent company, which for the purposes of making a distribution to creditors has been the subject of set-off, shall, at its contractual payment date, be payable at its full value and not at the discounted value that was calculated for the purposes of working out set-off.

On this occasion, the decision shows the Court's willingness to look beyond the literal wording in the statute and to apply a purposive meaning, designed to reflect the actual intention behind the rule. It must be highlighted, however, that the application of this ruling is limited in its scope and is likely to only be of relevance to financial institutions who engage in lending to their depositors.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 21/05/2010.

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