Stein v Blake

Bankruptcy set-off under section 323 of the Insolvency Act 1986 operates automatically at the date of bankruptcy and alters substantive rights. The parties’ separate cross-claims cease to exist as choses in action. They are replaced by a single claim for the net balance, calculated retrospectively using subsequent events and, where necessary, statutory estimation.

The trustee may assign that balance before it has been quantified, including to the bankrupt. An assignment expressed by reference to the original claim may carry the net balance. If only part of the balance is assigned, the trustee must be joined so that the statutory account is taken once.

Mr Stein was adjudicated bankrupt while pursuing legally aided proceedings against Mr Blake for breach of contract and an indemnity. Mr Blake had counterclaims for misrepresentation and costs. The trustee in bankruptcy declined to pursue the litigation but assigned its benefit back to Mr Stein in return for part of any net proceeds.

Mr Blake obtained an order dismissing the proceedings on the ground that a claim subject to bankruptcy set-off could not validly be assigned. The Court of Appeal reversed that decision in [1994] Ch 16.

The appeal concerned whether section 323 of the Insolvency Act 1986 extinguished the separate cross-claims and substituted a claim for the net balance, whether that balance could be assigned before quantification, and whether the deed assigned it.

1. Appeal dismissed unanimously. Lord Hoffmann delivered the leading speech. Lord Keith of Kinkel, Lord Ackner, Lord Lloyd of Berwick and Lord Nicholls of Birkenhead expressly agreed with his reasons. The Court of Appeal’s order was affirmed, with costs against the appellant and taxation of the respondent’s costs under the Legal Aid Act 1988.

2. Per Lord Hoffmann, bankruptcy set-off differs fundamentally from legal set-off. Legal set-off is procedural and generally leaves substantive causes of action intact until judgment. Section 323 of the Insolvency Act 1986 operates automatically at bankruptcy without a proof, pleading or other procedural step. It affects substantive rights by setting mutual liabilities against each other and leaving only the resulting balance.

   The account is deemed to have been taken at the bankruptcy date. Subsequent events may be used to determine the value then attributable to a contingent or unascertained liability. Where necessary, the trustee may estimate the value of a bankruptcy debt under section 322(3).

3. Per Lord Hoffmann, the original cross-claims cease to exist as separate choses in action and are replaced by a claim to the net balance. Later litigation merely calculates retrospectively what that balance was at bankruptcy. The reasoning of Neill J in Farley v Housing & Commercial Developments Ltd [1984] B.C.L.C. 442 was approved.

   Mason J’s construction of “due” in Day & Dent Constructions (Pty) Ltd v North Australian Properties (Pty) Ltd (1982) 150 C.L.R. 85 was disapproved. Brett J’s dictum in New Quebrada Co Ltd v Can (1869) L.R. 4 C.P. 651 was not followed as an authoritative construction of section 323.

4. Per Lord Hoffmann, the trustee may assign the claim to the net balance before quantification. It is property vested in the trustee and may be realised like another chose in action. The trustee need not participate in the calculation unless required as a party to resolve a counterclaim or ensure that a single account is taken.

   The deed carried the whole balance because the trustee asserted no other claim arising from the pleaded facts and was willing to clarify that the entire balance had been assigned. Mr Stein therefore had title to sue. The policy concerns arising from legal aid and costs afforded no basis for restricting assignments; any wider reform was for Parliament.

• House of Lords: In Stein v Blake, the House unanimously dismissed Mr Blake’s appeal and affirmed the Court of Appeal’s order.
• Court of Appeal: The court reversed the first-instance dismissal and held that the action could continue: [1994] Ch 16.
• First instance: The judge dismissed the action on the ground that Mr Stein lacked title to sue because a claim subject to bankruptcy set-off could not validly be assigned.