Stein v Blake

The House of Lords held that bankruptcy set-off under section 323 of the Insolvency Act 1986 operates automatically on the date of bankruptcy and replaces the separate causes of action between bankrupt and creditor with a single right to the net balance. As a result the original choses in action do not continue to exist as assignable rights; the trustee's property is the claim to the net balance. A trustee may assign that right to the net balance like any other chose in action and need not await a prior judicial "taking of account" before assignment. In the present case the trustee's deed was construed as an assignment of the whole net balance and the plaintiff therefore had title to continue the proceedings. The appeal against the Court of Appeal was dismissed.

Background and parties. The bankrupt, Mr Stein, had been pursuing a claim against the defendant Mr Blake when adjudication in bankruptcy occurred. Mr Blake had a cross-claim and costs orders against Mr Stein. The trustee in bankruptcy executed a deed assigning the benefit of the action back to Mr Stein in return for a share of the proceeds. Mr Blake applied to have the proceedings dismissed on the basis that, because of bankruptcy set-off under section 323 of the Insolvency Act 1986, Mr Stein no longer had an assignable cause of action.

Procedural history. The application succeeded at first instance (the judge ordered dismissal for lack of title). The Court of Appeal reversed that decision. Mr Blake appealed to the Appellate Committee of the House of Lords.

Relief sought and issues framed. The defendant sought dismissal for want of title to sue. The Lords framed three central issues: (i) whether, on bankruptcy, the bankrupt's individual cause of action survives as a chose in action capable of assignment, or whether section 323 operates to extinguish separate causes and substitute a right to a net balance; (ii) if only a net balance remains, whether the trustee may assign that net balance before it has been judicially ascertained; and (iii) if assignment is possible, whether the particular deed in this case effected an assignment of the net balance.

Reasoning and decision. The House held that section 323 is mandatory and self-executing: mutual claims are treated as having been set off as at the bankruptcy date, by reference where necessary to subsequent events or to estimation under section 322(3). That means the separate causes of action do not continue as independent choses in action; they are treated solely for the retrospective calculation of the net balance. Because the right to the net balance forms part of the bankrupt's estate vested in the trustee, the trustee may assign that right like any other chose in action, and need not be a party to the later proceedings in order to make the assignment effective. The deed in the present case was to be construed as passing the whole net balance (the trustee confirmed he asserted no other causes of action), so the assignee had title to continue the proceedings. The appeal was dismissed. The court also noted, as context, the practical tensions that may arise where bankruptcy intersects with litigation funding and legal aid, but observed these are policy questions for Parliament rather than the courts.

Appeal dismissed. The House held that section 323 Insolvency Act 1986 operates automatically as at the date of bankruptcy to replace separate reciprocal causes of action by a single claim for the net balance; that the trustee's property is the right to that net balance and he may assign it before judicial ascertainment; and that the deed in this case conveyed the whole net balance, so the assignee had title to sue.

At first instance the judge allowed the defendant's application and ordered dismissal for want of title. The Court of Appeal reversed (reported at [1994] Ch. 16), holding the assignment effective. The appellant appealed to the House of Lords, which dismissed the appeal and affirmed the Court of Appeal ([1995] UKHL 11; [1996] 1 AC 243).