Secretary of State for Trade and Industry v Frid

The House of Lords held that rule 4.90 of the Insolvency Rules 1986 (the statutory set-off rule) permitted set-off between a company's claim against HM Customs and Excise for overpaid VAT and the Secretary of State's subrogated claim under section 167(3) of the Employment Rights Act 1996. The court treated contingent statutory liabilities (here the Secretary of State's right to recover amounts paid to employees under ss 166 and 167) as capable of being "mutual debts" or the product of "other mutual dealings" for the purpose of rule 4.90, provided the cross-claims are commensurable and arose before the insolvency date.

The court rejected the broader reading of In re A Debtor (No 66 of 1955) (Ex p The Debtor v Trustee of Waite) [1956] 1 WLR 1226 that appeared to require actual payment before the insolvency date by a guarantor to found set-off. It also held that there was sufficient mutuality between different Crown departments or funds so that the Crown, acting in different statutory capacities, could set off the VAT credit against the National Insurance Fund's subrogated claim.

Background and facts:

• West End Networks Ltd went into creditors' voluntary liquidation on 10 March 1999. The company had a VAT credit of £7,185.77 with HM Customs and Excise and outstanding liabilities for compensatory notice pay and redundancy payments to nine former employees under the Employment Rights Act 1996 (ss 88 and 135).
• The company did not make those payments; the Secretary of State paid the employees £11,574.49 from the National Insurance Fund under ss 166(1)(b) and 167(1). By s 167(3) the Secretary of State succeeded to the employees' rights against the company.
• HM Customs and Excise allocated the VAT credit rateably among Crown claimants and paid £2,344.03 to the Secretary of State's administrators. The Secretary of State lodged a proof for £9,230.46 having given credit for that sum; the liquidator rejected the proof on the ground it was too low to raise the point of principle.

Procedural history:

• The liquidator rejected the proof; the Secretary of State appealed to Mr Registrar Jacques who upheld the liquidator relying on In re A Debtor [1956] 1 WLR 1226. A further appeal to Mr David Mackie QC (deputy High Court judge) was dismissed. Leave was given to bring the appeal directly to the House of Lords.

Issues framed:

• Whether rule 4.90 of the Insolvency Rules 1986 applied so that the company's VAT credit with Customs could be set off against the Secretary of State's subrogated claim under s 167(3) of the Employment Rights Act 1996.
• Whether contingent statutory liabilities which crystallise after the insolvency date are "mutual debts" or arise from "other mutual dealings" within rule 4.90.
• Whether mutuality exists between different manifestations of the Crown (HM Customs and Excise and the Secretary of State acting for the National Insurance Fund).

Court's reasoning:

• The court explained that rule 4.90 requires mutual credits, mutual debts or other mutual dealings between the same parties before the insolvency date, but the debts need not be due and payable at that date so long as an obligation existed that would give rise to a money claim on a future event.
• The judges surveyed authorities on contingent liabilities (guarantees and statutory obligations) and concluded that a contingent statutory obligation established before the insolvency date can amount to a debt or give rise to a set-off when it later crystallises. The broadly restrictive reading of In re A Debtor was rejected as incompatible with principle and later authority.
• Statutory origin of a liability is not decisive; what matters is that the cross-claims are commensurable. The Secretary of State's position as a statutory "guarantor" under ss 166–167 and the subrogation in s 167(3) produce a claim which is capable of being set off against the company's VAT claim.
• As to mutuality between Crown departments and funds, the court held that the Crown in its different manifestations is beneficially the owner of central funds; the statutory framework governing the National Insurance Fund does not create private trusts that prevent set-off. Public accounting procedures preserved parliamentary accountability and did not preclude set-off.

Relief sought and disposition:

• The Secretary of State sought acceptance of her reduced proof reflecting set-off. The House of Lords allowed the appeal and directed that the set-off be recognised so that the lesser proof should have been accepted.

This appeal was allowed. The House of Lords held that rule 4.90 of the Insolvency Rules 1986 permits set-off of a company's pre-insolvency VAT credit against the Secretary of State's subrogated statutory claim under section 167(3) of the Employment Rights Act 1996. Contingent statutory liabilities existing before the insolvency date but crystallising later are capable of being "mutual debts" or arising from "other mutual dealings" for the purposes of rule 4.90, and mutuality was satisfied between Crown departments/funds in this context.

The liquidator rejected the Secretary of State's proof. The Registrar (Mr Registrar Jacques) upheld the liquidator's position relying on In re A Debtor [1956] 1 WLR 1226. A further appeal to Mr David Mackie QC (deputy High Court judge) was dismissed. Leave was granted for a direct appeal to the House of Lords, which allowed the appeal.