Secretary of State for Trade and Industry (Appellant) v. Frid (Respondent) (Civil Appeal from Her Majesty's High Court of Justice)

For insolvency set-off, a debt need not have become due and payable before the insolvency date. It is enough that, before that date, a contractual or statutory obligation existed from which a money claim would arise on a future event.

Mutuality requires commensurable cross-claims between the same parties in the same capacity. It does not require a consensual transaction, or direct dealings, between those parties. Statutory liabilities can therefore found a set-off. The Crown acts in the same private-law capacity through its departments where both claims are beneficially owned by the Crown; statutory controls over the National Insurance Fund do not create a private trust.

West End Networks Ltd entered creditors’ voluntary liquidation with a credit for overpaid VAT. It had failed to make redundancy and compensatory notice payments due to former employees.

Under the Employment Rights Act 1996, the Secretary of State paid the employees from the National Insurance Fund and their rights against the company vested in her. HM Customs and Excise set off part of the VAT credit against that subrogated claim. The Secretary of State accordingly lodged a proof for the balance.

The registrar and a deputy High Court judge rejected the proof as too low, considering themselves bound by an earlier Court of Appeal authority. Leave was given for a direct appeal to the House of Lords. The central issue was whether compulsory insolvency set-off under rule 4.90 applied to the Crown’s statutory, contingent and subsequently crystallised claim.

1. Appeal allowed unanimously. Lord Hoffmann delivered the leading speech, with which Lords Nicholls, Hope, Phillips and Brown agreed. The set-off of £2,344.03 was allowable and the Secretary of State’s proof for the reduced balance had to be accepted.

2. Per Lord Hoffmann, rule 4.90 of the Insolvency Rules 1986 makes set-off mandatory once its requirements are met. A cross-obligation need not be payable on the insolvency date. It is sufficient that a pre-insolvency contract or statute has created an obligation under which a money debt will become payable upon a future event. The employer’s insolvency and the Secretary of State’s subsequent payment crystallised such an obligation under section 167(3) of the Employment Rights Act 1996.

3. Lord Hoffmann rejected the broad reasoning in In re A Debtor [1956] 1 WLR 1226. A statutory origin does not prevent mutuality. The relevant requirement is commensurable cross-obligations between the same persons in the same capacity. Nor do “other mutual dealings” require both claims to be exclusively referable to a direct transaction between the parties. Statutory obligations and torts may constitute dealings for this purpose.

4. On mutuality between Crown bodies, Lord Hoffmann held that the statutory segregation and parliamentary accountability of the National Insurance Fund did not create a private-law trust. The Crown was beneficially entitled to the funds and acted as both creditor and debtor in the same capacity. Lord Hope expressly agreed, adding that the Secretary of State and HM Customs and Excise were each performing public duties on behalf of the Crown rather than acting as private trustees.

• House of Lords: allowed the Secretary of State’s direct appeal and held that the reduced proof should be accepted.

• High Court: Mr David Mackie QC, sitting as a deputy High Court judge, dismissed the appeal from the registrar because he considered himself bound by the earlier Court of Appeal authority. He granted leave for a direct appeal to the House of Lords.

• Registrar: Mr Registrar Jacques upheld the liquidator’s rejection of the proof on the same basis.