Kaupthing Singer & Friedlander Ltd

The court interpreted the Insolvency Rules 1986 (in particular Rules 2.85 and 2.105 and Rules 2.86–2.88) as governing the operation of insolvency set-off in an administration. The account of mutual dealings is to be taken as at the date of the administrator's notice of intended distribution under Rule 2.85(3). Debts payable after the distribution date are to be discounted to present value under Rule 2.105; debts falling due before the distribution date are included at full value.

The valuation rules in Rules 2.86–2.88 apply to sums due from the company as well as to sums due to the company for the purpose of set-off so that currency conversion, periodical payment rules and interest rules operate consistently on both sides of the account. Post-administration interest is excluded from the account on both sides, but if the account produces a balance in favour of the company that balance remains a contractual, interest-bearing obligation recoverable by the administrator from the date of administration. Finally, when discounting future interest-bearing debts under Rule 2.105 the value "X" excludes post-administration interest (other than accrued interest to the administration date).

This was a first-instance hearing in which the joint administrators of Kaupthing Singer & Friedlander Ltd sought the court's directions on the application of the insolvency set-off and related quantification rules in the Insolvency Rules 1986 in the context of a substantial administration with many creditors who were both depositors and borrowers.

• Nature of the application: Directions were sought on how to apply Rules 2.85 and 2.105 (and related Rules 2.86–2.88, 2.89, 2.95 and 2.97) when taking an account of mutual dealings for the purpose of making a distribution under paragraph 65 of Schedule B1 to the Insolvency Act 1986.
• Parties and context: KSF was in administration; creditors included the Financial Services Compensation Scheme and approximately 3,000 non-Edge depositors. Many depositors were also borrowers on floating-rate loans repayable over a range of future dates.
• Issues framed: The court addressed (a) the accounting date and treatment of "future" debts for set-off, (b) whether the valuation rules in Rules 2.86–2.88 apply to sums due from the company as well as sums due to the company, (c) the treatment of post-administration interest in set-off, and (d) how Rule 2.105's discounting formula interacts with interest-bearing future debts and whether "X" includes future interest.

Court's reasoning (concise): The judge examined the established doctrines of insolvency set-off (mandatory, retroactive to the accounting date and subject to the hindsight principle) and the text and purpose of the Rules. He held that the account is taken as at the date of the notice of distribution under Rule 2.85(3); consequently a debt is "future" if not due at that date. Rule 2.105's discounting applies to debts payable after the distribution date but discounting is calculated from the administration commencement date. The rules in 2.86–2.88 should, so far as possible, operate symmetrically on both sides of the account: currency conversion, periodical payment rules and interest rules apply to sums due from the company for the purposes of set-off. Post-administration interest is ignored in the accounting exercise on each side, but where the account yields a balance in the company's favour that balance remains a contractual debt bearing interest recoverable by the administrator from the date of administration. Finally, the discount formula is applied to the debt as ascertained at the accounting date and "X" excludes future (post-administration) interest other than accrued interest to the administration date.

Wider context: The judgment recognises tensions and practical difficulties created by applying present-value discounting to entire future loans while only a part may be needed to set off a deposit, but construes the Rules as they stand rather than rewriting the statutory scheme.

The court determined the application by giving declaratory directions interpreting the Insolvency Rules 1986. It held that: (a) the account of mutual dealings for set-off in an administration is taken at the date of the administrator's notice of intended distribution under Rule 2.85(3); (b) debts payable after the distribution date are discounted under Rule 2.105 but debts payable before that date are taken at full value; (c) Rules 2.86–2.88 apply, so far as conceptually possible, symmetrically to sums due from the company as well as sums due to it for the purposes of set-off; (d) post-administration interest is excluded from the account on both sides but a balance found in favour of the company remains a contractual, interest-bearing debt recoverable by the administrator from the date of administration; and (e) when discounting a future interest-bearing debt under Rule 2.105 the value "X" excludes post-administration interest (except accrued interest to the administration date). The reasoning was based on the statutory text, the established principles of insolvency set-off and the need for consistent valuation on both sides of the account.