Kaupthing Singer & Friedlander Ltd

In an administration, insolvency set-off is governed by the true construction of the applicable Insolvency Rules. The account of mutual dealings is taken at the date of notice of the intended distribution. Debts payable before distribution are taken at full value; debts payable afterwards are discounted. The valuation rules for currency, periodical payments and interest apply on both sides of the account. Post-administration interest is excluded when the set-off balance is calculated, but the company may recover contractual interest on any balance due to it from the administration date. For future interest-bearing debts, the discount formula applies to the debt excluding post-administration interest up to maturity.

Kaupthing Singer & Friedlander Ltd entered administration on 8 October 2008. Its administrators sought directions concerning the calculation of insolvency set-off between depositors who also owed money to the company. The questions concerned future debts, foreign-currency and periodical obligations, interest, and the interaction between rules 2.85, 2.88 and 2.105 of the Insolvency Rules 1986.

The central issue was how mutual deposits and loans should be valued when the account was taken for an interim distribution.

Mr Justice Norris gave directions on four issues concerning insolvency set-off under rule 2.85 of the Insolvency Rules 1986.

1. The account of mutual dealings is taken at the date of the notice of intended distribution. A debt payable before the distribution date is taken at full value. A debt payable after that date is taken at its discounted value under rule 2.105.
2. The quantification provisions in rules 2.86 to 2.88 apply to sums due from the company as well as sums due to it. The Rules require equivalent valuation treatment on both sides of the account.
3. When the set-off balance is calculated, post-administration interest is excluded on both sides. However, the company remains entitled to contractual interest on a balance due to it. That balance is not a newly created liability, but the residue of the contractual debt after set-off, and interest runs from the administration date, subject to credit for interest already paid on the extinguished part.
4. For future interest-bearing debts, the discount formula applies to the debt as ascertained at the notice date, excluding interest accruing after administration and before maturity. The formula applies to all future sums due from the company, not merely the amount required to match the creditor’s cross-claim.

The court acknowledged tensions and practical difficulties arising from the Rules, including the treatment of several loans and floating interest rates. Those difficulties did not justify departing from the statutory language. Directions were given in the terms set out at paragraph 42.