Mills & Ors v HSBC Trustee (C.I) Ltd & Ors>

The rule in Cherry v Boultbee may apply in an insolvency administration where a claimant owes, or may owe, an indemnity to the fund. A contractual exclusion of the rule does not require express words, but the intention to exclude it must be clear. The rule is not excluded merely because a guarantee clause restricts rights arising from payments, claims, remedies or security. Its operation is an equitable accounting mechanism affecting distribution from the debtor’s fund, rather than an exercise of a right against the debtor or its assets. Contractual construction remains dependent on the wording and context of the particular instrument. A decision of a judge of co-ordinate jurisdiction on differently worded documents in a different context need not be followed.

The administrators of Kaupthing Singer and Friedlander Limited sought directions concerning a proof lodged by Singer & Friedlander Funding plc in KSF’s administration. Funding had advanced the proceeds of a guaranteed note issue to KSF, while KSF had guaranteed Funding’s obligations to the noteholders. The administrators contended that the rule in Cherry v Boultbee, as developed in Re Melton and applied in Re SSSL Realisations (2002) Ltd, required Funding’s contingent indemnity liability to be brought into account, reducing its dividend. HSBC Trustee argued that clause 7.7 of the trust deed excluded the rule. The central issue was whether the clause achieved that result.

1. The court declared, in substance, that clause 7.7 of the trust deed did not exclude the rule in Cherry v Boultbee as applicable in KSF’s administration. The further directions concerning the effect of Re SSSL Realisations (2002) Ltd were not required because counsel agreed that the Court of Appeal’s decision concluded those issues. Any remaining issue under paragraph 1(c) of the application was left for further argument if still disputed.

2. Subject to the contractual clause, the rule applied to Funding’s claim. The fund was treated as notionally increased by KSF’s contingent claim for an indemnity in respect of the full guaranteed liability, and Funding’s dividend was reduced by the same amount. The rule could operate before the surety had fully paid the guaranteed debt and in an insolvent administration.

3. The rule gives rise to rights established in law, but contractual exclusion requires a clear intention. The principles concerning implication in A-G of Belize v Belize Telecom Ltd did not alter that conclusion because clause 7.7 expressly addressed the relevant situation.

4. The words concerning amounts paid under the guarantee did not encompass amounts merely payable or the operation of the rule. The rule did not depend on a payment by KSF, and its right arose when KSF’s assets became distributable. Nor did the words concerning money due, rights or remedies cover the contingent indemnity or the rule: the clause contemplated a present obligation to be performed by Funding, whereas the indemnity depended on KSF’s payment.

5. The references to security and to payments or distributions received on insolvency did not assist the Trustee. There was no judicial conclusion that the rule was a security in the abstract, and the final sentence of clause 7.7 confused economic effect with distinct legal operations. The assets held by KSF’s administrators were not Funding’s assets, and discharge by operation of the rule was not a payment or distribution received by KSF from Funding.

6. The postscript confirmed that Cattles plc v Welcome Financial Services Ltd did not require a different result. A judge is not bound to follow a decision of co-ordinate jurisdiction concerning differently worded instruments in a different context. The relevant documents and commercial context must be construed for themselves.