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

The Chancellor held that clause 7.7 of the Trust Deed did not exclude the operation of the rule in Cherry v Boultbee (as developed in Re Melton and applied in Re SSSL Realisations). Thus, in the administration of Kaupthing Singer & Friedlander Ltd (KSF) the contingent indemnity claim of KSF against Singer & Friedlander Funding plc (Funding) must be taken into account when calculating the distributable fund and the dividend payable to Funding. The court rejected the Trustee's construction arguments that clause 7.7 should be read so as to prevent KSF from relying on the rule, including arguments based on the words "paid", "due", the reference to "security" and the concluding trust provision of clause 7.7.

The applicants (the administrators of Kaupthing Singer & Friedlander Ltd) sought directions whether clause 7.7 of the Trust Deed for a £250m note issue prevented them from applying the equitable rule in Cherry v Boultbee when distributing KSF's assets in administration.

Background and parties:

• Funding issued notes guaranteed by KSF and the Trustee was HSBC Trustee (C.I.) Ltd.
• KSF and Funding entered administration in October 2008. The Trustee gave notice of default and lodged proofs in both administrations for the amounts due under the notes.
• KSF's administrators gave notice that its assets had become distributable; the administrators and the Trustee were in dispute as to whether the Cherry v Boultbee rule applied or was excluded by clause 7.7 of the Trust Deed.

Nature of the application: The KSF administrators applied for directions whether clause 7.7 prevented them from relying on the rule in Cherry v Boultbee so as to notionally increase the distributable fund by KSF's contingent right of indemnity against Funding and thereby reduce the dividend payable to Funding.

Issues framed: (i) Whether the Cherry v Boultbee rule applied in the administration of KSF (the parties agreed the Court of Appeal decision in Re SSSL Realisations established that it did); (ii) whether clause 7.7 disapplied or excluded the rule by virtue of its sub-paragraphs (a) and (b) or by the concluding trust provision; and (iii) related questions of contractual construction and when words such as "paid" or "due" should be read to include "payable" or contingent obligations.

Reasoning and conclusions: The Chancellor analysed the historical development of the Cherry v Boultbee rule (including Re Melton and SSSL) and concluded that, absent clear words, rights established by law will not be treated as excluded. He rejected the Trustee's four construction arguments: (1) the Sergeant's proposed reading of "paid" to include "or payable" was not justified by context, and the equitable right under Cherry v Boultbee does not depend on KSF having actually paid sums under the guarantee; (2) the word "due" in clause 7.7(b) did not properly extend to contingent indemnity obligations not presently payable; (3) the parenthetical reference to claiming the benefit of any "security" did not support treating the equitable operation of Cherry v Boultbee as a security for the purposes of the clause; and (4) the concluding sentence creating a trust where a distribution of Funding's assets was received by KSF before the Trustee was paid in full did not capture the legal operation of a quasi-retainer effected by Cherry v Boultbee, since the administrators' fund is not payment out of Funding's assets. The Chancellor therefore declared that clause 7.7 does not exclude the Cherry v Boultbee rule in the administration of KSF. Other issues under Re SSSL were not decided because counsel agreed SSSL governed those points; one outstanding matter was adjourned for argument if still disputed.

The court declared that clause 7.7 of the Trust Deed does not exclude the application of the rule in Cherry v Boultbee in the administration of KSF. The Trustee's submissions that clause 7.7 (in its sub-paragraphs or concluding trust provision) excluded the rule were rejected after detailed construction analysis. The court therefore allowed the administrators to treat KSF's contingent indemnity claim against Funding as part of the notional fund when computing dividends; further issues governed by Re SSSL were not determined as counsel accepted that decision.