Kaupthing Singer and Friedlander Ltd, Re

Contractual provisions excluding set-off and counterclaim are effective according to their terms. They may exclude legal set-off as well as equitable set-off, including where the underlying debts are unconnected. In a CREST transaction, the commercial purpose of requiring immediate payment means that the exclusion is not reduced by the insolvency, administration or receivership of the counterparty. A party cannot avoid the exclusion by seeking a stay of judgment or by relying on a counterclaim arising from separate transactions.

Newcastle Building Society acquired instruments of deposit issued by Kaupthing Singer & Friedlander Ltd and later issued a certificate of deposit to Kaupthing. Kaupthing entered administration before the certificate matured, while the instruments of deposit remained unpaid. Newcastle sought a declaration that it could withhold payment and rely on set-off.

The certificate was a dematerialised security settled through CREST. CREST rules and the governing deed required payment without set-off or counterclaim. The central issue was whether those provisions excluded Newcastle’s alleged legal set-off and related defences.

1. The application was dismissed. The money paid into the joint account was therefore to be dealt with according to whether Newcastle had a right to refuse payment; the court held that it had none.

2. Mandatory insolvency set-off did not apply because the debts were not mutual, given the equitable interest of Kaupthing Singer & Friedlander (Isle of Man) Ltd. Equitable set-off was unavailable because the relevant instruments were unconnected.

3. Legal set-off originated in the Insolvent Debtors Relief Acts but was permissive. The court followed Coca-Cola Financial Corporation v Finsat International Ltd [1998] QB 43 and held that the contractual right to exclude legal set-off was effective. The reasoning in Hong Kong and Shanghai Banking Corporation v Kloeckner & Co AG [1990] 2 QB 514 was also accepted.

4. The CREST provisions excluded every form of set-off and counterclaim. Their wording drew no distinction between legal and equitable set-off, and the commercial context required transactions to be completed immediately without regard to other dealings between the parties.

5. The exclusion was not diminished by Kaupthing’s insolvency. Authorities including Morrison Knudsen Corpn of Australia Ltd v Australian National Railways Commission (1996) 22 ACSR 262, Isovel Contracts Ltd v ABB Building Technologies Ltd [2002] BCLC 390 and John Dee Group Ltd v WMH (21) Ltd [1998] BCC 972 supported the conclusion that insolvency was precisely the circumstance in which such clauses were intended to operate.

6. Newcastle could not obtain a stay by analogy with cases concerning negotiable instruments. The examples relied upon did not involve clauses excluding set-off and counterclaim and did not concern a payment required to be made through CREST.

First-instance decision. No prior appellate decision is stated in the judgment.