Kaupthing Singer and Friedlander Ltd, Re

Where future debts are subject to insolvency set-off in an administration, the discounting formula in Insolvency Rules 1986, r 2.105(2) operates only to calculate the distribution and the set-off needed for that purpose. It does not reduce the contractual amount of a future loan which remains owing to the company after the set-off.

The unextinguished part of the loan remains payable at its contractual maturity in its undiscounted amount under r 2.85(8). This construction accords with the purposes of insolvency administration: efficient distribution, substantial justice between the parties to the set-off, and preservation of the company’s assets. Insolvency set-off is not intended to release a debtor from liabilities beyond what is necessary to effect the set-off.

Kaupthing Singer & Friedlander Ltd, a bank in administration, had depositors who also owed it loans, many repayable at future dates. Before making an interim distribution, the administrators sought directions on the calculation and set-off of the parties’ cross-claims.

Norris J held that future loans were discounted to present value for set-off and that any resulting balance owed to the company remained payable only in that discounted amount at the contractual repayment date. The administrators appealed that issue alone. They abandoned their earlier contention that contractual interest to maturity formed part of the amount to be discounted.

The central issue was whether the cross-reference in r 2.85(7) to the future-debt discounting formula in r 2.105 reduced the amount of the loan balance payable to the company under r 2.85(8).

1. Appeal allowed unanimously. Lord Justice Etherton gave the judgment, with which Lord Justice Hughes and Lord Justice Mummery agreed.

2. The construction adopted below produced an unjustified reduction of a creditor’s liability to the company. Insolvency set-off promotes efficient administration and distribution, substantial justice between the parties, and practical equality among creditors. It is not directed to diminishing debts owed to the insolvent company except so far as needed to set off mutual claims.

3. Rule 2.105(2) of the Insolvency Rules 1986 discounts future debts for dividend purposes. Read with r 2.85(7), that effect is confined to calculating the dividend due to the creditor and the set-off necessary to calculate it. The reference to all sums due and the requirements for taking the account did not require the whole future loan to be permanently converted into its present value.

4. The discounted values identify the respective portions of the future deposit and future loan which must be extinguished by the set-off. The remaining part of the loan is unaffected by that calculation and remains due, in its contractual amount, at the contractual repayment date under r 2.85(8).

5. Stein v Blake [1996] 1 AC 243, concerning the extinguishing effect of insolvency set-off on the original causes of action, did not resolve the distinct question of the statutory reach of the discounting formula. Re Park Air Services [2000] 2 AC 172 and the explanatory note to the 2005 amending Rules provided no assistance because they concerned future debts owed by the company to a creditor and the amount of the creditor’s proof.

6. The first-instance ruling on post-administration interest was not appealed and was not determined. The directions were varied by allowing the appeal on the amount of the post-set-off balance.

• Court of Appeal (Civil Division): Allowed the administrators’ appeal in [2010] EWCA Civ 518. The post-set-off balance of a future loan remained payable in its undiscounted contractual amount.
• Chancery Division, Companies Court (Norris J): By directions and order dated 2 October 2009, held that the balance owed to the company after set-off of future debts was payable in its discounted present-value amount at the contractual repayment date.