In the matter of Kaupthing Singer and Friedlander Limited (in administration) and In the matter of the Insolvency Act 1986

The rule against double proof prevents more than one proof in respect of what is substantively the same debt against the same insolvent estate. In a suretyship, until the creditor is paid in full, the surety cannot compete with the creditor by proving for an indemnity or by using that indemnity through set-off or equitable retention.

The equitable rule in Cherry v Boultbee is a technique for netting reciprocal obligations where legal set-off is unavailable. It cannot override a legal principle requiring strict priority between claims. The rule against double proof is such a principle and therefore excludes equitable netting while the creditor remains unpaid. Once the creditor has received 100p in the pound, that restriction ceases.

Kaupthing Singer & Friedlander Ltd (KSF) guaranteed notes issued by its subsidiary, Singer & Friedlander Funding plc. Funding lent the proceeds to KSF. Both companies later entered administration. The note trustee proved against both estates, while Funding also sought to prove for its loan to KSF.

On an application for directions, the Chancellor, bound by In re SSSL Realisations (2002) Ltd [2006] EWCA Civ 7, held that the equitable rule in Cherry v Boultbee permitted KSF's administrators to retain distributions otherwise payable to Funding until KSF's indemnity as guarantor had been satisfied. The Chancellor's decision was [2009] EWHC 3377 (Ch). He certified a point of law of general public importance, enabling a leapfrog appeal.

The central issue was whether the equitable rule could operate where the rule against double proof prevented the guarantor from competing with the principal creditor in the principal debtor's estate.

1. Appeal allowed unanimously. Lord Walker delivered the leading judgment, with which Lady Hale, Lord Clarke and Lord Collins agreed. Lord Hope agreed fully. The Chancellor's direction was set aside.

2. The rule against double proof prevents two proofs for what is substantively the same debt against the same insolvent estate. It does not prevent the creditor from proving for the full debt against two separate insolvent estates, although total recovery cannot exceed 100p in the pound. Its purpose is to protect the principal debtor's other creditors from the unfairness of multiple claims in respect of the same underlying debt.

3. In a simple suretyship, the principal creditor has priority over the surety in the principal debtor's insolvency until the creditor is paid in full. The surety therefore cannot compete directly by proving for an indemnity or indirectly by setting off or retaining the indemnity against another liability. The Court applied the reasoning in Secretary of State for Trade and Industry v Frid [2004] UKHL 24.

4. The equitable rule in Cherry v Boultbee is a method of netting reciprocal monetary obligations where legal set-off is unavailable. It normally produces an effect similar to set-off. It cannot operate in opposition to a cogent rule requiring one claim to have strict priority. The rule against double proof is such a rule. It would be technical, artificial and wrong for double proof to defeat statutory set-off but not the equivalent equitable technique.

5. The Court rejected the contrary reasoning in In re SSSL Realisations (2002) Ltd [2006] EWCA Civ 7. That decision had stated the potential indemnity principle too broadly, had treated In re Fenton (No 2) as wrongly decided, and had failed to give the rule against double proof its proper priority. In re Melton remained correctly decided on its unusual facts, where the creditor had been paid in full and the relevant rights had acquired a proprietary character before the later bankruptcy.

6. The Trustee had to be paid in full before KSF, as guarantor, could prove against Funding as principal debtor. Once the Trustee received 100p in the pound, the double-proof restriction would cease and any assets remaining with Funding's administrators could be administered without regard to it. The Court did not decide the construction of clause 7.7 of the trust deed.

1. United Kingdom Supreme Court: Allowed the Trustee's leapfrog appeal and set aside the Chancellor's direction: [2011] UKSC 48.

2. High Court, Chancery Division: The Chancellor, regarding himself as bound by the Court of Appeal decision in In re SSSL Realisations (2002) Ltd, declared that the rule in Cherry v Boultbee was not excluded and permitted KSF's administrators to rely upon it until KSF's indemnity had been satisfied in full: [2009] EWHC 3377 (Ch). He granted a certificate under section 12 of the Administration of Justice Act 1969.