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

The Supreme Court held that the equitable rule known as the rule in Cherry v Boultbee (a technique of equitable netting-off) is excluded by the rule against double proof insofar as that rule prevents statutory set-off in insolvency. The court treated the rule against double proof as an overarching insolvency principle that prevents a creditor or surety from obtaining by equitable retentions or notional netting what statutory set-off would not permit. The decision concerned distributions by administrators under paragraph 65 of Schedule B1 to the Insolvency Act 1986 and applied established authorities on suretyship and double proof (including In re Melton and Fenton). The court therefore allowed the Trustee's appeal, concluding that the trustee of the noteholders must be paid in full before KSF, as guarantor, could prove against Funding as principal debtor; the court did not decide the separate contractual construction issue in clause 7.7 of the trust deed.

Background and parties. Funding (Singer & Friedlander Funding plc) issued floating rate notes and advanced the net proceeds to its parent bank KSF by unsecured loan. Funding and KSF went into administration in October 2008. The trustee of the noteholders (the Trustee) and the administrators of KSF and Funding disputed whether KSF, as guarantor, could prove in Funding's administration for the loan while the Trustee had not yet been paid in full.

Nature of the application. KSF's administrators sought directions about distributions in administration and relied on the equitable rule in Cherry v Boultbee to net or retain amounts so as to permit KSF to prove in Funding despite the Trustee's prior proof. The question was whether that equitable rule could be applied where the rule against double proof operates to exclude statutory set-off.

Procedural history. The matter came before the Chancery Division (Sir Andrew Morritt C), which followed the Court of Appeal in SSSL Realisations and directed that the equitable rule applied. The Chancellor certified a point of law of general public importance under section 12 of the Administration of Justice Act 1969 and the Trustee obtained leapfrog permission to appeal to the Supreme Court.

Issues for decision. (i) Whether the equitable rule in Cherry v Boultbee can be applied to achieve a notional netting-off where the rule against double proof excludes statutory set-off; (ii) the proper scope and function of the rule against double proof as it applies to suretyship and administrations under Schedule B1 para 65; and (iii) a construction point on clause 7.7 of the trust deed (which the Supreme Court did not decide because unnecessary once the legal point was resolved).

Court's reasoning and conclusion. The court analysed the equitable rule (a device of netting-off used in chancery practice) and longstanding authorities on double proof and suretyship (including In re Oriental Commercial Bank, In re Melton and the Fenton cases). It concluded that the policy behind the rule against double proof, which prevents more than one dividend in respect of the same debt, is strong enough to displace the equitable Cherry technique where statutory set-off is excluded. The Court accordingly allowed the appeal: the Trustee must be paid in full before KSF may succeed in proving against Funding. The court declined to determine the separate contractual construction issue in clause 7.7 as it was unnecessary to the outcome.

Appeal allowed. The Supreme Court held that the equitable rule in Cherry v Boultbee is excluded by the rule against double proof where statutory set-off does not apply; accordingly the trustee of the noteholders must be paid in full before KSF as guarantor may prove against Funding as principal debtor. The court therefore set aside the Chancellor's direction and did not decide the separate trust-deed construction point.

Leapfrog appeal to the Supreme Court under section 12 of the Administration of Justice Act 1969 from the Chancery Division (Sir Andrew Morritt C) ([2009] EWHC 3377 (Ch)). The Chancellor had followed the Court of Appeal decision in In re SSSL Realisations (2002) Ltd [2006] EWCA Civ 7, [2006] Ch 610. The Supreme Court allowed the Trustee's appeal and set aside the Chancellor's direction.