Joint Administrators of Heritable Bank plc v The Winding-Up Board of Landsbanki Islands hf (Scotland)

The Supreme Court held that the Directive on the reorganisation and winding-up of credit institutions and the implementing Regulations must be read as a coherent scheme: an EEA insolvency measure in respect of an EEA credit institution has effect in the United Kingdom "as if it were part of the general law of insolvency of the United Kingdom" only for the limited purposes of giving effect to the exclusive jurisdiction and effects of the home Member State in relation to that foreign credit institution (regulation 5(1)).

Matters concerning the administration or winding-up of a UK credit institution (including the conditions for set-off, the lodging, verification and admission of claims and the ranking and distribution of assets) are governed by the general law of insolvency of the United Kingdom as modified by Parts 3 and 4 of the Regulations, in particular regulation 22(3)(d) and regulation 28. Accordingly the administrators of Heritable were entitled to determine issues of set-off under Scots insolvency law (the balancing of accounts in bankruptcy) and were not bound to treat a claim withdrawn or extinguished in the Icelandic winding-up as automatically incapable of being relied on for set-off in Heritable's administration.

On these grounds the appeal was dismissed.

Background and procedural history. Landsbanki (Icelandic head office) and its wholly-owned subsidiary Heritable (UK head office) each became subject to insolvency measures after the 2008 financial crisis. Landsbanki's winding-up board submitted claims in the administration of Heritable; the administrators of Heritable rejected one major Landsbanki claim by applying the Scots law rule of balancing of accounts (set-off). Heritable had earlier submitted claims in Landsbanki's Icelandic winding-up, later withdrawn. Landsbanki contended that the Icelandic winding-up board's rejection or extinction of Heritable's claims bound the administrators in Scotland by virtue of regulation 5(1) of The Credit Institutions (Reorganisation and Winding up) Regulations 2004, so Heritable's cross-claims could not be relied upon for set-off.

Nature of the application and issues. This was an appeal from the Inner House (First Division) ([2011] CSIH 61, 2012 SC 209) to the Supreme Court. The central legal issues were (i) the effect and scope of regulation 5(1) of the Regulations (implementing the Directive) and whether it meant that the effects of an EEA insolvency measure (Icelandic winding-up) were to be treated as part of UK insolvency law for the purposes of Heritable's administration; and (ii) whether questions of set-off and proof, and thus the availability of Heritable's cross-claims for set-off, were to be determined by the law applicable to the UK administration (Scots law) under regulation 22(3)(d) and regulation 28.

Court’s reasoning. The Court examined the Directive (noting articles 3, 9, 10, 21 and 23 and the recitals grounding the principles of unity and universality) and the structure of the Regulations. It concluded that regulation 5(1) is concerned to give effect in the United Kingdom to an EEA insolvency measure in respect of an EEA credit institution (i.e. to protect the exclusive jurisdiction and effects of the home Member State over that foreign credit institution and its branches). It does not import the foreign insolvency regime into the domestic proceedings concerning a UK credit institution. Matters such as set-off, lodging and admission of claims and ranking in the administration of a UK credit institution are to be determined under the general law of insolvency of the relevant part of the United Kingdom as given effect by Parts 3 and 4 (notably regulation 22 and regulation 28). The Court also noted common-law conflict-of-laws principles that, absent the Directive scheme, the proper law of an obligation would govern whether it had been extinguished; but the Regulations and Directive displace the common law only to the extent they prescribe. The Court rejected Landsbanki's submission that a creditor could defeat set-off in a separate state's administration merely by withdrawing or allowing its claim to be extinguished there, as that outcome would create an unprincipled rule encouraging forum shopping and universal priority to the first process to adjudicate.

Result and implication. The appeal was dismissed: the administrators of Heritable were entitled to apply Scots law on set-off in Heritable's administration and were not bound to treat Heritable's withdrawn or extinguished Icelandic claims as automatically unusable for set-off in the UK administration.

Appeal dismissed. The Court held that regulation 5(1) gives effect in the United Kingdom to an EEA insolvency measure only in relation to the foreign credit institution and its branches; it does not displace the Rules in Parts 3 and 4 governing the administration of a UK credit institution. Questions of set-off, lodging and admission of claims and ranking in Heritable's administration are governed by the general law of insolvency of the United Kingdom as applied by regulation 22 and regulation 28, so the administrators could apply Scots law set-off and were not bound by the extinguishment of Heritable's claims in the Icelandic winding-up.

Proceedings began in the Court of Session where, before the Lord Ordinary, the winding-up board's arguments were rejected: [2010] CSOH 100, [2011] 2 BCLC 437. The administrators reclaimed; the First Division (Inner House) recalled the Lord Ordinary's interlocutor and decided in favour of the administrators: [2011] CSIH 61, 2012 SC 209. Landsbanki appealed to the Supreme Court which dismissed the appeal: [2013] UKSC 13.