Focus: Examining 'the Body' of set-off law
14 June 2012
In brief: A recent High Court of Justice decision in the Isle of Man has held that an amount owed by a company acting as trustee and nominee of Elle Macpherson could not be set off with money owed to her personally. Partner Michael Quinlan and Lawyer Shae Roberts report on the case (based partly on Australian authority) that overturns a previous decision that set-off was available where a beneficial entitlement and beneficial liability for countervailing credits and debits corresponded.
How does it affect you?
- The case confirms that set-off will only be available where a sum is due from an insolvent to a person, and where a sum is due from that same person to the insolvent.
- Set-off may not be available in favour of parties that are separate legal entities with separate liabilities, unless an agency relationship gives rise to a legal indebtedness.
- The decision also confirms that the requirement 'to do substantial justice between the parties' has its limitations, as the court preferred an approach that considered the precise language used in section 22 of the Bankruptcy Code 1892, as well as its context and purpose.
- Although the case was decided in the UK, the decision is relevant to Australian practitioners, not only because Elle Macpherson was a party but because their Honours Tattersall and Deemster Doyle relied on English and Australian authority on substantially similar set-off provisions.
On 27 May 2009, a winding up order was made for Kaupthing Singer & Friedlander (Isle of Man) Limited (the bank) and liquidators were appointed. At that date, Elle Macpherson (Elle) had deposits of US$4,075,327 at the bank (which was then equivalent to £2,541,680). Light House Limited (LHL) owed the bank £7,801,727 in respect of a mortgage loan that had been used for the purchase and refinancing of a property for Elle.
Elle and LHL (collectively, the respondents) contended that s22 of the Bankruptcy Code 1892 (the code) applied to the dealings between the bank and the respondents. They argued that the sum due to Elle should be automatically set off against the sum due from LHL to the bank for the mortgage loan. In effect, only the net balance was due from LHL to the bank.
At first instance, his Honour Deemster Moran found that LHL's status as trustee and nominee of Elle under the nominee agreement resulted in a set-off under s22 of the code. The bank and the liquidators (collectively, the appellants) appealed against that determination.1 The Appeal Division was required to determine two issues:
- whether LHL's status as trustee and nominee of Elle under the nominee agreement resulted in a set-off under section 22; and
- whether Elle was herself party to the lending facilities, meaning she lent from the bank through LHL as her agent.
Their Honours Tattersall and Deemster Doyle held that his Honour Deemster Moran erred in concluding that there was a debt due from Elle to the bank within the meaning of s22.
Their Honours did not accept Deemster Moran's conclusions that he was 'required' to determine where he thought 'substantial justice' lay, or to avoid the apparent injustice that may be a necessary consequence of a strict literal interpretation of s22. They also disagreed that he should interpret s22 purposively so as to 'do substantial justice between the parties to mutual dealings upon the insolvency of either of them'.
Instead, the appeal court believed that the proper construction of s22 is answered by considering the precise language used, its context and the purpose of the code. Here the purpose was to establish whether on an insolvency there were debts and credits between the same parties. The requirement 'to do substantial justice between the parties' had its limitations, as recognised in the Australian case of Gye v McIntyre.2
Deemster Moran was required to look at the debts that resulted from the transactions between the parties, and then to decide whether they were mutual debts within the meaning of s22. While s22 begins with a reference to 'mutual credits, mutual debts or other mutual dealings', the section is addressed not to these dealings as such, but to the mutuality of the outcome of those dealings. Section 22 operates only where, on the making of a winding-up order, a sum is due from the insolvent to a person, and a sum is due from that same person to the insolvent.
Their Honours considered that for set-off to operate, there must be a sum due from the insolvent bank to Elle and a sum due from Elle to the insolvent bank. The court did not accept the submission that, by virtue of the nominee agreement, LHL acted as trustee for its sole beneficiary, Elle, in executing the facilities letters and lending from the bank. LHL was solely liable to the bank to repay the loans and Elle was not liable. Even if LHL had a right of indemnity against Elle, no sum was due from Elle to the bank.
The court also decided that the nominee agreement did not authorise LHL to bind Elle to contracts with the bank. Furthermore, Elle had not demonstrated that LHL actually exercised any such authority to act as her agent.
This decision provides further guidance to the concept of mutuality in set-off law and confirms that set-off will only be available where a sum is due from an insolvent to a person, and where a sum is due from that same person to the insolvent. This case is of practical significance in Australia, as their Honours relied on English and Australian authority on substantially similar provisions.
- Simpson and Spratt and Kaupthing Singer & Friedlander (Isle of Man) Ltd v Light House Living Limited and Elle Macpherson (High Court of Justice, Isle of Man, Staff of Government Division, 31 October 2011).
- Gye v McIntyre (1991) 171 CLR 609.
- Clint HinchenPartner,
Ph: +61 3 9613 8924
- Geoff RankinPartner,
Ph: +61 7 3334 3235
- Philip BlaxillPartner,
Ph: +61 8 9488 3739
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