Facts
Mr Stein was declared bankrupt by court order on 16 July 1990. At that time he was the recipient of legal aid, and was in litigation with Mr Blake. Mr Stein was suing for breach of contract, and Mr Blake had various counterclaims, including claims under costs orders which Lord Hoffman described "indisputable". Mr Stein's trustee in bankruptcy executed a deed of assignment on 4 April 1991 under which he assigned the benefit of those claims back to Mr Stein in return for 49% of the net proceeds. Mr Stein once again obtained legal aid in relation to those claims, and Mr Blake brought this action to have the proceedings dismissed on the ground that the effect of the statutory set-off under section 323 meant that the claims could not validly be assigned.
In the Court of Appeal, where Millett LJ had given the lead judgment, it had been held that the operation of insolvency set-off was procedural. Accordingly, because the assignment had taken place before an account had been taken, the full amount of the claim had been assigned without any deduction for set-off. Mr Blake appealed against this decision.
Decision
Lord Hoffman gave a long and careful exposition of the law relating to both procedural and insolvency set-off as it had developed from the time of Queen Anne. He noted that whilst procedural set-off required the claims to be a definite amount at the time the claims merged into a cause of action by way of issuing legal proceedings, insolvency set-off was not so limited. It was possible to set-off claims which were unliquidated, future or subject to contingencies under the insolvency set-off regime.
He further held that the operation of the set-off was automatic, and did not require any action on the part of the parties, following National Westminster Bank Ltd v Halesowen Presswork & Assemblies Ltd [1972] AC 785 on this point. The operation of the insolvency set-off rules was to extinguish the balance of any debt automatically. [3]
He endorsed the view expressed by Neill J in Farley v Housing & Commercial Developments Ltd [1984] BCLC 442 that after the operation of the set-off the claim for any balance did survive, and further, that as this was an asset of the bankrupt's estate, it was an asset which could be assigned by the trustee.
Lord Hoffman also clarified that the effective date of the set-off was the date upon which the bankruptcy commenced. Accordingly, where the debt of the bankrupt is a contingent debt, then the debt must be valued at that date for the set-off to be given effect. [4] In this respect the House of Lords followed the earlier Australian High Court decision in Gye v McIntyre (1991) 171 CLR 609.
In relation to the proper construction of the terms of the deed of assignment, Lord Hoffman held that this did indeed assign the net balance of the claim to Mr Stein. [5]
He noted that counsel for Mr Blake had made an appeal to policy that it was unfair that defendants should suffer potential claims by litigants who were bankrupt and supported by legal aid (against whom they could not recover their costs), but he expressed the view that this was a matter for Parliament, and not something which should affect the determination of the issue in the appeal. [6]
Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor.
Assignment is a legal term used in the context of the laws of contract and of property. In both instances, assignment is the process whereby a person, the assignor, transfers rights or benefits to another, the assignee. An assignment may not transfer a duty, burden or detriment without the express agreement of the assignee. The right or benefit being assigned may be a gift or it may be paid for with a contractual consideration such as money.
Consumer bankruptcy in Canada is governed by the Bankruptcy and Insolvency Act ("BIA"). The legislation is complemented by regulations, as well as directives from the Office of the Superintendent of Bankruptcy that provide guidelines to trustees in bankruptcy on various aspects of the BIA.
The Bankruptcy and Insolvency Act is one of the statutes that regulates the law on bankruptcy and insolvency in Canada. It governs bankruptcies, consumer and commercial proposals, and receiverships in Canada.
An individual voluntary arrangement (IVA) is a formal alternative in England and Wales for individuals wishing to avoid bankruptcy. In Scotland, the equivalent statutory debt solution is known as a protected trust deed.
An unfair preference is a legal term arising in bankruptcy law where a person or company transfers assets or pays a debt to a creditor shortly before going into bankruptcy, that payment or transfer can be set aside on the application of the liquidator or trustee in bankruptcy as an unfair preference or simply a preference.
A general assignment or assignment is a concept in bankruptcy law in which an insolvent entity's assets are assigned to someone as an alternative to a bankruptcy. One form is an "assignment for the benefit of creditors", abbreviated ABC or AFBC.
In law, set-off or netting is a legal technique applied between persons or businesses with mutual rights and liabilities, replacing gross positions with net positions. It permits the rights to be used to discharge the liabilities where cross claims exist between a plaintiff and a respondent, the result being that the gross claims of mutual debt produce a single net claim. The net claim is known as a net position. In other words, a set-off is the right of a debtor to balance mutual debts with a creditor.
United Kingdom insolvency law regulates companies in the United Kingdom which are unable to repay their debts. While UK bankruptcy law concerns the rules for natural persons, the term insolvency is generally used for companies formed under the Companies Act 2006. Insolvency means being unable to pay debts. Since the Cork Report of 1982, the modern policy of UK insolvency law has been to attempt to rescue a company that is in difficulty, to minimise losses and fairly distribute the burdens between the community, employees, creditors and other stakeholders that result from enterprise failure. If a company cannot be saved it is liquidated, meaning that the assets are sold off to repay creditors according to their priority. The main sources of law include the Insolvency Act 1986, the Insolvency Rules 1986, the Company Directors Disqualification Act 1986, the Employment Rights Act 1996 Part XII, the EU Insolvency Regulation, and case law. Numerous other Acts, statutory instruments and cases relating to labour, banking, property and conflicts of laws also shape the subject.
Forster v Wilson (1843) 152 ER 1165 is a UK insolvency law and English property law case, concerning the right to set off a debt against an insolvent company. It establishes that a person with a right to set off is not subject to the pooling of assets in insolvent liquidation.
British Eagle International Air Lines Ltd v Cie Nationale Air France [1975] 1 WLR 758 is a UK insolvency law case, concerning priority of creditors in a company winding up.
Bankruptcy in Irish Law is a legal process, supervised by the High Court whereby the assets of a personal debtor are realised and distributed amongst his or her creditors in cases where the debtor is unable or unwilling to pay his debts.
Belchier v Parsons (1754) 96 ER 908 is an English trusts law case, which stands as one of the earliest formulations of the prudent person rule.
Belmont Park Investments PTY Ltd v BNY Corporate Trustee Services Ltd[2011] UKSC 38, [2012] 1 All ER 505, [2012] 1 AC 383 is a UK insolvency law case, concerning the general principle that parties cannot contract out of the insolvency legislation. The principle has two key aspects, of which the Supreme Court of the United Kingdom ruled that only the first was relevant on the facts of the case:
- The anti-deprivation rule, which is aimed at attempts to withdraw an asset on bankruptcy or liquidation or administration, thereby reducing the value of the insolvent estate to the detriment of creditors.
- The pari passu rule, which reflects the principle that statutory provisions for pro rata distribution may not be excluded by a contract which gives one creditor more than its proper share.
Cayman Islands bankruptcy law is principally codified in five statutes and statutory instruments:
Anguillan bankruptcy law regulates the position of individuals and companies who are unable to meet their financial obligations.
In relation to corporate insolvency, modified universalism or modified universality is a legal concept relating to the general principle that national courts should strive to administer the estates of insolvent companies in the spirit of international comity. The broad concept is that it is desirable for cross-border insolvencies to be managed by a single officeholder as a single estate rather than a series of piecemeal and unconnected proceedings in different countries, and that this should be recognised globally. In practice, whilst many countries will recognise foreign bankruptcy proceedings, in many instances the courts have set some limits on the recognition of insolvency proceedings, such that the courts apply this principle of modified universality whereby the courts retain a discretion to assess whether the overseas proceedings are consistent with their own principles of justice and public policy. But, subject to that safeguard, the courts will generally defer to the proceedings which are regarded as the "main proceedings" for the purposes of getting in and distributing assets of the insolvent company. The principal is referred as to modified universalism in that it strives to find a balance between purely territorial bankruptcy systems, and entirely universal international bankruptcy system.
Cross-border insolvency regulates the treatment of financially distressed debtors where such debtors have assets or creditors in more than one country. Typically, cross-border insolvency is more concerned with the insolvency of companies that operate in more than one country rather than bankruptcy of individuals. Like traditional conflict of laws rules, cross-border insolvency focuses upon three areas: choice of law rules, jurisdiction rules and enforcement of judgment rules. However, in relation to insolvency, the principal focus tends to be the recognition of foreign insolvency officials and their powers.
Hague v Nam Tai Electronics refers to a pair of legal decisions of the Privy Council on appeal from the British Virgin Islands. The first was a unanimous decision given by Lord Hoffman, reported at [2006] UKPC 52, which focussed upon the anti-deprivation rule and secured creditor's rights. The second was a unanimous decision given by Lord Scott, reported at [2008] UKPC 13, and concerned the liability of a company liquidator. The second decision was much more widely reported.
National Westminster Bank Ltd v Halesowen Presswork & Assemblies Ltd [1972] AC 785 is a decision of the House of Lords in relation to a banker's right to combine accounts under English law. It is the leading English case and a banker's right to combine accounts, and also an important decision relating to insolvency set-off.
