Case Comment: Re Kaupthing Singer & Friedlander Ltd and Re the Insolvency Act 1986  UKSC 48
09 Wednesday Nov 2011
In its recent decision in Re Kaupthing Singer & Friedlander Ltd and Re the Insolvency Act 1986  UKSC 48, the Supreme Court unanimously overturned the High Court’s decision in Mill & Ors v HSBC Trustee (C.I.) Ltd & Ors  EWHC 3377 (Ch) and held that the equitable rule in Cherry v Boultbee (1839) 4 My & Cr 442 is excluded by the rule against double proof.
Please see the UKSC Blog case preview here.
The rule in Cherry v Boultbee
This equitable principle applies where a party is both entitled to a distribution from a fund and at the same time is in debt to the fund or has given the fund a right of indemnity. Application of the rule means that the party must first contribute to the fund to the extent of the debt owing before it may receive money from the fund.
The rule against double proof
This rule is applied to prevent the double proof of what is in substance the same debt being made against the same estate, leading to the payment of a double dividend out of one estate. In the simplest case of suretyship (where the surety has neither given nor been provided with security, and has an unlimited liability) there is a triangle of rights and liabilities between the principal debtor (PD), the surety (S) and the creditor (C). PD has the primary obligation to C and a secondary obligation to indemnify S if and so far as S discharges PD’s liability. However, if PD is insolvent S may not enforce that right in competition with C. S has an obligation to C to answer for PD’s liability; and the secondary right of obtaining an indemnity from PD. C can proceed against either or both of PD and S. If both PD and S are in insolvent liquidation, C can prove against each for 100 pence in the pound but may not recover more than 100 pence in the pound in aggregate from both of them.
Singer & Friedlander Funding plc (“Funding”), a wholly-owned subsidiary of Kaupthing Singer and Friedlander Ltd (“KSF”), was set up with the sole function to raise funds for use by KSF and other group companies. In 2005 Funding issued £250m of floating rate guaranteed bearer notes which were guaranteed by KSF. In turn, Funding gave an indemnity to KSF for its liability as guarantor. HSBC Trustee (CI) Ltd (“the Trustee”) acted as trustee for the noteholders. The trust deed, made between Funding, KSF and the Trustee (under which the notes were constituted), was dated 9 February 2005. The net proceeds of the notes received by Funding were advanced to KSF by way of an unsecured loan.
KSF went into administration on 8 October 2008, at which point it owed Funding approximately £242.6m pursuant to the loan. Funding went into administration on 15 October 2008, at which point approximately £240.3m was prospectively owed on the notes. The Trustee gave notice of an event of default on 23 March 2009 and the notes became immediately due and payable and the obligations of Funding, as principal debtor, and KSF, as guarantor, crystallised.
On 28 April 2009, the Trustee submitted proofs of debt in respect of the loan notes in the sum of approximately £248.1m to each of KSF’s and Funding’s administrators. On 8 May 2009, Funding submitted a proof in respect of its loan to KSF in the sum of approximately £242.6m. On 20 May 2009, KSF’s administrators gave notice of their intention to make distributions in the administration, including to ordinary unsecured creditors. KSF had numerous creditors who had already received dividends amounting to 58p in the pound. By contrast, Funding had only one creditor other than the Trustee, that is HM Revenue and Customs, the debt owing being just £2,654.10. Funding had no assets other than its loan to KSF.
KSF’s administrators applied to the Chancery Division for directions. At the first instance hearing, the Trustee recognised that the Chancellor was bound by the decision of the Court of Appeal in In re SSSL Realisations (2002) Ltd EWCA Civ 7,  Ch 2010 (SSSL) where in comparable circumstances the equitable rule in Cherry v Boultbee was applied. The Trustee made clear its intention to argue that SSSL was wrongly decided if given the chance to appeal. The Chancellor accordingly found (as he was bound to do) that the rule in Cherry v Boultbee was not excluded and directed that the administrators of KSF might rely on it unless and until KSF’s right of indemnity (as guarantor) had been satisfied in full. This case was a leapfrog appeal to the Supreme Court.
The key issue for the Supreme Court to determine was what function, if any, does the equitable rule in Cherry v Boultbee have in the operation of the rule against double proof as it applies in suretyship situations? In the instant case, if the rule does apply then this would require Funding to satisfy its indemnity in full to KSF before it could claim a distribution with respect to the loan to KSF. A further issue to determine was the correct construction of clause 7 of the trust deed, whereby KSF guaranteed payment of the principal and interest on the notes and performance of Funding’s other obligations under the trust deed, and in particular the non-competition provisions in clause 7.7 thereof.
The Supreme Court unanimously allowed the Trustee’s appeal. The rule in Cherry v Boultbee is excluded in this case by the rule against double proof. Accordingly, the Trustee must be paid in full before there can be any proof against Funding as the principal debtor by KSF as guarantor.
The conclusion reached by the court meant that it was not necessary to decide on the issue of the correct construction of clause 7 of the trust deed. The court therefore declined to comment on that issue.
Having two competing rules may, in certain factual scenarios, result in a better result for a claimant, although in the majority of cases the two rules do not sit well together. Having a situation whereby the Trustee was to lose out as a result of the application of an equitable principle over the common law rule against double proof in itself creates an inequitable result. Accordingly, a decision whereby the rule against double proof prevails would clearly appear to be the correct result.