These are busy times for insolvency lawyers and the collapse of Kaupthing Singer and Friedlander Ltd (“KSF”) provides the latest challenge to existing principles of insolvency law (for our preview of the Perpetual Trustee back in March, see here) . KSF’s appeal in this case, which has been leapfrogged from the High Court to the Supreme Court, seeks to determine whether the rule in Cherry v Boultbee (1839) 4 My & Cr 442 is (i) compatible with the principle against double proof in insolvency; and (ii) is limited to seeking an indemnity in respect of sums actually paid.


Singer & Friedlander Funding plc (“Funding”) is a subsidiary of KSF which was incorporated as part of a capital raising venture. Back in January 2005, Funding issued £250m of floating rate guaranteed bearer notes which were guaranteed by KSF and, in turn, Funding gave an indemnity to KSF for its liability as guarantor. All monies raised from the note issue were lent to KSF by Funding, and HSBC Trustee (C.I.) Ltd acted as trustee for the noteholders.

Both KSF and Funding went into administration in 2008. In March 2009, the Trustee issued notices of default against both KSF and Funding and then subsequently, in April 2009, submitted a claim in the administration of KSF for the guarantee and a claim in the administration of Funding for the notes. Funding, which had no other significant creditors, also submitted a claim in the administration of KSF for the upstream loan.

The Rule became relevant in July 2009 when KSF’s administrators gave notice of their intention to make distributions out of the KSF fund. KSF’s administrators applied to the High Court seeking directions as to whether the terms of the trust deed, containing a non-competition clause (a clause broadly intended to restrict a guarantor from exercising its rights against the principal debtor in competition with the creditor so as to maximise recovery), which governed the note issue were wide enough to prevent KSF from relying on the Rule as against Funding.

The High Court decision (Mills & Ors v HSBC Trustee (C.I.) Ltd & Ors [2009] EWHC 3377 (Ch))

The Rule, as subsequently interpreted by the Court of Appeal in Re SSSL Realisations (2002) Ltd [2006] Ch 2010, is that a person who is entitled to a distribution from a fund but who is also in debt to the fund or has given the fund a right of indemnity, must contribute to the fund before he can receive money from it even if, in the case of an indemnity, the third party liability has not yet been satisfied out of the fund and is only contingent. The fund is treated as being increased by the person’s contribution and the person’s share of the fund is calculated by reference to the notionally increased fund. The Rule is not disapplied by the person or fund’s insolvency.

The High Court handed down judgment on 18 December 2009 and held that the contractual agreement between the parties did not prevent the application of the Rule which meant that Funding could not claim against KSF for the intercompany debt without first paying the amount it owed under the indemnity. The High Court also held that it was not necessary to expressly refer to the Rule but that the intention to exclude the Rule must be clear; evident from its proper construction and not from some a priori purpose; and its application did not depend on KSF paying out under the guarantee. The narrow and literal interpretation of the terms of the trust deed leaves Funding’s claim thereby valued at zero which has the effect of reducing its available fund and limiting the Trustee’s recovery.


This High Court decision has left this area of law in a state of uncertainty. Another High Court judgment, Cattles Plc v Welcome Financial Services Ltd & Ors [2009] EWHC 3027, in a similar case in which the Rule had also not been specifically excluded, was handed down within days of Mills. The judge in Cattles, adopting a purposive approach, reached the opposite conclusion shortly after the draft judgment in Mills had been circulated to the parties. The judge in Mills, however, declined to change his decision on the basis that he was not bound to follow the decision in Cattles which considered an instrument of a different form used in a different context. The decision in Cattles has since been upheld by the Court of Appeal.

Supreme Court hearing

The Trustee in Mills was granted permission to make a leapfrog appeal to the Supreme Court bypassing the Court of Appeal which would have otherwise been bound to follow its earlier judgment. In both Mills and Cattles, whilst the application of the Rule, as interpreted by the Court of Appeal, was accepted, the key issue was whether or not it had been excluded by contractual agreement of the parties. According to the case details on the Supreme Court website, the hearing will consider the Rule itself by addressing its limitations and its compatibility with the rule against double proof which states that there can only be one dividend in respect of what is substantially the same debt (In re Oriental Commercial Bank (1871) L.R. 7 Ch. App. 99). As we do not yet have further details on the Supreme Court appeal, we will address the latter limb of this appeal in the case comment.

The Supreme Court’s decision may reverse the High Court’s decision in Mills. In the meantime, loan documentation should clearly set out the rights and remedies that are and are not to be excluded, and should specifically name the Rule to show clearly that the intention is for it to be excluded.

The Supreme Court hearing is to take place on Wednesday 13 and Thursday 14 July 2011 and will be heard by Lord Hope, Lord Walker, Lady Hale, Lord Collins of Mapesbury and Lord Clarke.