Set Off Flashcards
Insolvency Rules 1986, r.4.903(3)
The “basic effect”:
“An account shall be taken of what is due from each party to the other in respect of mutual dealings, and the sums due from one party shall be set off against the sums due form the other”
Insolvency Act 1986, s.323(2)(4)
The “basic effect”:
Mutual dealings does not include any debt arising out of an obligation incurred at a time when the creditor had notice of meeting of creditors/pending petition or liquidation immediately preceded by administration
Rolls Razor Ltd v Cox [1967] 1 QB 552 (HL)
Facts: RR, in liquidation, owed C commission; could C set off (i) proceeds of sale of 2 washing machines (ii) table top entrusted to him to sell (iii) 7 tap adaptors belonging to RR which were not for sale?
Decision: Could set off (i) and (ii); but not (iii) as that would convert a loan agreement to contract for sale
N.B. Goode does not like (ii) as on liquidation C’s authority to sell goods had terminated so should his authority to turn into money
Rule: Can set off money lent at the time of determination of the contract and the proceeds of goods held for sale or the value of such goods; but not property on loan
Re BCCI SA (No.8) [1998] AC 214
Case: Company borrowed from bank; shareholders deposited money with bank and agreed money would not be withdrawn as long as company owed bank money and bank could utilise deposit to redeem company’s loan; when bank in liquidation could bank’s debt to shareholders be set off against company’s debt to bank?
Decision: This was a flawed asset technique and set off was not allowed as shareholders are a third party
N.B. MS Fashions plc where similar situation but shareholders took on additional burden of taking on the company’s debt by guaranteeing debt so set off allowed
Insolvency Act 1986, s.323(1)
Mutuality must exist before commencement of bankruptcy
Insolvency Rules 1986, r.4.90(1)
Mutuality must exist before company goes into liquidation
Re Charge Card Services Ltd [1987] Ch 150
Case: Concerns an agreement where company supplied cards to customers, who would then use these to purchase fuel for garages (who were paid by the company) and the customer would pay the company bank 14 days later. As the company would pay the garage before the customer paid them, they entered into agreements selling its receivables under an invoice discounting agreement to a factor.
Clause 10 provided that if the company went into liquidation, the factor could give written notice determining the agreement and requiring the company to repurchase at face value any outstanding receivables purchased by the factor. By standard condition 3A the factor was to maintain a current account crediting, inter alia, the purchase price of each receivable before deduction of the discounting charge and debiting, inter alia, the amount of any sum payable by the company under the guarantee clause 3. Standard condition 3B gave the factor a right of retention, inter alia, in respect of any amount prospectively chargeable to the company as a debit to the current account. The factor retained 15 per cent of the balance against the risk of bad debts together with a further 85 per cent of the receivables shown to be overdue by 120 days from the date of the invoice. The company went into voluntary liquidation.
Decision: The contractual obligation was before liquidation, therefore provable, therefore set off allowed; it was not registrable as a charge since it was impossible to have charge in favour of debtor of his own indebtedness -Hoffman disagrees in BCCI (No 8) HL (no resolved) so that is good law
N.B. Mutuality may be created by assignment of debts and thus persons owing money to an insolvent debtor will benefit by taking assignments of debts owing by the debtor so as to create a set off. However, this must be before commencement of bankruptcy or company goes into liquidation cf British Eagle v Air France
Insolvency Act 1986, s.323(3)
No set-off where solvent party knew, at time obligation incurred or assignment take under which sums became due from the insolvent party in bankruptcy petition
Insolvency Rules 1986, r.4.90(2)(a)(ii),(d)(iii)
No set-off where solvent party knew, at time obligation incurred or assignment take under which sums became due from the insolvent party in compulsory winding up, that petition pending
Insolvency Rules 1986, r.4.90(2)(a)(i),(d)(ii)
No set-off where solvent party knew, at time obligation incurred or assignment take under which sums became due from the insolvent party in voluntary winding up, meeting of creditors summoned under s.98
National Westminster Bank Ltd v Halesowen Presswork & Assemblies Ltd [1972] AC 785
Rule: A party cannot contract out of set off
