IFI Update, June 2009 - Part 2

CREST payments: provisions precluding legal

set-off

The Chancellor, Sir Andrew Morritt, has considered the

effectiveness of contractual and similar provisions which purported

to preclude the exercise of legal rights of setoff. In this case,

the provisions were contained in the rules of the CREST system

(particularly Rule 7, para. 3.2) and the deed of agreement executed

by the issuer of the relevant dematerialised debt securities that

were to be issued and settled within the CREST system (such deed of

agreement being executed pursuant to Rule 7 para 5 of the CREST

rules). The issuer of the securities, which were Eligible Debt

Securities for the purposes of the system, wished to assert the

right of legal set-off against debts due to it by the recorded

holder of the securities.

The Chancellor noted that the rights as to legal set-off were

originally established under the Insolvent Debtors Relief Acts of

1729 and 1735. They are now to be found in S. 49(2) of the Supreme

Court Act 1981 and CPR Rule 16.6. Relying upon the decisions of

Lord Denning MR in Halesowen Presswork & Assemblies Ltd

v. Westminster Bank Ltd [1971 1 QB 1, at 34, Hirst J in

Hong Kong and Shanghai Banking Corp. v. Kloeckner & Co.

AG [1990] 2 QB 514 and the Court of Appeal in

Coca-Cola Financial Corp. v. Finsat International

Ltd [1998] QB 43 and notwithstanding the very old

decisions in Lechmere v. Hawkins (1798) 2 Esp 626

and Taylor v. Okey (1806) 13 Ves Jun 181, his

Lordship held that it was possible by contract to exclude legal

rights of set-off. He then went on to hold that the provisions in

the CREST rules and the deed of agreement, which precluded the

issuer of the securities from exercising a right of setoff or

counterclaim, were intended to apply to both rights of legal

set-off and rights of equitable set-off. In this, he drew upon what

had been said by Parker LJ in Continental Illinois National

Bank and Trust Company of Chicago v. Papanicolaou [1986] 2

Lloyd's Rep 441 that the natural meaning of a clause requiring

payment "without set-off or counterclaim" covered all

types of set-off, especially when taken in the relevant commercial

context. That context was the requirement that a party's

obligations should be settled promptly and treated as if they were

independent obligations.

His Lordship also distinguished the position in this case from

the situation where the courts may have been willing to stay the

enforcement of a judgment relating to obligations under negotiable

instruments pending the resolution of a counterclaim (see, for

instance, the discussion in the Kloeckner case, at

524 and 526). In this case, there was nothing in the relevant

provisions to indicate an intention to treat the obligations as

akin to those under a negotiable instrument and in none of the

negotiable instrument examples were there contractual provisions

intended to prevent the assertion of rights of set-off.

Furthermore, even if there were such a provision relating to a

negotiable instrument and the court was nonetheless prepared to

grant a stay, it could not be assumed that the court would adopt

the same attitude with "respect to what is required to be a

CREST payment with all that that entails".

The Chancellor said that the fact that the other party had

become insolvent and gone into administration or receivership did

not change the approach that should be taken to clauses excluding

set-offs and counterclaims. It was precisely in those circumstances

that the provisions were needed. In this regard, he referred to

Morrison Knudsen Corp. of Australia Ltd v. Australian

National Railways Commission (1996) 22 ACSR 262,

Isovel Contracts Ltd v. ABB Building Technologies Ltd

[2002] BCLC 390 and John Dee Group Ltd v. WMH (21)

Ltd [1998] BCC 972. It should be noted, however, that the

mandatory rules of insolvency set-off in administration (or

liquidation) did not apply in this case, for two reasons. First,

there was no mutuality between the counterclaims, as the debt due

to the insolvent party was held by the latter on trust for a third

party. Secondly, the insolvent party was in administration and Rule

2.85 of the Insolvency Rules 1986 (SI 1986/1925, as amended by SI

2005/527), which contains the provision as to set-off in

administration, had not been applied.

Re Kaupthing Singer and Friedlander Ltd (in

Administration); Newcastle Building Society v. Mill [2009]

EWHC 740 (Ch) ( Sir Andrew Morritt C, 8/4/2009).

Avoidance of cross-border transactions within an EU

insolvency

The European Court of Justice has decided that the courts of the

EU state where insolvency proceedings have been opened will have

jurisdiction to determine, in the context of their own insolvency

laws, the validity under those laws of a transaction entered into

by the insolvent debtor in favour of a third party in another EU

state. This is because Art. 3(1) of the EC Insolvency Regulation

(1346/2000/EC OJ L160/1 30/6/2000), when taken in conjunction with

the Recitals to the Regulation and Arts 16(1) and 25(1) of the

Regulation, confers international jurisdiction on such a court to

hear and determine actions which derive directly from the

insolvency proceedings and actions that are closely connected with

them. Pursuant to Arts 16(1) and 25(1), a judgment given by such a

court against the third party should be recognised and enforced in

the EU state where the third party is present.

Although it did not refer to this point, the conclusions of the

ECJ are supported by Art. 4(2)(m) of the Regulation. It provides

that the law of the state where the insolvency proceedings have

been opened shall determine "the rules relating to the

voidness, voidability or unenforceability of legal acts detrimental

to all creditors". It makes sense that the courts of that

state should make a determination on such matters by applying their

own insolvency law and that such a determination should be

recognised and enforced in other EU member states. This, of course,

is subject to the specific exceptions to the application of Art.

4(2)(m) that will be found by the application of Arts 9 and 13 of

the Regulation.

The facts of the case concerned proceedings that the liquidator

of a German company had brought in the German courts, to retrieve a

payment that the insolvent debtor had made to a Belgium payee. The

payment had been made the day before the insolvency proceedings had

been commenced. The German courts requested the ECJ to determine if

they had international jurisdiction to determine the matter. The

ECJ replied to the effect that the German courts did have that

jurisdiction.

Seagon v. Deko Marty Belgium NV Case C- 339/07

(ECJ decision 12/2/2009).

Jurisdiction in tortious claims under the EC Regulation

on jurisdiction and judgments and the right of an agent to enforce

a contract for its own benefit under the Contracts (Rights of Third

Parties) Act 1999

Christopher Clarke J has considered the basis of jurisdiction

available for tortious claims under the EC Regulation on

jurisdiction and judgments (EC 44/2001 OJ L12/1 16/1/2001). Art.

5(3) of the Regulation confers a basis of jurisdiction in such

claims on the courts of an EU member state with which the tort is

connected, provided that the defendant is domiciled in another EU

member state. His Lordship also addressed the question of whether

under English law an agent for one of the parties to a contract

could rely on the Contracts (Rights of Third Parties) Act 1999 so

as to enforce the contract for the agent's own benefit.

The issue under the Regulation concerned the claim of an English

company against a Swedish domiciled third party, alleging that the

third party had tortiously induced a breach of contract between the

English company and its Turkish counterparties or, alternatively, a

similar claim against the third party in the tort of conspiracy.

The contract was between the English company and Turkish

underwriters, under which the English company was appointed as the

recovery agent of the Turkish underwriters, arising from the

collision and sinking...