Setting Off For Iceland

In a recent decision (In the matter of Kaupthing

Singer & Friedlander Ltd (in administration) [2009] EWHC 740

(Ch)), the High Court found that a creditor of a bank in

administration was not entitled to set-off a payment, otherwise due

to the bank under an instrument of deposit, against the amounts

owed to it by the bank.

On three dates in August and September 2008, the Newcastle

Building Society ("NBS") acquired three instruments of

deposit issued by Kaupthing Singer & Friedlander Ltd

("KSF"), a wholly owned subsidiary of the Icelandic bank

Kaupthing Bank hf, in the aggregate sum of £11 million,

repayable on three maturity dates in November and December 2008

("the KSF Instruments"). Meanwhile, on 29 September 2008,

KSF acquired a certificate of deposit issued by NBS in the

principal sum of £10 million repayable on 6 January 2009

("the NBS CD").

On 8 October 2008, KSF went into administration. The KSF

Instruments were not repaid on maturity in November and December

2008. Since NBS was still to make a payment of £10 million to

KSF under the NBS CD on 6 January 2009, on 15 December 2008 NBS

applied to the High Court for a declaration that KSF was not

entitled to payment or to enforce payment under the NBS CD as NBS

had a legal right of set-off and a defence to any such claim

arising out of the liability of KSF under the KSF Instruments. The

parties agreed to an interim measure whereby NBS made payment into

a joint account in the names of the parties' solicitors and the

substantive application was heard in March 2009 by the Chancellor

of the High Court.

The NBS CD was a dematerialised security issued and to be

settled under the CREST system operated by Euroclear. The rules of

CREST provide that any security transferable in accordance with its

rules must be "transferable free from any equity,

set-off or counterclaim between the issuer and

the...holder of the security" (rule 7 para 3.2).

Further, NBS had entered into a Deed in respect of its CREST

obligations, clause 3.2 of which required payments by NBS to be

made "without set-off, counterclaim or other

deduction, save as required by law". In its application,

NBS recognised that it would have to overcome the prima facie

operation of these provisions in obtaining the relief sought. It

was also accepted that insolvency set-off did not apply to this

situation because KSF bought the NBS CD on behalf of a subsidiary,

and because that subsidiary had an equitable interest in the NBS CD

there was not...