Two Bites At The Cherry

The rule in Cherry v Boultbee (the "Rule") had all but disappeared from reported cases in this jurisdiction for more than half a century until 2006 when it was revived in the Court of Appeal, with potentially dramatic consequences for those within the sphere of influence of insolvent companies. Last month, two more cases bolstered the rather obscure Rule's new lease of life. The parties in both Cattles Plc v Welcome Financial Services Ltd & Ors [2009] EWHC 3027 (Ch) and Mills, Bloom & Ors (as joint administrators of Kaupthing Singer and Friedlander Ltd) v HSBC Trustee (C.I.) Ltd & Ors [2009] EWHC 3377 (Ch) accepted (for the purposes of their respective High Court hearings) the Court of Appeal's 2006 interpretation of the Rule in Re SSSL Realisations (2002) Ltd [2006] Ch. 610, but sought a ruling on whether the non-compete clauses in their respective finance documents evidenced a sufficiently clear intention to oust the Rule's effect in the calculation of dividends payable to creditors who are also debtors of the insolvent company.

The Rule in Cherry v Boultbee

The Rule is sometimes referred to as a "right of quasi-retainer", or alternatively the "fund ascertainment principle". It can be briefly summarised as the principle that no one should be admitted to share in the distribution of a fund until he has discharged his obligation to contribute to the fund.

At first sight, the principle looks similar to a right of set-off, but it is not. The Rule can only apply where there is no set-off, because where set-off (such as insolvency set-off) applies, the Rule is displaced. The Rule can also be displaced by clear contractual intention, but it has often been problematic deciding whether such a clear intention has been demonstrated, especially since the Rule's legal characteristics are hard to describe and do not fit easily within common definitions such as "asserting" or "enforcing" "rights", "security" and/or "claims".

Chadwick LJ in SSSL described the Rule as follows:

"(1) The general rule applicable in the distribution of a fund is that a person cannot take an aliquot [i.e a defined] share out of the fund unless he first brings into the fund what he owes. Effect is given to the general rule, as a matter of accounting, by treating the fund as notionally increased by the amount of the contribution; determining the amount of the share by applying the appropriate proportion to the notionally increased fund and distributing to the claimant the amount...