Goods & Intangibles
Cases
Freaney v. Bank of Ireland
[1975] IR 376
Kenny J.
Tailteann Freight Services Limited (“the company”) were carriers, and import and export agents. They had their current bank account with the Rathmines branch of the National Bank of Ireland (“the bank”#). Customs offcials are reluctant to accept cheques in payment of import duties and this was a serious inconvenience to the company. So the company asked the bank to write to the Customs and Excise authorities undertaking that the company’s cheques would be honoured when they were presented for payment. On the 29th December, 1969, the bank wrote to the officer in charge of Customs and Excise: “Tailteann Freight Services Limited Dear Sir, kindly accept as cash cheques drawn by the above mentioned company to the extent of £250 in any one day until the 30/6/70.”# The bank continued to write similar letters each six months.
A strike or lock-out began in all the associated banks on the 1st May, 1970, and continued until the 17th November but, although the banks opened for business on that day, the work of clearing cheques and bringing payments up to date was not completed until the 22nd January, 1971. This strike or lock-out was responsible for the failure of many businesses.
On the 3rd December, 1970, the bank heard that the company was about to be wound up and immediately opened a suspense account (in the name of the company) to which the bank debited all the cheques drawn by the company and presented after that date. There were no lodgments to the credit of this account. On the 14th December, 1970, the company resolved that it be wound-up voluntarily and the applicant was appointed liquidator. The company is insolvent. When the suspense account was opened, the company’s ordinary account was £14,472 in credit.
The liquidator notified the bank immediately of his appointment but, despite this, the bank paid a number of cheques in favour of the Customs and Excise authorities and debited these to the suspense account; all these cheques were drawn before the 14th December, 1970, but were presented after that date. The bank’s officials took the view that, having committed themselves to the Customs and Excise authorities to meet the company’s cheques for import duties, they were bound to honour the cheques although the company was in liquidation. The bank paid 48 cheques for £2,884 which were dated prior to the 30th June, 1970, but presented after the 14th December, 1970. When the company resolved on liquidation, the amount due on the suspense account was £7,578.85. The bank also debited to the suspense account cheques which had been lodged to the company’s current account but which had not been honoured when presented for payment; some of these debits to the suspense account were not made for a considerable time because of the enormous volume of work involved in clearing all the cheques presented after the 17th November, 1970. After the last debit had been made to the suspense account there was £8,329.15 due on this account. This consisted of £2,884.75 in respect of Customs and Excise cheques, £4,087.05 being the company’s own cheques drawn in favour of “cash,” £1,207.25being cheques presented by the company and drawn by other persons and not honoured, and £150.10 for interest.
The liquidator requested the bank to open a current account and on the 12th January, 1971, a new account entitled “Tailteann Freight Services Limited in Voluntary Liquidation”# was opened and some days afterwards the credit balances in the current accounts of the company prior to the date of the commencement of the liquidation were transferred to this account without any deduction for the amount due on the suspense account. The bank asked the liquidator on a number of occasions to send instructions to them to debit his current account with the amount to debit of the suspense account. On the 9th February, 1971, at the request of the liquidator and without prejudice to the claim to debit the liquidator’s current account with the amount owing on the suspense account, the amount standing to the credit of the liquidator’s current account was transferred to a deposit account designated ” Tailteann Freight Services Limited in Voluntary Liquidation.”# The purpose of this was that the sum to the credit of the liquidator’s current account would earn interest. On the 11th February, 1971, the liquidator instructed the bank to pay the entire sum standing to the credit of his deposit account to the Hire Purchase Company of Ireland. The bank refused to do this and again asked for instructions to debit the deposit account with the sum due on the suspense account. A long correspondence followed in which the bank claimed the right to set off the amount due on the suspense account against the amount due by the bank on the liquidator’s deposit account.
The first contention was that the bank had no authority to pay the cheques in favour of the Customs and Excise authorities after the commencement of the winding-up. Section 254 of the Companies Act, 1963, provides that in case of a voluntary winding-up the company shall, from the commencement of the winding-up, cease to carry on its business except so far as may be required for the beneficial winding-up thereof. It was emphasised that the cheques presented by the company to the Customs and Excise authorities had not been marked good. However, it seems to me that, having committed themselves to the Customs and Excise authorities to honour cheques of the company presented in respect of import duties, the bank was bound to pay cheques issued before the 14th December, 1970. I think that the Revenue Commissioners could have successfully sued the bank on any cheques accepted by them in payment of import duties before the 14th December, 1970. The bank’s authority to debit the account of the company in respect of cheques drawn after the 14th December, 1970, ceased when the liquidation commenced but, in my view, the bank had authority to pay cheques drawn before that date and given to the Customs and Excise authorities.
The next contention was that, when the associated banks re-opened for business, the bank was bound to pay the Customs and Excise cheques as guarantors only, and not as bankers to the company. The effect of this, it was said, was that the bank would be ordinary creditors of the company. I think the true view is that the bank, as bankers, guaranteed that the cheques accepted by the Customs and Excise authorities would be paid by the bank in any event. They gave the guarantee as bankers and it was their commitment to honour the cheques which induced the Revenue authorities to accept them. In my view their claim in respect of these cheques can validly be made as bankers of the company and not as guarantors only.
The next contention was that the liquidator’s current account and his deposit account were trust accounts and that the bank could not claim to set off any sum against such an account. The liquidator’s deposit account consisted in part of sums standing to the credit of the company’s current account before it went into liquidation and, of the total sum standing to the credit of the liquidator’s deposit account, the sum of £14,472 represented moneys which had stood to the credit of the company’s account before the commencement of the liquidation. While a bank has no authority without the consent of the customer to debit a deposit account, they have a right of set-off so that they may set off the amount due on one account to them against an amount due by them on another account: see the decision of the Supreme Court in Bank of Ireland v. Martin 4 and see Flanagan v. National Bank .5 The bank did not lose this right of set-off when they opened the liquidator’s current account or his deposit account. The funds standing to the credit of these included moneys which had stood to the credit of the company’s current account before the company resolved to go into liquidation. Accordingly, the bank are entitled to set against the amount due by them on the liquidator’s deposit account the amount due to them on the suspense account.
It was argued for the liquidator that the claim by him was to a sum standing to his credit. However, the liquidator cannot have a better claim than the company had because the corporate status of the company remains until it is dissolved: see s. 254 of the Act of 1963. The liquidator cannot have a better claim than the company had to any asset which came into existence before the 14th December, 1970. It was also argued for the bank that the effect of s. 284 of the Act of 1963 was to give it a right of set-off, which right was in addition to the right to set-off given to the bank by s. 27, sub-s. 3, of the Supreme Court of Judicature Act (Ireland), 1877. Section 284 of the Act of 1963 provides that in the winding-up of an insolvent company, the same rules shall prevail and be observed relating to the respective rights of secured and unsecured creditors and to debts provable and to the valuation of annuities and future contingent liabilities as are in force for the time being under the law of bankruptcy relating to the estates of persons adjudged bankrupt. Section 251 of the Irish Bankrupt and Insolvent Act, 1857, provides that where there has been mutual credit given by the bankrupt and any other person or where there are mutual debts between the bankrupt and any other person, the court shall state the account between them and one demand may then be set against another. It has been established by decisions of the highest authority that the corresponding section in the British Companies Acts import the law as to set-off contained in the Bankruptcy Acts: see Mersey Steel and Iron Co. v. Naylor, Benzon & Co .6 In the Irish decision of Deering v.Hyndman 7 it was conceded that the right of set-off given by the Act of 1857 was imported into the winding-up of an insolvent company. Although s. 251 of the Act of 1857 is very different in its terms to the English Bankruptcy Acts of 1869, 1883 and 1914, the effect of s. 284 of the Act of 1963 is to import s. 251 of the Act of 1857 into the liquidation of an insolvent company: see the decision of the House of Lords in National Westminster Bank Ltd. v. Halesowen Presswork Ltd .8 It follows that the bank has a right of set-off under s. 284 of the Act of 1963 in addition to its right of set-off given by the Act of 1877.
There was no discussion in argument about whether the bank were entitled to debit the suspense account with interest when the current account seems to have been in credit and, therefore, I express no opinion on this question. The Governor and Company of the Bank of Ireland are the respondents on this summons because they subsequently took over the assets and liabilities of the bank.
The first question in the summons will be answered by saying that the National Bank of Ireland were entitled to make payments to the Customs and Excise authorities of the amount of cheques drawn by the company before the 14th December, 1970, but presented for payment after that date as bankers to the company. The second question will be answered by stating that the Bank of Ireland are entitled to set off the total amount due to them on the suspense account against the amount due by them on the liquidator’s deposit account.
O ‘Meara -v- Bank of Scotland PLC
[2011] IEHC 402 Laffoy J.
11. Right of set-off against joint deposit account No. 101 – general observations
11.1 Although the security condition in the letter of offer of 17th December, 2008, which I have quoted at para. 1.10 above, referred to a “lien” incorporating a right of set-off over a deposit account, as was held by the House of Lords in Westminster Bank v. Halesowen [1972] 1 All ER 641, no man can have a lien on his own property. As the money lodged to joint deposit account No. 101 became the defendant’s money, although the defendant was indebted to the account holders for the balance on the account, a lien could not have been created. Indeed, I did not understand the defendant to claim that it had a lien. It claimed that such security as it obtained under the right of set-off document, that is to say, attachment (5), was a right of set-off or a right to combine accounts.
11.2 The contention of the defendant in this case, however, is that it is not limited to whatever right was created by the set-off document, but that its right of set-off falls within each of the following recognised categories of set-off, namely:
(a) a bank’s common law right of set-off of accounts;
(b) equitable set-off, although that is not pleaded; and
(c) contractual set-off.
While I will consider the application of each category to the facts in turn, a preliminary observation is apposite. When the requirement of a right of set-off was conditioned into the letter of offer dated 17th December, 2008 by the defendant, the targeted deposit account, joint deposit account No. 101, was in the joint names of Mr. O’Meara and the plaintiff and the defendant’s contractual relationship in relation to that account was with both account holders. What the defendant required was a contractual right of set-off in the defendant’s “standard form” from both joint account holders. Mr. O’Meara accepted the offer on the basis of that express condition. In my view, the only issue which could properly arise in relation to the monies in that joint deposit account on 22nd December, 2008 is whether the defendant followed through on the express condition and obtained an enforceable right of set-off in the standard form from both account holders. I can see no basis on which the Court could find that there was some other implied agreement in the “ether”, which could be resorted to by the defendant if it did not ensure that the express term was effectively complied with.
12. Bank’s common law right of set-off?
12.1 As regards the application of a bank’s common law right of set-off to the facts as found, on the basis of the finding I have made that the joint deposit account No. 101 was legally (that is to say, contractually as against the defendant) and beneficially owned by Mr. O’Meara and the plaintiff, whereas the loan account No. 128 was in the sole name of Mr. O’Meara and he had sole liability for it, the defendant had no right at common law to set-off or combine the two accounts. The fundamental principle which underlies the entitlement of a bank to set off under the general law is mutuality, which requires that the debts be between the same parties in the same right. The finding that the defendant was contractually liable to Mr. O’Meara and the plaintiff jointly, who were beneficial joint owners of the monies on deposit in joint deposit account No. 101, precludes any application of the rule of set-off at common law.
12.2 Accordingly, it is unnecessary to express a definitive view on the submission made on behalf of the plaintiff, by reference to the decision of the Supreme Court in Bank of Ireland v. Martin [1937] I.R. 189, that, in the absence of a contractual arrangement, a bank may not combine a deposit account and a loan account, although I appreciate that particular emphasis was laid in the submission on the fact that the deposit account was a joint account, whereas the plaintiff was not indebted to the defendant and the plaintiff was not relying merely on the proposition that in this jurisdiction combining accounts at common law is confined to current accounts.
12.3 Nor do I consider it necessary to comment on the point made by counsel for the plaintiff in their submissions that, in any event, the defendant could not combine the loan account with any other account at any time prior to the death of Mr. O’Meara, because the loan account was for a term of three years, and the principal advanced had not become repayable prior to Mr. O’Meara’s death. Having said that, the reality of the situation is that, apart from whatever, if any, right of set-off the defendant has, it is clear on the evidence that the defendant is not going to recover the amount due on loan account No. 128.
13. Equitable set-off?
13.1 As regards the principle of equitable set-off in the context of bank accounts, the requirement of mutuality in relation to the beneficial interests in the cross-debts pervades its application. Having made the finding that Mr. O’Meara and the plaintiff were the joint beneficial owners of the monies in joint deposit account No. 101, in my view, there is no basis on which the principle of equitable set-off could avail the defendant and the argument based on the principle is misconceived. Nonetheless, I propose analysing the argument made on behalf of the defendant.
13.2 As counsel for the defendant pointed out, the most recent exposition of the principle of equitable set-off is to be found in a note on the decision of the Court of Appeal in England and Wales in Geldof Metaal Constructie NV v. Simon Carves Ltd. [2010] 4 All ER 847, which, in my view, is of little assistance in addressing the application of the principle to the facts of this case. Having considered the jurisprudence on equitable set-off, Rix L.J. set out his conclusions in para. 43 of his judgment, which is quoted in full in the note. He set out his conclusion at page 849 as follow;
“For all these reasons, I would underline Lord Denning MR’s test, freed of any reference to the concept of impeachment, as the best restatement of the test, and the one most frequently referred to and applied, namely ‘cross-claims . . . so closely connected with [the plaintiff’s] demands that it would be manifestly unjust to allow him to enforce payment without taking into account the cross-claim’. That emphasises the importance of the two elements identified in Hanak v. Green; it defines the necessity of a close connection by reference to the rationality of justice and the avoidance of injustice; and its general formulation, ‘without taking into account’, avoids any traps of quasi-statutory language which otherwise might seem to require that the cross-claim must arise out of the same dealings as the claim, as distinct from vice versa. Thus, if the Newfoundland Railway test were applied as if it were a statute, very few of the examples of two-contract equitable set-off discussed above could be fitted within its language. I note that in Chitty on Contracts (30th edn., 2008) vol. II, para. 37 – 152 the test for equitable set-off is formulated in terms of Lord Denning MR’s test.”
13.3 The test of Lord Denning MR referred to in that quotation was postulated in Federal Commerce v. Molena Alpha Inc [1978] 3 All ER 1066, sometimes referred to as “The Nanfri”, which is also of little assistance in addressing the application of the principle of equitable set-off to the facts here. Although there were three time charterparties at issue in that case, in reality it was a one-contract case. The matter came to court by way of an award of an umpire in the form of a special case, following an arbitration in which the two arbitrators disagreed. One of the questions which the Court of Appeal had to consider was whether the charterer was entitled to deduct from hire, without the consent of the owner, claims against the owner. It was held that he was by virtue of the terms of the charterparty and by reason of the fact that a rule of law in relation to a charterparty, which required payment in full without deduction, did not extend to hire payable under a time charterparty, so that the charterer was entitled to deduct claims which constituted an equitable set-off. Having alluded to the distinction made at common law between set-off and cross-claim and the strictures imposed by the courts of common law, Lord Denning MR stated (at p. 1077):
“But the courts of equity, as was their wont, came in to mitigate the technicalities of the common law. They allowed deductions, by way of equitable set-off, whenever there were good equitable grounds for directly impeaching the demand which the creditor was seeking to enforce: see Rawson v. Samuel . . . per Lord Cottenham LC.”
Later, having referred to the effect of the Judicature Act 1873, Lord Denning MR continued (at p. 1078):
“We have to ask ourselves: what should we do now so as to ensure fair dealing between the parties? . . . This question must be asked in each case as it arises for decision; and then, from case to case, we shall build up a series of precedents to guide those who come after us. But one thing is quite clear: it is not every cross-claim which can be deducted. It is only cross-claims that arise out of the same transaction or are closely connected with it. And it is only cross-claims which go directly to impeach the plaintiff’s demands, that is, so closely connected with the demands that it would be manifestly unjust to allow him to enforce payment without taking into account the cross-claim.”
On the facts of that case, Lord Denning MR and Goff LJ held that in time charterparty cases, the equitable right to deduct should be limited to instances when the ship owner wrongly deprives the charterer of the use of the vessel or prejudices him in the use of it. It should not be extended to other breaches or default of the ship owner, such as damage to cargo arising from the negligence of the crew. What is significant for present purposes is that there is nothing in the test for equitable set-off as formulated by Lord Denning MR or in the Geldof decision which dispenses with the requirement of mutuality in relation to beneficial interests.
13.4 The application of the doctrine of equitable set-off in the context of bank accounts is considered in Paget (op. cit.) at paras. 29.27 et. seq. relied on by counsel for the defendant. Reference is made by the editors of Paget to the decision of the Court of Appeal in Bhogal v. Punjab National Bank [1988] 2 All ER 296 which, like many of the authorities on the issue of equitable set-off, arose in the context of entitlement of a plaintiff to summary judgment. The appeal related to two actions, in each of which the plaintiff, who had monies on deposit in the defendant bank, had obtained summary judgment for the amount on deposit, and the defendant bank appealed, contending that it should be granted unconditional leave to defend the actions because it had a valid defence by way of equitable set-off. The basis of the claim for equitable set-off was the defendant bank’s contention that each of the plaintiffs was merely a nominee of a third party, who was indebted to the defendant bank and that it was entitled to set off the credit balance on each deposit account against the debit balance on the third party’s account. It was held by the Court of Appeal that, since the evidence did not clearly establish that the deposit account of each of the plaintiffs was a nominee account, the defendant bank could not raise a defence of equitable set-off in their actions. In the Court of Appeal the following passage from the judgment of Scott J. at first instance in one of the cases was quoted and in the judgment of Bingham L.J. there was reference to “the wisdom of the rule” which Scott J. laid down. The passage (which appears at p. 306 in the judgment of Bingham L.J.) is to the following effect:
“The commercial banking commitment that a bank enters into with a person who deposits money with it is just as needful of immediate performance as are a bank’s obligations under a letter of credit or bank guarantee. I think it would be lamentable if a bank were able to defeat a claim by a person who had deposited money on such grounds as the bank is asserting in the present case. It is possible that this action will come to trial in some two or three years’ time and that the bank will fail to make good the arguable case that it has set out before me. It would have succeeded in postponing for that considerable period its obligation to repay a customer who had made a simple deposit of money with it. That seems to me to be totally contrary to the basis on which banks invite and get money deposited with them. I hold that the bank is not entitled to refuse repayment of money deposited with it on the basis merely of an arguable case that some other debtor of the bank has an equitable interest in the money.”
13.5 Of course, on the facts here, on the basis of the finding I have made, no question remains as to the ownership in equity of the monies in joint deposit account No. 101. Apart from the contractual liability of the defendant, which in my view is the paramount consideration, as I have found that Mr. O’Meara and the plaintiff were the beneficial owners of the monies on deposit in joint deposit account No. 101, they, or, after the death of the first to die, the survivor (subject to the fixed term aspect of the particular deposit, which is not in issue) was entitled to withdraw the balance in the account on demand. Because of the lack of mutuality, the defendant had no entitlement in equity to set-off Mr. O’Meara’s sole liability for the debt on foot of loan account No. 128 against the balance in that deposit account.
13.6 The basis on which the defendant sought to demonstrate that there was an equitable right of set-off does not stand up to scrutiny. The defendant undoubtedly entered into two agreements with Mr. O’Meara which were closely connected from its perspective and probably also from Mr. O’Meara’s perspective. Under one, say Agreement A, the defendant advanced a loan of €1.6m to Mr. O’Meara. Under the other, say Agreement B, Mr. O’Meara and the plaintiff deposited the proceeds of the Anglo cheque with the defendant. The defendant contends that the two agreements are intimately connected and it would be unjust to enforce Agreement B by requiring the release of the monies on deposit on the demand of the plaintiff, because to do so would be to ignore the defendant’s claim to recover the loan advanced under Agreement A. That proposition ignores the absence of mutuality between the defendant’s liability under Agreement B and its entitlement under Agreement A. In the absence of some contractual foundation binding not only Mr. O’Meara, but also the plaintiff, the requirement of mutuality cannot be overridden by the defendant. It is not unjust that the defendant should be compelled to release the monies on deposit to the surviving joint account holder, the plaintiff, in accordance with its contractual obligation. The principle of equitable set-off does not apply.
13.7 Furthermore, it ill behoves the defendant to seek to rely on an equitable principle in support of the exercise of a right of set-off against the plaintiff, having regard to the fact that there was absolutely no communication between the defendant and the plaintiff and, in particular, the defendant did not advise the plaintiff to obtain legal advice and made no inquiry as to whether she had the benefit of legal advice in accordance with the principles referred to later in para. 15.6, when dealing with the issue of rectification. Given the plaintiff’s lack of understanding of what the defendant contends she was doing in subscribing her name to the right of set-off document, and her lack of understanding as to what was being agreed by Mr. O’Meara with the defendant, it would be unfair and inequitable to enforce the right of set-off against the plaintiff, if she is not contractually bound.
13.8 The kernel of the issue as to whether the right of set-off was validly exercised on 5th January, 2009 is whether the defendant, as it clearly had intended to do, effectively obtained from both of the account holders of joint deposit account No. 101 a contractual right to set-off Mr. O’Meara’s liability on loan account No. 128 against the monies in that account.
14. Contractual right of set-off?
14.1 That question turns on the construction of the right of set-off contained in attachment (5). I think it is worth recalling that the plaintiff endorsed her signature on the Anglo cheque on or before the 26th November, 2008 in her home. Some time later Mr. O’Meara put the application form for the six month fixed deposit account, which he had been given after the defendant’s officials decided that a joint deposit account should be opened, before the plaintiff and she signed on the third page. Just short of a month later, on 20th December, 2008, the right of set-off document was put before her. It was the twelfth page of the compendium of documents which comprised the letter of offer and attachments. The only reference to a deposit account with the defendant was on the second page of the letter of offer and it was in the provision in relation to security which I have quoted at 1.10 above, which refers to a deposit account in the names “of John O’Meara and Claire O’Meara”. The entire document was complex. Having regard to the manner in which it was completed, it is reasonable to infer that Mr. O’Meara, an experienced and astute businessman, had difficulty navigating his way through it, in that he arrived back in the defendant’s office on St. Stephen’s Green on 22nd December, 2008 without having signed the most crucial part of it, namely, the acceptance on page 7, which resulted in the involvement of Mr. Abdullah as a witness. He had signed attachment (2) in relation to insurance instructions, apparently on the 19th December, 2008. He did not sign attachment (3), dealing with authorised signatures on the loan account apparently until 22nd December, 2008. Similarly, attachment (4) containing the instruction to Bank of Ireland, Naas Branch in relation to the direct debit in respect of the interest payments was not executed until 22nd December, 2008.
14.2 Counsel for the plaintiff submitted that the right of set-off document should be construed contra proferentem. They submitted that, as a matter of interpretation of that document, neither Mr. O’Meara nor the plaintiff agreed to a right of set-off being effected against the deposit accounts. In fact there was only one deposit account in existence at the time – joint deposit account No. 101. For illustrative purposes, and not intending to preclude any argument which the personal representative of the defendant may make in the future, it can be observed that, if that account had been in the sole name of Mr. O’Meara, as a matter of construction, it would appear to have been captured by the right of set-off document in that, as borrower/account holder, he agreed that the defendant might “debit any credit balance on any account in my name”, which, prima facie, would capture the credit balance on a deposit account in his sole name. The real problem with the right of set-off document, from the defendant’s perspective, is that it was clearly drafted for execution by a sole account holder and, while it might have been, it was not adapted to bind joint account holders conferring a right of set-off on the defendant over a specific existing joint deposit account. The document did not signify that it was to be executed by a person other than a sole account holder and, ex facie, the plaintiff signed as a witness. Having regard to the finding I have made that Mr. O’Meara and the plaintiff had a joint legal interest in, and were jointly beneficially entitled to, joint deposit account No. 101, I consider that the right of set-off document was not effective to bind the plaintiff as one of the joint account holders and, in the events which happened, as the surviving account holder, so as to confer a right of set off on the defendant in relation to that account.
14.3 From the evidence of Mr. Savage, it is clear that when he reviewed the documentation following the meeting with O’Meara in July 2009, he noticed the fact that the right of set-off document was signed by the plaintiff only as a witness and had a concern about that. However, no steps were taken to rectify the situation.
14.4 It is convenient at this juncture to consider the relevance or otherwise of an authority relied on by counsel for the plaintiff – the decision of Costello J. in O’Keeffe v. O’Flynn Exhams and Partners and Allied Irish Banks (the High Court, Unreported, 31st July, 1992). The basis on which that case was decided against Allied Irish Banks in favour of the plaintiff, Mrs. O’Keeffe, is summarised in the judgment as follows (at p. 35):
“In my opinion if a request is made for a joint loan to purchase property which is accompanied by an agreement to deposit the title deeds of the property then an equitable claim over the interest of both purchasers is created once the loan is made as requested and the land conveyed to both. But if contrary to the request the loan is made to one of the purchasers only and the property is subsequently purchased jointly the interest of the customer with whom the bank contracted and to whom it lent the money is the only interest which is subject to an equitable charge. When subsequently the title deeds are lodged the equitable charge created by the agreement over the customer’s interest becomes an equitable mortgage by the deposit of the deeds. This means that in the events that happened in this case the bank obtained an equitable mortgage over Mr. O’Keeffe’s undivided moiety in the Kilpeacon lands, but it obtained no equitable interest of any sort over Mrs. O’Keeffe’s interest.”
14.5 Frankly, I do not see the relevance of that finding to the factual circumstances of this case. It concerned the severance of a joint tenancy in land by one joint owner creating an equitable charge by deposit of title deeds. Here the Court is concerned with a joint deposit account at the defendant bank, in respect of which the defendant was contractually liable to both joint account holders. More importantly, in this case, the agreement between the defendant and Mr. O’Meara was that the loan would be to Mr. O’Meara solely and that is what happened. The defendant wanted security over the monies on deposit with it, the source of which was the Anglo cheque, which, as I have held, were beneficially owned by Mr. O’Meara and the plaintiff. The mistake the defendant made is that, as it could not either at common law or in equity obtain a right of set-off of the monies due from Mr. O’Meara on loan account No. 128 against the monies in the joint deposit account because of lack of mutuality, it needed to obtain a contractual right of set-off, which bound both account holders, but it failed to do that. Accordingly, it obtained no right of set-off against the monies in joint deposit account No. 101 as of 23rd December, 2008.
15. Rectification?
15.1 Emphasising that the issue which is being addressed is whether the Court should find that the defendant is entitled to exercise the claimed right of set-off against the balance of the monies on deposit in joint deposit account No. 101, as it purported to do on 5th January, 2010, I will now consider the defendant’s counterclaim for rectification. In the circumstances which I have found prevailed, the defendant could only acquire a right of set-off by contract and the objective of the defendant clearly was to extend the general law to a tri-partite situation where the joint owners of the monies on deposit with the defendant would agree with the defendant that those monies might be set off against a debt due to the defendant by one of the joint owners, Mr. O’Meara, solely. I emphasise that, because it seems to me that the fundamental question is whether the other joint owner, the plaintiff, ever signified the intention to be bound by such agreement.
15.2 On the basis of the defendant’s claim for rectification as pleaded, it is not suggested that the text of the right of set-off document as quoted at para. 1.11 above requires rectification. What is suggested is that the details of execution require rectification. If the application were acceded to, the details of execution (the words in bold type having been added) would read:
Signed/Witness John O’Meara
Borrower/Account Holder
Date: 20/12/08
Signed/Witness: Claire O’Meara
Borrower/Account Holder
Address: Pitchfordstown Stud
Kilcock
Date: 22/12/08
In the interests of clarity, I should say that the elements which are shown in italics are the signatures of Mr. O’Meara and the plaintiff, the date of execution by Mr. O’Meara, which I think it probable was inserted by Mr. O’Meara, and the address and final date, which also appear in manuscript and I think it probable were inserted by Ms. Corrigan on 22nd December, 2008. It was submitted on behalf of the plaintiff that, given that the preceding text is not proposed to be rectified, the additions to the right of set-off document proposed would still not expressly authorise the exercise of a right of set-off of the monies due on loan account No. 128 against the balance in joint deposit account No. 101.
15.3 The legal basis on which a court can order rectification is well settled. It was recently succinctly summarised by Clarke J. in Mooreview Developments & Ors. v. First Active Plc & Ors. [2009] IEHC 214 in the following terms (at para. 9.9):
“Rectification is a discretionary remedy which allows a court to amend the wording, but not affect the making, of a contract, where the wording does not reflect the intentions of the parties to the contract. The party seeking rectification must provide evidence of a common continuing intention in relation to the provisions of the contract agreed between the parties up to the point of execution of the formal contract. In Irish Life Assurance Co. v. Dublin Land Securities Ltd [1989] I.R. 253, Griffin J., at p. 263, described this standard of proof as ‘convincing proof, reflected in some outward expression of accord, that the contract in writing did not represent the common continuing intention of the parties on which the court can act’. The court in Irish Life further held that there will be an especially onerous burden on a party seeking rectification where long negotiations have taken place between the parties, both of whom have taken legal advice during such negotiations.”
15.4 The criterion stipulated in the last sentence in that quotation has no application to the facts of this case because, not only was no legal advice taken by the plaintiff but there was no engagement by the defendant with the plaintiff at all and, in fact, there was no direct communication or contact with her by any official or agent of the defendant in relation to the condition imposed by the defendant on Mr. O’Meara in the letter of offer of 17th December, 2008 that the defendant be granted a right of set-off against the monies in joint deposit account No. 101. There is absolutely no evidence in this case of a common continuing intention to which the plaintiff was a party that the defendant would be given security by way of right of set-off against joint deposit account No. 101 in respect of the monies to be advanced to Mr. O’Meara, which were subsequently the subject of loan account No. 128. The only evidence before the Court on which the defendant could rely in support of the existence of such an intention is that the facility letter, with attachment (5) stapled to it, was probably handed by Ms. Corrigan to Mr. O’Meara when he called to the defendant’s office at St. Stephen’s Green, probably on the 17th December, 2008. Ms. Corrigan, in her evidence said that it was “more than likely” that she told Mr. O’Meara that the plaintiff had to sign the right of set-off document. She had no exact recall of doing so, although she suggested that, if she did not say it to Mr. O’Meara, then she doubted that the plaintiff’s signature would be on it. I do not think it is reasonable to infer that, because the plaintiff’s signature appears on attachment (5), the plaintiff was signing in her personal capacity, rather than as a witness, as the document suggests. The fact that Mr. O’Meara signed attachment (5), which was the last page of the twelve page document and had the “witness” portion of the execution details completed by the plaintiff, while not having completed what was arguably the most important element of the document, the acceptance on page 7, is open to the inference that Mr. O’Meara got the plaintiff to sign as a witness rather than as a party to the transaction. Accordingly, the defendant’s claim for rectification must fail because there is no evidence of a continuing common intention on the part of the plaintiff to execute a right of set-off document to comply with the security condition provided for in the letter of offer of 17th December, 2008.
15.5 Even if it were possible to conclude that it was the intention of the plaintiff to execute the right of set-off document not merely as a witness but in a manner which would bind her as one of the beneficial owners of joint deposit account No. 101, and that the document needs to be rectified to reflect that, a question would arise as to whether the Court should exercise its discretion to grant the equitable relief of rectification in circumstances in which the defendant took no steps whatsoever to ensure that the plaintiff understood the implications of executing a document which would have given the defendant the type of security it was seeking over the monies in joint deposit account No. 101. In particular, the question would arise as to whether the defendant should have advised the plaintiff to seek legal advice to avoid being disentitled to equitable relief. While, on the basis of the finding I have made in the next preceding paragraph, the question is hypothetical, I propose to comment on it generally.
15.6 Apart from reference to a text (Hodge on Rectification, 1st Ed., 2010 at para 1 – 41 et. seq.), no authority was specifically cited by counsel for the plaintiff to support their contention that the defendant did not take the steps it should have taken, including advising the plaintiff to obtain independent legal advice. I have noted earlier that the plaintiff did not allege either in the pleadings or in her evidence that Mr. O’Meara exerted undue influence over her or that he took any unfair advantage of her. Her position was that she just signed what Mr. O’Meara put in front of her without seeking or obtaining any explanation. There is authority in the United Kingdom that a bank is always on inquiry when a wife provides security for her husband’s debt and that it must take reasonable steps to satisfy itself that the practical implications of the proposed transaction have been brought home to the wife, in a meaningful way, so that she enters into the transaction with her eyes open so far as its basic elements are concerned and reliance by the bank upon confirmation from a solicitor, acting for the wife, that he advised her appropriately is sufficient to discharge the bank’s obligation (the decision of the House of Lords in Royal Bank of Scotland v. Etridge (No. 2) [2002] 2 AC 773). The manner in which the defendant went about obtaining what it considered as security for the loan it was advancing to Mr. O’Meara solely over a deposit account in the joint names of Mr. O’Meara and his wife, the plaintiff, is so egregiously at variance with the principles enunciated by the House of Lords in Etridge (No. 2), which, as academic commentators have suggested should be applied by the courts of this jurisdiction (Mee (2002) 27 Ir. Jur. 292; Delany Equity and the Law of Trusts in Ireland, 5th Ed. at p. 746), that it is unlikely that a court would afford an equitable remedy to the defendant to perfect its security, if such was necessary and it was appropriate to do so, without seeking to explore in depth the application of those principles in this jurisdiction, having regard to the conduct of the defendant and the potentially improvident nature of what the defendant was requiring the plaintiff to do.
15.7 Finally, it is pertinent at this point to make two general observations in the interests of clarity. First, in the context of the application of equitable principles, in my view, it is necessary to distinguish between the operation of a joint deposit account by the account holders, which banks, understandably, as reflected in condition 3(a) of the general conditions quoted at para. 1.7 above, leave to the account holders, on the one hand, and the creation of what, in effect is a type of security over a joint deposit account, on the other hand. Secondly, I accept the argument advanced on behalf of the defendant that the defendant did not occupy a fiduciary position vis-à-vis the plaintiff and that the plaintiff’s claim, insofar as it is based on alleged breach of fiduciary duty, is misconceived.
16. Estoppel?
16.1 The basis on which counsel for the defendant contended that the plaintiff is estopped from asserting that the monies on deposit in joint deposit account No. 101 were not to be applied in reduction of Mr. O’Meara’s liability to the defendant under loan account No. 128 was that all necessary ingredients of an estoppel are present, namely: a representation by the plaintiff; reliance on the representation by the defendant; and the defendant acting to its detriment. The defendant’s officials appear to have assumed on 23rd December, 2008 that there was an effective right of set-off against the monies in joint deposit account No. 101 in place by reason of the plaintiff’s signature on the right of set-off document. The defendant certainly acted to its detriment in advancing the loan to Mr. O’Meara when, as I have found, it had no right of set-off. The question which remains is what representation was made by the plaintiff, whether by word or conduct, to the defendant which, in the words of Griffin J. in Doran v. Thompson Ltd. [1978] I.R. 223 relied on by counsel for the defendant, amounted to “a clear and unambiguous promise or assurance” that she would participate in granting a right of set-off to the defendant against the monies on deposit in joint deposit account No. 101?
16.2 The defendant’s submission was that it is to be found in the plaintiff’s assent to the lodgement of the Anglo cheque, which was to be “cash backing” for the loan to Mr. O’Meara, and her agreement (in effect) that Mr. O’Meara could mandate withdrawals from that account without reference to her, and her knowledge (if not her explicit assent) of the set-off commitment provided by Mr. O’Meara. All the plaintiff did was that –
(a) she endorsed the Anglo cheque,
(b) she signed the application form to open joint deposit account No. 101, which included the withdrawal instructions, which resulted, in due course, in the joint deposit account being depleted to the extent of €600,000, and
(c) she subscribed her name as a witness to Mr. O’Meara’s signature to the right of set-off document.
Those actions, separately or in conjunction with each other, did not amount to “a clear and unambiguous promise or assurance” that the defendant would have a right of set-off against the monies in joint deposit account No. 101.
16.3 The fundamental problem for the defendant in this case is that it did not get the commitment it required from the plaintiff in order to obtain the security which it sought. In fact, it completely ignored the plaintiff’s interest. The result is that it must suffer the consequences of its own mistake.
17. Ownership/ rights over joint deposit account No. 102
17.1 The monies which the defendant transferred to joint deposit account No. 102 were sourced from loan account No. 128. Sole liability for the sum of €665,873.40 so transferred was assumed by Mr. O’Meara under loan account No. 128. The sole purpose of the drawdown was to meet the security requirement in relation to providing a right of set-off against a joint deposit account with a balance equivalent to the amount of the loan, €1.6m. It was the defendant’s officials, on their own initiative, who put the joint deposit account in place in the joint names of Mr. O’Meara and the plaintiff to meet that requirement. While the “sub-account”, as it was characterised, was opened in the joint names of Mr. O’Meara and the plaintiff, the plaintiff was not a party to it at any time. Therefore, the decision of the Supreme Court in Lynch v. Burke, in my view, does not assist the plaintiff. Moreover, before it was opened, she had no legal or beneficial entitlement to any part of the sum of €665,873.40 transferred by the defendant’s officials to it. Accordingly, in my view, one has to look behind the names on the account.
17.2 On the basis of the doctrine of a resulting trust, as Mr. O’Meara, through the medium of the draw down from loan account No. 128, was the sole contributor to the monies in joint deposit account No. 102, prima facie, he was the beneficial owner of those monies, unless the presumption of advancement overrides the doctrine of resulting trust.
17.3 The plaintiff implicitly relied on the evidence of Mr. Savage in support of its contention that the monies in joint deposit account No. 102 were jointly beneficially owned by Mr. O’Meara and the plaintiff and passed to the plaintiff by right of survivorship. Mr. Savage was asked in cross-examination why a deposit account in the sole name of Mr. O’Meara was not opened to bring up to the level of €1.6m the balance on deposit with the defendant, given that the right of set-off document extended to any account in his name. The response of Mr. Savage was that Mr. O’Meara wanted it that way. He wanted the money to go back into the joint deposit account, which he had set up at the particular time. What he had instructed the defendant to do was to put the money in the name of himself and his wife. That response is inconsistent with the evidence of Ms. Corrigan and Ms. Dwyer, who were the officials of the defendant who were implementing the transactions on 23rd December, 2011 and who, on their evidence, did so without reference to Mr. O’Meara.
17.4 Even if Mr. O’Meara intended that the monies in joint deposit account No. 102 would be beneficially owned by himself and his wife, effect could only have been given to that intention subject to any trust or equitable interest known to the defendant to which the monies were subject. Mr. O’Meara was facilitated by the defendant in the draw down the sum of €665,873.40 from loan account No. 128 and its transfer to joint deposit account No. 102 for a specific purpose – to top up the monies on deposit to the level of the set-off requirement conditioned into the letter of offer of 17th December, 2008. Therefore, the monies in joint deposit account No. 102 must be deemed to have been impressed with an obligation in equity to fulfil that purpose. Accordingly, the right of the defendant to have that purpose fulfilled would have had priority in equity over the beneficial ownership of the monies, whether the beneficial ownership was vested in Mr. O’Meara and the plaintiff jointly or in Mr. O’Meara solely. It follows that, wherever the beneficial ownership was vested, the plaintiff cannot rely on beneficial ownership by right of survivorship to make the case that the defendant did not have a right of set-off as against those monies for Mr. O’Meara’s sole liability on foot of loan account No. 128 on 5th January, 2010.
17.5 The question whether Mr. O’Meara and the plaintiff jointly were the beneficial owners, or Mr. O’Meara was the sole beneficial owner, of the monies on deposit in joint deposit No. 102 subject to the defendant’s right of set-off arises between the plaintiff, on the one hand, and the personal representative of Mr. O’Meara, on the other hand. Representation has not been raised to the estate of Mr. O’Meara and his personal representative was not before the Court. Accordingly, it would be inappropriate for the Court to express any definitive view on that question. Notwithstanding the absence of the personal representative of Mr. O’Meara, it has been necessary to reach a conclusion as to whether beneficial ownership of the monies, wherever it lay, was subject to the right of the defendant to set-off, and I have concluded that it was.
17.6 Consistent with the view I have expressed earlier in relation to the analogy with the liquidation situation addressed by the Supreme Court in Dempsey v. Bank of Ireland, the personal representative of Mr. O’Meara would acquire no better title to the monies in joint deposit account No. 102 than Mr. O’Meara had.
18. Summary of conclusions and orders
18.1 As regards joint deposit account No. 101, I have come to the conclusion that the monies in that account were jointly beneficially owned by Mr. O’Meara and the plaintiff and that they passed to the plaintiff by right of survivorship on the death of Mr. O’Meara. I have further concluded that the defendant was not entitled to set-off the monies due on loan account No. 128 against those monies, as it purported to do in January 2010. Accordingly, the plaintiff is entitled to a declaration that all the monies which were standing to the credit of that account on 28th November, 2009 are the property of the plaintiff. As to how the plaintiff is to be compensated for the breach of contract by the defendant in not paying those monies to the plaintiff on being requested to do so, although the plaintiff claimed interest under the Courts Act 1981, as amended, in the statement of claim, no case was made on behalf of the plaintiff for pre-judgment interest at the Court rate. I consider that the plaintiff will be properly compensated by payment by the defendant to her of interest from 28th November, 2009 to the date of judgment at the rate applicable to six month fixed term deposits with the defendant and thereafter interest at the Court rate.
18.2 There will be judgment for the appropriate sum, the quantification of which should be agreed between the parties.
18.3 Having come to the conclusion that the plaintiff did not have a beneficial interest in the monies lodged in joint deposit account No. 102, the plaintiff is not entitled to any relief in respect of those monies. While, in the absence of the personal representative of Mr. O’Meara before the Court, I think it is inappropriate to make the declaration sought by the defendant in its counterclaim that the defendant was entitled to set-off the monies in that account, I propose that a declaration be made that the plaintiff has no claim to the said monies.
18.4 Subject to that, the defendant not being entitled to rectification of the set-off document, the defendant’s counterclaim will be dismissed.
Geldof Metaalconstructie NV v Simon Carves Ltd
[2010] EWCA Civ 667
The jurisprudence of equitable set-off
Although most of the written and oral submissions before us on this appeal related to the correct test for equitable set-off, at the end of the day it was not clear either how the parties differed from one another as to the test, or how the test, when identified, would affect its application on the particular facts of this case.
Nevertheless, if only because there appears to be some uncertainty on the subject, I would hazard the following observations as to the jurisprudence.
It is generally considered that the modern law of equitable set-off dates from Hanak v. Green [1958] 2 QB 9. Morris LJ’s judgment there has been described as a masterly account of the subject (Gilbert Ash (Northern) v.Modern Engineering (Bristol) Ltd [1974] AC 689 at 717 per Lord Diplock). In Dole Dried Fruit v. Trustin Kerwood Ltd [1990] 2 Lloyd’s Rep 309 at 310 Lloyd LJ said that for all ordinary purposes, the modern law of equitable set-off is to be taken as accurately stated there. Morris LJ set out the law in these terms:
“The position is, therefore, that since the Judicature Acts there may be (1) a set-off of mutual debts; (2) in certain cases a setting up of matters of complaint which, established, reduce or even extinguish the claim; and (3) reliance as a matter of defence upon matters of equity which formerly might have called for injunction or prohibition…The cases within group (3) are those in which a court of equity would have regarded the cross-claims as entitling the defendant to be protected in one way or another against the plaintiff’s claim” (at 23).
However, that did not mean that all cross-claims may be relied on as defences to claims. In his examination of Bankes v. Jarvis [1903] 1 KB 549, Morris LJ identified two factors as critical: it would have been “manifestly unjust” for the claim to be enforced without regard to the cross-claim; and “there was a close relationship between the dealings and transactions which gave rise to the respective claims” (at 24).
For these purposes the facts of Bankes v. Jarvis, which Morris LJ set out, are instructive. There were two separate but related transactions. The plaintiff was acting as agent or trustee for his son. The son had bought a veterinary surgeon’s practice from the defendant. As part of that transaction he had also agreed to pay the rent and otherwise indemnify the defendant against liability under a lease of premises from which the practice was carried on. That was one transaction. However, the son decided to leave the country, and gave the plaintiff authority to sell the practice. The plaintiff sold it on his son’s behalf back to the defendant. That was the second transaction. The defendant owed £50 under that second transaction, but the son owed the defendant £21 for rent and a further £30 for failure to perform covenants in the lease, under the first transaction. That was a quantified counterclaim for unliquidated damages. When the plaintiff sued the defendant for the £50, the defendant claimed to be able to set off the £51. As Morris LJ explained: “It was held that the defendant could set up as a defence to the claim against him that the plaintiff’s son (the cestui que trust of the plaintiff) was indebted to the defendant in a sum for unliquidated damages exceeding the amount of the claim.”
In Hanak v. Green itself the claim was against a builder for failing to complete the works. The builder made three counterclaims and relied on them by way of set-off. One arose under the building contract itself, for loss caused by the plaintiff’s refusal to admit the builder’s workmen; a second arose out of a quantum meruit for extra work performed outside the contract; and the third was for trespass to the builder’s tools, and thus arose in tort. Morris LJ left the third item aside, for the first two by themselves overtopped the plaintiff’s claim. He said, “it seems to me that a court of equity would say that neither of these claims ought to be insisted upon without taking the other into account” (at 26). Sellers LJ considered that all three items could be set off, for the first “arises directly under and affected the contract on which the plaintiff herself relies”, and the other two were “closely associated with and incidental to the contract” (at 31).
Some twenty years later in Aries Tanker Corporation v. Total Transport [1977] 1 WLR 185, the House of Lords had to consider the long-standing historical rule that a cargo owner or charterer could not set off a claim for damage to cargo against the shipowner’s claim for freight. Lord Wilberforce said (at 191):
“One thing is certainly clear about the doctrine of equitable set-off – complicated though it may have become from its involvement with procedural matters – namely, that for it to apply, there must be some equity, some ground for equitable intervention, other than the mere existence of a cross-claim (see Rawson v. Samuel (1839) Cr. & Ph. 161, 178 per Lord Cottenham L.C., Best v. Hill (1872) L.R. 8 C.P. 10, 15, and the modern case of Hanak v. Green But in this case counsel could not suggest, and I cannot detect, any such equity sufficient to operate the mechanism, so as, in effect, to over-ride a clear rule of the common law on the basis of which the parties contracted.”
Lord Simon of Glaisdale spoke to similar effect (at 193).
Shortly thereafter in Federal Commerce & Navigation Co Ltd v. Molena Alpha Inc [1978] 2 QB 927 (The “Nanfri”) this court had to consider whether claims against a shipowner could be set off against time charter hire. The issue had to be decided against the background of the historical rule excluding set-off against voyage charter freight (see The Aries just cited) and special terms in the time charter in question permitting deductions in certain circumstances. That therefore was a special case arising in a one contract only situation. This court fashioned its own solution to that problem, which does not concern us here. However, The Nanfri’s importance is that it was the occasion for a further consideration of the doctrine of equitable set-off. Lord Denning MR said (at 974G/975A):
“It is now far too late to search through the old books and dig them out. Over 100 years have passed since the Judicature Act 1873. During that time the streams of common law and equity have flown together and combined so as to be indistinguishable the one from the other. We have no longer to ask ourselves: what would the courts of common law or the courts of equity have done before the Judicature Act? We have to ask ourselves: what should we do now so as to ensure fair dealing between the parties? See United Scientific Holdings Ltd. v. Burnley Borough Council [1978] A.C. 904 per Lord Diplock. This question must be asked in each case as it arises for decision: and then, from case to case, we shall build up a series of precedents to guide those who come after us. But one thing is clear: it is not every cross-claim which can be deducted. It is only cross-claims that arise out of the same transaction or are closely connected with it. And it is only cross-claims which go directly to impeach the plaintiff’s demands, that is, so closely connected with his demands that it would be manifestly unjust to allow him to enforce payment without taking into account the cross-claim. Such was…Hanak v. Green…”
In Leon Corporation v. Atlantic Lines and Navigation Co Inc [1985] 2 Lloyd’s Rep 470 (The Leon), in another case which raised the issue of the extent to which a time charterer could set off a counterclaim against time charter hire, Hobhouse J refused to depart from the line drawn by this court in The Nanfri, although he was pressed to do so on the ground of “fairness”. The submission led to the following observations (at 474/5):
“It is also correct that equitable principles derive from a sense of what justice and fairness demand and should therefore include the capacity to develop and adapt as the need arises…But this does not mean that equitable set-off has been reduced to an exercise of discretion. Since the merging of equity and law, equitable set-off gives rise to a legal defence. This defence does not vary according to the length of the Lord Chancellor’s foot. The defence has to be granted or refused by an application of legal principle.
The relevant principle is that identified by Lord Cottenham in Rawson v. Samuel (1841) Cr. & Ph. 161, at p. 179: “The equity of the bill impeached the title to the legal demand”. What this requires is that the Court or arbitrator should consider the relationship between the claim and the cross-claim. This is why not every cross-claim, even though it arises out of the same transaction, necessarily gives rise to an equitable set-off. This element of the cross-claim impeaching the plaintiff’s demand is to be found in all the modern cases and is a recognition that the principle being applied is essentially the same as that stated by Lord Cottenham.”
In Bank of Boston Connecticut v. European Grain and Shipping Ltd [1989] AC 1056 (The Dominique) the House of Lords held that the historical rule of no set-off against voyage-charter freight extended to a counterclaim for damages for repudiation of the charterparty. It was another single contract case. It was decided on the basis that there was no good reason to distinguish between the case of a counterclaim for mere breach and the case of a counterclaim for repudiatory breach: see at 1106E/1109C. Therefore the historical rule prevailed. In reaching this conclusion, Lord Brandon of Oakbrook, with whose speech the rest of their Lordships agreed, dealt with three reasons which had been advanced by the counterclaiming charterers for making the distinction which the House ultimately rejected. The first reason was that a repudiatory breach satisfied the impeachment test for a defence by way of equitable set-off laid down in Rawson v. Samuel. That had been the major submission of counsel for the charterers, see Mr Eder arguendo at 1079:
“It was said in The Leon that the suggestion of manifest injustice being the relevant test was wrong and that the proper test was impeachment of title whatever that might mean, and when one looks at The Nanfri, pp. 974-975, the test is; does the cross-claim go directly to impeach the plaintiff’s demands?”
Lord Brandon dismissed this primary argument of the charterers head-on, and swiftly. He said (at 1106F):
“I find it difficult, however, to see how, when a charterparty expressly provides, in effect, that the legal title to advance freight is to be deemed to be complete on the signing of bills of lading, a subsequent breach of the charterparty, even one of a repudiatory character, can properly be regarded as impeaching that title.”
Despite this direct treatment of the charterers’ major argument, Lord Brandon had in fact gone out of his way in the course of his speech to displace the impeachment rationale of Rawson v. Samuel. He said it was necessary to explain briefly the “nature, origins and basis of a defence by way of equitable set-off” (at 1101E). Making no express mention of Morris LJ’s judgment in Hanak v. Green, nor of The Nanfri, he reached back to “see whether such cross-claim is of such a character that it would before the coming into force of the Supreme Court of Judicature Acts 1873 and 1875 have led a court of equity to prohibit by injunction the enforcement of the common law claim” (at 1101G). He referred to Rawson v. Samuel as the authority “most relied on as providing the relevant test” (at 1101H). However, he rejected that test as of continuing use in the modern world in the following passage:
“The concept of a cross-claim being such as “impeached the title of the legal demand” is not a familiar one today. A different version of the relevant test is to be found in the decision of the Judicial Committee of the Privy Council in Government of Newfoundland v. Newfoundland Railway Co. (1888) 13 App. Cas. 199…It is to be observed that the criterion which Lord Hobhouse applied, 13 App Cas 199, 213, in deciding whether the government’s cross-claim for unliquidated damages could be set off against the company’s claim was not that the cross-claim “impeached the title to the legal demand,” as in Rawson v.Samuel, 1 Cr. & Ph. 161, 179, but rather that it was a cross-claim “flowing out of and inseparably connected with the dealings and transactions which also give rise” to the claim.”
However, even though Lord Brandon had gone out of his way to dethrone the rationale of impeachment, he did not use that dethronement as an answer to Mr Eder’s submission in the dispositive part of his speech (see at para 28 above). Indeed, he only returned to the Newfoundland Railway case in order to deal with a separate point (“Question (4): Set-off as between charterers and bank”, see at 1109Hff), which was whether the plaintiff bank, as assignee of the shipowner’s claim for freight, could equally rely on the shipowner’s immunity from set-off against freight. That, however, followed from, or at any rate as a rational counterpoint to, the decision in the Newfoundland Railway case itself, where the assignee of an underlying claim which was susceptible to set-off, had to take the claim subject to that equity.
It may be noted, however, that Lord Brandon said nothing about the other element of Mr Eder’s submission, which was that “the suggestion of manifest injustice being the relevant test was wrong”. Lord Brandon said nothing about the concept of fairness, and that has led in the current case to submissions that the Newfoundland Railway test is a single exclusive test for equitable set-off and has either supplanted or must be regarded as somehow incorporating the fairness aspect of Morris LJ’s test in Hanak v. Green and of Lord Denning’s test in The Nanfri. I will have to revert to that question, but I would in the meantime observe that Lord Brandon’s main concern in the passage cited above was to replace the impeachment test by something which was easier to understand and apply in the modern world. He did not address the concept of fairness, and perhaps did not need to do so in a situation where the underlying rule of no set-off against freight was so well ensconced. As Lord Wilberforce and Lord Simon had said in The Aries, the parties had contracted against the background of it, and could not be heard to say that they had an equity which ran directly contrary to the rule.
I think this view of the matter is confirmed by going back to the Newfoundland Railway case itself. The suit there was brought by the railway company and its assignees (trustees for bondholders) against the Government of Newfoundland. The underlying contract was one whereby the company was to build a railway and the government was to pay a subsidy. The railway was not completed. There was an issue as to whether the contract was an “entire” contract whereby no part of the subsidy was payable unless the railway as a whole was completed, but that issue was decided in favour of the company: the subsidy was payable, in part, as each section of the line was completed. There was also a counterclaim by the government for non-completion of the line. Could that be set off against the company’s entitlement to subsidy? There was no issue between the parties that it could, at any rate as between company and government (at 209). It might have been argued that the severance of the payment of the subsidy to relate to each completed section of the line presented difficulties for a set-off premised on the uncompleted sections of the line, but it was not. In any event the Privy Council emphasised the intertwined nature of the obligations under the railway contract and said that it “had no hesitation in saying that in this contract the claims for subsidy and for non-construction ought to be set against one another” (at 212/213). What was said was that the set-off could not be made as against the assignees: that once notice of the assignment of the debt had been given, “the debt or claim is so severed from the rest of the contract that the assignee may hold it free from any counter-claim in respect of other terms of the same contract” (at 210). However, the Privy Council distinguished between a set-off properly allowable under the contract itself, which bound an assignee of a debt due under that contract, and a cross-claim which might “arise from any fresh transaction freely entered into by [the government] after notice of assignment by the company” (at 212). In the former case, “It would be a lamentable thing if it were found to be the law that a party to a contract may assign a portion of it, perhaps a beneficial portion, so that the assignee shall take the benefit, wholly discharged of any counter-claim by the other party in respect of the rest of the contract, which may be burdensome” (at 212). That was the context in which the Privy Council said (at 213):
“Unliquidated damages may now be set off as between the original parties, and also against an assignee if flowing out of and inseparably connected with the dealings and transactions which also give rise to the subject of the assignment.”
It may be observed that in the circumstances of the structure of the argument in the Newfoundland Railway case there was no particular need to emphasise the requirements of justice and fairness. The set-off between the original parties was not controversial. And the disputed set-off as against the assignees was argued on a more technical level depending on the assignment. Even so, the ultimate answer given by the Privy Council was, in effect, that the assignees took subject to equities: and this was explained in terms of it being “a lamentable thing” if it were otherwise, and that the claims and cross-claims “ought” to be set against one another.
At any rate, it was not long before Lord Brandon’s exegesis in The Dominique was considered, albeit in the context of a two contract case. In Dole Dried Fruit and Nut Co v. Trustin Kerwood Ltd [1990] 2 Lloyd’s Rep 309 the plaintiff had made the defendant its exclusive distributor in England. Pursuant to that distributorship agreement, the plaintiff repeatedly sold its products to the defendant under separate contracts of sale. The plaintiff was now claiming the price of goods sold under the latest of such sale contracts, and the defendant was seeking to set off its counterclaim for repudiation by the plaintiff of the distributorship agreement. This court held that the counterclaim could be set off and that there was thus an arguable defence to the claim for the price of goods sold.
In the court below Webster J had applied the Newfoundland Railway test, as approved by Lord Brandon, which he regarded as being narrower and more specific than the test to be found in The Nanfri. Even so, he had found in favour of the defendant’s set-off. On appeal, the plaintiff argued that the impeachment test from Rawson v. Samuel still survived and was narrower still. This court, however, disagreed. Lloyd LJ regarded the impeachment test and the Newfoundland Railway test as merely “the same test in different language”. He referred to the exceptional rule about no set-off against freight, and continued (at 310/311):
“But for all ordinary purposes, the modern law of equitable set-off is to be taken as accurately stated by the Court of Appeal in Hanak v. Green…It is not enough that the counterclaim is “in some way related to the transaction which gives rise to the claim”. It must be “so closely connected with the plaintiff’s demand that it would be manifestly unjust to allow him to enforce payment without taking into account the crossclaim”: see The Nanfri per Lord Denning at p. 140…
The authority of these cases has not been diminished by The Dominique. They establish that the mere existence of a crossclaim is insufficient. The claim and crossclaim must arise out of the same contract or transaction, and must also be so inseparably connected that the one ought not to be enforced without taking into account the other.”
I observe that it is possible to see there Lloyd LJ moulding (at least part of) the Newfoundland Railway test (“inseparably connected”) into and within the previous jurisprudence, which he states continues to hold authority. I would also respectfully observe that something appears to have gone wrong with the text to the effect that “claim and crossclaim must arise out of the same contract or transaction”. That, I believe, has never been the position, unless the connection “arise out of” is given an unhelpfully broad scope. It is better to be transparent about the matter. As Lord Denning stated in The Nanfri: “It is only cross-claims that arise out of the same transaction or are closely connected with it” (at 974/5, emphasis added) that fall within equitable set-off.
Thus, in upholding the set-off Lloyd LJ’s critical reasoning (at 311) acknowledged that that was a two contract case. He accepted, at any rate as probably correct for the purposes of the summary judgment application, that the individual sale contracts were separate transactions not governed by the terms of the distributorship agreement. However –
“The whole purpose and intent of the agency agreement was that the parties should enter into contracts for the purchase and sale of the plaintiffs’ goods. In those circumstances the claim and counterclaim are sufficiently closely connected to make it unjust to allow the plaintiffs to claim the price of goods sold and delivered without taking account of the defendants’ counterclaim for damages for breach of the agency agreement.”
So Lloyd LJ did not require claim and cross-claim to arise out of the same transaction.
Esso Petroleum Co Ltd v. Milton [1997] 1 WLR 938 concerned a licence agreement between an oil company plaintiff and a garage licensee defendant. The plaintiff sued for the price of petrol deliveries and the defendant counterclaimed for damages for repudiation of the licence agreement, which he sought to set off against the otherwise admitted claim. The plaintiff sought summary judgment. It appears that this was treated as a single contract case, that is to say that the petrol deliveries did not amount to separate contracts of sale (as in Dole Dried Fruit). The plaintiff raised three arguments as to why the alleged set-off should fail: (i) because under the contract the petrol had to be paid under direct debit arrangements, which it was submitted was like payment by cheque and thus amounted to an exclusion of a right of set-off; (ii) because of an express provision, clause 34, by which the defendant agreed not “for any reasons to withhold payment of any amount due to the plaintiffs”; and (iii) because there was insufficient connection between the claim in respect of past deliveries of fuel and the counterclaim for damages for loss of future profits. As to these three arguments, this court held as follows: (i) the direct debit argument succeeded (in the opinion of Thorpe LJ and Sir John Balcombe, albeit Simon Brown LJ dissented); (ii) clause 34 was unreasonably wide and thus unenforceable (per Simon Brown LJ and Sir John Balcombe, with Thorpe LJ not dealing with this point); and (iii) the counterclaim was insufficiently connected with the claim (per Simon Brown LJ and Sir John Balcombe, with Thorpe LJ also considering that the counterclaim was unarguable in itself).
We are interested in point (iii), but as will appear this point was not entirely separate from the other two. Simon Brown LJ considered that the modern law of equitable set-off was to be found in Hanak v. Green and The Nanfri. Thus he restated the position as follows:
“For equitable set-off to apply it must therefore be established, first that the counterclaim is at least closely connected with the same transaction as that giving rise to the claim, and second that the relationship between the respective claims is such that it would be manifestly unjust to allow one to be enforced without regard to the other.”
That is very close to Lord Denning’s statement of the test.
Simon Brown LJ went on to say that no case had been cited in which payment of a debt presently due had been required to await the resolution of a cross-claim for future losses: but it appears that Dole Dried Fruit, which would have supplied such a case, had not been cited. What, however, seems to me to be striking about Esso v. Milton are the following factors: first, the existence of the direct debit and clause 34 provisions, which even Simon Brown LJ (dissenting on point (i)) held to be relevant to his decision on point (iii) (see at 951H, “all of these provisions and considerations seem to me properly in play when deciding the overall justice of the case”); secondly, the deliveries of fuel were converted by the defendant almost immediately into cash; thirdly claim for future losses was merely speculative. These factors were of such a nature that Thorpe LJ, having decided that the counterclaim was in any event so speculatively unrealistic as to be unarguable (at 952E/F), went on to comment in strong terms (at 953B/H) about the inequity of the defendant’s case, starting from the proposition that “As Simon Brown LJ has demonstrated, claims to equitable set-off ultimately depend upon the judge’s assessment of the result that justice requires.”
Finally, I refer to Bim Kemi v. Blackburn Chemicals Limited [2001] 2 Lloyd’s Rep 93. It concerned a claim by the claimant for damages for repudiation of a 1994 distribution agreement for the supply of a product called Dispelair. The defendant denied the existence of the 1994 agreement, but in the alternative counterclaimed for damages for its repudiation by the claimant. The defendant also sought to set off a counterclaim for breach of the parties’ 1984 licensing agreement relating to other products. The claimant sought to strike out that set off, but failed both at first instance and again in this court. Under the heading of “Close Connection” Potter LJ reviewed the authorities discussed above and commented as follows:
“29. The Dole Fruit case illustrates the wise refusal of this Court to become bogged down in the nuances of different [sc differences?] between the formulation of the test propounded in The Nanfri, both in relation to the earlier criterion of “impeachment of title” disapproved by Lord Brandon in the Bank of Boston case, and in relation to the need for a “close connection” between claim and cross-claim…It seems that, insofar as there may be a difference, the Court has been content for the outcome to be governed by the notion of fairness involved in the proposition that it must be “manifestly unjust” to allow one to be enforced without regard to the other. For myself, I consider that Lord Brandon’s formulation is to be preferred because on the one hand it emphasizes that the degree of closeness required is that of an “inseparable connection”, while on the other it makes clear that it is not necessary that the cross-claim should arise out of the same contract; all that is required is that it should flow from the dealings and transactions which gave rise to the subject of the claim…
30. That said, however, it is clear that the principle stated by Lord Brandon and applied in the Dole Fruit case is apt to cover a situation where there are claims and cross-claims for damages in respect of different but closely connected contracts arising out of a long-standing trading relationship which is terminated. That fact will not per se establish the requisite “inseparable connection” but, in an appropriate case, it may well be manifestly unjust to allow one claim to be enforced without taking account of the other…
36…I regard it as appropriate to apply the test propounded by Lord Brandon in the Bank of Boston case unconstrained by the former concept, difficult to define and apply, of “impeachment of title”, which has since been replaced, or at least redefined, in terms of a cross-claim which “flows out of and is inseparably connected with the dealings and transactions giving rise to the subject of the claim”…”
Then, under the heading of “Manifest injustice”, Potter LJ went on to say this:
“38. As treated in The Nanfri, the question of whether or not it would be manifestly unjust to allow a claimant to enforce payment of his claim is the criterion by which to judge the closeness of the connection between the claim and the cross-claim…Once Lord Brandon made clear in the Bank of Boston case that the question of closeness required inseparable connection with the dealings and transactions giving rise to a claim, without reference to the issue of “manifest injustice”, it is difficult to envisage in what circumstances, assuming his test to be satisfied, it would be other than just to allow an equitable set-off, save in certain established categories of cases where the Court has traditionally taken a strict view of the right of a claimant to be paid the liquidated sum which he claims free of any set-off. Examples are to be found in claims for rent, freight, and sums due under bills of exchange. Nonetheless, as it seems to me, it is appropriate in every case to give separate consideration to the question of manifest injustice; cf the approach of Lord Justice Brown in Esso Petroleum v. Milton at 950D.”
In my judgment, this jurisprudence allows the following conclusions:
(i) The impeachment of title test, although derived from the leading case of Rawson v. Samuel and still stated by Lord Denning in his formulation in The Nanfri, even if it is there immediately glossed by his “so closely connected…that it would be manifestly unjust” test, should no longer be used: The Dominique and Bim Kemi. It is an unhelpful metaphor in the modern world. In the light of the emphasis put on it by Hobhouse J in The Leon and the reliance sought to be placed on it by the charterers in The Dominique, it made sense for the House of Lords to go out of its way to downplay its significance.
(ii) There is clearly a formal requirement of close connection. All the modern cases state that, whether Hanak v. Green, The Nanfri, The Dominique (by reference to the Newfoundland Railway case), Dole Dried Fruit or Bim Kemi. The requirement is put in various ways in various cases. Morris LJ in Hanak v. Green spoke of a “close relationship between the dealings and transactions which gave rise to the respective claims”. Lord Denning in The Nanfri spoke of claims and cross-claims which are “closely connected”. How closely? “[S]o closely connected with his demands that it would be manifestly unjust to allow him to enforce payment without taking into account the cross-claim”. The Dominique adapted the Newfoundland Railway test and spoke of a cross-claim “flowing out of and inseparably connected with the dealings and transactions which also give rise to the claim”. Dole Dried Fruit returned to Lord Denning’s test in The Nanfri but also spoke of a claim and cross-claim which was so “inseparably connected that the one ought not to be enforced without taking into account the other”. Bim Kemi expressed a preference for the test in The Dominique, while warning against being caught up in the nuances of different formulations.
(iii) Thus the Newfoundland Railway test of “inseparable connection” is one formulation of the close connection test, but it is not the only one. Potter LJ wisely referred to the wise refusal of the courts to become bogged down in the nuances of formulation. Oddly enough, both the Newfoundland Railway case and The Dominique were single contract cases, and therefore probably rather unhelpful contexts in which to judge what is meant by “inseparable connection”. In truth, where separate contracts (or dealings or transactions) are concerned, the metaphor of inseparability is not all that helpful. Ex hypothesi, the contracts are separate (as in Bankes v. Jarvis, the case about the veterinary surgeon’s practice discussed by Morris LJ in Hanak v. Green). I am not aware of the “inseparable connection” test being used to exclude a set-off, where some other formulation of the close connection requirement would have allowed it. It was not used to exclude a set-off in either the Newfoundland Railway case, nor in The Dominique nor in Bim Kemi. Nor is the test all that helpful in single contract cases: as Potter LJ remarked in Bim Kemi, where a case concerns a claim and cross-claim arising out of the same contract, although that fact is not in itself enough to ensure an equitable set-off, it is on the whole likely to take a special rule excluding set-off, such as the rules about freight, rent and cheques (and now direct debits, see Esso v. Milton), to prevent a set-off. In this connection, Modern Engineering (Bristol) Ltd v. Gilbert-Ash (Northern) Ltd [1974] AC 689 emphasises that an equitable set-off for defective work is not easily excluded even in building contracts where sums are payable under an architect’s certificate. On the other hand, The Nanfri itself shows that in the context of maritime adventures and time charter hire, and against the background of the rule as to freight, a special regime of limited but not general set-off has been fashioned for cross-claims under the charterparty.
(iv) There is also clearly a functional requirement whereby it needs to be unjust to enforce the claim without taking into account the cross-claim. This functional requirement is emphasised in all the modern cases, viz Hanak v. Green, The Aries, The Nanfri, Dole Dried Fruit, Esso v. Milton, and Bim Kemi. The only modern authority cited above which does not in terms refer to the functional requirement of injustice is Lord Brandon’s discussion in The Dominique. This has led Potter LJ in Bim Kemi (at para 38) to remark on the absence of reference to “manifest injustice” by Lord Brandon: but nevertheless it did not lead him to dispense with that requirement (ibid). It seems to me impossible to do so: it is not coherent to have a doctrine of equitable set-off which ignores the need for consideration of aspects of justice and fairness. Mr David Friedman QC, on behalf of SCL, has submitted that the test of “inseparable” connection contains inherently within it the need for a requirement of manifest injustice. That is what, he submits, “inseparable” means. In my judgment, such lack of transparency in a test would be undesirable, and I do not believe that it is as Mr Friedman submits. But I do not in any event think that Lord Brandon was intending to use the Newfoundland Railway formulation as an exclusive test for equitable set-off. Rather, he was using it to dethrone the concept of impeachment.
(v) Although the test for equitable set-off plainly therefore involves considerations of both the closeness of the connection between claim and cross-claim, and of the justice of the case, I do not think that one should speak in terms of a two-stage test. I would prefer to say that there is both a formal element in the test and a functional element. The importance of the formal element is to ensure that the doctrine of equitable set-off is based on principle and not discretion. The importance of the functional element is to remind litigants and courts that the ultimate rationality of the regime is equity. The two elements cannot ultimately be divorced from each other. It may be that at times some judges have emphasised the test of equity at the expense of the requirement of close connection, while other judges have put the emphasis the other way round.
(vi) For all these reasons, I would underline Lord Denning’s test, freed of any reference to the concept of impeachment, as the best restatement of the test, and the one most frequently referred to and applied, namely: “cross-claims…so closely connected with [the plaintiff’s] demands that it would be manifestly unjust to allow him to enforce payment without taking into account the cross-claim”. That emphasises the importance of the two elements identified in Hanak v. Green; it defines the necessity of a close connection by reference to the rationality of justice and the avoidance of injustice; and its general formulation, “without taking into account”, avoids any traps of quasi-statutory language which otherwise might seem to require that the cross-claim must arise out of the same dealings as the claim, as distinct from vice versa. Thus, if the Newfoundland Railway test were applied as if it were a statute, very few of the examples of two-contract equitable set-off discussed above could be fitted within its language. I note that in Chitty on Contracts, 30th ed, 2008, Vol II, at 37-152, the test for equitable set-off is formulated in terms of Lord Denning’s test.
Citroen Sales (Ireland) Ltd. v. Ashenhurst Williams & Co. Ltd.
[1993] IR 69
Finlay C.J.; Hederman J.; McCarthy J. 71
S.C.
Finlay C.J.
I have read and agree with the judgment about to be delivered by McCarthy J.
Hederman J.
I also agree.
McCarthy J.
Ashenhurst and Dieselectrix appeal from the order of Lardner J. in the High Court whereby he declared that the “net-offs” referred to in paragraph 5 of the statement of claim were not effective as payments and are to be disregarded by the respective liquidators of the applicant and respondent companies.
The facts
Cornelius Breen, the accountant, had full accounting function for all four companies. He brought what he thought necessary to the attention of the directors, who were common to all companies, but, otherwise, he worked on his own initiative. At the beginning of 1982 he knew the companies were in difficult trading and financial conditions. In 1982 he was not aware in detail of proposals for any takeover of the companies except for a remark of Mr. Stewart that negotiations were going on. He thought it was a possibility that the companies might be facing insolvency but this was the worst outlook; if takeover negotiations were taking place, that did not mean that the companies would not continue to be able to carry on business. This appears to have been Mr. Breen’s state of mind when the procedures for the annual audit began on the 17th May, 1982. This was done in the normal course of business as in previous years.
Ashenhurst substantially owned all the assets employed in the businesses; they had a book value of over £1 million pounds. They included the land, premises, workshops, storage areas and accumulated profits. Funds were transferred between the companies as each had a need with the object of keeping all four companies going. Each company’s financial year ended on the 31st December. The questions raised in these proceedings concern the treatment in the accounts of the financial transactions between the four companies in relation to the financial year ended on the 31st December, 1981. These transactions were mainly transfers of cash. They related to charges for management and other services rendered by Ashenhurst to the other companies, charges for wages for employees and for the use of land and premises and to other inter-company transactions. These charges appear in entries in the nominal ledgers of the companies and are dated the last day of each month. They were supported by journal entries and journal vouchers. The net-offs were achieved by setting off against a debt due by Ashenhurst to Sales, debts due by Importers to Ashenhurst, debts due by Dieselectrix to Ashenhurst and debts due by Importers to Dieselectrix. This operation of netting-off was carried out each year when the need arose to provide the material for the annual audit. It would have been feasible to do this in each month of the financial year but this was not the practice. In 1982, in respect of the accounts for the year 1981, Mr. Breen within one week of the 17th May posted the net-offs in the journals. These were the last entries for finalising the accounts of the four companies for the relevant year.
The companies had experienced trading difficulties in 1981 and 1982 and the directors were negotiating with the French suppliers SAAC to whom certain proposals had been made.
The inferences
The learned trial judge concluded that at the date of the net-offs, the boards of directors of Sales and Importers, if they had directed their minds to and considered the question, could not have realistically concluded that for the foreseeable future these companies would be able to discharge their liabilities as they fell due. He concluded that the decision to make the net-offs should have been considered on that basis, namely, that there was a very serious risk that the companies were then insolvent. “In fact the evidence, if accepted, establishes that in May of 1982 the directors of Importers or Sales did not direct their minds to or consider the question of the solvency of these companies or the propriety of making the net-offs. The matter was left to Mr. Breen to deal with as part of his accountancy function in the course of preparing management accounts and he did not consider the question either.”
The judgment of the High Court
Lardner J. concluded that the correct inference to be drawn from the evidence was that Mr. Breen did not have the authority of the boards of any of the companies to make a decision that the payments which constituted the net-offs should be made – that the net-offs remained provisional until the accounts incorporating their results were agreed and adopted by the respective boards of directors. He rejected the proposition that the transaction constituted a gift between the companies and, therefore, was ultra vires.
The law
Section 286 of the Companies Act, 1963, provides, inter alia, that any payment or other act relating to property made or done by or against a company within six months before the commencement of its winding up which, had it been made or done by or against an individual within six months before the presentation of a bankruptcy petition on which he is adjudged a bankrupt, would be deemed in his bankruptcy a fraudulent preference, shall in the event of the company being wound up be deemed a fraudulent preference of its creditors and be invalid accordingly. No suggestion of any impropriety, technical or otherwise, has been made against Mr. Breen or against the directors of the companies. This is wholly accepted on behalf of the applicant companies and expressly stated by the liquidator, Mr. Shorthall, (“I accept what Mr. Breen did was absolutely in order . . .”); it is further accepted that the journal entries were the equivalent of a cash or cheque transaction. It is contended on behalf of Sales and Importers that the transactions of the 17th May are provisional only and depend for their effect on what is called “crystallising” when sanctioned by the directors. The amounts involved were substantial but not in their independent make-up; they were substantial because they were accumulated. It was further contended that because of a lack of mutuality – that it was not a pound for a pound – there was no valid novation.
Conclusion
Once it is established, as accepted here, that what Mr. Breen did was an ordinary transaction in the course of business, carried out annually, a heavy burden lies on anyone seeking to set it aside. To do so, in my judgment, it must be shown that he lacked authority to do what he did and nothing more than what he did in May, 1982. I find nothing in the evidence to support a view that the actual size of the transactions as of the particular date is relevant to the extent of his authority. The lack of mutuality did not exist as of that date; it arose because of the resolution of winding up which took place on the 11th June. Any argument questioning the scope of his authority or what he did within that scope must face up to the acceptance that there was no impropriety whatever. There is nothing whatever in the material before this Court that would support any other view. Mr. Breen acted very properly throughout. In my view, the argument on behalf of the applicant companies fails because it is founded on hindsight. By the 11th June, it might well be that the directors could not properly authorise the net-offs such as were effected but, as of the 17th May, there was no reason to interfere with the ordinary procedures. If on the 11th June, with the knowledge of the immediate collapse of the companies, the directors had attempted to effect such a transaction, it would seem to bear the hallmark of a fraudulent preference. In my judgment, the case made on behalf of the applicant companies is an attempt to effect an amendment of s. 286 of the Companies Act, 1963.
I would allow this appeal and dismiss the claim by the applicant companies.
In re Greendale Developments Ltd. (In Liquidation) (No. 2) [1998] 1 IR 8
Keane J. 29
S.C.
The President accordingly rejected the claim by the first respondent that these sums could be set off against the sums due by the first respondent to the company.
It has been treated as settled law in England since the decision of the Court of Appeal in In re Anglo-French Co-Operative Society, Ex Parte Pelly [1882] 21 Ch. D. 492, that an officer of a company, who has been found liable to pay money to the company in misfeasance proceedings, is not entitled to set off a debt owing by the company to him against that liability. It appears from the judgments in that and subsequent cases that the reason for the rule was that the right of set off only arose in the case of actions between parties. However, it was also pointed out by Hall V.C. in another case referred to in a footnote in In re Anglo-French Co-Operative Society, Ex Parte Pelly ,that no right of set off would in any event arise unless the debts could be said to be mutual. In the present case, there is clearly no mutuality between the monies sought to be recovered by the liquidator as having been misapplied by the first respondent in breach of his fiduciary duties as director, and the sums claimed by him in respect of the transactions just summarised.
Counsel for the respondents, in any event, did not invite the Court to disapprove of the authorities to which I have referred, but contented himself with suggesting that they should have no application where the company is solvent. The authorities, however, lend no support to that view. They proceed on the basis that the corresponding sections in
England afford the liquidator an expeditious summary remedy to recover monies or property of the company wrongfully spent or misapplied by an officer, and that to allow cross claims by the officer to be litigated on such an application would be inconsistent with the nature of the remedy provided.
I am satisfied that the submission made on behalf of the liquidator is correct, and, even if the sums claimed by the first respondent were recoverable against the company, they could not properly be set off against the sums found to be owing by him to the company. Counsel for the liquidator accepted that this would not preclude the first respondent from proving for these alleged debts as an unsecured creditor in the winding-up. He also accepted that, while it was obvious that the liquidator would not admit these alleged debts, he would not seek to rely on the determination of the issue in the High Court proceedings as rendering the matter res judicata.
The President accordingly rejected the claim by the first respondent that these sums could be set off against the sums due by the first respondent to the company.
It has been treated as settled law in England since the decision of the Court of Appeal in In re Anglo-French Co-Operative Society, Ex Parte Pelly [1882] 21 Ch. D. 492, that an officer of a company, who has been found liable to pay money to the company in misfeasance proceedings, is not entitled to set off a debt owing by the company to him against that liability. It appears from the judgments in that and subsequent cases that the reason for the rule was that the right of set off only arose in the case of actions between parties. However, it was also pointed out by Hall V.C. in another case referred to in a footnote in In re Anglo-French Co-Operative Society, Ex Parte Pelly ,that no right of set off would in any event arise unless the debts could be said to be mutual. In the present case, there is clearly no mutuality between the monies sought to be recovered by the liquidator as having been misapplied by the first respondent in breach of his fiduciary duties as director, and the sums claimed by him in respect of the transactions just summarised.
Counsel for the respondents, in any event, did not invite the Court to disapprove of the authorities to which I have referred, but contented himself with suggesting that they should have no application where the company is solvent. The authorities, however, lend no support to that view. They proceed on the basis that the corresponding sections in England afford the liquidator an expeditious summary remedy to recover monies or property of the company wrongfully spent or misapplied by an officer, and that to allow cross claims by the officer to be litigated on such an application would be inconsistent with the nature of the remedy provided.
I am satisfied that the submission made on behalf of the liquidator is correct, and, even if the sums claimed by the first respondent were recoverable against the company, they could not properly be set off against the sums found to be owing by him to the company. Counsel for the liquidator accepted that this would not preclude the first respondent from proving for these alleged debts as an unsecured creditor in the winding-up. He also accepted that, while it was obvious that the liquidator would not admit these alleged debts, he would not seek to rely on the determination of the issue in the High Court proceedings as rendering the matter res judicata.
– 26 -Re Bank of Credit and Commerce International SA (No 8) [1998] AC 214
Lord Hoffmann held that the charges were valid and not conceptually impossible. He referred to the general attributes of charges and went on. He said the right to claim payment of a deposit with a bank is a chose in action – a proprietary right. It can be granted to a third party. So a charge could be created over a deposit in favour of BCCI. He said as follows.[3]
“ The doctrine of conceptual impossibility was first propounded by Millett J. in In re Charge Card Services Ltd [1987] Ch 150, 175-176 and affirmed, after more extensive discussion, by the Court of Appeal in this case. It has excited a good deal of heat and controversy in banking circles; the Legal Risk Review Committee, set up in 1991 by the Bank of England to identify areas of obscurity and uncertainty in the law affecting financial markets and propose solutions, said that a very large number of submissions from interested parties expressed disquiet about this ruling. It seems clear that documents purporting to create such charges have been used by banks for many years. The point does not previously appear to have been expressly addressed by any court in this country. Supporters of the doctrine rely on the judgments of Buckley L.J. (in the Court of Appeal) and Viscount Dilhorne and Lord Cross of Chelsea (in the House of Lords) in Halesowen Presswork & Assemblies Ltd v Westminster Bank Ltd [1971] 1 QB 1; [1972] A.C. 785 . The passages in question certainly say that it is a misuse of language to speak of a bank having a lien over its own indebtedness to a customer. But I think that these observations were directed to the use of the word lien,” which is a right to retain possession, rather than to the question of whether the bank could have any kind of proprietary interest. Opponents of the doctrine rely upon some 19th-century cases, of which it can at least be said that the possibility of a charge over a debt owed by the chargee caused no judicial surprise.
The reason given by the Court of Appeal [1996] Ch. 245, 258 was that “a man cannot have a proprietary interest in a debt or other obligation which he owes another.” In order to test this proposition, I think one needs to identify the normal characteristics of an equitable charge and then ask to what extent they would be inconsistent with a situation in which the property charged consisted of a debt owed by the beneficiary of the charge. There are several well-known descriptions of an equitable charge (see, for example, that of Atkin LJ in National Provincial and Union Bank of England v Charnley [1924] 1 KB 431, 449-450) but none of them purports to be exhaustive. Nor do I intend to provide one. An equitable charge is a species of charge, which is a proprietary interest granted by way of security. Proprietary interests confer rights in rem which, subject to questions of registration and the equitable doctrine of purchaser for value without notice, will be binding upon third parties and unaffected by the insolvency of the owner of the property charged. A proprietary interest provided by way of security entitles the holder to resort to the property only for the purpose of satisfying some liability due to him (whether from the person providing the security or a third party) and, whatever the form of the transaction, the owner of the property retains an equity of redemption to have the property restored to him when the liability has been discharged. The method by which the holder of the security will resort to the property will ordinarily involve its sale or, more rarely, the extinction of the equity of redemption by foreclosure. A charge is a security interest created without any transfer of title or possession to the beneficiary. An equitable charge can be created by an informal transaction for value (legal charges may require a deed or registration or both) and over any kind of property (equitable as well as legal) but is subject to the doctrine of purchaser for value without notice applicable to all equitable interests.
The depositor’s right to claim payment of his deposit is a chose in action which the law has always recognised as property. There is no dispute that a charge over such a chose in action can validly be granted to a third party. In which respects would the fact that the beneficiary of the charge was the debtor himself be inconsistent with the transaction having some or all of the various features which I have enumerated? The method by which the property would be realised would differ slightly: instead of the beneficiary of the charge having to claim payment from the debtor, the realisation would take the form of a book entry. In no other respect, as it seems to me, would the transaction have any consequences different from those which would attach to a charge given to a third party. It would be a proprietary interest in the sense that, subject to questions of registration and purchaser for value without notice, it would be binding upon assignees and a liquidator or trustee in bankruptcy. The depositor would retain an equity of redemption and all the rights which that implies. There would be no merger of interests because the depositor would retain title to the deposit subject only to the bank’s charge. The creation of the charge would be consensual and not require any formal assignment or vesting of title in the bank. If all these features can exist despite the fact that the beneficiary of the charge is the debtor, I cannot see why it cannot properly be said that the debtor has a proprietary interest by way of charge over the debt.
The Court of Appeal said that the bank could obtain effective security in other ways. If the deposit was made by the principal debtor, it could rely upon contractual rights of set-off or combining accounts or rules of bankruptcy set-off under provisions such as rule 4.90. If the deposit was made by a third party, it could enter into contractual arrangements such as the limitation on the right to withdraw the deposit in this case, thereby making the deposit a “flawed asset.” All this is true. It may well be that the security provided in these ways will in most cases be just as good as that provided by a proprietary interest. But that seems to me no reason for preventing banks and their customers from creating charges over deposits if, for reasons of their own, they want to do so. The submissions to the Legal Risk Review Committee made it clear that they do.
If such charges are granted by companies over their “book debts” they will be registrable under section 395 and 396(1)(e) of the Companies Act 1985. There is a suggestion in the judgment of the Court of Appeal that the banking community has been insufficiently grateful for being spared the necessity of registering such charges. In my view, this is a matter on which banks are entitled to make up their own minds and take their own advice on whether the deposit charged is a “book debt” or not. I express no view on the point, but the judgment of my noble and learned friend, Lord Hutton, in Northern Bank Ltd v Ross [1990] BCC 883 suggests that, in the case of deposits with banks, an obligation to register is unlikely to arise.
Since the decision in In re Charge Card Services Ltd [1987] Ch 150 statutes have been passed in several offshore banking jurisdictions to reverse its effect. A typical example is section 15A of the Hong Kong Law Amendment and Reform (Consolidation) Ordinance (c. 23) , which I have already mentioned. It reads:
“For the avoidance of doubt, it is hereby declared that a person (‘the first person’) is able to create, and always has been able to create, in favour of another person (‘the second person’) a legal or equitable charge or mortgage over all or any of the first person’s interest in a chose in action enforceable by the first person against the second person, and any charge or mortgage so created shall operate neither to merge the interest thereby created with, nor to extinguish or release, that chose in action.”
There is similar legislation in Singapore (section 9A of the Civil Law Act (c. 43)); Bermuda (the Charge and Security (Special Provisions) Act 1990 (c. 53) ) and the Cayman Islands (the Property (Miscellaneous Provisions) Law 1994 (No. 7 of 1994) ). The striking feature about all these provisions is that none of them amend or repeal any rule of common law which would be inconsistent with the existence of a charge over a debt owed by the chargee. They simply say that such a charge can be granted. If the trick can be done as easily as this, it is hard to see where the conceptual impossibility is to be found.
In a case in which there is no threat to the consistency of the law or objection of public policy, I think that the courts should be very slow to declare a practice of the commercial community to be conceptually impossible. Rules of law must obviously be consistent and not self-contradictory; thus in Rye v Rye [1962] AC 496, 505, Viscount Simonds demonstrated that the notion of a person granting a lease to himself was inconsistent with every feature of a lease, both as a contract and as an estate in land. But the law is fashioned to suit the practicalities of life and legal concepts like “proprietary interest” and “charge” are no more than labels given to clusters of related and self-consistent rules of law. Such concepts do not have a life of their own from which the rules are inexorably derived. It follows that in my view the letter was effective to do what it purported to do, namely to create a charge over the deposit in favour of B.C.C.I.
Headstart Global Fund Ltd -v- Citco Bank Nederland NV & Ors
[2010] IEHC 334
Clarke J.
1.1 This case involves the obscure (at least to the uninitiated) world of hedge funds and repo transactions. The case also involves a long standing difficulty which the courts have faced in cases which might loosely be said to involve the problem of two innocents. In such cases, due to wrongdoing on the part of a third party, one person loses property which ultimately ends up (or so it might be argued) in the hands of a second. Neither the original losing party nor the ultimate receiving party have done any wrong. The intervening wrongdoer either has disappeared or has no assets. The court is left with a choice of restoring the property to the original owner (which might seem unfair in many cases to the party ultimately acquiring the property) or leaving it where it is (which may seem equally unfair to the original owning party). By and large the courts have attempted to grapple with this difficult problem by attempting to follow the ownership of the property concerned through whatever series of transactions may have intervened between the handing over of the property from its original owner to its ultimate receipt by the other contender.
1.2 The plaintiff (“Headstart”) operates as a hedge fund. The other real contender in these proceedings is the third named defendant (“RMF”) which also operates as a hedge fund. The first named defendant (“Citco”)is a bank located in the IFSC where, on Headstart’s case, the funds, the subject matter of these proceedings, ultimately ended up. As will become clear in the course of this judgment, funds were frozen in an account held by RMF at Citco pending the result of these proceedings. It became clear at the very commencement of the proceedings that no accusation against Citco itself was being made. In those circumstances, counsel for Citco withdrew and Citco agreed to abide by any order which the court might make. The second named defendant (“Nexus”) did not enter an appearance nor did it take any part in these proceedings. Nexus was involved in the original transaction whereby monies were paid out by Headstart in circumstances which Headstart alleges amounts to fraud.
1.3 Ultimately Headstart says that what it claims to be its money ended up in the account maintained by RMF at Citco. Headstart argues that the monies remain its monies and that it is entitled to have them back. RMF says that it received the relevant monies as payment of sums already due. That fact is not, in itself, contested. The case turns, therefore, principally, on the question of whether, following the ownership trail of the monies concerned, the monies ultimately paid into Citco Bank to the credit of RMF and ultimately frozen there are, in truth, Headstart’s monies.
1.4 Quite an amount of the factual background to these proceedings is not in dispute and I turn, therefore, to that factual background.
2. The Factual Background
2.1 Headstart is a Cayman Island registered company which, as I have pointed out, operates as a Hedge Fund. RMF is also a Cayman Island registered investment company. In the context of the transactions which are at the heart of these proceedings, it is also necessary to identify some other players. DD Growth Premium Fund (“DD”) is a further Cayman Island registered Hedge Fund. It, like the other Cayman Islands funds referred to, is entitled to dispense with the Ward Limited in its name. The investment manager of that Fund is an English registered company based in London called DD Capital Management Limited (“Management”). On the evidence it is clear that a Dr. Alberto Micalizzi (“Dr. Micalizzi”) was at least a significant person in relation to DD and Management. It will be necessary to return to the precise status of Dr. Micalizzi in due course.
2.2 From March, 2007 Headstart had dealings with DD, starting with an initial investment of US$5,000,000.00 at that time. RMF also had dealings with an associated entity from September, 2007 investing an initial sum of approximately US$25,000,000.00 into a related fund known as the DD Growth Premium 2X Fund (“DD2X”). Both DD and DD2X are so called feeder or investor funds for what was called the DD Growth Master Fund (“the Master Fund”). Management was also the manager of DD2X and the Master Fund.
2.3 It is appropriate at this stage to say something about those funds and their inter relationship. The Master Fund invested in so called “pairs” of companies. For these purposes a pair of companies involve two companies in broadly the same business which are quoted on major international stock exchanges. Thus, investments in such companies are highly liquid with the funds invested being capable of being realised in short course. While the precise method of investment used by the Master Fund is not of particular relevance to the issues which I have to decide, it would appear on the evidence that the strategy followed by the Master Fund was to invest in such a pair of companies at a time when the share price of the respective companies relative to each other appeared to have moved out of kilter with the norm. The underlying rationale of the investment strategy was that companies in the same broad general business have, traditionally, and for hardly surprising reasons, followed a broadly similar trend as to their share price. The assumption is that any such short term deviation from the historical relationship between the share prices of the two shares in question is likely to be corrected. With that in mind, the Master Fund typically took what is called a long position in the share which was lower than expected. Likewise, a so called short position was taken on the share that was higher than expected. In the event that the expected re-convergence of the share price, as and between the two shares, occurs, then the fund will make a profit because the share price of the lower share will recover during the currency of the long position thus revealing a profit, while the share price of the other company will remain higher during the short period in respect of which the investment in that company operated.
2.4 It would appear that actual investments in shares in such publicly quoted pair companies were held through the Master Fund. Both DD and DD2X invested in the Master Fund and, thus, shared in its profits (should it be successful). The difference between DD and DD2X was that investments in DD2X were geared up by virtue of that Fund borrowing a matching amount of money to the relevant investment. Thus, for every US€1.00 put into that Fund by an investor US$2.00 (being the original investment plus an equivalent amount of borrowing) was ultimately invested in the Master Fund. It follows that, by virtue of that gearing, investors in DD2X would obtain twice (hence the name 2X) the profits of those in DD, but would be liable for twice the losses in the event that the investment strategy was unsuccessful.
2.5 It should, however, be emphasised that the three Funds were distinct legal entities. While there was clearly a connection between them, and between each of them and Dr. Micalizzi, the precise legal relationship between them is a matter which will need further consideration in due course.
2.6 In any event, as has been pointed out, both Headstart and RMF had a relationship with the DD Funds generally and with Dr. Micalizzi well before the events which give rise to these proceedings.
2.7 Against that general background it is necessary to move to the latter part of 2008 and the early part of 2009, when the events which give rise to these proceedings occurred. It will be recalled that that time was one of almost unprecedented volatility in financial markets. Lehman Brothers had collapsed in the autumn of 2008, Mr. Bernard Madoff had been exposed in December and the whole international financial system was in a state of turmoil.
2.8 During that period two separate sets of transactions relevant to these proceedings were ongoing involving respectively Headstart and RMF. On the RMF side a decision was taken to redeem a significant portion of its investment in DD2X. It will be recalled that each of the funds was intended to be highly liquid. With that in mind, the terms of investment in each of the funds permitted an investor to obtain a repayment in early course. Given the liquid nature of the investments, no difficulty should have been encountered in the relevant fund liquidating a sufficient part of its investments to repay any investor within such a short timeframe. RMF partially redeemed its investment in DD2X by redemption exercised on the 29th and 31st October, 2008. Any such redemption had a redemption date by reference to which the value of the interest of the investor concerned in the relevant fund was to be valued. In this case the redemption date was the 30th November and RMF was, therefore, entitled to be paid funds as of the 14th December. Some but not all of the funds due were paid but an amount remained owing to RMF. In the latter part of December, 2008 and through January, 2009, RMF were pressing DD2X for payment. It is not disputed but that RMF were entitled to be paid those monies by DD2X .
2.9 In parallel, and on the 16th January, 2009, the evidence establishes that Dr. Micalizzi approached Headstart with a proposal for a so called “repo transaction”. A repo transaction is, in legal form, a sale and repurchase transaction normally involving a financial asset. Under the terms of a typical repo transaction a purchaser agrees to buy the relevant asset at a price significantly below its market value. However, there is a further agreement that it be resold back to the original seller after a pre-defined period and at a pre-defined profit. Assuming all goes well, the seller will have the benefit of the cash price for the agreed period while the purchaser will obtain a profit in the shape of the difference between the sale price and the resale price. The purchaser will, of course, have to meet any transaction costs out of that profit so the difference between the sale and resale price should not be taken as pure profit. In the ordinary way, the purchaser is given comfort in that it owns the relevant asset during the period when it is out of its money. Indeed, given that the asset has been purchased at a fraction of its true value, the ownership of the asset during the relevant period should, in most cases, provide very significant comfort.
2.10 In commercial substances, although not in legal form, the transaction is in reality a loan secured by the transfer of the ownership of an asset worth significantly more than the amount of the loan.
2.11 The proposal originally put to Headstart involved Nexus. The approach was made by Dr. Micalizzi. The connection of Nexus with Dr. Micalizzi is not clear and the subject of some controversy. It was said at the time by Dr. Micalizzi that Nexus was itself an investor in the DD funds. The original proposal was made by email which noted that an unnamed investor in what was described as the DDGP had US$75,000,000.00 worth of investments. It was suggested that that unnamed investor needed a one week repo for US$25,000,000.00. The suggested profit was to be US$1.25M.
2.12 It will be necessary to say something more about the course of dealing between Headstart and Dr. Micalizzi in relation to the repo transaction in due course. However, ultimately the transaction went ahead in part. Headstart indicated that it was not interested in a transaction at US$25,000,000.00 but would be interested at US$5,000,000.00. The text of relevant contractual arrangements was agreed with legal assistance. In substance, the deal appeared to be one in which Headstart would buy part of the holding of Nexus in a DD Fund for US$5,000,000.00. There was to be a gross profit of 7% for two weeks with further amounts in the event of delay or default. The money was to be paid to Nexus.
2.13 However, at the last minute, it was suggested by Dr. Micalizzi that, rather than the purchase price of US$5,000,000.00 being transferred to Nexus, it should be transferred into a UK account held by the Master Fund. This was agreed. The reason given for the suggestion was that Nexus was based in Australia and that the timing differential between Australia and Europe could be alleviated by transferring to an account in the United Kingdom.
2.14 A further difficulty emerged concerning the actual transfer of what was said to be Nexus’ interest in the relevant DD Fund. It was said that rather than that transfer taking place instantaneously, it might be delayed for a day. It subsequently proved impossible for Headstart to obtain any timely registration of Headstart’s interest in the Nexus investment.
2.15 The period of the investment was lengthened by agreement. However, ultimately Headstart became frustrated and suspicious by reason of a combination of factors, not least the difficulty in securing repayment within the period agreed or even the extended period allowed, coupled with the difficulty in securing registration of the ownership of the relevant asset. This latter problem was said, by the company charged with affecting such registration, to be due to a failure on the part of Nexus to have complied with money laundering legislation.
2.16 In any event, Headstart employed a former senior UK policeman, now operating as a private investigator, to look into the matter. In circumstances which it may be necessary to address in due course, that investigator appears to have become aware of a money trail which lies at the heart of this case. The proper characterisation of that money trail is, indeed, one of the issues between the parties. However, it was established in evidence that there were a series of transactions, immediately following the payment from Headstart into the relevant DD account (i.e. the Master Fund account) of the US$5,000,000.00 to which I have referred. All bar the last of those transactions involved payments as and between entities within the DD stable. The final payment was into the RMF account at Citco which payment was in partial discharge of the liability of DD2X to RMF, to which I have already referred.
2.17 Subsequently, funds in that RMF account at Citco were, as I have pointed out, frozen.
2.18 Against that general background it is next necessary to turn to the issues which arise in these proceedings.
3. The Issues
3.1 The case made by Headstart involves a number of propositions. First, it is said that the circumstances leading to the payment by Headstart into the Master Fund account amounted to fraud. It is said that, as a consequence, the Master Fund had only a voidable title to the monies so paid.
3.2 That question gives rise to the first issue in these proceedings. Is it proper to characterise the payment by Headstart of US$5,000,000.00 as conferring only a voidable title on the Master Fund? If the Master Fund obtained full title to the monies, then no question as to the ownership of those funds thereafter could arise. RMF contests Headstart’s claim that it has been established that the Master Fund had a voidable title to the monies.
3.3 The second element of Headstart’s case involves tracing the monies from their initial payment by Headstart until their ultimate payment into the RMF account at Citco. It is said by Headstart that, in accordance with the equitable rules on tracing, it is appropriate to treat the monies passing at each step of the relevant transactions as being the same monies so that, on the basis of that argument, the monies ultimately paid into the Citco account on behalf of RMF are said to be Headstart’s monies. On a variety of grounds RMF contest that suggestion. The second set of issues, therefore, concern whether, on the assumption that the Master Fund only had a voidable title in the relevant monies when same were received by them from Headstart, the equitable doctrine of tracing will treat the monies, as paid over by DD2X to RMF, as being the same monies and subject to the same voidable title.
3.4 The third issue arises out of the circumstances in which the relevant monies came to be paid to RMF. It is common case that RMF were already owed at least US$5,000,000.00 by DD2X. The monies were, therefore, paid in discharge of a lawful and genuine debt. In those circumstances the question arises as to whether RMF should be treated as a bona fide purchaser for value so that RMF would acquire good title to the monies, even if the title of DD2X up to that point was voidable.
3.5 So far as the series of transactions are concerned there are, therefore, three issues. They concern the beginning, middle, and end of the series of transactions.
3.6 In addition, some further points are made on behalf of RMF. First, it is said that it is inappropriate for Headstart to maintain these proceedings without joining some or all of the DD Funds (especially the Master Fund and DD2X) and/or Dr. Micalizzi. The basis for that suggestion stems from the fact that the fraudulent activity is said to be that of those funds acting through Dr. Micalizzi or Dr. Micalizzi personally and that the monies passed through the hands of those funds. There is no doubt that the factual basis for RMF’s suggestion is correct. It will be necessary to address the legal consequences of that situation in due course.
3.7 In addition, RMF make a complaint about the manner in which the investigation report to which I have referred was compiled. It is said that the appropriate inference to draw from the evidence is that the investigator concerned obtained information in breach of the duty of confidence of various banks or others involved in the financial transaction system. In addition, it is said that there was a lack of candour displayed on behalf of Headstart when an order was originally applied for seeking the freezing of the monies in the relevant Citco account. It may be necessary to go into the facts of that issue in more detail and also to deal with any possible legal consequences of such facts as might be found.
3.8 However, it is clear that the starting point for a consideration of the issues must be to determine the question as to whether the original payment by Headstart to the Master Fund only gave DD a voidable title in the relevant property. It should, however, be noted that that issue is closely linked to the question raised by RMF which seeks to place reliance on the fact that Dr. Micalizzi was not joined. I also propose to address that issue in the next section of this judgment. I, therefore, turn to those issues.
4. The Original Headstart Payment
4.1 Leaving aside, for the moment, those issues arising from the non-joinder of Dr. Micalizzi, the evidence given on behalf of Headstart, prima facie, establishes a number of matters.
4.2 First, the various DD Funds were always presented as being highly liquid funds. That was part of their attraction. An investor would be entitled to get its money back in relatively short order should the investor concerned require it. Indeed, evidence given on behalf of RMF confirmed that fact.
4.3 Second, it is clear that, by the latter part of 2008, the DD Funds generally were suffering a significant liquidity problem. Reports of liquidators appointed in the Cayman Islands to the various DD Funds registered there make clear that the funds had suffered significant losses throughout 2008 (doubtless due to the then prevailing international conditions). It seems clear on the evidence that the DD Funds had not admitted those losses to their investors. Indeed, I am satisfied on the evidence that Dr. Micalizzi continued to represent that the funds remained highly liquid during the period in question. Witnesses called on behalf of both Headstart and RMF agreed that, what they were respectively being told in their capacity as investors by Dr. Micalizzi at the relevant time was clearly untruthful. It would appear that, in substance, much of the funds which should have been invested in companies quoted on major stock exchanges, ultimately came to be invested in some form of Russian bond whose status is unclear but whose liquidity was, on any view, highly limited.
4.4 There can be not doubt, therefore, but that at the relevant time, that is to say early 2009, Dr. Micalizzi was knowingly involved in giving a false picture of the then current status of the DD Funds to his investors. Indeed, it is clear that part of the reason why RMF became concerned about its investment was because, in the words of one of its witnesses, it became clear that Dr. Micalizzi was lying to them. That the DD Funds were not, as of early 2009, as they were being held out to be, is manifestly clear. That the representations being made generally about the funds by Dr. Micalizzi were knowingly false is also clear.
4.5 The precise situation in relation to the Nexus repo transaction is not, however, so clear. The precise role of Nexus is shrouded in doubt. A number of possibilities exist. First, it is possible that Nexus was simply a vehicle either controlled by Dr. Micalizzi or, although independently controlled, was happy to work along with Dr. Micalizzi, and in either event was used for the purposes of creating a false repo transaction so as to extract some money from an investor such as Headstart to meet the pressing cash flow demands such as those which were, at the relevant time, being pressed by RMF. On that scenario Nexus, whether independent or controlled by Dr. Micalizzi, was simply a knowing vehicle for a transaction which was entirely false.
4.6 A second possibility is that Nexus was a genuine party who had the cash flow needs identified by Dr. Micalizzi and who bona fide entered into the repo transaction. In that eventuality, it remains the case that representations made by Dr. Micalizzi to Headstart about the transaction were false (and false to Dr. Micalizzi’s knowledge). The representations were false because the ultimate security for the transaction was Nexus’ holding in relevant DD Funds, which in turn depended on the status of those funds being as it appeared. For the reasons I have already set out that was not the case, and it would have been known by Dr. Micalizzi that the representations as to the then current status of relevant DD Funds was false. The question which arises in that context, however, is as to whether the fact that Dr. Micalizzi made representations to Headstart which were false could affect the title of Nexus to any monies properly paid over on foot of the relevant transaction (on the assumption, which underlies this part of the judgment, that Nexus was a genuine and bona fide party).
4.7 A further issue arises as to the circumstances in which the monies due to Nexus by Headstart under the repo transaction came to be paid into a DD account. There are again two possibilities. It would appear that, at some stage, Dr. Micalizzi suggested to Headstart personnel that the true reason for payment in that way was that Nexus owed money to relevant DD Funds so that, even if the monies were, prima facie, due to Nexus, it was appropriate to arrange for them to be paid into a DD account in discharge of that alleged Nexus obligation. That is, therefore, one possibility. On that scenario, the monies were genuinely owed by Headstart to Nexus on foot of the transaction (subject to that transaction being possibly capable of being avoided by virtue of Dr. Micalizzi’s fraudulent misrepresentation), but a similar sum was also owed by Nexus on foot of a commitment to invest in DD Funds which had not been fully met. On that scenario, there would be nothing wrong, in itself, provided Nexus agreed, with the monies being transferred direct to the DD Fund in question. Whether Nexus did agree in such an eventuality is a question upon a question.
4.8 The alternative scenario is, of course, that, even if Nexus was a genuine party, it too was defrauded by Dr. Micalizzi who, on that scenario, fraudulently diverted the monies from the original intention that same be paid direct to Nexus, into a DD account.
4.9 It is against the background of those (and, indeed, other possible) scenarios that it is necessary to consider the evidence and also to consider the affect, if any, of the non-joinder of Dr. Micalizzi.
4.10 So far as the repo transaction itself is concerned, it is the failure to join Dr. Micalizzi that is principally relied on. The failure to join the relevant DD Funds (that is the Master Fund who received the original money from Headstart and DD2X which made the payment into the RMF account at Citco) are concerned more with the second question as to tracing.
4.11 It is said on behalf of RMF that it is inappropriate for Headstart to seek to persuade the court that a fraud was committed on it by Dr. Micalizzi without joining Dr. Micalizzi as a party. A similar suggestion is made in respect of Manager. I am not satisfied that that submission is well founded. Dr. Micalizzi does not appear to have any proprietary right in any of the assets which are the subject of these proceedings. Any finding of fact by the court in proceedings to which Dr. Micalizzi was not a party cannot bind him. He cannot have any legal rights affected by any judgment which the court might give in these proceedings. It is, of course, the case that the courts are reluctant to allow unnecessary evidence, which may cause reputational damage to parties not before the court, to be given. However, in some proceedings such evidence may be necessary. A party should not be required to be joined simply because accusations about that party are to be made where no relief is being sought, either against that party or in relation to matters which would affect the legal rights of that party. The situation might well be otherwise were the reliefs claimed capable of affecting the legal interests of such a party. That seems to follow from the judgment of Lynch J. in Tassin Din v. Ansbacher & Co (Unreported, High Court, Lynch J., 20th April, 1987).
4.12 That being said it does not, of course, follow that the absence of Dr. Micalizzi from the proceedings may not have an effect on the evidence. For example, had Dr. Micalizzi been joined (and had he participated) it might be that greater clarity could have been brought to the precise circumstances in which Nexus became involved. However, it is illustrative to note that the joinder of Nexus did not bring any such clarity.
4.13 In my view it is necessary for the court, as in all cases, to reach such conclusions as to the facts as it can on the admissible evidence presented and having regard to the onus of proof. In my view the evidence supports the fact that, on the balance of probabilities, Dr. Micalizzi was suffering a significant cash flow problem in the early part of 2009. Indeed, the very fact that RMF had lost confidence in him and were pressing for payment of monies already due supports that conclusion. In my view it is unnecessary on this point to determine whether Nexus was a willing party to a scheme on the part of Dr. Micalizzi to improve his cash flow by putting in place a repo transaction, or whether Nexus themselves were duped as part of such a transaction. In either event, the transaction as a whole was put in place by Dr. Micalizzi as part of a fraudulent scheme to obtain US€5,000,000.00 from Headstart so to enable DD2X to pay off some of its obligations. I have come to that view for a number of reasons.
4.14 First, all of the evidence (including evidence from RMF) suggests that Dr. Micalizzi was lying about the status of the DD Funds generally at the relevant time. Dr. Micalizzi was under significant pressure to pay debts from the funds and same conflicting explanations at different times. In addition, I am satisfied on the evidence that Dr. Micalizzi was the driving force behind all of the arrangements put in place. All of the evidence points to substantive dealings with the funds being principally with and to Dr. Micalizzi. It seems clear that both RMF and Headstart treated any high level dealings with the funds as being dealings which they were likely to have with Dr. Micalizzi personally. It is, however, true to note that the signatories on a number of the relevant transactions were persons other than Dr. Micalizzi.
4.15 In that context it is proper to have regard to the decision of the Supreme Court in Salthill Properties Limited v. Porteridge Trading Limited [2006] IESC 35. It is clear from the judgment of McCracken J. in that case that a court is entitled to impute to a company, the knowledge of a person who exercises a reasonable degree of control over the affairs of the company, even though the person concerned may not actually be formally a director. While Salthill specifically turned on the onus of proof in such cases, it is clear from the judgment of McCracken J. that, had the defendant company in that case discharged a prima facie onus of proof on it, it would have been open to the plaintiff the satisfy the court by evidence that the closeness of the relationship between the principal of the defendant company (who was not a director) and the extent of control which he exercised over its affairs, was such as would entitle the court to impute to the company any knowledge which that principal might have.
4.16 Likewise, it seems to me that it is open in principle to Headstart in this case to seek to impute to any of the funds any knowledge which Dr. Micalizzi might have, for it is clear on the evidence that there was a very close relationship between Dr. Micalizzi and each of the funds such that Dr. Micalizzi appeared to be able to speak for the funds in dealings with third parties such as both Headstart and RMF. Indeed, RMF’s dissatisfaction with the funds was attributed the fact that Dr. Micalizzi was, in the view of RMF, lying to them.
4.17 I am, therefore, satisfied that the money paid by Headstart into the Master Fund account, as the initial part of the series of relevant transactions, was part of a fraudulent scheme on the part of Dr. Micalizzi to procure monies from Headstart for the purposes of satisfying urgent cash flow demands. Whether the Master Fund can be fixed with the consequences of that fact is the next question that arises.
4.18 It is also necessary to consider the fallback argument made on behalf of Headstart which relied on the fact that the transaction with Nexus was procured by a fraudulent misrepresentation on the part of Dr. Micalizzi concerning the current status of the DD Funds. It is clear that Dr. Micalizzi did falsely represent the then status of the funds. Rather than being in good order and highly liquid the funds had lost very substantial sums of money and were heavily invested in a highly illiquid Russian bond. As the repo transaction itself related to a sale and repurchase of an interest in the funds, then representations concerning the status of the funds was necessarily highly material. I accept Headstart’s evidence that it would not have contemplated entering into the repo transaction had it not been for the representations as to the status of the fund. That those representations were false to Dr. Micalizzi’s knowlege is also clear. There is, however, a question as to whether Dr. Micalizzi can be said to have been acting as an agent on behalf of Nexus in the transaction. Clearly if it were the case that Nexus was either a vehicle for Dr. Micalizzi or a willing partner in a plan by Dr. Micalizzi to solve his cash flow problems, then it would undoubtedly be appropriate to characterise Dr. Micalizzi as an agent of Nexus such that Nexus would be fixed with the consequences of the undoubted fraudulent representations made by Dr. Micalizzi on the occasion in question. If, on the other hand, Nexus was itself duped by Dr. Micalizzi, then a more difficult question might arise as to whether Nexus could be said to have to bear responsibility for Dr. Micalizzi’s fraudulent misrepresentation. I am not satisfied that it has been established on the balance of probabilities that Nexus was aware of the fraudulent intent of Dr. Micalizzi. It may have been. It is simply that I am not satisfied that there is sufficient evidence to allow such a conclusion to be reached.
4.19 It is next necessary to turn to the consequences of the finding that Dr. Micalizzi was guilty of fraud. In that context, I turn to the issue concerning the non-joinder of the Master Fund and DD2X.
4.20 Before dealing with the question of whether the relevant funds can be traced through the various accounts of different DD Funds prior to their ultimate transmission to the RMF account at Citco, it is necessary to deal with the fact that none of the relevant DD Funds were parties to these proceedings. As pointed out earlier in the context of the non-joinder of Dr. Micalizzi, different considerations may apply where a judgment of the court can have an effect on the actual legal rights and liabilities of parties who are not joined. It seems to me that a judgment in these proceedings in favour of Headstart has a real potential to have an affect on the entitlements of the various DD Funds. It must be recalled that the DD Funds are now undergoing an insolvency procedure in the Cayman Islands. In truth, the entitlements of the DD Funds are now the entitlements of their creditors which, of course, include both Headstart and RMF but also other parties. A finding by this Court along the lines urged on behalf of Headstart has, in my view, at least a potential to affect the rights of those funds and through them their creditors. The question which arises is as to whether it would, therefore, be appropriate to make any such order without giving those currently in charge of the funds (presumably the liquidators) an opportunity to be heard. In my view it would not. While I have, in the previous section, expressed the view that, on the evidence before me, Headstart had established that the arrangements entered into by Dr. Micalizzi were part of a fraudulent scheme on his part in respect of which knowledge might be imputed to the relevant DD Funds, it seems to me that any consequences of such a finding which could affect the proprietorial or property interests of the DD Funds cannot be made without giving the relevant DD Funds an opportunity to be heard.
4.21 It certainly cannot be ruled out that a finding in favour of Headstart in this case could affect the entitlements of various DD Funds or their creditors. As pointed out on behalf of RMF, the liquidators of the funds have indicated that they may seek to reverse transactions entered into by the funds in the period prior to the funds going into liquidation. Without giving the funds an opportunity to be heard in these proceedings, it is possible that there could be unintended consequences for the ability of the liquidators to give effect to remedies to which they might otherwise be entitled with adverse consequences. Thus, the property or proprietorial interests of the funds have the potential to be affected by any judgment which I might deliver in this case. In those circumstances it does not seem to me that it would be appropriate to form a view as to whether the title acquired by any of the DD Funds is capable of being challenged without giving the current representatives of those funds (i.e. the liquidators) an opportunity to be heard. As currently constituted I am not, therefore, satisfied that it is open to me to make the findings urged on behalf of Headstart.
5. Conclusions
5.1 In the light of that finding, it seems to me that I should afford the parties an opportunity to consider this judgment and to make submissions as to what the consequences should be.
5.2 When the parties have had an opportunity so to do, I will arrange to have the matter re-listed to enable further consideration to be given.
S.I. No. 624/2010 –
European Communities (Settlement Finality) Regulations 2010.
ARRANGEMENT OF REGULATIONS
I, BRIAN LENIHAN, Minister for Finance, in exercise of the powers conferred on me by section 3 of the European Communities Act 1972 (No. 27 of 1972), and for the purpose of giving effect to Directive 98/26/EC of the European Parliament and of the Council of 19 May 19981 (as amended by Directive 2009/44/EC of the European Parliament and of the Council of 6 May 20092 ), hereby make the following Regulations:
Citation, commencement and application
1. (1) These Regulations may be cited as the European Communities (Settlement Finality) Regulations 2010.
(2) These Regulations come into operation on 30 June 2011.
(3) These Regulations apply to—
(a) designated systems that are subject to the law of the State (regardless of the currency or currencies in which such systems operate),
(b) participants in systems referred to in subparagraph (a), and
(c) collateral security provided in connection with participation in such a system, or operations of a central bank in the context of its function as a central bank.
Interpretation
2. (1) In these Regulations
“Bank” means the Central Bank of Ireland;
“business day” for a designated system has the meaning given to it in the rules of that system and, for the avoidance of doubt, covers both day and night-time settlements in that system and includes all events happening during a business cycle of that system;
“central bank” means the European Central Bank or a central bank of a Member State;
“collateral security” means a realisable asset of any kind (including, without limitation, financial collateral referred to in Article 1(4)(a) of Directive 2002/47/EC of the European Parliament and of the Council of 6 June 20023 ) provided under a pledge, a repurchase or similar agreement, or otherwise, for the purpose of securing rights and obligations that may arise in connection with a designated system, or provided to a central bank, and includes money provided under a pledge for that purpose;
“commencement of proceedings” has the meaning given by Regulation 3;
“Court” means the High Court;
“credit institution” means a credit institution (within the meaning of Article 4(1) of Directive 2006/48/EC of the European Parliament and of the Council of 14 June 20064 ), and includes the institutions listed in Article 2 of that Directive;
“default arrangements” means the arrangements established by the operator of a designated system to limit systemic and other types of risks that may arise when a participant is apparently unable, or is apparently likely to become unable, to meet its obligations in respect of a transfer order, and includes
(a) rules that enable action to be taken in respect of unperformed contracts to which the participant is party,
(b) arrangements for netting,
(c) arrangements for the closing-out of open positions, and
(d) arrangements for the application or transfer of collateral security;
“designated system” means a system that has been designated by the Minister, and notified to the European Commission, under Regulation 4, and includes a system referred to in Regulation 16, but does not include a formal arrangement entered into between interoperable systems;
“indirect participant” means an institution, a central counterparty, a settlement agent, a clearing house or a system operator with a contractual relationship with a participant in a designated system which enables the indirect participant to pass transfer orders through the designated system, provided that the indirect participant is known to the system operator;
“insolvency proceedings”—
(a) if under the law of the State and in relation to a body corporate, means—
(i) proceedings for the appointment of an examiner in respect of the body, or
(ii) proceedings for the compulsory winding up of the body, or
(iii) a voluntary winding up (either creditors’ or members’) of the body, or
(iv) proceedings for the appointment of an administrator in respect of the body, or
(b) if under the law of the State and in relation to a natural person, means—
(i) proceedings under which the person is or may be adjudicated bankrupt, or
(ii) if the person has died insolvent, proceedings for the administration in bankruptcy of the person’s estate, or
(iii) proceedings with the objective of the protection by a court of the person and the person’s property from any action or other process, or
(c) if under the law of a Member State other than the State, or a third country, means any collective measure provided for in the law of that Member State or third country to wind up or reorganise a person if the measure involves suspending or imposing limitations on relevant transfers or payments;
“institution” means a credit institution, investment firm, public authority or publicly guaranteed undertaking, or an undertaking whose head office is outside the European Union;
“interoperable systems” means 2 or more systems whose system operators have entered into an arrangement with one another that involves cross-system execution of transfer orders;
“investment firm” means an investment firm as defined in Article 4(1)(1) of Directive 2004/39/EC of the European Parliament and of the Council of 21 April 20045 , but does not include the institutions set out in Article 2(1) of that Directive;
“Member State” means each Member State of the European Union and Iceland, Norway and Liechtenstein;
“Minister” means the Minister for Finance;
“netting” means the conversion into one net claim or one net obligation of claims and obligations resulting from transfer orders within a designated system;
“participant” means—
(a) an institution, a central counterparty, a settlement agent, a clearing house, or a system operator that is a participant in a designated system, or
(b) a person that is treated by the Bank, in accordance with Regulation 5(1), as a participant in a designated system;
“securities” means instruments of the kinds listed in section C of Annex I to Directive 2004/39/EC of the European Parliament and of the Council of 21 April 20045;
“settlement agent”, in relation to a designated system, means a person who provides settlement accounts through which transfer orders are settled (whether or not the person extends credit to participants for settlement purposes);
“settlement account” means an account at the Bank, a central bank, a settlement agent or a central counterparty used to hold funds or securities and to settle transactions between participants in a designated system;
“Settlement Finality Directive” means Directive 98/26/EC of the European Parliament and of the Council of 19 May 19981;
“system” means a formal arrangement—
(a) between 3 or more participants (other than the operator of the system, any settlement agent, any central counterparty, any clearing house or any indirect participant),
(b) with common rules and standardised arrangements for the clearing (whether or not through a central counterparty) or execution of transfer orders between the participants,
(c) governed by the law of a Member State chosen by the participants (being a Member State in which at least one of those participants has its head office),
that has been designated and notified to the European Commission for the purposes of the Settlement Finality Directive;
“system operator” means the entity or entities legally responsible for the operation of a system;
“third country” means a country that is not a Member State, and includes a state, province, region or dependent territory of such a country;
“transfer order” means
(a) an instruction by a participant to place an amount of money at the disposal of a recipient by means of a book entry on the accounts of a credit institution, a central bank, a central counterparty or a settlement agent,
(b) an instruction that results in the assumption or discharge of a payment obligation as defined by the rules of a designated system, or
(c) an instruction by a participant to transfer the title to, or an interest in, a security or securities by means of a book entry on a register or by any other means.
(2) A word or expression used in these Regulations and also in the Settlement Finality Directive has, in these Regulations, unless the contrary intention appears in these Regulations, the same meaning as it has in that Directive.
(3) Nothing in these Regulations prevents a participant from acting as, or carrying out the functions of, a central counterparty, a settlement agent or a clearing house.
(4) Nothing in these Regulations prevents a system operator from acting as a settlement agent, central counterparty or clearing house.
References to commencement of insolvency proceedings
3. (1) For the purposes of these Regulations references to the commencement of insolvency proceedings shall be construed in accordance with this Regulation.
(2)“Commencement” of insolvency proceedings under the law of the State in relation to a body corporate means—
(a) the making by the Court of an order for the appointment of an examiner in respect of the body, or
(b) the making by the Court of an order for the winding up of the body, or
(c) the passing by the members of the body of a resolution for the voluntary winding up (whether creditors’ or members’) of the body.
(3)“Commencement” of insolvency proceedings under the law of the State in relation to a natural person means—
(a) the making of an order of the Court adjudicating the person bankrupt, or
(b) if the person dies insolvent, the making by the Court of an order for the administration in bankruptcy of the person’s estate, or
(c) the making by the Court of an order providing for the protection of the person and the person’s property under an arrangement controlled by the Court.
(4)“Commencement” of insolvency proceedings under the law of a Member State (other than the State) or a third country (whether in relation to a body corporate or a natural person) means the opening (within the meaning given by Article 6 of the Settlement Finality Directive) of insolvency proceedings against the body or person.
Designation of designated systems, etc
4. (1) The Minister may designate a system as a designated system if—
(a) he or she is satisfied that the rules of the system comply with Regulation 7, and
(b) the system is governed by the law of the State.
(2) If the Minister designates a system he or she—
(a) shall so notify the European Commission, and
(b) shall notify the European Commission of the system operator.
Bank may decide that person should be treated as participant in designated system
5. (1) Subject to paragraph (2), the Bank may decide
(a) that a person that participates in a designated system and is responsible for discharging financial obligations arising from transfer orders made through the system is to be treated as a participant, or
(b) that persons belonging to a class of persons that participate in a designated system and are responsible for discharging financial obligations arising from transfer orders made through the designated system are to be treated as participants.
(2) The Bank may decide to treat a person as a participant, or persons belonging to a class of persons as participants, under paragraph (1) only if
(a) the Bank considers that the treatment is justified on the grounds of systemic risk, and
(b) the designated system is one—
(i) in which at least 3 participants (other than a person to be treated as a participant because of that decision) participate, and
(ii) through which transfer orders of the kind referred to in paragraph (c) of the definition of “transfer order” are made.
(3) If the Bank decides to treat a person as a participant, or to treat persons belonging to a class of persons as participants, in a designated system in accordance with paragraph (1), it shall give written notice of its decision to the operator of the system.
(4) An indirect participant shall be taken to be a participant in a designated system only if so doing is justified on the grounds of systemic risk.
(5) An indirect participant’s being taken to be a participant in a designated system under paragraph (4) does not limit the responsibility of the participant through which the indirect participant passes transfer orders to the designated system.
Transfer order and netting to be binding despite insolvency proceedings
6. (1) A transfer order that has entered a designated system is legally enforceable and binding on participants and third parties even if insolvency proceedings against a participant are commenced if (but only if) the transfer order entered the system before the commencement of the proceedings.
(2) Netting is legally enforceable and binding on participants and third parties even if insolvency proceedings against a participant are commenced if (but only if) the transfer orders to which the netting relates were entered into the system before the commencement of the proceedings.
(3) Paragraphs (1) and (2) have effect even in the case of insolvency proceedings against a participant in an interoperable system or against the system operator of an interoperable system which is not a participant.
(4) If
(a) a transfer order entered a designated system after the commencement of insolvency proceedings against a participant in the system, and
(b) the order is executed on the business day (as defined by the rules of the designated system) on which those insolvency proceedings commenced,
the order is legally enforceable and binding only if the system operator can prove that, at the time that the transfer order became irrevocable, it did not know, and had no reason to know, that those proceedings had commenced.
(5) No law, regulation, rule or practice on the setting aside of contracts and transactions entered into before the commencement of insolvency proceedings against a participant in a designated system has the effect of unwinding a netting.
Requirements for rules of designated systems and interoperable systems
7. (1) The rules of a designated system shall
(a) specify the moment at which a transfer order is to be considered to have been entered into the system,
(b) specify the moment after which a transfer order may not be revoked by a participant or any third party, and
(c) prohibit the revocation by a participant or any third party of a transfer order from the moment specified in accordance with paragraph (b).
(2) In the case of interoperable systems, the rules of each system shall specify the moment of entry into that system in such a way as to ensure, as far as possible, that the rules of all the interoperable systems are coordinated in this regard. Unless expressly provided for by the rules of all the interoperable systems concerned, each system’s rules on the moment of entry are not affected by the rules of any other system with which it is interoperable.
(3) In the case of interoperable systems, the rules of each system shall specify the moment of irrevocability from that system in such a way as to ensure, so far as possible, that the rules of all the interoperable systems are coordinated in this regard. Unless expressly provided for by the rules of all the interoperable systems concerned, each system’s rules on the moment of irrevocability are not affected by the rules of any other system with which it is interoperable.
Certain matters to be notified to Bank
8. (1) The Bank is the appropriate authority in the State for the purposes of Article 6.2 of the Directive.
(2) Where a participant in a designated system is a body corporate, the Court shall notify the Bank immediately after making an order for
(a) the appointment of an examiner in respect of the participant, or
(b) the compulsory winding-up of the participant.
(3) Where a participant in a designated system is not a body corporate, the Court shall notify the Bank immediately after making an order
(a) adjudicating the participant bankrupt,
(b) if the participant has died insolvent, for the administration in bankruptcy of the participant’s estate, or
(c) for an arrangement under the control of the Court that involves the protection, by court order, of the participant’s person and property from any action or other process.
(4) Where a participant in a designated system is a body corporate, if the participant becomes subject to a creditors’ or members’ voluntary winding-up, the participant shall notify the Bank immediately after the members have passed a resolution for that winding up.
(5) Immediately after receiving a notification under any of paragraphs (1) to (4), the Bank shall notify the appropriate authorities in the other Member States of the order or the passing of the resolution.
State law relating to insolvency or insolvency proceedings not to affect certain rights and obligations
9. (1) No law of the State relating to insolvency or insolvency proceedings invalidates or otherwise affects
(a) the rights and obligations of a participant arising from participation in a designated system before the commencement of insolvency proceedings against the participant,
(b) a transfer order or a disposition of property made under such an order,
(c) the default arrangements of a designated system, or an action taken under those arrangements, or
(d) the rules of a designated system as to the settlement of transfer orders not dealt with under the system’s default arrangements,
(e) the provision of collateral security,
(f) a contract, scheme or arrangement that provides for realising, or any action taken to realise, collateral security in connection with
(i) participation in a designated system otherwise than under its default arrangements, or
(ii) the operations of a central bank,
or
(g) any disposition of property as result of a contract, scheme or arrangement, or an action, referred to in subparagraph (f).
(2) The powers of a liquidator, provisional liquidator or examiner, the Official Assignee, or a trustee in bankruptcy or other insolvency official appointed under a law of the State, and the powers of a court under a law of the State relating to insolvency or insolvency proceedings, may not be exercised so as to prevent or interfere with
(a) the settlement, in accordance with the rules of a designated system, of a transfer order not dealt with under the system’s default arrangements,
(b) action taken under a designated system’s default arrangements, or
(c) action taken to realise collateral security in connection with
(i) participation in a designated system otherwise than under the system’s default arrangements, or
(ii) the operations of a central bank.
(3) Paragraph (2) also applies as regards the rights and obligations of—
(a) a participant in an interoperable system, or
(b) a system operator of an interoperable system which is not a participant.
(4) Insolvency proceedings shall not have retroactive effects on the rights and obligations of a participant arising from, or in connection with, its participation in a system before the moment of opening of such proceedings.
(5) Paragraph (4) also applies as regards the rights and obligations of a participant in an interoperable system, or of a system operator of an interoperable system which is not a participant.
Certain questions to be determined in accordance with foreign law
10. (1) Subject to Regulation 9, if insolvency proceedings are commenced against a person who participates, or has participated, in a system designated for the purposes of the Settlement Finality Directive, any question that
(a) relates to the rights and obligations arising from, or in connection with, that participation, and
(b) falls to be determined by a court in the State,
is to be decided in accordance with the law governing the system.
(2) If an equivalent overseas order is subject to the insolvency law of the State, these Regulations apply to and in relation to that order in the same way as they apply to and in relation to a transfer order.
(3) If an equivalent overseas security is subject to the insolvency law of the State, these Regulations apply to and in relation to that security in the same way as they apply to and in relation to a collateral security connected with a designated system.
(4) In this Regulation—
“equivalent overseas order” means an order that has the equivalent effect as a transfer order made through a system designated by a Member State (other than the State) for the purposes of the Settlement Finality Directive;
“equivalent overseas security” means any realisable asset (including money) that is provided under a pledge, repurchase or similar agreement for the purpose of securing rights and obligations potentially arising in connection with a system through which equivalent overseas orders are made.
Insolvency proceedings not to affect certain rights
11. (1) Notwithstanding the provisions of any other enactment, the rights of—
(a) a system operator or a participant to collateral security provided to it in connection with a system or any interoperable system, and
(b) a central bank to collateral security provided to it,
to realise those rights are not affected by insolvency proceedings against—
(i) the participant (whether in the system concerned or in an interoperable system),
(ii) the system operator of an interoperable system which is not a participant,
(iii) the counterparty to a central bank, or
(iv) any third party which provided the collateral security.
(2) Collateral security referred to in paragraph (1) may be realised for the satisfaction of rights referred to in that paragraph.
(3) If—
(a) securities are provided as collateral security to any one or more of a participant, a system operator or a central bank, and
(b) the right of the participant, system operator or central bank with respect to the securities is legally recorded in a register, account or centralised deposit system located in a Member State,
the law of that Member State governs the determination of the rights of the participant or central bank as a holder of collateral security in relation to those securities.
(4) Without prejudice to the generality of paragraphs (1) and (3) and for the avoidance of doubt, a claim of a participant or a central bank to collateral security referred to in this Regulation has, and shall be taken always to have had, priority over any claim of any other person to that collateral security including, without limitation, in an insolvency proceeding and including, without limitation, any claim—
(a) for costs, charges and expenses referred to in sections 244 and 281 of the Companies Act 1963 (No. 33 of 1963),
(b) for remuneration, costs, expenses and liabilities referred to in section 29 of the Companies (Amendment) Act 1990 (No. 27 of 1990),
(c) for debts referred to in section 285(2) of the Companies Act 1963 , and
(d) of the Revenue Commissioners pursuant to section 571, 1001 or 1002 of the Taxes Consolidation Act 1997 (No. 39 of 1997),
unless, in respect of any such claim of another person, the terms on which the collateral security was provided expressly provide that that claim is to have priority to the claim of the participant or the central bank, as the case may be.
(5) In this Regulation—
“central bank” includes a nominee, agent or third party acting on behalf of a central bank;
“participant” includes a nominee, agent or third party acting on behalf of a participant;
“system operator” includes a nominee, agent or third party acting on behalf of a system operator;
“securities” includes rights in securities.
Operators to notify Bank of participation in system
12. The operator of a designated system shall, on designation of the system, notify the Bank of the participants in the system, including any possible indirect participants, and shall immediately notify it of any change of participants in the system.
Institutions to provide information to certain persons about designated systems
13. An institution shall, on being requested to do so by a person who claims to have a legitimate interest in the designated systems in which the institution is a participant, provide the person with information about the main rules governing the functioning of that system.
Commencement of insolvency proceedings against participant not to prevent certain funds, etc., from being used to fulfil obligations
14. (1) The commencement of insolvency proceedings against a participant or a system operator of an interoperable system does not prevent funds or securities available on the settlement account of that participant from being used to fulfil that participant’s obligations in the system or in an interoperable system on the business day of the opening of the insolvency proceedings.
(2) In the case referred to in paragraph (1), the participant’s credit facility connected to the system may be used against available, existing collateral security to fulfil the participant’s obligations in the system or in an interoperable system.
Revocation of European Communities (Settlement Finality) Regulations 2008
15. The European Communities (Settlement Finality) Regulations 2008 ( S.I. No. 88 of 2008 ) are revoked.
Transitional arrangements
16. (1) A system shall be taken to be a designated system for the purposes of these Regulations if—
(a) the Minister had, before the commencement of these Regulations, designated the system as a relevant system within the meaning of the European Communities (Settlement Finality) Regulations 2008 ( S.I. No. 88 of 2008 ), and
(b) that designation had not been revoked before that commencement.
(2) A transfer order which entered a system referred to in paragraph (1) before the commencement of these Regulations but is settled after that commencement shall be taken to be a transfer order for the purposes of these Regulations.
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GIVEN under my Official Seal,
21 December 2010.
BRIAN LENIHAN,
Minister for Finance.
EXPLANATORY NOTE
(This note is not part of the Instrument and does not purport to be a legal interpretation.)
This Statutory Instrument transposes the mandatory provisions of Directive 98/26/EC of the European Parliament and of the Council of 19 May 1998 on settlement finality in payment and securities settlement systems. The Statutory Instrument also includes necessary revisions required by Directive 2009/44/EC of the European Parliament and of the Council of 6May 2009 amending Directive 98/26/EC on settlement finality in payment and securities settlement systems and Directive 2002/47/EC on financial collateral arrangements as regards linked systems and credit claims, specifically in relation to the treatment of night-time settlement and the development of links between settlement systems. The amendments are designed to ensure that the protections offered by the Directive remain adequate in light of market changes.
The primary aim of Directive 98/26/EC is to reduce the legal risks associated with participation in settlement systems, in particular as regards the legality of netting agreements and the enforceability of collateral security.
The Directive’s provisions apply to any European Community payment or securities settlements system operating in any currency or the euro, any European Community institution that participates in such a system, collateral security provided in connection with participation in such a system, and collateral security provided in connection with monetary policy operations. The Directive provides protections against systemic problems arising in the event of an institution not being able to make payments.
European Communities (Financial Collateral Arrangements) Regulations 2010
Definitions
Application of these Regulations
Formal requirements with respect to financial collateral arrangements and provision of financial collateral
Parts 2, 3 and 4 not to limit certain other State laws
Financial collateral arrangement to have effect despite winding-up proceedings or reorganisation measures
Right of collateral taker to use financial collateral if arrangement so provides
Use of financial collateral by collateral taker not to render rights of collateral taker invalid or unenforceable
Part 4 Title transfer financial collateral arrangements
Recognition of title transfer financial collateral arrangements
Recognition of close-out netting provisions
Part 5 Disapplication of certain insolvency provisions
Meaning of “commencement” in relation to winding-up proceedings, etc
Financial collateral arrangements and financial collateral not to be invalidated or voided
Certain financial collateral arrangements, etc., to be enforceable against third parties
Provision of financial collateral not to be invalidated or declared void by certain events
Supplementary provisions
EXPLANATORY NOTE
Conveyancing Act, 1881
Interpretation of property, land, &c.
Sale; Insurance; Receiver; Timber.
Regulation of exercise ef power of sale.
Sale
Mortgages.
Receiver
LAND AND CONVEYANCING LAW REFORM ACT 2009
Interpretation generally.
Service of notices.
Position of mortgagor and mortgagee.
Chapter 2
Court order for sale.
Advances on joint account.
Chapter 3