UKSC 48
On appeal from:  EWHC 3377 (Ch)
In the matter of Kaupthing Singer and Friedlander Limited (in administration) and In the matter of the Insolvency Act 1986
Lord Hope, Deputy President
JUDGMENT GIVEN ON
19 October 2011
Heard on 13 and 14 July 2011
Gabriel Moss QC
(Instructed by Allen & Overy LLP)
Robin Dicker QC
(Instructed by Freshfields Bruckhaus Deringer LLP)
LORD WALKER (with whom Lady Hale, Lord Clarke and Lord Collins agree)
The rule against double proof
"But the principle itself – that an insolvent estate, whether wound up in Chancery or in Bankruptcy, ought not to pay two dividends in respect of the same debt – appears to me to be a perfectly sound principle. If it were not so, a creditor could always manage, by getting his debtor to enter into several distinct contracts with different people for the same debt, to obtain higher dividends than the other creditors, and perhaps get his debt paid in full. I apprehend that is what the law does not allow; the true principle is, that there is only to be one dividend in respect of what is in substance the same debt, although there may be two separate contracts."
"In re Fenton, Ex p Fenton Textile Association Ltd  1 Ch 85 was another case of a surety under a pre-insolvency guarantee, but this time he had not actually paid. Nor could he pay, because he was bankrupt and his assets had vested in his trustee. The creditor was still owed the money and entitled to prove in the liquidation. The Court of Appeal held, first, that one could not have more than one proof in respect of the same debt ('the rule against double proof'); otherwise, if there had been, say, four guarantors, there could have been five people receiving dividends on the same debt. Secondly, the Court of Appeal said that until the creditor had been paid, he had the superior right of proof and a proof by a surety was excluded. Thirdly, the court said that a debt which could not be proved could not be relied upon for set-off. There is no longer doubt about any of these propositions. But the judgments of Lawrence and Romer LJJ make it clear (that of Lord Hanworth MR is a little obscure) that if the guarantor had paid off the debt after the insolvency date, he would have been entitled to set it off against a debt which he owed to the company."
The rule in Cherry v Boultbee
"A person who owes an estate money, that is to say, who is bound to increase the general mass of the estate by a contribution of his own, cannot claim an aliquot share given to him out of that mass without first making the contribution which completes it. Nothing is in truth retained by the representative of the estate; nothing is in strict language set off; but the contributor is paid by holding in his own hand a part of the mass, which, if the mass were completed, he would receive back. That is expanding what the Lord Chancellor calls in Cherry v Boultbee 'a right to pay out of the fund in hand,' rather than a set-off."
In re Akerman was not an insolvency case. The issue was whether in the division of the testator's residuary estate three of the testator's seven children had to bring into account statute-barred debts due to the estate. It was held that they were bound to bring them into account.
"The right view is that the person liable as contributory must discharge himself in that character before he can set up that, as a creditor, he is entitled to receive anything, and a fortiori, as it seems to me, before he can set up that, as a contributory, he is entitled to receive anything."
That decision was upheld by the Court of Appeal in a brief judgment of the court  1 Ch 1. The payment-up of the shares in full was a condition precedent to any participation in the distribution of surplus assets. In this appeal the appellant's case is that payment-off in full of the Trustee as creditor is a condition precedent to the admission of any proof against Funding by KSF as surety.
In re Melton, In re Fenton (No 1) and In re Fenton (No 2)
"The fallacy is that at the date of the bankruptcy what was claimed was not part of the debtor's estate. An equity that the testator's estate should be indemnified in respect of his liability under the guarantee arose at his death; and when the sons became bankrupt there was already an equity subject to which the trustees in bankruptcy took the sons' interests; and the trustees in bankruptcy took nothing more than the debtors had, and the debtors' interests under the will were subject to this equity."
In this passage the word "equity" is used three times. It is not fully explained but it emphasises that an unsecured right of indemnity had, on the testator's death, acquired some sort of proprietary character.
"What the trustees are here claiming never was distributable amongst the creditors of the bankrupt at all. I think, therefore, in the present case, on the simple ground that the right of the trustees to retain is in respect of something which at the date of the bankruptcy did not form part of the estate distributable amongst the creditors of the bankrupt, the trustees are still entitled to the right they then had.
If it were necessary for the purposes of this decision – I do not think it is – I should, as at present advised, be prepared to say that the trustees in respect of their claim are in the position of secured creditors; for their right, as expressed by the Lord Chancellor in Cherry v Boultbee, seems to me to have all the characteristics of a depository lien."
"Speaking for myself, I am not prepared to say that this right of the executor is a mortgage, charge or lien. I do not wish finally to decide that, because the question may directly arise in other cases, but, as at present advised, I do not see how that can be called a lien. Equally, however, I see nothing in section 7(1) of the Bankruptcy Act 1914, to prevent the exercise of this right; it is not the use of a remedy against the property or person of the debtor, which the creditor is forbidden to make use of, unless he is a secured creditor. It appears to me to be simply a right to see that the person who claims a share of the testator's estate claims only the proper share . . ."
So the appeal was dismissed.
"was paid out of something which, having before the execution of the creditors' deed been dedicated to the purpose of indemnifying the surety, was not, at the time of the execution of that deed, part of the debtor's estate."
There was also a question of construction of the guarantee which both courts resolved in favour of the bank.
"But the difficulty in [S's] way is this – that there is no debt in respect of which [S] can at present claim to retain anything as against [PD]. The claim against [PD] is made by [C]; and [S] cannot as against [C] set up an adverse claim of any kind. No doubt when [C] have been paid in full the position of matters would be different . . ."
North J went on to explain that, on the facts, there was no real prospect of the bank ever being paid in full. Warrington LJ criticised North J in In re Melton (at p 57) but he was mistaken in his premise (at p 56) that the facts of In re Binns were "undoubtedly, for all substantial purposes, identical" with those of In re Melton. In In re Melton the bank had been paid in full; in In re Binns the bank had not been paid in full, and was never going to be paid in full. Moreover in In re Melton there was no question of anything in the testator's estate going to the bankrupt son's trustee: his interest had been mortgaged and then sold and Frances (the deserted wife) was a purchaser for value (but only of an equitable interest, and with notice of the equity of indemnification). In In re Binns, by contrast, the sons' interests under their father's will were available to their trustees in bankruptcy, and the diversion of those interests to other members of the family would have meant that S was in competition with C while C's claims had not been fully satisfied.
"The reason why, in my opinion, such a claim . . . cannot be set off is because so long as the estate of the principal debtor remains liable to the principal creditor the surety will not be permitted to prove against the estate of the principal debtor, as such a proof would be a double proof for the same debt, and would therefore be inadmissible as being contrary to the established rule in bankruptcy."
Romer LJ agreed. He said at pp 119-120:
"In the present case, if Fenton, not having paid the banks anything under his guarantee, were entitled to prove in the winding-up of the Association, or if, having paid them less than the amount due to them, he were to prove for the amount so paid, and the banks were also to prove in the winding-up of the Association for the full sum due to them, as they would be entitled to do, the estate of the Association would be subjected to more than one proof in respect of the same debt, and this is not permissible."
"But the position is further complicated by the fact that the banks have already proved or are entitled to prove against the assets of the Association in respect of the whole of the sum guaranteed, and consequently if the trustee of the deeds of arrangement should retain out of the dividend payable to the Association a sum equal to the dividend on the total amount due to the banks under the guarantee, there would in effect be an allowance against the Association of two dividends in respect of what is for all practical purposes the same debt, and so the rule against double proof would be infringed."
In other words S (Fenton's estate) would be competing with C (the banks, which had not been, and never were going to be, paid in full) in claiming (whether directly or by set-off or retention) against PD (the Association). The Court of Appeal in SSSL held that In re Fenton (No 2) was wrongly decided.
SSSL: the Court of Appeal's reasoning
(1) Para 68 sets out the financial implications of the point.
(2) Paras 69 to 78 contain a full discussion of In re Melton, concluding with the extraction of three principles stated in para 79.
(3) Paras 80 to 82 identify three questions left unanswered by In re Melton.
(4) Paras 83 to 92 discuss the two cases of In re Fenton, concluding that In re Fenton (No 2) was wrongly decided.
(5) Paras 93 to 97 discuss the purpose of the rule against double proof (which has been briefly introduced in paras 14 to 15).
(6) Paras 98 to 117 discuss and answer the three questions left unanswered by In re Melton, the first being whether the equitable rule applies in a situation where statutory set-off is (as noted by Lord Hoffmann in Secretary of State for Trade and Industry v Frid  2 AC 506, para 13) excluded by the rule against double proof.
"the debt due to the testator is one which is not immediately payable, whereas the right of the debtor to receive the residuary share is an immediate right. I think, therefore, that the debtor is entitled to receive that share..."
Chadwick LJ also relied on Warrington LJ's comments on In re Binns  2 Ch 584. But (as already noted) the facts of In re Binns were not identical, or even similar, to those of In re Melton.
"But the question remains whether the [equitable] rule is applicable in a case where – by reason of the rule against double proof – there is no set-off between X's claim against the fund, on the one hand, and the fund's right to be indemnified by X on the other hand."