England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		18 December 2009

The Chancellor:

Introduction
1. In Re SSSL Realisations (2002) Ltd [2006] Ch 610, 647 para 79 Chadwick LJ, with whom Jonathan Parker LJ and Etherton J agreed, described the rule in Cherry v Boultbee (1839) 4 My & Cr.442, as developed by the Court of Appeal in Re Melton [1918] 1 Ch. 37, in the following terms:

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

(2) That general rule is applicable not only where the claimant (X) is indebted to the fund but also where the fund has a right to be indemnified by X against a liability which the fund may be required to meet in the future, as surety for a debt owed by X to a creditor (Y). It is not necessary that the liability to Y has been satisfied out of the fund: it is enough that it may have to be satisfied in the future....

(3) The general rule - as applicable to a case where the fund has a right to be indemnified by X - is not displaced in a case where the claimant (X) is in bankruptcy...."

2. Kaupthing Singer & Friedlander Ltd ("KSF") was incorporated in January 1966 to carry on the business of banking originally established in 1907. Its subsidiary Singer & Friedlander Funding plc ("Funding") was incorporated as a public company in March 2004 for the purpose of raising capital for use in the Singer & Friedlander Group. On 26th January 2005 Funding issued £250m of floating rate guaranteed bearer notes 2010 at 99.625%. The guarantor was KSF and the trustee for the benefit of the note-holders ("the Trustee") HSBC Trustee (C.I.) Ltd. The capital so raised, net of expenses, came to £249,515,000 all of which was advanced by Funding to KSF. Between April and 4th July 2008 £9.67m notes were redeemed by Funding and cancelled.
3. On 8th October 2008 an administration order was made in respect of KSF on the application of the Financial Services Authority under s.359 Financial Services and Markets Act 2000 and four insolvency practitioners were appointed the administrators ("the KSF Administrators"). On that date KSF owed Funding the aggregate sum of £242,568,988 on a mixture of deposit and current accounts, interest and management and audit fees, being the balance due in respect of the original capital raised by Funding and advanced to KSF. A week later, on 15th October 2008, Funding appointed administrators ("the Funding Administrators") under paragraph 22(2) Schedule B1 Insolvency Act 1986. On that date £240,330,000 was prospectively due by Funding to the Trustee in respect of the amount due to holders of the notes.
4. On 23rd March 2009 the Trustee gave notice of default to both Funding and KSF. The effect of the notice was to make immediately due and payable (1) the amounts due under the outstanding notes to their holders, (2) the amount due by Funding to the Trustee for redemption of the outstanding notes and (3) the equivalent amount due by KSF to the Trustee as the guarantor of the notes. On 28th April 2009 the Trustee lodged proofs for £240,330,000 plus interest in the administration of both Funding and KSF. On 8th May 2009 Funding lodged a proof of debt in the administration of KSF for £242,568,988 due in respect of the net proceeds of the outstanding notes advanced by Funding to KSF.
5. On 20th May 2009 the KSF Administrators gave notice under Insolvency Rule 2.68 of their intention to declare and distribute dividends to creditors proving in the administration of KSF before 18th June 2009. They declared and paid a dividend of 20p in the £1 on 22nd July 2009; another dividend of 10p in the £1 has been paid recently. It is common ground that as and from the giving of this notice the assets of KSF became distributable amongst its creditors. As the fund of assets of KSF had become distributable the rule in Cherry v Boultbee became relevant, see Re Peruvian Railway Construction Company Ltd [1915] 2 Ch 144.
6. The KSF Administrators had received proofs from the Trustee for £240,330,000 being the sums due under KSF's guarantee of the notes and for £242,568,988 from the Funding Administrators in respect of the balance of the proceeds of the note issue advanced by Funding to KSF. The Funding Administrators had received the proof for £240,330,000 from the Trustee in respect of its liability under the notes but had no other creditors of significance and had submitted its proof for £242,568,988 in the administration of KSF. Accordingly any amounts the Funding Administrators received in respect of its proof from the KSF Administrators would provide another fund from which to pay the Trustee amounts due to the noteholders. This would afford to the Trustee what counsel for the KSF Administrators described as a 'double dip' into the assets of KSF.
7. But if KSF had discharged its liability to the Trustee as guarantor of Funding it would have had a claim against Funding for an indemnity. Such claim could have been set off against the liability of KSF to Funding in respect of the amounts advanced to it by Funding from the proceeds of the note issue. In the light of the figures I have given above such a set-off would reduce the claim of Funding against KSF to £2,238,988. If, as is anticipated, the KSF Administrators pay dividends of not less than 50p in the £1 the secondary fund in the hands of the Funding Administrators would be reduced by £120,175,000.
8. The KSF Administrators contend that the rule in Cherry v Boultbee, as developed in SSSL, should apply to Funding's claim against KSF. Thus the fund of assets available for distribution to creditors would be notionally increased by the amount of the debt contingently due by Funding to KSF, but the dividend due from KSF to Funding would be reduced by the same amount. It would follow that the amount of the fund in the hands of the Funding Administrators available for the 'double dip' would be reduced to the figure of £2,238,988 explained above.
9. As Funding has virtually no creditors apart from the Trustee the Funding Administrators have no interest in the point separate from that of the Trustee and have taken no part in these proceedings. The Trustee accepts that I am bound by the decision of the Court of Appeal in SSSL (but reserves the right to contend on any future appeals that it was wrongly decided) and that if the rule in Cherry v Boultbee is applicable it has the result indicated above. Before me the Trustee contended only that the rule was inapplicable because it had been excluded by clause 7.7 of the Trust Deed regulating the note issue. The clause provides:

"If any moneys shall become payable by the Guarantor under this guarantee the Guarantor shall not, so long as the same remain unpaid, without the prior written consent of the Trustee:

(a) in respect of any amounts paid by it under this guarantee, exercise any rights of subrogation or contribution or, without limitation, any other right or remedy which may accrue to it in respect of or as a result of any such payment; or

(b) in respect of any other moneys for the time being due to the Guarantor by the Issuer, claim payment thereof or exercise any other right or remedy;

(including in either case claiming the benefit of any security or right of set-off or, on the liquidation of the Issuer, proving in competition with the Trustee). If, notwithstanding the foregoing, upon the bankruptcy, insolvency or liquidation of the Issuer, any payment or distribution of assets of the Issuer of any kind or character, whether in cash, property or securities, shall be received by the Guarantor before payment in full of all amounts payable under these presents shall have been made to the Noteholders, the Couponholders and the Trustee, such payment or distribution shall be received by the Guarantor on trust to pay the same over immediately to the Trustee for application in or towards the payment of all sums due and unpaid under these presents in accordance with Clause 10."

10. In these circumstances the KSF Administrators have issued the application now before me seeking the directions of the court whether by reason of that provision of the Trust Deed they are prevented from relying on the rule in Cherry v Boultbee in respect of the proof of debt submitted to them by Funding. They also seek further directions as to how the rule should be applied if, contrary to their position before me, SSSL was wrongly decided, I am only concerned with the four grounds relied on by the Trustee for its contention that the rule is excluded altogether by the provisions of clause 7.7. Before I deal with them it is convenient to describe in greater detail the terms of the note issue, the development of the rule and the principles of construction relied on by the respective parties.
The Note Issue
11. The notes were constituted under and regulated by the terms of the Trust Deed dated 9th February 2005 and made between Funding (1), KSF (2) and the Trustee (3). The notes, in the forms prescribed by clause 3 and schedules 1 and 2, provide for the payment of interest on the 9th February, May, August and November at 0.25% above LIBOR Screen rate on the interest payment date and for their redemption at their principal amount on 9th February 2010. The conditions state that payment of the principal and interest in respect of the notes had been unconditionally and irrevocably guaranteed in favour of the Trustee which was also declared to be the principal paying agent. Condition 10 prescribes various events of default entitling the Trustee to give notice to Funding and KSF thereby rendering the notes immediately due and payable at their principal amount. Condition 11 entitles the Trustee at any time and at its discretion to take proceedings against Funding or KSF to enforce the provisions of the notes or the Trust Deed.
12. By clause 2.2 Funding covenanted with the Trustee to pay or procure to be paid to or to the order of the Trustee all sums due by way of interest or principal in respect of the notes for the time being in issue. Clause 7 contains the guarantee of KSF. By clause 7.1 KSF irrevocably and unconditionally guaranteed to the Trustee the due and punctual payment of all principal and interest due in respect of the notes. If Funding failed to do so then by clause 7.2 KSF agreed to cause every such payment to be made as if it was the issuer. The provisions of clause 7.7 are those set out in paragraph 9 above. Clause 7.9 confirmed that the obligations of KSF were direct, unconditional and unsubordinated.
13. The Offering Circular dated 7th February 2005 comprised the listing particulars approved as required by the Financial Services and Markets Act. It summarised the effect of the conditions attached to the notes and the principal terms of the Trust Deed. It did not refer to the provisions or effect of clause 7.7 but the Trust Deed was described as available for inspection. The Offering Circular indicated that the net proceeds of the notes would be applied by Funding for "the general corporate purposes" or "the business operations" of the Singer & Friedlander Group. The importance of the KSF guarantee was indicated by the fact, as disclosed, that the issued and paid up capital of Funding was only £12,500.
The development of the rule in Cherry v Boultbee
14. In Cherry v Boultbee (1839) 4 My & Cr.442 Thomas Boultbee was indebted to his sister Catherine in the sum of £1,878. In November 1821 he went bankrupt and Cherry was his assignee. In December 1821 Catherine made a will leaving to Thomas a sum in excess of his debt to her on terms that it should not be anticipated or assigned by him or be liable to his debts. Catherine died in January 1823 without having sought to prove her debt in the bankruptcy of Thomas. Cherry sued her executors for the amount of the legacy due to Thomas. The executors sought to set off the amount of the debt due by Thomas against the legacy bequeathed to him. It was held by both the Master of the Rolls and the Lord Chancellor on appeal that they were not entitled to do so.
15. At page 447 the Lord Chancellor stated:

"It must be observed that the term "set-off" is very inaccurately used in cases of this kind. In its proper use, it is applicable only to mutual demands, debts and credits. The right of an executor of a creditor to retain a sufficient part of a legacy given by the creditor to the debtor, to pay a debt due from him to the creditor's estate, is rather a right to pay out of the fund in hand, than a right of set-off. Such right of payment, therefore, can only arise where there is a right to receive the debt so to be paid; and the legacy or fund, so to be applied in payment of the debt, must be payable by the person entitled to receive the debt.

In the present case, however, the bankruptcy of the debtor having taken place in the lifetime of the testatrix, her executors never were entitled to receive from the assignee more than the dividends upon the debt; and although the bankrupt had not obtained his certificate, and the liability incident to that state remained upon him, yet he, for the same reason, was never entitled to receive the legacy; and, consequently, there never was a time at which the same person was entitled to receive the legacy and liable to pay the entire debt; the right, therefore, of retaining a sufficient sum out of the legacy to pay the debt can never have been vested in anyone. The assignees who claim the legacy would, indeed, have been liable to the payment of any dividend upon the debt, had it been proved; and the Master of the Rolls proposed to the executors to make provision for deducting the amount of such dividend from the amount of the legacy.

In all the cases referred to, except that of Ex parte Man (Mont. & Mac. 210), the liability to pay the debt and the right to receive the money had been at some time vested in the same person; and all that the Court did in those cases was to consider that the party liable to pay the legacy had actually done what the law considers him entitled to do, namely, to apply a sufficient part of the legacy to payment of the debt."

It is clear from that quotation that the right of the executors to withhold part of the legacy depended on the existence of the cross-claims at some time when both were due and payable. As the only cross-claim to which the executors might have been entitled was the dividend payable in the bankruptcy of Thomas had Catherine sought to prove in his bankruptcy they were obliged to pay the legacy in full.

16. Subsequent cases developed the basic rule. Thus in Re Akerman [1891] 3 Ch 212 Kekewich J deduced the principle from Cherry v Boultbee to be:

"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."

He applied that principle so as to reduce the share of residue due to one of the testator's sons by the amount of the statute barred debt previously due to the testator by the son.

17. In Re Goy & Co Ltd [1900] 2 Ch 149 Stirling J considered that the rule applied to a liability for misfeasance as opposed to a liquidated sum. He described the rule to be:

"that a person entitled to a share of a fund should not receive anything in respect of that share without paying what he may be bound to contribute to the same fund. Under such circumstances the Court in effect says to the person claiming to be paid, "You have in your own hands that which is applicable to the payment - pay yourself out of that.""

18. In Re Leeds and Hanley Theatres of Varieties Ltd [1904] 2 Ch 45 Buckley J applied the principle in respect of two companies, T and F, both in liquidation. F was a creditor of T for £5,100 due under debentures issued by T but owed T £4,323 being the balance of a larger sum ordered to be paid in respect of misfeasance. In the administration of the assets of T Buckley J treated F as having paid its debt of £4,323 in full, such sum being applied in paying a dividend to all creditors including F in respect of the sum of £5,100. If in consequence of that exercise the amount due to F was more than £4,323 the excess should be paid to F, if not F would receive nothing. On the other hand the principle did not apply where the debtor to the testator was a partnership of which the legatee was a member, see Turner v Turner [1911] Ch 716. In that case Lord Cozens-Hardy MR said (p.719):

"I do not doubt that principle. I think that the more logical and correct mode of explaining that doctrine is this: You, the debtor, have in your hands part of the assets of the testator and you cannot claim any part of the assets of the testator, out of which of course your legacy must be paid, without bringing into the estate that portion which is now in your pocket; or, in other words, your legacy must be treated as paid pro tanto out of the assets of the testator which you have in your pocket."

19. As recorded by Chadwick LJ in SSSL in the passage from his judgment quoted in paragraph 1 above the principal development of the rule came in Re Melton [1918] 1 Ch 37. The chronology is important. In October 1901 the testator guaranteed the debts of his son Arthur to a bank to a limit of, in effect, £250. In February 1906 the testator made a will by which he bequeathed his real estate to his wife for life and after her death to his executors on trust for sale the net proceeds of sale to be held in trust for all his children in equal shares. The testator died in July 1907 leaving his wife, Arthur and three daughters surviving him. In June 1910 Arthur charged his share in the testator's real estate to the bank as security for his debts, notice of which was given to the executors. In April 1911 Arthur absconded and a receiving order was made against him. At the date of his adjudication in June 1911 Arthur owed the bank £1057. The bank valued its security at £158 and proved in the bankruptcy for the balance of £899 on which it received a dividend of £494. The bank called on the executors of the testator to pay the £250 due under the testator's guarantee plus interest of £63 which they eventually did in February 1912. The testator's widow died in April 1916 and the question arose whether and how the sum of £313 paid under the testator's guarantee should be brought into account in respect of the share of Arthur by then due to an assignee. Astbury J concluded that Arthur's share payable to the assignee should be reduced by the amount paid under the guarantee, namely £313. The assignee appealed.
20. Swinfen Eady LJ considered it to be unquestionable (p.48) that the debt arising under an obligation to indemnify a surety can be deducted from a legacy or share of residue given to the debtor. He went on to deal with the consequence of the debtor, Arthur, having gone bankrupt. At page 52 he said:

"The claim of the surety is not an adverse claim set up against the principal creditors. The suggestion is that it is set up against the principal creditors because the estate that would be divisible in the bankruptcy is diminished by reason of this claim. 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."

His conclusion as to the result (p.54) was:

"The fund treated as being available for division must first be increased by the amount which Arthur owes, and then his assign is entitled to one fourth of that entire amount subject to this, that she [the assignee] must give credit for the 313l. that he [Arthur] has already notionally received."

21. The other members of the Court, Warrington and Scrutton LJJ, agreed in the result. Given the dates I have set out in paragraph 19 above it would appear that the Court considered the testator's estate to be divisible for the purposes of the principle or rule as at the death of the testator notwithstanding the life interest bequeathed to his widow. Further they considered that the principle or rule applied in respect of the contingent claim of a surety for indemnity from the principal debtor before payment had been made under the guarantee. These developments from the original rule are reflected in the passages (2) and (3) from the judgment of Chadwick LJ in SSSL quoted in paragraph 1 above.
22. In SSSL the possible application of the rule did not emerge until service of the respondent's notice in the Court of Appeal. I have quoted the relevant passage from the judgment of Chadwick LJ as to the principles to be derived from Re Melton. He noted that three questions remained unanswered namely (1) whether the general rule described in paragraph 79(1) applies in the distribution of a fund in insolvent administration, (2) if so, whether the amount to be brought into account as the debtor's contribution to the fund is the full amount of his liability to the creditor or some lesser amount to reflect the fact that the fund is insolvent and (3) whether such amount is to be reduced if the principal debtor is insolvent and the insolvency occurred before the principal debtor was entitled to claim his share in the fund.
23. Chadwick LJ answered the first question in the affirmative (para 100). In relation to the second question he considered that the full amount should be brought into account because (para 103):

"The principle that it would be inequitable to allow the contributor to compete against the other persons entitled to share until the fund has been made whole requires that-as between the contributor and the other persons entitled to share in the fund-those others should not have to bear any part of the debt for which the contributor is liable as principal debtor. That requirement can be met only if the amount which the contributor has to contribute (before he can share in the fund) is the whole amount of the debt for which the creditor has proved."

In relation to the third question Chadwick LJ accepted as the correct approach that followed by Buckley J in Re Leeds and Hanley Theatres. The conclusions of Chadwick LJ were applied by the Lt Bailiff of Guernsey, Mr Richard Southwell QC in Flightlease Holdings (Guernsey) Ltd v Flightlease (Ireland) Ltd 14th January 2009 Unreported.

24. In the light of these authorities, in particular Re Melton and SSSL, it is not disputed before me that, subject always to the effect of clause 7.7 of the Trust Deed, the contingent claim of KSF against Funding for an indemnity in respect of the full amount of the claim under its guarantee of the obligations of Funding given to the Trustee, namely £240,330,000, is to be taken into account in determining the amount of the fund in the hands of the KSF Administrators. Accordingly, as against Funding, the distributable assets of KSF are to be treated as increased by that amount. The amount of dividend payable to Funding by the KSF Administrators is to be reduced by that amount, namely £240,330,000,.
Principles of construction
25. Counsel did not differ on what the relevant principles are so much as which ones should be applied in the circumstances of this case. Counsel for KSF emphasised the need for clear words if rights assured by law are to be treated as excluded. Examples of such rights being the right of set-off and the right conferred on a surety who has paid the creditor to be subrogated to the creditor's rights against the debtor. He relied for that proposition on Gilbert Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689, 717H, ACSIM v Dancon (1989) 47 BLR 55 and Liberty Mutual Insurance Company (UK) Ltd v HSBC plc [2002] EWCA Civ 691 paras 56, 102-104. Counsel for the Trustee relied on the judgment of the Privy Council in A-G of Belize v Belize Telecom Ltd [2009] UKPC 10 to the effect that the meaning of a document is what the reasonable addressee would take it to mean thereby enabling an implication to be made in cases where the document does not expressly provide for some future event. He relied on Harvey v Palmer (1851) 4 de G & Sm. 425 and Re Griffin Trading Co [2000] BPIR 256 as cases where the rule in Cherry v Boultbee was excluded without clear words in the sense of an express reference.
26. I accept that the rule in Cherry v Boultbee has given rise to rights established in law. But the principles of implication to which the Privy Council referred in A-G of Belize v Belize Telecom Ltd were applicable to cases in which the instrument under consideration does not expressly provide for what is to happen when some event occurs. In this case clause 7.7 has made provision for cases where 'moneys have become payable by KSF'. The question is to what the subsequent provisions of the clause extend. I accept that the exclusion of the rule in Cherry v Boultbee does not require an express reference but the intention to exclude must be "clear".
27. The two cases to which counsel for the Trustee referred are not examples of an exclusion arising from anything other than a very clear indications of intention. In Harvey v Palmer the testator bequeathed a warehouse to his son in addition to the amounts, said to amount to some £7,000, he had lent him in his lifetime "for his own personal support and maintenance, and to be entirely free from any claim, charge, demand or lien of his creditors...either at law or in equity". It was held that the direction in the will was sufficient to exclude the rule. It would have been astonishing if it had been held that the rule applied. Likewise in Re Griffin Trading Co the side letter provided that the individual relevant accounts must be kept separate. It necessarily followed that they could not form one aggregate and distributable fund to which the rule could have been applied.
The effect of clause 7.7
28. I have set out the terms of clause 7.7 in paragraph 9 above. Counsel for the Trustee points out that the opening words of the clause "If any moneys are payable by the Guarantor under this guarantee..." are satisfied in consequence of the notice of default given to KSF by the Trustee on 23rd March 2009. Further he relies on the fact that not only are such moneys payable but some 30% has been paid to the Trustee by way of dividend in the administration of KSF. It is not in dispute that the balance of 70% has not been paid and is most unlikely to be paid in full. In those circumstances KSF may not:

(1) "in respect of any amounts paid by it under this guarantee, exercise....without limitation any other right or remedy which may accrue to it in respect of or as a result of any such payment";

(2) "in respect of any other moneys for the time being due to [KSF] by [Funding]...[(i)] exercise any other right or remedy; [or (ii) claim] the benefit of any security".

Counsel for the Trustee contends that each of those three prohibitions applies so as to exclude the rule in Cherry v Boultbee. Counsel for the Trustee also relies on the last sentence of clause 7.7. He maintains that the rule in Cherry v Boultbee must be excluded because, in effect, its application would give rise to such a trust as that sentence refers to. In essence he claims that the application of the rule would give rise to a "payment or distribution of assets of [Funding]...[being] received by [KSF] before all the other creditors have been paid in full".

29. It is common ground that the rule in Cherry v Boultbee is excluded if any one of these four contentions is correct. I will deal with each of them in turn. First, I should refer to submissions made by counsel for the Trustee common to all of them. He points out that the rule has three elements (1) a fund distributable by the holder (A) to a class of beneficiary including B, (2) a debt due by B to the fund (or its holder) and (3) no set-off between the two. As the application of the rule involves the debt by B being taken into account in the computation of the amount due to B out of the fund held by A so as both notionally to increase the fund and to discharge the whole or part of the debt due by B it necessarily involves the enforcement of a right. He points out that the application of the rule also gives rise to the discharge in whole or in part of each of the mutual obligations of A and B.
30. In relation to the first point relied on and summarised in paragraph 28(1) above counsel for the Trustee contends that the commercial purpose behind clause 7.7(a) was to ensure maximum recovery by the Trustee without competition from KSF. He contends that this can be readily achieved by reading the word "paid" in the first line of clause 7.7(a) as including the words "or payable" and similarly extending the reference in the last line to "such payment" so as to include the words "or obligation". He points out, correctly, that the word "paid" has often been read as including "or payable" and cites Charter Reinsurance Co Ltd v Fagan [1997] AC 313, 391-392. He contends that the reasonable banker to whom clause 7.7 is addressed would have understood this part of clause 7.7(a) to exclude the rule in Cherry v Boultbee both in respect of the 30% paid and the 70% unpaid. He adds in relation to the 70% unpaid that it would be odd if KSF were better off in relation to amounts unpaid compared to its position in relation to amounts paid.
31. I do not accept these submissions. First the commercial purpose on which counsel for the Trustee relies is an assumption on his part. The exclusion effected by subparagraph (a) depends on its proper construction not on some a priori purpose. Second what is forbidden is the exercise by KSF of a right accruing to it as a result of a payment made by KSF. But the rights arising to the KSF Administrators under the rule in Cherry v Boultbee do not depend on any such payments, see Re Melton and SSSL. Third, the right under the rule in Cherry v Boultbee only arose when the assets of KSF became distributable amongst its creditors, namely when the notice dated 20th May 2009 was given by the administrators. That is not a right or remedy accruing to KSF as guarantor generally even though the administrators are agents of KSF under para 69 Schedule B1 to the Insolvency Act 1986. Fourth, I do not accept that the context justifies reading the words "paid" and "payment" as embracing the words "or payable" and "or obligation". The words "paid" and "payment" are used elsewhere in clause 7.7 in contexts which plainly do not admit of the extensions for which counsel for the Trustee contends. Prima facie the same words should be given the same meaning in all parts of clause 7.7. There is, in my view, no justification for the extensions in the particular contexts relied on by counsel for the Trustee. Fifthly, having regard to all these considerations, the right KSF may not exercise is one exercisable against Funding or its assets. The application of the rule in Cherry v Boultbee plainly affects Funding but cannot, in my view, be sensibly regarded as the exercise of a right or remedy against Funding or its assets.
32. I turn then to the second point based on the wording of sub-paragraph (b) of clause 7.7. The Trustee contends that the contingent liability of Funding to indemnify KSF against its liability to the Trustee brings that paragraph into operation as it is comprehended in the phrase "any other moneys for the time being due to [KSF] by [Funding]". Given that the paragraph is thereby engaged the Trustee submits that the application of the rule in Cherry v Boultbee constitutes "[the] exercise [of] any other right or remedy" and is precluded by clause 7.7 as a whole. Counsel for the Trustee relied on the decision of the Court of Appeal of New South Wales in Deputy Federal Commissioner of Taxation (NSW) v Peacock (1980) 11 ATR 103 for the proposition that the word "due" can embrace an existing liability to make a payment in the future.
33. I do not doubt that given an appropriate context the word "due" may include present obligations to make payments in the future. Even then it would require a very special context to enable the word "due" to include contingent obligations for payments in the future. In my view clause 7.7(b) does not provide such a context for either interpretation. The word "due" is used in juxtaposition to the words "payment" and "exercise". Both envisage a present obligation to be presently performed by Funding. But the obligation to indemnify KSF does not arise unless and until KSF has paid the amounts guaranteed in full. It has not done so and it is most unlikely that it ever will. Further, the words "other right or remedy" cannot, in context, embrace the application of the rule in Cherry v Boultbee because it is a right exercisable in the administration of the assets of KSF not against Funding or Funding's assets or by KSF generally as guarantor.
34. The third point relates to the specific mention of "security" in the parenthesis which follows paragraph (b). The matters there referred to are included for the purposes of both (a) and (b) by way of extension of the "other right or remedy" referred to in each of them. The suggestion that the rule in Cherry v Boultbee or its application constitutes a "security" is based on a variety of judicial descriptions in Re Melton. Thus, Swinfen Eady LJ described it as "an equity" and Warrington LJ as "a depository lien". By contrast Scrutton LJ did not think it was a right of retainer or a lien and found it unnecessary "to say what the exact legal description of the right is". He was not prepared to say that it was a "mortgage, charge, or lien" within s.167 Bankruptcy Act 1914.
35. Thus there is no judicial conclusion that the rule or its application constitutes a security in abstract let alone in the context of clause 7.7. Further if, as I consider, neither paragraph (a) nor (b) is applicable in relation to "any other right or remedy" it would make no difference to the outcome of this application if the rule or its application did amount to a 'security'. It follows that it is unnecessary to decide the point. Suffice it to say, I should require a good deal of persuading that it did, given both the nature of the rule and the fact that it only applies in relation to the assets of a company if the company is either in liquidation or administration.
36. The fourth point arises from the words in the concluding sentence of clause 7.7. They apply "If...upon the...insolvency...of [Funding] any payment or distribution of assets of [Funding]...shall be received by [KSF] before all the other creditors [of Funding] have been paid in full". In such an event the payment or distribution received by KSF is held on trust for the Trustee. Counsel for the Trustee submits that these requirements are satisfied by an application of the rule in Cherry v Boultbee. He submits that the discharge of the debt due by Funding to KSF by way of indemnification of a surety is equivalent to a payment to KSF out of the assets of Funding. He contends that the relevant words would be so understood by a reasonable banker.
37. I do not accept these submissions either. They appear to me to confuse economic effect with the various legal operations which may bring it about. The assets in the hands of the administrators of KSF are not assets of Funding. Payment by a debtor is not the same as discharge by the creditor and both differ from a discharge by operation of law from the application of a rule such as that in Cherry v Boultbee.
Conclusion
38. For all these reasons I conclude that clause 7.7 of the Trust Deed does not exclude the rule in Cherry v Boultbee applicable in the administration of the assets of KSF. In those circumstances I will make the declaration, as sought in paragraph 1(a) of the application notice, in a negative sense. As it was agreed by counsel for both KSF and the Trustee that the decision of the Court of Appeal in SSSL concludes the further issues raised in paragraph 1(b) I am not called on to make any order. In respect of paragraph 1(c) I have heard no argument. Accordingly if it is still in dispute it will have to be adjourned for further argument on another day.
Postscript
39. After this judgment had been sent to counsel in draft my attention was drawn by counsel for KSF to the judgment of HH Judge David Cooke in Cattles plc v Welcome Financial Services Ltd [2009] EWHC 3027 given on 14th December 2009. He made no submissions in relation to it but offered to do so if asked. Counsel for the Trustee, to whom a copy had been provided, sent submissions in writing to the effect that the decision of HH Judge David Cooke had determined what was described as essentially the same issue of construction but in the opposite sense. He submitted, in reliance on my own decision in Re Spectrum Plus Ltd [2004] EWHC 9, that I should follow the decision of HH Judge David Cooke as the prior decision of a judge of co-ordinate jurisdiction notwithstanding my draft judgment to the opposite effect.
40. Cattles was the parent company of a group providing financial services to others. It carried on its business by borrowing from established lenders and lending on to its subsidiaries so that they might provide finance to those to whom 'mainstream' credit was not so readily available. The principal subsidiary was Welcome. Cattles had raised substantial finance from Royal Bank of Scotland on the security of a Group cross-guarantee. At the material time Cattles owed Royal Bank of Scotland £2.6bn and Welcome owed Cattles £2.9bn. In addition, Welcome was liable to Royal Bank of Scotland under the Group cross guarantee for the debt of Cattles. Both Cattles and Welcome were insolvent.
41. Cattles brought a part 8 claim to determine a number of questions arising from attempts to restructure the group. They included the questions (1) whether, if both Cattles and Welcome went into insolvent liquidation, the liquidators of Welcome could apply the rule in Cherry v Boultbee so as to retain against the sum due to Cattles the contingent liability of Cattles to Welcome arising from its counter-indemnity for Welcome's guarantee of the debt due by Cattles to Royal Bank of Scotland, and, if so, (2) whether the rule in Cherry v Boultbee had been excluded by either or both clause 6 of the Group cross-guarantee or clause 15.7 of the facility agreement under which the liability of Cattles to Royal Bank of Scotland arose. HH Judge David Cooke, having regard to the decision of the Court of Appeal in SSSL answered the first question in the affirmative.
42. Clause 6 of the Group cross-guarantee provided, so far as material:

"Preservation of the Bank's claim

6. Until all claims of the Bank in respect of all the Obligations of each Debtor have been discharged in full:

[6.1...]

6.2 no Guarantor shall in competition with or in priority to the Bank make any claim against any Debtor...or [its] estate nor make any claim in the insolvency of any Debtor...

[6.3...]

43. Clause 15.7 of the Facility Agreement, so far as material provided:

"Non-competition

Unless:

(a) all amounts which may be or become payable by the Obligors under the Finance Documents have been irrevocably paid in full; or

(b) the Facility Agent otherwise directs,

no Guarantor will, after a claim has been made or by virtue of any payment or performance under this clause:

(i) be subrogated to any rights, security or moneys held, received or receivable by any Finance Party (or any trustee or agent on its behalf);

(ii) be entitled to any right of contribution or indemnity in respect of any payment made or moneys received on account of that Guarantor's liability under this Clause;

(iii) claim, rank, prove or vote as a creditor of any Obligor or its estate in competition with any Finance Party (or any trustee or agent on its behalf); or

(iv) receive, claim or have the benefit of any payment, distribution or security from or on account of any Obligor, or exercise any right of set-off as against any Obligor.

Each Guarantor must hold in trust for and immediately pay or transfer to the Facility Agent for the Finance Parties any payment or distribution or benefit of security received by it contrary to this Clause or in accordance with any directions given by the Facility Agent under this Clause."

44. HH Judge David Cooke considered, strictly obiter, that both provisions had the effect of excluding the rule in Cherry v Boultbee. In relation to clause 6 he concluded that the assertion of a claim sufficient to found a right of quasi-retainer constituted the making of a claim for the purposes of clause 6.2 and clause 15.7(iii) and (iv). In that respect he said [55]:

"The commercial purpose of clause 6.2, as I have indicated above is to maximise the amount of the Bank's recovery from the assets of a particular Debtor. The expression "make any claim" falls to be considered in that context. It is potentially a wide term, not necessarily restricted to issuing proceedings, or claiming a property right or a right to share in assets. In that context, it seems clear to me that the assertion of a right of counter indemnity to be taken into account in the payment of a dividend on Cattles' claim has the same commercial effect as making a claim in any conventional way. It reduces the amount of assets available in the insolvency of Cattles, to the benefit of Welcome, and so, in relation to the Bank's claims against Cattles, it is in competition with the Bank. Seen in that context, it is precisely within the scope of the protection that clause 6 is intended to give to the Bank and it could not be said to be commercially likely that if the Bank and Welcome have agreed that until the Bank has been paid in full by Cattles, Welcome will not make any claim against Cattles, they would have intended that a claim should be nevertheless given effect to by the particular operation of a rather obscure rule of equity."

45. He considered, in addition, that clause 15.7(ii) was sufficient to exclude the rule because [57]:

"If Welcome has no right of counter indemnity for a payment actually made by it as surety, it cannot have a right of counter indemnity for its liability to make such a payment before it has actually done so. If it has no such right of counter indemnity there is nothing to be taken account of in a quasi-retainer. Clause 15.7 therefore also prima facie operates to exclude the application of the rule in Cherry v Boultbee in favour of Welcome."

46. Having considered the written submissions of counsel and the authorities to which they referred I see no reason to alter my judgment. It is not the case that one judge is bound, unless convinced that it is wrong, to follow the decision of another judge of co-ordinate jurisdiction on the construction of an instrument in a different form and context. I dealt with this topic in paragraphs 7 to 9 of my judgment in Re Spectrum Plus [2004] EWHC 9. As the citation from the judgment of Sir William James V-C in Re Hotchkiss Trusts (1869) 8 Eq.643 makes clear the terms of the two instruments must be the same if judgment in respect of one is to be followed in respect of the other.
47. Plainly documents in different terms made in different contexts but dealing with the same subject matter may produce different results. It would be wrong either to assume that they do not or to enter into a consideration of whether HH Judge David Cooke reached the correct conclusion on the documents before him. For example, in the context of a group cross-guarantee, HH Judge David Cooke rejected [32] the contention that the word "claim" should be read in the context of a claim by a "guarantor". The group cross-guarantee and the facility letter contained a clear express prohibition on competing with or, in the case of the former only, gaining priority over Royal Bank of Scotland. Clause 7.7 contains no such express prohibition. Given the different context and terminology, to arrive at a different conclusion does not cause unacceptable uncertainty.
48. For these reasons my judgment, as handed down, reaches the same conclusions and for the same reasons as those set out in the draft released to counsel on 14th December 2009.