FIRST DIVISION, INNER HOUSE, COURT OF SESSION
Lord President Lord Mackay of Drumadoon Lord Marnoch	[2011] CSIH 61 P1590/09 OPINION OF THE COURT delivered by THE LORD PRESIDENT in Reclaiming Motion by joint administrators of Heritable Bank plc Respondents and Reclaimers: against THE WINDING-UP BOARD OF LANDSBANKI ISLANDS HF Noter and Respondent; _______

Act: S.P.L. Wolffe, Q.C., Duthie; Shepherd & Wedderburn LLP (Respondents and Reclaimers)

Alt: Currie, Q.C., O'Brien; Maclay Murray & Spens (Noter and Respondent)

28 September 2011

Introduction

[1] The complex background to the present dispute is comprehensively set out in the Opinion of the Lord Ordinary. The respondents and reclaimers ("the reclaimers") are the joint administrators of Heritable Bank Plc ("Heritable"), a company incorporated under the Companies Act 1985 with its registered office in Glasgow. The Noter and respondent ("the respondent") is the winding-up board of Landsbanki Islands HF ("Landsbanki"), a company incorporated under the laws of Iceland with its registered office in Reykjavik. Heritable is a wholly owned subsidiary of Landsbanki. The reclaimers were appointed as administrators of Heritable on 7 October 2008. On the same day the Financial Supervisory Authority of Iceland took control of Landsbanki. On 8 December 2008 the respondent submitted a statement of claims in the Heritable administration for debts it claimed were owed by Heritable to Landsbanki. One of those claims, amounting to around £86 million, related to a revolving credit facility ("the Landsbanki RCF claim"). It also submitted two contingent claims, for £50 million and £1,011,817,245 respectively. On 30 October 2009, the reclaimers submitted claims in the Landsbanki winding-up for debts they claimed were owed by Landsbanki to Heritable. Those claims totalled around £905 million ("the Heritable claims"). The largest of these claims (the Heritable RCF claim) for in excess of £661 million is an illiquid claim for damages - for alleged breach by Landsbanki of the revolving loan facility.

[2] On 6 November 2009 the reclaimers rejected the Landsbanki RCF claim. Applying the principles of balancing of accounts in bankruptcy (anglice, set-off), they indicated that the whole of that claim was extinguished by the Heritable claims against Landsbanki. They did not dispute the Landsbanki RCF claim on any other basis. On 26 November 2009 the contingent claims were accepted, but valued at nil, on the basis that there was no prospect of the contingency being satisfied. On 14 January 2010 the respondent rejected all but one of the Heritable claims. The claim accepted was valued at just over £7 million. The rejection was initially appealed by the reclaimers to the Icelandic District Court.

[3] By way of a Note in the Petition for the making of an administration order in respect of Heritable, the respondent appealed against the reclaimers' refusal of its claims. While the decision as regards the contingent claims has also been challenged, the present reclaiming motion is concerned solely with the Landsbanki RCF claim. Relying on Regulation 5 of The Credit Institutions (Reorganisation and Winding Up) Regulations 2004/1045 ("the 2004 Regulations") the respondents argued that the decision in the Icelandic winding-up proceedings to reject the Heritable claims was binding in the United Kingdom, and that there were therefore no valid claims by Heritable to set off against the Landsbanki RCF claim. The reclaimers raised a plea to the relevancy of the Note as regards the respondent's reliance on Regulation 5 and on the decisions taken in the Landsbanki winding-up proceedings. They sought to have excluded from probation the averments in question. The matter proceeded to debate where the discussion included discussion of the principle of res judicata - resort to the Icelandic court was then thought to be imminent. On 20 July 2010 the Lord Ordinary rejected the arguments presented in support of the plea to the relevancy. This reclaiming motion has been brought against that decision.

The issue in dispute

[4] The issue now in dispute between the parties concerns the effect, in Scots law, of a decision by the respondent in the winding-up proceedings of Landsbanki. In short the dispute may be formulated thus: whether, by virtue of Regulation 5 of the 2004 Regulations, a decision by the respondent made under Icelandic law in the winding-up of Landsbanki as regards the existence and extent of any claims by Heritable against Landsbanki (against which an appeal to the Icelandic court was taken but subsequently abandoned) is decisive for the purposes of the administration proceedings of Heritable in Scotland; or, alternatively, whether the availability of set-off against Landsbanki's claims has to be determined by the reclaimers according to Scots law in the Heritable administration.

Background

The withdrawal of the Heritable claims

[5] There have been significant developments since the Lord Ordinary's decision. On or about 12 August 2010 the Heritable claims were withdrawn in their entirety from the Landsbanki winding-up proceedings. On 20 September 2010 the Icelandic District Court granted the reclaimers' request to discontinue the appeal proceedings before it. That decision was affirmed by the Icelandic Supreme Court on 21 October 2010. There is consensus between the parties that the issue of res judicata is no longer live.

Icelandic Law

[6] In reaching his decision, the Lord Ordinary took as pro veritate the following averments made by the respondent as regards Icelandic law:

"17.1 The winding up of Landsbanki is governed by Chapter XII of Act No.161/2002 Financial Undertakings, as amended. Article 102 of that Act, in the official English translation, provides inter alia:

'The same rules shall apply to the winding-up of a financial undertaking as apply generally to bankruptcy proceedings concerning reciprocal contractual rights and claims against it ...

Provisions of Chapter XVIII of the Act and Part 5 of the Act on Bankruptcy etc shall apply concerning processing of claims against a financial undertaking upon its winding-up, including the effect of failure to submit claims ...'

17.2 The Act on Bankruptcy etc 1991, as amended, ('the AB') provides in Chapter XVIII for the processing of claims against a bankruptcy estate. In particular, Article 116 of the AB provides that an action for payment cannot be commenced against a bankrupt, although pending actions can be continued. Article 117, in the official English translation, provides inter alia:

'A party wishing to uphold a claim against a bankruptcy estate, but unable to pursue it as provided for in Article 116, shall submit a statement of his claim to the trustee in bankruptcy ...

A statement of claim submitted to a trustee in bankruptcy shall have the same effects as if legal action had been filed in respect of the claim at the point in time when the trustee receives a statement.'

17.3 Article 118 of the AB provides that if a claim is not the subject of a pending action, and is not submitted to the trustee in bankruptcy within the prescribed time, then it shall be 'cancelled with respect to the estate', subject to certain exceptions which do not apply to the Heritable Claims.

17.4 Article 119 of the AB provides that once the period for stating claims is over, the trustee in bankruptcy shall prepare a list of the claims 'stating his independent standpoint as to how each claim shall be recognised.' Article 120 of the AB makes provision for that determination to be challenged by a claimant. It provides inter alia:

'A claimant unwilling to accept the stand taken by the trustee in bankruptcy with respect to recognition of his claim shall state his objections at a meeting of the creditors held to consider the stated claims, or notify of this in a letter to be received by the trustee no later than at that meeting ...

... If an objection is raised at the meeting against the trustee's position as regards the recognition of a claim, and both or all the relevant parties, the objectors and those against whom their objections are directed, are present, the trustee shall endeavour to settle the dispute; if unsuccessful, he shall convene the parties in question to a separate meeting for this purpose. If the dispute cannot be settled in this manner, the trustee shall refer the matter to the district court as provided for in Article 171.

To the extent the trustee's standpoint as regards the recognition of a claim is not challenged as provided for in the first paragraph, it shall be regarded as finally approved during the bankruptcy proceedings.'

[7] The Lord Ordinary also took as pro veritate certain other of the respondent's averments as regards Icelandic law and procedure: the submission of claims in the winding-up of Landsbanki was equivalent to the bringing of a legal action against Landsbanki; any claim of Heritable which was not submitted in the winding-up of Landsbanki had been extinguished altogether and the debt discharged; where a claim is submitted, the winding-up determines the merits of that claim once and for all, subject to any appeal to the Icelandic courts; and the proceedings before the Icelandic District Court were concerned not merely with Heritable's entitlement to rank as a creditor in the winding-up procedure, but with the validity and quantum of its claims.

The 2001 Directive

[8] The 2004 Regulations sought to transpose into United Kingdom law the European Directive of 4 April 2001 on the reorganisation and winding-up of credit institutions (2001/24/EC - "the Directive"). In broad terms this Directive establishes a system for the allocation of jurisdiction for insolvency proceedings involving credit institutions, on its face within the Community but extended by agreement to the European Economic Area (EEA). Subject to certain exceptions, which are not relevant to the present reclaiming motion, it provides for the mutual recognition of any such proceedings initiated in the home Member States of those credit institutions. Iceland is a member of the EEA. Both parties referred in detail to certain of the recitals of the Directive. It is helpful to set out the recitals referred to in full:

"(14) In the absence of reorganisation measures, or in the event of such measures failing, the credit institutions in difficulty must be wound up. Provisions should be made in such cases for mutual recognition of winding-up proceedings and of their effects in the Community

...

(16) Equal treatment of creditors requires that the credit institution is wound up according to the principles of unity and universality, which require the administrative or judicial authorities of the home Member State to have sole jurisdiction and their decisions to be recognised and to be capable of producing in all the other Member States, without any formality, the effects ascribed to them by the law of the home Member State, except where this Directive provides otherwise.

(17) The exemption concerning the effects of reorganisation measures and winding-up proceedings on certain contracts and rights is limited to those effects and does not cover other questions concerning reorganisation measures and winding-up proceedings such as the lodging, verification, admission and ranking of claims concerning those contracts and rights and the rules governing the distribution of the proceeds of the realisation of the assets, which are governed by the law of the home Member State.

...

(23)          Although it is important to follow the principle that the law of the home Member State determines all the effects of reorganisation measures or winding-up proceedings, both procedural and substantive, it is also necessary to bear in mind that those effects may conflict with the rules normally applicable in the context of the economic and financial activity of the credit institution in question and its branches in other Member States. In some cases reference to the law of another Member State represents an unavoidable qualification of the principle that the law of the home Member State is to apply."

The Directive comprises various titles. Titles II and III deal with "Reorganisation Measures" and "Winding-Up Proceedings" respectively. These terms are defined in Article 2 as follows:

" - 'reorganisation measures' shall mean measures which are intended to preserve or restore the financial situation of a credit institution and which could affect third parties' pre-existing rights, including measures involving the possibility of a suspension of payments, suspension of enforcement measures or reduction of claims...

- 'winding-up proceedings' shall mean collective proceedings opened and monitored by the administrative or judicial authorities of a Member State with the aim of realising assets under the supervision of those authorities, including where the proceedings are terminated by a composition or other, similar measure".

Before this court, as before the Lord Ordinary, the debate was focused on Articles 9 and 10, which fall within Title III and deal with winding-up proceedings. Those Articles provide:

"Article 9
Opening of winding-up proceedings - Information to be

communicated to other competent authorities

1. The administrative or judicial authorities of the home Member State which are responsible for winding up shall alone be empowered to decide on the opening of winding-up proceedings concerning a credit institution, including branches established in other Member States.

A decision to open winding-up proceedings taken by the administrative or judicial authority of the home Member State shall be recognised, without further formality, within the territory of all other Member States and shall be effective there when the decision is effective in the Member State in which the proceedings are opened.

2. The administrative or judicial authorities of the home Member State shall without delay inform, by any available means, the competent authorities of the host Member State of their decision to open winding-up proceedings, including the practical effects which such proceedings may have, if possible before they open or otherwise immediately thereafter. Information shall be communicated by the competent authorities of the home Member State.

Article 10

Law applicable

1. A credit institution shall be wound up in accordance with the laws, regulations and procedures applicable in its home Member State insofar as this Directive does not provide otherwise.

2. The law of the home Member State shall determine in particular:

(a) the goods subject to administration and the treatment of goods acquired by the credit institution after the opening of winding-up proceedings;

(b) the respective powers of the credit institution and the liquidator;

(c) the conditions under which set-offs may be invoked;

(d) the effects of winding-up proceedings on current contracts to which the credit institution is party;

(e) the effects of winding-up proceedings on proceedings brought by individual creditors, with the exception of lawsuits pending, as provided for in Article 32;

(f) the claims which are to be lodged against the credit institution and the treatment of claims arising after the opening of winding-up proceedings;

(g) the rules governing the lodging, verification and admission of claims;

(h) the rules governing the distribution of the proceeds of the realisation of assets, the ranking of claims and the rights of creditors who have obtained partial satisfaction after the opening of insolvency proceedings by virtue of a right in re or through a set-off;

(i) the conditions for, and the effects of, the closure of insolvency proceedings, in particular by composition;

(j) creditors' rights after the closure of winding-up proceedings;

(k) who is to bear the costs and expenses incurred in the winding-up proceedings;

(l) the rules relating to the voidness, voidability or unenforceability of legal acts detrimental to all the creditors."

The 2004 Regulations
[9] The structure of the Regulations does not mirror exactly that of the Directive which they transpose. Part 2 of the Regulations is headed "Insolvency Measures and Proceedings: Jurisdiction in Relation to Credit Institutions". It contains Regulation 3, which prohibits a court in the United Kingdom from making a winding-up order, appointing a provisional liquidator or making an administration order in relation to an EEA credit institution (other than a UK credit institution) or any branch of an EEA credit institution. It is not in dispute that Heritable is a UK credit institution and that Landsbanki is an EEA credit institution within the meaning of the Regulations. Part 2 also contains Regulation 5, which was referred to at length in the debate before us. Unlike the scheme of the Directive, it deals with both reorganisation and winding-up measures, which it terms "insolvency measures", in a single provision. Again, it is not in dispute that the winding-up of Landsbanki in Iceland constitutes an EEA insolvency measure.

[10] Regulation 5 is in the following terms:

"Reorganisation measures and winding-up proceedings in respect of EEA credit institutions effective in the United Kingdom

5.-(1) An EEA insolvency measure has effect in the United Kingdom in relation to -

(a) any branch of an EEA credit institution,

(b) any property or other assets of that credit institution,

(c) any debt or liability of that credit institution,

as if it were part of the general law of insolvency of the United Kingdom.

...

(6) In this regulation -

...

'EEA insolvency measure' means, as the case may be, a directive reorganisation measure or directive winding-up proceedings which have effect in relation to an EEA credit institution by virtue of the law of the relevant EEA State;

'relevant EEA State', in relation to an EEA credit institution, means the EEA State in which that credit institution has been authorised in accordance with Article 4 of the banking consolidation directive."

[11] Part 4 of the 2004 Regulations is headed "Reorganisation or Winding up of UK Credit Institutions: Recognition of EEA Rights". It includes Regulation 22 which, again, was referred to at length in the debate before us. Regulation 22 is in the following terms:

"EEA rights: applicable law in the winding up of a UK credit institution

22.-(1) This regulation is subject to the provisions of regulations 23 to 35.

(2) In a relevant winding up, the matters mentioned in paragraph (3) are to be determined in accordance with the general law of insolvency of the United Kingdom.

(3) Those matters are -

(a) the assets which form part of the estate of the affected credit institution;

(b) the treatment of assets acquired by the affected credit institution after the opening of the relevant winding up;

(c) the respective powers of the affected credit institution and the liquidator or provisional liquidator;

(d) the conditions under which set-off may be invoked;

(e) the effects of the relevant winding up on current contracts to which the affected credit institution is a party;

(f) the effects of the relevant winding up on proceedings brought by creditors;

(g) the claims which are to be lodged against the estate of the affected credit institution;

(h) the treatment of claims against the affected credit institution arising after the opening of the relevant winding up;

(i) the rules governing -

(i) the lodging, verification and admission of claims,

(ii) the distribution of proceeds from the realisation of assets,

(iii) the ranking of claims,

(iv) the rights of creditors who have obtained partial satisfaction after the opening of the relevant winding up by virtue of a right in rem or through set-off;

(j) the conditions for and the effects of the closure of the relevant winding up, in particular by composition;

(k) the rights of creditors after the closure of the relevant winding up;

(1) who is to bear the cost and expenses incurred in the relevant winding up;

(m) the rules relating to the voidness, voidability or unenforceability of legal acts detrimental to all the creditors."

Submissions on behalf of the reclaimers

[12] Mrs Wolffe for the reclaimers began her submissions by explaining the background to the reclaimers' withdrawal from the Icelandic winding-up proceedings. She advised us that Heritable's claims in that process had initially been lodged as a "hedge": they were intended to preserve any right of set-off in the Heritable administration. In fact, upon a proper construction of the Directive and Regulations, that had not been necessary. The decision to discontinue the appeal before the Icelandic court, and to withdraw Heritable's claims, was born of a concern about Icelandic procedure, which was summary in the extreme and did not allow expert evidence as to foreign law - English law was the law of the contracts in question. It was therefore not suitable for litigating a dispute involving large amounts of money and complex issues of English law. However, the effect of that withdrawal was simply that, there being no decision of an Icelandic court, the issue of res judicata did not arise.

[13] The context in which the current dispute arose was important in approaching the issue of interpretation. For the purposes of the Regulations and the Directive, Heritable's administration constituted "collective" winding-up proceedings (Article 2 of the Directive and Regulation 2 of the Regulations; cf Insolvency Act 1986, Schedule B1, para 3). A critical feature of that process was that it resulted in the pari passu distribution of the estate (Bell: Commentaries, Volume I, pages 8-9). It involved the adjudication of creditors' claims. Its purpose was the determination of their entitlement to a dividend in that process and not, other than incidentally, with the determination of rights. It was not equivalent to a court judgment (Wight v Eckhardt Marine [2004] 2 BCLC 539, per Lord Hoffmann at para [26]-[27]; Cambridge Gas Transportation Corporation v Unsecured Creditors of Navigator Holdings plc [2007] 1 AC 508, per Lord Hoffmann at paras 14-17).

[14] The Directive had three main features. It mandated: (i) the exclusive jurisdiction of the home Member State of the credit institution to open insolvency proceedings; (ii) a mandatory choice of law rule of that jurisdiction ("lex concursus"); and (iii) the recognition of the effect of those proceedings throughout the EEA. In this it was, to a large extent, modelled on the European Regulation on Insolvency Proceedings (Regulation (EC) No 1346/2000). Like that Regulation, its focus was strictly on a single entity in self-contained proceedings; it made no express provision for groups of companies (Lastra, Cross-Border Bank Insolvency, at paras 6.08-6.14); cf Virgos-Schmit Report on the Convention of Insolvency Proceedings (EC Council doc. 6500/96 DRS 8(CFC) at para 76 as regards the Regulation). In particular, it did not seek to harmonise possibly inconsistent decisions arising in insolvency proceedings of different entities. One ought not to adopt an interpretation of the Directive which attempted to fill that perceived gap. That was clearly outwith the scope of the Directive. Indeed it had been identified as a possible area of reform (Lastra, ibid at paras 6.84, 6.87 and 6.92 -6.93).

[15] In light of the Directive's scheme, Heritable's administration in Scotland had to be seen as separate from, and parallel to, the winding-up proceedings of Landsbanki in Iceland. A parent company and its subsidiary were to be treated as separate entities. As the "home Member State" for Heritable, Scotland had jurisdiction in respect of its insolvency proceedings and, subject to certain exceptions, which were not relevant, Scots law applied as the lex concursus in relation to both the procedural and substantive aspects of the Heritable insolvency proceedings (Recitals 17 and 23, and Articles 9(1) and 10(1) of the Directive). Moreover, it applied to all aspects of those proceedings including, but not limited to, the lodging, verification and admission of claims and the operation of set-off (Article 10(2)(c), (f), (g) and (h)). The Directive focussed on the practical issues involved in the actual adjudication of participating creditors' claims and their entitlement to participate in a distribution of assets, not on any abstract considerations (cf Recital 20 and Articles 14 and 18). The principles of "unity" and "universality" in the Directive meant that the decisions taken in that process had to be recognised throughout the EEA (Recital 16, and Articles 9 and 10).

[16] The Regulations had to be interpreted purposively and consistently with the objectives outlined in the Directive's Articles and, in cases of uncertainty, in its recitals (Litster v Forth Dry Dock and Engineering Company Ltd 1989 SC (HL) 96, per Lord Templeton at pages 104-105; Marleasing SA v La Comercial Internacional de Alimentacion SA (Case C-106/89) [1990] ECR 1-4135; [1993] BCC 421, at para 8; Syska v Vivendi Universal SA [2008] EWHC 2155 (Comm); [2008] 2 CLC 459, per Christopher Clarke, J at paras 15-16 and 18-20; [2009] EWCA Civ 677; [2009] Bus LR 1494, per Longmore LJ at para 20; Schweizerische Lactina Panchaud AG v Germany (Case 346/88), [1991] 2 CMLR 283 ECJ, at paras [8]-[10]). Regulation 22 transposed Article 10 of the Directive. It applied Scots law to Heritable's administration. It was the lex concursus for determining: Heritable's assets (including its claims against Landsbanki); its liabilities (including Landsbanki's claims against it); and set-off (including set-off as between such claims and counterclaims).

[17] The administrators had a duty under Scots law to consider, verify and adjudicate on Landsbanki's claim as a creditor, for the specific purpose of determining whether it could participate in the distribution of Heritable's assets. If Heritable had a valid counterclaim, even if illiquid, it would be set off in terms of the Scots law rules on the balancing of accounts in bankruptcy (St Clair & Drummond Young: The Law of Corporate Insolvency in Scotland, paras 17-03-17.04). If that counterclaim was disputed, the matter would be resolved in the context of the Scottish administration by means of the Note procedure (Insolvency (Scotland) Rules 1986, Rule 4.16, applying Bankruptcy (Scotland) Act 1985, section 49 to the liquidation of a company; Liquidator of the Ben Line Steamers Ltd, Noter 2011 SLT 535). Applying the principles of international private law, the Scottish court would apply English law as the lex causae to determine the merits of the Heritable claims. In short, Heritable could rely on the "shield" of set-off in the Scottish insolvency proceedings, even if it had abandoned the "sword" of its claim in the Landsbanki winding-up.

[18] The respondent's reliance upon Regulation 5 was misplaced. While it gave effect to the principle of universality by ensuring that decisions in the insolvency proceedings of a credit institution in other EEA Member States were recognised in the United Kingdom, it did so only for issues arising in those proceedings for that credit institution. For example, it prevented any interference with that institution's assets situated in the United Kingdom (Regulation 5(1)(b)), and ensured that any debts claimed against it by those who wish to participate in the distribution of its assets were dealt with in the home State (Regulation 5(1)(c)). Thus, Heritable could not rely upon its claim to interfere with any of Landsbanki's assets situated in the United Kingdom. Regulation 5 had, however, no application to reorganisation or winding-up proceedings involving United Kingdom credit institutions. Indeed, it fell outwith Part 4 of the Regulations which dealt with such matters. In the present case it gave effect to Landsbanki's insolvency, but said nothing at all about how Heritable's administration was to be conducted or the law which applied to questions arising in it.

[19] Similarly, no reliance could be placed on the purported discharge of the respondents' claims under the Icelandic Act on Bankruptcy etc. 1991 due to the withdrawal of Heritable's claim from Landsbanki's winding-up. Such matters were governed by Scots law, under which the discharge of a liability in a foreign liquidation was effective only for liabilities governed by the law of that jurisdiction (St Clair & Drummond Young: The Law of Corporate Insolvency in Scotland, para 22-32; Adams v National Bank of Greece S.A. [1961] AC 255, per Lord Reid at pp 282-283); National Bank of Greece and Athens S.A. v Metliss [1958] AC 509, per Viscount Simonds at pp 525-526). As the lex causae for the underlying obligations in the present was English law, any discharge in terms of Icelandic law was of no effect. That would be so even if the respondent had given consideration to English law in reaching its decision: the discharge of the debt was ultimately dependent on the Icelandic statute.

[20] In favouring the respondent's interpretation of Regulations 5 and 22, the Lord Ordinary had erred in law. He had failed to take into account that a decision on a claim lodged in winding-up proceedings in a home Member State determined the entitlement to participate in the distribution of assets in those proceedings; it was not conclusive for all purposes. That would require a formal court ruling, leading to a plea of res judicata. The Lord Ordinary's conflation of these issues had fatally informed his interpretation of Regulation 22 (see paras [72]-[75] of his Opinion). He had erred in determining that the decision by the respondent and the impact of the Icelandic statute law as regards Heritable's non-participation in Landsbanki's winding-up ousted the application of Scots law in Heritable's administration as regards the different question of the operation of insolvency set-off against the Landsbanki claims when determining Landsbanki's entitlement to a distribution from Heritable's estate. He had also incorrectly interpreted Regulation 22 as relating only to procedural matters. Standing Heritable's withdrawal of its appeal from the Icelandic court, the complications raised by the issue of res judicata had been removed and the matter was at large for this court.

[21] The reclaiming motion should be allowed and the averments of the respondent at paragraphs 17-17.5 and 64.1 of the Note should be excluded from probation.

Submissions on behalf of the respondent

[22] Mr Currie for the respondent submitted that the Lord Ordinary's construction of the Regulations had been correct. He had not conflated a consideration of Regulation 5 with the issue of res judicata. The reclaimers had originally sought a ruling in order to establish whether they should continue with their appeal before the Icelandic court. The respondent, in its pleadings, had averred that any abandonment of that appeal would, by virtue of the Icelandic Act on Bankruptcy etc. 1991, have an effect equivalent to a court judgment discharging the underlying debt. The Lord Ordinary was aware of this. He proceeded on the hypothesis that he might be concerned only with a ruling of the respondent in relation to Heritable's claims (see paragraph [8] and [64]-[65] of his Opinion). Nevertheless, he had drawn comfort in his construction of Regulation 5 from the fact that, in many other situations, liquidators or receivers had to respect decisions in other jurisdictions.

[23] Pending expert evidence on the matter, the court had to proceed on the basis that the respondent's decision, which had not ultimately been appealed, not only determined that Heritable was not entitled to rank as a creditor in Landsbanki's winding-up, but also extinguished its claims and the underlying debts to which they related for all purposes under Icelandic law. That would have been the position even had Heritable made no claim in the Icelandic winding-up (Article 118 of the Icelandic Act on Bankruptcy etc. 1991). Indeed, the same would have been true under Icelandic law even had Heritable been solvent with established liquid claims against Landsbanki. Quantum valeat, Mr Currie understood that the respondent did take advice on English law when determining Heritable's claims.

[24] There was no basis in the Directive for the reclaimers' construction of the Regulations, which suggested that the respondent's decision would have effect in Scotland only for the purposes of Landsbanki's winding-up. Moreover, it was not clear what was meant by such a limitation: one had to look for a substantive effect of the Icelandic proceedings in the United Kingdom to give some meaning to Regulation 5. The preamble to the Directive made clear its objective. The emphasis was on the decisions of judicial and administrative bodies in insolvency proceedings being recognised in all EEA Member States (Recitals 7, 14 and 16). The Regulations had to be interpreted in light of those objectives, with which they were entirely consistent. Esto Regulation 5 went beyond the Directive's objectives in giving full effect to decisions in foreign insolvency proceedings, that construction, which involved a plain reading of it, ought to be followed unless inconsistent with Community law (Parkwood Leisure Ltd v Alemo-Herron [2011] UKSC 26, per Lord Hope of Craighead at paras 30-32).

[25] Interpreted in that context, Regulation 5 was clear: the EEA insolvency measure comprised the decision of the winding-up board of Landsbanki in Iceland; any claim which Heritable had against Landsbanki was a "debt or liability" of Landsbanki; and the decision of the Landsbanki winding-up board in relation Heritable's claims was to be given effect as if it were part of the general law of insolvency of the United Kingdom (Regulation 5(1)(c)). Under Icelandic law the effect of the Landsbanki winding-up proceedings was that the underlying debt to Heritable had been extinguished. Giving effect to that as if it were part of the general law of insolvency of the United Kingdom meant that Heritable could not use its claims against Landsbanki for the purposes of set-off. That did not prevent the reclaimers performing their duty of considering whether Heritable had a relevant counterclaim: such consideration would simply include a determination of whether, as here, any such counterclaim had been extinguished. Without having participated in the Icelandic winding-up, Heritable, even if it had been solvent, could not rely on any counterclaims in any action raised against it in Scotland by Landsbanki.

[26] The reclaimers' reliance on Regulation 22 was misplaced. It had nothing to do with the assessment of the merits of any claim. It simply provided that, where any of the issues specified in Regulation 22(3) arose, they were to be determined in accordance with the general law of insolvency of the United Kingdom. Moreover, on the respondent's construction of Regulation 5 that general law of insolvency would include the effect of the respondent's decision in Landsbanki's winding-up. There was no tension between the provisions.

[27] The reclaiming motion should be refused.

Reply on behalf of the reclaimers
[28] Mrs Wolffe submitted that it was irrelevant whether the respondent had taken advice on English law before rejecting Heritable's claims. The rule of discharge relied upon was still founded on the Icelandic statute and could have no effect in Scotland (National Bank of Greece and Athens SA v Metliss; Adams v National Bank of Greece S.A.). It was not clear that national Regulations could ever go further than was necessary in transposing a Directive: that was the issue referred to the European Court of Justice in Parkwood Leisure Ltd v Alemo-Herron. However, it was clear that they could not do so if it was precluded by Community law (per Lord Hope at para 32). In the present case the Directive itself prevented the interpretation of the Regulations advanced by the respondents. Such an interpretation was fundamentally inconsistent with the scheme of the Directive, which had as its focus a single entity. Its effect would be to have separate and parallel insolvency proceedings impinge on one another. The Directive gave exclusive jurisdiction to the Scottish courts in Heritable's winding-up. The reclaiming motion should be allowed.

Discussion
[29] At common law a debt under a contract whose proper law is the law of another jurisdiction may, for the purposes of Scots law, be discharged by insolvency proceedings in that other jurisdiction (Rochead v Scot (1724) M 4566; see also Wight v Eckhardt Marine, per Lord Hoffmann at para [15]). But such proceedings will not, for the purposes of Scots law, discharge a debt where the proper law of the contract is not the law of the jurisdiction in which the proceedings take place (Adams v National Bank of Greece S.A.; St Clair and Drummond Young: The Law of Corporate Insolvency in Scotland (3^rd ed.) para 22-32).

[30] Mr Currie, rightly in our view, did not rely upon any common law rule for the proposition that events in Iceland had, for the purposes of the present proceedings in Scotland, discharged any liability of Landsbanki under the Heritable claims, the proper law of which is English law. He relied solely on the Regulations, as interpreted against the Directive.

[31] Heritable is a wholly owned subsidiary of Landsbanki. But, while the Regulations and Directive make specific provision for credit institutions and their branches in other States, they make no such provision for subsidiaries in other States of such institutions. For the purposes of the Regulations and the Directive the credit institution and its subsidiary are distinct entities - just as if there was no legal relationship between them.

[32] Heritable is in administration in Scotland. But the logic of Mr Currie's argument, as he accepted, was that the same result (viz. the discharge of Heritable's claims by the Icelandic proceedings and their unavailability to be set-off against Landsbanki's claims in the Scottish proceedings) would follow if Heritable had been a wholly solvent company. Thus, if, hypothetically, Heritable, having a substantial and indisputable claim against Landsbanki, had decided not to pursue it in Landsbanki's winding-up (because the prospects of a dividend were remote and the costs of pursuing it outweighed any possible advantage), Heritable, according to the respondent's argument, would, by virtue of its unpursued claim having been discharged under Icelandic law, have been unable in Scottish proceedings brought by Landsbanki effectually to set-off by way of defence its claim against that pursued by Landsbanki.

[33] Unless the Regulations and the Directive require a different answer, Heritable under Scots law would, it may be assumed, on the basis of its counterclaim be entitled to resist a claim by (an insolvent) Landsbanki. The relevant principle is referred to by Bell: Commentaries (7^th ed.) Vol.2, pages 118 et seq as "balancing of accounts in bankruptcy", somewhat loosely referred to in some contexts as a species of "retention" - though as Heritable's counterclaim appears to arise out of the same contract as Landsbanki's claim retention proper may also apply. Retention is to be distinguished from "compensation" which involves mutual extinction of debts. Erskine: Institutes III.iv.20 observed:

"The right of retention may be here explained, upon account of its near resemblance to compensation, though it has not the effect of extinguishing obligations, but barely of suspending them, till he who pleads it obtains payment or satisfaction for his counter claim ...".

In Ross v Ross (1895) 22 R 461 Lord McLaren observed at page 465:

"The doctrine [of retention] has received much extension in cases of bankruptcy and insolvency, where it is practically settled that anyone who has a claim against an insolvent estate is entitled to keep back money which he owes to the estate ...".

See also Scott's Trustee v Scott (1887) 14 R 1043, per LP Inglis at page 1051. The debate before us proceeded on the basis that, as a matter of the common law of Scotland, retention, in one form or other, would be available to Heritable against Landsbanki's claim.

[34] The critical provision of the Regulations is Regulation 5(1), which provides:

"An EEA insolvency measure has effect in the United Kingdom in relation to -

(a) any branch of an EEA credit institution,

(b) any property or other assets of that credit institution,

(c) any debt or liability of that credit institution,

as if it were part of the general law of insolvency of the United Kingdom."

"An EEA insolvency measure" includes a directive reorganisation measure as well as directive winding-up proceedings (Reg 5(6)).

[35] The general thrust of Regulation 5 (as read in the context of the Directive) is clear: where a credit institution in another EEA State is being reorganised or wound up, the reorganisation or winding-up measure is, in relation to the lettered matters, to have effect in the United Kingdom as if it were part of the general law of insolvency of this jurisdiction. That treatment is in accordance with Recital 16 of the Directive which recognises that equal treatment of creditors requires that the credit institution be wound up (or reorganised) according to the principles of unity and universality. This in turn requires that, subject to certain exemptions which are not for present purposes material, the administrative and judicial authorities of the "home Member State" have sole jurisdiction and that their decisions are to be recognised and be capable of producing in all other relevant States the effects ascribed to them by the law of the home State. The Regulations secure this result by providing that, in a case such as the present, the Icelandic winding-up measure has effect in Scotland, in relation to the lettered matters, as if it were part of Scots general insolvency law. To adopt a metaphor, the envelope of the Icelandic proceedings extends, in relation to the lettered matters, to embrace these matters in the United Kingdom.

[36] Thus, perhaps most obviously, disposal of the property or assets of an Icelandic or other EEA credit institution is to be regulated by the reorganisation or winding-up proceedings in that State. They are not, for example, to be disposed of in accordance with the rules of diligence applicable in Scotland, albeit such property or assets are situated in Scotland. The position is perhaps less obvious in relation to a debt or liability situated in the United Kingdom of an institution authorised in Iceland or another EEA State. One of the functions of Regulation 5(1)(c) may, however, be to ensure that steps by a creditor to vindicate any positive claim against a credit institution authorised in another EEA State are pursued solely in the winding-up proceedings in that other State - albeit the debt or liability may arise in the United Kingdom. Another may be to ensure that a discharge of creditors' claims in a reorganisation effected in another EEA State is not disrupted by separate proceedings initiated by a creditor in the United Kingdom. Such provision - to exclude the "sword" of separate positive proceedings in pursuit of a liability or debt of the credit institution - is not inconsistent with such a liability or debt being available for use as a "shield" in the event that the institution should itself bring proceedings in the United Kingdom against a debtor here.

[37] This more limited scope of Regulation 5 is, in our view, more consistent with the substantive terms of that Regulation - the "EEA insolvency measure has effect in the United Kingdom ... as if it were part of the general law of insolvency of the United Kingdom". The logic of the respondents' argument is that, if Landsbanki had a liquid claim against Heritable and Heritable in turn had a liquid claim against Landsbanki, in the events which have occurred (Heritable's claim having been discharged under Icelandic law) compensation could not operate. But compensation is no part of "the general law of insolvency". And it is difficult to see why there should be a different result when the principle to be invoked is retention.

[38] This approach is consistent with the principle of unity and universality required by the Directive. It allows the affairs of Heritable, a United Kingdom credit institution itself in insolvency, to be wound up with the defences available to it under the general law to protect the interests of its creditors. It thus accords with Heritable being wound up in accordance with the desiderated principles. It also gives effect to Regulation 22 - and in particular Regulation 22(3)(d) which provides that United Kingdom law determines, in the case of the winding-up of a credit institution authorised in this country, the conditions under which set-off may be invoked.

[39] In para [73] of his Opinion the Lord Ordinary posed the question: "Why would it follow [from Regulation 22] that the Administrators, in so deciding [the net amount of Landsbanki's claim against Heritable] are free to ignore decisions of competent courts or other tribunals having jurisdiction over the matters upon which they have come to a decision?" He then posits arbitral and judicial decisions binding upon Heritable (including in para [74] judicial proceedings in Iceland where a like question is formulated). He answers both questions firmly in the negative. But it does not follow that, because arbitral and any competent judicial decisions would be binding (for all purposes) on Heritable's claims against Landsbanki, the decisions of Landsbanki's administrators (who do not constitute a court) are binding for all purposes on those claims. So far as appears, the Lord Ordinary was not alerted to the distinction which, in our view, is critical - namely, between Heritable deploying its claim as a "sword" (initiating proceedings against Landsbanki) and deploying it as a "shield" (in defence of proceedings initiated by Landsbanki). The fact that, by abandoning its claim in the Landsbanki winding-up proceedings, Heritable has lost its right to seek payment - in Iceland or elsewhere - of the relative debt, does not, in our view, entail that it is disabled, in its own winding-up proceedings, from relying on that claim in so far, and only in so far, as it is used to defend itself against the claim made by Landsbanki. Thus the withdrawal of Heritable's claim in Landsbanki's winding-up, discharging as it may have done under Icelandic law the underlying debt owed to Heritable, has effect, in Iceland and elsewhere, for the purposes of Landsbanki's winding-up; it does not have effect for the purposes of Heritable's winding-up.

[40] If the Lord Ordinary's decision is correct, universal priority would be given to the process in which a decision happened first to be made. That, we think, cannot be correct.

[41] For these reasons we shall recall the Lord Ordinary's interlocutor, sustain the reclaimers' first plea-in-law (in so far as it relates to statements 17 and 64 of the Note No.35 of process) and remit the proceedings to the Lord Ordinary to proceed as accords.