First instance ruling
Appeal Court decision
The liquidators of the insolvent bank Kaupthing Singer & Friedlander (Isle of Man) Limited (in liquidation) have won an important victory in the Isle of Man Appeal Court, overturning a first instance judgment which was delivered in favour of Australian supermodel Elle Macpherson. Macpherson had previously won a landmark victory in the Isle of Man High Court in a case in which the court cited an equitable principle dating back to 1675.(1)
As a customer of the bank, Macpherson deposited the equivalent of approximately £2.5 million with the bank. Macpherson also owned an Isle of Man company called Light House Living Limited (LHL), which owed the bank about £7.8 million in respect of a mortgage on a residential property in London. Macpherson guaranteed the repayment of LHL's debt to the bank and the property was acquired and held by LHL as nominee and trustee for Macpherson. When the bank went into liquidation, LHL owed the bank £7.8 million in respect of the mortgage loan and the bank owed Macpherson approximately £2.5 million in respect of the deposit.
First instance ruling
The court found in favour of Macpherson on the basis of an equitable argument and ordered that the sum due from the bank to Macpherson in respect of her deposits with the bank should be set off under Section 22 of the Bankruptcy Code 1892 against the debt due from LHL to the bank. Section 22 states:
"Where there have been mutual credits, mutual debts, or other mutual dealings between a debtor against whom an order of adjudication shall be made under this Act, and any other person proving or claiming to prove a debt under such order, an account shall be taken of what is due from one party to the other in respect of such mutual dealings, and the sum due from one party shall be set off against the sum due from the other party, and the balance of the account, and no more, shall be claimed or paid on either side respectively."
The court stated that a strict literal interpretation of Section 22 was entirely inappropriate. It noted that the longstanding purpose was to do substantial justice between the parties to mutual dealings upon the insolvency of either party. The court held that the dealing began with two parties (ie, just the bank and Macpherson); both parties agreed to interpose LHL on the one side of the account, but the real and substantial parties to the transactions remained the bank and Macpherson.
Appeal Court decision
On October 31 2011 the Appeal Court overturned the first instance judgment. The court found that a trustee in English and Manx law contracts in its own name and is solely liable to the other contracting party on a contract into which it enters. In the absence of agency, the beneficiary is not liable. Lord Hoffmann in Ingram v Inland Revenue Commissioners(2) was quoted at 305: "A trustee in English law is not an agent for his beneficiary. He contracts in his own name with a right of indemnity against the beneficiary for the liabilities he has incurred".
The court therefore found that LHL was solely liable to the bank to repay the loans and Macpherson was not so liable. Even if LHL had a right of indemnity against Macpherson, no sum was due from Macpherson to the bank.
The Appeal Court held that the first instance court had erred in concluding that dicta of Gye v McIntyre,(3) an Australian case, recognised the possible existence of a situation or relationship which could be described as one of "beneficial liability" in respect of monies lent to a trustee. The court stated that it believed that the first instance court adopted such an interpretation merely because it felt that such an interpretation was warranted by the substantial justice of the case. The Appeal Court concluded that such an approach was not justified.
The court therefore rejected the conclusion that Macpherson was under a beneficial liability to the bank. It further held that the court of first instance had erred in finding that there was a debt due from Macpherson to the bank within the meaning of Section 22 of the Bankruptcy Code. The court was not satisfied that Section 22 applied to the dealings between the bank and the respondents to the appeal, Macpherson and LHL, and therefore was not satisfied that the sum due to Macpherson from the bank in respect of the deposits was automatically set off against the sum due from LHL to the bank in respect of the mortgage.
The liquidators of the bank achieved on appeal a declaration that Macpherson's deposits with the bank had not been set off against LHL's debt to the bank so that when the London property was sold, the entirety of the proceeds of the sale ought to be accounted for to the bank.
This judgment might be seen as restoring some order in respect of the recognition of the distinction between legal entities and the separate legal personality of a company. It also favours a literal rather than a purposive statutory interpretation.
The Appeal Court preferred the proper construction of Section 22 of the Bankruptcy Code by considering the precise language used, rather than taking a purposive approach. The appeal judgment adopted Hoffman's view in Robinson v Secretary of State for Northern Ireland and Others:
"I am not sure that it is sufficiently understood that it will be very rare indeed for an Act of Parliament to be construed by the courts as meaning something different from which it would be understood to mean by a member of the public who was aware of all the material forming the background to its enactment but who was not privy to what had been said by individual members (including Ministers) during the debate in one or other House of Parliament."(4)
The possibility of a point of law appeal to the Privy Council remains open if special leave is granted.
For further information on this topic please contact John T Aycock at M&P Legal by telephone (+44 1624 695800), fax (+44 1624 695801) or email ([email protected]).
(1) For further information on the original ruling please see "Supermodel wins landmark victory in High Court insolvency case".
(2)  1 AC 293.