Effect of no set-off clause on counterclaim

It is well understood that the courts will seek to give effect to the express terms of a contract. In ABN Amro Bank NV v Totisa Holdings SA and others, the effect of the court doing so was to refuse to grant a stay of execution of a judgment (the Stay) pending determination of a counterclaim.

ABN Amro Bank NV (the Bank) was entitled to summary judgment in relation to unpaid sums under a facility agreement (the FA). The defendants sought to bring a counterclaim against the Bank for breach of the FA. The alleged breach was a refusal by the Bank to lend the final instalment under the FA.

The FA contained a no set-off clause which provided that all payments by the defendants were to be 'calculated and made without (and free and clear of any deduction for) set-off or counterclaim.' As a result, the defendants conceded that the counterclaim was no defence to the claim for payment of the debt. It was argued, however, that the court had an unfettered discretion when considering the application for the Stay and that it should exercise that discretion in the defendants' favour so as to achieve justice.

The defendants argued that the effect of the Bank's alleged breach was that the defendants had no funds with which to pursue the counterclaim against the Bank. If the Stay was not granted and the defendants had to pay the claim, the defendants would go out of business, the counterclaim would be stifled and that would lead to an injustice.

The High Court refused to grant the Stay finding that the defendants had failed to adduce sufficient evidence that its business would fail or that the counterclaim would, or may, be stifled. The defendants had not considered third party funding of the counterclaim, or pursuing it inside an insolvency procedure.

The court considered that the no set-off clause in the FA strongly suggested that the defendants had agreed that where, as in this instance, there was an argument over whether one of the parties had complied with the contract, the parties had agreed that the correct outcome was that the claim be paid, and any counterclaim be a matter for separate pursuit.

In exercising its unfettered discretion as between commercial parties, the court had to give great weight to the no set-off clause as it expressly addressed the parties' agreement about what should happen.

Things to consider

The contract reflected the intention of commercial parties and they were bound by the terms that they had agreed. The court would not intervene where the contract term dealt with exactly the situation that arose.

Court sets out procedure for contempt of court proceedings against bankrupt

For the first time, the Divisional Court has provided guidance on the correct procedure to be used in contempt of court cases falling under the Insolvency Act 1986 (IA).

In Simmonds (as trustee in bankruptcy of A J Pearce) v Pearce (a bankrupt), the claimant trustee in bankruptcy (the Trustee) sought to commit the defendant to prison for contempt of court for failing to comply with his obligations under ss 333 and 363 of the IA. The Trustee alleged the defendant had failed to deliver up records or provide information relating to his financial affairs; had taken active steps to conceal his assets; had told lies and refused to answer questions in breach of directions given to him by the court at his public examinations; and had refused to co-operate with the Official Receiver or the Trustee.

The court found the defendants' actions to be a clear case of deliberate and calculated non-co-operation with the Trustee and a calculated attempt to obstruct the Trustee in his function. His actions amounted to clear and deliberate contempt of court.

The court considered that the current state of the rules for contempt of court cases falling under the IA was unsatisfactory and unclear and in need of review. Although there are numerous reported examples of bankrupts who had failed to co-operate with their trustees in bankruptcy (TIBs) being punished for contempt of court, there was scant authority on the procedure TIBs should adopt. The court held that pending such a review, the correct procedure is that set out under the Civil Procedure Rules r. 81.15 (CPR 81.15).

As a TIB is an officer of the court, there is no requirement on TIBs to obtain permission to make an application. An application under CPR Part 8 would only be required where the bankrupt's dishonesty has only been discovered after he has been discharged from bankruptcy and the administration of his estate has been completed.

Applications should be issued in the Chancery Division and dealt with by a judge of that Division. The court accepted that this might cause some listing difficulties in court centres outside London. If any such applications are issued in the Administrative Court, they should be transferred administratively to the Chancery Division as a matter of course.

The Trustee had made the appropriate application, albeit to the Administrative Court. The defendant was guilty of contempt of court.

Things to consider

The court considered that CPR 81.15 is couched in wide enough terms to encompass all instances of non-co-operation with TIBs.

No evidence of misrepresentations and cavalier attitude leads to worldwide freezing injunction

In Bank and Clients plc v King and anor, the claimant advanced a loan of £2.15 million to the company (Ve), secured by way of, amongst other things, personal guarantees (the Guarantees) given by the defendants. The defendants failed to pay under the Guarantees following demand. The claimant sought summary judgment and a worldwide freezing order against them. It alleged the defendants had given misleading information as to the value of their assets when the Guarantees were entered into and there was a real risk of dissipation of the defendants' assets to avoid the judgment.

The defendants asserted that they were not liable under the Guarantees due to representations or collateral warranties or promises made by the claimant's chief executive (E) that the claimant would first seek to enforce other securities it held before it sought to enforce the Guarantees, which it had not done.

The High Court held that in the absence of fraud or misrepresentation, the defendants were bound by the Guarantees which imposed clearly defined primary obligations on them.

As to the alleged representations by E, the court concluded that the defendants' evidence lacked precision; was contradicted by contemporaneous evidence and inconsistent with a subsequent amended facility agreement which they entered into. The alleged representations were commercially fanciful and had been raised only after demand had been made under the Guarantees:

The defendants were intelligent, experienced, sophisticated businessmen who would not have relied upon the alleged oral representations in light of the wording of the Guarantees they entered into. It was incumbent on the defendants to read the Guarantees before signing them to make sure they reflected what had been agreed. Their alleged failure to do so meant that they had been induced to enter into the Guarantees by their own assumptions, not the alleged representations.

The court concluded that the defendants had no real prospect of defending the claim against them and each was liable to the claimant for in excess of £3.5 million.

The court was satisfied, on the evidence, that there was a real risk of dissipation of the defendants' assets in order to avoid payment of the judgment. The defendants had treated Ve's assets as their own and used them for their own purposes; had had a wholly cavalier attitude when providing (misleading) information to the claimant as to the value of their assets when required to do so before entering into the Guarantees; and had behaved with unacceptably low standards of commercial morality in dealing with Ve's money as well as in their dealings with the claimant.

As the defendants had been made bankrupt, the injunction was to be framed to make it clear that any assets caught by the injunction would be held for the benefit of the defendants' creditors as a whole, not just the claimant.

Things to consider

Once again, the court was more than willing to hold the defendants to what they had contractually agreed. No reasonable businessman would have relied on oral representations without ensuring the representations made were reflected, or at least not contradicted, in the documents subsequently signed. Failure to read documents before signing is no defence.

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Insolvency Litigation: recent cases and issues - December 2017

In our update this month we take a look at three cases that provide helpful clarification from the courts on issues that will be of interest to the insolvency and fraud industry - the key message from each case confirms: