Lloyd's Maritime and Commercial Law Quarterly
CONTRACTING OUT OF SET-OFF IN A WINDING UP
Stein v. Blake
The House of Lords’ decision in Stein v. Blake
1 is an opportunity to re-examine the principle that the statutory set-off in a bankruptcy2 or a winding up3 is mandatory, in the sense that a contract which purports to exclude it is ineffective.4 This was the position taken by the House of Lords in National Westminster Bank Ltd. v. Halesowen Presswork & Assemblies Ltd.5 by a majority of 3 to 1.6
This position has since gained general acceptance. In Stein v. Blake
7 Lord Hoffmann gave the mandatory nature of bankruptcy set-off, as well as the fact that it is “selfexecuting” (that is, it operates automatically8 as of the bankruptcy date), as the basis for the conclusion that the set-off extinguishes the claims on each side and to replace them by a net balance.9 In MS Fashions Ltd. v. BBCI10 both the Court of Appeal and Hoffmann,
1. [1995] 2 W.L.R. 710.
2. Insolvency Act 1986, s. 323.
3. Insolvency Rules 1986 (S.I. 1986 No. 1925), r. 4.90.
4. It used to be thought that, quite apart from bankruptcy set-off, any undertaking to pay without set-off was invalid, but this was shown to be incorrect in Hongkong and Shanghai Banking Corp. v. Kloeckner [1990] Q.B. 514.
5. [1972] A.C. 785.
6. Viscount Dilhorne, Lord Simon of Glaisdale and Lord Kilbrandon; Lord Cross of Chelsea dissenting. Lord Donovan, the fifth member of the Appellate Committee, was taken ill during the hearing: see the reporter’s note at [1972] A.C. 785.
7. [1995] 2 W.L.R. 710, 716E.
8. Lord Hoffmann considered (ibid., 714, 719) that the statement in the Insolvency Act 1986, s. 323(2) that “An account shall be taken of what is due from each party to the other” could not be interpreted literally as a requirement that the court has to draw up this account. However, the House of Lords’ attention seems not to have been drawn to the fact that the Bankrupt Law Consolidation Act 1849, the Act preceding the 1869 Act which introduced the language now found in the Insolvency Act 1986, s. 323(2), expressly provided for the court to state the account.
9. However, no illogicality would have been involved in holding that set-off operates automatically unless excluded by prior agreement; see the statement of Wright, J., in Watkins v. Lindsay & Co. (1898) 5 Mans 25, 29, quoted by Lord Cross in Halesowen at p. 816 and the observation of the High Court of Australia in Gye v. McIntyre (1991) 171 C.L.R. 609, 622 quoted in Stein v. Blake [1995] 2 W.L.R. 710, 716.
10. [1993] Ch. 425, 446.
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