Lloyd's Maritime and Commercial Law Quarterly
LIQUIDATION SET-OFF: THE MUTUALITY PRINCIPLE AND SECURITY OVER BANK BALANCES
Re BCCI (No. 8)
The Court of Appeal’s judgment in Re Bank of Credit and Commerce International S.A. (No. 8)
1 contains important statements on two subjects: the mutuality principle in bankruptcy set-off, and the nature of the security which a bank can take over a customer’s credit balance with it to secure amounts owing to the bank by that customer or a third party.
The mutuality principle in bankruptcy set-off
Bank of Credit & Commerce International S.A., in liquidation in England (as well as Luxembourg), had made a loan to a company. To secure that loan, the person controlling the company had deposited funds with BCCI and signed a document2 charging the funds with the repayment of the company’s debt. The depositor did not guarantee repayment of the loan or accept any other form of personal liability. The Court of Appeal, upholding Rattee, J.,3 held that the deposit could not be set off against the company’s liability for the loan. Accordingly, BCCI’s liquidators could recover the full amount of the loan from the company, leaving the depositor to prove for his deposit as an ordinary unsecured creditor.
The basis of the decision was that, once BCCI went into liquidation, the only form of set-off available was that provided for by Rule 4.90 of the Insolvency Rules 1986. This the court viewed as a narrow statutory exception to the principle that, in a winding up, the assets of a company must be applied in paying its creditors pari passu. It followed that, in a winding up, public policy forbids any form of set-off other than that under Rule 4.90.4 However, on the facts of the case, Rule 4.90 could not operate since there was no mutuality between the claims sought to be set off. It was the borrowing company that owed the amount due to BCCI (the loan). But the amount due from BCCI (the deposit) was owed to the depositor, who owed BCCI nothing since he had not given any personal guarantee.
BCCI (No. 8) contrasts with the 1993 decision in M. S. Fashions Ltd v. BCCI
5. Both cases involved a person charging a deposit which he had made with BCCI to secure a loan by BCCI to a company controlled by him. But in M. S. Fashions the charge over the deposit provided that the liabilities of the depositor would be those of a principal debtor. This was used by Hoffmann, L.J. (sitting at first instance) and the Court of Appeal6 to arrive at the conclusion that the depositor had a personal liability to BCCI in respect of the borrower’s indebtedness and that, when BCCI went into liquidation, there was a set-off
1. [1996] 2 All E.R. 121 (Rose, Saville and Millett, L.JJ.). The judgment was delivered by Rose, L.J., and is stated to be the judgment of the court. However, the direct prose style seems to suggest the authorship of Millett, L.J.
2. The text is set out in the report of the first instance decision at [1994] 1 B.C.L.C. 758, 761–763.
3. [1994] 1 B.C.L.C. 758.
4. [1996] 2 All E.R. 121, 143.
5. [1993] Ch. 425.
6. Albeit by different routes.
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