Derham on the Law of Set-Off

1254 Pages·2010·13.881 MB·English

by  Rory Derham

Dedication
From: Derham on the Law of Set-Off (4th Edition)
Rory Derham
Content type:Book content
Product:Financial Law [FBL]
Published in print:18 November 2010
ISBN:9780199578825
To Heather, Ryan, Kate and Stephen(p. vi)
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Preface
From: Derham on the Law of Set-Off (4th Edition)
Rory Derham
Content type:Book content
Product:Financial Law [FBL]
Published in print:18 November 2010
ISBN:9780199578825
A number of important developments have occurred in the law of set-off since the
publication of the third edition some seven years ago. Of particular importance are the
changes introduced by the Insolvency (Amendment) Rules 2005 in relation to set-off in
company liquidation and administration. Curiously, set-off in bankruptcy has not attracted
the same attention, notwithstanding that some of the amendments made in relation to
company liquidation are equally relevant to bankruptcy. There have also been a multitude of
cases in relation to set-off since the last edition, which is to be expected given the breadth
of the subject. One may note in particular the decision of the House of Lords in Secretary of
State for Trade and Industry v Frid [2004] 2 AC 506 (insolvency set-off) and, in the Court of
Appeal, Muscat v Smith [2003] 1 WLR 2853 (equitable set-off and assignments) and Re
SSSL Realisations (2002) Ltd [2006] Ch 610 (the rule in Cherry v Boultbee and insolvency
set-off). In Australia, the High Court in International Air Transport Association v Ansett
Australia Holdings Ltd (2008) 234 CLR 151 considered the much-discussed decision of the
House of Lords in British Eagle International Air Lines Ltd v Compagnie Nationale Air
France [1975] 1 WLR 758. It came to a different conclusion based upon amendments made
to the IATA Clearing House Regulations after the House of Lords' decision. Of significance
also is the decision of the Supreme Court of Canada in Caisse populaire Desjardins de l'Est
de Drummond v Canada (2009) 309 DLR (4th) 323, which recognized that in some
circumstances a set-off agreement may constitute a security interest.
Muscat v Smith is significant for at least two reasons. In the first place, it was said in that
case that cross-claims available for equitable set-off must lie between the same parties,
which imports a requirement of mutuality. This view has since been repeated in the Court of
Appeal. Certainly the insolvency set-off section and the Statutes of Set-off require mutuality,
and ordinarily it would be necessary for equitable set-off. But, as Australian and Canadian
courts have recognized, it is not a strict rule in equity. There have been a number of
occasions when set-off has been permitted in equity notwithstanding an absence of
mutuality, which is consistent with the inherent flexibility of equitable remedies. The issue
of mutuality in relation to equitable set-off is discussed in Chapter 4. The second point
concerns the principle that an assignee takes subject to equities. That principle has its
foundation in the doctrines of equity in cases where, before the Judicature Acts, an
assignment of a debt was recognized only in equity. In order to enforce the debt in a
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common law action, the assignee had to sue in the name of the assignor and therefore took
subject to defences available against the assignor. The principle did not apply in those
limited situations, such as in the case of negotiable instruments, where the transferee of a
debt could sue in the common law courts in his or her own name and right. In Muscat v
Smith, however, the Court of Appeal applied the ‘taking subject to equities’ principle as
against a purchaser of leased premises who was entitled to sue for arrears of rent from the
period before the sale based on his own title, as opposed to that of the seller as the original
landlord. This aspect of Muscat v Smith is considered in Chapter 17. The discussion of the
case reproduces (p. viii) material first published in an article in the Law Quarterly Review.11
I am grateful to the editor of the Law Quarterly Review for permission to reproduce that
material.
As in the first three editions, the book considers the principles of set-off from both an
English and an Australian perspective.
The law is stated on the basis of the reported law available to me on 15 May 2010. The
important judgment of the Court of Appeal in Geldof Metaalconstructie NV v Simon Carves
Ltd [2010] EWCA Civ 667 in relation to equitable set-off arrived too late for anything other
than brief references.
Rory Derham
Tenth Floor St James Hall Chambers
Sydney
Footnotes:
11  ‘Equitable set-off: a critique of Muscat v Smith’ (2006) 122 LQR 469.
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Preface to the First Edition
From: Derham on the Law of Set-Off (4th Edition)
Rory Derham
Content type:Book content
Product:Financial Law [FBL]
Published in print:18 November 2010
ISBN:9780199578825
Set-off is an area of the law that, for some unknown reason, has not proved attractive for
academic writers. In the early part of the nineteenth century Babington and Montagu each
published monographs on the subject, but since then it has received remarkably little
attention. This is surprising given the importance that the business community does attach
to the right to set cross-demands against each other, particularly in the event of an
insolvency. The avowed aim of this book is to provide an exposition of some of the more
important principles of the law of set-off. It had its genesis in a thesis for which the author
was awarded the degree of Doctor of Philosophy, and subsequently also a Yorke Prize, at the
University of Cambridge. The thesis was entitled ‘The Law of Set-off in Bankruptcy and
Company Liquidation’, and more and less constitutes the material set out in Chapters 2 to
12 of the present book. The first chapter, dealing with equitable set-off and the final
chapter, on a surety's right of set-off, have been added in order to expand the scope of the
work for the purpose of publication.
The emphasis throughout is on the question of when a right of set-off is available. Questions
of pleading and procedure are not dealt with. For these, the appropriate rules of court, and
commentaries thereon, should be consulted. Moreover the book is concerned with the
principles of set-off. It does not purport to provide an exhaustive list of the myriad
situations in which the courts in the past have allowed a right of set-off. Rather the aim is to
indicate the principles upon which the decided case law is based.
During my period of research at Cambridge I was fortunate to have as my supervisors
Professor Gareth Jones, of Trinity College, and Michael Prichard, of Gonville and Caius
College. I am grateful to these gentlemen for their advice and assistance. The thesis was
examined by Dr Len Sealy, of Gonville and Gaius College, and Professor Roy Goode, of
Queen Mary College in London. Their comments and criticisms, and the encouragement
they gave me to publish this book, are greatly appreciated. Of course none of these people
is in any way responsible for any errors of omission or commission that may be contained in
the ensuing pages.
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The discussion of the various principles of set-off is based primarily upon English case and
statute law, though reference is also made to suitable authorities from Australia and New
Zealand. There are also extensive cross-references to the relevant Australian statutory pro-
visions. The law is stated on the basis of the available reported law as at 31 December
1986. However for the second impression of the book cases reported after that date and
before 30 September 1988 have been included, but by way of brief reference only in the
footnotes. Unfortunately it has not been possible to discuss these cases in any great depth.
R. D.(p. x)
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Contents—Summary
From: Derham on the Law of Set-Off (4th Edition)
Rory Derham
Content type:Book content
Product:Financial Law [FBL]
Published in print:18 November 2010
ISBN:9780199578825
Table of Cases xxxi
Table of Legislation, Treaties, and Conventions cv
1. Introduction 1
2. Set-off Between Solvent Parties: Common Law 9
3. Set-off Between Solvent Parties: Equitable Set-off 73
4. Substantive Equitable Set-off 79
5. Set-off Between Solvent Parties: Various Aspects 163
6. Set-off in Bankruptcy and Company Liquidation 259
7. Debts, Credits, and Dealings 355
8. Claims Susceptible to Insolvency Set-off 375
9. Commensurable Demands 425
10. Trust Funds 437
11. Mutuality–Introduction 471
12. Mutuality–Same Parties 501
13. Mutuality–Same Right 527
14. The Rule in Cherry v Boultbee 613
15. Combination of Bank Accounts 675
16. Set-off Agreements 741
17. Assignees, and Other Interested Third Parties 807
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18. Sureties 909
Bibliography 933
Index 941
(p. xii)
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Contents
From: Derham on the Law of Set-Off (4th Edition)
Rory Derham
Content type:Book content
Product:Financial Law [FBL]
Published in print:18 November 2010
ISBN:9780199578825
Table of Cases xxxi
Table of Legislation, Treaties, and Conventions cv
1. Introduction 1
A. The Meaning of Set-off 1.01
B. The Importance of Set-off 1.02
(1)  Insolvency 1.02
(2)  Counterclaim 1.03
(3)  Costs 1.06
(4)  Third party interests 1.07
(5)  Arbitration 1.08
C. The Forms of Set-off 1.10
D. Civil Procedure Rules 1.13
E. Applicable Law for Determining the Existence of a Cross-Claim 1.15
2. Set-off Between Solvent Parties: Common Law 9
A. Early Developments 2.01
B. Statutes of Set-off 2.04
(1)  Introduction 2.04
Australia 2.07
(2)  When must the set-off be available? 2.08
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(3)  Mutuality 2.13
(4)  The requirement of debts 2.14
What is a ‘debt’? 2.15
Alternative causes of action 2.18
Demands closely analogous to debts 2.19
Claims on guarantees 2.21
Indemnities 2.25
(5)  Due and payable 2.29
(6)  Freight and negotiable instruments 2.32
(7)  Trustees 2.33
C. The Statutes of Set-off as a Procedural Defence 2.34
(1)  The procedural nature of the defence 2.34
Concepts inherent in describing the defence as procedural 2.37
Parker v Jackson criticized 2.40
(2)  Cross-debt must be enforceable by action 2.46
Limitation Act 2.47
Unenforceable on other grounds 2.48
(3)  Cross-debt must be able to be determined in the plaintiff's
action 2.51
(p. xiv) D. Substantive Aspects of the Defence 2.53
Acceleration and termination clauses 2.57
E. Equitable Remedies 2.58
Forfeiture and possession 2.62
F. The Statutes of Set-off in Australia 2.63
(1)  New South Wales 2.64
Civil Procedure Act 2005 (NSW), s. 21 2.66
(2)  Criticism of the Stehar Knitting Mills case 2.74
The defence is not wholly procedural 2.76
(3)  Queensland 2.81
(4)  Victoria 2.83
G. Connected Cross-Demands at Common Law 2.87
H. Judgments 2.90
(1)  Pleading a judgment debt as a defence under the Statutes 2.91
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(2)  Stay on enforcement of a judgment on the basis of an
unlitigated cross-claim 2.92
Equitable set-off 2.94
Cross-claim accruing after judgment 2.97
(3)  Setting off judgments and orders 2.98
The nature of the set-off 2.99
Mutuality 2.106
Assignment 2.108
Bankruptcy 2.111
Solicitor's lien 2.114
Legal aid 2.121
I. Common Law Abatement 2.123
(1)  General principle 2.123
(2)  Substantive or procedural? 2.129
(3)  Abatement is distinct from equitable set-off 2.134
3. Set-off Between Solvent Parties: Equitable Set-off 73
A. Introduction 3.01
(1)  Money claims 3.02
B. The Forms of Equitable Set-off 3.03
(1)  Implied agreement 3.03
(2)  Equitable proprietary estoppel 3.05
(3)  Acting by analogy with the Statutes 3.07
(4)  Substantive equitable set-off 3.10
4. Substantive Equitable Set-off 79
A. The Traditional Formulation 4.02
B. New Approaches 4.08
C. Equitable Set-off in Australia 4.19
(p. xv) D. The Substantive Nature of Equitable Set-off 4.29
(1)  What is meant by ‘substantive’? 4.30
(2)  Some possible problems 4.35
(3)  Is the set-off confined to litigation? 4.38
(4)  Right to take action consequent upon default 4.45
(5)  Action taken by a creditor before a set-off has been asserted 4.48
(6)  Estimating the value of the cross-claim 4.50
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