In the case of Stein v Blake [1995] UKHL 11 the House of Lords examined insolvency set off on appeal of a bankruptcy case involving mutual claims and the implications of Section 323 of the Insolvency Act 1986.
(See also: Rule 14.25 Insolvency Rules 2016 for the scheme of insolvency set off applying to liquidations (corporate insolvency) whereas Section 323 of the Insolvency Act 1986 contains similar insolvency set off provisions for personal bankruptcy)
Bankruptcy / Insolvency set off and Its Implications
The judgment addresses legal implications of bankruptcy / insolvency set off, particularly in the context of mutual claims between a bankrupt individual and their creditor.
- Section 323 of the Insolvency Act 1986 applies to mutual debts and dealings before bankruptcy.
- It mandates that an account be taken of what is due from each party, allowing for set-off of mutual debts.
- Only the net balance, if any, is provable as a bankruptcy debt.
- The law treats debts as having been ascertained at the bankruptcy date, affecting the substantive rights of the parties.
The Nature of Claims in Bankruptcy
The Stein v Blake determination examines whether claims continue to exist as separate causes of action after bankruptcy.
- The original chose in action ceases to exist and is replaced by a claim for a net balance.
- This conclusion aligns with the ruling in Farley v. Housing & Commercial Developments Ltd.
- Cross-claims are treated separately for the purpose of calculating the balance but do not survive as assignable items.
- The Court of Appeal’s view that separate causes of action survive is critiqued as fundamentally flawed.
Assignment of net balance insolvency set off rights
The text addresses whether a trustee can assign the right to the net balance after bankruptcy.
- The trustee has the duty to realize the bankrupt’s estate, which includes the right to the net balance.
- The assignment of the net balance does not require prior quantification of the balance.
- The self-executing nature of bankruptcy set-off allows for the assignment without the trustee being a party to the action.
- The deed of assignment must clearly convey the intent to transfer the net balance.
Legal Precedents and Interpretations
The judgment references various legal cases and interpretations that shape the understanding of bankruptcy set-off.
- The case of Gye v. McIntyre illustrates the automatic operation of bankruptcy set-off.
- The distinction between legal set-off and bankruptcy set-off is emphasized, with the latter being self-executing.
- Historical context is provided through references to earlier bankruptcy laws and their evolution.
- The text critiques the reliance on outdated legal interpretations that do not align with current bankruptcy law principles.
Legal Proceedings and Cross-Claims
The court addressed the implications of a cross-claim in the context of a bankruptcy assignment.
- The assignment was deemed effective despite not explicitly referencing the defendant’s cross-claim.
- If the trustee retained part of the claim, the action would require the trustee to be added as a party.
- Mr. Blake should not face the burden of raising the same cross-claim in multiple proceedings.
- The plaintiff’s counsel clarified that the trustee had no other claims against Mr. Blake and was assigning the entire net balance.
Wider Issues in Bankruptcy and Legal Aid
The appeal highlighted broader concerns regarding bankruptcy, legal aid, and the rights of defendants.
- The case reflects common issues where individuals become insolvent while pursuing claims.
- Disputes often arise between the bankrupt and the trustee over whether to pursue claims.
- The trustee may assign claims to the bankrupt to act in the interest of creditors.
- Defendants may feel disadvantaged when a bankrupt pursues claims with legal aid, which the trustee cannot access.
- The court noted that the bankruptcy did not relieve Mr. Blake of his legal challenges, raising questions for legislative consideration.
Court’s Final Judgment and Orders
The court affirmed the previous ruling and addressed the costs associated with the appeal.
- The House of Lords upheld the Court of Appeal’s decision from May 5, 1993.
- The appeal by David Blake was dismissed, and he was ordered to pay the respondent’s costs.
- The costs incurred by the respondent were to be certified by the Clerk of the Parliaments.
- The respondent’s costs were to be taxed in accordance with the Legal Aid Act 1988.
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