Law Report: Director's right of set-off: High Street Services Ltd and others v Bank of Credit and Commerce International SA - Court of Appeal (Lord Justice Dillon, Lord Justice Nolan and Lord Justice Steyn), 25 March 1993

A company director who guaranteed, as a principal debtor, the repayment to a bank of loans to his company could, upon the bank's insolvency, set off the debt owed to the bank by him and his company, by the amount of credit in his own deposit account with the bank.

The Court of Appeal dismissed two appeals by the liquidators of Bank of Credit and Commerce International SA, from Lord Justice Hoffmann, sitting as an additional Chancery Division judge (the Independent, 6 January 1993) who granted declarations against BCCI upon motions brought by (1) MS Fashions Ltd and others, the decision in whose case was not appealed; (2) High Street Services Ltd, Portmaid Fashions Ltd, Cira Ltd, Raees Ahmed and Saeed Ahmed; and (3) Impexbond Ltd, Tucan Investments plc and Nasir Abdul Amir.

John Jarvis QC and Robin Dicker (Lovell White Durrant) for BCCI; Jonathan Sumption QC and Mark Hapgood (Glanvilles; Slaughter & May) for the plaintiffs.

LORD JUSTICE DILLON said the problem was this: if a bank lent money to a company, and took a guarantee of that debt from a director of the company, and also took from the director a deposit of money charged in the bank's favour with the payment to it of the company's debt or the director's liability to the bank as guarantor of that debt, and if the bank later became insolvent and went into liquidation, could the company or the director compel the bank to apply the director's deposit in reduction of the company's debt, and also of the director's liability as guarantor, or could the bank require the company to repay the full amount of its debt without regard to the director's deposit, leaving the director to prove as an unsecured creditor in the bank's liquidation for his deposit?

Rule 4.90 of the Insolvency Rules 1986 (SI 1925) provided: '(1) This rule applies where, before the company goes into liquidation, there have been mutual credits, mutual debts or other mutual dealings between the company and any creditor proving or claiming to prove for a debt in the liquidation. (2) An account shall be taken of what is due from each party to the other in respect of the mutual dealings, and the sums due from one party shall be set off against the sums due from the other . . . (4) Only the balance (if any) of the account is provable in the liquidation.'

BCCI argued that there was no relevant personal liability on the directors concerned to be set off against their deposits because their personal liability was merely that of a guarantor, a guarantor's liability was contingent on a demand being made, and no demand had yet been made on either of them.

In his Lordship's judgment, however, the question was essentially one of construction of the contract. Here, each of the directors had expressly agreed in the documents he had signed that his company's liabilities should be recoverable from him as a principal debtor. When BCCI went into liquidation, there was a debt presently due from each of the companies to BCCI and equally due from each director as principal debtor, and there was the liability of BCCI to each director for the deposits. That satisfied entirely the requirements for statutory set-off and rule 4.90 had automatic effect.

LORD JUSTICE NOLAN and LORD JUSTICE STEYN agreed.

Paul Magrath, Barrister