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07 January 2011
Australian supermodel Elle Macpherson recently won a landmark victory in an Isle of Man High Court insolvency case by citing an equitable principle dating back to 1675.
Macpherson was a customer of the bank Kaupthing Singer and Friedlander (Isle of Man) Limited when it went into liquidation in May 2009. She also owned an Isle of Man company called Light House Living Limited (LHL), which owed the bank £7.8 million in respect of a mortgage on a residential property in London. Macpherson guaranteed the repayment of LHL's debt to the bank and the property was acquired and held by LHL as nominee and trustee for Macpherson. She occupied the property as her home in England.
When it went into liquidation, LHL owed the bank £7.8 million in respect of the mortgage loan and the bank owed Macpherson approximately $4 million (then equivalent to about £2.5 million) in respect of deposits.
As a result of the winding-up order made by the Isle of Man High Court on May 27 2009, the effect of the insolvency set-off provisions in Section 22 of the Bankruptcy Code 1892 – as applied to company windings-up by Section 248 of the Companies Act 1931 – fell to be considered by Deemster Moran. The liquidator of Kaupthing was the claimant in the proceedings and sought a declaration that Macpherson's US dollar deposits could not be offset against the mortgage debt that LHL owed the bank. Macpherson contended that Section 22 of the code applied to the dealings between the bank, LHL and herself, with the result that the sum due to her from the bank in respect of the deposits was automatically offset against the sum due from LHL to the bank in respect of the mortgage loan. Macpherson therefore contended that only the net balance of about £5.3 million (£7.8 million less her deposit of £2.5 million) was due from LHL to the bank.
Section 22 of the code states:
"Where there have been mutual credits, mutual debts, or other mutual dealings between a debtor against whom an Order of Adjudication shall be made under this Act, and any other person proving or claiming to prove a debt under such Order, an account shall be taken of what is due from one party to the other in respect of such mutual dealings, and the sum due from one party shall be set off against any sum due from the other party, and the balance of the account, and no more, shall be claimed or paid on either side respectively."
The liquidator contended that Section 22 did not apply and that there was no offset as the parties were distinct. The liquidator argued that LHL was bound to repay the full £7.8 million to the bank, and that it was for Macpherson to prove in the liquidation that she was owed £2.5 million. She would then receive whatever dividend was ultimately to be paid.
In October 2009 LHL sold the London property for £6.4 million with the consent of the bank liquidator. The terms of the sale were that the net sale proceeds, less the personal deposit (as if set-off had taken place) would be paid to the liquidators. The balance was held by English solicitors pending determination of the dispute.
Deemster Moran identified the principal battleground before him as being the argument regarding equitable set-off. In his judgment he cited that Section 22 of the code is of the same form and language as its equivalent UK predecessor and successor provisions, and has several Commonwealth cousins. Notwithstanding this factor, the long history and wide geographical incidence of the provision, the issues raised by the case in relation to the equitable set-off argument had not arisen in another relevant jurisdiction.
Macpherson's legal team contended that it was she and not LHL who should be regarded as the real party with whom the bank was mutually engaged in these dealings. Notwithstanding the interposition of a nominee and trustee to borrow from the bank to legally acquire the property and assume its mortgage liability, Macpherson's team said she was the real party with whom the bank was mutually engaged. It was argued that it was Macpherson who was beneficially entitled to have the debt owed to her based on her deposits offset in full against the legal indebtedness of LHL to the bank. Deemster Moran was ultimately convinced that Macpherson and her company were in equity one and the same.
Deemster Moran made it clear that, with regard to the equitable set-off argument, he was exercising the jurisdiction founded in equity and which had been fashioned and used from the earliest times "to do substantial justice between the parties". He expressed the view that if Macpherson failed to secure a set-off because of the interposition of LHL, then it would be a:
"purely inadvertent technical legal consequence of her reasonable wish to preserve her anonymity in ownership of property which the bank in promotion of its business and the making of its profits was entirely happy to go along with knowing that the money was still to be loaned entirely and exclusively for the benefit of Macpherson and that it would be wholly repaid by her through her nominee upon realisation of her beneficially owned assets, purchased and improved with that money."
Deemster Moran then conducted a review of the ancient authorities on the equitable argument. He cited Bailey v Finch(1), which itself referred to the rule of mutual credit dating back to authority from 1675. The 1871 extract in the judgment from Justice Blackburn cited two cases and then stated:
"Now those two cases, before the Revolution, and before there had ever been a Statute of Set Off, shew (sic) that at that time the most equitable principle was adopted that the cross accounts should be set off one against the other, and that the balance only should be proved. That was enacted in the Statute of 4 Anne, Chapter 17, Section 11, was continued afterwards in other statutes, and is continued now."
Deemster Moran stated that he had to look at the equitable or beneficial interests to determine whether the credits, the debts or the claims were between the same persons or parties and in the same interests. He concluded:
"I am satisfied... that the equitable or beneficial interest in the credit deposit with the bank and the equitable or beneficial interest in the liability to the bank, in the sense contemplated by this provision properly understood are completely reciprocal, countervailing and in the same person or party namely Macpherson."
To that extent, Deemster Moran said that it was abundantly clear that a strict literal interpretation of Section 22 of the code was entirely inappropriate. He said the provision had a longstanding, clear and definite purpose of enabling and requiring a court exercising bankruptcy jurisdiction to do substantial justice between the parties to mutual dealings upon the insolvency of either party. He gave the provision a purposive construction, stating:
"I can see no reason in principle for treating a party who acquires beneficial entitlement to property or performance of an obligation to a legal undertaking of his trustee with another party, differently in the exercise of this jurisdiction, to a party who is a beneficiary and has his trustee undertake a legal obligation to deliver a reciprocal benefit to that other party, which in reality, truth and substance is to be delivered by the beneficiary."
Deemster Moran went on to say that the dealing began with two parties – just the bank and Macpherson. Both parties agreed to interpose LHL on one side on the account, but the real and substantial parties to the transactions remained the bank and Macpherson. Accordingly, Deemster Moran found in favour of Macpherson being entitled to the relief claimed in her counterclaim.
As well as providing an insight into how wealthy supermodels can be, this case is significant for a number of reasons. Among others, the following conclusions may be drawn:
It remains to be seen whether the decision will go to appeal.
For further information on this topic please contact John T Aycock at M&P Legal by telephone (+44 1624 695800), fax (+44 1624 695801) or email (email@example.com).
(1)  LR 7 QB 34.
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John T Aycock