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Judgments - Secretary of State for Trade and Industry (Appellant) v. Frid (Respondent) (Civil Appeal from Her Majesty's High Court of Justice)

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    33.  Bell, Commentaries on the Law of Scotland, 7th ed (1870), ii, 122 sets out the qualification that applies in the case of insolvency in this way:

    "2. In compensation the debts must both be due at the same time. One who is due money presently payable, cannot defend himself against the demand by setting off money due to him six months after, or the payment of which depends on a condition.

    But this is a rule which holds strictly only while the parties are solvent. If one of them becomes bankrupt, the other may defend himself against a present demand, by setting off a debt that is future or contingent, although the term be after the bankruptcy. He cannot so plead, however, on a debt arising after bankruptcy.

    3. In compensation the debts must both be liquid, or capable of immediate liquidation. A debt is deemed liquid when it is actually due and the amount ascertained, 'Cum certum an et quantum debeatur.' But if the debt itself be contested, and the creditor has not his proof ready; or if the amount is disputed, and it depend on a long discussion what is to be adjudged due; the debtor will not be allowed to avoid the payment of what is liquid and due till that litigation be terminated.

    This, however, does not hold as to the balancing of accounts on bankruptcy. If one party have failed, and a demand be made on the other, he will not be obliged to pay the liquid debt, and come in as a creditor only for the dividend. The immediate necessity for payment of the liquid debt is taken away by the bankruptcy; and there is no impediment to the equity which holds the one debt an extinction of the other."

    34.  So the fact that nothing was yet due to the Secretary of State by the company at the insolvency date would not be an obstacle to the application of the principle. And, although the point has not arisen for decision in Scotland, there seems to be no reason to doubt that the question how the debts arose is not a material consideration either. Any kind of debt will do for the purposes of the plea of compensation in a case of insolvency in Scots law, so long as it is a debt that is capable of being ranked for. That general approach makes it unnecessary to distinguish between debts that arise out of contract and those that, because they are purely statutory, do not involve any kind of direct contact or other similar relationship. It would appear that, had this case arisen in Scotland, there would have been no difficulty in holding that the company's claim against the Crown in respect of overpaid VAT must be set off against the Crown's subrogated claim under section 167(3). It is satisfactory that it has been possible to reach the same conclusion as to the effect in England of rule 4.90 of the Insolvency Rules 1986.

    35.  Secondly, as to the question of mutuality, I would add the following explanation as to the general background. The National Insurance Fund, out of which the Secretary of State became liable to pay the employees under sections 166(1)(b) and 167(1) of the Employment Rights Act 1996 (in the case of the redundancy payments) and sections 182 and 184(1)(b) of that Act (in the case of compensatory notice pay), was first established by section 35 of the National Insurance Act 1946 as a fund maintained under the control and management of the Minister. All contributions paid by employers and insured persons were to be paid into this fund, and out of it were to be paid all claims for benefit and certain other sums payable under various statutes. The fund was continued in being for these purposes by section 83 of the National Insurance Act 1965. Section 83(4) of that Act provided for accounts of the National Insurance Fund to be prepared, for them to be examined and certified by the Comptroller and Auditor General and for copies of these accounts together with his report thereon to be laid before Parliament.

    36.  In the same year section 26 of the Redundancy Payments Act 1965 established a new fund, to be called the Redundancy Fund, into which all sums received by the Minister under Part II of the Act were to be paid and out of which were to be made the payments provided for by that Act. Its original function was to provide for the payment of rebates to employers who had made redundancy payments. Section 26(2) of that Act provided for the preparation, examination and certification of accounts of this fund and their laying before Parliament in the same way as was done in the case of the National Insurance Fund. The Redundancy Fund was continued in being by section 103 of the Employment Protection (Consolidation) Act 1978. Section 106 of that Act, the statutory predecessor of section 167 of the Employment Rights Act 1996, provided for the making of redundancy payments direct to employees out of the fund in the event of the employer's insolvency. Sections 122 to 127, the statutory predecessors of sections 182 to 189 of the 1996 Act, provided for the payment out of the fund of the debts to employees, including arrears of wages, which were guaranteed in the event of the insolvency.

    37.  The system for the payment of rebates to employers was abolished by section 17 of the Employment Act 1989. In the following year the Redundancy Fund was abolished by section 13 of the Employment Act 1990, as there was no longer a good reason for its existence as a separate fund. Its assets and liabilities were merged with those of the National Insurance Fund. By that time the National Insurance Fund was under the control and management of the Secretary of State under section 133 of the Social Security Act 1975 which section 161 of the Social Security Administration Act 1992 has replaced. It is from the merged fund that the sums at issue in this case were paid to the former employees of the company. Its important characteristic for present purposes is that it is a fund which is under the control and management of the Secretary of State for the statutory purposes and for which she is accountable under the statute to Parliament. In the performance of these functions the Secretary of State is not in the position of a trustee under a private trust. She is performing a public duty on behalf of the Crown. So too is HM Customs and Excise when it accounts to taxable persons for overpayments of VAT. It too is performing on behalf of the Crown a public duty which has been laid upon it by statute.

    38.  It is a general rule of the doctrine that allows for one debt to be set off against another that each of the two parties be both creditor and debtor in his own right. This is as true under the law of Scotland as it is under the English common law. As Bell, Commentaries on the Law of Scotland, ii, 124 puts it:

    "Compensation can be pleaded only when the demands are mutual; and this whether the plea be strictly compensation, or the more extended remedy of the balancing of claims in bankruptcy. To constitute this mutuality of debt and credit, the sums reciprocally due must be owing to the parties in their own right respectively."

I agree that in the present case this requirement is satisfied. The Crown is acting both as debtor and as creditor in the same capacity. The claims to the sums in question on either side are claims due to and owed by the Crown in its own right. It is clear that there is, in this situation, no lack of mutuality.


My Lords,

    39.  I agree that this appeal should be allowed for the reasons given by my noble and learned friend, Lord Hoffmann.


My Lords,

    40.  I have had the advantage of reading in draft the speech of my noble and learned friend Lord Hoffmann. I too agree that, for the reasons he gives, this appeal should be allowed.


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