Barclays Bank Ltd and Ors v TOSG Trust Fund Ltd and Ors

[1984] 1 All ER 628

Between: Barclays Bank Ltd and Ors
And: TOSG Trust Fund Ltd and Ors

Court:
United Kingdom Court of Appeal

Judges: Oliver LJ
Kerr LJ
Slade LJ

Subject References:
COMPANY
Insolvency
Winding up
Proof and ranking of claims
Rule against double proof
Test of whether rule against double proof applies
Application of rule against double proof
Guarantor's right of proof
Company taking out bond against insolvency
Banks paying over money under bonds when company becoming insolvent
Money used to pay creditors in part
Creditors assigning claims to third party
Banks proving for debt under bonds
Third party proving for debt under assignments
Whether both proofs admissible
If only one proof admissible, whether banks or third party having better right of proof

Case References:
Birkley v Presgrave - (1801) 1 East 220; 102 ER 86
Brocklesby v Temperance Permanent Building Society - [1895] AC 173, HL
Deering v Bank of Ireland (1886) 12 App Cas 20, HL; rvsg sub nom Re Killen, a bankrupt - (1885) 15 LR Ir 388, CA Ir
Dering v Earl of Winchelsea - (1787) 1 Cox Eq Cas 318; 29 ER 1184; [1775-1802] All ER Rep 140
Ellis v Emmanuel - (1876) 1 Ex D 157; [1874-80] All ER Rep 1081, CA
Fenton, Re, ex p Fenton Textile Association Ltd - [1931] 1 Ch 85; [1930] All ER Rep 15, CA
Gray v Seckham - (1872) LR 7 Ch App 680, LJJ
Hobson v Bass - (1871) LR 6 Ch App 792, LC
Hoey, Re, ex p Hoey - (1918) 88 LJKB 273, DC
Liverpool, The, (No 2) - [1960] 3 All ER 307; [1963] P 64; [1960] 3 WLR 597, CA; rsvg [1960] 1 All ER 465; [1963] P 64; [1960] 2 WLR 541
Melton, Re, Milk v Towers - [1918] 1 Ch 37; [1916-17] All ER Rep 672, CA
Midland Banking Co v Chambers - (1869) LR 4 Ch App 398, LJJ
Moss, Re, ex p Hallet - [1905] 2 KB 307; [1904-7] All ER Rep 713, DC
Oriental Commercial Bank, Re, ex p European Bank - (1871) LR 7 Ch App 99, LJJ; [1984] 1 All ER 628 at 631
Paul v Speirway Ltd (in liq) - [1976] 2 All ER 587; [1976] Ch 220; [1976] 2 WLR 715
Rushforth, Ex p - (1805) 10 Ves 409; 32 ER 903
Sass, Re, ex p National Provincial Bank of England - [1896] 2 QB 12
Wylie v Carlyon - [1922] 1 Ch 51
Daunt, Re, ex p Joint Discount Co - (1871) LR 6 Ch App 455, LJJ
Liggett (B) (Liverpool) Ltd v Barclays Bank Ltd - [1928] 1 KB 48; [1927] All ER Rep 451
Orakpo v Manson Investments Ltd - [1977] 3 All ER 1; [1978] AC 95, HL
Rees, Re, ex p National Provincial Bank of England - (1881) 17 Ch D 98, CA
Wheeldon v Burrows - (1879) 12 Ch D 31; [1874-80] All ER Rep 669, CA

Hearing date: 16-20, 23-25 May 1983
Judgment date: 12 July 1983


In 1970 a group of holiday tour operators, which included C Ltd, set up a scheme to alleviate the consequences to holidaymakers and customers of the insolvency of any of their number. The scheme required individual tour operators who were members of the scheme to take out a banker's bond whereby the bank agreed to pay a specified sum to a company (TOSG), formed as part of the scheme, in the event of the operator becoming insolvent and unable to fulfil its obligations to holidaymakers and customers. The purpose of TOSG was to use money paid to it under the bonds to look after and repatriate holidaymakers stranded abroad and to protect customers who had made prepaid bookings from suffering financial loss. Under the terms of the bonds TOSG was entitled to call in the bond moneys from the bank as soon as the operator concerned became insolvent. The bonds contained no restriction on how TOSG expended or disbursed moneys it received but TOSG was required to pay back to the bank any surplus remaining after the claims of customers had been met. In accordance with the scheme C Ltd arranged for a number of banks to enter into bonds on its behalf in return for the payment of commission and the execution of counter-indemnities under which C Ltd agreed to indemnify the banks against any loss which they sustained under the bonds. In 1974 C Ltd could no longer fulfil its obligations to its customers and went into liquidation.

The bond moneys were called in from the banks by TOSG which, after rescuing C Ltd's customers who were stranded abroad, then had some £ 1·268m to reimburse claims by customers who had paid for holidays which C Ltd was no longer able to provide. Since that amount was unlikely to be sufficient to meet all such claims TOSG entered into an agreement with the Air Travel Reserve Fund Agency (a statutory body set up to compensate persons who lost holidays as a result of the collapse of tour operators) whereby TOSG would, to the extent the bond moneys made possible, reimburse customers who were owed money in return for such customers assigning to the agency their right to prove in the liquidation of C Ltd for the full amount of their claim and the agency would then satisfy customers' debts which remained unpaid by TOSG. In accordance with that agreement TOSG expended, and received assignments to the agency of claims amounting to, some £ 1·268m while the agency satisfied the remaining claims, amounting to some £ 3·09m. In the ensuing liquidation of C Ltd the banks proved under the counter-indemnities and the agency proved under the assignments for the £ 1·268m paid out by TOSG. The liquidators took the view that the rule against double proof prevented the banks and the agency from both proving for the £ 1·268m.

The banks sought a declaration that they were entitled to prove for the £ 1·268m but the judge held that the agency had the better right of proof, on the assumption that the rule against double proof applied, because the banks had in effect guaranteed C Ltd's liabilities to its customers and were therefore subject to the rule that the proof of a surety could not displace the proof of a creditor unless and until the surety fully discharged all his liabilities to the creditor, and therefore C Ltd's customers (and thus the agency) were entitled to prove as creditors for the whole of their debts in priority to the banks (and without giving credit for moneys received from the banks via TOSG) unless and until the whole of their debts were satisfied and, moreover, considerations of broad equity favoured the agency rather than the banks. The banks appealed, contending, inter alia, that they were entitled by subrogation to assume the rights of customers who had been paid out of the bond moneys.

Held

(1)
(Per Oliver and Kerr LJJ) There could not be any subrogation between the banks and TOSG because there was no general principle that if money was lent or supplied by one person to another to enable that other to pay off a debt to a creditor the lender was automatically subrogated to the rights of the creditor, and there was no stipulation that TOSG was required to expend the bond moneys in a manner which entitled the banks to stand in TOSG's shoes (see p 638 a to d f g and p 649 f g, post); Wylie v Carlyon [1922] 1 Ch 51 and Paul v Speirway Ltd (in liq) [1976] 2 All ER 587 applied; Brocklesby v Temperance Permanent Building Society [1895] AC 173 explained.
(2)
The effect of the bonds and counter-indemnities given by the banks was (i) that a debt due to the banks, provable in the liquidation of C Ltd, arose as soon as TOSG called in and was paid the bond moneys, and (ii) that, although TOSG was under no contractual obligation to the banks regarding the way in which it spent the bond moneys, nevertheless TOSG was required to refund to the banks any bond moneys which were not expended, thereby reducing pro tanto C Ltd's liability under the counter-indemnities. Furthermore, the effect of the payments by TOSG to customers who were owed money by C Ltd was that the customers' rights to prove in the liquidation of C Ltd were limited to the balance, if any, of their debts still outstanding after the payments made to them by TOSG, and the effect of the assignments to the agency was that the agency was in no better position to prove in the liquidation than the customers or TOSG would have been. In those circumstances it followed that-

(a)
(per Oliver LJ) the rule against double proof in a liquidation did apply. The test of whether the rule against double proof applied was whether the two competing claims were in substance claims for payment of the same debt twice over, and, furthermore, that was to be determined at the time of payment of the dividend, at which point the question to be asked was whether two dividends were being sought in the winding up for a liability which the debtor would discharge by one payment if it were solvent. Applying that test, if C Ltd had become solvent after the calling in of the bond moneys and had used its own money to discharge the debts due to its customers, then because the bond moneys would have remained unused and C Ltd would have been required to return them to the banks it would at the same time have discharged its liability to the banks and would thus have only made one payment in discharging both liabilities. Furthermore (Kerr LJ concurring), when the rule against double proof was applied the banks had the better right of proof over the agency because, by analogy with the position of a surety, the banks' position vis-a-vis the customers of C Ltd (and therefore the agency as the assignee of the customers) was akin to that of a surety who had guaranteed a fluctuating account (ie the amount owed by C Ltd to its customers) up to a specified limit and who, if he paid up to that limit, was entitled to that extent to stand in the shoes of the creditor (ie C Ltd's customers) and to prove in priority to him. Moreover, on broad equitable principles the banks had the better right of proof, since they were out of pocket to the full nominal amount of their claims whereas the customers (and therefore the agency) were out of pocket to less than their full nominal claims by reason of having received the banks' money (see p 636 a to j, p 637 e to j, p 640 f, p 641 d j to p 642 a, p 643 c to e h j, p 644 f to j, p 648 d e j, p 650 e j, p 651 e g h and p 652 h j, post); Ex p Rushforth (1805) 10 Ves 409, Hobson v Bass (1871) LR 6 Ch App 792, dictum of Mellish LJ in Re Oriental Commercial Bank, ex p European Bank (1871) LR 7 Ch App at 102 and Gray v Seckham (1872) LR 7 Ch App 680 applied; Ellis v Emmanuel [1874-80] All ER 1081 considered; The Liverpool (No 2) [1960] 3 All ER 307 distinguished;
(b)
(per Slade LJ) having regard to the particular facts and the substance of the relevant liability and applying the principle that there could only be one dividend for what was in substance the same debt even though there may have been two contracts, the rule against double proof in a liquidation did apply, because if TOSG had itself taken assignments from C Ltd's customers and then sought to prove for the £ 1·268m it would in substance have been proving for the same debt as the banks. Furthermore (Kerr LJ concurring), applying the rule against double proof, the banks had the better right of proof because the relevant comparison was not between the respective rights of proof of the banks and C Ltd's customers but between the respective rights of proof of the banks and TOSG, and it could not reasonably be inferred that the parties intended at the time the bonding arrangements were made that TOSG would have the right to expend the bond moneys by purchasing assignments of debts from C Ltd's customers which would take priority over, and destroy, the banks' right to prove for the bond moneys in the liquidation of C Ltd, since such an inference was inconsistent with the nature of the bonding arrangements and produced an inequitable result (see p 649 j, p 650 e f, p 651 d, p 653 b c e to j, p 654 d e, p 655 d to f h to p 656 c g h, post); dictum of Mellish LJ in Re Oriental Commercial Bank, ex p European Bank (1871) LR 7 Ch App at 102 applied;
(c)
(per Kerr LJ) the rule against double proof did not apply because the common intention of the parties concerned in setting up the bonding scheme was that the banks were to be able to prove to the full extent of the bond moneys paid over while each customer was to be able to prove only for the balance of his debt still outstanding after the bond moneys had been paid out, and therefore there was no basis for the application of the rule. However, if, the rule did apply then the banks had the better right of proof (see p 645 h j, p 647 d to f, p 648 j to 649 b and p 651 a, post).

(3)
Accordingly, the banks had the right to prove in the liquidation of C Ltd for the £ 1·268m to the exclusion of the agency. The banks' appeal would therefore be allowed (see p 645 b, p 650 g h, p 651 a c and p 656 h, post).

Per Oliver LJ. Where money is lent or supplied by one person to another to enable that other to pay off a debt to a creditor the lender has a right to be subrogated to the rights of the creditor only if there is an agreement between the supplier of the money and the payer of the debt that the money is to be used for that purpose or, on equitable principles, if the supplier of the money is deprived of his right of recovery, eg because of the incapacity of the person to whom the money was lent (see p 638 b c e, post).

Notes

For the rule against double proofs and its application to sureties, see 3 Halsbury's Laws (4th edn) paras 712, 728, and for cases on proofs by sureties against a bankrupt principal debtor, see 4 Digest (Reissue) 303-306, 2691-2720.

Appeal

The plaintiffs, Barclays Bank Ltd, Lloyds Bank Ltd, National Westminster Bank Ltd and Wintrust Securities Ltd (the banks), appealed against so much of the judgment of Nourse J given on 27 February 1981 and the order made on 26 June 1981 as dismissed the bank's action against the first defendant, TOSG Trust Fund Ltd (TOSG), the twelfth defendant, Air Travel Reserve Fund Agency (the agency), and the thirteenth defendant, Clarksons Holidays Ltd (Clarksons), in which they sought, inter alia, a declaration against those defendants that the banks were entitled to prove in the liquidation of Clarksons to the exclusion of the agency in respect of all bond moneys expended by TOSG in paying creditors of Clarksons, and declared on the agency's counterclaim that the joint liquidators of Clarksons were entitled and bound to admit in full the proof of debt lodged with them by the agency. The facts are set out in the judgment of Oliver LJ.