CR-2018-009110 - [2025] EWHC 2115 (Ch)

Since it was argued before me, I will also address the issue relating to set-off – in particular, as to whether the assertion of an equitable set-off by BTI in respect of some sums which are due from it to the Company affects the value of its creditor claim for this purpose.

The obligations due from BTI to the Company arise under the Funding Agreement. This provides that some portion of the proceeds received by BTI from the settlement of the negligence action against PwC should be paid to BTI. This amount is agreed to be around £7.6m. BTI has not yet made this payment, and is withholding it on the basis that it should be entitled to set this amount off against it under its proof. The Administrators dispute BTI’s entitlement to set-off, and demand to be paid the money.

Ordinarily, the insolvency rules mandate a compulsory set-off of all obligations where there is mutuality. However, this does not apply in Administration (unless the administrator intends to make a distribution and has delivered a notice under rule 14.29 – see rule 14.24). The issue is therefore as to whether the ordinary rules of set-off apply in this situation.

The Company’s claim against BTI is a liquidated claim, but BTI’s claim against the Company is as yet unliquidated, so no statutory set-off could apply. The question is therefore as to whether there is an equitable set-off and, if so, how it operates.

Dealing with the second point first, it is often said that whereas common law set-off is procedural (that is, it can only operate as a defence to a legal action), equitable set-off is substantive. The way to think about this is that a Court of Equity could at any time, at the suit of the party claiming the set-off, grant an injunction preventing the other party from making a claim for the debt beyond the net amount (see e.g. Eller v Grovecrest Investments Ltd [1995] QB 272(CA)). However, it is important to note that ‘(unless the administrator intends to make a distribution and has delivered a notice under rule 14.29 – see rule 14.24)’he assertion of an equitable set-off does not have the effect of reducing or extinguishing the claim made (see the decision of the House of Lords in Aries Tanker Corporation v Total Transport Ltd [1977] 1 WLR 185 and Derham, The Law of Set-Off, 4th ed at pp 99-100). The position today, even if the set-off exists, is therefore that BTI owes the Company £7.6m and the Company owes BTI an amount to be determined. However, BTI can resist any claim by the Company for the payment of the £7.6m pending resolution of its claim.

Equitable set-off has a formal requirement of close connection between the claims which are sought to be set off – where no such connection can be found, no equitable set-off is available. However, it also requires some equitable ground for the protection of the set-off asserted. The mere proof of a close connection does not entitle a person to a set-off (Bim Kemi AB v Blackburn Chemicals Ltd (2001) 2 Lloyds Rep 93 at [39]). In practice, this comes down to a requirement that it should be manifestly unjust to enforce the claim without regard to the cross-claim: Geldof Metaalconstructie NV v Simon Carves Ltd [2010] CLC 895 at [43](ii), (iv) and (vi); and see Derham, 4.73.

As regards the “close connection” requirement, it was suggested to me that, even though both claims arose out of the Funding Agreement, they were not in fact sufficiently “closely connected” to found an equitable set-off. The basis for this argument was that the Funding Agreement specifies that Section 6 Payments are payable to a separate bank account from other receipts, for onward transmission by BTI to BAT: ss 6.1(c), 7. The proceeds of settlement of the PwC Proceedings were payable into the “General Payments Account” and could only be used for wholly separate purposes. The relevant purpose for which the settlement proceeds could be used is stated in s 10.3, whereby BTI was obliged to pay “portions of” the recoveries fund to the Company’s designated account after receipt.

All of this is true. However, I do not regard two payments to be made under the same contract between the same parties arising out of the same substantive agreement between them as being not closely connected simply because they are to be made into different bank accounts, or that the agreement states that, once received, they are to be used for different purposes.

It is also argued that there is an equitable ground on which a court might refuse to recognise a set-off. What is argued is that the Administrators were induced to co-operate with BTI in the PwC litigation by the promise of immediate payment of the proceeds. It is then argued that, because this has not been done, it would be unjust – and therefore contrary to this principle – for the court to recognise such a set-off. The necessary implication of this argument is that the Company would not have co-operated with this litigation had it not been for this representation.

I admire the ingenuity of this argument, but not its logic. It is entirely true that the Company was told that it would be entitled to be paid a proportion of whatever amount was received from PwC, because that is the outcome that the Funding Agreement provided for. It is also nonsensical to say that the Company only co-operated with this litigation on the basis of a promise that it would be paid the cash received immediately - partly because there is no evidence that any such promise was ever made, and partly because it is entirely clear that the Company would have co-operated in any event, whether such a representation was made or not, because it was heavily in its own interest to do so.

I was also offered a somewhat speculative argument to the effect that, since the Funding Agreement was an executory contract, and since post-liquidation receipts derived from the activity of the officeholder and use of the company’s resources cannot be set off against liabilities of the Company, there was therefore an objection to set-off on this ground: Goode & Gullifer on Legal Problems of Credit & Security, 7th ed, 7-110. However, this argument rested on the fallacy that the entitlement of the Company to the PwC Share arose by reason of the Administrators’ decision to continue to assist post-Administration. This is simply not true – the PwC recovery was procured through the efforts of BAT and BTI, and there would have been no basis for the Administrators not to assist in this process given that the estate administered stood to benefit substantially financially from the successful conduct of the litigation. If Administrators apply the resources of the Company to facilitate the recovery of money from wrongs done to the company prior to the Administrators appointment, this principle has no application in such a case.

I therefore find as follows on this point:

This is a slightly smaller figure than that set out in the Administrators’ most recent progress report dated 25 November 2024, which suggests that the Applicants’ claims represent 97.5% of total creditor claims.