Elle MacPherson sets it off

Insolvency Group

Elle MacPherson sets it off.

Set off: whether mutuality. Continuation of problems highlighted in Re BCCI (No 8) [1998] AC 214 and M.S. Fashions Ltd v BCCI [1993] Ch 425

Simpson and Spratt and Kaupthing Singer & Friedlander (Isle of Man) Ltd v Light House Living Ltd and Elle MacPherson 2/12/10

Facts: Elle MacPherson arranged to borrow money from Kaupthing to purchase a house in London. The loan was offered to her in her own name. In order to protect her privacy she decided instead to use a nominee company to purchase the property and it was arranged, with Kaupthing’s consent, that the loan would be to the company, she would guarantee the company’s obligation and would deposit a substantial sum of money, but less than the amount of the loan, with Kaupthing. The loan was secured on the property. Kaupthing also had sight of the agreement between the company and Ms MacP., in which the company stated the property was held on trust for her and that it would not be under any obligations in relation to the transaction. The liquidators argued that she could not set off her deposit against the loan to the company. There was no mutuality as she and the company was not the same person. They also relied on the fact that where a nominee or trustee enters into an obligation on behalf of the beneficiary or trust, he takes on that obligation personally as regards the other party to the transaction, subject only to his right of indemnity by the beneficiary or out of the trust assets. Therefore unlike the situation where the nominee or trustee holds an asset on trust for the beneficiary, it could not be said that he holds an obligation on trust for the beneficiary, so that the beneficiary is the equitable owner of it. Ms. MacP argued that insolvency set off is concerned not with bare legal titles but equitable ownership. The loan had been taken out for her benefit and she was the person ultimately liable for it, therefore she was the beneficial owner of it. Therefore there was mutuality.

Held: Ms. MacP was the beneficial owner of the loan. There was mutuality and set off was permitted.

Comment: the deemster made it clear that he regarded the justice of the case as lying with Ms. MacP, which it clearly did. The facts were extreme and it would have been highly unjust if she had not been allowed to set off the deposit against the loan in a transaction, in which she derived no financial or commercial benefit from its structure but simply protection of her privacy. Where a nominee or trustee holds an asset on trust for a beneficiary, the equitable interest in the asset clearly resides in the beneficiary. Where the nominee or trustee undertakes an obligation, the position is more complex because the nominee/trustee does not act as the beneficiary’s agent and enter into the obligation on the beneficiary’s behalf so that the beneficiary becomes personally liable to the obligor but takes on the obligation himself, so that the obligor’s only cause of action to enforce the obligation is against the nominee/trustee. It must be questionable whether one can say in those circumstances that there is a beneficial interest in the obligation which resides in the beneficiary. The basic rule is that the benefit of contracts can be assigned without the other party’s consent but the burden cannot. The deemster decided that it was clear that the obligations here were being undertaken for Ms. MacP and she was the person ultimately liable. Another way of looking at the situation might have been to say that the house was held on trust for her and the house was subject to the mortgage securing repayment of the loan. Her equitable interest was subject to the loan and that gave her sufficient equity for the purposes of set off. An alternative approach, which is not referred to in the judgment and may not have been raised, would be to try to rely on the rule in ex parte James (1874) L.R.9 Ch App 609). The deemster was clearly right in his assessment of where the merits lay and there was no justification for the creditors receiving a windfall because Ms. MacP was trying, with the knowing assistance of Kaupthing, to protect her privacy.

Richard Ritchie – XXIV Old Buildings