MAY 2005

31.1.2 Definition of book debt

A book debt, in the context of this chapter is, the term used for sums of money owed to the insolvent at the date of the insolvency order usually in respect of goods or services supplied for which payment has not been made although book debts can include debts which arise in other circumstances (as long as they arise in the course of business). When dealing with this type of asset the term 'book debt' should be taken to include 'trade debts'.

The right to set off debts due from the insolvent against book debts applies where before the commencement of the insolvency proceedings there have been mutual credits, mutual debits or other mutual dealings between the insolvent and any creditor of the insolvent proving or claiming to prove for a debt [note 1].

For set-off to arise it is only necessary that there be mutual debts between the same parties in the same capacity . For example, where a bankrupt builder is owed money for building work by a florist, any debt due to the florist by the builder for the supply of flowers can be set off against the debt for the building work done even though the transaction is one of a different nature. A debt owed to a person in a personal capacity cannot be set off against a debt owed by that person in a non-personal capacity, i.e. as a representative for a third party or estate. For example, a debt owed by the official receiver for the provision of telephone services to his office cannot be set off against a debt due from that telephone company to an insolvent estate of which he is the trustee or liquidator.

An account shall be taken of what is due from each party to the other in respect of the mutual dealings and the sums due from one party shall be set off against the sums due from the other [note 2].

Set-off is strictly limited under section 323 and rule 4.90 to mutual claims existing at the insolvency date. It is not possible to set-off claims by third parties, even with their consent, as this would be to allow parties by agreement to subvert the fundamental principle of pari passu distribution of an insolvent’s assets (In Re: M S Fashions Ltd v Bank of Credit and Commerce International SA [1993] BCC 70).

Pre-insolvency liabilities may be subject to the right of Crown set-off. [note 3] The Crown is regarded as a single entity in its dealings, even though various aspects of its affairs may be handled through different government departments. For example, it has been held that debts owing by a company in liquidation to the Secretary of State under the Employment Rights Act 1986 may be set off against amounts due to the company from HM Customs and Excise in respect of VAT refunds, because they all represent debts due to and from the Crown. (Secretary of State v Frid [2004], UKHL 24). Crown set-off also applies against amounts due to the company under contracts for the supply of goods or services, for example contracts with the Ministry of Defence. Further information on set-off is provided at Chapter 36, Part 6paragraphs 36.119 to 36.124.

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