No delivery up of assets as set-off

This application concerned a dispute arising out of construction works carried out by Castletech Retail for L’Occitane Limited. When Castletech went into liquidation, it claimed to be owed £396,000 by L’Occitane. L’Occitane had served a pay less notice asserting no sums were due and claimed repayment of £676,000.

There was no dispute the set off rules were engaged and that an account needs to be taken under Insolvency Rule 14.25(2). However, the liquidators produced an account which identified a sum they considered was due to the company, and sought that sum from L’Occitane under Section 234 Insolvency Act 1986 on the basis IR 14.25(4) states that where, after an account is taken, there is a balance owed to the company, that balance is an asset of the company. 

There had been no determination, either by a court or an adjudicator, of whether the account (in the form of a determination by the liquidator) was correct. Both at first instance, and on appeal, the court held this sort of approach by a liquidator was irregular. In Stein v Blake, the House of Lords held that where an account taken for the purposes of set-off, previous cross-claims are replaced by a new chose in action. That chose in action is an asset in the hands of the company, not the debtor, leaving nothing to deliver up until Section 234. 

Further, the Insolvency Rules did not give a liquidator the power to determine claims owed to a company. They allowed a liquidator to reject a proof of debt and set out a process for that adjudication to be appealed. If the company’s claim was disputed (as it was here), that needed to be resolved – whether by litigation, adjudication, arbitration or ADR – before an account could be taken. 

In regards to Smithson v L’Occitane Limited [2024] EWHC 474 (Ch).

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