Secretary of State for Trade and Industry v Frid

I have had the advantage of reading in draft the speech of my noble and learned friend Lord Hoffmann. I agree that, for the reasons he gives, this appeal should be allowed.

LORD HOFFMANN

My Lords,

On 10 March 1999 West End Networks Ltd ("the company") resolved to go into creditors' voluntary liquidation. Its assets included a credit of £7,185.77 with HM Customs and Excise in respect of overpaid VAT. Its liabilities included compensatory notice pay and redundancy payments due to nine former employees under sections 88 and 135 of the Employment Rights Act 1996. The company did not make these payments and the Secretary of State accordingly became liable under sections 166(1)(b) and 167(1) of that Act to pay all or part of them out of the National Insurance Fund. Pursuant to this obligation the Secretary of State paid the employees £11,574.49 and by virtue of section 167(3) all the rights and remedies of the employees against the company thereupon vested in her. The question of principle raised by this appeal is whether in determining the company's claims against the Crown or the Crown's right to prove in the liquidation of the company, the VAT credit must be set off against the Crown's subrogated claim under section 167(3).

The procedure by which this question has been brought before the House is somewhat unusual. Besides the claim of the Secretary of State under section 167(3), there were claims against the company for PAYE and National Insurance contributions which even by themselves exceeded the VAT credit. HM Customs and Excise allocated the credit rateably between the three Crown claimants and paid £2,344.03 to the Secretary of State (for the account of the National Insurance Fund) as her share. The Secretary of State submitted a proof in the liquidation for £9,230.46, giving credit for the £2,344.03 as having been set off against the VAT credit. The liquidator rejected the proof on the somewhat paradoxical ground that it was too low. He said that it should have been for the full sum of £11,574.49. The purpose of the rejection was to raise the question of principle without requiring the liquidator to bring proceedings against HM Customs and Excise. The matter has since been litigated on this basis.

The Secretary of State appealed to Mr Registrar Jacques, who upheld the liquidator's decision on the ground that he was bound by the decision of the Court of Appeal in In re A Debtor (No 66 of 1955), Ex p The Debtor v Trustee of Waite (A Bankrupt) [1956] 1 WLR 1226. A further appeal to Mr David Mackie QC, sitting as a deputy High Court judge, was dismissed for the same reason. Both the registrar and the judge expressed regret over their decisions, saying that they appeared to be contrary to justice and principle. As it appeared likely that the Court of Appeal would also consider itself bound by the earlier case, Mr Mackie gave leave for an appeal to be brought directly to your…

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