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KEY POINTS Feature ––Suspense accounts can maximise a creditor’s recoveries in a liquidation. ––To be effective a creditor should refrain from appropriating sums in such an account towards the outstanding until it has exhausted its other remedies. ––A suspense account will not assist a creditor to prove against a principal debtor for the entire amount owed where a ’s obligations extend to part of a only and the surety has discharged that part.

Author Matthew Padian Keeping it in suspense – the use and

limits of suspense accounts

Suspense accounts commonly feature in and documents. They Conversely, if the lender £50 allow a creditor to partial from a surety, or from realising assets recovered from the guarantor to a suspense subject to security from a surety, to a suspense or “securities realisation” account. account, the lender can prove for £100 in The account represents a fund to which the creditor can resort, but without any the borrower’s liquidation. Assuming the obligation to do so until it has recovered all debts in full. This enables a creditor liquidation are still 50 pence for to prove for the full amount owed in a liquidation of the principal debtor where a each £1 of debt, the lender will recover £50, shortfall is anticipated, thereby improving the prospects of a full recovery. meaning a total recovery of £100 once it uses the sum in the suspense account. The lender therefore achieves a full recovery. In this article we take a closer look at right to do so. This could include an ■why creditors use suspense accounts, individual or a corporate creditor. Can suspense accounts be used the benefits of doing so and the limitations Individual creditors less familiar with outside ? KEEPING IT IN SUSPENSE – THEKEEPING – AND USE IT IN LIMITS SUSPENSE ACCOUNTS OF SUSPENSE of such rights by reference to the questions practices might be more Potentially yes, although how useful they below. inclined to open a suspense account at a are depends upon the wording of the surety as per the example in Commercial instrument. According to Goode, ‘the SPECIFIC CONSIDERATIONS Bank of Australia, although that is not general rule outside insolvency appears to be necessarily essential. that a part by the surety does not What kind of account is a suspense prevent the creditor suing a solvent principal account? How can a suspense account debtor for the whole amount of the debt’.3 We A suspense account is not necessarily an benefit a creditor in insolvency? could see how a suspense account could account at a bank as a layman might expect. Sums in a suspense account do not be useful in this context. For example, if a Often they are ledger accounts only, with reduce the amount of a creditor’s claim claimant credits monies recovered from a transactions recorded by book entry alone. against a principal debtor so as it surety to a suspense account while suing a While opening a designated account at does not appropriate such amounts to the solvent defendant for breach of , a bank is not essential to create a suspense outstanding debt. The creditor can then there may be equities that the defendant account, this is probably the cleanest way to prove for the entire debt in a liquidation can assert which mean the claimant is left earmark such funds and keep them separate of the principal debtor rather than part . from other recoveries. only. Moreover, the surety from whom the The claimant may have additional rights In of Australia,1 the amount has been recovered acquires no against the surety which enable it to resort to Privy Council considered how monies right to be indemnified by the principal monies in the suspense account to recover the recovered from guarantors had been debtor and no provable claim in the additional amounts claimed. credited to a specially named suspense liquidation of the debtor in respect of sums account held in the names of the guarantors in the suspense account. Is there any advantage for a who had paid funds in. These advantages can be illustrated by surety when a creditor uses a Setting aside the monies in this the following example: if a lender that is suspense account? way ensured that, ‘down to the time of owed £100 recovers £50 from a guarantor Since they enable a creditor on liquidation appropriation by the bank … their Lordships and applies that sum to discharge part of to postpone the appropriation of monies [were] unable to see anything which could the outstanding debt, the debt is reduced to recovered from a surety against outstanding discharge the principal debtor’.2 £50. Thereafter the lender can only prove debts, suspense accounts help to delay when for £50 in the borrower’s liquidation. If a surety might compete with a creditor by, Who can open a suspense the liquidation dividends amount to say 50 for example, exercising its subrogation or account? pence for each £1 of debt, the lender will other rights against the principal debtor. Conceivably any creditor can open a receive £25. The lender’s total recovery is They also complement the rule against suspense account if it has a contractual £75 and it suffers a £25 shortfall. double .4

482 September 2017 Butterworths Journal of International Banking and Financial KEEPING IT IN SUSPENSE – THE USE AND LIMITS OF SUSPENSE OF ACCOUNTS SUSPENSE LIMITS IN IT USE AND – KEEPING THE Feature

This obviously sounds disadvantageous These were considered by Vaughan the payment of the principal debt pro tanto, from the surety’s perspective. Some Williams J. in Re Sass,9 in which the bank, and as soon as they made such appropriation concessions may be afforded to a surety in having recovered part of the indebtedness it would undoubtedly operate as payment.’12 intercreditor arrangements, for example, owing by the bankrupt borrower from its an ability to prove in the insolvency of a guarantor, sought to credit that amount How can appropriation occur? principal debtor at least to preserve their to a suspense account and prove in the Appropriation of monies in a suspense contingent claims. On the plus side, a bankrupt’s for the entire debt. The account usually occurs when the creditor suspense account does at least create the trustee rejected the proof on the basis elects to apply such funds towards possibility (theoretical perhaps) that a that the bank’s claim should have been the discharge of the indebtedness. surety will get reimbursed some or all of its reduced by the amount recovered from the However, appropriation can also happen money, assuming the beneficiary recovers guarantor. Vaughan Williams J disagreed automatically by mandatory set-off. more than expected from the principal with the trustee since the This is illustrated byMS Fashions debtor in a liquidation or otherwise. extended to the whole indebtedness, albeit (No 2),13 in which Mr Sarwar, a director the amount recoverable was limited by of M.S. Fashions Limited, put funds on Is it market practice to include amount. Contrasting the with a deposit with BCCI as security for his a suspense account in a surety guarantee in respect of part of a debt only, guarantee of the company’s obligations instrument? Vaughan Williams J noted that ‘if the surety to BCCI. BCCI subsequently entered Yes, and equally it is unusual for a surety is a surety for part of the debt, and the surety liquidation and its liquidators sought to to delete it. An example of a suspense has paid that part, then by virtue of that enforce the security from the company in account can be found within the guarantee payment the right of proof, which would have favour of BCCI. Mr Sarwar contended that and language of the Loan been the right of proof of the principal creditor, BCCI should use its deposit to partially Market Association’s template loan becomes pro tanto the right of proof by the satisfy the debt and offered to repay the documentation.5 Surety requests for surety’.10 balance. suspense accounts to be interest bearing are In summary, Goode concludes that so Lord Hoffman rejected the submission usually accepted. long as the surety’s obligations extend to made by BCCI’s that the bank was the entire amount of the indebtedness, then entitled to transfer Mr Sarwar’s deposit to Does a creditor need a suspense suspense accounts merely confer upon a a suspense account rather than applying it account to prove for the entire beneficiary a right to use a procedure that to discharge the company’s debt. Hoffman amount of its debt in the is ‘sensible as a matter of accounting practice concluded that: ‘In my this clause insolvency of a principal debtor? [but] not essential to enable [a] creditor to cannot survive the winding up of B.C.C.I. and This question has attracted some debate maintain his proof for the full sum owing to the application of the mandatory principle.’14 and the use or not of a suspense account him’.11 The mandatory statutory set-off does not seem conclusive; rather, the rules are now set out at Rule 14.25 of answer appears to turn on the scope of a When is it too late to use a the Insolvency Rules15 and apply in a surety’s obligations. suspense account? winding up where, before a company Goode refers to the general rule of Once sums recovered from or in respect of enters liquidation, there have been mutual English law that partial recoveries from a surety have been appropriated towards dealings between the company and a a surety do not have to be deducted by a the debt in question, a creditor cannot creditor of the company proving or claiming creditor from his proof whether before or thereafter attempt to credit those amounts to prove for a debt in the liquidation. The after so long as the creditor to a suspense account. For example, if a application of such rules in MS Fashions does not receive in total more than 100 bank credits monies on a suspense account (No 2) seems counterintuitive at first blush pence in the pound.6 towards a principal debtor’s since Mr Sarwar was not the borrower; There have been examples of exceptions balance, it cannot later elect to move those however, the of Appeal bypassed to this rule in other jurisdictions7 and monies back into the suspense account this issue based on the “principal debtor” some doubt has been cast by Dillon L.J.’s when it learns that the principal debtor is wording in his guarantee. comments in MS Fashions (No 2)8 that ‘A on the brink of insolvency. Lord Hoffman concluded that once creditor cannot sue the principal debtor for This is consistent with the view the winding-up order or resolution is an amount of the debt which the creditor has expressed by the Privy Counsel in passed, mandatory set-off occurs and already received from a guarantor.’ Commercial Bank of Australia, in which the suspense account ceases to have any What appears to be crucial is the extent to the then Lord Chancellor concluded that: further effect. This suggests that a suspense which the surety’s obligations extend to all of ‘The bank no doubt had power when it thought account cannot be used to revive a debt the outstanding intendedness or part only. it prudent to do so to appropriate that sum to that has been discharged by such set-off.

Butterworths Journal of International Banking and Financial Law September 2017 483 Biog box Feature Matthew Padian is a senior associate at Stevens & Bolton LLP. Email: [email protected]

The decision also implies that a suspense the surety in order to generate a £30 Guarantor shall be entitled to the benefit of account may be ineffective against an surplus that can be turned over for the the same and (b) hold in an interest-bearing insolvent guarantor. benefit of other creditors? This might be suspense account any moneys received helpful if other affiliates of the creditor from any Guarantor or on account of any Can a creditor use proceeds in a (secured or unsecured) also have claims Guarantor’s liability under this Clause.’ suspense account? against the borrower. 6 This is based on various including Yes, although any application of such In our view, creditors enjoy no such Ellis v Emmanuel (1876) 1 Ex. D. 157; Re funds will be deemed to represent an rights and based on the outcome of cases Sass [1896] 2 QB 12; Ulster Bank Ltd v appropriation against the relevant debts for such as Westpac Banking Corp17 it seems Lambe [1968] NI 161; Re An Arranging which the sums were recovered. to us that surplus recoveries need to be Debtor No.A 1076 [1971] NI 96. For example, if a creditor spends monies turned over to from whom partial 7 See, for example, the Scottish case of sitting in a suspense account by depositing payments have been recovered and cannot MacKinnon’s Trustee v Bank of Scotland them in a high-earning interest account be used to put others in a better position [1915] S.C. 411 and the New Zealand with an which subsequently than they might otherwise have been. case of Stotter v Equiticorp Australia Ltd goes insolvent, that is to be regarded as an (In Liquidation) [2002] 2 NZLR 686. appropriation and any resulting loss is the SUMMARY 8 [1993] 1 Ch 425, 448. creditor’s problem rather than the surety’s. Suspense accounts are a useful tool for 9 [1896] 2 QB 12. This is consistent with the views expressed creditors taking guarantees or security. 10 [1896] 2 QB 12, 15. by the Privy Council in Commercial Bank However, they should not be included in 11 Goode on Legal Problems of Credit and of Australia. surety instruments in isolation. Care needs to Security, 5th edn, paragraph 8-18. KEEPING IT IN SUSPENSE – THEKEEPING – AND USE IT IN LIMITS SUSPENSE ACCOUNTS OF SUSPENSE be taken to ensure the scope of guaranteed or 12 Commercial Bank of Australia v Official How long can a creditor hold secured obligations reflects the parties’ true Assignee of the Estate of Wilson [1893] AC monies in a suspense account? intention. Suspense accounts also being 181, 185. Monies can usually be kept in a suspense rendered redundant by the application of 13 [1993] 1 Ch 425. account until such time as the guaranteed statutory set-off as illustrated byMS Fashions 14 [1993] 1 Ch 425, 438. or secured obligations have been discharged (No 2). n 15 Insolvency Rules (England and Wales) in full. It follows that if a creditor recovers 2016 (SI 2016/1024). more than the amount due, he holds the 1 Commercial Bank of Australia Limited 16 Westpac Banking Corp v Gollin & Co Ltd surplus on trust for the surety.16 v Official Assignee of the Estate of John [1988] VR 397. Of course it is entirely possible that Wilson & Company [1893] AC 181. 17 Westpac Banking Corp v Gollin & Co Ltd a creditor may still suffer a shortfall 2 [1893] AC 181, 185. [1988] VR 397. following the liquidation of the principal 3 Goode on Legal Problems of Credit and debtor and any appropriation of partial Security, 5th edn, paragraph 8-18. recoveries sitting in a suspense account. 4 See Re Oriental Commercial Bank (1871– In that instance, the creditor can continue 72) LR 7 Ch App 99 for the to pursue the surety for any remaining rule against double proof. shortfall depending upon the scope of the 5 For example, see Clause 17.6 surety’s obligations. (Appropriations) of the Loan Market Association Single Currency Term Facility If a creditor is over-compensated Agreement dated 18 July 2017 which reads as a result of using a suspense as follows: ‘Until all amounts which may be account, can it choose how to or become payable by the Obligors under or in use the surplus? connection with the Finance Documents have This possibility can be illustrated by the been irrevocably paid in full, each Finance following example: supposing a creditor Party (or any trustee or agent on its behalf) owed £100, recovers £80 from a surety and may (a) refrain from applying or enforcing Further Reading: credits that sum to a suspense account. any other moneys, security or rights held or ––The strength of a bank guarantee: a The creditor then recovers 50 pence in the received by that Finance Party (or any trustee ? [2009] 8 JIBFL 488. pound in the insolvency of the borrower so or agent on its behalf) in respect of those ––The insolvent bank and security over it realises £130 in total. Can the creditor amounts, or apply and enforce the same in deposits [1996] 4 JIBFL 185. choose whether it reimburses £30 to the such manner and order as it sees fit (whether ––LexisPSL: Banking & Finance: surety or applies the £80 recovered from against those amounts or otherwise) and no Guarantees of and Bonds

484 September 2017 Butterworths Journal of International Banking and Financial Law