The Use and Limits of Suspense Accounts

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 debts 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 surety’s obligations extend to part of a debt 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 guarantees and security documents. They Conversely, if the lender credits £50 allow a creditor to credit partial payments 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 dividends 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 insolvency? KEEPING IT IN SUSPENSE – THEKEEPING – AND USE IT IN LIMITS SUSPENSE ACCOUNTS OF SUSPENSE of such rights by reference to the questions accounting 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 bank 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 payment 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 long 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 contract, 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 short. from other recoveries. only. Moreover, the surety from whom the The claimant may have additional rights In Commercial Bank 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 proof.4 482 September 2017 Butterworths Journal of International Banking and Financial Law KEEPING IT IN SUSPENSE – THEKEEPING – AND USE IT IN LIMITS SUSPENSE ACCOUNTS OF SUSPENSE Feature This obviously sounds disadvantageous These risks 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 estate 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 guarantee 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 position 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 loan 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 indemnity 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 counsel 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 judgment 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.

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