Neutral Citation Number: [2006] EWCA Civ 7
Case No: A2/2004/1940
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
(MR JUSTICE LLOYD) 
No 0057 of 2004 
Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 18/01/2006
Before :
LORD JUSTICE CHADWICK
LORD JUSTICE JONATHAN PARKER
and
MR JUSTICE ETHERTON
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Between :
	SQUIRES and others
(Liquidators of SSSL Realisations (2002) Limited	Applicants	
	- and -		
	AIG EUROPE (UK) LIMITED and another	Respondents	
	And between		
	ROBINSON and another
(Liquidators of Save Group Plc)	Applicants/Appellants	
	- and –		
	AIG EUROPE (UK) LIMITED and another	Respondents	

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- - - - - - - - - - - - - - - - - - - - -

Mr Michael Briggs QC and Mr Philip Jones (instructed by Pannone & Partners of 123 Deansgate, Manchester M3 2BU) for the Appellants, the liquidators of Save Group Plc  
Mr Gabriel Moss QC and Mr Richard Fisher (instructed by DLA Piper Rudnick Gray Cary UK LLP of 3 Noble Street, London EC2V 7EE) for the Applicants, the liquidators of SSSL Realisations (2002) Limited
Mr Richard Snowden QC and Mr Andrew Lenon (instructed by Halliwells LLP of 1 Threadneedle Street, London EC2 R 8AW) for the Respondents, AIG Europe (UK) Limited  

Hearing dates: 18, 19, 20 and 21 July 2005
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Judgment
Lord Justice Chadwick : 
1.	This is an appeal from an order made on 27 July 2004 by Mr Justice Lloyd in conjoined applications in the liquidations of Save Group Plc (“Group”) and one of its subsidiaries, SSSL Realisations (2002) Limited (formerly known as Save Service Stations Limited and, hereafter, “Stations”). The application in each liquidation was made by the liquidators. Each company was named as a respondent to the application in the liquidation of the other. The other respondent (in each liquidation) was AIG Europe (UK) Limited (“AIG”), a creditor of both Group and Stations and of other companies in the Save group. Common questions arise between Group, AIG and those other companies (which are in liquidation and of which the liquidators are the same as those of Stations) as arise between the parties to the conjoined applications. Those other companies agreed to be bound by the order (subject to any appeal) made in those applications.  

The underlying facts  
2.	The underlying facts are not in dispute. They are set out by the judge at paragraphs 2 to 4 of his judgment [2004] EWHC (Ch) 1760, [2005] 1 BCLC 1:
“2	 The Save group traded primarily as retailers of petrol, and had some 400 or so petrol stations. The trading pattern was that Group bought petrol and related products from suppliers, and sold it on to Stations who sold it to retail customers. Group was also in charge of bank borrowing for the whole Save group, and lent on to subsidiaries such funds as were necessary for their trading purposes. There were, therefore, substantial inter-company debts, above all on the part of Stations to Group for money borrowed and lent on to Stations, and for petrol products bought by Group and sold on to Stations. Stations owned the premises from which retail trading took place, and most other fixed assets used in the retail business. 
3.	The supply of petrol to Group gave rise to liabilities to Her Majesty's Customs & Excise for duty. It is possible to defer liability to pay the duty by providing a bond to the Customs & Excise to secure payment. AIG and members of the group of which it forms part are willing to enter into such bonds. As a condition of that transaction they require indemnities from the companies on whose behalf they provide the bonds. AIG (or another member of its group – it matters not which and I will treat AIG as if it were the only relevant party) entered into such a bond on behalf of the Save group. AIG also entered into a deed of indemnity on 30 September 1997 with 6 members of the Save group, including Group itself, the parent, and Stations. The issues I have to decide relate to the effect of that deed, which I will call the Deed. 
4.	Administration orders were made in relation to Group and each of its subsidiaries on 28 February 2001. Stations and the other subsidiaries went into creditors' voluntary liquidation on 8 May 2002. Group was wound up compulsorily on 9 May 2002. The administrators had sold the business and assets of the entire Save group for some £54.5 million. By far the largest proportion of that represented the property and other fixed assets owned by Stations, and almost £53.5 million of the price was attributed to Stations. When Stations' liquidators were appointed they received about £50.5 million from the administrators. They have paid a first dividend of 18p to those creditors whose debts are undisputed, and they hold some £39 million for distribution, including some in a trust account for preferential creditors. Group's main asset is the inter-company debt owed to it by Stations, of the order of £127 million. Stations also owes other subsidiaries about £38 million. AIG was owed almost £10 million. Under the Deed it is a creditor for the same amount in respect of each of Stations, Group and several other subsidiaries. Stations has other creditors, including banks for some £60 million, and trade creditors for some £6 million. The banks are creditors of each relevant member of the group for the same amount. Fuel suppliers have claims against Group for £27 million, and there are some other trade creditors of Group, of about £100,000.” 

3	The subordination provisions upon which AIG relied were contained in clauses 8.2 and 8.3 of the deed of indemnity:
“8.	ENFORCEMENT OF SURETY’S RIGHTS AND NON-COMPETITION
. . . 
8.2 Postponement of Indemnitors' Rights
Until all amounts which may be or become payable by the Indemnitors to the Surety under this deed have been irrevocably paid in full no Indemnitor shall after a claim has been made by the Surety hereunder or by virtue of any payment made by it under this deed:
(a)  be subrogated to any rights, security, cash cover or other monies received on account of that Indemnitor's liability hereunder.
(b) claim rank prove or vote as a creditor of any Indemnitor or its estate in competition with the Surety: or
(c)  receive, claim or have the benefit of any payment distribution or security from or on account of any Indemnitor or exercise any right of set-off as against any Indemnitor.
8.3 Declaration of Trust
Each Indemnitor shall hold in trust for and forthwith pay or transfer to the Surety:
(a) 	any payment distribution benefit or security received by it contrary to clause 8.2 and
(b) 	following any claim upon or payment by the Surety under or in respect of a Bond any payment or repayment received by it from the Commissioners or any other person in respect of the Charges or in respect of any overpayment or over-declaration of Value Added Tax.”
In that context AIG is “the Surety” and the companies listed in the first schedule to the deed (which include Group and Stations) are “the Indemnitors”.
The issues before the judge
4	As the judge observed, at paragraph 3 of his judgment, the issues which he had to decide turned on the effect of the deed dated 30 September 1997, under which Group, Stations and other members of the Save group had agreed to indemnify AIG in respect of the liabilities to Customs & Excise which AIG had undertaken in providing bonds to secure payment of excise duty. It was AIG’s contention that, under the terms of that deed, the indebtedness of Stations to Group (some £127 million) and to other members of the Save group (some £38 million) – together “the Stations’ intercompany debt” (some £165 million) - was subordinated to the debt which Stations owed to AIG. If that contention were made good, the assets available for distribution in the liquidation of Stations (some £39 million) would be applied towards the payment of AIG, the banks and its trade creditors, whose proofs of debt in that liquidation exceeded, in aggregate, £76 million (AIG - £10 million; banks - £60 million; trade creditors - £6 million). The Stations’ intercompany debt would remain unpaid. As the judge put it, at paragraph 6 of his judgment:
“6.	Broadly, if AIG is right, Group and the other subsidiaries will get nothing out of Stations, and the competition for the assets in that liquidation will be between AIG, the banks and Stations' trade creditors, all of whom will therefore do much better because of the exclusion of the inter-company debts of £165 million. There will be no dividend in the liquidation of Group, so the Fuel suppliers and Group's trade creditors will get nothing, and although AIG and the banks will also get nothing out of the liquidation of Group, they will have done much better through Stations.”

5	The issues for trial by the judge had been directed by an order made on 5 May 2004 by Mr Justice Peter Smith. They included the following (so far as material):
“Construction
1.	Whether or not as a matter of construction of clause 8.2 of the Deed dated 30th September 1997 and made between (1) AIG (2) Group and each of its subsidiaries including Stations (“the AIG Indemnity”), Group is entitled to prove for its inter-company debt due from Stations as a non-subordinated debt or otherwise in the liquidation of Stations and to receive a dividend in respect of such proof in the liquidation of Stations.
2.	Whether as a matter of construction of clause 8.3 of the AIG Indemnity, the obligations thereby imposed on Group (a) to hold on trust and (b) to pay or transfer to AIG apply to:
i	all sums received within the provisions of subclauses 8.3(a) and (b), or
ii	only such of the sums so received as are sufficient to pay in full the amount which AIG is owed.
Public Policy  
3.	Whether or not on the true construction of clause 8.2 of the AIG Indemnity, Group’s assets fall to be dealt with in a manner contrary to sections 107 or 148 of the Insolvency Act 1986 or r.4.181 of the Insolvency Rules 1986 and whether or not to that extent the AIG Indemnity is void on grounds of public policy. 
4.	Whether or not on the true construction of clause 8.3 of the AIG Indemnity, the obligations thereby imposed on Group are void as a penalty. . .
Companies Act 1985 
“5. Whether or not on the true construction of clause 8.2 of the AIG Indemnity:
5.1	AIG has a binding, proprietary right capable of defeating the rights and interests of the general body of creditors in Group’s liquidation, or
5.2	such a right constitutes an unregistered charge over book debts and is accordingly void for want of registration pursuant to section 395 Companies Act 1985.
6	Whether or not on the true construction of the AIG Indemnity, clause 8.3 constitutes an unregistered charge over book debts and is accordingly void for want of registration pursuant to section 395 Companies Act 1985.”
Disclaimer under the Insolvency Act 1986
7.	Whether or not in all the circumstances of this case Group’s liquidators may disclaim the AIG Indemnity and/or the contract of which the AIG Indemnity forms part as ‘onerous property’ under section 178 of the Insolvency Act 1986.
8.   In the event that the Court holds that Group’s liquidators may disclaim the AIG Indemnity and/or the contract of which the AIG Indemnity forms part as ‘onerous property’ under section 178 of the Insolvency Act 1986, whether in all the circumstances of this case group’s liquidators should so exercise the statutory power to disclaim.
Proof issues
9.	In the event that the Court determines that clause 8.2 of the AIG Indemnity is valid and that it would be a breach of it for Group to prove in the liquidation of Stations:
9.1	 . . .
	9.2	whether and if so to what extent and on what conditions (if any) in all the circumstances of this case Group should nevertheless prove for its inter-company debt due from Stations in the liquidation of Stations; 
	 . . .
	10. . . .”
The  order of 27 July 2004 
6.	The judge answered the first of the issues directed by the order of 5 May 2004 in favour of AIG. He held that, on the true construction of clause 8.2 of the deed, Group was prohibited from proving for its inter-company debt due from Stations in the liquidation of Stations - and from receiving a dividend in respect of such debt in the liquidation of Stations - at a time when the debt to AIG under the deed remained unpaid. On the basis of that construction he answered the third issue, also, in favour of AIG. He held that the deed was not void on grounds of public policy: Group’s assets did not fall to be dealt with in a manner contrary to section 107 of the Insolvency Act 1986 or rule 4.181 of the Insolvency Rules 1986. There is no appeal from those parts of his order.
7.	The judge answered the second of those issues in favour of AIG. By paragraph 2 of his order dated 27 July 2004 he declared that:
“2.		On the true construction of clause 8.3 of the Deed, the obligations thereby imposed on Group (to hold payments on trust and to pay or transfer to AIG sums received within the provisions of sub-clauses 8.3(a) and (b)), apply only to such sums so received as are necessary and sufficient to pay in full the amount which is owed to AIG under the Deed.” 
That led him to hold that the fourth issue did not arise. 
8	The judge answered the fifth and sixth issues in favour of AIG. He declared that:
“4.	On the true construction of clauses 8.2 and 8.3 of the Deed, the Deed does not constitute a charge over book debts or any other assets of group, requiring registration under section 395 of the Companies Act 1985 or at all.” 
He answered the seventh issue in favour of AIG:
“5.	Neither the Deed nor the contract of which the deed forms part is capable of being disclaimed by the Group Liquidators pursuant to section 178 of the Insolvency Act 1986. ”
In the light of that answer the eighth issue did not arise.
9	The judge held that, on the basis that clause 8.2 of the deed was valid (as he had decided in answer to the third and fifth issues) and that it would be a breach of that clause for Group to prove in the liquidation of Stations, it should not do so (issue 9.2). He declared:
 “6.	In the premises and by reason of the debt due to AIG under the Deed remaining unpaid in full, Group is not entitled to prove for the inter-company debt due from Stations in the liquidation of Stations.”
He gave effect to that declaration by a direction, in paragraph 7 of his order, that
“7. 	The Group Liquidators should not submit a proof of debt in the liquidation of Stations.”

10	Group and its liquidators appeal from paragraphs 2, 4, 5, 6 and 7 of the order of 27 July 2004. They appeal, also, from paragraphs 8 to 10 of that order. Paragraph 8 gives further effect to the declaration in paragraph 6: it directs that the liquidators of Stations are at liberty to distribute a final dividend in Stations’ liquidation without regard to the claim of Group to be a creditor of Stations. Paragraphs 9 and 10 of the order require Group and its liquidators to pay the costs of the applications. Permission to appeal was granted by this Court (Lord Justice Neuberger) on 5 October 2004.
The new points raised by respondent’s notice 
11	Group’s appeal was listed for hearing in the week beginning 28 February 2005. On 7 February 2005 the liquidators of Stations filed a respondent’s notice. That notice raised two new points, not argued before the judge. The first of those points is conveniently set out at paragraph 1 of section 6 in that notice:
“1.	In the event that the Court of Appeal were to hold that the Liquidators of [Group] were entitled to disclaim the contract with [AIG] of which the Deed forms part . . . or the relevant parts thereof, the Liquidators of Stations will contend that they have a right of quasi-retainer pursuant to the rule in Cherry v Boultbee (1839) 4 My & Cr 442 as applied by the Court of Appeal in Re Melton [1918] 1 Ch 37 to insolvency/surety situations and that Group will not receive any dividend.”
The second is set out at paragraph 2.a. of section 6:
“2		In the event that the Court of Appeal were to hold that the question of the availability of an injunction to AIG were to be relevant, Stations will contend . . . 
a.	that, as a party to the AIG Contract, Stations is entitled to rely on its terms and reject the proof by Group; . . .”
The remaining sub-paragraphs in paragraph 2 of section 6 take the point that, in deciding whether (absent disclaimer) Group should be permitted to prove in the liquidation of Stations (issue 9.2), the Court should have regard to the right of the liquidators of Stations, pursuant to the rule in Cherry v Boultbee, to retain any dividend which would otherwise be payable in respect of Group’s proof.
12	The rule in Cherry v Boultbee is applied in equity to the distribution of a fund.  Put very shortly (at this stage) equity requires that a person cannot share in a fund in relation to which he is also a debtor without first contributing to the whole by paying his debt. The operation of the rule may be illustrated by an example. Suppose A is indebted to B in the sum of £1,000. B dies leaving his residuary estate to be shared equally amongst four beneficiaries, of which A is one. After the payment of B’s debts, administration expenses and specific legacies (but before A has paid the £1,000) the amount of the residuary estate in the hands of B’s executors is £10,000. A must bring his debt into account before he can receive his share. So the amount which he will receive will be £1,750 (1/4 of {£10,000 + £1,000} - £1,000). The other three beneficiaries will each receive £2,750. It can be seen that, if A’s debt were greater than his aliquot share of the whole, he would receive nothing in the distribution.  
13	The rule is displaced in bankruptcy (and in corporate insolvency) by the statutory requirement that mutual debts and credits be set-off; so that only the balance is provable as a bankruptcy debt – see, now, section 323 of the Insolvency Act 1986 and rule 4.90 of the Insolvency Rules 1986 (SI 1986/1925). So, if B has four creditors to each of whom he owes, say, £3,000 but one of whom (A) owes him £1,000, A can only prove in B’s bankruptcy for the balance of his debt after set-off (£2,000). If the assets to be distributed in the bankruptcy are £10,000, A will receive £1,818 (2/11 of £10,000). And, in such a case, B could not prove in A’s bankruptcy. B’s debt (£1,000) would be extinguished by set –off in both bankruptcies. Had the rule in Cherry v Boultbee applied in such a case, A would have received £1,750 (3/12 of {£10,000 + £1,000} - £1,000). 
14	The statutory requirement does not extend to a case where one of the debts is not provable in the bankruptcy of the debtor by virtue of the rule against double proof. That rule prevents a surety from proving in the bankruptcy of the principal debtor until the creditor has been paid in full. So, if (in the example given) A’s claim against B (£3,000) is for an indemnity in respect of A’s liability as surety for a debt owed by B to C, A cannot prove in the bankruptcy of B in competition with C – In re Oriental Commercial Bank, ex parte European Bank (1871) LR 7 Ch App 99, 103-104, In re Polly Peck Plc [1996] 2 All ER 433, 442h. And, further, A’s claim for an indemnity (£3,000) cannot be set-off (so as to extinguish) B’s debt (£1,000) when B proves in the bankruptcy of A – Secretary of State for Trade and Industry v Frid [2004] UKHL 24, [13], [2004] 2 WLR 1279, 1283G. 
15	The first new point raised by the liquidators of Stations in their respondent’s notice is whether, in a case where the rule against double proof prevents the surety from proving in the bankruptcy of the principal debtor – and so prevents the surety from setting off, in his own bankruptcy, his claim for indemnity against the debt which he owes to the principal debtor – the surety’s insolvent estate must be administered so as to give effect to the rule in Cherry v Boultbee. Again put shortly (at this stage), it is said that, in such a case, the equitable rule is not displaced by the statutory requirement that mutual credits and debits be set-off – because the rule against double proof prevents the application of the statutory requirement – so that there is no reason why it should not be given effect. And, it is said, that is what the decision of this Court in In re Melton [1918] 1Ch 37 requires.
16	The relevance of the new point is that Stations, as a party to the deed of indemnity, is in the position of surety vis à vis Group in respect of the debt owed by Group to AIG. Further, Stations (it is said) is in the position of surety vis à vis Group in respect of the debts owed to the banks. As surety Stations would have claims for indemnity against Group. But the effect of the rule against double proof is that Stations cannot set-off its claims for indemnity against Group’s proof of debt in its liquidation. So, if Group is entitled to prove for its debt in the liquidation of Stations (in competition with AIG), it will prove for the whole of that debt. But, it is said, if the rule in Cherry v Boultbee applies Group will have to bring into account in the liquidation of Stations – not by way of set-off, but as a contribution to the whole of the distributable fund – the value of Stations’ claims to indemnity.  And, it is said, the effect of that (on the figures) is that Group would receive nothing in the distribution. 
The issues for consideration on this appeal
17	At first sight, the issues for consideration on this appeal (other than costs) fall into three groups: (i) whether (notwithstanding the prohibition in clause 8.2 of the deed of indemnity) Group is entitled, or should be permitted, to prove in the liquidation of Stations; if so, (ii) whether the effect of the rule in Cherry v Boultbee, as applied by this Court in In re Melton, is such that, if Group were to prove in the liquidation of Stations, it would receive nothing by way of distribution; and (iii) whether, if Group were to receive monies by way of distribution in the liquidation of Stations, it would be required (by clause 8.3 of the deed) to pay or transfer those monies to AIG. But, as will be seen, the issues in those groups overlap. 
18	The issues in the first of those groups are raised by the appeal of Group and its liquidators from the declarations in paragraphs 5 and 6 of the judge’s order of 27 July 2004 and from the directions in paragraphs 7 and 8 of that order. Put shortly, the issues are (i) whether the liquidators of Group are entitled to disclaim the deed of indemnity and, if not, (ii) whether Group should nevertheless be permitted to prove in the liquidation of Stations notwithstanding that to do so would be in breach of clause 8.2 of the deed. 
19	It is accepted on behalf of the liquidators of Group – as it must be – that, if they cannot disclaim the deed of indemnity, then Group cannot prove in the liquidation of Stations without committing a breach of clause 8.2 of that deed. That is the effect of the restriction in paragraph (b) of that clause. But the liquidators of Group point out that, if the judge was correct in the answer which he gave at paragraphs 2 and 4 of his order of 27 July 2004, that breach would cause no loss to AIG. That is because (as the judge held) the effect of clause 8.3(a) of the deed is that any monies received by Group by way of dividend on its proof in the liquidation of Stations (up to the amount necessary and sufficient to pay in full the amount owed to AIG under the deed) would be received by Group upon a trust to pay or transfer those monies forthwith to AIG.  
20	The point may be illustrated by reference to the figures. If Group does not prove in the liquidation of Stations, AIG may expect to receive £6.68 million or thereabouts by way of dividend on its proof in that liquidation. If, on the other hand, Group does prove in the liquidation of Stations then (subject to the Cherry v Boultbee point) the amount which AIG may expect to receive in that liquidation is reduced to £2.07 million or thereabouts. At first sight, therefore, the loss to AIG (if Group were to prove in the liquidation of Stations) would be some £4.61 million. But that would be to ignore the interest which AIG has in any monies received by Group (or its liquidators) by way of dividend on Group’s proof in the liquidation of Stations. 
21	The dividend on Group’s proof in the liquidation of Stations (subject to the Cherry v Boultbee point) would be £27 million or thereabouts. If clause 8.3(a) of the deed of indemnity is given the effect which the judge’s order requires, then AIG would be paid in full. The monies received by Group by way of dividend in the liquidation of Stations would be more than sufficient to pay the balance of the amount owed to AIG under the deed. On that basis, AIG has no interest in seeking to enforce clause 8.2(b) of the deed. Its interests are best served by allowing Group to prove in the liquidation of Stations; and to rely on the trust imposed by clause 8.3(a). AIG would not wish to rely on paragraph 6 of that order; and would not wish to uphold either paragraph 7 or paragraph 8 of that order. AIG would, I think, join with the liquidators of Group in inviting the Court to set aside those paragraphs. 
22	The liquidators of Stations oppose any attempt to set aside paragraphs 7 and 8 of the judge’s order. As I have said, they take the point that the restriction in clause 8.2(b) of the deed is a restriction upon which Stations, itself, can rely. That is the new point raised by paragraph 2a of the respondents’ notice which the liquidators have filed on this appeal.
23	The issues in the third group are (i) whether the effect of clause 8.3 of the deed of indemnity is to impose a trust on all monies received by Group in the liquidation of Stations: and, if so, (ii) whether that trust constitutes a security which was registrable as a charge over book debts or other assets under section 395 of the Companies Act 1985 and so void for want of registration. If the liquidators of Group are entitled to disclaim the deed of indemnity, those issues fall away. That is because the obligations imposed by clause 8.3(a) – as well as the restriction imposed by clause 8.2(b) – would not survive a valid disclaimer of the deed. But, absent disclaimer, those issues would need to be addressed if (i) Group were, nevertheless, permitted to prove in the liquidation of Stations and (ii), notwithstanding the Cherry v Boultbee point, Group would receive a dividend in that liquidation . 
24	The liquidators of Group pursue the issues in the third group on this appeal - notwithstanding that clause 8.3(a) of the deed of indemnity (if given the effect which paragraphs 2 and 4 of the judge’s order require) would  remove any interest which AIG would otherwise have in seeking to enforce clause 8.2(b) of that deed - because they take the view (no doubt correctly) that the interests of the creditors in the liquidation of Group (other than AIG) are best served if the whole of the monies received by Group by way of dividend in the liquidation of Stations is available for distribution in Group’s liquidation, free of any obligation to give effect to the trust imposed by clause 8.3(a) of the deed. 
25	If Group were permitted to prove in the liquidation of Stations and the appeal on the issues in the third group issues were to succeed, then (subject to the Cherry v Boultbee point) AIG would suffer loss. If the whole of the £27 million (to be received by Group in the liquidation of Stations) were to be distributed in the liquidation of Group, the dividend on AIG’s proof in Group’s liquidation would be £2.90 million or thereabouts. So AIG would receive less, in aggregate, by way of dividend in the two liquidations ({£2.07 million + £2.90 million} = £4.97 million) than the amount (£6.68 million) that it would receive in the liquidation of Stations if Group were excluded from that liquidation. 
26	The question, then, is whether damages would be an adequate remedy for that loss. If so, it is said, Group should be permitted to prove, notwithstanding the breach of the restriction in clause 8.2(b) to which that proof would give rise. AIG should be left to its remedy in damages. That question turns on whether AIG would have to prove for those damages (in addition to the monies owing under the deed of indemnity) in the liquidation of Group. It is clear that, if AIG were to be treated as a liquidation creditor in respect of those damages, it would not recover the full amount of its loss. The amount that it would receive in respect of its loss would be limited to the dividend on that element of its proof. The liquidators of Group accept that, if AIG were left to prove in the liquidation of Group, there would be no adequate remedy for the loss that AIG would suffer if (in breach of clause 8.2(b) of the deed) Group were permitted to prove in the liquidation of Stations. 
27	In order to meet that point the liquidators of Group offer to pay to AIG, as an expense of the liquidation, a sum equal to the full amount of the loss which AIG would suffer if Group were permitted to prove in the liquidation of Stations. The offer found its final expression, I think, in an amended paragraph B.4 in section 9 of the appellants’ notice. The liquidators of Group seek directions (in the alternative to their primary case that they are entitled to disclaim the deed of indemnity) that they shall submit a proof of debt in the liquidation of Stations; and that they:
“. . . shall pay to AIG as an expense in the liquidation of Group out of the receipts received from the liquidators of Stations a sum equal to the difference between the dividend which AIG would receive from the liquidation of Stations in the absence of any proof from Group and the dividend it will receive if Group proves in that liquidation (this payment being without prejudice to any further claim AIG might have in the liquidation of Group as an unsecured creditor for any sums still outstanding to AIG after this payment is taken into account) or alternatively such greater sum not exceeding the full amount owing to AIG as the Court shall think fit.”
If this Court were to give a direction in those terms the liquidators of Group propose that, in default of agreement, the matter be remitted to the Companies’ Court to determine the amount to be paid under that direction. 
28	AIG’s primary position, of course, is that if Group were permitted to prove in the liquidation of Stations (notwithstanding the breach of the restriction in clause 8.2(b) to which, absent disclaimer, that proof would give rise), AIG would rely on clause 8.3(a) of the deed. But, if it were not able to do so – because the appeal on the issues in the third group had succeeded – AIG would, I think, be content with a direction in the terms which I have just set out; if a direction in those terms could properly be given. That is, perhaps, unsurprising: a payment in accordance with a direction in those terms would over-compensate AIG for the loss. On the illustrative figures which I have already set out, the direction would lead (i) to a payment, as an expense in the liquidation of Group, of £4.61 million (the difference between the £6.68 million that AIG would receive in the liquidation of Stations if Group did not prove in that liquidation and the £2.07 million that AIG would receive in the liquidation of Stations if Group did prove in that liquidation)  and (ii) to a dividend in the liquidation of Group (the assets in which would be swollen by some £22.39 million – being the balance of the £27 million after payment of that £4.61 million) on AIG’s proof for the unpaid part of the amount owed to it under the deed. The effect of the direction would be that the amount for which AIG could prove in the liquidation of Group would be the same (whether or not Group proved in the liquidation of Stations). The effect of bringing additional assets into the liquidation of Group would be that the dividend on AIG’s proof in the liquidation of Group would be greater than it would have been if Group had not proved in the liquidation of Stations.    
29	AIG’s concern, in this context, is not that it would be under-compensated by the proposed direction: its concern is that the Court has no power to give a direction in those terms. Put shortly, AIG does not accept that the liquidators could be directed to pay, as an expense in the liquidation, a sum which (in substance) represents damages for breach of an obligation in a pre-liquidation contract. It points out, correctly, that the judge held (at paragraph 74 of his judgment) that there was no power to direct that damages be paid as an expense in the liquidation of Group. As the judge put it:
“. . . in this statutory context [section 115 of the Insolvency Act 1986 and rule 4.218(a) of the Insolvency Rules 1986] it would be an extraordinary use of language to describe as ‘costs and expenses’ sums payable by way of damages for breach of contract . . . In my judgment, if Group were to prove in Stations’ liquidation, and if Group were as a result to be liable in damages to AIG, the amount of those damages would be a debt for which AIG would have to prove, and would not be given any higher priority in payment as a cost or expense of the liquidation.”

30	Faced with the prospect that they will fail to persuade this Court that the judge was wrong to take that view, the liquidators of Group put forward a further alternative. This was advanced as an amended paragraph D.1 in section 9 of their appellants’ notice. It is said that, if the orders appealed from are otherwise confirmed, there should be substituted for the direction in paragraph 8 of the order of 27 July 2004 a direction in these terms:
“That Stations Liquidators be not at liberty to distribute a final dividend in Stations’ Liquidation without regard to the claim of Group to be a creditor of Stations without first giving 35 days for Group Liquidators to seek to secure by negotiation a waiver of the rights of the Surety under clause 8.2 and/or 8.3 of the Deed so as to permit Group to prove in the liquidation of Stations.”
The thinking behind that proposed direction, as I understand it, is that there must be a price for the waiver of AIG’s rights under clause 8.2(b) which AIG will accept and the liquidators of Group will be advised to pay (as an expense in the liquidation) in order to bring part of Stations’ assets (by way of dividend) into the liquidation of Group. At first sight, however, it is difficult to see why (if paragraphs 2 and 4 of the judge’s order are not set aside) AIG would be prepared to accept less than the whole of the unpaid balance of the amount owing to it under the deed. There may be some financial advantage to AIG in waiving its right to enforce the restriction on proof in clause 8.2(b); but waiver of that right leads to a position where AIG obtains the full benefit of clause 8.3(a). It is not at all clear that there could be any advantage to AIG in surrendering any part of that benefit; nor that there is any prospect that it would do so.    
31	The premise which underlies the issues which I have discussed in the preceding paragraphs is that, if Group (following disclaimer) were entitled - or (absent disclaimer) were permitted - to prove in the liquidation of Stations, it would receive a dividend on its proof. But the liquidators of Stations challenge that premise. It is that challenge which gives rise to the issues in the second group. As I have explained, it is said on behalf of the Stations’ liquidators that the effect of the rule in Cherry v Boultbee is that, if Group were to prove in the liquidation of Stations, it would have to bring into account – not by way of set-off, but as a contribution to the whole of the distributable fund – the value of Stations’ claim to indemnity.  And, it is said, the effect of bringing the value of Stations’ claim to indemnity into account is that Group would receive no dividend in the liquidation of Stations. 
32	The issues in the three groups which I have identified overlap. But it is, I think, convenient to address them in the following order: (1) whether Group’s liquidators may disclaim the deed of indemnity; (2) whether Group should be permitted to prove in the liquidation of Stations; (3) whether, if Group were entitled or permitted to prove in the liquidation of Stations, it would receive any dividend on its proof – the Cherry v Boultbee point; and (4) whether (absent disclaimer) any dividend which Group would receive in the liquidation of Stations would be subject to the obligation in clause 8.3(a) of the deed. The question whether Stations (as well as AIG) can rely on the restriction against proof in clause 8.2(b) of the deed can conveniently be addressed within the second of those issues.
The first issue:  whether the liquidators of Group are entitled to disclaim the deed of indemnity?
33	The issue which the judge was asked to decide was whether or not in all the circumstances of this case Group’s liquidators may disclaim the deed of indemnity, or the contract of which the indemnity forms part, as ‘onerous property’ under section 178 of the Insolvency Act 1986. The section is in these terms, so far as material:
“178(1)	. . . 
(2) Subject as follows, the liquidator may, by the giving of the prescribed notice, disclaim any onerous property, . . .  
(3) The following is onerous property for the purposes of this section –
(a) any unprofitable contract, and
(b) any other property of the company which is not readily saleable or is such that it may give rise to liability to pay money or perform any other onerous act.
(4) A disclaimer under this section -
(a) operates so as to determine, as from the date of the disclaimer, the rights interests and liabilities of the company in or in respect of the property disclaimed; but
(b) does not, except so far as is necessary for the purpose of releasing the company from any liability, affect the rights or liabilities of any other person.
(5)  . . .
(6)  Any person sustaining loss or damage in consequence of the operation of a disclaimer under this section is deemed a creditor of the company to the extent of the loss or damage and accordingly may prove for the loss or damage in the winding up.”

34	As the judge explained (at paragraph 56 of his judgment) the effect of a disclaimer by the liquidators of Group of the deed of indemnity would be that AIG, as a person sustaining loss or damage by the disclaimer, would be deemed to be a creditor of Group to the extent of the loss or damage and could prove for that amount in Group’s liquidation. That would put AIG in a much less advantageous position than it would be in if it can insist on the subordination of the inter-company debt. 
35	The judge took the view that, if the deed of indemnity were to fall within the statutory definition of “onerous property” it would be because it was an “unprofitable contract” within paragraph (a) of section 178(3) of the 1986 Act. He rejected the submission that the deed could fall within paragraph (b) of section 178(3) as “any other property of the company”. After reminding himself of the definition of “property” in section 436 of the 1986 Act, the judge said this (at paragraph 60):
“It seems to me that for something to qualify as "property", it must involve some element of benefit or entitlement for the person holding it, which is not true of the Deed as regards Group or any of the other Indemnitors in present circumstances; the Indemnitors have already had the benefit for which they entered into the Deed. Moreover, even if this is wrong and the obligations under the Deed could be regarded as property, it cannot fairly be described as property which is ‘unsaleable or not readily saleable’. In itself that phrase seems to confirm the last proposition, that there must be, potentially at least, some benefit or entitlement arising from the thing in question. Nor can the Deed give rise to a liability to pay money or to perform any other onerous act. It imposes on Group a negative obligation or disability, preventing it from collecting in an asset, rather than a positive obligation to pay money or do anything at all.”
In my view the judge was correct in his analysis as to the scope of section 178(3)(b) of the 1986 Act. It is not challenged on this appeal.
36	In addressing the question whether the deed was properly to be regarded as an unprofitable contract within paragraph (a) of section 178(3) the judge found assistance in the judgment of Mr Justice Chesterman, sitting in the Supreme Court of Queensland, in Transmetro Corporation Ltd v. Real Investments Pty Ltd (1999) 17 ACLC 1,314. In the course of that judgment Mr Justice Chesterman reviewed the Australian authorities - Re Middle Harbour Investments Ltd (in liquidation) (1977) 2 NSWLR 652, Dekala Pty Ltd v Perth Land & Leisure Ltd (1988) 6 ACLC 131, (1989) 17 NSWLR 664, Rothwells Ltd v Spedley Securities Ltd (1990) ACLR 783, (1990) 20 NSWLR 417 and Old Style Confections Pty v Microbyte Investments Pty Ltd (in liquidation) [1995] VR 457 - and two English authorities – Ex parte East and West India Dock Company, In re Clarke (1881) 17 ChD 759 and In re Bastable [1901] 2 KB 518. Mr Justice Chesterman set out, at paragraph 21 of his judgment (17 ACLC 1,314, 1,320), five principles which he had derived from those authorities:
“[1] A contract is unprofitable for the purposes of section 568 [of the Corporations Law 1989] if it imposes on the company continuing financial obligations which may be regarded as detrimental to the creditors, which presumably means that the contract confers no sufficient reciprocal benefit.
[2] Before a contract may be unprofitable for the purposes of the section it must give rise to prospective liabilities.
[3] Contracts which will delay the winding-up of the company's affairs because they are to be performed over a substantial period of time and will involve expenditure that may not be recovered are unprofitable.
[4] No case has decided that a contract is unprofitable merely because it is financially disadvantageous. The cases focus on the nature and cause of the disadvantage.
[5] A contract is not unprofitable merely because the company could have made, or could make, a better bargain.”
In the third edition (2005) of Principles of Corporate Insolvency Law, Professor Sir Roy Goode QC refers (at paragraph 6-22) to that as “an instructive summary of the principles to be extracted from prior authority to determine whether a contract was unprofitable”. Mr Justice Chesterman’s summary was adopted by Mr Justice Santow in the Supreme Court of New South Wales in Global Television Pty Ltd v Sportsview Australia Pty Ltd (2000) 35 ACSR 484, [2000] NSWSC 960.  
37	The liquidators of Group draw attention to the fact that the Transmetro case was decided, not in the context of section 178 of the Insolvency Act 1986, but in the context of (different) provisions in the Australian legislation. Section 568(1) of the Corporations Law 1989 permits a liquidator to disclaim “property of the company that consists of . . . (f) a contract”. But section 568(1A) provides that a liquidator cannot disclaim a contract “(other than an unprofitable contract or a lease of land)” except with the leave of the Court. When addressing the meaning of “unprofitable contract” in that context in the Global Television case (ibid, [63]), Mr Justice Santow said this:
“Given that, with any necessary leave, every contract may now be disclaimed by a liquidator, but only unprofitable contracts avoid the need for the court’s leave, and given the consequences for a party contracting in good faith if disclaimer does occur, I find this a further reason not to construe ‘unprofitable contracts’ unduly broadly.”
It is clear, therefore, that Mr Justice Santow took the view that the fact that the power to disclaim an unprofitable contract could be exercised without first obtaining the leave of the court was a factor which suggested that the concept should not be given too broad a meaning.  
38	It is pointed out, also, that when Parliament enacted the provisions as to disclaimer in section 178 of the Insolvency Act 1986 it did so in language which differed from that formerly used in the Companies Acts and the Bankruptcy Acts over a period of nearly 120 years. Provisions enabling the trustee to disclaim onerous property first appeared in the Bankruptcy Act 1869, at section 23:
“When any property of the bankrupt acquired by the trustee under this Act consists of land of any tenure burdened with onerous covenants, of unmarketable shares in companies, of unprofitable contracts, or of any property which is unsaleable, or not readily saleable, by reason of its binding the possessor thereof to the performance of any onerous act, or to the payment of any sum of money, the trustee, . . . may . . . disclaim such property, . . . ”
That section was re-enacted, in substantially the same terms, successively as section 55(1) of the Bankruptcy Act 1883 and section 54(1) of the Bankruptcy Act 1914. A provision, again in substantially the same terms (save that disclaimer required the leave of the court) was introduced into corporate insolvency by section 267(1) of the Companies Act 1929; and it appeared thereafter as section 323(1) of the Companies Act 1948 and as section 617(1) of the Companies Act 1985. The history of these provisions is set out in paragraphs 1185 to 1190 of the Report of the Review Committee into Insolvency Law and Practice (the Cork Committee) presented in 1982 (Cmnd. 8558). But, as the Cork Committee observed at paragraph 1191, by the date of its report little use had been made of the power to disclaim. 
39	The Cork Committee drew attention, at paragraph 1193 of the Report, to the position in Australia; where, following the recommendation of the Clyne Committee, the disclaimer provision was enacted, as section 133(1) of the Bankruptcy Act 1966-1973, in rather wider terms – in that the property which could be disclaimed extended to “property (including land) that is unsaleable or is not readily saleable”. It was not necessary, under the Australian bankruptcy legislation, to show that the property was unsaleable or not readily saleable “by reason of its binding the possessor thereof to the performance of any onerous act, or to the payment of any sum of money”; but the Australian Bankruptcy Act retained the specific categories of “land of any tenure burdened with onerous covenants” and of “unprofitable contracts”, which had been in the English legislation since 1869. The Cork Committee recommended the enactment of a similar relaxation in relation to unsaleable property in England. 
40	Effect was given to that recommendation in section 178(3) of the Insolvency Act 1986. That section assimilated the position in corporate insolvency with that in personal bankruptcy; in the sense that the need to obtain the leave of the court formerly required under the corporate insolvency code (and re-enacted in section 617(1) of the Companies Act 1985) but which had not been required under the bankruptcy code, was not re-enacted in the 1986 Act.  But there is no reason to think that the phrase “unprofitable contract” was intended to have a different meaning after 1986 from that which had been given to that phrase before the 1986 Act; or to have a different meaning in England from that which it had been given in Australia since 1966. In particular, there is nothing to support the submission – made in footnote 13 to paragraph 37 of the skeleton argument filed on behalf of the liquidators of Group in support of their appeal – that the reasoning of Mr Justice Chesterman in the Transmetro case can be distinguished on the ground that that case was decided on different legislative language; nor to support the submission that his analysis of the earlier English and Australian authorities has no application to the position under the 1986 Act.
41	I have referred to the decision of Mr Justice Santow in Global Television Pty Ltd v Sportsview Australia Pty Ltd (2000) 35 ACSR 484, [2000] NSWSC 960, in which (at [62]) he adopted Mr Justice Chesterman’s summary, in the Transmetro case, of the five principles to be derived from the earlier authorities. There is, I think, further assistance to be found in Mr Justice Santow’s observations at [59] and [60]:
“[59]  In defining what an unprofitable contact means, I am content to adopt the approach of Young J in Dekala Pty Ltd (in liq) v Perth Land & Leisure Ltd (1989) 17 NSWLR 664; 12 ACLR 585. At 667 he speaks of a contract which ‘would involve the liquidator in at least eight months of work and in taking the chance that the purchaser would obtain finance on terms and conditions . . . satisfactory to it’. Young J understandably concluded that:
‘This would seem to be a contract which cannot satisfactorily be carried out by a liquidator whose interest is to realise the company’s property and to pay a dividend to creditors at the earliest possible time.’
[60]   To say that an unprofitable contract is one the performance of which cannot be satisfactorily be carried out still leaves the need for further elaboration of what is meant by ‘unsatisfactory’. What is important in that context is whether the contract could be satisfactorily carried out by a liquidator or trustee in bankruptcy, compatibly with the liquidator’s duty to realise the company’s property and pay a dividend at the earliest possible time. Consistent with that approach a contract must be more than merely financially disadvantageous as Hayne J concluded in Old Style Confections Pty Ltd v Microbyte Investments Pty (in liq) [1995] 2 VR 457 at 466-7; (1994) 15 ACSR 191. Thus if a liquidator could perform a contract without prejudicing his obligation to realise the company’s property and pay a dividend to creditors at the earliest possible time, he could not turn around and disclaim that contract merely on the expedient ground that he substitute a more profitable one. Such a notion of comparative financial advantage is not the applicable test. Indeed I do not understand Hodgson J in Rothwells Ltd v Spedley Securities Ltd (1990) 20 NSWLR 417 at 423; 2 ACSR 398 to have concluded otherwise.”
Given that the liquidators of Group placed some reliance on the judgment in the Rothwells case, it is pertinent to note that Mr Justice Santow rejected the suggestion that that judgment provided support for a test of “comparative financial advantage”.  
42	In my view (if I may say so) he was right to do so. The passage in Mr Justice Hodgson’s judgment in the Rothwells case is found at (1990) 8 ACLC 783, 787:
“. . . However it seems to me that obligations which have already accrued in the past are not liabilities which can be terminated [by disclaimer]. Liabilities which can be terminated could be such things as an obligation to arise in the future to pay money or transfer property or provide goods or services, and they could be restrictions on or inroads into the use or enjoyment of property. Where an obligation has arisen but the time for performance has not yet arrived, or where the obligation is subject to conditions which are not yet performed, then it may be . . . that that is a liability which can be terminated. In some cases, however, a question of degree may arise whether in substance this is a fully accrued obligation which cannot be terminated, or in substance an obligation in relation to the future which can be.”
Mr Justice Hodgson is recognising there, as it seems to me, that it is a necessary feature of an “unprofitable contract” (in the context of disclaimer) that the contract imposes future obligations – that is to say, obligations yet to be performed – the performance of which may be detrimental to creditors. That is the thrust of Mr Justice Chesterman’s first two principles, summarised in the Transmetro case. But Mr Justice Hodgson does not suggest that that feature is sufficient in itself. A contract is not an “unprofitable contract” in this context merely because it is financially disadvantageous or merely because the company could have made or could make a better bargain. That is made clear by Mr Justice Chesterman in the fourth and fifth of his principles; and is emphasised by Mr Justice Santow in the Global Television case. The critical feature, summarised by Mr Justice Chesterman in his third principle and accepted by Mr Justice Santow, is that performance of the future obligations will prejudice the liquidator’s obligation to realise the company’s property and pay a dividend to creditors within a reasonable time  – or, as Mr Justice Santow would put it, “at the earliest possible time”.  
43	That view of the purpose for which the power to disclaim is conferred is endorsed by Professor Goode in Principles of Corporate Insolvency Law (op cit, para 6-20). He summarises the position in these terms:
“The purpose of the disclaimer provisions is twofold: first, to allow the liquidator (whether in a solvent or [an insolvent] liquidation) to complete the administration of the liquidation without being held up by continuing obligations on the company under unprofitable contracts, or continued ownership and possession of assets which are of no value to the estate; and, secondly, in an insolvent liquidation to avoid the continuance of liabilities in respect of onerous property which would be payable as expenses of the liquidation to the detriment of unsecured creditors. It should be borne in mind that liquidation does not of itself bring a contract to an end, nor is it necessarily a ground for the solvent party to terminate the contract. The liquidator is not obliged to procure the company to continue performance if he considers this will not benefit the company, but neither (apart from the disclaimer provisions) can he compel the other party to treat the contract as at an end. It is precisely to avoid such a stalemate, which would inhibit the completion of the winding-up, that the law gives the liquidator the right to terminate the contract unilaterally by disclaimer where it is unprofitable.”
The first of the two purposes identified by Professor Goode - the need to enable a liquidator to bring the administration of the liquidation to an early closure without being held up by continuing obligations under unprofitable contracts of the liquidation – was recognised by Lord Millett (in the context of onerous property) in In re Park Air Services Plc [2000] 2 AC 172, 184H.
44	The judge considered the facts in the present case with Mr Justice Chesterman’s five principles in mind. At paragraphs 67 to 69 of his judgment he said this:
“67. . .  although the Deed is detrimental to the creditors of Group, this is not because it imposes on Group continuing financial obligations. It does not give rise to prospective liabilities. It does not require performance over a substantial period of time or involve expenditure. It seems therefore that Chesterman J would not have regarded the present contract as one which the liquidator, under the Australian legislation, could disclaim without getting permission from the court.”
68. Looking at the matter more broadly, while the Deed is disadvantageous to Group in present circumstances, the disability which it imposes on Group as regards the inter-company debt is, as it were, part of the price for the advantage secured by Group through obtaining the assistance of AIG in getting the payment of duty deferred. Given that Group has had the benefit for which it entered into the Deed, it seems to me that it would be inappropriate to look at the transaction at this stage purely from the point of view of the present disadvantage to Group and its creditors, to which Group agreed to submit in exchange for the advantage secured at the outset. Of course, if the ‘price’ due from Group for the benefit already provided were payable in money, then AIG would have to prove for the debt, unless it were secured. Because the benefit for which AIG stipulated was deliberately aimed at improving AIG's position if any of the Indemnitors became insolvent, for Group to be able to avoid that advantage by disclaimer would subvert much of the point of the clause. 
69. More generally, it does not seem to me that the Deed can properly be characterised as an unprofitable contract simply because the consequence of it being implemented at this stage is disadvantageous to Group and its creditors. In terms of Chesterman J's question whether the contract confers a sufficient reciprocal benefit, Group has already had the benefit for which it contracted. Who is to say that this benefit was not sufficient? No doubt it seemed sufficient to those involved in the management of Group at the time.” 
And he concluded, at paragraph 70, that:
“70. In my judgment the principles set out by Chesterman J are a valuable guide to what is or is not an unprofitable contract under section 178(3)(a), despite the differences in the legislation. Applying those principles, I hold that the Deed is not an unprofitable contract within the meaning of section 178(3)(a) and it is not open to Group's liquidators to disclaim it.”

45	The liquidators of Group challenge the judge’s conclusion. It is said that the deed of indemnity – or, as it is put, “more accurately, the contract of which it forms part” – is an “unprofitable contract” within the meaning of section 178(3)(a) of the 1986 Act. 
46	The liquidators do not set out, in terms, what they say is “the contract” of which the deed of indemnity forms part. But it is, I think, reasonably clear that the contract to which they intend to refer is that mentioned in the recital to the deed: 
“Whereas the Surety has agreed to issue or execute Bonds as hereinafter defined on behalf of the Indemnitors for good and valuable consideration and the Indemnitors have agreed to indemnify the Surety and otherwise to perform the agreements and obligations set out below.”
There were, therefore, three (or, perhaps, four) elements to the contract between AIG, Group and the other companies in the Save group: (i) AIG’s agreement to issue bonds to the Commissioners, (ii) Group’s agreement (and, it may be, the agreement of one or more of the other group companies) to pay “good and valuable consideration” to AIG in order to obtain the issue of bonds, and (iii) the agreement of Group and the other group companies (a) to indemnify AIG and (b) to perform and observe the other terms in the deed of indemnity.   
47	The obligation to indemnify AIG is, itself, an obligation imposed by the deed of indemnity. So, also, is the obligation to make payment on demand. Those obligations are imposed by clauses 2 and 3.1 of the deed:
“2.		 INDEMNITY
The Indemnitors shall without limiting the obligations of the Indemnitors to make payment to the Surety on demand under clause 3, indemnify and keep the Surety indemnified from and against all claims, liabilities, costs, expenses, damages and/or losses (including loss of interest) incurred by the Surety under or by virtue of Bonds. . . .
3.	DEMANDS FOR PAYMENT
3.1 Reimbursement or Payment of Surety on Demand 
If the Surety shall receive any demand for payment from or make any payment to the Commissioners  under or in respect of any Bond the Indemnitors shall pay or repay the full amount thereof to the Surety forthwith upon written demand ... stating that such sum has been so demanded or that such payment has been made . . .
. . .” 
48	The obligations in clauses 2 and 3.1 must be read with clause 4:
“4.	CASH COVER PROVISION
4.1 Deposit of Cash Cover			The Indemnitors shall upon demand in writing by the Surety forthwith deposit with the Surety in immediately available funds such sum as shall represent the aggregate of the maximum aggregate liabilities of the Surety as set out in all Bonds . . . on or at any time after the occurrence of any of the following events:
. . . 
4.1.4	Commencement of Winding Up	A meeting is convened or a petition . . . is presented or an effective resolution is passed or an order made for the winding up of any Indemnitor . . .
. . . 
4.2 Application of Cash Cover		The Surety shall hold and apply the sums paid pursuant to clause 4.1 and all interest accruing thereon as cash cover for the purpose of paying or settling any claims in respect of Bonds . . . and subject thereto any surplus shall be refunded to the Indemnitors following the release or discharge of all Bonds to the satisfaction of the Surety.
. . .    	”
It is to cash cover provided under clause 4.1 that the prohibition in clause 8.2(a) refers. 
49	Clause 9 of the deed (“Joint and Several Obligations”) provides that Group and the other group companies party to the deed shall be bound thereunder as principal debtors to AIG and that the obligations and liabilities of the Indemnitors shall be both joint and several. Clause 10 (“Continuing Indemnity”) provides that the obligations of the Indemnitors under the deed shall be continuing and shall not be discharged or released by any intermediate payment, settlement or discharge.
50	It can be seen that the deed of indemnity imposes obligations on each of the Indemnitors which do not, necessarily, crystallise or fall to be performed forthwith upon the liquidation of that Indemnitor. For example, the obligation to make payment under clause 3 does not arise until AIG receives demand for payment from, or makes some payment to, the Commissioners; and then only upon written demand by AIG. The obligation to provide cash cover does not arise until AIG makes a written demand. The obligation to pay to AIG any payment or repayment received by the Indemnitor from the Commissioners in respect of any overpayment or over-declaration of tax, does not arise under clause 8.3(b) until (i) a claim has been made against AIG (or AIG has itself made payment) under a Bond and (ii) the Indemnitor has received the payment or repayment from the Commissioners. It is, as it seems to me, essential to keep that in mind when considering whether the deed of indemnity – or the contract of which the deed forms part – is capable of being an “unprofitable contract” within section 178(3)(a) of the 1986 Act, in the context of the liquidation of that Indemnitor.
51	For my part, I can envisage circumstances in which the deed of indemnity – or the contract of which the deed forms part – could be held to be an “unprofitable contract” within section 178(3)(a) of the 1986 Act in the context of the liquidation of a group company which was party to that deed as an Indemnitor. I can envisage circumstances in which the future obligations to be performed by the Indemnitor under the deed were such as to impede or prejudice the liquidator’s obligation to realise the company’s property and pay a dividend to creditors within a reasonable time. If, for example, the Indemnitor (in a solvent liquidation) was at risk of being called upon, in the future, to provide cash cover under clause 4 in an amount (not then capable of being quantified) the liquidator might well be able to disclaim on the ground that that contingency impeded the realisation and distribution of the company’s property.  But that is not this case.
52	The relevant question in the present case, as it seems to me, is whether the restriction in clause 8(2)(b) of the deed – which, as the judge held, has the effect that Group cannot prove in the liquidation of Stations – impedes the liquidators of Group in discharging their functions in Group’s liquidation. It is not suggested that there is any other provision in the deed – or in the underlying contract – which has that effect. In my view, the answer to that question is ‘No’. The reason is that given by the judge in paragraph 67 of his judgment:
“. . . although the Deed is detrimental to the creditors of Group, this is not because it imposes on Group continuing financial obligations. It does not give rise to prospective liabilities. It does not require performance over a substantial period of time or involve expenditure”

53	 The position might be otherwise if the restriction in clause 8(2)(b) could be regarded as other than permanent: that is to say, if (on the facts) there were a prospect that there would come a time when “all amounts which may be or become payable by the Indemnitors to the Surety under this deed have been irrevocably paid in full”; so that the restrictions imposed by clause 8.2 fell away. But, again, that is not this case. It cannot be suggested, on the facts in this case, that there are any circumstances in which AIG will be paid the full amount due to it from the Indemnitors in respect of its liability under the Bonds. The reason appears from the judge’s summary (at paragraph 4 of his judgment) of the overall position of the group companies. By far the largest proportion of the group’s assets is in Stations; and (on any basis) AIG must compete in the liquidation of Stations with other outside creditors - in particular, AIG must compete with the banks (£60 million) and trade creditors (£6 million). The best predicted outcome for AIG (on the figures put to us) is that it may recover approximately 70 per cent of the monies which it has been required to pay to the Commissioners.
54	For those reasons I would hold that the judge was right in the answer which he gave in paragraph 5 of his order of 27 July 2004.
The second issue: whether Group should be permitted to prove in the liquidation of Stations?
55	This point would not arise if the liquidators of Group were entitled to, and did, disclaim the deed of indemnity. Further, if I am correct in my view that Group cannot disclaim the deed, it will only arise (in practice) if, notwithstanding the rule in Cherry v Boultbee, Group would receive some dividend in the liquidation of Stations if it were permitted to prove in that liquidation. It would be in that situation – and only, I think, in that situation – that there would be any incentive for AIG to waive its right to enforce the restriction in clause 8.2(b) or any basis upon which the court could refuse to give effect to that right. But, if that situation were to arise, then the liquidators of Stations would or might wish to rely on the restriction – if entitled to do so.
56	The question whether the liquidators of Stations could rely on the restriction in clause 8.2 – even if AIG were to waive its right to do so - was not argued before the judge. Indeed, we were told that, in the skeleton argument prepared for use at trial, counsel for the liquidators of Stations (who did not include the leading counsel instructed on the appeal) conceded that the promise in clause 8.2(b) of the deed of indemnity was given by each Indemnitor to AIG alone, and not by each Indemnitor to AIG and each other Indemnitor, so that the liquidators of Stations were not, in reliance of some right conferred on Stations, able to rely upon clause 8.2(b) as a ground upon which to reject a proof by Group. But the point is raised in this Court by respondents’ notice; it is a short point, which turns on the true construction of the deed of indemnity; and (with the encouragement of, or at least without objection from, the other parties) we have heard argument upon it.
57	I have already set out the provisions of clause 8.2(b) of the deed of indemnity; but it is necessary to have them in mind in the present context and it may be convenient if I do so again:
 “8.2 	Until all amounts which may be or become payable by the Indemnitors to the Surety under this deed have been irrevocably paid in full no Indemnitor shall after a claim has been made by the Surety hereunder or by virtue of any payment made by it under this deed: . . . (b) claim [or] . . .  prove . . . as a creditor of any Indemnitor or its estate in competition with the Surety; or (c) receive, claim or have the benefit of any payment [or] distribution . . . from or on account of any Indemnitor . . .”
The obvious purpose of that clause is to prevent one group company (say, A) from competing with AIG in the liquidation of another (say, B). It goes well beyond the rule against double proof; which would (in any event) protect AIG (as the principal creditor in this context) from competition in the liquidation of Group (as the principal debtor) and in the liquidation of the other group companies (as co-sureties) in respect of claims arising from the rights of sureties to a contribution. The clause protects AIG from competition in respect of inter-company claims which do not arise out of the relationship of principal debtor and co-sureties. 
58	The clause has a further effect (which may or not have been in the minds of the parties when they entered into the deed). Not only does the clause protect AIG from competition from inter-company debts in the liquidations of Group and the other group companies, the clause protects other creditors in those liquidations from competition from inter-company debts. That, as it seems to me, is a necessary consequence of the restriction which prevents any group company from proving in the liquidation of any other group company until AIG has been paid in full. But, once the restriction has ceased to have effect – because AIG has been paid in full – the group companies can prove for inter-company debts in each other’s liquidation. That does not, of course, affect the operation of the rule against double proof; which will continue to prevent more than one proof in each liquidation in respect of the debt owed to AIG. 
59	Clause 8.2 must be read with the material words of clause 8.3:
“Each Indemnitor shall hold in trust for and forthwith pay or transfer to the Surety: (a) 	any payment distribution benefit or security received by it contrary to clause 8.2 . . .” 
	The plain intention of clause 8.3(a) – whether or not that intention is prevented from having effect by the provisions of section 395 of the Companies Act 1985 – is that a distribution received by one group company (say, A) in the liquidation of another (say, B) contrary to clause 8.2 will be received for the benefit of the Surety. It is, I think, of some significance that the trust is imposed on payments received “contrary to” clause 8.2; the words are not “in breach” of clause 8.2. That suggests that (as might be expected) the parties intended that, if a payment was received by A from a proof by A in the liquidation of B, that payment should (until AIG has been paid in full) be paid over by company A under the trust whether or not there had been a breach of clause 8.2. And that, in turn, suggests that the parties contemplated that there might be circumstances in which the restriction imposed by clause 8.2 would not be enforced.
60	The question, therefore, is whether the restriction in clause 8.2(b) of the deed of indemnity can be waived unilaterally by AIG. In that context we were referred to observations in this Court in Hawksley v Outram [1892] 3 Ch 359, 376. The question, as Lord Hope of Craighead pointed out in Total Gas Marketing Ltd v Arco British Ltd and others [1998] 2 Lloyd’s Rep 209, 223, is a question of construction: the answer “must be found upon the face of the contract”. And as Mr Justice Brightman put it in Heron Garage Properties Ltd v Moss and another [1974] 1 WLR 148, 153G-H:
“. . . If it is not obvious on the face of the contract that the stipulation is for the exclusive benefit of the party seeking to eliminate it then in my opinion it cannot be struck out unilaterally. I do not think the court should conduct an inquiry outside the terms of the contract to ascertain where in all the circumstances the benefit lies if the parties have not concluded the matter on the face of the agreement they have signed.”

61	It is, I think, important to have in mind that, if the effect of waiver by AIG of the restriction on clause 8.2(b) would be that a distribution received by A in the liquidation of B will be paid to AIG, it must follow that a distribution received by B in the liquidation of a third group company (say, C) - and a distribution received by C in the liquidation of A - will also be paid to AIG.  In each case, whatever is received by one group company in the liquidation of any other group company will be paid over to AIG.
62	So, if it is in the interest of AIG to waive the restriction in relation to proof by A in the liquidation of B, it will also be in the interest of AIG to waive the restriction in relation to proof by B in the liquidation of C and in relation to proof by C in the liquidation of A. That, as it seems to me, leads to the conclusion that, if AIG is entitled to waive the restriction unilaterally, there are no circumstances in which it will not choose to do so; save, perhaps, in the case where there was no inter-company debt - and, in that case, the restriction would be of no effect in any event. 
63	 If the parties had intended that AIG should enjoy the benefit of an arrangement that whatever was received by one group company in the liquidation of any other group company should be paid over to AIG – until the group debt to AIG had been paid in full – it would have been simple to achieve that result without including the restriction in clause 8.2(b). Indeed, if that were the parties’ intention, there would be no purpose in including the restrictions in either clause 8.2(b) or (c) – save, perhaps, in relation to voting. All that would have been needed would have been a provision which gave direct effect to clause 8.3(a): 
“Until all amounts which may be or become payable by the Indemnitors to the Surety under this deed have been irrevocably paid in full . . .  each Indemnitor shall hold in trust for and forthwith pay or transfer to the Surety any payment distribution or benefit received by it . . . in respect of any claim or proof as a creditor of any other Indemnitor or from or on account of any Indemnitor . . .”
The inclusion of the restriction in clause 8.2(b) – in circumstances where (as it seems to me) it will always be in the interests of AIG to waive the restriction - suggests that it was intended to have some purpose which would not be defeated by a unilateral waiver by AIG.  
64	That purpose must be to ensure that, vis à vis AIG, each group company is treated in the same way. The plain intention of clause 8.2(b) is that no group company will prove or receive dividend in the liquidation of any other group company until AIG has been paid in full. As between the group companies and AIG – and as between the group companies inter se - inter-company indebtedness is to be left out of account until the group debt to AIG has been paid. That, as it seems to me, is a sensible commercial arrangement for AIG to make with the companies in the Save group. I do not think it can be set aside unilaterally by AIG.    
65	The judge declined to hold that there was a negative obligation on each Indemnitor not to admit another Indemnitor to proof where it would be a breach of clause 8.2(b) for the latter Indemnitor to proof for the debt. At paragraph 34 of his judgment he said this:
“A separate question was also argued, namely whether the clause carries with it, by implication, a negative obligation on each Indemnitor not to admit another Indemnitor to proof, where it is a breach of clause 8.2(b) for the latter Indemnitor to prove for the debt. Mr Snowden [for AIG] argued that an implication of this kind is required. Mr Randall [for Group], and Mr Mortimore Q.C. for the Stations liquidators, argued to the contrary. I agree with them. In particular, it seems to me that paragraph (c), which deals with payments received, and also clause 8.3 which deals with payments received in breach of clause 8.2, provide the sanction under the Deed for a failure to comply with clause 8.2(b). This seems to me to undermine whatever case there might otherwise be for an implied term not to admit such claims to proof. ”
In my view the judge was right to reject the submission that clause 8.2(b) imposes a negative obligation on the liquidator of a group company (say, A) not to admit inter-company debts to proof in the liquidation of A. I doubt whether an obligation of that nature could be imposed as a term of a bilateral pre-liquidation contract between the principal creditor and company A. The better analysis, as it seems to me, is that there is a multilateral obligation – enforceable by the principal creditor and each group company – that no company will prove for an inter-company debt in the liquidation of any other group company until the principal creditor has been paid in full. So, if company B seeks to prove in the liquidation of A, it can be restrained by the principal creditor and by company C. The important point, in the present context, is that the restriction which prevents B from proving in the liquidation of A cannot be waived by the principal creditor unilaterally. The obligation can only be waived by the mutual agreement of the principal creditor and the liquidators of A, B and C.
66	At paragraph 78 of his judgment the judge said this: 
“More generally, however, it seems to me that, in the case of an agreement of this kind for the subordination of debts, whose relevance is above all to the case of an insolvency, the court would and should, if necessary, enforce the negative obligation against proving in the liquidation by an injunction.”
I agree. It seems to me commercially important that, if group companies enter into subordination agreements of this nature with their creditors while solvent, they and the creditors should be held to the bargain when the event for which the agreement was intended to provide (insolvency) occurs.    
67	It follows that I would dismiss the appeal from paragraph 6, 7 and 8 of the judge’s order. I would decline to make an order in the terms sought in paragraph D1 in section 9 of the amended appellants’ notice; on the ground that an order in those terms would serve no useful purpose.
The third issue: the Cherry v Boultbee point - whether if Group were to prove in the liquidation of Stations it would receive any dividend on its proof? 
68	The liquidators of Stations contend that, in the light of the debts owed to the banks (£60 million) and to AIG (£10 million) in respect of which vis à vis Group Stations is surety, Stations has a right of indemnity amounting to approximately £70 million. The assets remaining for distribution in the liquidation of Stations amount to £39 million, or thereabouts. The debt owed by Stations to Group is of the order of £127 million. Debts to trade creditors amount to some £6 million. It is accepted that the indemnity claims cannot be set-off against Group’s proof of debt. But if on those figures – which I adopt only for the purpose of illustrating the point – Group were required to bring Stations’ claims for indemnity into account as a contribution to the whole fund distributable in the liquidation of Stations, the dividend which would be payable on Group’s proof (£68 million) would be less than the amount of that contribution (£70 million). So Group would receive nothing in the liquidation of Stations. That would provide a further reason why (absent disclaimer) Group should not be permitted to prove in the liquidation of Stations in breach of clause 8.2(b) of the deed of indemnity: to permit Group to prove in Stations’ liquidation would be pointless. On the other hand, if the conclusions which I have reached on the first two issues are correct, it must follow that the Cherry v Boultbee point will not arise. Group could not prove in the liquidation of Stations even if, by proving, it would receive a dividend. But the point has been fully argued in this Court and, as it seems to me, it is sensible to address it.   
69	The principal authority upon which the liquidators of Stations rely is the decision of this Court in In re Melton, Milk v Towers [1918] 1 Ch 37. The facts may be summarised as follows. On 26 October 1901 Richard Melton (and another) guaranteed to London and Provincial Bank payment of all monies at any time due on the account of his son, Arthur Melton to a limit of £500. Richard Melton died on 6 July 1907, survived by his widow, Arthur and three daughters. By his will he gave his real estate to his widow for her life, with remainder to his four children in equal shares. On 4 June 1910 Arthur Melton mortgaged his share of the estate to the bank to secure his account. On 12 June 1911 he was adjudicated bankrupt. At that date he owed the bank £1,057. The bank valued its security at £158 and proved in Arthur’s bankruptcy for the balance of the debt. It received a dividend of £494. The bank made demand under the guarantee. Richard’s executors raised funds by mortgaging the testator’s real estate and paid £313 to the bank (£250 + £63 by way of interest). On 30 April 1915 the bank, as mortgagee of Arthur’s share of the estate, assigned that share to Arthur’s wife, Frances. The testator’s widow died on 13 April 1916. The real estate was sold and the executors had some £1,598 available for distribution amongst the three daughters and Frances (as assignee of Arthur’s share). The question arose whether the £313, paid by the estate under the guarantee, ought to be brought into account and retained as against Arthur’s share. The effect, on the figures, would be that Frances would receive £164.75 (1/4 of {£1,598 + £313} - £313) rather than £399.50 (1/4 of £1,598).  
70	Mr Justice Astbury held that the £313 paid under the guarantee must be brought into account and retained as against Arthur’s share. He rejected the submission that the executors were (in effect) seeking to prove in Arthur’s bankruptcy – which, he accepted, they would be precluded from doing by the rule against double proof. He held that the question whether the executors could have proved in respect of their right of indemnity as sureties was not the determining factor. The true principle was that the testator’s estate having satisfied its debt (under the guarantee) neither the principal creditors (the bank) nor the trustee in bankruptcy could demand payment of more than the unpaid amount of the bankrupt-trustee-beneficiary’s share.
71	That decision was upheld by this Court. The issue was stated, succinctly, by Lord Justice Swinfen Eady at [1918] Ch 37, 46:
“The appellant [Mrs Frances Melton] claims that she is entitled to receive one fourth of this sum [£1597 18s 10d], say about £400, without any deduction in respect of the £313. Against her it is said that the estate consists not only of the sum of £1600, but also of the £313 which the estate has paid on behalf of the son, and in respect of which the son Arthur was indebted to his father under the agreement that the debtor must indemnify the surety for the obligations of the surety. Therefore, treating the £1600 and £313 as making roughly £1900, the trustees say to Mrs [Melton], ‘You are entitled only to one fourth of about £1900, of which you have in hand £313’.”
His answer is  stated (ibid, 54) in terms which are equally succinct:
“The fund treated as being available for division must first be increased by the amount which Arthur owes, and then his assign is entitled to one fourth of that entire amount subject to this, that she must give credit for the £313 that he has already notionally received.”

72	In the course of his judgment Lord Justice Swinfen Eady examined (ibid, 46-48) the rule against double proof. The whole passage repays study; but it is, I think, sufficient (in the present context) to set out the following extract:
“It is not disputed that under an ordinary creditors’ deed – and it would be the same in bankruptcy for this purpose – the creditor could, having regard to the form of the guarantee, prove for the whole amount of the debt; and the bank have in this case carried in a proof against the bankrupt’s estate for the balance of their debt after valuing their security. They could do that notwithstanding that the surety on account of his liability might have made a payment to the bank. In carrying in their proof the bank were not bound to give credit for that, but might prove for the whole amount just as if no payment had been made by the surety. I think, further, it cannot now be disputed that the position would be the same although the payment made by the surety to the creditor had not been made out of his own money but out of the proceeds of a counter-security given to him by the debtor to indemnify him against his liability as surety. That is the effect of the decision in Midland Banking Co v Chambers [(1869) LR 4 Ch App 398, 402]  . . .  
Upon the construction of a guarantee similar to the one in the present case In re Sass [[1896] 2 QB 12] was to the same effect. It is quite true, as Mr Potts urged [on behalf of the appellant], that there can be no double proof against the estate; and the rule against double proof has regard to the substance of the transaction and not to the form. It may well be that technically there are two claims against the debtor in respect of the transaction and two separate liabilities of the debtor arising out of the transaction. One of these is the debtor’s liability to the bank for the money he owed. The other, which is a separate liability arising out of the contract of guarantee, is the debtor’s liability to indemnify the sureties in respect of their liability to the principal creditor. Technically they are two separate liabilities, but in substance they are the same; and in respect of that liability there could not be double proof against the estate. The creditor could not prove for the amount of the debt and the surety bring in a proof for part of the same amount as regards his liability for that part of that amount. I think that it is clear from what Mellish LJ said in In re Oriental Commercial Bank [(1871) LR 7 Ch App 99, 103]. Mellish LJ there said: ‘This rule against double proof applies in the Court of Chancery as well as in the Court of Bankruptcy, and therefore would apply equally where companies are being wound up’ And then, after referring to the extent to which the principle should be carried, he proceeded in this way; ‘But the principle itself – that an insolvent estate, whether wound up in Chancery or in Bankruptcy, ought not to pay two dividends in respect of the same debt – appears to me to be a perfectly sound principle. If it were not so, a creditor could always manage, by getting his debtor to enter into several distinct contracts with different people for the same debt, to obtain higher dividends than the other creditors, and perhaps get his debt paid in full. I apprehend that is what the law does not allow; the true principle is, that there is only to be one dividend in respect of what is in substance the same debt, although there may be two separate contracts’. That applies to a case of principal and surety. There could not be a double proof in respect of that obligation.”

73	The Lord Justice then observed that: 
“Apart from the debtor having become bankrupt, I think it cannot be questioned that the debt arising under an obligation to indemnify a surety can be deducted from a legacy or share of residue given to the debtor”
He found support for that proposition in the decision of Sir John Romilly, Master of the Rolls, in Willes v Greenhill (No 1) [(1860) 29 Beavan. 673, 675]. It may be seen as an application of the rule in Cherry v Boultbee – although (later in his judgment – ibid, 53) Lord Justice Swinfen Eady seems to suggest that he did not rely on that rule. He went on (ibid, 49-50):   
“Now what was the position here. At the death of the testator Arthur took under the will a share of the proceeds of sale of the real estate. At the same moment Arthur was under an obligation to indemnify the testator against the consequences of the guarantee; and the money paid out of the testator’s estate in discharge of that liability would, therefore, obviously be brought in as against Arthur in respect of his share of the estate. It is money which he is liable to repay to the testator’s estate; and he is to be treated as already having in his possession that sum. That is how the matter stands, apart from the bankruptcy.

74	Lord Justice Swinfen-Eady then turned to consider whether the position was affected by the bankruptcy. He said this (ibid, 50-51):
“I apprehend it is clear that even where there is a bankruptcy, but the principal creditor has not brought in a proof in bankruptcy, the right of the surety and the trustees of the surety’s estate would not be affected. I think that follows from In re Watson [[1896] 1 Ch 925. . . .
Down to that point I think there is no dispute; but it is said that the proof by the creditor against the estate [of the bankrupt] affects the right of the surety; and that where the creditor has proved against the estate of the bankrupt, the right of the representatives of the surety to make this deduction is lost. I cannot see why. Mr Potts contended that, by virtue of the bankruptcy and the proof by the creditor, the debt was gone and there was nothing owing in respect of which the executors had a right of retainer. . . . 
The only authority on which he relied in support of his proposition was the case before North J of In re Binns [1896] 2 Ch 584, 587, 588]. . . . In my opinion the judgment of North J in this respect was erroneous, and I think he fell into that fallacy which was exposed by Giffard LJ in Midland Banking Co v Chambers. For these reasons I am of opinion that that case was wrongly decided. I think, therefore that there is nothing in the present case to prevent the trustees of the will now maintaining their right to say that the share to which Arthur and his assigns are interested is a share in an estate increased by the £313 that Arthur owes to the estate.”

75	It is, I think, pertinent to have in mind the error into which Mr Justice North, in In re Binns, Lee v Binns [1896] 2 Ch 584, was held to have fallen. The question in that case (as in In re Melton) was whether the trustees of a will could retain against the shares in the estate given by the testator to his two sons an amount equal to monies deposited by the father with a bank as security for the sons’ indebtedness. The sons had become bankrupt; the bank had proved in the bankruptcies; but had received no dividend. Mr Justice North had held that there could be no retention. He had said, ([1896] 2 Ch 584, 588):
“But the difficulty in their way is this – that there is no debt in respect of which the trustees of the will can at present claim to retain anything as against the trustees of the sons’ estate. The claim against that estate is made by the principal creditors; and the surety cannot against the principal creditors set up an adverse claim of any kind.”
Lord Justice Swinfen Eady pointed out the error in his judgment in In re Melton [1918] 1 Ch 37.  He said this (ibid, 52):
“The claim of the surety is not an adverse claim set up against the principal creditors. The suggestion is that it is set up against the principal creditors because the estate that would be divisible in the bankruptcy is diminished by reason of this claim. The fallacy is that at the date of the bankruptcy what was claimed was not part of the testator’s estate. An equity that the testator’s estate should be indemnified in respect of his liability under the guarantee arose at his death; and when the sons became bankrupt there was already an equity subject to which the trustees in bankruptcy took the sons’ interests; and the trustees in bankruptcy took nothing more than the debtors had, and the debtors’ interests under the will were subject to this equity.”

76	Lord Justice Swinfen Eady referred to Cherry v Boultbee in the course of his judgment in In re Melton (ibid, 53); but only to adopt the passage (4 Myl & Cr 442, 447) in which Lord Cottenham, Lord Chancellor, had explained the nature of the retention which the trustees of a fund were entitled to make:
“It must be observed that the term ‘set-off’ is very inaccurately used in cases of this kind. In its proper use, it is applicable only to mutual demands, debts and credits. The right of an executor of a creditor to retain a sufficient part of a legacy given by the creditor to the debtor, to pay a debt due from him to the creditor’s estate, is rather a right to pay out of the fund in hand, than a right of set-off.”

77	Lord Justice Warrington agreed. He, too, thought that the position could be analysed by asking whether the effect of Arthur’s bankruptcy, and the bank’s proof in that bankruptcy, had been to deprive the executors of the right to retain so much of Arthur’s share in his father’s estate as was sufficient to provide for the indemnity against any claim by the bank which they might have to satisfy under the guarantee: a right “which, but for those circumstances, they would certainly have had”. He went on to say this (ibid, 55-56):
“The first question as to which one has to satisfy oneself is, What is really the nature of the right which the trustees had as against Arthur, the beneficiary under the testator’s will? That is clearly expressed by the Lord Chancellor in Cherry v Boultbee [vide, 4 My & Cr 442, 447] . . . The important part of that passage is that the right of the executor is a right to pay out of the fund in hand. I think it follows from that that if the right of the executors at the testator’s death was to pay out of the share sufficient to discharge and satisfy the claim to be indemnified, then so much of that fund as was necessary to make good the trustee’s claim never formed part of Arthur’s estate so as to become divisible in bankruptcy amongst his creditors. In saying that I am only adopting the view clearly expressed by Giffard LJ in Midland Banking Co v Chambers. It seems to me clearly a corollary of the statement by the Lord Chancellor of that which is the executor’s right. . . . In my judgment, therefore, the answer to the claim put forward by the assignee, who is in the same position, of course as Arthur, is that the £313 requisite to repay the testator’s estate that which had been paid in satisfaction of the guarantee never formed part of the bankrupt’s estate so as to be divisible amongst his creditors. That completely answers the argument put before us founded upon the undoubted principle that in bankruptcy there can never be a double proof for the same debt. It is not a question of double proof at all.”
He, too, thought that In re Binns [1896] 2 Ch 584 – the facts in which were “undoubtedly, for all substantial purposes, identical with those of the present case” – had been wrongly decided.
78	Lord Justice Scrutton, after observing that the case was one of “considerable complication” – inevitable, he supposed, “when the facts raise questions as to the relation of principal and surety, the right, whatever it is, of executors to pay themselves a debt due from a beneficiary out of his share, and the question of double proof in bankruptcy” – said that he was glad to be able to agree “entirely” in “the only result consistent with common sense”. For my part, I find his judgment illuminating; and, at the risk of burdening this judgment with over-lengthy citation, it is, I think, helpful to set out a substantial part of it:
“Take the questions of law that arise one by one. First, if there were no bankruptcy, and no question of principal and surety, but an existing debt, what would be the position of the executors? A long series of authorities has decided the position in such a case; and I take the statement of law from the judgment of Swinfen Eady J in In re Rhodesia Goldfields, Ld [[1910 1 Ch 239, 247] : ‘The rule is of general application that where an estate is being administered by the Court, or where a fund is being distributed, a party cannot take anything out of the fund until he has made good what he owes to the fund’. That followed a series of authorities, and the authority most often cited is a passage from the judgment of Kekewich J in In re Akerman [[1891] 3 Ch 212, 219]: ‘A person who owes an estate money, that is to say, who is bound to increase the general mass of the estate by a contribution of his own, cannot claim an aliquot share given to him out of that mass without first making the contribution which completes it. Nothing is in truth retained by the representative of the estate; nothing is in strict language set-off; but the contributor is paid by holding in his own hand a part of the mass, which, if the mass were completed, he would receive back’. Take a simple case when a beneficiary is given half the residue and that beneficiary owes the estate a sum. Suppose, for instance, the executors have in hand £500, but that beneficiary A owes the estate £500, what happens. The executors are entitled under that principle to say, ‘The real residue is £1000, for you must pay the £500 you owe. Half £1000 is £500. Therefore we can give the other beneficiary B £500 in our hands and we need give you nothing, because you have to pay us £500, which we would then have to hand back to you. There is no need to go through that performance; what you get is a release of your debt’. In the same way, if instead of owing £500 the beneficiary A owed £250, and the amount in the hands of the executors was £500, making £750 in all, so that each beneficiary would be entitled to £375; £375 would be paid to beneficiary B; but to beneficiary A the executors would say, ‘Here is £125; the other £250 is, as far as you are concerned, discharged. You ought to have given it to us, and we should then have handed it back to you; it has the same effect if you take a discharge’. I do not think it necessary to decide exactly what that right of the executors is. I am rather disposed to agree with Kekewich J that it is not a retainer. I have great difficulty, in spite of the dictum of the Lord Chancellor in Cherry v Boultbee, in seeing how it is a lien. I do not think it is necessary for me, beyond stating the principle in the way that I have done, to say what the exact legal description of the right is.
The next question is, how does the fact that the debt is a debt arising out of the relation of principal and surety affect the matter? As I understand, the law of principal and surety is worked out by having regard to three principles. (1) The debtor must discharge the debt once, and he need not discharge it more than once. (2) The creditor is entitled to get his 20s. in the pound from some one. He cannot get more than 20s. in the pound. (3) The surety is not entitled to keep as against the debtor more than he has paid, or is liable to pay. If the creditor is paid in full by the surety, that does not prevent the creditor suing the debtor for the whole debt, because although he has received 20s.in the pound he has not received it from the debtor; but he can enforce the claim as trustee for the surety who has paid the 20s. Again, supposing the debtor has paid the surety the full amount, but owing to the surety’s absconding the creditor has not received it, then, although the debtor has paid 20s. in the pound, the creditor can recover the amount of the debt from the debtor. If, however, the debtor pays more than 20s. in the pound he can get the surplus back.
To these two sets of legal principles I have mentioned it remains to add the fact of the debtor’s bankruptcy, and in particular the rule in bankruptcy that there must not be a double proof for the same debt, with the further explanation that, in determining whether the two proofs are in respect of the same debt regard must be had, not to technicalities, but to the substance, as was pointed out in In re Oriental Commercial Bank. Bankruptcy has supervened here and the trustee in bankruptcy and the bank come to the executors and say, ‘Pay us the share of this beneficiary in the estate’. What is there to prevent the executors exercising the right to which I have already referred and saying, ‘You want the share of this beneficiary in the estate, but we must first find out what the whole is of which you claim a share, and the whole includes the debt owing from this beneficiary to the estate’. It is said, as I understand it, that the executors cannot exercise this right because by reason of s. 7 of the Bankruptcy Act, 1914, the only person who can exercise such a right is a secured creditor. A secured creditor is defined by s. 167 of the Bankruptcy Act 1914, as ‘a person holding a mortgage, charge or lien on the property of the debtor’. Speaking for myself, I am not prepared to say that this right of the executor is a mortgage, charge or lien. I do not wish finally to decide that, because the question may directly arise in other cases, but, as present advised, I do not see how that can be called a lien. Equally, however, I see nothing in s. 7, sub-s. 1, of the Bankruptcy Act 1914, to prevent the exercise of this right; it is not the use of a remedy against the property or person of the debtor, which the creditor is forbidden to make use of, unless he is a secured creditor. It appears to me simply a right to see that the person who claims a share of the testator’s estate claims only the proper share and to prevent his picking out only such portion of the estate as he thinks will give him a benefit and leaving out those portions which will reduce the share he would otherwise receive. I see nothing in s. 7 to prevent the exercise of this right.
Then how does the rule against double proof come in? When one considers the principles that I have laid down – I hope correctly – governing the law of principal and surety, how in any way does it infringe against the rule against double proof that, when the bankrupt claims his share, the representatives of the surety should say, ‘Certainly, but you must ascertain your share in the proper way’? If in the end it turns out that the debtor has paid more than 20s. in the pound he will get his overpayment back from either the principal creditors or the representatives of the surety. If in the end it turns out that the creditors have got more than 20s. in the pound the surplus will be returned to the surety or the debtor, whichever ought to have it; and I am quite unable to see how the rule against double proof applies to this case.”
Lord Justice Scrutton agreed with the other members of the Court that the decision of Mr Justice North in In re Binns had been wrong. 
79	In my view the following principles can be derived from the judgments of this Court in In re Melton:
(1)   The general rule applicable in the distribution of a fund is that a person cannot take an aliquot share out of the fund unless he first brings into the fund what he owes. Effect is given to the general rule, as a matter of accounting, by treating the fund as notionally increased by the amount of the contribution; determining the amount of the share by applying the appropriate proportion to the notionally increased fund; and distributing to the claimant the amount of the share (so determined) less the amount of the contribution. The rule can be expressed in the form: D = 1/n of (A + C) – C, where 1/n is the proportion which the aliquot share bears to the whole, A is the amount of the assets to be distributed before taking account of the contribution due to the fund from the claimant, C is the amount of the contribution, and D is the amount which the claimant is entitled to receive in the distribution. It can be seen that the claimant will receive nothing by way of distribution if C > 1/n of (A + C).
(2)	That general rule is applicable not only where the claimant (X) is indebted to the fund but also where the fund has a right to be indemnified by X against a liability which the fund may be required to meet in the future, as surety for a debt owed by X to a creditor (Y). It is not necessary that the liability to Y has been satisfied out of the fund: it is enough that it may have to be satisfied in the future. That proposition was recognised by Lord Justice Warrington in his judgment in In re Melton when he said (ibid, 55): “I think it is quite clear that the trustees at that time had a right to be indemnified against any claim which they might ultimately have to satisfy as a result of the guarantee; and to retain in their hands so much of Arthur’s share as was sufficient to provide for that indemnity”. It was recognised, also, by Lord Justice Swinfen Eady when approving (ibid, 52) the analysis (in the judgment of Mr Justice North in In re Binns [1896] 2 Ch 584, 588) of the position as it would have been (in that case) if the sons’ bankruptcy had not intervened: “Now that would undoubtedly have been the position apart from bankruptcy”. And it was recognised by Lord Justice Scrutton when he observed (ibid, 59): “The surety is not entitled to keep against the debtor more than he has paid, or is liable to pay” [emphasis added]. Further, the clear view of each of the three members of this Court in In re Melton  that the decision of Mr Justice North in In re Binns had been wrong, is consistent only with the proposition which I have stated. In re Binns was a case in which (at the time when the point arose) the bank (creditor Y) had not called upon the father’s estate (as surety) for payment of the sons’ debt. But, as Lord Justice Warrington observed in In re Melton (ibid, 56): “The facts in In re Binns are undoubtedly, for all substantial purposes, identical with those of the present case; and if that case were rightly decided it would decide the present case; . .”. 
(3) 	The general rule – as applicable to a case where the fund has a right to be indemnified by X - is not displaced in a case where the claimant (X) is in bankruptcy. Application of the general rule, in such a case, is not inconsistent with the rule against double proof; which would prevent the fund from proving in the bankruptcy of X in competition with the creditor Y.     
80	There are, however, three questions which (because they did not arise in that case) are not answered by the judgments in In re Melton. The first is whether the general rule to which I have referred has any application in the distribution of a fund in the course of an insolvent administration. As I have said, the rule must yield to the principle of mutual set-off – now enacted (in the context of bankruptcy) as section 323 of the Insolvency Act 1986 and reflected (in corporate insolvency) in rule 4.90 of the Insolvency Rules 1986. But the question remains whether the rule is applicable in a case where – by reason of the rule against double proof – there is no set-off between X’s claim against the fund, on the one hand, and the fund’s right to be indemnified by X on the other hand.
81	The second question is whether – if the rule does remain applicable in such a case – the amount which is to be brought into account (as X’s contribution to the whole) is the full amount of the fund’s liability (as surety) to the creditor Y; or some lesser amount to reflect the fact that (by reason of the fund’s insolvency) the liability to Y will not be met in full.
82	The third question is whether – if the rule is applicable – the amount which would otherwise have to be brought into account by X is reduced in a case where X is insolvent and that insolvency commenced before the point at which X (or his trustee or assignee) became entitled to claim his share in the fund.   
83	Before addressing those questions it is convenient to consider the decision of Mr Justice Luxmoore in In re Fenton (No 2), Ex parte Fenton Textile Association, Limited [1932] Ch 85. Counsel for the liquidators of Stations accept that that decision is difficult, if not impossible, to reconcile with the submissions which they seek to advance in reliance on the judgments in In re Melton. They invite this Court to hold that the decision in In re Fenton (No 2) is wrong. Counsel for the liquidators of Group have no quarrel with the decision in In re Melton – which, in any event, is binding in this Court – but they reject the suggestion that the decision in In re Fenton (No 2) is inconsistent with the reasoning in In re Melton. They submit that the decision in In re Fenton (No 2) is correct; that it provides a cogent reason why the rule in Cherry v Boultbee can have no application in a case where mutual set-off between two insolvent estates is displaced by the rule against double proof; and that it is determinative of this issue in the present case.  
84	The facts in In re Fenton may be stated shortly. In 1920 the debtor, Mr Henry Fenton, had guaranteed advances made by banks to the Fenton Textile Association. In 1921 he executed deeds of arrangement in favour of his creditors. In 1923 the Association was ordered to be wound up. The banks proved against the debtor’s estate for the full amount due under the guarantees (£176,795). In 1927 the liquidators of the Association sought to prove against the debtor’s estate for the sum of £436,192. Before any dividend had been paid in the debtor’s estate, the trustee under the deeds of arrangement sought to set off against the Association the amount of the banks’ proof.  That question was taken to the Court of Appeal in In re Fenton (No 1) [1931] 1 Ch 85. This Court refused to allow the set-off, on the grounds that a set-off in those circumstances would be contrary to the rule against double proof – the banks, or some of them, having been admitted to proof in the liquidation of the Association in respect of (at least) part of the amounts sought to be set-off. Following that decision the trustee declared an interim dividend of 1s. in the pound in the administration of the debtor’s estate. The effect was that the banks received £8,839 15s. The trustee sought to withhold dividend on the Association’s proof.
85	The argument for the trustee is set out by Mr Justice Luxmoore in In re Fenton (No 2) at [1932] 1 Ch 178, 183:
“Mr Tindall Davis has argued that the position is governed by a series of decisions of which the well known case of Cherry v Boultbee is the leading example, and he claims that so long as the Association is indebted, whether presently or contingently, to Harry Fenton’s estate, no dividend can be received by the Association.”
In that context it is pertinent to note that – although not referred to by Mr Justice Luxmoore in his judgment - In re Melton was cited to him (both by counsel for the trustee and by counsel for the Association). After rejecting (correctly, as it seems to me) the submission that the point had already been decided against the trustee in In re Fenton (No 1) Mr Justice Luxmoore addressed that argument (ibid, 186):
“It is, therefore, necessary for me to consider and determine whether the principle enunciated in Cherry v Boultbee, and developed in the later cases – namely, In re Leeds and Hanley Theatres of Varieties, Ld [[1904] 2 Ch 45]; In re Ackerman [[1891] 3 Ch 212]; In re Rhodesia Goldfields Ld [[1910 1 Ch 239, 247]; and In re Peruvian Ry. Construction Co, Ld [1915] 2 Ch 144], applies to the present case. The principle is clearly stated by Sargant J in the last mentioned case as follows: ‘Where a person entitled to participate in a fund is also bound to make a contribution in aid of that fund, he cannot be allowed to participate unless and until he has fulfilled his duty to contribute’. This principle obviously applies where the person to make the contribution is solvent, but if he happens to be insolvent then the position must be considered in the light of the law governing insolvent persons.”
That passage contains an accurate statement of the principle; and Mr Justice Luxmoore was plainly correct to observe that “This principle obviously applies where the person to make the contribution is solvent.” But it does not seem to have been drawn to his attention – or, if it was, he must have overlooked – that, in In re Melton, this Court had decided the very question which he then set out to address: whether the principle applied “if [the person to make the contribution] happens to be insolvent”. In In re Melton the “person to make the contribution” was treated as standing in the shoes of Arthur’s insolvent estate. 
86	 Before addressing the underlying question whether the rule in Cherry v Boultbee had any application at all in a case where the person to make the contribution (“the contributor”) was insolvent, Mr Justice Luxmoore first considered (ibid, 186-187) what the effect of the rule would be if it did apply. He said this:
“It appears to me to have been decided in Cherry v Boultbee, that if the person to make the contribution is insolvent at the time when the contribution is to be made, the persons entitled to receive the contribution cannot be entitled to receive more than the dividend appropriate to the amount to be contributed. . . .”
And, after referring to the decision of Mr Justice Sargant in In re Peruvian Ry. Construction Co, Ld, he went on:
“In my judgment, apart from any question arising out of the relationship of principal creditor, principal debtor, and surety existing between the banks, the Association and Henry Fenton respectively, the fact that the Association was in liquidation before any payment was made by or out of the surety’s estate would have limited the trustee’s right of retainer or quasi set-off – to use the nomenclature adopted by Sargant J in In re Peruvian Ry. Construction Co, Ld – to a sum equal to the appropriate dividend in the liquidation of the Association in respect of the amount which the Association would have been bound to contribute if solvent.”
Whether that is a correct understanding of the effect of the rule if it applies in a case where the contributor is insolvent is a question to which I shall need to return. 
87	Mr Justice Luxmoore addressed the underlying question – whether the rule in Cherry v Boultbee has any application at all in a case where the contributor is insolvent – in the penultimate paragraph of his judgment. He said this (ibid, 188-189):
“But the position is further complicated by the fact that the banks have already proved or are entitled to prove against the assets of the Association in respect of the whole of the sum guaranteed, and consequently if the trustee of the deeds of arrangement should retain out of the dividend payable to the Association a sum equal to the dividend on the total amount due to the banks under the guarantee, there would in effect be an allowance against the Association of two dividends in respect of what is for all practical purposes the same debt, and so the rule against double proof would be infringed. It is true that the right of retainer under the principle I have referred to is not correctly described as a set-off, and has repeatedly been stated to be a higher right and to rest on quite different principles, and that the decision of the Court of Appeal [in In re Fenton (No 1)] does not in terms cover the present case; yet I am satisfied that the same ground – namely the rule against double proof – that was held in the Court of Appeal to preclude the right of set-off in the present case also affords an answer to the claim of the trustee to retain the dividends on the admitted proof of the Association or any part of such dividends at any rate so long as any part of the debt due to the bank remains unsatisfied.”

88	The reasoning in that passage turns on the proposition that “if the trustee of the deeds of arrangement were to retain out of the dividend payable to the Association a sum equal to the dividend on the total amount due to the banks under the guarantee there would in effect be an allowance against the Association of two dividends in respect of what is for all practical purposes the same debt” It is that which is said to infringe the rule against double proof. But that is to revive the fallacy which had led Mr Justice North into error in In re Binns [1896] 2 Ch 584; and which was exposed by this Court in In re Melton [1918] 1 Ch 37. Adapting the words of Lord Justice Swinfen Eady in In re Melton (ibid, 52) to the facts in In re Fenton: “The claim of [the trustee of the deeds of arrangement] is not an adverse claim set up against the [banks]. The suggestion is that [the claim of trustee] is set up against [the banks] because the [assets of the Association that would be distributable in its insolvency are] diminished by reason of that claim. The fallacy is that at the date of [the liquidation of the Association] what was claimed was not part of the [assets of the Association]. An equity that [Mr Harry Fenton’s estate under the deeds of arrangement] should be indemnified in respect of his liability under the guarantees arose [when he executed the deeds of arrangement], and when [the Association went into liquidation] there was already an equity [to which the Association’s claim against Mr Harry Fenton’s estate was subject]”. 
89	In In re Fenton (No 1) [1931] 1 Ch 85 it was held in this Court (reversing Mr Justice Luxmoore) that the trustee of the deeds of arrangement could not set-off against the Association’s claim in the distribution under those deeds the amount of Mr Harry Fenton’s contingent liability under the guarantees which he had given to secure the Association’s debts to the banks. The banks had proved under the deeds of arrangement; but nothing had been paid. One reason why set-off could not be allowed was that there was no debt due from the Association to the estate – (ibid, per Lord Hanworth, Master of the Rolls, at 103, 107, 109). It must be doubtful whether that reason could be sustained in the light of later authority – given the terms of section 30 of the Bankruptcy Act 1914. A second reason was that, even if there were a debt within section 30 of the 1914 Act, it was not a debt provable in the liquidation of the Association. – In re Oriental Commercial Bank LR 7 Ch App 99, 102. The rule against double proof prevented that – (ibid, per Lord Hanworth at 109, per Lord Justice Lawrence at 115 and per Lord Justice Romer at 119). And, because the debt was not provable in the liquidation of the Association, it could not be set-off against the Association’s claim under the deeds of arrangement. As Lord Justice Romer put it (ibid, 120):
“The claim of Fenton’s trustee not being in the circumstances provable in the winding-up of the Association, it follows that it cannot be set off against the claim of the Association in respect of the £436,000”.

90	In Secretary of State for Trade and Industry v Frid [2004] UKHL 24, [13] [2004] 2 WLR 1279, 1283G, Lord Hoffmann treated the proposition that a debt which could not be proved could not be relied upon for set-off as one in relation to which “there is no longer doubt”. The reason, as it seems to me, why (in a double insolvency case) a debt which cannot be proved by A in the liquidation of B cannot be set-off against B’s proof of debt in the liquidation of A is that the requirement of mutuality is not satisfied. The provisions as to statutory set-off in the insolvency code require that the same balance in respect of “the mutual credits, mutual debts or other mutual dealings” be struck between A and B in both liquidations.   	
91	In my view the reasoning in the penultimate paragraph of Mr Justice Luxmoore’s judgment in In re Fenton (No 2) (ibid, 188-189) is impossible to reconcile with the judgments in this Court in In re Melton. It is important to keep in mind that, in the context in which Mr Justice Luxmoore was addressing the problem in In re Fenton (No 2), it was the Association which was the contributor – the Association was X for the purposes of the analysis in paragraph 79 of this judgment. The rule against double proof prevented the trustee of the deeds of arrangement from proving in the liquidation of the Association (in respect of his contingent claim) in competition with the banks. It was because the trustee could not prove in the liquidation of the Association that he could not set-off his contingent claim against the Association’s proof under the deeds of arrangement. That was decided by this Court in In re Fenton (No 1). It was proof in the liquidation of the Association, or set-off of the trustee’s claim against the debt due to the Association, that was forbidden; because to allow proof or set-off would be to expose the Association to what would “in effect be an allowance against the Association of two dividends in respect of what is for all practical purposes the same debt”. But, as this Court explained in In re Melton, the rule against double proof did not prevent the will trustees from exercising the right – recognised in Cherry  v Boultbee and a series of cases thereafter – to require a contribution to be brought into account by Arthur’s estate (the contributor, X, in the context of In re Melton) against Arthur’s claim to a share in the distribution out of the testator’s estate. Nor, as it seems to me, should it have been held in In re Fenton (No 2) that the rule against double proof prevented the trustee of the deeds of arrangement from requiring the Association to bring into account a contribution against its claim to share in a distribution under the deeds. The decision in In re Fenton (No 2) was wrong on that point.
92	It is said on behalf of the liquidators of Group that to have allowed the trustee of the deeds of arrangement in In re Fenton (No 2) to require the Association to bring into account a contribution against its claim to share in a distribution under the deeds would have been to violate the principle which this Court had been concerned to uphold in In re Fenton (No 1). To require the Association to bring into account a contribution against its claim to share in a distribution under the deeds would have been to expose the Association to what would “in effect be an allowance against the Association of two dividends in respect of what is for all practical purposes the same debt” in much the same way as to allow double proof or set-off. But, as it seems to me, that is to misunderstand the principle which underlies the rule in Cherry v Boultbee; and to misunderstand the reasoning of this Court in In re Melton. It is also, I think, to misunderstand the object of the rule against double proof.
93	The basis of the rule against double proof was explained by Mr Justice Walker in In re Polly Peck International plc (in administration) [1996] 2 All ER 433, at 442e-h:
“Much the commonest situation in which the rule against double proof applies is that of suretyship. Indeed it has been said that it applies only in a situation which actually is, or is analogous to, that of suretyship (the latter category includes the old cases on negotiable instruments considered in Re Oriental Commercial Bank, ex p European Bank). It is therefore convenient to set out some very elementary rules as to suretyship, shorn of complications arising from the provision of security or from the Ellis v Emmanuel distinction. In what follows, C is the principal creditor, D the principal debtor , and S the surety (and all are companies).
(1) 	So long as any money remains due under the guaranteed loan, C can proceed against either D or (after any requisite notice) S.
(2)  	If D and S are both wound up, C can prove in both liquidations and hope to receive a dividend in both, subject to not recovering in all more than 100p in the pound.
(3)	S’s liquidator can prove in D’s liquidation (under an express or implied right of indemnity) only if S has paid C in full (so that C drops out of the matter and S stands in its place).
(4)	As a corollary of (3) above, S’s liquidator cannot prove in D’s liquidation in any way that is in competition with C; although S has a contingent claim against D (in the event of C being paid off by S), S may not make that claim if it has not in fact paid off C.
The situation in (2) above is what insolvency practitioners call a ‘double dip’, which is permissible; the situation in (4) above is the simplest case of what would be double proof, which is not permissible.
So far as the basis of the rule needs (or indeed allows of) further explanation it is that the surety’s contingent claim is not regarded as an independent, free-standing debt, but only as a reflection of the ‘real’ debt – that in respect of the money which the principal creditor had loaned to the principal debtor.”

94	The rule against double proof protects the principal creditor (C, in Mr Justice Walker’s nomenclature) from the competing claim of the surety (S) in respect of the same debt in the liquidation of the principal debtor (D) It also protects the other creditors in D’s liquidation from two claims (those of both C and S) in respect of the same debt. The object of the rule is not to swell the assets available for distribution in the liquidation of D; it is to limit the claims that can be made in the distribution of those assets by ensuring that there is no more than one proof in respect of each debt. There is no reason in principle why the rule against double proof should have the effect of enabling the liquidator of D to collect an asset which he could not collect under the general law. In particular, there is no reason why the rule against double proof should have the effect of enabling the liquidator of D to collect an asset the collection of which would otherwise be subject to the rule in Cherry v Boultbee. 
95	By contrast, the rule in Cherry v Boultbee – as applied in In re Melton – protects the creditors in the liquidation of S (which will, or may, include the principal creditor, C) from the claim of the principal debtor (D) to share in the distribution of the assets distributable in that liquidation without bringing into account his contribution to those assets. If D is to share in the assets distributable in the liquidation of S, he must contribute, under the express or implied indemnity, to those assets. He must do so, because the burden of C’s claim in the liquidation of S should fall primarily on D to the relief of the other creditors proving in that liquidation.
96	Allowing both the rule against double proof and the rule in Cherry v Boultbee to have effect in a case where both principal debtor (D) and surety (S) are insolvent strikes a fair balance, as it seems to me, between the interests of the creditors in both liquidations. The right of the principal creditor (C) to prove in both liquidations is unaffected. C does not compete against S in the liquidation of D; and, in the liquidation of S, C’s share is not diminished, but the burden of his claim falls primarily on D to the relief of the other creditors. The other creditors of D are not required to compete with two claims in respect of the same debt. The other creditors of S benefit to the extent that, if D claims in the liquidation of S, the burden of C’s claim falls primarily upon D.  It is, I think, important to remember that, if D and S have separate creditors, the separate interests of those creditors must be respected. Mr Justice Walker made the point in In re Polly Peck International plc (ibid, 444j-445b):
“ . . . where there is a group of companies and they are all solvent, a claim by one group company against another, even though sound in law, is likely to have only marginal economic effects . . . But as soon as both companies go into insolvent liquidation, any claim between them assumes much greater importance. . . . That is, I think, the point that Lord Wilberforce must have had in mind when he said in Ford & Carter Ltd v Midland Bank Ltd (1979) 129 NLJ 543 at 544:
‘When creditors become involved, as they do in the present case, the separate legal existence of the constituent companies of the group has to be respected.’
This important effect of group insolvency needs to be underlined because it has sometimes been suggested (eg in Barclays Bank Ltd  v TOSG Trust Fund Ltd [1984] 1 All ER 628 at 637, [1984] AC 626 at 636-637 per Oliver LJ) that it is useful to test a disputed case of double proof by reference to the situation as it would be if all parties were solvent. In circumstances of all round group insolvency that may not be a wholly reliable test.”

97	It follows that I reject the submission that the decision of Mr Justice Luxmoore in In re Fenton (No 2) should be followed in preference to the decision of this Court in In re Melton – even if that course were open to this Court. 
98	I return therefore to the three questions to which the judgments of this Court in In re Melton do not provide answers. The first is whether the general rule to which I have referred in paragraph 79 of this judgment has any application in the distribution of a fund in the course of an insolvent administration. As I have said, the rule must yield to the principle of mutual set-off. But, in cases where there is no set-off between a claim by the fund in liquidation against the creditor and the debt provable by the creditor in the liquidation, there is a well established line of cases the English Courts in which the rule has been applied. An early illustration of its application is found in In re Auriferous Properties Limited (No 2) [1898] 2 Ch 428. The question in that case was whether (absent the usual provision in the articles of association) the liquidator of the company could require unpaid calls to be brought into account when making a distribution. Mr Justice Wright held that he could so require. He said this (ibid, 430-431):
“There is no contract for a set-off, nor do the articles of association of either company appear to contain any provision for it, nor do the general statutes of set-off apply. Nor, as it seems, is the doctrine of set-off in bankruptcy . . . applicable to this case. . . . But in my opinion this case is governed by the principle established in Grissell’s case [In re Overend, Gurney & Co (1866) LR 1 Ch App 528] and is within the express terms of the Lord Chancellor’s judgment in that case. If the creditor-contributory were allowed to take the dividend without paying the call, he would be receiving payment of part of the debt which the company owes to him without making his contribution to the fund out of which that debt, with the other debts of the company, was to be paid. ‘If’, Lord Chelmsford says, ‘the amount of an unpaid call cannot be satisfied by a set-off of an equivalent portion of a debt due to the member of a company upon whom it is made, it necessarily follows in the last place, that the amount of such call must be paid before there can be any right to receive a dividend with the other creditors. The amount of the call being paid, the member of the company stands exactly on the footing of the other creditors with respect to a dividend upon the debt due to him from the company. The dividend will be of course upon the whole debt, and the member of the company will from time to time, when dividends are declared, receive them in like manner when either no call has been made, or having been made, when he has paid the amount of it.’. . .”
There are observations to the same effect in In re Leeds and Hanley Theatres of Varieties, Limited [1904] 2 Ch 45, at 51, in In re Rhodesia Goldfields, Limited [1910] 1 Ch 239, at 245 and 247, in In re Peruvian Railway Construction Company Limited [1915] 2 Ch 144, at 151 and in In re National Livestock Insurance Company, Limited [1917] 1 Ch 628 at 631-632; and in this Court in In re West Coast Gold Fields Limited, Rowe’s Trustee’s Claim [1906] 1 Ch 1, at 9, and in In re White Star Line, Limited [1938] 1 Ch 458, at 479-480. We were taken, also, to the decision of Mr Justice Fuad in the High Court of Hong Kong in In re Kowloon Container Warehouse Co Ltd [1981] HKLR 210, in which those authorities are reviewed.   
99	We were referred to the decision of Mr Justice Williams, sitting in the Supreme Court of Queensland, in Fused Electrics Pty Ltd (in liq) v Donald [1995] 2 Qd R 7. The headnote to the report suggests that the decision is authority for the proposition that the rule in Cherry v Boultbee must give way to the priority of payments in a winding up as fixed by statute. For my part, I do not think that that proposition is in doubt. But reliance is placed on the observation of Mr Justice Williams (ibid, 8 lines 49 – 51) that: “I am by no means satisfied that it is correct to categorise the assets of a company in liquidation as a fund for the purposes of applying the equitable principle [underlying the rule in Cherry v Boultbee]”. It is true, of course, that the assets of a company in liquidation are administered in accordance with the statutory code enacted in successive Companies Acts (and now in the Insolvency Act 1986 and the Insolvency Rules 1986). But that has been the position in this jurisdiction since (at least) the Judicature Act 1875; section 10 of which assimilated the law of corporate insolvency with that of bankruptcy. It seems to me impossible to suggest that the observations in the English authorities to which I have just referred overlooked the existence of the statutory code. The inter-relation of the equitable principles applicable in the distribution of a fund and the statutory code for administration in insolvency was, I think, recognised and explained by the observation of Lord Chelmsford, Lord Chancellor, in Grissell’s case to which Mr Justice Wright referred in Auriferous Properties (supra, at 431): where there is no set-off under the statute “it necessarily follows in the last place” that the equitable principles must fill the gap.
100	It follows that I would hold that the general rule to which I have referred in paragraph 79 of this  judgment has application in the distribution of a fund in the course of an insolvent administration in cases in which .there is no set-off between a claim by the fund in liquidation against the creditor and the debt provable by the creditor in the liquidation. Those cases include cases where mutual set-off is prevented by the rule against double proof.
101	I turn, therefore, to the second of the three questions to which the judgments of this Court in In re Melton do not provide answers. The second question is whether the amount which is to be brought into account (as X’s contribution to the whole) is the full amount of the fund’s liability (as surety) to the creditor Y; or some lesser amount to reflect the fact that (by reason of the fund’s insolvency) the liability to Y will not be met in full. The problem in a double insolvency case – where the obligation on the contributor (X) is to indemnify the insolvent fund (S) in respect of the fund’s liability as surety for the debt which X owes to the creditor (Y) – is that, although Y proves against S for the full amount of the debt, the amount paid or to be paid out of the fund to Y is limited to the dividend on that proof. The question in a case of that nature is whether (leaving aside for the moment X’s own insolvency) the amount which X has to contribute to S under the rule in Cherry v Boultbee is the whole amount of the debt for which Y has proved, or only the amount of the dividend which S has paid or will be required to pay.
102	We were referred to no case in which this question has been addressed. It is necessary, therefore, to approach the question with the underlying principle in mind. The equity which requires the contributor to bring into the fund what is due from him before he can take a share out of the fund is based on the principle that it would be inequitable to allow the contributor to compete against the other persons entitled to share until the whole fund has been constituted. And, as I have said, in deciding whether the whole fund has been constituted in a case where the obligation of the contributor is to indemnify the fund against a claim made upon it as surety, it is not necessary that the liability to the creditor has been satisfied out of the fund: it is enough that it may have to be satisfied in the future – that is made clear by the observations of Lord Justice Warrington in In re Melton  (ibid, 55) to which I have already referred and by the remarks of each member of the Court when holding, in that case, that In re Binns had been wrongly decided. The reason is explained by Mr Justice Parker in In re Mitchell, Freelove v Mitchell [1913] 1 Ch 201 when holding that the right of executors to retain against the beneficial share of the principal debtor an amount equal to that which the estate might be required to pay to the creditor under the guarantee given by the testator was not lost by a release in the will of “all debts” owing to the testator by the principal debtor. Mr Justice Parker said this (ibid, 206):
“There is no doubt that there is a right to come into equity for the purpose of obtaining the indemnity even before the money has been paid under the guarantee. . . . The right is not really a debt; it is a right to come, for the purpose of indemnity, to a Court of Equity.”

103	The principle that it would be inequitable to allow the contributor to compete against the other persons entitled to share until the fund has been made whole requires that – as between the contributor and the other persons entitled to share in the fund - those others should not have to bear any part of the debt for which the contributor is liable as principal debtor. That requirement can be met only if the amount which the contributor has to contribute (before he can share in the fund) is the whole amount of the debt for which the creditor has proved.
104	The point can be illustrated by an example. Suppose that X, a creditor of the fund (S) in respect of a debt of £3,000, is debtor to Y in the sum of £1,000 and that S is surety for that debt; and suppose that there are two other creditors of the fund (P and Q)  each in respect of a debt of £2,000. Each of the four creditors P, Q, X and Y prove for their debts against the fund. Suppose that the amount of the fund (before taking into account any contribution from X) is £4,000. If the fund were distributed without regard to the rule in Cherry v Boultbee, each of P and Q would receive a dividend of £1,000 (2/8 of £4000), X would receive a dividend of £1,500 (3/8 of £4,000) and Y would receive a dividend of £500 (1/8 of £4,000). But the effect of the rule in Cherry v Boultbee – as explained in In re Melton - is that X cannot receive a dividend without bringing in a contribution to the fund. What is the amount of the contribution that can be required of X? If X were to make a full contribution, equal to the amount of Y’s proof (£1,000), each of P and  Q would receive a dividend of £1,250 (2/8 of {£4,000 + £1,000}), Y would receive a dividend of £625 (1/8 of {£4,000 + £1,000}) and X would receive £875 net (3/8 of {£4,000 + £1,000} - £1,000). The whole burden of the dividend which Y receives will fall on X (£1,500 - £875 = £625). If, on the other hand, X were required to contribute only the amount of the dividend which Y would have received if X had not proved (1/5 of £4,000 = £800), each of P and Q would receive £1,200, Y would receive £600 and X would receive £1,000. Part of the burden of the dividend which Y receives will fall on P and Q .         
105	It follows that I would hold that the answer to the second question is that the amount which is to be brought into account (as X’s contribution to the whole) is the full amount of the fund’s liability (as surety) to the creditor Y;
106	The third of the three questions which I have identified is whether the amount to be brought into account as X’s contribution to the whole is the full amount of X’s liability to the fund (by way of indemnity) or some lesser amount to reflect the fact that (by reason of X’s insolvency) that liability would not have been met in full even if, absent the rule against double proof, the fund had been entitled to prove in X’s insolvency. In re Melton itself provides the answer to that question where the insolvency of the claimant (X) postdates the constitution of the fund. In that case the fund (the testator’s estate) was constituted on the death of the testator in 1907. The beneficiary (Arthur) whose share the assignee sought to claim out of the estate was made bankrupt in 1911. The amount to be brought into account was the full amount of the indemnity (£313) to which the executors were entitled in respect of the guarantee of Arthur’s debt. There was no reduction to reflect the fact that a proof in Arthur’s bankruptcy would have yielded a lesser sum. There is no reason why the answer should be different where the fund is constituted, not by the death of the surety, but by the insolvency of the surety. If, in a double insolvency case, the insolvency of the claimant postdates the insolvency of the fund against which he claims, the full amount of the indemnity must be brought into account in the distribution of the fund.    
107	Nevertheless, it is necessary to recognise that, in cases where the claimant (X) is an individual, there is a distinction between those cases where X’s bankruptcy predates the constitution of the fund to which he is required to contribute and those cases where his bankruptcy postdates the constitution of the fund. The position where the claimant’s bankruptcy predates the death of the surety was explained by Lord Cottenham, Lord Chancellor, in Cherry v Boultbee itself. At (1839) 4 Myl & Cr 442, 447-448, the Lord Chancellor said this:
“In the present case, however, the bankruptcy of the debtor having taken place in the lifetime of the testatrix, her executors never were entitled to receive from the assignee more than the dividends upon the debt; and although the bankrupt had not obtained his certificate, the liability incident to that state remained upon him, yet he, for the same reason, was never entitled to receive the legacy; and, consequently, there never was a time at which the same person was entitled to receive the legacy and liable to pay the entire debt; the right, therefore, of retaining a sufficient sum out of the legacy to pay the debt can never have been vested in anyone. The assignees who claim the legacy would, indeed, have been liable to the payment of any dividend upon the debt, had it been proved; and the Master of the Rolls proposed to the executors to make provision for deducting the amount of such dividend from the amount of the legacy.”

108	That passage may, I think, be analysed as follows. (1) Equity requires that a person (X) who claims a share in a fund administered by executors or trustees must bring into the fund what he owes before he can take out his share; the basis of that requirement is that the amount of the share cannot be determined until the fund has been fully constituted by getting in the asset which X’s debt represents. (2) Effect must be given to that equity from the time when X is first entitled to claim his share; so, in the case where the fund is a deceased’s estate, the equity cannot arise during the lifetime of the deceased. (3) In circumstances where the debtor (X) has become bankrupt during the lifetime of the deceased and remains bankrupt at the death, X is never in a position to claim a share in the fund; the right to his share has vested in his trustee in bankruptcy before the time at which it can be claimed; (4) The trustee in bankruptcy could not be required to pay the full amount of the debt due from X to the fund; he could never be required to pay more than the dividend on that debt payable in X’s bankruptcy; (5) Accordingly, when the trustee in bankruptcy claims to be paid X’s legacy out of the fund, the equity is satisfied by requiring him to bring into the fund the amount which is due from him; that amount is equal to the dividend that would be payable on the debt in X’s bankruptcy. 
109	Lord Cottenham’s observations were made in the context of a case where the claimant (X) was an individual; so that, on X’s bankruptcy, his assets vested in his assignee or trustee in bankruptcy. In particular, on the subsequent death of the testator, the claim to share in the testator’s estate was a claim which could only be brought by the assignee. In a case where X is not an individual, but a limited company, the position is different. On liquidation the claim does not vest in the liquidator; it remains in the company. The position was explained in argument by Mr Richard Scott QC (as he then was) in In re Kowloon Container Warehouse Co Ltd [1981] HKLR 210 – see (ibid) at 217G-218H4 where the point is set out by Mr Justice Fuad in his judgment. I need cite only the following passage:
“. . . In order to apply the principle, where distribution of the surplus assets of a company in liquidation is concerned, it is necessary to calculate how much is owing to the company by the creditor or contributory in question and to treat that amount as a notional addition to the assets of the company in liquidation. The distributions payable by the liquidator must then be calculated by reference to the actual and notional assets, and the creditor/contributory is treated, to the extent of his unpaid debt, as if he had already been paid the distribution to which he is entitled.  
Mr Scott puts his next proposition in this way: prima facie the equitable principle still applies in that manner notwithstanding that the debtor is an insolvent company in liquidation and this is certainly the case if the creditor company’s liquidation preceded the liquidation of the debtor. He submits that Leeds and Hanley, Auriferous Properties [1898] 2 Ch 428 and National Livestock Insurance make it plain that the equitable principle applies despite the fact that the debtor is insolvent for in all three case the debtor company was insolvent and in liquidation. He contends that to understand the true basis of the decisions in Peruvian Railway [1915] 2 Ch 442 and Cherry v Boultbee 4 Myl & Cr 442 which he seeks to distinguish, it is necessary to have regard to the fact that the effect of bankruptcy on an individual is, inter alia, to vest his assets in his trustee in bankruptcy. This was quite unlike the position of a company in liquidation where the assets remained vested in the company, merely being administered by the liquidator as its agent. The reason why insolvency was material in those cases was because it affected both the identity of the claimant on the fund and also the amount of the debt the claimant owed. If it is the trustee, and not the person originally entitled to claim, who is claiming from the fund, it was crucial to have in mind what is the nature of the debt owed by the trustee. The debt he owes is not the bankrupt’s debt but only the dividends payable in the bankruptcy.”
Mr Justice Fuad returned to that point later in his judgment (ibid, 225E-226F). In particular, he said this (ibid, 226A-B):
“In my judgment Mr Scott’s analysis of the effect of Cherry v Boultbee and Peruvian Railway [1915] 2 Ch 442, to which analysis I earlier referred, is right. As I understand the decision in Cherry v Boultbee it turned on the fact that at no time had counter obligations to pay in full existed.”

110	The position, in a double corporate insolvency case where the insolvency of the claimant predates the insolvency of the fund, was considered by Mr Justice Buckley in In re Leeds and Hanley Theatres of Varieties Limited [1904] 2 Ch 45. The outline facts may be taken from the headnote:
“The [Finance] Company and the [Theatres] Company were both in liquidation; the F Company were creditors of the T Company for £5100 on debentures of the T Company and were also debtors to the T Company for £4323, the balance of a sum of £12,000 ordered to be paid to the T Company for misfeasance. There being no mutual credit, and consequently no set-off of these two debts, the question now raised was how the claim by the F Company for £5100 against the T Company was to be adjusted.”

111	The Finance company had gone into voluntary liquidation (in September 1898) before the order for the winding up of the Theatres company (in 1899). There was no mutual credit – and no set-off – because the misfeasance claim, brought by the liquidator of the Theatres company, gave rise to a post-liquidation debt. The assets of the Finance company had been fully distributed. After payment of all its creditors (other than the Theatres company) there had been a surplus of £7,677. That sum had been paid to the Theatres company in part satisfaction of the misfeasance debt (£12,000). It was the balance of that debt (£4,323) which remained owing from the Finance company to the Theatres company. Subsequently, other claims for misfeasance were brought against the Finance company, with the result that (in addition to the debt of £4,323 owed to the Theatres company) the Finance company had other creditors whose claims amounted to £5,490. Its remaining asset was the debt (£5,100) in respect of the debenture, for which it had proved in the liquidation of the Theatres company.
112	The liquidator of the Theatres company had distributed part of the £7,677 received from the Finance company amongst other creditors of the Theatres company. But, in describing the position in the liquidation of the Theatres company, Mr Justice Buckley left that on one side. He said this (ibid, 50-51):
“In the Theatres Company’s liquidation the position is this – they have funds. There is in cash a sum of a little over £600; there is the £7677 which they received under the order of 1902; and their further asset is this, that they are entitled, as against the Finance Company, to get if they can the balance of their debt of £12,000 – that is, £12,000 less £7677, making £4323. The assets side of the Theatres balance-sheet for the moment is £600 odd, and £7677 received from the Finance Company, and a claim against the Finance Company for £4323. On the other side their liabilities are a liability to the Finance Company of £5100 11s 2d., and £4685 3s. 1d. to other people who have proved in the Theatres Company’s liquidation. The question is how these assets ought to be administered. The Theatres Company have in fact paid dividends of 16s 8d. in the pound out of the £7677 to these other creditors for £4685 3s. 1d. But for convenience of statement I will deal with it as if this had not been done.
Now what is the proper way to administer it? In my opinion what I have to do is this. I am administering the assets of the Theatres Company. There is a person, namely the Finance Company, who is both a debtor to the fund to be administered and a claimant against that fund. I think that that person cannot come and say ‘I am entitled to a dividend out of the fund’ until he has first made complete the fund out of which he says he is entitled to receive payment . . . [T]he Theatres Company can say to the Finance Company, ‘You shall not receive anything from the Theatres Company’s assets till you have paid what you owe us.’ In point of fact, of course, the Finance Company cannot pay what they owe to the Theatres Company, because they have no money. They are bare at present, and the only question is whether they can get anything out of their proof against the Theatres Company until they have paid what they owe to the fund. I think not.
The proper administration in my judgment, therefore, is this. Notionally treat the Finance Company as having paid the £4323 to the Theatres Company; take the aggregate notional sum thus arrived at and treat it as applied in payment of a dividend upon all the debts of the Theatres Company – that is to say, upon the £5100 due to the Finance Company and the £4685 due to other people. That will attribute to the Finance Company a certain sum. If that sum be greater than the £4323 that they owe, they will get the difference. If it be less, or equal, they will receive nothing. If the dividend thus arrived at on the £4685 cannot be satisfied in full (because the notional sum, of course, is not really paid) then the £4685 would take the whole of the assets of the Theatres Company, although it be less than the notional dividend calculated upon the footing that the Finance Company have paid that which they have not paid.”

113	In re Leeds and Hanley Theatres of Varieties, Limited was, as I have said, a double insolvency case where the insolvency of the claimant, the Finance company, predated the insolvency of the fund (the assets of the Theatres company in liquidation). It is clear that, had the Theatres company been able to prove in the liquidation of the Finance company for the balance of the misfeasance debt, it would have been in competition with other creditors and would have received less than the full amount (£4,323) owing to it. But that did not lead Mr Justice Buckley to the conclusion that the notional contribution required of the Finance company before it could prove in the liquidation of the Theatres company should be less than the full amount. £4,323 was the amount which the Finance company had to bring into account.
114	The approach in In re Leeds and Hanley Theatres of Varieties, Limited was followed  in the subsequent double corporate insolvency case - In re National Live Stock Insurance Company, Limited [1917] 1 Ch 629 - cited to Mr Justice Fuad in In re Kowloon Container Warehouse Co Ltd.  In my view it is the correct approach. In a case where the claimant (X) is a company in liquidation, there is no reason in principle why the answer to the question whether the amount to be brought into account as X’s contribution to the fund distributable in the liquidation of the surety is the full amount of X’s liability to indemnify the fund or some lesser amount to reflect the fact that (by reason of X’s insolvency) that liability could not have been enforced in full by proof in X’s liquidation should turn on whether X’s liquidation predates or postdates the liquidation of the surety. The identity of the person liable to indemnify the fund (X) does not alter on the liquidation of X; and the extent of that liability in equity (as distinct from what would be the fruits of a claim to enforce it in the liquidation of X if a claim in the liquidation of X were not precluded by the rule against double proof) is the same as well after as before X’s liquidation.
115	The conclusions which I have reached cannot be reconciled with the decision of Mr Justice Luxmoore in In re Fenton (No 2), as Mr Justice Fuad recognised in In re Kowloon Container Warehouse Co Ltd, (ibid, 226F). I have already referred (at paragraph 86 in this judgment) to the answer which he gave – [1932] 2 Ch 178,186-187 - to the question what amount would be brought into account as the Association’s contribution to the fund distributable in the insolvency of Mr Harry Fenton, but it will be convenient if I set the passage out again:
“. . . the fact that the Association was in liquidation before any payment was made by or out of the surety’s estate would have limited the trustee’s right of retainer or quasi set-off . . . to a sum equal to the appropriate dividend in the liquidation of the Association in respect of the amount which the Association would have been bound to contribute if solvent.”
In reaching the conclusion that he did, Mr Justice Luxmoore relied on the observations of Lord Cottenham, Lord Chancellor, in Cherry v Boultbee (ibid, 447-448) set out in paragraph 107 of this judgment.    
116	In re Fenton (No 2) the surety, Mr Harry Fenton, had executed deeds of arrangement in favour of his creditors in 1921, before the principal debtor, the Association, was ordered to be wound up in 1923. So, at the time when the Association became entitled to claim a share in the estate of the surety, the Association was not in liquidation. It was a case, like In re Melton, where the insolvency of the claimant (the Association - X, in the analysis which I have set out) postdated the constitution of the distributable fund under the deeds of arrangement. On a true analysis the observations of Lord Cottenham, in the passage of his judgment on which Mr Justice Luxmoore relied, would not have been in point even if the claimant in In re Fenton (No 2) had been an individual. And, for the reasons which I have explained those observations would not have been in point even if the insolvency of the Association (being a corporation) had predated the deeds of arrangement. And, of course, the decision of Mr Justice Luxmoore on this point was obiter. In my view his decision on this point was wrong.
117	For those reasons I would hold that the liquidators of Stations are correct in their contention that, if Group were to prove in the liquidation of Stations, it would be required to bring into account the whole of Stations’ claims for indemnity as a contribution to the whole fund distributable in the liquidation of Stations. On the figures that have been put before this Court that requirement would have the effect, prima facie, that the dividend which would be payable on Group’s proof (£68 million) would be less than the amount of that contribution (£70 million). If so, Group would receive nothing in the liquidation of Stations.
The fourth issue: whether (absent disclaimer) any dividend which Group would receive in the liquidation of Stations would be received subject to the obligation in clause 8.3(a) of the deed?
118	The issue which the judge was asked to decide was whether the obligations to hold on trust and pay or transfer to AIG, imposed on Group by clause 8(3) of the deed, apply to all sums received by Group which fell within either of the two paragraphs of that clause, or only such of the sums received as were sufficient to pay in full the amount which AIG is owed. 
119	 The parties were agreed before the judge that the obligation to pay or transfer imposed by clause 8(3), as distinct from the obligation to hold on trust, was limited to the payment or transfer of sufficient monies to satisfy the debt due to AIG. As the judge observed, at paragraph 37 of his judgment, that was a sensible reading of the clause: “since AIG would have no legitimate interest in receiving more money than is due to it overall”. But it was not common ground that the obligation to hold on trust was subject to the same limit. Group and its liquidators were concerned to establish that the obligation to hold on trust extended to all monies received by Group by way of payment or distribution in contravention of clause 8(2) or by way of repayment of tax from the Commissioners; and was not confined to those monies needed to satisfy the payment obligation. They were concerned to establish that as a foundation on which to base the argument that what might otherwise be said to be a bare trust was, on a true analysis, a security interest by way of charge. And, if a charge, then (it was said) it was a charge on book debts and so void for want of registration under section 395 of the Companies Act 1985.
120	 The judge held that both the obligation to pay and transfer and the obligation to hold on trust extended only to such sums as were necessary and sufficient to pay in full the amount owed to AIG under the Deed. He rejected the argument that the obligation to hold on trust should be given a wider reach than the obligation to pay and transfer for the reasons which he expressed, succinctly, at paragraph 37:
“37. . . It seems to me that the natural reading is to take the trust provision and the payment obligation as applying to the same subject matter, so that the payments which an Indemnitor has to pay over to AIG are limited to those necessary to pay AIG in full what is owed to it. I reject the argument that this gives no additional content to the trust obligation. That covers the position after any relevant receipt by an Indemnitor and until it is paid over.”

121	In the skeleton argument filed on behalf of Group and its liquidators for the purposes of this appeal, it seems be accepted that the argument can now be confined to monies received by Group by way of distribution in the liquidation of Stations – see, in particular, the statement at paragraph 6 of that skeleton: “The true construction and effect of clause 8.3, however, only becomes an issue if Group is permitted to prove in the liquidation of Stations.” And it is accepted, in this Court, that clause 8(2)(b) of the deed and paragraph 7 of the order of 27 July 2004 prevent Group from proving in the liquidation of Stations. The clause 8(3) issue – and the related issue (whether the charge (if any) created by clause 8(3) is void for want of registration) - will not arise unless the appeal from paragraph 7 of the order were allowed. For the reasons which I have given earlier in this judgment, I would uphold the direction in paragraph 7. Further, of course, the issue cannot arise if, as the figures put before this Court suggest, the effect of the rule in Cherry v Boultbee is that Group would receive nothing in the liquidation of Stations even if the liquidators of group were entitled to disclaim the deed of indemnity.  
122	It follows that it is unnecessary to add to the length of this judgment by addressing the fourth issue in any detail. It is enough to say that I agree with the judge’s view and with the reasons that he gave, expressed at paragraphs 49 and 51 of his judgment, that clause 8.3 of the deed of indemnity does not create a charge. He said this:
“49	 . . . [C]lause 8.3 . . . must be seen in the context of clause 8.2 to which it is ancillary. On my reading of clause 8.3 both the trust obligation and the payment obligation are limited to the sums due to AIG. It follows that neither clause constitutes a charge. 
	. . .
51 Clause 8.3 does involve the creation of a property right in favour of AIG, in the form of the trust obligation. It is accepted that this would create a charge if, but only if, it is construed as applying to all receipts, rather than to sums received up to the amount owed to AIG. Accordingly, on my reading of the clause it does not create a charge.”
If clause 8.3 of the deed does not create a charge, it is unnecessary to consider whether (if it did) the charge would be registrable as a charge over book debts. But, for completeness, I will add that I agree with the judge, for the reasons which he gave at paragraphs 52 to 54 of his judgment, that – if clause 8.3 did create a charge - the charge would not be a charge over book debts.
Conclusion 
123	 I would dismiss this appeal on each of the issues raised by the appellants’ notice; and I would not make the order sought at the amended paragraph D.1 in section 9 of that notice.     
Lord Justice Jonathan Parker:
124	I agree.
 Mr Justice Etherton:
125	I also agree.