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Note: In order to facilitate electronic obligations, Section 207 of the Companies Act of 1989 authorized the Secretary of State to promulgate regulations to permit financial instruments to be issued and transferred without a written instrument. Under this authority, the Secretary of State permitted "uncertificated" securities to be issued by approved systems. The CREST system, operated by Euroclear UK and Ireland Ltd was such a system. Pursuant to CREST's regulations, any security under the system "must be transferable free from any equity, set-off or counterclaim between the issuer and the original or any intermediate holder of the security".

Newcastle Building Society (Newcastle) acquired uncertificated securities totaling GBP 11,000,000 issued by Kaupthing Singer & Friedlander Ltd (Kaupthing), a wholly owned subsidiary of Kaupthing Bank hf, the-then largest bank in Iceland. Subsequently, Kaupthing acquired uncertificated securities issued by Newcastle in the amount of GBP 10,000,000. When Kaupthing became insolvent, Newcastle applied for a determination of its right to exercise setoff should Kaupthing claim payment on its securities on their maturity.

The Chancery Division, Sir Andrew Morritt, C., dismissed Newcastle's application in the administration of Kaupthing, ruling that the right to setoff was not absolute and could be waived or excluded by agreement and that the CREST rules was such an agreement.

In analyzing the ability of parties to waive the right to setoff, the Judge discussed English law on setoff related to LCs. He citied In Hong Kong and Shanghai Banking Corporation v Kloeckner & Co AG, [1990] 2 QB 514 (Comm.), a decision in which the issuer sought to set off US$10,200,000 resulting from assignments or other obligations against its LC liability of US$10,000,000 where Hirst, J., concluded that no principle of common law prevented a bank from exercising the right to set off of a claim against the beneficiary on its LC obligation to that beneficiary.

[JEB/mcb]

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