Andrew Witts on resurrecting debts that have been rejected.

Andrew Witts is a banking litigation partner at Dibb Lupton Alsop's City office.

Mr Justice Park is to consider whether a claim for set-off can be raised following an earlier rejection of a proof of debt – one of the issues in BCCI (Overseas) (In Liquidation) v Habib Bank in the Court of Appeal.

The issue arose from an application by Habib Bank to set aside a default judgment obtained against it by the liquidators of BCCI – a Cayman Islands-based company that has adopted English insolvency rules.

The liquidators had rejected proofs of debts submitted by Habib on the ground that liability for BCCI's debts in the territories concerned was assumed by local banks. Habib had not challenged this rejection under Rule 4.83 of the 1986 Insolvency Rules.

BCCI then issued proceedings in London against Habib claiming monies for travellers' cheques sold by Habib as agent for BCCI and for the proceeds of foreign documentary bills.

Judgment in default was obtained against Habib, which applied to set aside the judgment. Habib argued that the judgment was irregular and that it had a good defence, being entitled to set off debts owed to it by BCCI.

Judge Park disagreed, and held that "a creditor who uses the statutory route to try and recover his debt, but fails, cannot then say that the debt is still alive and capable of being enforced by him by the use of other non-statutory routes". Habib was therefore issue estopped from raising the debt by way of set-off.

It was also argued that Rule 4.90 of the Insolvency Rules 1986 (automatic set-off) preserved Habib's right of set-off, automatic set-off having taken effect at the date of liquidation. But Judge Park, adopting Lord Justice Hoffmann's "hindsight principle" in MS Fashion v BCCI SA, held that the liquidators were entitled to take account of subsequent events.

On the irregularity issue, he held that while the judgment was overstated it was capable of correction and so it would be "ridiculous" to penalise BCCI by setting the whole judgment aside and running up additional costs. This is an indication of how some technical arguments may be dealt with in this Woolf era.

Assuming this decision is upheld by the Court of Appeal, then a rejection of a proof of debt, if unchallenged – or presumably if challenged unsuccessfully – will sound the last rights to a creditor's debt claim, a creditor being unable to resurrect the debt at some later stage.