Date: Fri, 11 Jul 2003 16:49:44 +0100

From: Robert Stevens

Subject: Estoppel Question

1. I don't think there is any doctrine of transferred representation.

2. It is very doubtful whether a negative pledge in favour of an unsecured creditor is capable of binding subsequent incumbrancers (Kelly v Central Hannover bank 11 F Sup 497). This is an aspect of the general rule that third parties are not bound by contracts to which they are not parties. There are limited exceptions to this rule (eg Swiss Bank v Lloyds Bank [1979] Ch 548; Tettenborn 1982 CLJ 58) but none wide enough to cover the situation you describe. This being so, I think it is very doubtful whether a third party would be bound by the sort of non-contractual statement you are postulating.

3. If Z is subordinated to Y, he will be subordinated to everyone who ranks pari passu with Y and everyone who ranks above Y. Why should other creditors take the benefit of a representation that was not made to them and of which they were unaware?

Looks fairly hopeless to me but I am not an expert in estoppel.

R

----- Original Message -----

From: Jason Neyers
Sent: Friday, July 11, 2003 4:01 PM
Subject: ODG: Estoppel Question

Dear Colleagues,

I just wanted to 'pick your brains' if you did not mind. The facts I have in mind are as follows:

Suppose X represents to Y that, in case of bankruptcy, any claims that Y might have on the basis of a particular transaction will have priority over all past and future encumbrances/debts. Y relies on that statement (detrimentally as it turns out) and enters into the transaction with X. X's business is suffering hardship. Z, knowing of this representation, and trying to help X, lends X a substantial amount of money. X subsequently goes into bankruptcy. It turns out that as a matter of positive law and statute, Y does not have priority and will now have to share pari passu with Z.
Should Z be estopped for insisting on its rights, and therefore be subordinated to Y, given that although they did not make the representation, they knew about it?

Any opinions and guidance as to relevant estoppel cases dealing with a 'transferred representation' or being 'affixed with another's representation' would be most welcome.

PS: The facts are distilled from the somewhat more complicated Ontario case on which I am attempting to comment (see attached if interested).

Thank you in advance,

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