McAllister and another v The Society of Lloyds

CHANCERY DIVISION

[1999] Lloyd's Rep IR 487, (Transcript)

HEARING-DATES: 2 DECEMBER 1998
2 DECEMBER 1998

INTRODUCTION: 
This is a signed judgment handed down by the judge, with a direction that no further record or transcript need be made (RSC Ord 59, r(1) (f), Ord 68, r1). See Practice Note dated 9 July 1990, [1990] 2 All ER 1024. 

COUNSEL: 
S McAllister appeared in person; J Briggs for the Respondent 

PANEL: CARNWATH J 

JUDGMENTBY-1: CARNWATH J 

JUDGMENT-1: 
CARNWATH J: This is an appeal from an Order of Mr Registrar James dated 10 June of this year. He dismissed applications by the applicants, Mr and Mrs McAllister, to set aside statutory demands served on them by the respondents, the Society of Lloyds ("Lloyds"), in amounts of £643,021 and £635,384 respectively. 

Background 

The McAllisters became members of Lloyds in January 1988, at the instigation of a Mr Young of the EverSure Underwriting Agency, whom they knew socially. In the following year, they increased their underwriting capacity with the support of bank guarantees from Barclays Bank for £100,000 each, secured on their family home. Later that year, unfortunately, Mr McAllister's property development business failed, and they found themselves in serious financial difficulties. In 1991 they applied to Lloyds for assistance under their hardship scheme. Following an investigation into their affairs, in January 1994 the Hardship Committee offered to enter into a hardship agreement. The letter describing the offer made it clear that there would be no binding contract until a formal Hardship Agreement was executed by both parties. 

Further negotiations led to a formal proposal of an amended Hardship Agreement by letter dated 1 September 1995. That letter confirmed proposals that had been set out in a letter dated 5 April 1995 from Lloyds, as follows: 

1. Mr and Mrs McAllister's principal residence be put up for sale immediately with a view to moving to a property valued at no more than £130,000, within one year. The balance of the sale proceeds to be used to repay Barclays Bank (guarantors of the Lloyd's Deposit guarantees). 

2. Lloyd's to encash the Barclays Bank guarantees for Mr and Mrs McAllister totalling 200,000 (100,000 each). 

Of these moneys, Lloyd's will make available, to Mr and Mrs McAllister, the sum of £130,000 maximum to enable them to purchase a new home. 

3. Lloyd's to take an all monies charge over the new principal residence, enforcement of which be deferred until the deaths of Mr and Mrs McAllister. 

4. The agreement to include the provision of a Nil periodic payment from income. 

This means that should Mr and Mrs McAllister's joint income within the first three years of the Agreement exceed the Hardship Scheme's income guidelines, then a payment from income will be required. 

5. All current and future Lloyd's related tax, litigation and stop loss recoveries together with any profits on open years of account be assigned to Lloyd's." 

As the Registrar observed - 

... the intention of the new proposal was to protect the McAllisters from the effect of the bank calling in its mortgage of Hutton Lodge by providing an alternative home for them for the rest of their lives." 

The letter of 1 September enclosed a form of acceptance by which the recipient was able to confirm his willingness to enter into a Hardship Agreement in the terms proposed. That was signed by the McAllisters on or about 6 September. Although that exchange of correspondence did not itself constitute a binding contract, both parties expected an agreement to be concluded, and the McAllisters took steps to find and negotiate for the purchase of a new home. 

At that point there emerged a problem under the "Security and Trust Deed" which the McAllisters had entered into with Lloyds in January 1989 to provide security in case of default. The details do not matter, but the effect was that the consent of Barclays Bank would be required to renounce its rights as a beneficiary under that Deed. In a letter dated 4 October 1995 Barclays refused to give such consent, except on terms which would have involved the McAllisters making monthly payments of £1,500 in reduction of their outstanding indebtedness to the bank until Mr McAllister attained the age of 60. The McAllisters were unable to meet that requirement and, following further attempted unsuccessful negotiations, Lloyds withdrew their offer of a Hardship Agreement on 2 February 1996. 

Notwithstanding that withdrawal the McAllisters continued to seek a change of heart from Barclays. It appears that Lloyds were initially sympathetic to those approaches. According to a letter from the McAllister's solicitors to solicitors for Barclays dated 24 April 1996: 

Our clients are advised by Lloyds that this is the first time a hardship proposal has been prevented from being concluded by a bank. Neither Lloyds nor we can see why your clients are taking up their present position which cannot enhance their recovery situation, and to date no explanation has been forthcoming from our clients". 

In the meantime, as is well known, Lloyds itself was in serious difficulties, arising out of the accumulated losses of some £8 billion reported in respect of the 1988/1992 underwriting years of account. In 1995, under powers given by the Lloyds Act 1982, the Council of Lloyds had made the Reconstruction and Renewal By-laws (No 22 of 1995) to carry out their proposed Reconstruction and Renewal Plan ("R&R Plan"). The two central elements of the Plan were (i) re-insurance of liabilities for the 1992 and prior years of account into a group of companies formed for the purpose ("Equitas"), and (ii) the Settlement Offer, which would enable Names to accept a financial package in return for settlement of their Lloyds-related litigation. The details of the plan and settlement offer were sent to all 34,000 Lloyds Names. There was extensive discussion and consultation, and at least two unsuccessful challenges through the Courts. 

On or about 30 July 1996, pursuant to the Bye-laws, Names were sent a set of documents, including a document headed "Reconstruction and Renewal Settlement Offer" (the "SOD") and a "Finality Statement". The SOD included the Settlement Offer and the Settlement Agreement. The terms and conditions of the offer made clear that it must be accepted in accordance with the instructions and - 

... each Name who executes and returns a form of acceptance irrevocably accepts the Settlement Offer, agrees to be bound by the terms and conditions set out in this document and the Settlement Agreement, makes all releases, waivers, assignments and other dispositions and grants all powers of Attorney, authorities and appointments thereunder". 

This was one of a number of clear warnings as to the irrevocable effect of the agreement once accepted. 

One essential feature of the arrangement was an obligation to pay outstanding amounts in accordance with the "Finality Statement". By clause 4.1 of the Settlement Agreement, each Accepting Name agreed to pay - 

... all amounts due in respect of his Finality Statement in accordance with the terms set out in the Settlement Offer Document and hereof, free and clear of any set off, counterclaim or other deduction on any account whatsoever, including, without limitation, in respect of any Claim against Lloyd's... and further agrees to the waiver of any stay of execution and to the immediate enforcement of any judgment in respect of his obligations to pay all or any such amounts due in respect of his Finality Statements." (emphasis added) 

The Finality Statement provided for the total amount outstanding in respect of each Name to be off-set by amounts credited under the scheme. Thus in Mr McAllister's case the total liabilities were recorded as over £700,000 each, but were off-set by "debt credits" amounting to over £500,000. The net result was that the amount due from each of them was limited to about £200,000, including the value of the Barclays guarantees. That had to be paid by the settlement date, 30th September 1996. Failure to pay the finality bill by that date would, under the terms of the offer, result in loss of the right to the credits. 

The McAllisters signed the acceptance forms on 27th August. No payment having been received from them by the settlement date, they were sent letters of demand by Lloyds on 18th October. In response, Mr McAllister contacted Lloyds by telephone, referring to their Hardship Applications and his continuing attempts to make progress with Barclays; he claimed that the Bank of England had instructed Barclays to resolve the matter. Lloyds then made contact with Barclays, who explained their view of the position in a letter dated 7th November. The letter noted that Mr McAllister had made a complaint to the Bank of England in August, but that the investigation had absolved Barclays of any contravention of the Banking Acts. However, the letter went on to propose further discussions with a view to reaching an agreed solution. The writer agreed that the "ball is in our court", and promised to revert quickly to Lloyds to indicate their proposals. 

On 15th November Lloyds wrote to the McAllisters a letter which is central to the second limb of Mr McAllister's arguments before me. Enclosed with it were two forms of promissory note, each for £200,032. I will set out the material terms of the letter in full: 

RECONSTRUCTION AND RENEWAL 

The Society Incorporated by Lloyd's Act 1871 (the Society) has issued, and you have accepted, a proposal letter the intention of which is that the Society and you are to enter into a Hardship Agreement regulating your affairs at Lloyd's and your liability to pay the Total Amount Owing . 

The Society has issued to you the Settlement Offer Document which relates to the settlement of the litigation in the Lloyd's market. 

In respect of all members who have accepted a proposal letter but the Hardship Agreement has not been completed, the Society has agreed in principle to pay that member's finality bill as set out and calculated in the Settlement Offer Document. The Society is not, however, prepared to incur this obligation unless certain pre-conditions are met. 

If you wish to preserve your rights under the proposal letter then: 

1. You must have accepted the Settlement Offer, and 

2. You must lodge a duly signed and dated promissory note in the amount of your finality statement. The promissory note must be sent to the Financial Recovery Department, Lloyd's of London, Gun Wharf, Dock Road, Chatham, Kent, ME4 4TU. 

I enclose engrossment of the promissory note for signature. I must stress that the promissory note must not be amended. This will not be accepted by the Society. 

Where you have delivered a promissory note as set out above, you must use your best endeavours to complete the Hardship Agreement as soon as practicable before 31 December 1996. If a Hardship Agreement (in form and substance satisfactory to the Society in accordance with the proposed letter) is duly completed then the Society will cancel the promissory note. 

If you do not use your best endeavours to complete the Hardship Agreement by 31 December 1966 in any event, then: 

1. the proposal letter will lapse automatically; 

2. all moneys then due to the Society and Equitas will be immediately payable, and 

3. the Society will enforce the promissory note. 

The Society reserves the right to serve notice on you requiring completion of the Hardship Agreement by a specified date, time then being of the essence. 

For the avoidance of doubt the fact that the Society does not demand payment of the debt on the date specified in the promissory note does not operate as a waiver. Your obligation under the promissory note is not to be released in any way by any concession, neglect or forbearance of the Society or any time or indulgence given by the Society." 

On 19 November Lloyds confirmed to Mr McAllister that the proposals accepted in September 1995 would remain unchanged and would form the basis of the Hardship Deeds, but that, before any monies could be released, consent from Barclays Bank would be needed. On 26 November the McAllisters accepted the proposal of 15 November, by a letter from their solicitor enclosing two promissory notes in the form requested. The letter said: 

My clients will do everything they can to complete the matter by 31st December 1996 but, as you are insisting that the consent of Barclays Bank be obtained, I must insist that the promissory note be returned to me in the event that the Bank holds up completion." 

In its reply of 27 November, Lloyds confirmed receipt of the promissory notes, and added: 

Once you complete your Hardship Agreement, the Note will no longer be necessary and will therefore be destroyed. If you do not complete your HA, Lloyds will consider pursuing you for any outstanding debts." 

On 28 November Barclays wrote to the McAllisters a "without prejudice" letter. It referred to a previous discussion in September of a proposal for "a full and final settlement", the main obstacle to which had been that it would have left the Lloyds position unresolved. The letter continued: 

I have discussed this with Mr Holden (of Lloyds) and we would like to talk to you about the possibility of a combined settlement package whereby you resolve both the bank and Lloyds of London positions which will include the possibility of maintaining ownership of Hutton Lodge." 

On 4 December Lloyds wrote to Mr McAllister reminding him of "the tight time constraints" and the need to complete the Hardship Agreement by 31 December. He continued: 

Whilst this letter is not designed to alarm you, I must advise that once the deadline has expired the Hardship Scheme will not exist and where full documentation has not been executed, the proposal currently in place will lapse". 

The planned meeting took place on 18 December at Lloyds, but ended without agreement. There is no written record of that meeting. I shall refer below to the differing accounts in the evidence before me, but, as the Registrar observed - 

... it does appear to be common ground that it was Mr Holden (of Lloyds) who stated that the offer of the Hardship Agreement was no longer available and that Lloyd's was withdrawing from those negotiations." 

There were no further negotiations with Lloyds. On 23 January 1997 they wrote to Mr McAllister saying that, as the Hardship Agreements had not been completed before 31 December, the Hardship Scheme had lapsed. According to Mr McAllister, a wholly satisfactory settlement was subsequently reached with Barclays Bank, but the details of that are not apparent from the evidence. 

On 23 October 1997 the Statutory Demands, which are the subject of the present appeal, were received. The particulars supporting the demands referred to the McAllisters' obligation under the Settlement Offer to pay the amounts due by 30 September 1996, failing which they would "lose certain financial benefits thereunder"; and to their failure to pay as required. There is no reference to the letter of 15 November 1996 nor to the promissory notes. The amounts claimed are of the same order as the totals in the Finality Statement rather than the reduced amounts after taking account of the "debt-credits" (para 10 above). 

The Court's powers 

The Court's powers on such an application are set out in r 6.5 of the Insolvency Rules 1986. Rule 6.5(4) provides: 

The court may grant the application if - 

a) the debtor appears to have a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt or debts specified in the Statutory Demand; or 

b) the debt is disputed on grounds which appear to the court to be substantial..." 

The test under either paragraph is whether the application raises a "genuine triable issue" (Re A Debtor No 991 of 162 [1963] 1 All ER 85, [1963] 1 WLR 51, 56; Bankruptcy Practice Note 1/87). 

It is to be noted that counterclaim, set-off, and cross demand are referred to without distinction in paragraph (a). This is consistent with the practice in the analogous procedures relating to company insolvency (see Re Bayoil SA 31 July 1998 CA unreported). It follows that a successful application does not depend on the applicant's claim being one which would, under the rules relating to set-off, give him a defence to the creditor's claim. Nor, in my view, is the application defeated by a contractual provision, such as clause 4.1 of the Settlement Agreement, requiring payment without set-off, counterclaim or other deduction. Such a contractual provision cannot override the statutory rule. 

Mr Briggs submitted that, even if clause 4.1 did not limit the jurisdiction of the Court, it would be a matter to be taken into account in exercising the discretion to set aside the demand. Initially I saw some force in that suggestion, since it appeared to give effect to the intention of clause 4.1 However, on further consideration, I would reject it. It is inconsistent with the equal status which the rule gives to the three categories. In any event, there is nothing in the wording of clause 4.1 to suggest that it is directed to the Statutory Demand procedure, as opposed to "execution... and enforcement of any judgment", which is expressly mentioned. 

The appellants' case 

Mr McAllister was represented by Counsel before Mr Registrar James, and the matter was argued at some length, as appears from the Registrar's careful judgment. Before me Mr McAllister appeared in person, and put his case succinctly and forcefully in his own words, while adopting the legal arguments which had been made on his behalf before the Registrar. 

In essence his case is that he was misled by Lloyds when he extended his underwriting cover in 1989, that he was pressurised into entering the Settlement Agreement, and that he was unfairly treated when Lloyds broke off negotiations on the Hardship Agreement in December 1996. These complaints were relied on as grounds for disputing the debt itself, or as giving rise to a cross-claim equal to or greater than the debt. Although Mrs McAllister did not appear separately, I accepted her husband's submissions as made on her behalf also. It will be convenient to deal with the arguments in two parts: first, those directed to the validity of the Settlement Agreement and, secondly, those based on the subsequent negotiations for the Hardship Agreement. 

The Settlement Agreement 

The Registrar rejected the arguments based on alleged misrepresentations in 1989, and on the circumstances surrounding the Settlement Agreement. In my view, he was clearly right to do so. As appears to have been accepted before him, unless the Settlement Agreement itself could be successfully attacked, a defence based on allegations of earlier misrepresentation was ruled out by the provision (Clause 4.5) requiring waiver of prior claims (decision p 17). 

In my view, there was no arguable basis for challenging the validity of the Settlement Agreement, on the grounds of economic duress or failure to act in good faith or any other reason. Undoubtedly Mr McAllister, like many other Names, was in an unenviable position. But it was critical to the R&R Plan that strict time limits should be imposed for acceptance. This created particular problems for the McAllisters because of the delays over the conclusion of the Hardship Agreement; but those delays were not, at that stage at any rate, the responsibility of Lloyds. 

I do not see this as turning so much on the credibility of Mr McAllister's accounts of what he was told at the time (cf decision p 40). He had no real choice in practice but to accept the offer if he wanted to keep open the possibility of an overall settlement. Whatever he may have been told, his problems arose from the circumstances. As to those, the Registrar said (p 41): 

The proposition that the SOD took advantage of the impoverished state of the McAllisters' affairs does not persuade me. The same offer was made to all Names, it as inevitable that some Names would be in less fortunate circumstances than others... 

... It is abundantly clear that Lloyds was acting in the interests of the Society as a whole and entirely within its regulatory powers, the SOD was an essential part of the R & R plan which had been approved by the membership, in accordance with the Society's bylaws." 

I agree. 

The Hardship Agreement 

The other limb of Mr McAllister's argument raises issues of more substance. In summary, the submission is that the letter of 15 November 1996, having been accepted by the McAllisters by signing and returning a promissory note, imposed an implied contractual obligation to negotiate in good faith up to the time limit set by that agreement namely 31 December, and that this obligation was breached when Mr Holden unilaterally broke off negotiations in the week of 18 December. As I interpret the Registrar's account of the argument before him (p 34-5, 44), there were at least two alternative ways of putting the case: 

(a) (under r 6.5(4)(a)) as raising a cross-claim, for breach of an implied contractual obligation resulting in loss of the opportunity to enter the hardship agreement; 

(b) (under r 6.5(4)(b)) as grounds for disputing the debt, as particularised in the Statutory Demands, on the basis that, by the letter of 15 November 1996, Lloyds had assumed the McAllisters' responsibility for payments under the Finality Statements (subject only to their using best endeavours to complete by 31 December, which they had done). 

I am indebted to Mr Briggs, for Lloyds, for fairly presenting the arguments on both sides. As I understand it, he accepts that the letter of 15 November had some contractual force, at least to the extent that it would have required Lloyds to destroy the promissory note if the Hardship Agreement had been concluded by the end of the year. However, he submits that it is impossible to imply into that agreement any duty in respect of the negotiations. 

He refers me to Walford v Miles [1992] 2 AC 128, [1992] 1 All ER 453 where the House of Lords repudiated the suggestion that there can be an enforceable duty to "negotiate in good faith". In the words of Lord Ackner (p 138) F-H : 

A duty to negotiate in good faith is as unworkable in practice as it is inherently inconsistent with the position of a negotiating party.... In my judgment, while negotiations are in existence, either party is entitled to withdraw from those negotiations, at any time and for any reason." 

Accordingly, says Mr Briggs, Lloyds were free to withdraw from the discussions, and the McAllisters have no legal redress, however unreasonable or capricious the circumstances of the withdrawal. 

I am not convinced that the position of Lloyds is identical to that of an ordinary party negotiating a private contract. I would certainly be reluctant to resolve that issue in a summary procedure such as this, and without fuller argument on both sides. There seems to me to be room for argument that, even if Lloyds is not a public body susceptible to judicial review (see Society of Lloyds v Leighs [1997] CLC 759, 782E), the fact that it was performing functions in the public interest, within a statutory framework, imposed some limitation on their freedom of action, analogous to Wednesbury (Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223, [1947] 2 All ER 680) principles. It is also arguable that, in imposing a condition on the McAllisters of "best endeavours", they impliedly accepted a corresponding obligation themselves, or at least an obligation not unreasonably to frustrate the conclusion of an agreement. 

If the Barclays problem had been clearly resolved by the time of the December meeting, and given that the McAllisters were ready to accept the Hardship Agreement (the terms of which had long been settled, and confirmed as recently as 19 November), it is inconceivable in practice that Lloyds would have turned their back on the agreement without any reason, and I am not persuaded that they would have been legally free to do so. If this is right, then the circumstances in which the negotiations were broken off at the December meeting become critical. 

I return therefore to the evidence of what went wrong at that meeting. The solicitor's affidavit supporting the application to set aside the Demand adopts (presumably on instructions from Mr McAllister) what was said in a letter sent to Lloyds on 15 November 1997 disputing the Demand. It was addressed to Mr Holden of Lloyds, who was at the meeting. According to that letter - 

Initially Barclays were not prepared to grant that consent. Barclays were persuaded by our clients to change their minds and a meeting was convened for 17th December 1996 at which you were present and said that the agreement had lapsed and there was no way forward. Whereas prior to the meeting it was Barclays who were holding up the Hardship Agreement it then became Lloyds who were refusing to complete it." 

That version was later supported by an affidavit from Mr McAllister himself, dated 15 January 1998. His account is as follows: 

A meeting was called at the respondent's office on 17th December 1996 at which were present Mr Holden for the respondents, Mr Otty of Barclays Bank, together with myself and my banking advisor Mr Jones. The purpose of the meeting was to agree the timescale for the completion of the Hardship Agreement and when the funds to purchase the new house would be provided by the respondents. Mr Otty was at the meeting to confirm the full co-operation of Barclays Bank but Mr Holden said that the hardship offer had lapsed although we had been given until 31st December to execute the Hardship Agreement. Mr Holden said there was no way forward unless we were in a position to make a substantial sum of money available to the respondents." 

The only response from Lloyds is an affidavit from one of their solicitors, Mr Colebeck, who was not at the meeting but reports what he has been told by Mr Holden: 

The continuing negotiations culminated in what, I am informed by Philip Holden and verily believe, turned out to be an acrimonious meeting between Philip Holden for Lloyds, Les Otty for Barclays Bank and Mr McAllister which was held on 18th December 1996 at Lloyds. It became clear in the course of this meeting that it was not going to be possible to reach a tripartite agreement and certainly not by 31st December 1996. I am informed by Mr Holden and verily believe that at this stage it was made clear to the McAllisters that the offer of the Hardship Agreement was no longer available. Lloyds had already decided to bring hardship negotiations with all names to a conclusion and set a time deadline of 31st December 1996 for all cases". 

As a response to Mr McAllister's account, I find that less than satisfactory. Mr McAllister was claiming that, by the time of the meeting, Barclays were willing to conclude an agreement, and that the meeting was aborted solely because of Mr Holden's introduction, without prior warning, of a new demand for a substantial monetary payment by the McAllisters. Mr Holden does not address that complaint. He says that it was an acrimonious meeting, but does not say why. He does not specifically address Mr McAllister's evidence as to the position of Barclays Bank. He says that it became clear that it was not going to be possible to reach an agreement by 31 December, but again does not say why. The one thing that both accounts agree on is that it was Mr Holden who broke off negotiations. 

On the present state of the evidence, I would hold that Mr McAllister have raised a triable issue whether the failure of the negotiations was due to unreasonable conduct on the part of the Lloyds' representative. Further, contrary to the conclusion of the Registrar (p 44), it is in my view at least arguable that this was in breach of an implied obligation pursuant to the letter of 15 November. 

The Registrar considered that the McAllisters had themselves "failed to show good faith" in the terms in which they had accepted the offer of 15 November. As he saw it, they were required to deliver their promissory notes unconditionally but instead they instructed their solicitors to impose a condition that the notes would be returned if negotiations with Barclays Bank prevented completion of the Hardship Agreement. However, Lloyds kept the promissory notes, apparently treating them as a valid acceptance of their offer (see their letter of 27 November); and there is no evidence that this point was relied on by Mr Holden as a reason for breaking off negotiations. If there was a defect in the response, it seems to have been waived. In the event Mr Briggs did not press this point strongly in argument before me. 

The conclusion that there is a triable cross-demand is not sufficient to get the McAllisters home. It is still necessary to consider the other issue which arises under r 6.5(4)(a), that is, whether the amount of the counterclaim appears to be equal to or greater than the claim. The Registrar did not address this issue, and the argument before me was necessarily limited, in view of Mr McAllister's lack of legal representation. It is not an easy issue to analyse in the context of the facts of this case. 

However, the case does not rest only on paragraph (a) of r 6.5(4). In my view, there is an arguable case relating to the debt itself, arising from Lloyds' apparent acceptance, in the letter of 15 November, of responsibility for the payments under the finality statements, subject only to best endeavours on the McAllisters' part, and to the substitution of the obligation under the promissory notes. The Registrar thought that this argument was defeated by the McAllisters' failure to deliver the promissory note unconditionally, and so to "satisfy the essential requirement ... which was a condition precedent to the assumption of their liabilities by Lloyds" (p 46). For the reasons given in relation to the "good faith" point (para 35 above), I do not regard this as a conclusive answer. In my view, there is at least a triable dispute under paragraph (b), sufficient to justify setting aside the Statutory Demand. 

Conclusion 

For these reasons, I will allow the appeals. I hold that the debts are disputed on substantial grounds under r 6.5(4)(b). I will accordingly set aside the Statutory Demands. 

DISPOSITION: 
Appeals allowed 

SOLICITORS: 
Lloyds