Garrow v The Society of Lloyd's
CHANCERY DIVISION (BANKRUPTCY COURT)
The Times 18 June 1999, (Transcript)
HEARING-DATES: 10 JUNE 1999
10 JUNE 1999
C Purle and L Jones for the Applicant; L Hilliard for the Respondent
PANEL: JACOB J
JUDGMENTBY-1: JACOB J
JACOB J: This, it is common ground, is something by way of a test case, there being quite a number of individuals who stand in the same or similar position as the applicant, Mr Garrow. He was a Lloyd's Name for a number of years. He applies to set aside a statutory demand served on him by Lloyd's on 10 August 1998. It is in the sum of about £200,000. That sum is due by way of a judgment debt obtained by Lloyd's in the Commercial Court on 11 March 1998. There is no dispute as to the liability. It arise from a liability to pay a premium by way of reinsurance into Equitas under the Lloyd's Reconstruction and Renewal Plan. The details of all this are to be found in the judgments of the Court of Appeal in Society of Lloyd's v Leighs  CLC 759. As is well-known, following the commencement of substantial litigation Lloyd's put forward a settlement proposal to Names. Most accepted but some did not. Mr Garrow is one of the non-acceptors. Despite this he is affected by the arrangements as was held by the Court of Appeal. In particular he is bound by clause 5.5 of the Reinsurance Contract (the 'pay now, sue later' clause) which provides:
Each Name shall be obliged to and shall pay his Name's Premium in all respects free and clear from any set-off, counterclaim or other deduction on any account whatsoever including in each case, without prejudice to the generality of the foregoing, in respect of any claim against ERL, the Substitute Agent, any Managing Agent, his Members' Agent, Lloyd's or any other person whatsoever and:
(a) in connection with any proceedings which may be brought to enforce the Name's obligation to pay his Name's Premium, the Name hereby waives any claim to any stay of execution and consents to the immediate enforcement of any judgment obtained;
(b) the Name shall not be entitled to issue proceedings and no cause of action shall arise or accrue in connection with his obligation to pay his Name's Premium unless the liability for his Name's Premium has been discharged in full; and
(c) the Name shall not seek injunctive or any other relief for the purpose, or which would have the result, of preventing ERL, or any assignee of ERL from enforcing the Name's obligation to pay his Name's Premium."
It is Mr Garrow's liability under that clause which forms the judgment debt. In the ordinary way of things, absent other factors, that debt being established and unpaid, Lloyd's would be entitled to proceed to use any of the methods of process available to enforce the judgment, seizure of goods pursuant to a writ of fieri facias, a garnishee order, a charging order on real property or by way of bankruptcy proceedings.
In the Leighs case, the Court of Appeal held that clause 5.5 prevented the defendants from raising matters by way of set-off or counterclaim. But it did not prevent them from raising those matters by way of a separate action. The matters the defendants (and others, who were not defendants) wished to raise are a claim against Lloyd's in fraud. So those in the same position as Mr Garrow along with those who are not cross-claimants have brought claims in the commercial court for fraud. There are, I understand, some 200 claimants in all. Some of these who are liable to pay premiums pursuant to clause 5.5. have meanwhile paid these. But those who are in financial difficulties have not. In some cases Lloyd's have obtained charging orders against their principal residences upon the basis that those orders will not be enforced to the extent of the values of those properties. Lloyd's have therefore secured their position. In other cases Lloyd's have proceeded by way of execution on goods. The Court of Appeal in Leighs indicated that it might be possible for individuals who would suffer hardship to apply for stays of execution. I was told that some individuals have done this before the Master. Two cases reached Colman J on 6 November 1998. Somewhat bizarrely the procedural position as regards bankruptcy was wholly misunderstood at the time. Lloyd's contended that a stay of execution would have the automatic effect of preventing bankruptcy proceedings which was simply not so. Moreover, the precise effects of bankruptcy, and in particular what would happen to the bankrupt's cause of action for fraud was not really in point. So all I can get from Colman J's decision is that in appropriate cases:
The availability of a stay of execution must be a facility which the court may deploy because it is in the interests of justice to both parties that execution should not be made either for the time being or at all."
I do take that observation as also applicable to what I have to decide. Mr Garrow, according to his evidence, has no real property or physical assets of any significance. It is true he is one of the claimants for fraud and that that claim is being funded. But I cannot draw the inference because of that that he has not been open about his financial affairs The fraud claim is being funded by a number of individuals whose names had been supplied to Lloyd's pursuant to a case management order made by Colman J on 30 June 1998.
The way the fraud claim is being handled is by way of a lead action (the 'Jaffray' action). He has ordered a preliminary point, called the 'threshold fraud point', which is as follows:
the issue whether Lloyd's made misrepresentations which it knew to be untrue and/or as to which it was reckless whether they were true or false and whether they were communicated to the Name and if so, when."
It is common ground that the decision of this preliminary point in the Jaffray case, whilst not finally determinative of the other cases (including that of Mr Garrow), will have a considerable effect upon them.
Thus the current position as regards Mr Garrow is that he owes £200,000 which he is liable to pay now which he cannot pay, and he has a counterclaim in respect of fraud. I was invited to consider the strength of that counterclaim but felt quite unable to do so. This is a matter pending in the Commercial Court. It is obviously a matter of considerable complexity - the estimated trial time is 3 months. It would have been a futile exercise for me in this collateral litigation to attempt to assess the strength or weakness of the claim. Although Lloyd's originally indicated to Colman J that the trial of even the preliminary point could not be heard for several years, Colman J has indicated, and indeed ordered, that it be heard later this year. Miss Hilliard, for Lloyd's, accepted that the trial will take place at least by January 2000. The claimants say they can be ready by October.
I am prepared to assume that if it is a good claim the damages will at least equal Mr Garrow's present liability. It was suggested that his pleadings do not quantify the damage. From the point of view of setting aside a statutory demand I do not think that matters. Miss Hilliard suggested that TSB Bank v Platts  2 BCLC 1, required quantification of the cross-claim. I do not think it does. It is sufficient to show that the cross-claim equals or overtops it.
As a practical matter, Miss Hilliard accepted that if the statutory demand is not set aside and Lloyd's proceed to present a petition, it is unlikely that it will be heard before the outcome of the Commercial Court decision in Jaffray. For one thing it might well be that the Registrar would simply adjourn the petition to await the result. Certainly Mr Garrow would resist the petition on the basis of his fraud claim. It is indeed possible for the court in deciding a petition to decide whether or not there is an underlying debt. See Brinds v Offshore Oil  BCC 98, 916. Realistically therefore she contended that what Lloyd's needed, and were entitled to, was to get a petition on foot. She said they needed this for two reasons. Firstly, quite generally and in other cases, Lloyd's were worried about potential dispositions of property at an undervalue or by way of preference. There is a time limit which runs from the day of presentation of the petition (see section 341 of the Insolvency Act 1986). Secondly, there was a specific worry in this case about a repayment of a loan by Mr Garrow to his father which Miss Hilliard suggested a trustee in bankruptcy might wish to investigate and which might be affected by the time limit. Mr Purle QC for Mr Garrow indicated that this specific worry could certainly be overcome by appropriate undertakings from Mr Garrow and his father, which he had proffered and which I am minded to accept.
As to the general worry, there is no material in this case suggesting that any other transaction of Mr Garrow's could be remotely affected. Moreover, in the case of all the people in Mr Garrow's position, it has been open to Lloyd's if they had material indicating a likelihood of disposition of assets, to apply for the usual remedy, namely a freezing order. I do not think that it is appropriate to say that a petition should be present and then suspended simply so that, even though it might ultimately be dismissed, the creditor would get protection in the meantime. It must also be remembered that under section 284 the day of presentation of the petition is a critical day. All dispositions may be void unless made with the consent of the court. This is likely to lead to trouble with bankers and so on. Miss Hilliard suggested the bank might not know of the presentation of the petition, but that is hardly a satisfactory way to leave things, even though any person who deals with the debtor in good faith and for value and without notice of the petition, is protected.
I therefore proceed on the basis that either the statutory demand should be set aside or it should not. Insolvency rule 6.5(4) provides that the debtor may apply to set aside a statutory demand if:
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."
The general rule is contained in the Bankruptcy Practice Note 1/87  1 All ER 403,  1 WLR 119:
When the debtor (a) claims to have a counterclaim, set-off or cross demand (whether or not he could have raised it in the action in which the judgment or Order was obtained) which equals or exceeds the amount of the debt or debts specified in the statutory demand . . . the Court will normally set aside the statutory demand, if in its opinion there is a genuine triable issue."
The general rule accords with the similar position in relation to companies as laid down by the Court of Appeal in Re Bayoil  1 All ER 374,  BCLC 62. It is sufficient to go to the headnote which says that:
In cross claim cases a petition for a winding up order should not be allowed where there existed a genuine cross claim. The cross claim must be genuine and serious or one of substance; it must be an amount exceeding the amount of the petitioner's debt and one that the company had been unable to litigate. Nevertheless, there existed a residual discretion which allowed the Judge to ask himself in each case whether there were special circumstances which might make it inappropriate for a petition to be dismissed or stayed."
Neuberger J in Hofer v Strawson [4 March 1999] accepted that the approach for companies in Bayoil should also be the approach in bankruptcy. I agree.
In Bayoil and Hofer the debtor's cross claim arose out of essentially the same transaction as the claim. Owing to the operation of rules of law however (in Bayoil that freight charges must be paid without set-off and in Hofer that a cheque must be honoured), the debtor could not actually defeat the claim. Miss Hilliard suggested that these cases were confined to situations where the claim and cross claim arose out of the same transaction. I do not think so. None of the reasoning turns on that point.
However, a consideration which did give me reason to pause was Nourse LJ's reference in Bayoil to the cross claim being one 'the company had been unable to litigate'. There is no such reference in the corresponding bankruptcy practice note. Miss Hilliard suggested that the requirement of a previous inability to litigate was a threshold requirement so that if the debtor could have litigated his cross claim earlier but failed to do so, he could not invoke it to resist bankruptcy or liquidation as the case may be. I do not think that is right. Where there is a delayed cross claim the court should take that delay into account in exercising its discretion. In some cases the lateness of the claim may go to whether or not it is really genuine and in other cases there may really be no excuse for the claim not having been brought earlier. But I can see no good reason for a brightline rule that if the cross claim could have been litigated earlier it must not be taken into account. There are plenty of practical reasons why people do not bring claims which are, or may be good, and it will often be the case that the cross-claim is only raised when the party is attacked.
In the present case Lloyd's did not really, in their evidence, take the point that the mere fact of delay prevented the cross claim from being taken into account. The delay was merged in to the more general point to the effect that this court should regard the fraud claim as being otherwise than 'genuine and serious or one of substance'. I think that although it is the case that the cross claim could have been brought earlier (Mr Purle QC for Mr Garrow accepted by 1995), in the context of the massive complication of the Lloyd's litigation with all its ramifications and costs and the need for class or class like claims and defences, that no blame can be attached to Mr Garrow's failure to bring his cross claim earlier. Therefore in the special circumstances of this case I do not think it matters.
The other point urged upon me was the pay now, sue later clause. Mr Garrow had agreed that if he was to bring a cross claim he should nonetheless pay the claim at once. This is of course true and if he had the means then I have no doubt that he should be made to do so. But I am concerned with whether the draconian effect of bankruptcy should be imposed when he may have a perfectly good cross claim. It seems to me that this would be disproportionate, particularly given the fact that, with the Commercial Court decision likely soon, there is no tangible benefit to be had. Indeed if a petition were presented in this (and as was accepted in a number of other cases) that be would bound to affect the funding of the key Commercial Court action, a matter considered by Colman J to be of considerable importance when he refused leave to appeal in the stay case. In the unlikely event of actual orders of bankruptcy being made before the Commercial Court case was heard, there would be further complications which would introduce impediments and costs in relation to the continuance of the fraud claims by the trustees in bankruptcy or the bankrupts themselves. Thus on procedural grounds too there is an interest of justice in the statutory demand being set aside, just as Colman J said was the position in relation to execution.
In the result I think the normal rule should apply in this case and accordingly I set aside the statutory demand.
Grower Freeman and Goldberg; Lloyd's