RE A DEBTOR sub nom SIMON RUSSELL GARROW v THE SOCIETY OF LLOYD'S (1999)

CA (Morritt LJ, Brooke LJ, Robert Walker LJ) 13/10/99

INSOLVENCY AND BANKRUPTCY - INSURANCE - FRAUD - COMMERCIAL - CIVIL PROCEDURE

LLOYD'S NAMES LITIGATION : LIABILITY TO PAY REINSURANCE PREMIUMS : DEBTS : BANKRUPTCY ORDERS : PRESENTATION OF BANKRUPTCY PETITIONS : STATUTORY DEMANDS : CROSS-CLAIMS FOR FRAUD : STRENGTH : SERIOUS AND GENUINE : SET ASIDE : INSOLVENCY RULES 1986 : QUANTIFICATION OF DAMAGE : PROTECTION OF CREDITORS : TANGIBLE BENEFIT : RECONSTRUCTION AND RENEWAL PLAN : R&R PLAN : REINSURANCE CONTRACT : PAY NOW SUE LATER CLAUSE : STAY OF EXECUTION : DELAY : TEST CASE : PERSONAL AND CORPORATE INSOLVENCY : PRACTICE AND PROCEDURE

Statutory demand against a Lloyd's Name was not enforceable where the Name had a genuine and serious cross-claim for fraud, the determination of which was pending in separate proceedings.

Appeal by The Society of Lloyd's ('Lloyd's') from the decision of Jacob J (summarised below) setting aside a statutory demand which it had served on the respondent ('G') a Lloyd's Name. Lloyd's grounds of appeal were as follows. (i) The judge erred in finding that G had shown that he had a genuine and serious cross-claim. (ii) In re Bayoil SA (1999) 1 BCLC 62, as a case concerned with corporate insolvency, had no application to proceedings relating to a statutory demand made against an individual. (iii) The judge should have held that clause 5.5 of the Reinsurance Contract (the "pay now, sue later" clause) created a contractual bar preventing G relying on his counterclaim as a ground for having the statutory demand set aside. This point was not fully argued before the judge.

HELD: (1) The judge was entitled to come to the conclusion that the cross-claim was serious and genuine. On the evidence before him, G had a sufficiently large counterclaim unless Lloyd's could rely on clause 5.5 to oust any cross-claim in respect of the reinsurance premium. (2) The general rule as to setting aside a statutory demand served on an individual (laid down in r.6.5(4) Insolvency Rules 1986, as supplemented by the practice note Bankruptcy Court: Statutory Demand (No.1 of 1987) (1987) 1 WLR 119) was very similar to the principle in Bayoil (supra) although there might be at least a difference in emphasis. (3) However, the function of the statutory demand was different in the two regimes of personal and corporate insolvency. In bankruptcy the crucial factor was the debtor's apparent inability to pay the debt in the statutory demand. Although Lloyd's had a judgment against G, it had chosen to proceed by way of a statutory demand and the statutory demand was crucial to the making of a bankruptcy order. It would be contrary to the scheme of the legislation, and to the practice of the bankruptcy court, to allow a doubtful statutory demand to stand on the ground that the debtor would still have the opportunity of opposing a bankruptcy petition, once presented. (4) The judge was right to reject the suggestion that he should allow a petition to be presented and then go into suspended animation. (5) The "procedural insulation" achieved by clause 5.5, fairly construed in accordance with the principles stated in Arbuthnot v Fagan (1995) CLC 1396 and Society of Lloyd's v Leighs & Ors (1997) CLC 1398, did not prevent G from asking the bankruptcy court to exercise its discretion to set aside the statutory demand served by Lloyd's. On the assumption that G's application to set aside the statutory demand amounted to the issue of proceedings and the assertion of a cause of action, it was not "in connection with his obligation to pay his name's premium" within the meaning of clause 5.5(b). The court followed the reasoning in Arbuthnot (supra). (6) The substance of the judge's conclusion was that he should apply the general rule (see point (2) above) and that led to the setting aside of the statutory demand. The judge was correct in that conclusion.

Appeal dismissed.

Edward Bannister QC and Lexa Hilliard instructed by the Society of Lloyd's for the appellant. Charles Purle QC and Lawrence Jones instructed by Grower Freeman & Goldberg for the respondent.

LTL 13/10/99 : TLR 28/10/99 : (2000) CLC 241 : (2000) 1 BCLC 103

Judgment Official

Document No. AC8600517

DECISION APPEALED

Ch.D Bankruptcy Court (Jacob J) 10/6/99

The applicant sought to set aside a statutory demand served on him by The Society of Lloyd's ('Lloyd's') on 10 August 1998, in the sum of about £200,000, which was due by way of a judgment debt obtained by Lloyd's in the Commercial Court on 11 March 1998 (see Society of Lloyd's v Leighs & Ors (1997) CLC 759). The liability arose from an obligation to pay a premium by way of reinsurance into Equitas under the Lloyd's Reconstruction and Renewal Plan. G was bound by clause 5.5 of the Reinsurance Contract (the "pay now, sue later" clause). G was one of 200 claimants who had started separate proceedings against Lloyd's for fraud. It was on the basis of this claim that he sought to set aside the statutory demand (r.6.5(4) Insolvency Rules 1986). A lead case was pending in the Commercial Court. He had no real property or physical assets of any significance. Lloyd's submitted the following points: (i) G's pleadings did not quantify the damage; (ii) Lloyd's needed to, and were entitled to get, a petition on foot as they were worried about potential dispositions of property at an undervalue or by way of preference (there was a time limit which ran from the day of presentation of the petition, s.341 Insolvency Act 1986; and (iii) the court should regard the fraud claim as being otherwise than "genuine and serious or one of substance".

HELD: (1) It would have been a futile exercise for the judge in this collateral litigation to attempt to assess the strength or weakness of the fraud claim. (2) For the purpose of setting aside a statutory demand it did not matter that the damage was not quantified. TSB Bank v Platts (1998) 2 BCLC 1 did not require quantification of the cross-claim but that it be shown that the cross-claim equalled or overtopped the claim. (3) It was not appropriate to say that a petition should be presented and then suspended simply so that, even though it might be ultimately dismissed, the creditor would get protection in the meantime. (4) The general rule in relation to setting aside the statutory demand accorded with the similar position in relation to companies as laid down by the Court of Appeal in In re Bayoil SA (1999) 1 BCLC 62. (5) Where there was a delayed cross-claim the court should take that delay into account in exercising its discretion but there was no strict rule as to the effect of delay. Although this claim could have been brought earlier, in the context of the massive complication of the Lloyd's litigation, no blame could be attached to G's failure to bring the cross-claim earlier. (6) Despite the "pay now, sue later" clause, the judge felt that the draconian effect of bankruptcy should not be imposed when the applicant might have a perfectly good cross-claim. It would be disproportionate and, particularly with the Commercial Court decision to come, there would be no tangible benefit to be had. On procedural grounds too there was an interest of justice in the statutory demand being set aside as a petition would impede the continuance of the fraud claims. (7) The normal rule should apply and the statutory demand set aside.

Judgment accordingly.

Charles Purle QC and Lawrence Jones instructed by Grower Freeman & Goldberg for the applicant. Lexa Hilliard instructed by the Society of Lloyd's for the respondent.

LTL 10/6/99 : TLR 18/6/99 : ILR 5/7/99

Approved - 9 pages

For related proceedings on the R&R Plan see Society of Lloyd's v Terence William Fraser (1998) 1630 and Society of Lloyd's v Sir William Otho Jaffray (1999) LTL 18/6/99.