z544sd98.txt Re a debtor (No 544/SD/98) COURT OF APPEAL (CIVIL DIVISION) [2000] 1 BCLC 103 HEARING-DATES: 2 September, 13 October 1999 13 October 1999 CATCHWORDS: Bankruptcy -- Winding up -- Statutory demand -- Application to set aside -- Counterclaim, set-off or cross-demand equalling or exceeding amount of statutorydemand -- Debt in statutory demand based on judgment obtained in respect of non-payment of reinsurance premium -- Debtor seeking to set aside statutory demand in reliance on cross-claim against creditor for fraudulent misrepresentation -- Contractual provision between creditor and debtor precluding debtor from issuing proceedings and postponing accrual of cause of action in connection with obligation to pay reinsurance premium until premium paid -- Debtor also contractually precluded from seeking injunctive or other relief preventing enforcement of obligation to pay reinsurance premium -- Whether debtor's application to set aside statutory demand amounting to institution of proceedings in connection with obligation to pay reinsurance premium or institution of proceedings seeking relief preventing enforcement of obligation -- Relationship between function of statutory demand in corporate andindividual insolvency regimes -- Insolvency Rules 1986, SI 1986/1925, r 6.5. HEADNOTE: Between 1976 and 1988 G had been an underwriting member (a Name) of Lloyd's. Due to losses sustained while he was a Name G owed a substantial sum to Lloyd's part of which he had repaid. He declined to accept a settlement offer made by Lloyd's and embodied in its Reinsurance and Renewal Plan. However, notwithstanding his non-acceptance of the plan G and all other non-acceptors were affected by the plan and in particular were bound by cl 5.5 of the plan which provided that each Name was obliged to pay his premium under the plan in all respects free and clear from any set- off, counterclaim or other deduction on any account whatsoever. That clause further provided that: (a) in connection with any proceedings brought to enforce the Name's obligation to pay the premium, the Name waived any claim to any stay of execution and consented to the immediate enforcement of any judgment so obtained; (b) the Name was disentitled from issuing proceedings and no cause of action would arise or accrue in connection with his obligation to pay the premium unless the premium had been paid; and (c) the Name was precluded from seeking injunctive or any other relief which would prevent enforcement of the Name's obligation to pay his premium. As a result of their being bound by the terms of cl 5.5 non-accepting Names could not raise any cross-claim by way of defence or set-off to Lloyd's claims for payment of the reinsurance premiums. G failed to pay the reinsurance premiumand in March 1998 Lloyd's obtained judgment against G in respect of it, and in August 1998 served a statutory demand upon him. In June 1998 a number of non-accepting Names (including G) commenced proceedings by way of counterclaim against Lloyd's alleging fraudulent misrepresentation. Trial of a preliminary issue in those proceedings was due to commence in January 2000. The judge acceded to an application by G to set aside the statutory demand pursuant to r 6.5(4)(a) of the Insolvency Rules 1986, SI 1986/1925, which permitted the court to grant such an application where, inter alia, the debtor had a counterclaim which equalled or exceeded the amount of the debt stated in the statutory demand. The judge did not attempt to quantify the amount of the counterclaim butapplying the guidance applicable to the setting aside on the basis of a counterclaim of a statutory demand served on a company, found that G's claim in fraud was a genuine and serious counterclaim, and the judge was prepared to assume that if it succeeded the damages would at least equal the amount of the debt stated in the statutory demand. Lloyd's appealed, submitting: (i) that the judge had erred in having regard to guidance concerned with corporate insolvencywhich had no application to proceedings relating to a statutory demand made against an individual; and (ii) that the judge should have held that cl 5.5 of the reinsurance contract created a contractual bar preventing G from relying on his counterclaim as a ground for having the statutory demand set aside. As regards quantification of G's counterclaim, it was common ground before the Court of Appeal that G's counterclaim could equal or exceed his liability in respect of the reinsurance premium only if that liability was itself brought in as part of the counterclaim and that accordingly G had a sufficiently large counterclaim unless Lloyd's could rely on cl 5.5 to oust any cross-claim in respect of the reinsurance premium. At the hearing before the Court of Appeal Lloyd's conceded that the presentation of the bankruptcy petition was not the enforcement of a judgment and it therefore abandoned any reliance on cl 5.5(a). Held -- (1) Rule 6.5(4) of the 1986 rules, laid down the general rule as to setting aside a statutory demand served on an individual. That general rule was very similar to the principle applicable to the corporate insolvency regime. However, there was one significant difference between the corporate and individual insolvency regimes, and that was the function of the statutory demand. In the former, the statutory demand merely provided one means of establishing a company's inability to pay its debts, whilst in bankruptcy, it was not the debtor's general inability to pay his debts that was crucial but the apparent inability to pay the debt in the statutory demand. Although Lloyd's had obtained a judgment against G, it had chosen to proceed by way of 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. On the evidence the judge had been entitled to conclude that the counterclaim for fraudulent misrepresentation was a genuine and serious counterclaim and he had been right to refuse to allow a petition to be presented and then go into suspended animation. Practice Direction (bankruptcy: statutory demand: setting aside) [1987] 1 All ER 607 and dicta of Peter Gibson LJ in TSB Bank plc v Platts (No 2) [1998] 2 BCLC 1 at 6-7, applied. Re Bayoil, Seawind Tankers Corp v Bayoil SA [1999] 1 BCLC 62 considered. (2) Clause 5.5(b) prohibited the Name from issuing proceedings and postponed the accrual of any cause of action in connection with the Name's obligation to make a payment until that obligation had been performed. Clause 5.5(c) prohibited the Name from seeking injunctive or other relief preventing enforcement of the obligation. Even assuming that G's application to set aside the statutory demand amounted to the issue of proceedings and the assertion of acause of action, it was not 'in connection with' his obligation to pay his Name's premium within the meaning of cl 5.5(b). Furthermore, G's original contractual obligation had been transformed into a judgment debt and Lloyd's could not, therefore, rely on cl 5.5(c). Clause 5.5 of the reinsurance contract did not therefore have the effect of preventing G from asserting that he had a genuine and serious counterclaim of sufficient size to enable him to ask the bankruptcy court to exercise its discretion to set aside the statutory demand served by Lloyd's. Arbuthnot v Fagan [1995] CLC 1396 applied. Accordingly, Lloyd's appeal would be dismissed. INTRODUCTION: The Society of Lloyd's appealed. COUNSEL: Edward Bannister QC and Lexa Hilliard for the appellant; Charles Purle QC andLawrence Jones for the respondent. JUDGMENT-READ: Cur adv vult 13 October 1999. The following judgments were delivered. PANEL: MORRITT, BROOKE, ROBERT WALKER LJJ JUDGMENTBY-1: ROBERT WALKER LJ JUDGMENT-1: ROBERT WALKER LJ (giving the first judgment at the invitation of Morritt LJ): This is an appeal from an order of Jacob J made on 17 June 1999 setting aside a statutory demand dated 10 August 1998 served on G by the Society of Lloyd's. The demand was for the sum of £196,167.13 under a judgment for £189,829.59 obtained by Lloyd's against G on 11 March 1998. G was a name at Lloyd's and the judgment debt was based on his undisputed liability to pay a reinsurance premium under the Lloyd's Reconstruction and Renewal Plan (the R & R Plan), a description of which can be found in the judgment of Colman J in Society of Lloyd's v Leighs [1997] CLC 759 at 761- 765. The amount of the reinsurance premium was £169,029.81; the balances over that amount in the judgment debt and the statutory demand were in respect of interest. G claims to have a counterclaim against Lloyd's for an amount at least equal to his liability to Lloyd's in respect of the premium, and it was on that ground that Jacob J set aside the statutory demand. The judge described this as something of a test case. In autumn 1996 Lloyd's issued writs against over 600 names or former names who had declined to accept the R & R Plan. Colman J directed a number of test cases to be heard in order to determine the legal effect of cl 5.5 (which is often referred to as the 'pay now, sue later' clause) of the reinsurance contract dated 3 September 1996. Colman J delivered two judgments, on 20 February and 23 April 1997 (see [1997] CLC 759 and [1997] CLC 1012) and these were upheld by this court on 31 July 1997(see [1997] CLC 1398). Other defences to Lloyd's claims under cl 5.5 also failed(see Society of Lloyd's v Fraser [1998] CLC 127; affd [1998] CLC 1630). The outcome is that non- accepting names are bound by the terms of cl 5.5 and cannot raise any cross-claim by way of defence or set-off. Nevertheless many non-accepting names (including G) have put forward cross-claims against Lloyd's alleging fraudulent misrepresentations. The lead case is Society of Lloyd's v Jaffray in which the defendant's defence and counterclaim were served on 21 November 1997, and in which G is a claimant by counterclaim. On 30 June 1998 Colman J directed a preliminary issue in Jaffray. This preliminary issue (often referred to as the 'threshold fraud point') is in the terms- 'whether Lloyd's made misrepresentations which it knew to be untrue and/or asto which it was reckless whether they were true or false and whether such misrepresentations were communicated to the Name and if so when.' The trial of the threshold fraud point was to have commenced during October or early November 1999, with an estimated duration of three months. Between 24 and 29 June 1999 Cresswell J heard an application by Lloyd's to postpone the hearing until 1 February 2000. Cresswell J treated the application as a full management directions hearing and refixed the date for trial of the preliminary issue as 11 January 2000. His order (made on 1 July 1999) contains detailed directions as to preparation for the hearing. The directions include the trial of a further issue, that is whether each of three sample names relied on the pleaded representations during the relevant period. (G is not a sample name.) The estimated duration of the hearing is now three to six months. In the meantime Lloyd's has obtained summary judgment against numerous other defendants in the same position as G, and has served statutory demands on many of them. Since the judgment of Jacob J, Lloyd's has agreed with the solicitors for the other counter-claimants that other applications to set aside statutory demands will be held in suspense until the determination of this appeal. But theagreement (and the status of G's appeal as a test case) go no further than that.Since the court's power to set aside a statutory demand involves the exercise ofa judicial discretion, the outcome may depend on the facts of the particular case. The grounds on which the court may grant an application to set aside a statutory demand are set out in r 6.5 of the Insolvency Rules 1986, SI 1986/1925(the 1986 rules), para (4) of which 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 . . .' Practice Direction (bankruptcy: statutory demand: setting aside) [1987] 1 All ER 607, [1987] 1 WLR 119 provides guidance as to the exercise of the court's powers: '3. Where the statutory demand is based on a judgment or order, the court will not at this stage go behind the judgment or order and inquire into the validity of the debt nor, as a general rule, will it adjourn the application to await the result of an application to set aside the judgment or order. 4. 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 or (b) disputes the debt (not being a debt subject to a judgment or order), the court will normally set aside the statutorydemand if, in its opinion, on the evidence there is a genuine triable issue.' The practice note was signed by the Chief Bankruptcy Registrar, but no doubt after consultation with the Vice-Chancellor (Sir Nicolas Browne- Wilkinson V-C). It has not been suggested that the practice note should be overruled or departedfrom. It was referred to without any disapproval by this court in TSB Bank plc vPlatts (No 2) [1998] 2 BCLC 1 at 7. Before Jacob J, G relied on r 6.5(4)(a) and para 4(a) of the Practice Direction, which the judge referred to as the general rule. He said that that general rule accorded with the similar position in relation to companies laid down by this court in Re Bayoil, Seawind Tankers Corp v Bayoil SA [1999] 1 BCLC 62, [1999] 1 WLR 147. But before going further into the judge's reasoning, and the submissions made in this court, it is appropriate to summarise the essentialfacts of G's case. G was elected as an underwriting member of Lloyd's in 1976. He was then 30 years of age and working as a self-employed artist. He became a member of the O Syndicate XXX/XXX and as a member of that syndicate he sustained losses for the 1982 year of account. On 26 April 1988 he was informed by his underwriting agents that he faced 'a substantial cash call for the [O] 1982 Open Year' (then estimated at £10,000 to £15,000). On 1 July 1988 he resigned as an underwriting member. The agents' estimate proved to be far too low and by the end of 1989 G owed Lloyd's Central Fund nearly £20,000, after calls on his deposited funds. Atthe end of 1990 he approached the Lloyd's Members' Hardship Committee (MHC) but was dilatory in completing the necessary declaration of his personal financial position. He eventually submitted it to Lloyd's in October 1991. In December 1992 the MHC indicated the terms which it was likely to recommend. These included taking a charge on G's beneficial half-share in his residence, subject to a substantial building society mortgage. In June 1993 G wrote to the MHC to let them know that he and his wife were separating, the house was to be sold in order to pay off the mortgage, and his teaching job was coming to an end. The house was sold in May 1994 for £285,000, of which the mortgage took all but about £60,000. G's solicitors informed Lloyd's that the balance had been used to repay a loan from his father. On 27 February 1995 Lloyd's informed G that as he had chosen to repay his father in preference to Lloyd's, his hardship application had been withdrawn. Subsequently however Lloyd's reconsidered that position. In July 1996 Lloyd's circulated to its underwriting members details of a settlement offer embodying the R & R Plan. G did not accept the offer. In October 1996 Equitas Ltd (the principal operating company of the Equitas Group established as part of the R & R Plan) assigned to Lloyd's the right to recover premiums payable under the plan. Lloyd's then issued over 600 writs against non-accepting names, including G, leading to the proceedings already mentioned before Colman J and this court. After Lloyd's obtained summary judgment against G and served the statutory demand on him, he was granted an extension of time for his application to have it set aside. In an affidavit sworn on 11 September 1998 he deposed that he had paid Lloyd's over £140,000 and had assets (cash at bank and an old car) valued at only £1,000. He was training to be a teacher and subsisting on a local authority grant and income support. He was living in rented accommodation with his two daughters, both of whom are students. However, Mr Philip Coldbeck (the Assistant Manager of Lloyd's Financial Recovery Department) has deposed that G paid only about £57,000 (including the drawing down of his deposited funds). The judge made no reference in his judgment to this striking disparity in the evidence and it may not have been brought clearly to his attention. G further deposed that as he had no assets of any material value, his initial attitude had been to let Lloyd's do its worst. However, he had decided that he should at least try to pursue his counterclaim against Lloyd's. He believed that if Lloyd's succeeded in bankrupting him, his counterclaim would never reach the court. His defence and counterclaim were pleaded on 12 October 1998, largely by reference to the schedules to the defence and counterclaim in Jaffray (the fact that G put in a defence, despite having had summary judgment entered against him, is an oddity resulting from the terms of Colman J's directions). In his judgment Jacob J did not attempt to quantify G's prospects of success in his counterclaim. The judge regarded that as a futile exercise. Instead he asked himself, following the guidance given by Nourse LJ in Bayoil [1999] 1 BCLC62 at 71, [1999] 1 WLR 147 at 155, whether the cross- claim was 'genuine or serious or, if you prefer, one of substance'. The judge was prepared to assume that if the cross-claim succeeded the damages would at least equal G's liability. In this court counsel for Lloyd's have advanced a number of criticisms of thejudge's approach and conclusions. They have submitted that (quite apart from the'pay now, sue later' clause, on which they rely as a separate ground of appeal) the judge erred in finding that G had shown that he had a genuine and serious cross-claim. They have submitted that Bayoil, as a case concerned with corporateinsolvency, has no application to proceedings relating to a statutory demand made against an individual. They have also submitted that the judge should have held that cl 5.5 of the reinsurance contract created a contractual bar preventing G relying on his counterclaim as a ground for having the statutory demand set aside. In order to lay the foundation for this last submission Lloyd's applied for permission to amend its notice of appeal (which already extended to nine paragraphs, some elaborately subdivided). This court gave permission for the amendments, although some of them raise points not argued (ornot fully argued) before the judge. Counsel for Lloyd's were critical of the pleading of G's counterclaim in the Jaffray action and of G's affidavit evidence in these proceedings. The burden ison G to show that he has a substantial cross-claim. Counsel relied on some observations of Lloyd J in Re Latreefers Inc, Stocznia Gdanska SA v Latreefers Inc [1999] 1 BCLC 271 at 282: '[Counsel for the cross-claimant company opposing a winding-up petition] pointed out that these cross-claims are asserted in the counterclaim and have not been the subject of an application to strike them out. That is beside the point. To bring the Bayoil practice into play he has to show, at least on a prima facie basis, the substance of the cross-claims, which involves more than just pleading them.' Whether or not Bayoil provides a close analogy in cases where an individual debtor is relying on a cross-claim in an application to have a statutory demand set aside, the general rule which the judge derived from r 6.5(4)(a) of the 1986rules and para 4(a) of the Practice Direction requires the debtor to show that his cross-claim has substance and will, if it succeeds, at least equal the debtor's liability. Delay in putting forward a cross-claim may lead to an inference that it is not put forward in good faith, but only as a pretext in an attempt to stave off bankruptcy. However, there may be a satisfactory explanation for delay, and the Practice Direction recognises that failure to raise it in the original action against the debtor need not be fatal. In this case G's own affidavit evidence cannot be described as a detailed verification of his cross-claim against Lloyd's. In his first affidavit sworn on 11 September 1998 he deposed: 'However, I am in my present parlous position solely because of my involvement with Lloyd's and the trust that I placed in what I was told by Lloyd's and those who represented Lloyd's. I therefore wish to pursue my counterclaim against Lloyd's through the membership of the United Names Association to recover some at least of what I have lost.' In his second affidavit sworn on 15 February 1999 G referred to an affidavit of Mr Coldbeck seeking- 'to undermine the nature, purpose and impact of my allegations against Lloyd's which are, inter alia, that Lloyd's fraudulently suppressed relevant information and made fraudulent mis-representations to names such as me, thereby inducing those names to become members of Lloyd's and/or to increase their participation and/or to renew their membership year by year.' Later in the same affidavit G added, 'If any further evidence were required to demonstrate that the [Jaffray] action represents a genuine and serious claim and is one of substance' reference might be made to what Colman J said on 15 January 1999 when dismissing an application made by Lloyd's for a stay of proceedings. Colman J is reported as having said: 'The present case involved allegations by the names of the utmost seriousness, involving a pattern of deception by Lloyd's directed to maximizing its capacity in order to accommodate more business. These allegations are not confined to a short period of time many years ago. They allege a continuing culture of misrepresentation over many years. These allegations are exceptionally damaging to Lloyd's reputation and to the reputation of the Londoninsurance market in general. Further, if they are made good at the trial, it mayalso be proved that this conduct has caused the names to suffer immense financial losses, so great in many cases that individuals have been driven to bankruptcy, physical illness and death as a result.' The judge found that G did have a genuine and serious claim and that G's delay was excusable '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'. In my judgment the judge was entitled to come to those conclusions. G's cross-claim has not simply been pleaded (although the fact that the allegation of fraudulent misrepresentation appears in a pleading signed by leading and junior counsel is not without significance). Intensive case-management has already made judges of the commercial court (Colman J and Cresswell J in particular) familiar with the issues in the group action, and many of the most important issues are to be tried within a matter of months. G is not one of the sample names in the further issue directed by Cresswell J, but he has deposed that he trusted Lloyd's and relied on representations made onits behalf. That is not the end of this point because counsel for Lloyd's also criticisedthe judge's approach to the quantum of G's cross-claim. Here it is necessary to come back to the serious conflict in the evidence as to how much G has already paid to Lloyd's. Fortunately it is not necessary to resolve that conflict because leading counsel for G conceded that even if the figure of about £140,000is correct, the counterclaim can equal or exceed G's liability in respect of thereinsurance premium only if that liability is itself brought in as part of the counterclaim (which leads straight into the cl 5.5 point). Conversely leading counsel for Lloyd's accepted that, even if the amount of the past payment was only about L57,000, the inclusion of the reinsurance premium would be decisive. The cl 5.5 point has therefore acquired much more importance in this court than it was seen as having at first instance. The judge has been criticised for stating that he was 'prepared to assume' that if G's counterclaim was good the damages awarded to him would at least equal his liability for the reinsurance premium. The judge's choice of words might have been improved on but he was right in his conclusion. On the evidence before him, however the conflict were to be resolved, G had a sufficiently large counterclaim unless Lloyd's can rely on cl 5.5 to oust any cross-claim in respect of the reinsurance premium. Although the decision of this court in Bayoil featured prominently in the original notice of appeal and in the appellant's written argument, it was rightly given less prominence in counsel's oral submissions. There are obvious similarities, but also obvious points of difference, between the two statutory regimes dealing with individual and corporate insolvency, and the determination of this appeal does not depend on compiling a balance- sheet of similarities and differences. Rule 6.5(4) of the 1986 rules, as supplemented by the Practice Direction, lays down the general rule as to setting aside a statutory demand served on an individual. That general rule is very similar to the principle in Bayoil, although there may be at least a difference in emphasis between the Practice Direction ('whether or not he could have raised it in the action') and Nourse LJ's requirement ([1999] 1 BCLC 62 at 71, [1999] 1 WLR 147 at 155) that the cross-claim 'must be one which the company has been unable to litigate'. It is, however, material to note one significant difference between the individual and corporate insolvency regimes, that is the function of the statutory demand which is provided for in both regimes (in individual bankruptcyprimarily ss 267 and 268 of the Insolvency Act 1986; in winding- up primarily s 123). But as Peter Gibson LJ said, delivering the judgment of the court in TSB Bank plc v Platts (No 2) [1998] 2 BCLC 1 at 6-7, the statutory demand is of crucial importance in individual bankruptcy: 'It is accordingly quite different from a statutory demand in the field of company law which merely provides one means of establishing a company's inability to pay its debts, the usual ground on which a company is wound up compulsorily. In contrast in bankruptcy it is not the debtor's general inabilityto pay his debts that is crucial but the apparent inability to pay the debt in the statutory demand, and at the hearing of the bankruptcy petition the failure to pay or secure or compound for that debt.' Although Lloyd's has a judgment against G, it has chosen to proceed by way of a statutory demand and the statutory demand is 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. Counsel for Lloyd's have argued that thatcourse would enable Lloyd's to present a petition and so establish a date by reference to which transactions might be invalidated or impeached under ss 284 and 339 (and following) of the Insolvency Act 1986, while protecting G by an adjournment of the final hearing of the petition. However, it is precisely because of the far-reaching effect of those sections (and comparable sections in the winding-up legislation) that the bankruptcy court and the companies court have a strong and well-established policy of discouraging long or repeated adjournments of bankruptcy and winding-up petitions. The judge was right to reject the suggestion that he should allow a petition to be presented and then go into suspended animation. The judge did, in deference to some submissions made on behalf of Lloyd's, accept from G and his father undertakings that they would (in the event of the son's bankruptcy on a petition by Lloyd's founded on the judgment debt) accept 10 June 1999 as the 'relevant time' for the purposes of an application under s 339 in relation to the proceeds of sale of G's residence. The undertakings were offered by G's counsel and are embodied in the judge's order. Lloyd's did not ask for them and has now raised doubts as to their efficacy. It is not necessaryor appropriate to express any view as to those doubts. The undertakings plainly were not of central importance to the judge's conclusion that he must rule on the statutory demand on its merits, rather than allowing a petition to be presented and go into suspended animation. There has been much more argument in this court on cl 5.5 of the reinsurance contract (the 'pay now, sue later' clause) than there was below. It is in the following terms (ERL being a reference to Equitas Reinsurance Ltd): '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 anyaccount whatsoever including in each case, without prejudice to the generality_[H_ _=_[0m_[2J_______ [2000] 1 BCLC 103 of the foregoing, in respect of any claim against ERL, the Substitute Agent, anyManaging 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 toany 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.' Counsel on either side referred extensively to two previous decisions of thiscourt concerned with different aspects of the Lloyd's litigation. Arbuthnot v Fagan [1995] CLC 1396 concerned actions brought by Lloyd's names against their members' agents and managing agents. The standard forms of agency agreement contained a 'pay now, sue later' clause (cl 9(b) and (c) in the specimen form considered in the judgments). _[7m Society of Lloyd's _[0m v Leighs [1997] CLC 1398 was an appeal from the decisions of Colman J already mentioned, and was directly concerned with cl 5.5 of the R&R Plan reinsurance contract. Arbuthnot is not referred to in the judgment of the court in Leighs (delivered by Saville LJ), although all three members of the court in Arbuthnot (Sir Thomas Bingham MR, @teyn and Hoffmann LJJ) made some valuable general observations about the construction of contracts. In Arbuthnot cl 9(b) obliged the name to pay any funds required by the agent free of any set-off, counterclaim or other deduction, which was not to be a defence to any proceedings by the agent to enforce his requirement; the name waived any stay of execution and consented to the immediate enforcement of any judgment. Clause 9(c) then went on (at 1398): 'It shall be a condition precedent to the issue of proceedings or the making of any reference to arbitration by the name in respect of any matter arising outof or in any way connected with either the making of such requirement by the agent or the subject matter thereof, or the preparation or audit of the accounts referred to in cl. 6, that the name shall have duly complied with any such requirement made or purported to be made by the agent, and no cause of action inrespect of any such matter shall arise or accrue in favour of the name until such requirement shall have in all respects been duly complied with. At no time shall the name seek injunctive or any other relief for the purpose (or which hasthe result) of preventing the agent from making or enforcing any such requirement . . .' The last sentence of cl 9(c) dealt with the application of funds in the agent's hands and is not directly in point. There are obvious similarities (although also some points of difference) between the part of cl 9(c) set out above and the provisions of cl 5.5(b) and (c). The principal similarities are: (i) the prohibition on the issue of proceedings connected with the name's obligation to make a payment until that obligation has been performed; (ii) the postponement of the accrual of any cause of action connected with the obligation until the obligation has been performed; and (iii) the prohibition on the name seeking injunctive or other relief preventing enforcement of the obligation. In Arbuthnot Saville J and the Court of Appeal held that the purpose of cl 9(c) was to supplement cl 9(b) and ensure that agents' calls on names were met promptly, so as to enable claims to be met promptly. They rejected the agents' argument that cl 9(c) went further and extended to claims against the agents forbreach of duty since (as it was argued) 'the loss and damage claimed relate directly to and are founded upon the cash requirements made upon the names for purposes of the underwriting business' (see [1995] CLC 1396 at 1398). In this court Sir Thomas Bingham MR was influenced (at 1399) by the care with which the draftsman had defined the name's rights of suit which were to be postponed. The evident purpose of the clause was to ensure that funds were available for the prompt settlement of valid claims. Sir Thomas Bingham MR said (at 1400): 'But that need does not require that names should forego all rights to complain of negligent underwriting while there are still calls outstanding or unpaid. There is no necessary connection between foregoing rights to challenge requirements until payment has been made and foregoing rights to complain of negligent underwriting not involving a challenge (on grounds of procedure or substance) to the requirement, and far from seeking to link them the text of the subclause is on my reading of it clear in its intention to treat them separatelyby directing its prohibition to the former situation and not the latter. I am fortified in my preference for the names' construction by the recognition that the agents' would, as I think, deprive the names of valuable rights without doing so clearly or for any obvious reason, would in certain situations work severe hardship to the names without corresponding benefit to the market and would give rise to offensive anomalies.' Steyn LJ noted (at 1400-1401) that counsel for the agents- 'emphasised that the fact of cash calls, and the payments made by names pursuant to the cash calls, must necessarily be part of the evidential material which will be placed before the court in aid of the quantification of the names' losses. That may be right. But the very deployment of such evidence by the names will presuppose the acceptance by the names of the validity of the cash calls.' Hoffmann LJ said (at 1403) that the clause's references to connections must be limited to those which were relevant to the purpose in hand. He continued (at1404): 'On this view, the proceedings brought by the names do not fall within (c). They are not calculated to challenge, invalidate or block the enforcement of the cash calls. The names acknowledge their liability in respect of those which remain unpaid. In some cases at least, the reason for non-payment is that they have no more money. But they wish to pursue claims for negligence by the agents in the conduct of the underwriting business. In my judgment these claims are notfor the purpose of cl 9 "connected with" the cash calls. The whole purpose of the clause in making the cash call an autonomous obligation is to ensure that there is no such connection. It seems to me legitimate to test the plausibility of a given construction by examining what the consequences would be. The construction for which the agents contend means that if they are going to be negligent, they should rather ruin their names entirely than leave them with enough resources to pay their calls. In the latter case they will be exposed to an action for negligence whereas in the former case they will be immune.' In Leighs the appellants in this court were non-accepting names whom Colman Jhad held to be bound by the R&R Plan and the 'pay now, sue later' clause in the reinsurance contract. Many of the points considered by this court in Leighs do not arise on this appeal. But the sections of the judgment headed 'Set-off etc' and 'Stay of Execution' (see [1997] CLC 1398 at 1406-1410) contain some relevantpassages. The court first rejected various arguments for a restrictive interpretation of cl 5.5. Then (at 1408) it rejected the names' argument that their claims for damages for fraud should properly be regarded as a 'pure' defence transcending the words in cl 5.5 'any set-off, counterclaim or other deduction on any account whatsoever'. In the context of an application for a stay of execution the court said (at 1409): 'Whilst it is agreed that the clause cannot oust the court's jurisdiction, ithas potent effect. The insulation of the set-off and counterclaim was intended to achieve the speedy discharge of the indebtedness, which intention would be avoided and the whole function of the clause subverted by a stay of execution.' At the hearing of this appeal leading counsel for Lloyd's relied on cl 5.5(b)and (c). He conceded that the presentation of a bankruptcy petition is not enforcement of a judgment (see Re International Tin Council [1987] BCLC 272 at 290-291, [1987] Ch 419 at 454 (Millett J); [1988] BCLC 404 at 523 and 526-529, [1989] Ch 309 at 328 and 331-334 (Court of Appeal) and the earlier cases there cited. Bankruptcy leads not to the discharge of the debt owed to the petitioning creditor but to the administration of the debtor's assets for the discharge (so far as possible) of all the debts provable in his bankruptcy, after meeting the costs of the bankruptcy. In his submissions on cl 5.5(b) and (c) leading counsel for Lloyd's argued that it was the wrong approach to look at the position as it would be if G had been adjudicated bankrupt, when any contractual bar on mutual set-off would be overridden by statute (see s 323 of the Insolvency Act 1986 and, under the old law, National Westminster Bank Ltd v Halesowen Presswork and Assemblies Ltd [1972] 1 All ER 641, [1972] AC 785). Leading counsel for G, while referring to s323 and Halesowen in the respondent's notice and in his written submissions, relied primarily on Colman J's description of cl 5.5 (see [1997] CLC 1012 at 1032-1033) as 'a clause directed to nothing more than the procedural insulation of one class of claim' (so repeating the insulation metaphor used in Arbuthnot). As he developed his argument in his oral submissions (and especially in his reply) leading counsel for Lloyd's relied strongly on this court's rejection in Leighs of the 'pure defence' argument (see [1997] CLC 1398 at 1408), submitting that G's counsel was running essentially the same point in different clothing. I cannot accept that submission. G has made plain through his counsel that he does not (at any rate short of the House of Lords, if Jaffray were to go that far) challenge his liability for the reinsurance premium. He asserts that he hasa genuine and serious counterclaim of sufficient size to enable him to ask the bankruptcy court to exercise its discretion to set aside the statutory demand served by Lloyd's. The real issue is whether the 'procedural insulation' achieved by cl 5.5, fairly construed in accordance with the principles stated inArbuthnot and Leighs, prevents him from doing so. I do not consider that cl 5.5 has that effect, for reasons essentially the same as those given by this court in Arbuthnot. 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 my judgment 'in connection with his obligation to pay his name's premium' within the meaningof cl 5.5(b). All the passages in Arbuthnot which I have already cited support that conclusion, with the exception of Sir Thomas Bingham MR's reliance (see [1995] CLC 1396 at 1399) on the careful enumeration of the restricted rights of suit. But that point cannot be determinative. All the other citations emphasise the need for a purposive construction of the vague phrase 'in connection with'. Leading counsel for Lloyd's also relied on cl 5.5(c), pointing out that it refers to the enforcement of an obligation (rather than a judgment). But_Lloyd's is a judgment creditor and G's original contractual obligation has been transformed into a judgment debt. In the circumstances of this case cl 5.5(c) adds nothing to cl 5.5(a). In my judgment, therefore, the appellant's reliance on cl 5.5 fails as a matter of construction and it is unnecessary to consider whether (had the clause expressly referred to setting up a cross-claim of any sort in opposition to a statutory demand) the judge should have exercised his discretion so as to override a contractual provision inconsistent with the general scheme and policy of the bankruptcy legislation. That is a hypothetical question on which the court did not hear full argument and it is better to say no more about it. The submissions made to the judge in relation to cl 5.5 seem to have been different from those advanced in this court and it is unnecessary to comment on the judge's reasons for rejecting them (apart from noting that what the judge said about the funding of the Jaffray action, whether or not wholly correct, seems not to have been central to the exercise of his discretion). If and so faras the judge did take account of any irrelevant matters in the exercise of his discretion, I would not arrive at any different conclusion in the exercise of a fresh discretion. The substance of the judge's conclusion was that he should apply what he called the general rule and that the application of the general rule led to the setting aside of the statutory demand. I consider that the judge was correct in that conclusion and I would dismiss this appeal. JUDGMENTBY-2: BROOKE LJ JUDGMENT-2: BROOKE LJ: I agree. JUDGMENTBY-3: MORRITT LJ JUDGMENT-3: MORRITT LJ: I also agree. DISPOSITION: Appeal dismissed with costs subject to detailed assessment. SOLICITORS: Society of Lloyd's; Grower Freeman & Goldberg.