z544sd98_cd.txt Re a debtor (No 544/SD/98) CHANCERY DIVISION [2000] 1 BCLC 103 HEARING-DATES: 9, 10 June 1999 10 June 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 tothe 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-offto Lloyd's 0m claims for payment of the reinsurance premiums. G failed to pay thereinsurance premium and 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 but applying 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 insolvency which had no application to proceedings relating to a statutory demand made against an individual; and (ii) that the judge should haveheld 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 tooust 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 theapparent 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 genuineand 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. CASES-REF-TO: Arbuthnot v Fagan [1995] CLC 1396. Bayoil, Re, Seawind Tankers Corp v Bayoil SA [1999] 1 BCLC 62, [1999] 1 All ER 374, [1999] 1 WLR 147, CA. Brinds Ltd v Offshore Oil NL (1986) 2 BCC 98,916, PC. Hofer v Strawson [1999] 2 BCLC 336. International Tin Council, Re [1987] BCLC 272, [1987] 1 All ER 890, [1987] Ch 419; affd [1988] BCLC 404, [1988] 3 All ER 257, [1989] Ch 309, CA. Latreefers Inc, Re, Stocznia Gdanska SA v Latreefers Inc [1999] 1 BCLC 271. National Westminster Bank Ltd v Halesowen Presswork and Assemblies Ltd [1972] 1 All ER 641, [1972] AC 785, [1972] 2 WLR 455, HL. Society of Lloyd's v Fraser [1998] CLC 127; affd [1998] CLC 1630, CA. Society of Lloyd's v Jaffray (30 June 1998, unreported), QBD. Society of Lloyd's v Leighs [1997] CLC 759; [1997] CLC 1012; affd [1997] CLC1398, CA. TSB Bank plc v Platts (No 2) [1998] 2 BCLC 1, CA. INTRODUCTION: The applicant debtor applied to set aside a statutory demand served on him bythe Society of Lloyd's on 10 August 1998 in respect of a sum due by way of a judgment debt obtained by Lloyd's in the commercial court on 11 March 1998. The applicant sought to rely on a counterclaim which he alleged equalled or exceeded the amount of the debt in the statutory demand. Lloyd's contended that the debtor was contractually barred from relying on his counterclaim as a ground for having the statutory demand set aside. The facts are set out in the judgment of Jacob J. COUNSEL: Charles Purle QC and Lawrence Jones for the applicant; Lexa Hilliard for the respondent. PANEL: JACOB J JUDGMENTBY-1: JACOB J JUDGMENT-1: JACOB J: This, it is common ground, is something by way of a test case,[H=[0m[2J [2000] 1 BCLC 103 there being quite a number of individuals who stand in the same or similar position as the applicant, G. 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 L200,000. That sum is due by way of a judgment debt obtained by Lloyd's in the commercial court on 11 March 1998. There is nodispute as to the liability. It arises from a liability to pay a premium by way of reinsurance into Equitas Ltd 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 [1997] CLC 1398. 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. G 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 cl 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 anyaccount whatsoever including in each case, without prejudice to the generality of the foregoing, in respect of any claim against [Equitas Reinsurance Ltd (ERL)], the Substitute Agent, any Managing Agent, his Members' Agent, Lloyd's or any other person whatsoever and: (a) in connection with any proceedings whichmay 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 G'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 cl 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 area claim against Lloyd's in fraud. So those in the same position as G 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 cl 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 Appealin Leighs indicated that it might be possible for individuals who would sufferhardship 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. G, 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 andwhether 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 G), will have a considerable effect upon them. Thus the current position as regards G is that he owes L200,000 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 three 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. Theclaimants 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 G's present liability. It was suggested that his pleadings do not quantifythe damage. From the point of view of setting aside a statutory demand I do not think that matters. Miss Hilliard suggested that TSB Bank plc v Platts (No 2) [1998] 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 isnot 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 G would resist the petition on the basisof 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 Ltd v Offshore Oil NL (1986) 2 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 undervalueor by way of preference. There is a time limit which runs from the day of presentation of the petition (see s 341 of the Insolvency Act 1986). Secondly, there was a specific worry in this case about a repayment of a loan by G 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 G indicated that this specific worry could certainly be overcome by appropriate undertakings from G and his father, which he had proffered and which I am mindedto accept. As to the general worry, there is no material in this case suggesting that any other transaction of G's could be remotely affected. Moreover, in the case of all the people in G'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 presented 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 s 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. Rule 6.5(4) of the Insolvency Rules 1986, SI 1986/1925, 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 Practice Direction (bankruptcy: statutory demand: setting aside) [1987] 1 All ER 607, [1987] 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, Seawind Tankers Corp v Bayoil SA [1999] 1 BCLC 62, [1999] 1 WLR 147. It is sufficient to go to the headnote (see [1999] 1 BCLC 62) 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 [1999] 2 BCLC 336 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 acheque 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 [1999] 1 BCLC 62 at 71, [1999] 1 WLR 147 at 155, to the cross-claim being one 'the company had been unable to litigate'. There is no such reference in the corresponding Bankruptcy Practice Direction. Miss Hilliardsuggested that the requirement of a previous inability to litigate was a threshold requirement so that if the debtor could have litigated his cross- claimearlier 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 notit 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 G 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 claimsand defences, that no blame can be attached to G'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. G had agreed that if he was to bring a cross-claim he should none the less 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 would bebound 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 toappeal 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. DISPOSITION: Judgment accordingly. SOLICITORS: Grower Freeman & Goldberg; Society of Lloyds.