Financial Services Compensation Scheme Ltd v Larnell (Insurances) Ltd ((in Liquidation))
| Jurisdiction | England & Wales |
| Judge | Lord Justice Lloyd,Lord Justice Moore-Bick,Sir Peter Gibson |
| Judgment Date | 29 November 2005 |
| Neutral Citation | [2005] EWCA Civ 1408 |
| Docket Number | Case No: 2005/0547 |
| Court | Court of Appeal (Civil Division) |
| Date | 29 November 2005 |
[2005] EWCA Civ 1408
Lord Justice Lloyd
Lord Justice Moore-Bick and
Sir Peter Gibson
Case No: 2005/0547
IN THE SUPREME COURT OF JUDICATURE
QUEEN'S BENCH DIVISION
MR JUSTICE DAVID STEEL
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
Paul Stanley (instructed by Denton Wilde Sapte) for the Appellant
Adam Tolley (instructed by Squire & Co) for the Respondent
This appeal requires the court to examine the impact on limitation periods of the insolvency of the debtor, in a context where the creditor's claim against the debtor is brought in order to take advantage of rights of the debtor to an indemnity against that claim under an insurance policy, pursuant to the Third Parties (Rights against Insurers) Act 1930.
The appeal is brought by the Claimant against an order of Mr Justice David Steel by which he struck the claim out on the basis that, assuming all the facts alleged by the Claimant in its favour, the claim could not succeed by virtue of the Defendant's limitation defence. The allegations are disputed, but have to be assumed as correct for present purposes.
The essential facts as alleged can be shortly stated. The Claimant is the assignee of the rights of six investors each of whom alleges that he suffered loss by reason of the negligence of the Defendant in giving him advice about pensions. The Defendant was insured under an indemnity policy against claims of this kind. The alleged advice was given and acted on over a period from 1986 to June 1989. The primary limitation period under sections 2 and 5 of the Limitation Act 1980 expired by June 1995 at the latest. However, the Claimant relies on section 14A of the 1980 Act, and alleges that none of the six investors had the knowledge which is necessary under that section until 9 May 1997. Accordingly it contends that the alternative period under that section would have expired on 9 May 2000. The long-stop period under section 14B of the 1980 Act ran for 15 years from June 1989, at the latest, so it expired in June 2004. The present proceedings were commenced on 16 September 2004. Thus, on ordinary principles of limitation, the claim was time-barred on the date it was brought.
However, on 3 May 2000, when the three year period under section 14A had not quite expired, the shareholders of the Defendant passed a resolution for the winding-up of the company, and a liquidator was appointed. That brought into application the statutory regime under the Insolvency Act 1986 in relation to the liabilities of the company. The Claimant contends that the Defendant was then liable to it as assignee of the six investors, because the limitation period had not yet expired. The Defendant accepts that this is so on the assumed facts, but argues that, even so, the claim cannot succeed for a number of reasons.
The questions argued are these:
i) Does the special statutory regime for the administration of a company's assets in liquidation, which prevents time running under the Limitation Act 1980 after the winding-up resolution, apply to the present claim
a) as a matter of general principle; and if so
b) despite the fact that the Claimant has to rely on section 14A?
ii) If so, does the expiry of the long-stop period under section 14B after the winding-up resolution but before the proceedings were commenced make a difference?
No evidence was put in before the judge in opposition to the striking-out application. We were told, in the course of argument, that the Claimant did put in a proof of debt in August 2001, but that the liquidator has neither admitted nor rejected it. We were also told that it is not thought likely that the Defendant company had any assets of any real value other than the proceeds of the insurance policy in question, that the policy is capped at £250,000 (out of which costs of defending a claim may have to be met), and that the amount sought to be recovered in the action is some £607,000.
The Third Parties (Rights against Insurers) Act 1930 provides in section 1(1), so far as relevant to the present case, that:
"Where under any contract of insurance a person (hereinafter referred to as the insured) is insured against liabilities to third parties which he may incur, then … (b) in the case of the insured being a company, in the event of … a resolution for a voluntary winding-up being passed, with respect to the company, … if, either before or after that event, any such liability as aforesaid is incurred by the insured, his rights against the insurer under the contract in respect of the liability shall, notwithstanding anything in any Act or rule of law to the contrary, be transferred to and vest in the third party to whom the liability was so incurred."
Other events giving rise to the statutory transfer include bankruptcy of an individual insured, and other events of insolvency as regards either an individual or a company.
Section 1(4) provides that:
"Upon a transfer under subsection (1) … of this section, the insurer shall, subject to the provisions of section 3 of this Act, be under the same liability to the third party as he would have been under to the insured, but … (b) if the liability of the insurer to the insured is less than the liability of the insured to the third party, nothing in this Act shall affect the rights of the third party against the insured in respect of the balance."
The Act was passed in order to remedy a situation to which attention had been drawn by Re Harrington Motor Company Ltd [1928] Ch 105. In that case an individual had sued the company for damages for personal injury following a motor accident, and recovered judgment. The company was insured, the insurers had conducted the defence of the claim, and they eventually paid to the company the amount of the claim, less some deductions. In the meantime the company went into liquidation. Eve J held, and the Court of Appeal affirmed his decision, though with manifest reluctance, that the individual had no claim to the proceeds of the policy, which were applicable by the liquidator as part of the company's assets for the benefit of the creditors as a body.
It is clear and settled that the third party has to establish that the insured is liable to him before he can take advantage of the rights afforded to him under the 1930 Act: see Post Office v. Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363 and Bradley v. Eagle Star Insurance Co Ltd [1989] AC 957. Liability may be established by action, by arbitration or by agreement between the insured and the third party. The terms of the insurance policy may prohibit the insured from reaching any such agreement without the consent of the insurers, so that agreement may not be feasible in these situations, for practical reasons. If proceedings are necessary, they may take one of a number of forms. The obvious instance is a claim such as the present. Because the company is in voluntary winding-up it is unnecessary to obtain consent before starting such a claim. If the winding-up were compulsory the court's permission would be needed, and the court might regard it as more appropriate for the third party to prove for its debt. If the liquidator were to reject that proof, the third party could appeal against that rejection under rule 4.83 of the Insolvency Rules 1986. That would lead to a judicial determination which would also be sufficient establishment of the liability of the insured. Nothing turns on the particular procedure adopted. It makes no difference whether the proceedings themselves are brought within the bankruptcy or winding-up proceedings or outside them, as is the present claim.
Lord Goff of Chieveley observed, in The Fanti, The Padre Island [1991] 2 AC 1 at 31G that "what is transferred to and vested in the third party is the [insured]'s right against the [insurer]. That right is, at best, a conditional right to indemnity". In those cases before the House of Lords, liability of the insured to the third party had already been established, but it was said that the insurer's liability to the insured was contingent on the insured having paid the third party, under a "pay to be paid" clause. The right was conditional in that sense. In some decisions at first instance it was said that the transfer does not take place until liability is established. By virtue of Cox v. Bankside Members Agency Ltd [1995] 2 Lloyd's Rep 437 and Re OT Computers Ltd [2004] EWCA Civ 653, [2004] Ch 317, it is now settled that the transfer of the rights of the insured against the insurer takes place on the event of insolvency, even if the insured's liability to the third party has not yet been established: see Freakley v. Centre Reinsurance International Company [2005] EWCA Civ 115.
The operation of limitation periods in an insolvent administration: Re General Rolling Stock Co Ltd
I must describe next the position in an insolvency as regards the debtor's liabilities. In a voluntary winding-up, the liquidator's duty is to apply the company's property "in satisfaction of the company's liabilities pari passu": see Insolvency Act 1986 section 107. Similar provisions apply in a compulsory winding-up and in bankruptcy. An obligation which, at the relevant date, is barred by limitation, so that no action can be brought to enforce it, is not a "liability" for the purposes of the insolvency legislation: see Re Art Reproduction Co Ltd [1952] Ch 89. In that case Wynn-Parry J relied...
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