Garrow v Society of Lloyd's
| Jurisdiction | England & Wales |
| Judge | Morritt,Brooke,Robert Walker L JJ. |
| Judgment Date | 13 October 1999 |
| Date | 13 October 1999 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal (Civil Division).
Morritt, Brooke and Robert Walker L JJ.
Edward Bannister QC and Lexa Hilliard (instructed by the Society of Lloyd's) for the appellant.
Charles Purle QC and L Jones (instructed by Grower Freeman & Goldberg) for the respondent.
The following cases were referred to in the judgment of Robert Walker LJ:
Arbuthnott v Fagan [1995] CLC 1396.
Bayoil SA, ReUNK [1998] BCC 988.
International Tin Council, ReELR [1987] Ch 419; [1988] 3 All ER 257 (CA); (1987) 3 BCC 103; (1988) 4 BCC 559 (CA).
Latreefers Inc, ReUNK [1999] 1 BCLC 271.
National Westminster Bank Ltd v Halesowen Presswork & Assemblies LtdELR [1972] AC 785.
Practice Note (Bankruptcy Statutory Demand Setting Aside) (No. 1/87)WLR [1987] 1 WLR 119.
Society of Lloyd's v Fraser [1998] CLC 127; [1998] CLC 1630 (CA).
Society of Lloyd's v Leighs [1997] CLC 759; [1997] CLC 1012">1012; [1997] CLC 1398 (CA).
TSB Bank plc v PlattsUNK [1998] 2 BCLC 1.
Lloyd's insurance market — Claim by Lloyd's for Equitas reinsurance premium from names who did not accept Lloyd's settlement offer — Lloyd's served statutory demands on names — Names raised counterclaims of fraud against Lloyd's — Whether statutory demands should be set aside — Insolvency Rules 1986, r. 6.5(4).
This was an appeal from an order of Jacob J setting aside a statutory demand served on a name by the Society of Lloyd's.
In Society of Lloyd's v Leighs [1997] CLC 1398 the Court of Appeal held that names who had not accepted the Lloyd's reconstruction and renewal plan were nevertheless bound to pay a premium to Equitas to reinsure their Lloyd's liabilities and that, by virtue of the “pay now, sue later” clause (cl. 5.5) in the Equitas reinsurance contract, names could not set off their claims that they had been induced to become and remain names by fraud against their liability to pay the premium. Other defences to the claim for the premium also failed in Society of Lloyd's v Fraser [1998] CLC 1630 (CA). Lloyd's accordingly obtained judgment against non-accepting names for the premium and served statutory demands. Names, including G, put forward their cross-claims for fraudulent misrepresentation by way of defence and counterclaim. Lloyd's served a statutory demand on G. G claimed that the value of his counterclaim against Lloyd's for fraud was at least equal to his liability to Lloyd's in respect of the premium. Jacob J held that G's cross-claim was genuine or serious and that any delay in putting it forward could be justified. The cross-claim was large enough to equal or exceed the liability for the premium unless Lloyd's could rely on cl. 5.5 to bar any cross-claim, which it did not. Lloyd's appealed.
Held dismissing the appeal:
1. A debtor relying on a cross-claim to have a statutory demand set aside had to show that the cross-claim had substance and would, if it succeeded, at least equal the debtor's liability. Delay in putting forward a cross-claim might lead to an inference that it was not put forward in good faith. The judge was entitled to conclude that on the evidence G had a genuine and serious claim, that any delay was excusable and that the cross-claim was sufficiently large unless Lloyd's could rely on cl. 5.5.
2. It was contrary 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, and the judge was right to reject a submission that he should refuse to rule on the demand and instead allow a petition to be presented and then adjourned.
3. As a matter of construction, cl. 5.5 insulated the claim to the reinsurance premium but did not prevent the setting aside of the statutory demand on the basis of G's cross-claim. 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 cl. 5.5. (Arbuthnott v Fagan[1995] CLC 1396considered.)
Robert Walker 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 Mr Simon Garrow 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 Mr Garrow on 11 March 1998. Mr Garrow 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 pp. 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. Mr Garrow 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 ([1997] CLC 759 and 1012) and these were upheld by this court on 31 July 1997 ([1997] CLC 1398 (CA)). Other defences to Lloyd's claims under cl. 5.5 also failed (see Society of Lloyd's v Fraser[1998] CLC 127 and 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 Mr Garrow) 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 Mr Garrow 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 as to 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. (Mr Garrow 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 Mr Garrow, 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 counterclaimants that other applications to set aside statutory demands will be held in suspense until the determination of this appeal. But the agreement (and the status of Mr Garrow'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 of a 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, 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; or
…”
The Practice Note (Bankruptcy Statutory Demand Setting Aside) (No. 1/87)WLR[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...
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