| INSURANCE — Third parties’ rights — Liability insurance — Third parties unable to succeed in claim against discharged bankrupt debtors — Whether third parties’ inchoate claims elevated to established claims by admission in bankruptcy — Whether third parties entitled to prove in estates of discharged bankrupts — Whether third parties able to pursue insurers directly — Third Parties (Rights against Insurers) Act 1930
Law Society of England and Wales and others v Shah and others [2007] EWHC 2841 (Ch)
Ch D: Floyd J: 30th November 2007
It was possible for a third party, who had a “bankruptcy debt”, to claim payment from the debtor’s insurer under the Third Parties (Rights Against Insurers) Act 1930 after the debtor had been made bankrupt and discharged. In order to do so it was necessary to establish the liability of the debtor which could be achieved by a judicial determination of the third party’s right to prove the debt in the debtor’s bankruptcy.
Floyd J, so held in the Chancery Division when, inter alia, granting three originating applications issued by the Law Society of England and Wales, in the bankruptcies of the debtors, Raymond Sion David Barda, Zaheda Parveen Aziz and Marcus Rex Graziani, for determinations that the Law Society was able to: (i) prove certain debts in the bankruptcies; and (ii) pursue the second respondent, St Paul Travelers Insurance Co Ltd, on behalf of the Law Society’s Assigned Risks Pool, for payment of sums found due under the 1930 Act. The first respondents for each of the applications were respectively, James Earp, the trustee in bankruptcy of Mr Barda, and the official receiver, the trustee in bankruptcy of Ms Aziz and Mr Graziani.
The debtors had been solicitors whose firms had been acquired by a Mr Dixit Shah, who the Law Society alleged had misappropriated £12⋅5m from the client accounts of those firms over a two-year period. The debtors had subsequently been made bankrupt and then discharged from bankruptcy. Since the debtors had no professional indemnity insurance, cover was provided by the Law Society’s “assigned risks pool”, which was underwritten by the respondent insurers for the relevant period. The Law Society made payments totaling £12⋅5m to the clients of the firms and brought the main proceedings, together with some of those clients, against the debtors. Because the Law Society had no prospect of success in its subrogated claim against the discharged bankrupt debtors, it sought to claim against the insurers under the 1930 Act which conferred on third parties rights against the insurers of third party risks in the event of the insured becoming bankrupt. The issue arose as to whether the effect of the discharge of bankruptcy was a complete defence to the action in the sense that it had the effect not simply of releasing the bankrupt from the remedy of an order for payment but also of extinguishing the cause of action on which the obligation to pay was founded.
FLOYD J said that although a creditor’s “right of action” against a debtor was lost once the debtor had been discharged from bankruptcy, that did not mean that the underlying cause of action was destroyed. In order to identify an indemnifiable loss under an insurance policy, the third party’s claim had to be elevated to the status where it was established in the sense that it was no longer disputable as between the third party and the insured: see Financial Services Compensation Scheme Ltd v Larnell (Insurances) Ltd [2006] QB 808, para 11, per Lloyd LJ. The effect of the claim’s admission in bankruptcy was to give the claim that elevated status. Moreover, in order to “establish” a claim, it was not necessary for there to be a judicial decision admitting the debt in bankruptcy; the simple admission of the claim in bankruptcy was adequate to show that the insured had suffered an indemnifiable loss under the policy. Once that was accepted the release of the bankrupt from the obligation to pay was irrelevant, and it did not matter that there were no funds available in the estate. Since it would be convenient if the issue of the admission of the proof were decided at the same time as the actions against the discharged bankrupts, it would be determined that the Law Society had the right to prove in the bankruptcies of the discharged bankrupts, thereby establishing their liability, and enabling the Law Society to pursue the insurers directly.
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