The Law Society of England and Wales & Ors v Shah & Ors

Under the Third Parties (Rights against Insurers) Act 1930, a third party must establish the insured’s liability before enforcing transferred rights against the insurer. Establishment does not require a judgment, arbitration award or agreement if the claim is admitted in bankruptcy. Admission of a proof of debt can give the claim the necessary status, even where the bankrupt has already been discharged.

Discharge under section 281 of the Insolvency Act 1986 releases the bankrupt from the remedy of payment but does not destroy the underlying cause of action or prevent proof of the debt in the bankruptcy. The bankruptcy court has jurisdiction under section 363(1) to determine whether a proof should be admitted, despite the existence of other procedural mechanisms. The court therefore permitted determination of the proofs, dismissed the amendment application and allowed the strike-out applications.

The Law Society had compensated clients for alleged misappropriation by solicitors and pursued subrogated claims against several former partners. Three defendants had become bankrupt and were later discharged under section 281 of the Insolvency Act 1986. The Law Society accepted that the discharge defeated direct recovery against them, but sought to establish their pre-discharge liabilities so that rights against their professional indemnity insurers could be enforced under the Third Parties (Rights against Insurers) Act 1930.

The applications concerned amendment of the pleadings, strike-out or summary judgment, and determination of proofs of debt in the bankruptcies. The central questions were whether discharge destroyed the underlying causes of action, whether admission of a proof was sufficient establishment of liability for insurance purposes, and whether the court could determine the proofs directly under section 363(1) of the 1986 Act.

1. Insurance liability. The policy provided indemnity for civil liability arising from the insured’s practice. Applying Post Office v Norwich Union Fire Insurance Society Limited [1967] 2 QB 363 and Bradley v Eagle Star Insurance [1989] 1 AC 957, the insured’s liability must be established before an indemnifiable loss arises. Precise quantification is unnecessary; the claim must cease to be merely disputable.
2. Effect of bankruptcy and discharge. The statutory transfer under the 1930 Act occurs on bankruptcy. The transferred right may initially be contingent or inchoate and becomes enforceable when liability is established. Section 281 of the 1986 Act releases the bankrupt from the remedy of enforcement but preserves the underlying debt and the creditor’s right to prove it. Discharge therefore does not prevent a later admission of the proof from establishing the insured’s indemnifiable loss.
3. Proof of debt. The observations of the Court of Appeal in FSCS v Larnell [2005] EWCA Civ 1408 were obiter, but correctly contemplated that an admitted proof of debt may establish liability for the purposes of the 1930 Act. A judicial determination is required where the proof is disputed or rejected; it is not required where the debt is admitted.
4. Jurisdiction. Section 363(1) of the 1986 Act gives the bankruptcy court wide jurisdiction to decide questions of law or fact arising in a bankruptcy. It permits the court to determine the validity of the proofs without waiting for an anterior decision by the trustee, provided the statutory proof procedure is not thereby disapplied. The pragmatic absence of funds did not remove the jurisdiction.
5. The Bankruptcy Applications therefore succeeded to the extent that they sought determinations whether the proofs should be admitted. The Amendment Application failed. The Strike-Out Applications succeeded. The court reserved the form of order if the parties could not agree.

First-instance decision. No prior appellate decision is stated in the judgment.