Clydesdale Financial Services Ltd & Ors v Smailes & Ors

An insurer is not entitled to an insurance premium where the insured risk never attached. Where insurance and lending form a single scheme, the insurer is not on risk for cover dependent on a loan unless that loan is made. A person need not be a creditor to be a “victim” under section 423(5) of the Insolvency Act 1986. The question is whether the person is, or is capable of being, prejudiced by the transaction. A contingent liability may suffice, and prejudice includes an increased shortfall caused by an undervalue transaction. A formal offer accepted in writing may create a binding contract, although its terms may later be varied.

The claimants sought relief arising from the sale of the business and assets of Alexander Samuel LLP to Jiva Solicitors LLP immediately before the LLP entered administration. Focus Insurance Company Limited applied to amend its pleadings to claim creditor status for unpaid financial guarantee insurance premiums and audit fees, thereby supporting claims against the former administrators under paragraph 75 of Schedule B1 to the Insolvency Act 1986.

Jiva challenged Focus’s standing as a victim under sections 423–425 of the Act. The court considered whether Focus had a real prospect of establishing creditor status and whether, despite not being a creditor, it was capable of being prejudiced by an undervalue sale.

1. Application to amend. The court applied the usual test that an amendment should be permitted where the proposed claim has a real prospect of success, prejudice can be compensated in costs and the administration of justice is not significantly harmed. Relief from the earlier unless order was granted, but the proposed substantive claims failed.
2. FGI premiums. The insurance policies and lending arrangements formed one litigation-funding scheme. The policies secured loans made by CFS and covered costs funded by those loans. Applying the principle in Stevenson v Snow (1761) 3 Burr 1237 and Tyrie v Fletcher (1777) 2 Cowp 666, Focus was not on risk where no loan was made and had no real prospect of recovering the unpaid premiums in those cases. For the nine policies supported by loans, Focus had a possible claim against LLP, but its claim was extinguished by LLP’s set-off for unpaid commissions.
3. Audit fees and contract. The offer letter was a formal offer accepted by signature and was a binding contract. However, most audit-fee claims were made too late. Although it was reasonably arguable that the contractual terms applied to LLP through the parties’ course of dealing, this did not overcome the set-off and lack of creditor status.
4. Victim under section 423(5). “Victim” is wider than creditor. Focus could be capable of prejudice because an undervalue sale would increase the shortfall recoverable by CFS and the amount potentially payable by Focus under assigned policies. The fact that the loss was contingent, or that CFS had not yet claimed, was immaterial.
5. Focus’s amendment application was refused and its paragraph 75 claim was struck out. Jiva’s application to strike out or obtain summary judgment on Focus’s section 423–425 claim was dismissed.