Insurers not entitled to a lien over litigation proceeds of a foreign insolvent company

United Kingdom

Overview

The High Court has held that insurers who had facilitated litigation proceedings by an insolvent company were not entitled to a lien akin to a solicitor’s common law or equitable lien over the proceeds of the litigation to recover the deferred premium.

The High Court also held that a foreign insolvency office holder was not an officer of the court despite having being recognised under the Cross-Border Insolvency Regulations 2006 (“CBIR”). As such the foreign office holder is not subject to the principle in Ex parte James, which prevents an office holder from retaining sums where to do so would be unfair: (Brian Glasgow (the bankruptcy trustee of Harlequin Property SVG Limited and Wilkins Kennedy et al [2017] EWHC 3004 (Ch)).

The decision demonstrates the courts unwillingness to extend common law or equitable liens to insurers absent legislative provision and confirms that foreign representatives with CBIR recognition orders join the ranks of voluntary liquidators and administrative receivers as office holders who are not officers of the court.

Background

Harlequin Property SVG Limited (the Company) was incorporated in St. Vincent and the Grenadines (“SVG”).  In 2014, the Company issued proceedings against its former accountants and professional advisors, Wilkins Kennedy, claiming damages for breach of contract and professional negligence. In December 2016, the High Court found in favour of the Company, awarding damages plus interest and costs, which sum was paid into court by Wilkins Kennedy, totalling over £10.5 million.

In October 2016, the Company commenced restructuring proceedings in SVG.  In January 2017, the interim receiver obtained an order from the High Court recognising the SVG proceedings as foreign main proceedings under article 17 of CBIR. In February 2017, the interim receiver was appointed the bankruptcy trustee. The Company was heavily insolvent, with unsecured claims estimated at £200 million.

The Application

The application before the High Court was for directions to determine the rights of the insurers to the legal teams that represented the Company (the “Insurers”) in the action against Wilkins Kennedy. The Insurers claimed deferred premium to the value of approximately £3 million (the “Premium”). The net proceeds of the successful claim by the Company against Wilkins Kennedy were approximately £7.9 million and this sum was held in the Court Funds Office (the “Fund").

The Insurers’ Position and Argument

Ordinarily the Insurers might have benefited from contractual wording entitling them to the deferred Premium out of the proceeds of the successful litigation. However, due to an oversight, the Priorities Agreement was drafted on the apparent assumption that the Premium could be recovered from Wilkins Kennedy, which used to be the positon prior to the roll out of the Jackson reforms. However, the terms had not been updated to reflect the change in the law. As such the Insurers needed another angle.

The Insurers contended that they were entitled to a lien over the Fund in respect of the Premium. While the Insurers recognised they had no statutory or contractual right to a lien, they argued they should be entitled to a lien analogous to the common law and equitable lien which a solicitor has over the proceeds of a judgment recovered for a client in the course of litigation by the solicitor's exertions. The Insurers submitted that were it not for them, the Company could not have pursued its claim against Wilkins Kennedy and would never have obtained judgment.

In addition the Insurers argued that they were entitled to an order requiring the office holder to pay the Premium on the basis of the principle in Ex parte James. This provides that "where it would be unfair" for an office holder retain monies (or "to take full advantage of his legal rights”) the court will order him not to do so.

The decision

The Court held that the Insurers were not entitled to a lien and could not rely on the Ex Parte James principle.

No extension of the solicitor’s lien

With regards to the lien, the Court concluded it would be inappropriate for the courts to extend the law in relation to solicitors' liens to additional parties including insurers. Any decision that upgraded the Insurers’ claim from an ordinary unsecured one to one involving a proprietary lien over the Fund would create an exception to the statutory regime for the distribution of assets in an insolvency. The decision to extend the scope of a solicitor's lien is one for the legislature, not the courts.  

Further, finding a lien would be inconsistent with the terms of the Priorities Agreement. This agreement set out the parties’ respective proprietary entitlements to the Fund, namely that the balance of the Fund would be paid to the Company without first discharging sums due to the Insurers by way of the Premium. As such, the Court held it was not subsequently open to the Insurers to contend that they were nevertheless entitled to a lien.

Ex parte James

The Court noted that the principle only applies to officers of the court who are subject to its general supervisory or inherent jurisdiction. Given that the office holder was not an officer of the court (as he had been appointed as a bankruptcy trustee by the High Court in SVG) the principle did not apply to him. Furthermore, the position was not affected by the fact that the office holder had obtained an order recognising the proceedings as foreign main proceedings under the CBIR. Recognition of main proceedings under the CBIR triggers an automatic stay and entitles the foreign representative to request additional relief under article 21, but it does not make the office holder an officer of the English court.

Notwithstanding this hurdle, the Court took the view that even if the principle in ex parte James was capable of applying, it would not have been engaged on the facts of the present case. For the principle to operate, the claimant must not be in a position to submit an ordinary proof of debt. In this case, the Insurers agreed to provide insurance to the Company on terms that left the Premium outstanding and where, in the event that any recoveries were made from Wilkins Kennedy as a result of judgment, they would not have a proprietary claim over the recoveries, but merely an unsecured claim against the Company. In those circumstances it would not be unfair to require the Insurers to prove for the Premium, equally with all other unsecured creditors.

A cautionary tale for Insurers

This decision is consistent with the current judicial approach championed by Lord Neuberger amongst others. Judges will exercise caution in extending common law rules, particularly where Parliament has legislated on the point. In the absence of clear legislative intent, the Court was therefore unwilling to extend a common law or equitable   lien to insurers.

More practically, while ideally insurers would seek to recover an ATE premium up front, insolvent companies do not always have the funds to be able to pay it. As such the decision serves as a cautionary tale to insurers to make sure the terms of any funding or priorities agreement they enter into reflects the current position at law in order to allow them to recover sums owing to them.