Pursuing debt claim after Bankruptcy established

Chancery Division Published December 20, 2007 Law Society of England and Wales and Others v Shah and Others Before Mr Justice Floyd Judgment November 30, 2007

Where a third party was not able to pursue a debt claim directly against a bankrupt due to the fact that the Bankruptcy had been discharged, thereby extinguishing the claim, the third party could none the less pursue the claim against the bankrupt’s insurers once the third party had obtained a decision admitting the claim in Bankruptcy.

Mr Justice Floyd so held in the Chancery Division when, inter alia, allowing three originating applications of the Law Society for detailed relief designed to enable, through the proof of debt procedure in the bankruptcies of three discharged bankrupts, Raymond Sion David Barda, Zaheeda Parveen Aziz and Marcus Rex Graziani, a determination of its claim in the main proceedings by joining the trustee in Bankruptcy of Mr Barda, Mr James Earp, and the trustee in Bankruptcy of Ms Aziz and Mr Graziani, the Official Receiver, to those proceedings.

The main proceedings constituted 12 claims for breach of contract or fiduciary duty against nine solicitors, including the three discharged bankrupts and Mr Dixit Shah, by the Law Society and 19 clients of the defendant solicitors.

Mr Shah had acquired a number of solicitors’ firms, including those of the discharged bankrupts. The Office for the Supervision of Solicitors, which intervened in the firms, allegedly discovered that a total of £12.5 million had been misappropriated by Mr Shah from the client accounts of the firms.

Subsequently, Mr Barda, Ms Aziz and Mr Graziani were made bankrupt and then discharged. The Law Society’s compensation fund made various payments to the aggrieved clients totalling £12.5 million. Since the bankrupts had no professional indemnity insurance, cover was provided by the Law Society’s assigned risks pool which was underwritten by St Paul’s Travellers Insurance Co.

Mr David Edwards, QC and Mr Lloyd Tamlyn for the Law Society; Mr Richard Sheldon, QC and Mr Stephen Robins for the discharged bankrupts and the insurers; Mr Jonathan Brettler for Mr Earp; Ms Anna Markham for the Official Receiver.

MR JUSTICE FLOYD said that although normally the Law Society would be able to pursue the subrogated rights and remedies of the victims against the wrongdoers, the effect of the discharge from Bankruptcy was that it had no prospect of successfully pursuing its subrogated claims against the discharged bankrupts.

Accordingly, it sought to pursue the claims against the insurers under the Third Parties (Rights Against Insurers) Act 1930 which conferred on third parties rights against the insurers of third-party risks in the event of the insured becoming bankrupt, by using the proof of debt in Bankruptcy method.

Before an insurer was found to be obliged to provide an indemnity to an insured in relation to a third party claim, it was necessary that the third party’s unliquidated and unascertained claim against the insured be established in the sense that it was no longer disputable: Financial Services Compensation Scheme Ltd v Larnell (Insurances) Ltd ([2006] QB 808).

Although the effect of the discharge of Bankruptcy was to extinguish the Law Society’s inchoate claims, it was possible to elevate those claims to the status of “established” simply by the admission of the claim in Bankruptcy.

Although a 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.

The court would allow the Law Society the means of ascertaining that the discharged bankrupts were liable to the various clients, from whom the rights of the Law Society were subrogated, by the proof of debt in Bankruptcy route, which then enabled the Law Society to pursue the insurer directly.