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You are here: BAILII >> Databases >> Scottish Law Commission >> Scottish Law Commission (Reports) >> Third Parties –Rights Against Insurers [2001] SLC 184(2) (Report) (July 2001) URL: http://www.bailii.org/scot/other/SLC/Report/2001/184(2).html Cite as: [2001] SLC 184(2) (Report) |
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PART 2
THE SCOPE OF THE DRAFT BILL
1 Introduction
2.2 We go on to discuss two restrictions on the scope of the 1930 Act. First, the 1930 Act does not specifically cover a case in which the insured is anything other than an individual or a company, omitting, for example, partnerships. Second, the 1930 Act does not apply in the case of legal expenses insurance, or other insurance covering voluntarily incurred liabilities. We explain our view that these restrictions are major failings. The omission of legal expenses insurance, in particular, represents a serious obstacle to the government's stated aim that such insurance should play a wider role in the funding of litigation.[1] Both restrictions are removed by the draft Bill.
2.4 The degree to which the 1930 Act fails to reflect modern developments in company and insolvency law only became clear during the preparation of the draft Bill. In addition, the operation of the 1930 Act in the context of legal expenses insurance has only recently been clarified by the High Court.[2] For these reasons, a number of the issues in this Part were not covered in the consultation paper. We have, however, consulted informally before arriving at out recommendations.
2 Circumstances in which rights are conferred on third party
3 Definition of insured's insolvency etc
2.5 The 1930 Act specifies what must befall the insured before rights are conferred on the third party.[3] In the consultation paper we asked whether it would be desirable to describe these circumstances in general terms. Consultees strongly opposed any such change. In particular, they objected to the suggestion that the third party should receive rights if the insured encountered "financial difficulties"[4] or "disappeared".[5] Consultees felt that these events would be difficult to define and might occur in the case of insureds who were able and willing to pay their own debts and manage their own affairs. We agree. Accordingly, the draft Bill identifies precisely what must happen to the insured before rights are conferred on the third party.
2.6 The list of circumstances in which the 1930 Act confers rights on the third party was altered by the Insolvency Act 1985,[6] the Insolvency Act 1986,[7] the Bankruptcy (Scotland) Act 1985[8] and recently by the Limited Liability Partnerships Regulations 2001.[9] Some consultees pointed out, however, that the 1930 Act has not kept pace with other developments in company and insolvency law. We have adopted a number of improvements suggested by consultees; others we have identified ourselves. We set these out below.
4 Rights conferred in the circumstances set out in the 1930 Act
2.7 The draft Bill effects a statutory transfer in all the circumstances in which the 1930 Act currently does so. These include the commencement of formal insolvency procedures (bankruptcy in the case of an individual and insolvent winding-up in the case of a company) and the death of the insured whilst insolvent. In the case of corporate insureds, they also include the commencement of a number of other procedures not involving, or not always involving, insolvency. These are: the making of an administration order, a solvent winding-up[10] and the appointment of a receiver.
2.8 The 1930 Act also effects a transfer in the case of the insured "making a composition or arrangement with his creditors" or on the approval of a voluntary arrangement under Part I of IA 1986.[11] In view of the serious problems with the operation of the 1930 Act in the context of such voluntary procedures, we examine these issues separately in Part 6 below.
5 Striking off under section 652 or section 652A of CA 1985
2.9 Companies may be struck off the register of companies under CA 1985 without being formally wound up under the procedures laid down by IA 1986. In particular, sections 652 and 652A of CA 1985 empower the Registrar of Companies, in certain circumstances, to strike a company off the register when it is not carrying on business. A substantial majority of companies which cease to exist do so in this way.[12]
2.10 Under the 1930 Act, third parties must apply to restore such companies to the register under section 653 or section 651 of CA 1985; in order to receive a transfer of rights, they must then institute a formal insolvency (or bring about one of the other events specified in the 1930 Act).[13]
2.11 One consultee suggested that a third party faced with an insured which had been struck off the register of companies without having gone through a formal winding-up under IA 1986 should also receive a statutory transfer of rights. We agree. The requirement that a third party apply to court in order to restore such a company only to institute formal insolvency proceedings against it serves no purpose.[14] Accordingly, the draft Bill confers on the third party direct rights against the insurer if the insured is struck off the register of companies,[15] relieving third parties of the delay and expense currently caused.[16]
6 Voluntary winding-up as part of a reconstruction or amalgamation
2.12 The 1930 Act confers rights on the third party if the insured enters a voluntary winding-up.[17] This is subject to a proviso which prevents a statutory transfer if the voluntary winding-up is entered into "merely for the purposes of reconstruction or of amalgamation with another company".[18]
2.14 We agree. Like the 1930 Act, the draft Bill assists the third party by conferring on him direct rights against the insurer in a number of situations in which there may be no insolvency.[19] The suggestion that a winding-up for the purposes of reconstruction or amalgamation should be in the same category seemed to us to be sensible. The draft Bill therefore does not reproduce the proviso in section 1(6)(a) of the 1930 Act.
7 Appointment of a provisional liquidator
2.15 The draft Bill, like the 1930 Act, effects a statutory transfer on the making of an administration order.[20] The 1930 Act does not do so on the appointment of a provisional liquidator.[21] We have considered whether the draft Bill should do so.
2.16 The two regimes can be similar and may have a similar practical effect on the third party. Companies may appoint a provisional liquidator as a prelude to the implementation of a compromise or arrangement under section 425 of CA 1985 or a voluntary arrangement.[22] An administration order may be granted for the same purpose.[23] Whichever option the insured chooses, the third party will face a moratorium which will prevent him from starting, or continuing, proceedings against the insured to recover his debt without the leave of the court.[24]
2.17 In view of the similarity of the two regimes, the appointment of a provisional liquidator is treated in the same way as the appointment of an administrator in the draft Bill.[25]
8 Crystallisation of a floating charge
2.18 The 1930 Act confers rights on a third party in the vast majority of cases in which a floating charge crystallises.[26] However, exceptionally, crystallisation may (in England and Wales only) occur before any of the events set out in section 1(b) of the 1930 Act. For example, a floating charge over all the insured's assets may crystallise on notice to the insured by the charge holder.[27] In such a case, when the insurance fund becomes payable, it would benefit the charge holder.[28]
2.19 On one view, sums payable under an insurance policy, which would not be payable at all were it not for the insured having incurred liability to the third party, should always benefit the third party rather than other creditors. On these grounds, we considered recommending that the new Act should effect a statutory transfer on the crystallisation of a floating charge over the insurance proceeds, however that crystallisation came about. Nevertheless, we have concluded that this is not appropriate. Neither the insurer nor the third party would be likely to know about the crystallisation of a floating charge which occurred before one of the other circumstances effecting a statutory transfer.[29] It would have unfortunate effects if the draft Bill effected a statutory transfer in such a case. For example, the insurer might, after such a transfer, purport to enter into a settlement with the insured which, as a result of the transfer, but unknown to the insurer, did not discharge the insurer's obligations to the third party. The insurer might thereby find itself obliged to pay out again to the third party.[30]
2.20 Accordingly, whilst the draft Bill, like the 1930 Act, effects a statutory transfer in most of the circumstances in which a floating charge crystallises, it does not specify that a crystallisation per se will effect a transfer.[31] An insured who allows a charge over insurance proceeds to crystallise has effectively divested himself of the benefit of the insurance policy and, unless the event which causes the crystallisation coincidentally brings about a statutory transfer, the third party will not benefit from it.[32]
9 Recovery of insured: effect on statutory transfer of rights
2.21 If an insured incurs a liability to a third party before becoming subject to, or during the currency of, an administration order, the 1930 Act confers rights on the third party against the insurer. The third party retains these transferred rights even if the administration order is subsequently discharged. The position is the same should the insured recover from one of the other conditions which trigger a statutory transfer under the 1930 Act.[33]
2.23 We have not adopted this suggestion for two reasons. First, it is not obvious how such a retransfer should work.[34] Secondly, the case in favour of such a reform is not clear-cut. Even if he has not begun proceedings against the insurer, the third party may have been disadvantaged by the insured's original failure.[35] Therefore, under the draft Bill, a third party retains rights transferred to him regardless of what subsequently happens to the insured.
10 Liability to third party incurred after discharge from bankruptcy
2.24 The position is different should the insured incur a liability to a third party after it has recovered. In such a case the third party is unaffected by the insured's former problems and it would be anomalous to transfer rights to him. It appears to be the case that, under the 1930 Act, a third party might receive a transfer of rights in these circumstances.[36] We have clarified this in the draft Bill.[37]
11 The legal personality of the insured
12 Partnerships in English law
2.25 In the course of preparing the draft Bill we considered when the statutory transfer should occur if the insured is a partnership.[38] This was not an issue we discussed in the consultation paper.
13 The Insolvent Partnerships Order 1994
2.26 A range of orders (referred to in this Part as "IPO orders") analogous to those available against companies under IA 1986 is available in English law against partnerships. A partnership may, inter alia, be wound up, subjected to an administration or enter into a voluntary arrangement, as if it were a company.[39]
2.27 No amendment has been made to the 1930 Act to take account of these developments. We considered whether an IPO order would nevertheless trigger a transfer of rights under section 1 of the 1930 Act. In our view it would not.[40] Section 1(1)(a) of the 1930 Act appears to deal with orders against individuals only[41] and section 1(1)(b) is restricted to cases in which the insured is a company.
2.28 That appears to be anomalous. A third party faced by an insured which is, for example, being wound up under IPO 1994, will encounter many of the same practical disadvantages as a third party faced by a company in the course of a winding-up.[42] Most importantly, the insurance proceeds may go into a central fund and be distributed pro-rata to general creditors.
2.29 Accordingly, the draft Bill confers rights on the third party in all cases in which an event occurs to the insured[43] which would have conferred rights on the third party had the insured been a company.[44]
14 Orders against individual partners
2.30 It appears that the bankruptcy[45] of an individual partner triggers a statutory transfer under the 1930 Act, even if the other partners and the partnership as a whole remain solvent.[46] Although we have not found any direct authority on the point, this is consistent with the treatment of partnerships in the case law.[47]
2.31 We considered whether this feature of the 1930 Act should be reproduced in the draft Bill. It could be argued that, so long as one or more partners remain solvent, the third party should sue them rather than receive a transfer of rights giving direct rights against the insurer. However, we have concluded that the scheme in the 1930 Act is correct. Suppose a third party, confronted by a partnership in which all the partners are solvent, sues just one partner and obtains judgment. If that partner were then declared bankrupt, the 1930 Act would operate to prevent the insurance proceeds being claimed by the Trustee in Bankruptcy and to ensure that the third party received the full benefit of the insurance. The draft Bill does the same, effecting a statutory transfer irrespective of whether any other possible defendants are solvent and covered by the insurance policy.[48]
15 Partnerships in Scots law
2.32 Unlike those in England and Wales, Scottish partnerships (both under the Partnership Act 1890 and the Limited Partnerships Act 1907) have separate legal personality.[49] However, whereas the 1930 Act included a limited partnership within the expression "company" in the application of the Act to Scotland, an ordinary Scottish partnership was not included.[50] We can only speculate about the reason for this. The answer may lie in the fact that, initially, the Limited Partnerships Act 1907 required that a limited partnership be wound up under the Companies Acts.[51] That requirement was repealed by the Companies (Consolidation) Act 1908[52] which gave the court a discretion to wind up a limited partnership under the Companies Acts.[53] That arrangement continued in Scotland until the Bankruptcy (Scotland) Act 1985 brought limited partnerships under the bankruptcy regime.[54] Ordinary partnerships, too, are subject to the regime of the 1985 Act. All Scottish partnerships are included in the draft Bill.
16 Limited Liability Partnerships
2.33 A new legal entity, the "limited liability partnership" ("LLP") is created in Great Britain by the Limited Liability Partnerships Act 2000 ("LLPA 2000"). Provisions regulating the insolvency and winding-up of LLPs are contained in the Limited Liability Partnerships Regulations 2000 ("LLPR 2000").[55] Schedule 5 of the LLPR 2000 amends the 1930 Act so as to bring LLPs within its scope.
2.34 The draft Bill reproduces the effect of this recent amendment to the 1930 Act. A third party will receive a transfer of rights if he is owed money by an insured LLP which becomes subject to a winding-up or other procedure under the LLPR 2000.[56]
17 Other corporate and unincorporated bodies
2.35 The nature of the insured's legal personality does not seem to us to be relevant to the rationale for effecting a statutory transfer. In other words, if the insured is (for example) wound up under the IA 1986, it seems to us that this should bring about a statutory transfer, whether the insured is a limited company, a partnership, an LLP or some other entity.[57] This is the effect of the draft Bill.[58]
18 Power to amend new Act by secondary legislation
2.36 It may be that in the future it will be thought desirable to effect a statutory transfer in additional circumstances which meet Bingham LJ's test.[59] The chance of this is increased by the rapid development of insolvency law which produces a large amount of case law, is often amended by statute,[60] and is the subject of continuing review by the Government.[61]
2.37 It might be hoped that relevant primary legislation would, in the future, update a new Act where appropriate. Past experience, however, does not make us confident that this would always occur. It is also possible that future developments might come about by way of secondary legislation (for example by amendments to the Insolvency Rules). In order to prevent a new Act from failing to keep pace with the law in this way, the draft Bill contains a power of amendment, exercisable by the Secretary of State, so that new developments can easily be accommodated.[62]
19 Insurance policies covered
20 Application to full range of insurance policies
2.38 We asked consultees whether a new Act should, unlike the 1930 Act, apply only to a restricted range of liability insurance.[63] We canvassed various ways such restrictions might be defined and justified.[64] Consultees were broadly opposed to all of the suggested limitations. The idea that a new Act be limited to cases of compulsory insurance received some support, but other consultees objected that the regime of compulsory insurance in the United Kingdom is haphazard. It was suggested that the rationale of the 1930 Act applied equally to all types of liability insurance and that any restrictions would be arbitrary and unnecessarily complicated. We agree. The draft Bill applies in cases of liability insurance generally.
21 Application to policies insuring voluntarily incurred liabilities
2.39 Although we referred briefly in the consultation paper to the view that the 1930 Act does not cover legal expenses insurance,[65] we did not consult specifically on this; nor did consultees raise the subject themselves.
2.40 Since the consultation paper, this issue has been brought into focus by Tarbuck v Avon Insurance plc,[66] in which Toulson J held that insurance covering liabilities voluntarily assumed by the insured, such as legal expenses insurance, or health insurance, is not covered by the phrase "liabilities to third parties" in section 1 of the 1930 Act.[67] The judge regretted the result and called on the Law Commissions to re-examine this aspect of the 1930 Act as part of the present project. We have done so.
2.42 The creditor may only have dealt with the insured because he had such insurance. For example, a private hospital might only agree to treat a patient on evidence of health insurance; or a solicitor might only be prepared to act for a litigant on the basis of his legal expenses insurance. Tarbuck shows that even if such insurance is in place, and even if the insurer pays out under the policy, the creditor will not necessarily receive those funds. We find this objectionable.[68]
2.43 This is an important issue as legal expenses insurance is likely to play an increasing role in funding litigation in the future.[69] Although we did not consult specifically on this matter, we took account of the general opposition to restrictions on the type of insurance which should be covered when deciding how to treat this kind of insurance in the draft Bill. We have also consulted informally. The Law Society has suggested to us that:
...the judgment [in Tarbuck] is likely to have a negative effect on the [legal] professions' confidence in the developing legal expense insurance market both on the pre event insurance side and the after the event legal expense insurance side.
2.44 We agree with that view. Accordingly, the draft Bill reverses the effect of Tarbuck by extending the operation of the legislation to insurance covering voluntarily incurred liabilities.[70]
22 No application to reinsurance policies
2.45 We asked consultees whether a statute replacing the 1930 Act should be extended so as to cover reinsurance policies. We set out a number of difficulties with such a proposal.[71] The vast majority of consultees agreed with our provisional view that a new Act should not be extended in this way. In addition to the objections set out in the consultation paper, consultees emphasised the complexity of reinsurance arrangements and the problems of correlating particular claims to the correct reinsurance policies. Like the 1930 Act, the draft Bill excepts reinsurance from its scope.[72]
23 Rights against the insurer in Scots law
2.46 In the consultation paper we proposed that the phrase "becoming bankrupt" in the case of Scottish bankruptcies be replaced with the phrase, "person's estate being sequestrated".[73] This was supported by Scottish consultees and the draft Bill incorporates this reform.[74]
2.47 In addition to sequestration under the Bankruptcy (Scotland) Act 1985 and in line with the policy that the insolvency processes which bring about a transfer under the draft Bill should be British insolvency processes, the draft Bill includes judicial compositions and protected trust deeds as found in the Bankruptcy (Scotland) Act 1985, Schedules 4 and 5 respectively.[75]
2.49 While judicial composition will arise only after sequestration, the effect of the composition is that the individual is discharged and the sequestration ceases. In our view, a third party faced with an insured who incurs a relevant liability while a judicial composition is in force in respect of him should receive a transfer of rights: accordingly, the draft Bill so provides.[76]
2.50 Separate provision has been necessary to bring a Scottish trust within the ambit of the draft Bill.[77] This is due to the fact that, in Scotland, the trust estate itself can be subject to sequestration, a protected trust deed or a judicial composition.
2.51 Where the individual has died insolvent, in addition to sequestration, the draft Bill provides that the appointment of a judicial factor under the Judicial Factors (Scotland) Act 1889, section 11A, will effect a statutory transfer. As the section 11A procedure covers cases where it is not known whether a deceased individual's estate will be able to meet his debts, it was necessary to restrict the reference to this procedure so that it applies only where the estate does transpire to be insolvent. Accordingly, the draft Bill provides for the judicial factor to certify that the estate is absolutely insolvent within the meaning of the Bankruptcy (Scotland) Act 1985. [78]
24 Northern Ireland
2.52 The draft Bill, like the 1930 Act, applies in Great Britain only.[79] An Act in similar terms to the 1930 Act is in force in Northern Ireland[80] and we anticipate that, if the draft Bill is enacted, corresponding legislation would be introduced for Northern Ireland.
Note 1 See for example Hansard (HC) 21 November 1997, vol 301, col 536 where the government expressed the hope that legal action brought by “ordinary working people” will, in the future, be funded by conditional fees or legal expenses insurance. [Back] Note 2 Tarbuck v Avon Insurance plc [2001] 2 All ER 503. [Back] Note 3 Section 1(1)(a) and (b) and s 1(2). [Back] Note 4 Consultation paper, para 12.9. [Back] Note 5 Consultation paper, para 12.49. [Back] Note 6 Section 235(1), Sched 8, para 7. [Back] Note 7 Section 439(2), Sched 14. [Back] Note 8 Section 75(1), Sched 7, Pt I, para 6(1). [Back] Note 9 Schedule 5, para 2, inserting s 3A into the 1930 Act. [Back] Note 10 A voluntary winding-up under Chapter II of Part IV of IA 1986 is available to a solvent company. In addition, six of the seven grounds on which a company may be compulsorily wound up in s 122(1) of IA 1986 may be used against a solvent company. It is worth noting that even a company wound up under s 122(1)(f) as a “company ... unable to pay its debts” though insolvent in one sense, might still have an excess of assets over liabilities (for example if it is experiencing cash flow problems) so that the creditors will, in the end, recover what they are owed in full. [Back] Note 12 Of 116,600 companies removed from the register of companies in 1998-99, only 17,400 (15%) had been through a formal winding-up (Companies in 1998-99: report by the Department of Trade and Industry (1999) DTI pp 33-34). [Back] Note 13 Third parties using the 1930 Act have an additional reason to revive such companies. In order to convert the rights against the insurer transferred to them by the 1930 Act into actionable rights they must establish liability against the insured (see Post Office v Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363). The insured must be revived for the third party to do this. As we explain in Part 3 below, under the draft Bill, third parties would be entitled to proceed against the insurer without first establishing liability against the insured. [Back] Note 14 This is illustrated by the fact that applications to restore are almost never refused. All of the 1,299 applications to restore surveyed by us when preparing Appendix C of the consultation paper were granted. [Back] Note 15 Clause 1(3)(h). [Back] Note 16 That this difficulty is encountered in practice by substantial numbers of third parties is illustrated by the fact that 85% of the applications to restore analysed in Appendix C of the consultation paper were made under s 653 of IA 1986 (which may only be used in the case of companies struck off under s 652 or s 652A). In addition, some applications brought under s 651 (which may be used in the case of any defunct company) will have involved such companies. [Back] Note 18 Section 1(6)(a). [Back] Note 19 For example a corporate insured may be wound up, subject to a receivership or struck off the register of companies without being insolvent at any stage. [Back] Note 20 Clause 1(3)(b) and s 1(1)(b) of the 1930 Act. See para 2.7 above. [Back] Note 21 Under IA 1986, s 135. [Back] Note 22 On which see Part 6 below. Such schemes were described and approved by Harman J in Re English & American Insurance [1994] 1 BCLC 649. Although it seems that the scheme in that case was being used by an insurance company because it was not entitled to an administration order (s 8(4)(a) of IA 1986), there seems to be no reason in principle why companies other than insurance companies should not use a similar procedure. [Back] Note 23 IA 1986, s 8(3)(c). [Back] Note 24 IA 1986, s 11(3) (administration order); IA 1986, s 130(2) (provisional liquidator). [Back] Note 25 Clause 1(3)(e). [Back] Note 26 For example, the making of a winding-up order. [Back] Note 27 Re Brightlife Ltd [1987] Ch 200. Hoffmann J in that case also recognised, obiter, another situation in which crystallisation might occur before one of the events specified in the 1930 Act, namely when an appropriately worded clause caused automatic crystallisation without any intervention at all by the chargee. [Back] Note 28 In Banner Lane Realisations Ltd (in liquidation) v Berisford plc and Another [1997] 1 BCLC 380, the Court of Appeal held that, in the case of a debenture securing “present and future indebtedness”, “future indebtedness” included not only a present obligation to pay a sum certain in the future but also a present obligation to pay an unquantified sum in the future or on a contingency. The charge holder’s claim may be subordinated to the claims of preferential creditors by s 175(2) IA 1986. [Back] Note 29 Suppose for example, that the insured entered into an agreement with a bank which provided that a floating charge would crystallise should the insured attempt to create a further charge over its assets. The third party and insurer would be unlikely to know of this term, or of any crystallisation under it. [Back] Note 30 See Paras 7.40-7.44 below for an analysis of settlements in the context of the draft Bill. [Back] Note 31 In Scotland, a floating charge attaches on the class of assets comprised in it when a company goes into liquidation (see CA 1985, s 463(1)) or on the appointment of a receiver (see IA 1986, s 53(7) and s 54(6)). In both of these situations a transfer of rights would occur under the draft Bill. [Back] Note 32 This is consistent with the way the draft Bill operates in a case in which the insurance proceeds are subject to a fixed charge (otherwise than as a result of the crystallisation of a floating charge). See paras 7.13-7.14 below. [Back] Note 33 For example, the third party retains rights transferred to him by the 1930 Act if the insured’s winding-up proceedings are stayed, or a receivership or voluntary arrangement comes to an end. [Back] Note 34 After a statutory transfer the third party and insurer are free to litigate; they are also free to compromise their rights and might do so in a number of ways. It would be difficult to identify the occasions on which it would be appropriate to reverse the transfer, or to specify the effect of doing so in every circumstance. [Back] Note 35 For example, in the case of an administration order, the third party may have been prevented from enforcing a judgment against the insured (IA 1986, s 11(3)(d)). [Back] Note 36 It seems that the effect of s 1 of the 1930 Act is that this would be the case if the insured retained the same insurance contract after its revival as it possessed when it first became insolvent, entered into a voluntary arrangement etc. [Back] Note 37 Clause 1(3) is directed generally tostates of affairs, which may come to an end. Cf s 1(1) of the 1930 Act which is in terms ofevents. [Back] Note 38 A partnership in English law does not have a legal personality separate and distinct from the partners who at any time may comprise it (cf the position in Scots law on which see para 2.32 below). For a full description of the current law, and an exploration of how it might be improved, see Partnership Law (2000) Law Com No 159; Scot Law Com No 111. At para 4.32 of that consultation paper we propose the introduction of separate legal personality for partnerships in England and Wales. [Back] Note 39 See IPO 1994, made under IA 1986, s 420. See also the provisions referred to in IPO 1994, s 19(4). Insurance taken out by a partnership is “in theory a bundle of contracts between the insurer and the individual partners” (Scher v Policyholders’ Protection Board [1994] 2 AC 57 at p 115 per Lord Mustill). Nevertheless, IPO 1994 treats a partnership as though it were a separate entity. [Back] Note 40 We have found no authority on this point. [Back] Note 41 See para 6.14, n 17 below. [Back] Note 42 The presentation of a winding-up petition prohibits any form of execution against partnership assets (IA 1986, s 128) and the partnership or any partner or creditor may apply to stay any proceedings against the partnership or any partner (IA 1986, s 126 and s 127). [Back] Note 43 Under IPO 1994 or under one of the provisions set out in IPO 1994, s 19(4). [Back] Note 44 Clause 1(3) applies to an “unincorporated body”, which includes a partnership. References in that subsection to statutory provisions will be interpreted as references to those statutory provisions as applied by (for example) IPO 1994. See Interpretation Act 1978, s 20(2). [Back] Note 45 Or other event listed in s 1 of the 1930 Act. For simplicity, we only analyse bankruptcy in the text. [Back] Note 46 By virtue of s 1 of the 1930 Act and the nature of joint and several liability. A third party owed money by a partnership may sue one partner (call him X) for the whole of the debt, leaving to X the option of claiming contributions from other partners. If the third party does so, and if the debt for which he sues X is covered by an insurance policy taken out by the partnership, X would be able to claim on it. So if X became bankrupt, he would both owe money to the third party and have rights under an insurance contract in respect of the liability. This would generate a transfer of rights under s 1 of the 1930 Act. [Back] Note 47 In Jackson v Greenfield [1998] BPIR 699 the insured was a three person partnership. Two of the partners entered into voluntary arrangements; the other remained solvent. It was held that there had not been a transfer of rights under the 1930 Act because the liability of the partnership had not been established. It seems to have been assumed, however, that had liability been established, a transfer of the rights of the two partners could have taken place when they entered into voluntary arrangements (by virtue of s 1(1)(a)) and that this would have given the third party direct rights against the insurer under the insurance policy. [Back] Note 49 One of the consequences of separate legal personality is that somebody owed money by a partnership in Scotland must sue the partnership as principal in the first place. He may proceed against the partners (who have subsidiary liability), either at the same time as he sues the partnership, or after constituting the claim against the partnership (see Mair v Wood 1948 SC 83). [Back] Note 51 Limited Liability Partnerships Act 1907, s 6(4). [Back] Note 52 Section 286 and Sched 6. [Back] Note 53 Muirhead v Boreland 1925 SC 474. [Back] Note 55 Made under LLPA 2000, ss 14-17. [Back] Note 56 Clause 1(3) applies to a “body corporate”. This includes an LLP (which is defined as such in LLPA 2000, s 1(2)). References in clause 1(3) will be construed as references as applied by LLPR 2000 (see para 2.29, n 44 above). [Back] Note 57 Although we are not aware of any other entities to which this could happen at the time of writing, more may emerge in the future. For example, we have proposed in our consultation paper on partnership law ((2000) Law Com No 159; Scot Law Com No 111) that partnerships be given separate legal personality in England and Wales. In addition, there is a proposal to create a new form of legal personality for charities. See: Completing the Structure (2000) Company Law Review Steering Group of the DTI. [Back] Note 59 See para 1.3 above. [Back] Note 60 For example, the Insolvency Act 2000. [Back] Note 61 See in particular: A Review of Company Rescue and Business Reconstruction Mechanisms (2000) Insolvency Service, which contains a number of recommendations for change and describes itself as “a starting point in what should be a continuing process of change and improvement in our insolvency law” (Executive Summary, para 16). [Back] Note 62 Clause 18. An exercise of the power in this clause would be subject to the affirmative resolution procedure, the highest level of Parliamentary scrutiny available over a statutory instrument. We understand that this has been the preference of the Delegated Powers Scrutiny Committee when considering “Henry VIII clauses” such as this. [Back] Note 63 We use “liability insurance” to refer to insurance policies which indemnify the insured against liabilities which he may incur. A vast range of types of liability insurance exists. See the discussion in MacGillivray on Insurance Law (9th ed 1997) para 28-52. [Back] Note 64 Consultation paper, Part 11. In particular, we raised the possibility that the new Act might be restricted to cases in which the insurance policy was compulsory, in which the claim was for death or personal injury, in which the claim was brought by a consumer, or in which the claim was in tort (in Scotland, delict) rather than in contract. [Back] Note 65 See consultation paper, para 11.19, n 41. [Back] Note 66 [2001] 2 All ER 503. We understand that, at the time of writing, Tarbuck (the claimant firm of solicitors) are considering an appeal. [Back] Note 67 The judge based his judgment on the probable intention of Parliament when passing the 1930 Act. See p 508 g-h and p 509 b-c. [Back] Note 68 We recognise that, in theory, the insured might be able to protect his position by demanding an assignment of the third party’s rights under the insurance contract. However, that course of action might not occur to him, or the insured might refuse to co-operate. Even if these difficulties were overcome, such a course would involve expense; our proposed reform would render such steps unnecessary. [Back] Note 69 See for example, Access to Justice with Conditional Fees (1998) LCD consultation paper and para 2.2, n 1 above. [Back] Note 70 Clause 16 provides that voluntarily incurred liabilities are within the scope of the draft Bill. Note also that clause 1(1) does not restrict the statutory transfer to cases in which the debt is owed to a “third party”. Cf s 1(1) of the 1930 Act which is in terms of “liabilities to third parties”. [Back] Note 71 Consultation paper, paras 11.3-11.8. [Back] Note 72 Clause 15, reproducing the effect of s 1(5) of the 1930 Act. Other exceptions arise where the 1930 Act is specifically excluded by legislation giving third parties specific rights as in s 165(5) Merchant Shipping Act 1995. The other exceptions are preserved by the draft Bill (clause 19). [Back] Note 73 Paragraph 12.10. [Back] Note 74 Clause 1(4)(a). Clauses 1(3)(i), 7(a), 8(c) and 2(2)(b) also refer to sequestration. [Back] Note 75 Clause 1(2)(e) and (f) and clause 1(4)(k) and (i). [Back] Note 76 Clause 1(3)(l). [Back] Note 78 Clause 2(2)(c). [Back] Note 79 Clause 21(5). That subsection does extend clause 13(1)-(3) to Northern Ireland. This is necessary in order to ensure that jurisdictional rules (on which see Part 8 below), both before and after the implementation of parallel legislation in Northern Ireland, are consistent within the UK. [Back] Note 80 Third Parties (Rights against Insurers) Act (Northern Ireland) 1930. [Back]
