Financial Services Compensation Scheme Ltd v Larnell (Insurances) Ltd

This appeal requires the court to examine the impact on limitation periods of the insolvency of the debtor, in a context where the creditor’s claim against the debtor is brought in order to take advantage of rights of the debtor to an indemnity against that claim under an insurance policy, pursuant to the Third Parties (Rights against Insurers) Act 1930.

The appeal is brought by the Claimant against an order of Mr Justice David Steel by which he struck the claim out on the basis that, assuming all the facts alleged by the Claimant in its favour, the claim could not succeed by virtue of the Defendant’s limitation defence. The allegations are disputed, but have to be assumed as correct for present purposes.

The essential facts as alleged can be shortly stated. The Claimant is the assignee of the rights of six investors each of whom alleges that he suffered loss by reason of the negligence of the Defendant in giving him advice about pensions. The Defendant was insured under an indemnity policy against claims of this kind. The alleged advice was given and acted on over a period from 1986 to June 1989. The primary limitation period under sections 2 and 5 of the Limitation Act 1980 expired by June 1995 at the latest. However, the Claimant relies on section 14A of the 1980 Act, and alleges that none of the six investors had the knowledge which is necessary under that section until 9 May 1997. Accordingly it contends that the alternative period under that section would have expired on 9 May 2000. The long-stop period under section 14B of the 1980 Act ran for 15 years from June 1989, at the latest, so it expired in June 2004. The present proceedings were commenced on 16 September 2004. Thus, on ordinary principles of limitation, the claim was time-barred on the date it was brought.

However, on 3 May 2000, when the three year period under section 14A had not quite expired, the shareholders of the Defendant passed a resolution for the winding-up of the company, and a liquidator was appointed. That brought into application the statutory regime under the Insolvency Act 1986 in relation to the liabilities of the company. The Claimant contends that the Defendant was then liable to it as assignee of the six investors, because the limitation period had not yet expired. The Defendant accepts that this is so on the assumed facts, but argues that, even so, the claim cannot succeed for a number of reasons.

The questions argued are these:

No evidence was put in before the judge in opposition to the striking-out application. We were told, in the course of argument, that the Claimant did put in a proof of debt in August 2001, but that the liquidator has neither admitted nor rejected it. We were also told that it is not thought likely that the Defendant company had any assets of any real value other than the proceeds of the insurance policy in question, that the policy is capped at £250,000 (out of which costs of defending a claim may have to be met), and that the amount sought to be recovered in the action is some £607,000.

The Third Parties (Rights against Insurers) Act 1930 provides in section 1(1), so far as relevant to the present case, that:

“Where under any contract of insurance a person (hereinafter referred to as the insured) is insured against liabilities to third parties which he may incur, then … (b) in the case of the insured being a company, in the event of ... a resolution for a voluntary winding-up being passed, with respect to the company, … if, either before or after that event, any such liability as aforesaid is incurred by the insured, his rights against the insurer under the contract in respect of the liability shall, notwithstanding anything in any Act or rule of law to the contrary, be transferred to and vest in the third party to whom the liability was so incurred.”

Other events giving rise to the statutory transfer include bankruptcy of an individual insured, and other events of insolvency as regards either an individual or a company.

Section 1(4) provides that:

“Upon a transfer under subsection (1) … of this section, the insurer shall, subject to the provisions of section 3 of this Act, be under the same liability to the third party as he would have been under to the insured, but … (b) if the liability of the insurer to the insured is less than the liability of the insured to the third party, nothing in this Act shall affect the rights of the third party against the insured in respect of the balance.”

The Act was passed in order to remedy a situation to which attention had been drawn by Re Harrington Motor Company Ltd [1928] Ch 105. In that case an individual had sued the company for damages for personal injury following a motor accident, and recovered judgment. The company was insured, the insurers had conducted the defence of the claim, and they eventually paid to the company the amount of the claim, less some deductions. In the meantime the company went into liquidation. Eve J held, and the Court of Appeal affirmed his decision, though with manifest reluctance, that the individual had no claim to the proceeds of the policy, which were applicable by the liquidator as part of the company’s assets for the benefit of the creditors as a body.

It is clear and settled that the third party has to establish that the insured is liable to him before he can take advantage of the rights afforded to him under the 1930 Act: see Post Office v. Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363 and Bradley v. Eagle Star Insurance Co Ltd [1989] AC 957. Liability may be established by action, by arbitration or by agreement between the insured and the third party. The terms of the insurance policy may prohibit the insured from reaching any such agreement without the consent of the insurers, so that agreement may not be feasible in these situations, for practical reasons. If proceedings are necessary, they may take one of a number of forms. The obvious instance is a claim such as the present. Because the company is in voluntary winding-up it is unnecessary to obtain consent before starting such a claim. If the winding-up were compulsory the court’s permission would be needed, and the court might regard it as more appropriate for the third party to prove for its debt. If the liquidator were to reject that proof, the third party could appeal against that rejection under rule 4.83 of the Insolvency Rules 1986. That would lead to a judicial determination which would also be sufficient establishment of the liability of the insured. Nothing turns on the particular procedure adopted. It makes no difference whether the proceedings themselves are brought within the bankruptcy or winding-up proceedings or outside them, as is the present claim.

Lord Goff of Chieveley observed, in The Fanti, The Padre Island [1991] 2 AC 1 at 31G that “what is transferred to and vested in the third party is the [insured]’s right against the [insurer]. That right is, at best, a conditional right to indemnity”. In those cases before the House of Lords, liability of the insured to the third party had already been established, but it was said that the insurer’s liability to the insured was contingent on the insured having paid the third party, under a “pay to be paid” clause. The right was conditional in that sense. In some decisions at first instance it was said that the transfer does not take place until liability is established. By virtue of Cox v. Bankside Members Agency Ltd [1995] 2 Lloyd’s Rep 437 and Re OT Computers Ltd [2004] EWCA Civ 653, [2004] Ch 317, it is now settled that the transfer of the rights of the insured against the insurer takes place on the event of insolvency, even if the insured’s liability to the third party has not yet been established: see Freakley v. Centre Reinsurance International Company [2005] EWCA Civ 115.

I must describe next the position in an insolvency as regards the debtor’s liabilities. In a voluntary winding-up, the liquidator’s duty is to apply the company’s property “in satisfaction of the company’s liabilities pari passu”: see Insolvency Act 1986 section 107. Similar provisions apply in a compulsory winding-up and in bankruptcy. An obligation which, at the relevant date, is barred by limitation, so that no action can be brought to enforce it, is not a “liability” for the purposes of the insolvency legislation: see Re Art Reproduction Co Ltd [1952] Ch 89. In that case Wynn-Parry J relied on the decision of the Court of Appeal in Chancery in Re General Rolling Stock Co Ltd (1872) LR 7 Ch App 646. The court held that a claim which was still in time at the date when the winding-up commenced but which was not asserted by way of proof until after the normal period of limitation had expired was to be admitted to proof, because it was in respect of something which had been a liability at the commencement of the winding-up. In effect, so far as the operation of the winding-up is concerned, limitation periods cease to run at that date, so long as they have not already expired.

That case has been followed ever since, whatever the type of insolvency, and whether the claim is disputed or not: see for example Re Cases of Taff Wells Ltd [1992] BCLC 11 and Re Mixhurst Ltd [1994] 2 BCLC 19. In the first of those cases Judge Paul Baker Q.C. said at page 15:

“As I have indicated, I accept that the period of limitation does not cease to run when the petition to wind up is presented, save as regards the petitioning creditor. It is, however, an over-simplification to say that the period ceases to run on the making of the winding-up order or the passing of a resolution to wind up. The true question, as I see it, is whether the original contracts of the creditors were discharged by operation of law and replaced by other rights before time had run out by which actions would have had to be brought to enforce them. It is not simply that time has stopped running against the creditor; the cause of action itself is destroyed and replaced by other rights.”

Having considered Re General Rolling Stock and other cases he answered his question as follows, at page 17:

“One may conclude that the effect of an order to wind up is to convert the contractual rights of the creditors into proprietary rights under a trust. It may still be necessary and appropriate for a creditor to bring an action after the liquidation for the purpose of elucidating his original contractual rights, for which purpose he would have to get leave; but it is not necessary for the purpose of stopping time running against him in relation to his erstwhile contractual rights.”

In Wight v. Eckhardt Marine GmbH [2003] UKPC 37, [2004] 1 AC 147, the Privy Council had to consider an unusual point arising on an appeal from the Cayman Islands in the liquidation there of one of the BCCI companies. A guarantee obligation of the bank governed by the law of Bangladesh subsisted at the date of the winding-up, but was thereafter discharged by a scheme under Bangladeshi law and replaced by an equivalent liability against a newly established Bangladeshi bank. The creditor had lodged a proof before the scheme came into effect, but afterwards the liquidators rejected the proof. The creditor appealed to the court. The Court of Appeal held that the scheme did not affect the creditor’s right to prove, but the Privy Council allowed the liquidators’ appeal.

Lord Hoffmann gave the opinion of the Board, holding that in a case such as that, where the claimant had been a creditor at the start of the liquidation but had ceased to be a creditor by extinction of the debt thereafter, and before any dividend had been paid, the claimant could not share in the distribution of the company’s assets after the extinction of his rights against the company. In the course of his opinion he described the effect of a winding-up on creditors’ rights in rather different terms from those used by Judge Paul Baker Q.C., whose judgment does not appear to have been cited. He said this:

“26.

… It is first necessary to remember that a winding up order is not the equivalent of a judgment against the company which converts the creditor’s claim into something juridically different, like a judgment debt. Winding up is, as Brightman LJ said in In re Lines Bros Ltd [1983] Ch 1, 20, “a process of collective enforcement of debts”. The creditor who petitions for a winding up is “not engaged in proceedings to establish the company’s liability or the quantum of the liability (although liability and quantum may be put in issue) but to enforce the liability”.

27.

The winding up leaves the debts of the creditors untouched. It only affects the way in which they can be enforced. When the order is made, ordinary proceedings against the company are stayed (although the stay can be enforced only against creditors subject to the personal jurisdiction of the court). The creditors are confined to a collective enforcement procedure that results in pari passu distribution of the company’s assets. The winding up does not either create new substantive rights in the creditors or destroy the old ones. Their debts, if they are owing, remain owing throughout. They are discharged by the winding up only to the extent that they are paid out of dividends. But when the process of distribution is complete, there are no further assets against which they can be enforced. There is no equivalent of the discharge of a personal bankrupt which extinguishes his debts. When the company is dissolved there is no longer an entity which the creditor can sue.”

It seems to me that Lord Hoffmann’s analysis is correct and that Judge Paul Baker was wrong to describe a creditor’s rights under a contract (or in tort) as being converted into a trust. Insofar as it is necessary to ascertain what the creditor’s rights are, they have to be established in contract, tort, or otherwise as the case may be. The creditor’s cause of action remains as it was before, so that, for example, the Claimant correctly sues in tort in the present case. It is only as regards giving effect to those rights in the insolvency that the rights are subjected to the statutory trust resulting from the duty of distribution imposed on the liquidator or trustee in bankruptcy. Correspondingly, it is as regards giving effect to those rights in that way that, by virtue of the principle established in Re General Rolling Stock, the period of limitation ceases to run when the liquidation or bankruptcy commences.

As Lord Hoffmann points out in the passage cited above, if the debtor is a company, liquidation, when complete, puts an end to the company’s existence and to any possibility of enforcement against it and its assets. If further assets come to light after it has been dissolved at the end of the liquidation, the company can be restored to the register, but the liquidation will then be revived. A company cannot emerge from liquidation with its debts discharged but with assets remaining. By contrast an individual does survive his bankruptcy, with the bankruptcy debts discharged, and with some assets remaining and the possibility of acquiring other assets. Moreover, not all pre-bankruptcy debts are discharged, so there can be later claims by the creditor against the former bankrupt. The cases which demonstrate the limits to the application of the General Rolling Stock decision have, hitherto, been bankruptcy cases.

The first of these is Re Benzon [1914] 2 Ch 68. The facts are somewhat unusual. Mr Benzon was adjudicated bankrupt in 1890. A small dividend was paid in that bankruptcy, and the trustee in bankruptcy was released, but the bankrupt was never discharged. He was adjudicated bankrupt again in 1892. In that bankruptcy no dividend was paid. The trustee in bankruptcy was released and, again, the bankrupt was not discharged. In 1911 he died. Under the trusts of his father’s will he had a general power of appointment by will over a fund of £15,000. His executors brought proceedings for the administration of his estate. In response to an advertisement for creditors, creditors in each bankruptcy put in claims. The executors applied for directions as to whether their claims should be admitted.

The case came before Warrington J at first instance, who decided it by following his own decision in Re Guedalla [1905] 2 Ch 331. In that case, on somewhat similar facts, he had held that the appointed fund was not part of the property divisible between the creditors in the bankruptcy, under section 44 of the Bankruptcy Act 1883, and that any claim against the fund was precluded by section 9 of that Act, the equivalent of section 285(3) of the Insolvency Act 1986. In Re Benzon an additional point was taken, namely that the debts claimed were barred by limitation. The judge did not decide that point, that under section 9 being sufficient. In the Court of Appeal the limitation point was argued. Under the ordinary rules of limitation the debts were barred, but the creditors argued that this effect on their debts was avoided by the General Rolling Stock principle. The judgment of the Court of Appeal (Cozens-Hardy MR, Buckley LJ and Channell J) proceeded on the basis that the effect of section 44 of the 1883 Act was as had been held in Re Guedalla, and did not decide the point as to the effect of section 9 where the bankrupt had not been discharged. Instead the case was decided on the limitation point. Channell J referred to what I have called the General Rolling Stock principle (though by reference to a bankruptcy case):

“that in the bankruptcy a debt does not become barred by lapse of time if it was not so barred at the commencement of the bankruptcy, and of this there can be no doubt, but this is only in the bankruptcy.”

Since the appointed fund was not available for payment to creditors in the bankruptcy (because of section 44), the claim could not be regarded as one in the bankruptcy. Accordingly, the court held, the limitation period ran in the normal way and, by the time the claim was made against the executors, it was barred by limitation. Thus the fund was only liable for payment of debts incurred after the later bankruptcy, to the extent that these in turn were not time-barred. This point cannot arise in a corporate insolvency.

The next case concerned rights of a creditor who claimed to be secured, so that this could apply in a corporate situation as well as that of an individual bankrupt. This is Cotterell v. Price [1960] 1 W.L.R. 1097. Again the facts are unusual. A man created a first mortgage on March 1930 and a second mortgage over the same property in May 1930. In 1938 a receiving order in bankruptcy was made against him. No proof of debt was submitted by those entitled to the second mortgage debt. The bankrupt never obtained his discharge, though he remained in occupation of the property throughout, and the interest under the first mortgage was paid up to date, though none of the principal was paid. Nothing at all was ever paid in respect of the second mortgage. In 1958 the second mortgagee submitted a proof of debt for some £3000 and valued the security at £2250. Later in 1958 the second mortgagee gave notice to the trustee in bankruptcy under the Bankruptcy Act 1914 requiring the trustee to elect whether to exercise his power of redeeming the second mortgage or of requiring the security to be realised. The trustee made no election within the 6 months allowed under the Act. The second mortgagee accepted that any remedy by action under the mortgage was time-barred, but claimed that he still had the right to redeem the first mortgage. It was said that, although the right to claim possession and to foreclose were barred by specific provisions of the Limitation Act 1939, the only provision of that Act dealing with the right to redeem did not apply on the facts. Buckley J held that the mortgagee’s right to redeem did not survive the extinction, by limitation, of his rights to possession and to foreclose, and of his estate in the land. Then it was argued for the mortgagee that time did not run against him after the date of the receiving order. Re Benzon was cited and Buckley J relied on the passage cited above for the proposition that the effect on limitation periods applied only in the bankruptcy. He said, at 1105:

“It does not have any effect on the operation of the statute on any rights or remedies which are unaffected by the bankruptcy. In my judgment a mortgagee who relies upon his security retains and stands on rights which he had before the bankruptcy, and which remain unaffected by the bankruptcy.

…

Although the bankruptcy takes away the rights of ordinary creditors to sue for their dues and regulates their right of proof in the bankruptcy, the rights of secured creditors are unaffected ... and there is no reason, in my judgment, why time should not continue to run under the Limitation Act as regards those rights and remedies which the secured creditors have outside the bankruptcy.”

In that case, therefore, the creditor sought to rely on his property rights as a secured creditor, which lay outside the bankruptcy. Those rights, not being “in the bankruptcy”, were held to be subject to the normal application of the rules as to limitation.

The third case is also in bankruptcy, and one which, like Re Benzon, could not arise in a corporate liquidation, because it concerned the circumstances in which, despite a discharge from bankruptcy, certain debts are still enforceable. This is Anglo-Manx Group Ltd v. Aitken [2002] BPIR 215, a decision of Mr Jarvis Q.C. sitting as a Deputy Judge of the Chancery Division.

The Defendant took up a loan from the Claimant in 1991. In 1992 he was made bankrupt and three years later he was discharged from bankruptcy. The Claimant alleged that the loan had been procured by fraudulent misrepresentations. If so (and it was denied), section 281(3) of the Insolvency Act 1986 meant that discharge from bankruptcy did not release the Defendant from the resulting liability. The Claimant brought proceedings in 2000. If the running of the limitation period was unaffected by the bankruptcy, the claim was brought too late, because it was common ground that the fraud (if any) had been discovered before the bankruptcy order was made. The Claimant therefore argued that the limitation period was suspended during the bankruptcy, and relied on the General Rolling Stock line of cases. It relied on the fact that, during the three years of the bankruptcy, it could not pursue a remedy against the Defendant except by way of proof in the bankruptcy.

Counsel for the Claimant relied on various analogies including cases concerned with the consequences of the annulment of a bankruptcy. The judge said at paragraph 44 that, in such a case,

“it is as if [the bankruptcy] had never occurred and the previous rights revert. It is therefore impossible in those circumstances to say that there has been in some way a suspension of rights.”

The judge considered the case of personal injury claims, which are also not released on discharge from bankruptcy, and referred to the situation where the 1930 Act applies. He then considered Re Benzon and said this at paragraph 60:

“There was considerable argument before me as to what is meant by the words “in the bankruptcy” as distinct from the words “outside the bankruptcy”. Mr Adair [for the Defendant] submitted that the question can be formulated in this way. Is the claim being directed at property within the statutory trust, or does it relate to property outside of the trust; for example after-acquired property, or property which cannot form part of the estate. It seems to me that that is the correct formulation and is consistent with the analysis of Buckley J in Cotterell v. Price.”

Later, at paragraph 66 he said this:

“It seems to me that the judgment of the Court of Appeal in In Re Benzon is binding authority on me and that there is nothing to indicate that it was based on any false premise. The result of that Court of Appeal decision is that the Statute of Limitations, having begun to run against the claimant before the commencement of the bankruptcy, continues to run, notwithstanding the bankruptcy, in respect of a claim in relation to a fund pursued outside of the bankruptcy.”

Mr Tolley, for the Defendant, relies strongly on the formulation of the principle set out in paragraph 60 of Mr Jarvis’ judgment. He submits that the Claimant’s claim is directed at an asset outside the statutory trust (or, in other words, “which cannot form part of the estate”), namely the rights under the insurance policy which, by virtue of the 1930 Act, are taken out of the statutory trust so as not to be available to the creditors generally.

Mr Justice David Steel accepted that proposition. In his succinct judgment, at paragraph 20, he quoted paragraph 60 of Mr Jarvis’ judgment, and proceeded:

“I too accept that paragraph as accurately summarising the law. Reverting to the present case, it is clear from Re Benzon that the impact of the limitation provisions is only avoided in respect of debts or claims in the bankruptcy. This technical exception introduced, it would seem to me, more as a matter of convenience than as a matter of principle, only applies, in my judgment, where the relevant assets whereby the liabilities are to be discharged are to be shared amongst the creditors. The exception has no application to claims directed at property outside the administrative estate. It is accepted that the whole purpose of this claim was to take advantage of the transferred rights of the Defendant’s insurance cover. It is correct that the effect of the liquidation is to transfer the relevant insurance cover to the Claimant, nevertheless the underlying cause of action remains as against the insured. The potential for recovery under the policy can nonetheless be treated as an asset outside the bankruptcy. Indeed, to that extent, the Claimants are secured creditors. The whole purpose of the 1930 Act is to ensure that the benefit of the bankrupt’s right to an indemnity under the policy does not fall into the general estate – see Bradley v. Eagle Star [1989] AC 957. By the same token, the beneficiary should look to the insurer first: see Freakley.”

He held that there was no proper basis for distinguishing the present case from Re Benzon and that therefore the limitation defence was conclusive against the Claimant.

Given that the Claimant made no bones about its purpose being to get at the proceeds of the indemnity policy, that there is thought to be nothing worthwhile in the liquidation itself, and that those proceeds are, by virtue of the 1930 Act, taken out of the funds distributable to general creditors, it is easy to see the force of the analogy with Re Benzon on the facts of this case. Mr Stanley for the Claimant submits, however, that the point requires further analysis, having regard to the nature of the two-stage process involved under the 1930 Act, and the nature of the Claimant’s actual claim against the Defendant.

The rights under the policy are to an indemnity against claims by third parties established against the insured. Ignoring agreement or arbitration, such claims have to be established by a judicial determination. As indicated above at paragraph 11, there are several ways of achieving such a determination and it does not matter which is used. A claim such as the present is a normal method. Such a claim is and can only be brought against the insured. If successful, it will establish the liability of the insured to the third party, both for the purposes of triggering the right to indemnity under the policy and for the purposes of any claim in the liquidation. Though it may well be common, as in the present liquidation, for there to be no assets in the liquidation which are worth pursuing, given that the proceeds of the policy are taken out by the 1930 Act, that is by no means necessarily the case. There may be assets available to general creditors as well as the policy available to the third party. As in the present case, the policy may not be sufficient for the third party’s claim, if made out in full, by reason of a cap or a deductible, or there may be defences open to the insurer. Thus it does not follow that the third party will be satisfied in full, or at all, under the policy. In that case, the third party would need to rely on its right to prove in the liquidation as well, if there are any assets available to creditors. The right to do so would be settled by success in the claim. Thus pursuit of a claim such as the present may serve two purposes: both as against the insurer and as against the funds in the liquidation.

Plainly, so far as the third party’s claim to share in the funds available to creditors generally is concerned, the General Rolling Stock principle applies. If the claim is not barred by limitation when the winding-up resolution is passed, it does not become so barred by the passage of further time. How, then, can it be said that the third party’s claim, which is not barred as against the Defendant for the purposes of claiming in the liquidation, is barred insofar as it may be used to found a claim under the 1930 Act against the insurer?

Mr Tolley submitted that the test is that articulated by Mr Jarvis, to which he would add words which I have italicised, namely: whether, and if so to what extent, the claim is one which is “directed at property within the statutory trust, or does it relate to property outside of the trust”? On the facts of the present case it is not difficult to see the answer to that question. But it seems to me that this is not a satisfactory test for general purposes. Mr Jarvis plainly did not have a situation such as the present in mind, despite his references to the 1930 Act. It would be wrong to take his words and apply them to the present question as if they were a statutory formula. Mr Stanley submitted that the use of the phrase “directed at” would involve enquiry as to the Claimant’s subjective purpose or motivation in bringing the claim, which would be thoroughly unsatisfactory. Mr Tolley resisted that suggestion, and submitted that the question would be decided objectively, though even in that case there could be questions as to the facts as they were, and were perceived to be, at different dates as regards the position of the insolvent estate, and as to the Claimant’s knowledge of those facts. In the end Mr Tolley’s submission was that the test would not be one of intention or purpose at all, however that might be ascertained. It would be a test of result: if and to the extent that the establishment of the claim would result in a claim to the proceeds of a policy under the 1930 Act, time would continue to run against the third party despite the onset of liquidation, whereas if and to the extent that it would result in a proof in the liquidation, time would not run against the Claimant. So, in a case in which there was or might be anything worth proceeding against in the liquidation, as well as a claim under a policy by virtue of the 1930 Act, the third party’s claim would have to be treated as a mixed claim, liable to be defeated for one purpose by the passage of time after the commencement of the winding-up, but not so liable for another purpose.

It seems to me that, as Mr Stanley submitted, that proposition poses both conceptual and practical problems. How can a single claim, in respect of one cause of action, against one Defendant, be barred by limitation for one purpose and not for another? Separate causes of action of one Claimant against the same Defendant may be treated differently as regards limitation, as may causes of action against two Defendants, for example if one Defendant goes into bankruptcy or winding-up and another does not, and the Claimant may have rights outside the bankruptcy or winding-up as well as inside it, for example a secured creditor who may have to prove for a shortfall. But the Claimant in the present case, in respect of each of the six investors whose rights have been assigned to it, sues the single Defendant on one cause of action, in tort, for one item of loss. It is difficult to imagine how the plea of limitation would be treated on the statements of case, and indeed how it would be dealt with when giving judgment for the Claimant (assuming that it proves its case and gets over the limitation defence on the facts by virtue of section 14A).

In my judgment Mr Tolley’s proposition faces insuperable difficulties. Given that the first stage for a third party such as the Claimant is to establish the liability to it of the insured, which is necessarily being administered in insolvency, it seems to me that the third party’s claim against the insured is one to which the normal principles apply, namely that, if it is not time-barred at the commencement of the bankruptcy or winding-up, it does not become time-barred by the passage of further time thereafter. I therefore respectfully disagree with the judge on this, the main point in the case.

Mr Tolley mentioned in his submissions the Law Commission’s Report on the 1930 Act, published in 2001 (Law Com No 272). The Commission recommended a number of reforms, one of which would be to allow the third party to sue the insurer direct, in an action in which it would seek to establish both the liability of the insured and the liability of the insurer under the policy. It also made specific recommendations about the application of limitation to claims under the Act. In some respects the Commission’s statement of the existing law in the Report has been overtaken by subsequent decisions of this court. Nothing in the Report seems to me to call into question the conclusion I have reached on the main question in the case.

I should mention that Mr Tolley raised in his two skeleton arguments the question whether the principle of Re General Rolling Stock was still sound, but he did not suggest that we should consider that question, and it is clear that we cannot. We are bound by the decision, which applies just as much on the language of the Insolvency Act 1986 as it did under the Companies Act 1862. With all respect to the judge, I do not agree with his comment at paragraph 20, cited above, that it is a matter of administrative convenience rather than of principle. It is a point of statutory policy, on which the words of the relevant legislation have stood consistently for many years.

It is then necessary to proceed to Mr Tolley’s first alternative argument, raised in a Respondent’s Notice, namely that the General Rolling Stock principle does not apply if the third party has to rely on section 14A of the Limitation Act 1980. I can deal with this shortly. Like the judge, it seems to me that, if the third party’s claim is not time-barred under the Limitation Act 1980 at the relevant date (the winding-up resolution in this case), that claim is a liability for the purposes of section 107, whatever may be the provision, or combination of provisions, of the Limitation Act 1980 that the third party relies on to show that the limitation defence is not justified.

Section 14A substitutes in place of section 2 a different period of limitation in relation to any action for damages for negligence, other than for personal injury, where at the date when the cause of action accrued the Claimant did not have both the knowledge required for bringing an action for damages in respect of the relevant damage and the right to do so. Section 14A(3) says that no action to which the section applies shall be brought after the expiration of the period. The period is defined in section 14A(4) as six years from the date on which the cause of action accrued or (if later) three years from the first date on which the Claimant had the relevant knowledge and the right to bring the action. There is nothing in the section which provides a basis for Mr Tolley’s submission. Given that, in some cases to which the section applies, the basic 6 year period is the relevant period (if the knowledge was acquired less than 3 years after the cause of action accrued) it would be anomalous, to say the least, to treat a claim to which this section applies differently, where the Defendant goes into liquidation during the limitation period, from a case within section 2.

The same goes for section 14B, but Mr Tolley has a separate point on this section, and I must set it out:

“(1)

An action for damages for negligence [other than one for personal injury] shall not be brought after the expiration of fifteen years from the date (or if more than one, from the last of the dates) on which there occurred any act or omission

(a)

which is alleged to constitute negligence; and

(b)

to which the damage in respect of which damages are claimed is alleged to be attributable (in whole or in part).

(2)

This section bars the right of action in a case to which subsection (1) above applies notwithstanding that

(a)

the cause of action has not yet accrued; or

(b)

where section 14A of this Act applies to the action, the date which is for the purposes of that section the starting date for reckoning the period mentioned in subsection (4)(b) of that section has not yet occurred;

before the end of the period of limitation prescribed by this section.”

Mr Tolley submitted that when the period prescribed by this section expires, the person otherwise entitled to the benefit of the cause of action ceases to be entitled to it altogether, so that the section extinguishes the right, rather than merely barring the remedy of court proceedings. He then submits, if that be right, that when the period expired in this case, as it did before the issue of the proceedings, the Claimant lost its right to claim, even though the operation of other limitation periods had been interrupted under the General Rolling Stock principle.

In my judgment Mr Tolley’s premise is incorrect. As appears from the text of the section, subsection (1) uses the classic language of limitation: an action shall not be brought after the period has expired. That gives no reason to suppose that the operation of the section is any different in this respect from that of section 2 or section 14A. Subsection (2) uses the different phrase “this section bars the right of action”. Mr Tolley submits that this means that it extinguishes the creditor’s rights altogether. I disagree.

The Limitation Act 1980 does expressly provide for the extinction of title in the contexts of chattels and land: section 3(2) dealing with conversion - “the title of that person to the chattel shall be extinguished” – section 17 dealing with claims to recover land – “the title of that person to the land shall be extinguished” – and similar provisions in section 18(2) and (3). There is another such reference in section 11A(3) but that was introduced by the Consumer Protection Act 1987, after the introduction of section 14B, so it is not strictly relevant to the interpretation of section 14B and I therefore ignore it.

Mr Tolley submitted that section 14B should be read as extinguishing the right because of the need for finality so as to give proper effect to the ultimate long-stop provision introduced by the Latent Damage Act 1986 as the counterpart for extending the time within which a claim can be brought under section 14A. That could be a legitimate policy behind the pair of provisions, but it seems to me that all depends on the language of the section. Nothing in section 14B(1), which is the operative provision, suggests that the effect of the section is to be any different from that of other limitation provisions in the same field (i.e. not dealing with questions of title to assets) such as section 2 or section 14A. Mr Tolley therefore has to show that subsection (2), which, though certainly necessary, is explanatory, demonstrates that subsection (1) is intended to have a different effect from that which would normally follow from its own terms. He says this is the effect of the words “bars the right of action”. Although it was not necessary to his decision Mr Justice David Steel said that he would have accepted this submission: see paragraph 26 of his judgment.

I respectfully disagree. It seems to me that words far more specific than these would be necessary in order to show that a section which provides that “an action … shall not be brought” means that the cause of action is extinguished. It is true that in section 14B it is necessary to cover also the case where the cause of action has not yet accrued, so that to speak of it being extinguished would be odd (though I note that this is what section 11A(3) does). Additional words would be needed, such as to say that the right of action shall be extinguished or, as the case may be, shall not arise. The natural reading of the words used in subsection (2) is that they do no more than summarise the effect of subsection (1). In that, it seems to me, the words used are perfectly appropriate to refer to a provision which precludes an action being brought, but does no more. They mean the same as if subsection (2) had said “this section prevents an action being brought …”.

Mr Tolley showed us passages from McGee on Limitation Periods, 4^th edition (2002) in which the view is expressed that the section should be read as extinguishing the cause of action, particularly by reference to its impact on contribution claims, by reference to section 1(3) of the Civil Liability (Contribution) Act 1978. With all respect to the learned author, I am not persuaded by his arguments. It seems to me that the words of the section show the way to the correct reading, starting from the proposition that the expiry of a period of limitation does not normally extinguish rights, that where it does (in cases of title) there is a particular reason for it, and the Act says so expressly, that it does not say so in the present case, and there is not the same reason for it to do so, that the language of subsection (1) does not point to any different operation of this limitation period from those under sections 2 or 14A, and that the language of subsection (2) is consistent with this and does not call for a different reading.

It is therefore not necessary to consider the effect of the expiry of the 15 year period if it did extinguish the Claimant’s cause of action. Mr Tolley relied on Wight v. Eckhardt, which I have summarised at paragraph 17 above. That case was not concerned with extinction by limitation, but it may justify Mr Tolley’s proposition if it were otherwise right. As it is the point does not arise.

For those reasons, I hold that, if the Claimant can prove that the starting date for the investors’ claims under section 14A is 9 May 1997, then its claim as assignee was not barred by limitation when the Defendant went into voluntary winding-up on 3 May 2000, that it makes no difference that, if the Claimant can make good its claim on the merits as well, it will thereby be able to claim against the insurers under the insurance policy by virtue of the 1930 Act, and that it also makes no difference that the 15 year period under section 14B expired after the winding-up resolution but before the Claimant started these proceedings. I would therefore allow this appeal.

I agree that the appeal should be allowed for the reasons given by Lloyd L.J. and add a few words of my own in view of the fact that we are differing from the learned judge.

It is well-established that under a policy of insurance against legal liability the insured has no cause of action against the insurer until his own liability has been established by judgment, award or agreement: see Post Office v Norwich Union Fire Insurance Society Ltd [1967] 2 Q.B. 363 and Bradley v Eagle Star Insurance Co. Ltd [1989] A.C. 957. One consequence is that until the insured’s liability is established in one of those ways he has only a contingent right to recover under the policy. However, the effect of section 1(1) of the Third Parties (Rights against Insurers) Act 1930 is to transfer the insured’s rights under the policy to the third party immediately upon the happening of the relevant event, in this case the passing of a resolution for the winding up of the respondent company: see Cox v Bankside Members Agency [1995] 2 Lloyd’s Rep. 437, In re OT Computers Ltd (in administration), Nagra v OT Computers Ltd [2004] EWCA Civ 653, [2004] Ch. 317 and Freakley v Centre Reinsurance International Company [2005] EWCA Civ 115. It follows that the company’s rights under the policy do not form part of the assets available to the creditors in the liquidation.

The resolution for the winding up of the company was passed on 3^rd May 2000. It is common ground that the causes of action on which the claimant relies arose at the latest by June 1989. The ordinary period of limitation under section 2 of the Limitation Act 1980 therefore expired in June 1995 well before the company went into liquidation. It must be assumed for present purposes that the investors whose rights have been assigned to the claimant acquired the knowledge necessary to enable them to bring claims against the company by 9^th May 1997, so the extended limitation period provided by section 14A of the Limitation Act 1980 expired on 9^th May 2000, a few days after the winding up began. The proceedings were not issued until 16^th September 2004, so if time continued to run in the ordinary way the claims were then time-barred. The first question that arises in this case is whether the intervention of the winding up prevented the claims from becoming time-barred in the ordinary way.

Section 14B of the Limitation Act 1980 provides a ‘long stop’ limitation period in respect of claims based on negligence of 15 years from the date of the last act or omission relied on. In the present case that period came to an end in June 2004, well after the winding up had commenced, but some months before the proceedings were issued. The second question that arises on this appeal is whether the effect of the expiration of the limitation period under that section was to extinguish the claimant’s rights altogether so that it could no longer pursue a claim of any kind against the company, whether in the winding up or otherwise.

Under section 107 of the Insolvency Act 1986 it is the duty of the liquidator in a voluntary winding up to apply the company’s property pari passu in satisfaction of its liabilities. This reflects the position as it had been established in previous enactments going back to the nineteenth century. In In re General Rolling Stock Company (1872) L.R. 7 Ch. App. 646 a creditor sought to prove in the liquidation for a debt which had accrued due and was enforceable by action at the time of the commencement of the winding up but in respect of which the limitation period had expired by the date at which the proof was submitted. Lord Romilly M.R. held that the Statute of Limitations applied, but on appeal his decision was reversed. Having considered section 98 of the Companies Act 1862 (which in this respect does not differ materially from section 107 of the Insolvency Act 1986) James L.J. put the matter in this way at page 649:

“A duty and trust are thus imposed upon the Court, to take care that the assets of the company shall be applied in discharge of its liabilities. What liabilities? All the liabilities of the company existing at the time when the winding-up order was made which gives the right. It appears to me that it would be most unjust if any other construction were put upon the section. After a winding-up order has been made, no action is to be brought by a creditor except by the special leave of the Court, and it cannot have been the intention of the Legislature that special leave to bring an action should be given merely in order to get rid of the Statute of Limitations. It must have been intended that such leave should be given only in cases where the Court thought that an action was the most proper means of determining the question as to the liability of the company.”

Similarly, Mellish L.J. said

“I am of the same opinion. I think that the case is governed by the 98th section of the present Act, and that it is unnecessary to consider what was the proper construction of the former Acts. It appears to me to be the clear meaning of that section, that the assets should be applied in satisfaction of all the liabilities which existed at the time of the winding-up order.”

That decision, which, as Mr. Tolley accepted, is binding on us, establishes that the rights of a person who seeks to enforce a claim against the assets of the company in the liquidation are to be ascertained as at the date of the commencement of the liquidation. It is to the satisfaction of all such liabilities that the company’s property must be applied and therefore (subject to the effect of section 14B of the Limitation Act to which I shall come later) provided his claim is not time-barred at the date of the winding-up, the right to prove in the liquidation is not thereafter lost by reason of the operation of the Limitation Act.

As Lloyd L.J. has pointed out, a company cannot survive the process of winding up, even if it should be restored to the register following its dissolution as a result of some previously undiscovered property having come to light, but a natural person can expect to obtain a discharge from bankruptcy which will enable him to resume normal life and acquire new property outside the bankruptcy. Moreover, some obligations survive a discharge from bankruptcy, as the case of Anglo-Manx Group Limited v Aitken [2002] BPIR 215 demonstrates. In In re Benzon, Bower v Chetwynd [1914] Ch. 68 the question arose whether creditors of an undischarged bankrupt could recover against assets which only became available to the bankrupt on his death and which therefore fell outside the bankruptcy. The claims were time-barred unless, as the creditors contended, time ceased to run against them during the period of the bankruptcy. The court held that since the claims were made against property outside the bankruptcy, time continued to run and the claims were barred. Channell J. put the matter in this way at page 75:

“As to the second point, cases were quoted beginning with Ex parte Ross which shew that in the bankruptcy a debt does not become barred by lapse of time if it was not so barred at the commencement of the bankruptcy, and of this there can be no doubt, but this is only in the bankruptcy. From the nature of the case, as there are usually no means of recovering a debt provable in a bankruptcy other than under the machinery of the bankruptcy, there is likely to be little authority on the point whether bankruptcy keeps alive the right to take such other remedies, if there are any notwithstanding the lapse of time, and we find no direct authority on this point.

The real difficulty in the way of the appellants is the well-established rule that if the statute once begins to run it continues to run whatever happens.

. . . . . . . . . . . . We think the statute applies and is fatal to the appellants’ case. The fund is only assets for the payment of debts which are not barred, and in fact there are other creditors in this case whose debts were incurred after the bankruptcy but more than six years before the death whose claims have already been rejected. It would be curious if the effect of the bankruptcy were to make these much older claims maintainable.”

The decision of Buckley J. in Cotterell v Price [1960] 1 W.L.R. 1097 further demonstrates that rights enforceable otherwise than against property held by the liquidator or trustee in bankruptcy are subject to the operation of the Limitation Acts in the ordinary way.

These authorities were followed and applied by Mr. John Jarvis Q.C. in Anglo-Manx Group Ltd v Aitken. They support the conclusion that a distinction is to be drawn between rights to obtain satisfaction of claims from the property of the company through the process of the liquidation, which are determined as at the date of the commencement of the winding-up, and rights that may be enforceable outside the liquidation, for example by recourse to security. In the case of the former time does not run after the date of the winding up so that a proof may be submitted at any time, although without disturbing any previous distributions. In the case of the latter time runs in the ordinary way.

This makes it necessary to consider whether the claims brought against the company in the present case are claims within or outside the liquidation. The company says that they are claims outside the liquidation because the claimant is seeking to obtain the benefit of the rights under the insurance policy which do not form part of the company’s property. The learned judge accepted that argument. He held that although the underlying cause of action remained one against the company, the potential for recovery under the policy could nonetheless be treated as an asset outside the bankruptcy. He considered the claimant to be in substantially the same position as a secured creditor and therefore subject to the normal operation of the Limitation Act.

With great respect to the learned judge I think he was wrong about that. Although the 1930 Act operated to transfer the company’s rights under the policy to the claimant at the commencement of the winding up, those rights were inchoate and entirely dependent upon the establishment of the company’s liability to the claimant. Until that liability has been established neither the company nor the claimant has a right to recover under the policy. The position is unlike that of a secured creditor who has an immediate right to satisfy his claim by recourse to the security.

In the present case, as Lloyd L.J. has explained, the claimant’s rights against the company could be established by proceedings in the ordinary way (this being a voluntary liquidation) or by an appeal against the refusal of the liquidator to admit its proof, but in either case if it were successful it would establish its right to prove in the liquidation. By so doing it would also complete its cause of action against the insurers under the policy, but that does not mean that the claim is one that is made outside the liquidation or that the present proceedings are proceedings to enforce rights against property outside the liquidation. They cannot be, since no such rights exist until the company’s liability has been established.

Mr. Tolley submitted that since the purpose of the proceedings is to enable the claimant to enforce rights against the insurers, the claim should be held to be time-barred for those purposes even if it cannot be held to be time-barred for the purposes of establishing its right to prove in the liquidation. However, I find it impossible to accept that the same claim can be time-barred for one purpose but not for another. Either the claim can be brought or it cannot.

The ordinary limitation period under section 2 of the Limitation Act 1980 had expired by the date of the resolution for winding up, but the extended period provided by section 14A had not and I agree with the judge that, if the company’s liability is to be determined at that date (as I think it is), it would be contrary to principle to disregard the operation of section 14A in cases where the claimant was in a position to take advantage of its terms. It follows that, subject to the effect of section 14B, I am unable to accept that the claim in this case is time-barred.

Mr. Tolley submitted that, unlike section 14A, section 14B of the Limitation Act 1980 is substantive rather than procedural in nature. In other words, it does not merely bar the right to bring an action; it operates so as to discharge or extinguish the legal rights which the action would be brought to enforce.

In my view that is not the natural meaning of the words used in the section. In common with sections 2 (tort), 5 (simple contract), 7 (awards) and 8 (specialties), to mention but a few, as well as section 14A, the operative words of subsection (1) are “An action for damages for negligence . . . . . . shall not be brought after the expiration of . . . .”. In a system in which the distinction between the right to bring proceedings and the substantive legal rights underlying those proceedings is well recognised the natural and ordinary meaning of such words is to prevent the bringing of an action, not to extinguish the rights on which any such action is based. It is accepted that all the other sections of the Act in which similar language is used are procedural in nature and one would therefore expect the same to be true of section 14B(1). Moreover, one can see from other sections, notably sections 3 (title to chattels), 11A (defective products), 17 (title to land) and 18 (equitable interests in land) that where Parliament wished to extinguish substantive rights it did so expressly.

Two arguments were put forward in support of the submission that section 14B is substantive in its effect. The first rests on the language of subsection (2) which provides as follows:

“This section bars the right of action in a case to which subsection (1) above applies notwithstanding that

(a)

the cause of action has not yet accrued; or

(b)

where section 14A of this Act applies to the action, the date which is for the purposes of that section the starting date for reckoning the period mentioned in subsection (4)(b) of that section has not yet occurred;

before the end of the period of limitation prescribed by this section.”

It is said that the words “bars the right of action” indicate an intention to bar the legal rights in question rather than merely the right to bring proceedings, especially in the light of the fact that the section is to have effect even though the cause of action has not yet accrued. In my view however, this places more weight on the language of the subsection than it will bear. When one reads the section as a whole I think it is clear that subsection (2) is intended to complement subsection (1) which itself contains the principle which the section as a whole enacts. If that is correct, one would not expect subsection (2) to be significantly different in its effect from subsection (1). Once one moves from the language of prohibition (“an action shall not be brought”) to the language of positive effect a different form of words becomes inevitable. In my view that accounts for the use of the expression “bars the right of action”. In any event, it is one which in my view is entirely apposite to describe the effect of a procedural time bar since its effect is to remove or “bar” the right to bring an action. The fact that it is expressed to have that effect notwithstanding that the cause of action has not yet accrued is perhaps anomalous, but is explicable on the grounds that it is intended to make it clear that a right that would otherwise arise, if at all, only at a later date is intended to be affected. I can see nothing in the language of subsection (2), therefore, to indicate that it is intended to extinguish substantive legal rights.

The other argument is based as much on policy as on the language of the section. It is said that section 14B was enacted to balance the extended limitation period provided by section 14A by ensuring that a defendant obtains complete finality after 15 years and that in order to give it effect it is necessary to construe it as substantive in nature. In support of that submission we were referred to Limitation Periods, 4^th ed. by Professor Andrew McGee. In paragraphs 6.020 and 15.006 Prof. McGee argues that the section should be construed as extinguishing the claimant’s substantive rights, partly because it is properly to be regarded as a trade-off for the introduction of the concept of the starting date in section 14A and partly because of the possibility that to do otherwise would permit an even more extended limitation period for contribution claims.

With all respect to Prof. McGee, I am unable to accept that conclusion. I would accept that Parliament regarded sections 14A and 14B as complementary, but I do not think that points to the conclusion that section 14B was intended to extinguish the claimant’s rights rather than bar his remedy. Indeed, in the absence of some language that points clearly to a different conclusion, the very fact the two sections are intended to be complementary suggests that they were intended have a similar effect. Finality can be achieved just as much by a procedural time bar as by one that has substantive effect. It is true that by providing a limitation period of two years from the date of judgment in the case of claims under the Civil Liability (Contribution) Act 1978 section 10 of the Limitation Act 1980 enables a claim for contribution to be brought well after the underlying cause of action is time-barred, but that is an inevitable consequence of the fact that the limitation period applicable to contribution proceedings is directly related to the date on which judgment is given in the primary proceedings. I do not think that considerations of that kind provide a satisfactory basis for adopting what I consider would be an artificial construction of section 14B.

In my view section 14B is procedural in its effect. This makes it unnecessary to consider the implications of the Privy Council’s decision in Wight v Eckhardt Marine G.m.b.H. [2003] UKPC 37, [2004] 1 A.C. 147 in cases where a substantive time bar becomes effective after the commencement of the winding up and before proceedings of any kind have been initiated.

I agree with both judgments.