T&N Ltd & Ors, Re Insolvency Act 1986

This is an application by the administrators of T&N Limited and other companies in the T&N group, by which they seek the determination of certain legal issues which are central to the future conduct of the administrations. The directions sought by the administrators and the issues raised by this application are set out in paragraphs 12-18 below. It is convenient first to give the necessary background information.

In a judgment given in October 2004, Re T&N Ltd [2004] EWHC 2361 (Ch), [2005] 2 BCLC 488, I set out in paragraphs 6-44 the background to the administrations and the problems confronting the companies. The brief summary which follows and which brings the information up to date is sufficient for present purposes.

The T&N group was for many years engaged on a large scale in the mining of asbestos and in the manufacture and distribution of asbestos products. More recently it diversified into other product areas not necessarily involving asbestos, particularly the manufacture of parts for use in the automotive industry. The UK holding company was listed on the London Stock Exchange until 1998 when it was taken over by Federal Mogul Corporation Inc (FMC).

By then the hazardous nature of asbestos was well known and there had for some years been a rising number of claims against asbestos producers, such as T&N, by employees and former employees and members of their families, by third parties who had worked with asbestos products in, for example, the shipbuilding industry and by others who had been exposed to asbestos dust. These were in the main personal injury claims, but there have also been property damage claims and contribution claims by other asbestos producers.

The volume and scale of asbestos-related claims, particularly in the United States, continued to grow to the point in 2001 that the management of the Federal Mogul group, including the management of the T&N sub-group, concluded that the affected companies should seek the protection of appropriate insolvency proceedings. On 1 October 2001, administration orders were made in England in respect of T&N and 132 other English companies in the Federal Mogul group. At the same time, those companies and 23 US companies in the Federal Mogul group filed for protection under Chapter 11 of the US Bankruptcy Code.

The relevant companies face liabilities on a massive scale. There are great difficulties in attaching figures to the companies’ asbestos-related liabilities, particularly as some asbestos-related conditions do not manifest symptoms, or even start, for many years after exposure to asbestos dust. Evidence previously filed on applications in the administrations has provided a range of figures for current values of present and future claims of approximately £250 million for the United Kingdom and a range of about $2.7 billion to $10.5 billion for the United States. Proceedings were held earlier this year in the US District Court to estimate the value of all “pending” and “future” asbestos claims against the T&N companies for the purposes of a proposed plan of reorganisation of the companies. Written and oral expert evidence was submitted to the court. In its judgment on 19 August 2005, the US District Court estimated the current discounted value of total US claims, both pending and future, at $9 billion. For these purposes, claims were pending if they had been made by 1 October 2001, the date of the petitions under Chapter 11, and all remaining claims were future. Although the figure of $9 billion was not apportioned between the two categories, it is accepted by all parties that the future claims represent a very significant majority of the total figure. Future claims for these purposes include both claims made since the petition date and an estimate of claims which may be made in the future. Again there is no apportionment of the figure between these two elements, but it is accepted that the estimate for claims not yet made represents a significant majority of that category.

Evidence was also placed before the US District Court as to the value to be attributed to UK asbestos claims. This evidence was not challenged and the relevant figures were adopted by the court in its judgment. Pending claims were valued at £14 million and future claims at £229 million.

As well as asbestos liabilities, T&N and 13 other companies in administration have very substantial liabilities to the trustees of the T&N Retirement Benefit Scheme (1989) (the T&N pension scheme). Actuaries instructed by the trustees have valued the claim against the companies as at March 2004 at £1.8 billion, making the trustees the largest single creditor by a wide margin. In addition, the trustees have claims under section 75 of the Pension Act 1995. The Pension Protection Fund (the PPF) was established under the Pensions Act 2004. Its function is to assume responsibility for, and to provide compensation to members of, eligible pension schemes, when there is a qualifying insolvency event in relation to the employer and there are insufficient assets in the pension scheme to provide for the level of protected liabilities. It became operational on 6 April 2005. It is anticipated, and it is critical to the success of proposals for the future conduct of the administrations, that the T&N pension scheme will be taken into the PPF. The “assessment period” during which the PPF must determine whether it would be appropriate to take the scheme into the PPF will start when the administrators send out notices to creditors convening meetings to consider proposals for company voluntary arrangements (CVAs) under Part I of the Insolvency Act 1986.

Since the administration and Chapter 11 proceedings started in October 2001, there has been agreement in principle among the administrators, the debtor-in-possession management and the major creditor groups and representatives that, if possible, a means should be found to avoid a liquidation of the relevant US and UK companies. Some of the companies have businesses which are considered to be viable, and the problems associated with the long-term profile of the asbestos claims make highly desirable a solution other than liquidation. The solution would, if possible, involve a plan of reorganisation approved under the procedures contained in Chapter 11 of the US Bankruptcy Code and schemes of arrangements or CVAs in the UK. There have, however, been great difficulties in reaching agreement between the various groups as to the appropriate terms of these proposals. I outlined some of the issues in my judgment given on 21 October 2004: see paras 45–57 and 83–120.

More recently, progress has been made and on 26 September 2005 a number of parties entered into a Settlement Agreement. The parties are the administrators, FMC and T&N (acting by their debtor in possession management), the US Plan Proponents, the PPF and High River Limited Partnership, the most substantial holder of bonds issued by FMC. It represents a settlement which is acceptable to the largest creditors or creditor groups of the UK companies, that is, the trustees of the T&N pension scheme, in so far as it leads to entry into the PPF, and the Official Committee of US Asbestos Claimants. It has been approved by a resolution of the T&N creditors’ committee, with two abstentions. The unequivocal view of the administrators is that it embodies a sensible solution which treats all creditors fairly. It will enable the companies to come out of administration and Chapter 11 proceedings.

The Settlement Agreement involves the promotion of CVAs or schemes of arrangement which will provide for the payment of specific amounts to certain creditors and for the establishment of trusts and reserves from which dividends will be paid to relevant groups of creditors. The Plan Proponents agreed to make an application to the US Court for an Order that CVAs or schemes can be promoted before a Plan of Reorganisation is approved by the US Court. Since the hearing of this application, an order has been made by the US Court in terms which permit the promotion of CVAs or schemes. Certain creditor groups (notably US and Canadian asbestos personal injury claimants and the overwhelming majority of inter-company claims) are excluded from the UK asset distribution process, although US asbestos claimants will receive a very substantial share of collections under the Hercules insurance policy (as to which see Freakley v Centre Reinsurance International Co [2004] EWHC 2740 (Ch), [2005] 2 BCLC 530). Those creditors will (except in relation to the Hercules insurance policy) rely entirely upon the treatment they are to receive under the eventual Plan of Reorganisation to be confirmed in the US. Relevant participating creditors in the UK will (with the exception of the claim of the T&N pension scheme against T&N) have to establish their claims for dividend purposes in accordance with English legal and procedural requirements. The payments to creditors and the establishment of the necessary trusts and reserves will be funded from the cash already held by the Administrators and the sale proceeds of certain assets.

It is an essential feature of the proposals that not only those persons who have already made or are entitled to make asbestos-related claims, but also all future claimants, should be bound by the schemes or CVAs. As will appear, this involves no jurisdictional difficulty as regards future claimants who were employees and therefore have contractual claims, or claimants who have accrued causes of action in tort. The issue requiring resolution is whether future claimants who were not employees and who do not have accrued causes of action in tort can be parties to a scheme of arrangement or a CVA and bound by it. I should mention that there have been no submissions directed to statutory claims of former employees or their dependants. So far as US claims are concerned, they are or will be principally product liability claims and are maintainable, if at all, in tort.

A further issue which has been raised for decision is whether, on the hypothesis of a winding-up, persons with potential tort claims but without an accrued cause of action at the date on which the company goes into liquidation (the liquidation date) would have admissible claims for the purposes of proof in a winding-up. This in turn requires consideration of, first, claimants who do not have an accrued cause of action when they seek to prove, and, secondly, claimants who have a cause of action which accrues after the liquidation date. A very large proportion of persons who have been exposed to asbestos dust will never suffer any injury and will therefore never have a cause of action in tort. It is not however possible to predict whether any particular individual will or will not develop an asbestos disease.

This second issue is not raised because liquidations are anticipated, although they cannot be ruled out as a possible outcome. It is raised because, if these potential claimants are not entitled to prove and receive a distribution in a winding-up, issues may arise as to fairness and as to the proper constitution of classes for voting purposes in a scheme. I say that it may raise such issues, because it is not accepted by the administrators and other parties that it necessarily will do so. I have not heard submissions as to these consequential issues. Plainly, however, any problem is avoided if the proper conclusion is that such claimants are entitled to prove in a liquidation.

A third issue has arisen, if the answer to the second issue is that, applying the usual principles of statutory construction, the potential claimants cannot prove in a liquidation. It is then contended by the US Asbestos Creditors Committee and other parties that this would breach the claimants’ rights under the European Convention for the Protection of Human Rights and Fundamental Freedoms (the Convention) and the First Protocol.

There are, as it appears to me, two principal reasons for the importance of these issues in this case, which also explain why they have not previously arisen. First, the particular nature of asbestos-related diseases is, as I have mentioned, such that there may be a very long period between the exposure to asbestos and the start, let alone the appearance of symptoms, of the resulting disease. The second reason is the scale of the potential liabilities, particularly in the United States, and the inadequacy of available insurance cover. Asbestos-related diseases are not unique in having so long a period of development (see Cartledge v E Jopling & Sons Ltd [1963] AC 758) but it may be that previously there has been adequate insurance to meet the problem.

The administrators’ application, as amended, contains definitions in paragraph 2:

“For the purposes of this Application

(1)

“future asbestos claim” means any personal injury claim against a UK Debtor where:

(a)

the claimant was exposed to asbestos which could cause an asbestos-related disease or diseases, and

(b)

the relevant UK Debtor would be liable in respect of that exposure and any such disease or diseases, and

(c)

all of the exposure to asbestos occurred prior to the relevant date or the liquidation date (as the case may be), but

(d)

the claimant’s cause of action, if any, against the relevant UK Debtor will accrue after the relevant date (in the case of paragraph 2 below) or the liquidation date (in the case of paragraph 3 below).

(2)

“relevant date” means a date on which the Administrators propose in respect of the relevant UK Debtor a scheme of arrangement pursuant to section 425 of the Companies Act 1985 (the 1985 Act), and/or a company voluntary arrangement pursuant to the provisions of Part I of the Insolvency Act 1986 (the 1986 Act).

(3)

“liquidation date” means a date on which the relevant UK Debtor goes into liquidation pursuant to the provisions of Part IV of the 1986 Act.”

The substantive relief sought by the administrators is in paragraphs 3 and 4:

“3.

That it may be determined and declared whether a claimant in respect of a future asbestos claim against a UK Debtor would be a “creditor” of the UK Debtor so as to be capable of being bound by any compromise or arrangement sanctioned by the Court pursuant to section 425 of the 1985 Act and/or by any company voluntary arrangement approved pursuant to the provisions of Part I of the 1986 Act.

4.

That it may be determined and declared whether a claimant in respect of a future asbestos claim against a UK Debtor would be entitled to prove for a debt in the liquidation of that UK Debtor pursuant to the provisions of Part IV of the 1986 Act and/or Part 4 of the Insolvency Rules 1986.”

The application is for directions to enable the administrators to pursue and fulfil the purposes of the administrations. They do not seek declarations which would be binding or create issue estoppels as regards individual claimants. One reason for this is that it is of vital importance not to take any steps which might infringe the claims-handling rights of insurers and reinsurers under the Hercules insurance arrangements. No representation orders have therefore been sought or made.

The applications were provided to a number of interested parties. In addition to the administrators, for whom Mr Snowden QC and Mr Arden appeared, six groups of interested parties have been represented on the applications. Mr Sheldon QC and Mr Bayfield appeared for the Official Committee of Asbestos Creditors and for the Future Claimants’ Representative appointed in each case by the Office of the United States Trustee for the purposes of the Chapter 11 proceedings. They are among the proponents of, or they support, the Plan of Reorganisation being promoted in the Chapter 11 proceedings. Mr Dicker QC and Mr Fisher appeared for certain of the Plan Proponents, namely Federal Mogul Corporation and its affiliates as debtors in possession in the Chapter 11 proceedings, the Official Committees of Unsecured Creditors and of Equity Security Holders and JP Morgan Chase Bank as administrative agent for the holders of pre-petition bank claims. Mr Trower QC and Mr Robins appeared for Syndicate 45/177 at Lloyd’s, which is one of T&N’s employer’s liability insurers, covering a period from 1977 to 1995. There has been litigation between T&N and the syndicate but they have reached outline terms of settlement, one of the conditions of which is that future asbestos claimants must be bound by the terms of any final settlement, whether effected by scheme of arrangement or CVA. The representatives of UK asbestos claimants appointed by Lindsay J on 27 May 2004 were represented by David Allan QC and Hugo Groves. While supporting the administrators, they did not advance separate submissions on any of the issues. All these parties supported the position of the administrators that future asbestos creditors could be bound by a scheme of arrangement or CVA and that their potential claims were admissible to proof in a liquidation. There was a unanimity of approach to the first of those issues but, as will be seen, on the second issue, their submissions differed and in some respects conflicted. Nonetheless they were agreed as to the outcome.

The T&N pension trustees were represented by Mr Mortimore QC and Miss Leahy. The trustees do not have a position on the first issue and therefore neither support nor oppose the declaration on that issue sought by the administrators. Their primary concern is that the T&N pension scheme should enter the PPF. The PPF, not the trustees, is a party to the Settlement Agreement and has indicated its support for CVAs embodying its terms. Under the terms of the Settlement Agreement the trustees would receive payments totalling about £250 million and, if the pension scheme enters the PPF, these payments will be for the benefit of the PPF. At meetings to consider CVAs and schemes, the PPF, not the trustees, will be entitled to vote on behalf of the pension scheme. For these reasons, the trustees make no submissions on the first issue.

The trustees do, however, oppose the administrators’ position on the second issue and submit that without an accrued cause of action as at the liquidation date, a potential tort claim is not admissible to proof, nor is an actual claim in tort where a cause of action has in fact accrued but only after the liquidation date. As a very substantial creditor, the trustees and the many thousands of present and former employees who are beneficiaries under the scheme have a direct interest in this issue, if it proves impossible to give effect to the Settlement Agreement. Accordingly, Mr Mortimore assumed the burden of advancing submissions in opposition to the four separate sets of submissions made on this issue by Mr Snowden, Mr Sheldon, Mr Dicker and Mr Trower.

Very shortly before the start of the hearing, the administrators’ counsel lodged a supplemental skeleton argument, raising for the first time submissions that if the relevant statutory provisions were construed so as to prevent tort claimants without a cause of action accrued as at the liquidation date from proving in a liquidation, such a result would be incompatible with the Convention and the First Protocol. If that were right, the Court was bound by the Human Rights Act 1998 to construe the provisions in a way which was compatible with the Convention or, if that was impossible, the court should at least indicate the incompatibility, whether or not formal declarations were sought. At my request, the administrators’ solicitors notified the Department of Trade and Industry, which is the government department responsible for insolvency legislation, of these submissions. The Insolvency Service, which is the relevant agency of the Department, replied in writing that it did not wish to participate in the application and it has not made any submissions on this issue. Separate argument was addressed to me at a subsequent hearing by Miss Carss-Frisk QC on behalf of the Asbestos Creditors’ Committee and the Future Claimants’ Representative and by Mr Eadie on behalf of the trustees of the T&N pension scheme. I am very grateful to them, as I am to all counsel, for the great assistance which they gave on this application. The submissions of Miss Carss-Frisk were adopted without further argument by all parties, except of course, the pension scheme trustees.

It is appropriate to give a very brief summary of the development of these diseases, to give some sense of their scale and nature. This is an area of developing scientific knowledge. There are helpful statements of current medical opinion in a number of authorities, including Fairchild v Glenhaven Funeral Services Limited [2003] 1 AC 32 and Grieves v F. T. Everard & Sons [2005] EWHC 88 (now on appeal). The following summary is taken from the administrators’ skeleton argument. It is agreed by all counsel appearing on this application, including David Allan QC who has great experience in this area. The stages of the development of asbestos-related diseases, so far as known, is as follows:

(1)

The inhalation of asbestos fibres. Following inhalation, a proportion of the fibres never reach the lungs. Some are caught in the nasal passage; others are trapped in the mucus which lines the body’s airways and are eventually swallowed or expectorated.

(2)

Deposit of fibres into lungs. When fibres are deposited in the lungs, the body’s natural defences (scavenger cells known as “macrophages” and dissolution in tissue fluids) succeed in clearing some of the fibres or (by a coating process) operate so as to neutralise them. However, a substantial proportion survives these processes.

(3)

The by-products of the body’s natural defences and the bio-persistence of asbestos fibres are the cause of asbestosis. Failed macrophages die and they, and the surviving asbestos fibres, produce a chemical reaction. This reaction in turn produces an inflammation of the lung which, if sufficiently serious and prolonged, can cause fibrosis – asbestosis – to develop. It does not usually become apparent or detectable until after 20 years from first exposure.

(4)

The presence of asbestos fibres in the lung increases the likelihood of the development of lung cancer, with the fibres acting in relation to at least some of the genetic mutations which result in the first malignant cell. Asbestosis is a sufficient, but probably not a necessary, condition for the development of cancer of the lung. With the other asbestos-related diseases, it shares a long latency period. However, and as with mesothelioma (as to which further below), the first malignant cell may develop some considerable time before the cancer actually becomes manifest. Once manifest, the disease is almost always fatal and death occurs within a very short period of between 12 and 18 months.

(5)

Asbestos fibres can pass from the lungs and penetrate the pleura. The precise route is as yet unclear.

(6)

The presence of asbestos fibres commonly causes pleural plaques to develop. These are localised areas of pleural thickening, consisting of bland fibrous tissue. The cause is not absolutely clear, although it appears to be similar to asbestosis; that is, an inflammation caused by a chemical reaction produced by pleural macrophages and the presence of asbestos fibres. As with asbestosis, pleural plaque rarely becomes apparent or detectable until after 20 years from first exposure.

(7)

Pleural thickening is pleural fibrosis, extending continuously over a variable proportion of the thoracic cavity, usually involving the visceral pleura. The cause, development and latency period are similar to pleural plaques. However, unlike pleural plaques, the disease may manifest itself in the form of physical symptoms.

(8)

Mesothelioma is a malignant tumour arising from mesothelial cells and is found most commonly in the pleura, and sometimes in the peritoneum. Asbestos fibres in the pleura increase the likelihood of the development of the requisite malignant cell, although it is not clear precisely at which stages of mutation the fibre operates or what precise form that development takes. The mean latency period is 40 years, although (if the end of that period is taken to be the first manifestation of symptoms) the appearance of the first malignant cell takes place within that period – about 10 years prior to the first manifestation of symptoms. The disease is fatal, death usually occurring within about 12 months after the onset of symptoms.

It is therefore not just the symptoms, but the condition itself, which may not start to develop for many years after exposure.

Damage is a necessary element of a cause of action in the tort of negligence. Unless and until the claimant suffers a loss which is recognised in law as compensatable by an award of damages, the claimant has no claim in negligence. This is not a technical requirement. It goes to the foundation of the law of negligence and many other torts. The obligation which the law imposes in appropriate circumstances (where the legal decision is that there exists a duty of care to avoid loss of the type in question), and which a claimant may enforce by legal proceedings, is an obligation to compensate the claimant against loss which was a reasonably foreseeable consequence of his carelessness. There is no free-standing obligation or duty of care. This was clearly stated by Viscount Simonds in Overseas Tankship (UK) Limited v Morts Dock and Engineering Co Ltd (The Wagon Mound) [1961] AC 388 at 425:

“It is, no doubt, proper when considering tortious liability for negligence to analyse its elements and to say that the plaintiff must prove a duty owed to him by the defendant, a breach of that duty by the defendant, and consequent damage. But there can be no liability until the damage has been done. It is not the act but the consequences on which tortious liability is founded. Just as (as it has been said) there is no such thing as negligence in the air, so there is no such thing as liability in the air. Suppose an action brought by A for damage caused by the carelessness (a neutral word) of B, for example, a fire caused by the careless spillage of oil. It may, of course, become relevant to know what duty B owed to A, but the only liability that is in question is the liability for damage by fire. It is vain to isolate the liability from its context and to say that B is or is not liable, and then to ask for what damage he is liable. For his liability is in respect of that damage and no other. If, as admittedly it is, B's liability (culpability) depends on the reasonable foreseeability of the consequent damage, how is that to be determined except by the foreseeability of the damage which in fact happened - the damage in suit? And, if that damage is unforeseeable so as to displace liability at large, how can the liability be restored so as to make compensation payable?”

A cause of action in negligence can therefore accrue only if and when compensatable loss is suffered. The same is not true of a cause of action for breach of contract. By making the contract, a party assumes a legally recognised and enforceable obligation to perform it. A breach of contract is therefore without more a breach of legal obligation and a cause of action has accrued, even though substantial loss has not yet been suffered and may never be suffered.

These differences between liability in contract and in tort play an important part in the present application, for at least two reasons. First, the way in which the relevant provisions in the Insolvency Act 1986 and the Insolvency Rules are drafted focus attention on these issues. Secondly, the differences may produce surprisingly different results depending on whether a claim can be brought in contract or in negligence.

The accrual of causes of action in relation to asbestos-related claims raises acute difficulties, because of the long period which may elapse between exposure to asbestos and the onset of any medical consequences which can be recognised as damage, and because of the difficulties, often amounting to impossibility, of ascertaining the time at which those consequences started.

The issue of what constitutes compensatable loss is itself controversial. There is, of course, no difficulty with conditions such as mesothelioma, lung cancer or asbestosis. These are comparatively rare developments on a statistical basis, although still representing a very serious problem. The difficulty arises in relation to the much more common, asymptomic development of pleural plaques. In Grieves v F. T. Everard & Sons, Holland J held that permanent penetration by asbestos fibres, with only the potential for harmful physiological changes, did not constitute compensatable loss. He further held that pleural plaques were not of themselves sufficient for this purpose. However, pleural plaques providing a catalyst for future symptomatic diseases and amounting to physiological damage, when combined with resulting anxiety, was sufficient to amount to a compensatable loss and was therefore sufficient to give rise to a cause of action. On that basis, a claimant can elect for either a final award of damages or a provisional award. A final award will compensate not only for the damage presently suffered (e.g. anxiety) but also for all damage which might be suffered in the future, such as the development of mesothelioma, provided that it is not too speculative. A provisional award will compensate the claimant for his present loss, but also enable the claimant to apply for further damages in the event that a serious condition specified in the order later develops.

The power to award provisional damages is conferred by section 32A of the Supreme Court Act 1981 which enables the award to be made:

“for damages for personal injuries in which there is proved or admitted to be a chance that at some definite or indefinite time in the future the injured person will, as a result of the act or omission which gave rise to the cause of action, develop some serious disease or suffer some serious deterioration in his physical or mental condition.”

Its application to asbestos cases was described as follows by Holland J in Grieves (para 88a):

“This type of award has to be compensation for a penetration of the body by asbestos fibres, which penetration is permanent and of sufficient extent and maturity as to give rise to pleural plaques and to the fact of a lifetime risk of the onset of a symptomatic condition, with concomitant 'suffering' or loss of amenity in terms of anxiety. It does not have to compensate for the onset of any such conditions in terms of general damages or prospective financial loss. I reject a Defendants' submission that the fact of an award presently predicated on the basis that no such condition will in fact arise somehow adversely affects so much of the claim as invokes anxiety. Whether or not there is an immediate award that reflects the onset of such a condition and its consequences, the threat of such remains and is a potential source of anxiety.”

At para 90B, Holland J, explained the approach to a final award and the submissions made on it:

“Granted that the final award has from the onset been pitched at a level higher than that for a provisional award, what is it that commands greater compensation? The only apparent factor is the actual assessed risk of the future onset of an asbestos related symptomatic, possibly terminal condition. I consider each of the three presently claimed full awards separately in due course – it is convenient presently to take Mr. Grieves as an example. In his case (as a 64 year old) that which arguably justifies a general damages award higher than that appropriate on a provisional basis are 2% risks of the future onset of diffuse pleural thickening, further or alternatively asbestosis; and 5% risks of the future development of a mesothelioma, further or alternatively lung cancer. It is the potential for the onset of one or more of these conditions that is said to merit an enhanced award. Essentially, proof on balance of probabilities that there are these risks justifies, so it is submitted, substantially higher compensation in terms of general damages.”

Holland J held that Mr Grieves could not recover damages based on the possibility of an asbestos-related condition developing because it was too speculative.

Section 425 of the Companies Act 1985 makes provision for “a compromise or arrangement…proposed between a company and its creditors, or any class of them” to become binding on the company and the creditors, by a process involving a meeting or meetings of the creditors or classes of creditors concerned and subsequent sanction by the court. There is no definition of “creditors” for this or any other purpose in the Companies Act.

Part 1 of the Insolvency Act 1986 makes provision for the directors, administrator or liquidator of a company to “make a proposal under this Part to the company and to its creditors for a composition in satisfaction of its debts or a scheme of arrangement of its affairs”, called a voluntary arrangement (section 1(1)). Section 3 provides for a meeting of creditors and a meeting of members of the company to consider the proposal. If approved at both meetings, the CVA binds every creditor entitled to vote at the meeting of creditors, whether or not he in fact voted or was present or had notice of the meeting, as if he were a party to the arrangement (section 5(2)). The same is true if the proposal was approved only at the meeting of creditors, subject to the court’s powers under section 4A(6). There is no definition of “creditor” for the purposes of Part 1 of the Insolvency Act 1986, or indeed for the purposes of other provisions of the Act relating to companies.

Provision for schemes of arrangement was first made by the Joint Stock Companies Act 1870. It was more limited in scope than the later provisions now re-enacted as section 425. It applied only to schemes of arrangement between a company in liquidation and its creditors. The meaning of “creditors” was considered in Re Midland Coal, Coke and Iron Co [1895] 1 Ch 267 which concerned a scheme under that Act. The lessee of mines had assigned his leases to the company which covenanted to indemnify him against liability under the leases. The company went into liquidation and a scheme was approved, under which a new company took over the assets and liabilities of the company and agreed to pay or satisfy the unsecured creditors within three months of approval of the scheme. The lessee applied in the liquidation of the company to have a sum provided to meet his contingent liability for rent, royalties and breaches of covenant. In considering whether he was bound by the scheme and thereby precluded from lodging a proof in the liquidation of the old company, there was consideration of the meaning of “creditor” for the purposes of the 1870 Act. Wright J said at p 271:

“It is difficult to put a meaning on sect. 2 of the Joint Stock Companies Arrangement Act, 1870, and the case is complicated by the scheme. But, on the whole, I may take it that sect. 2 is intended to apply to everybody who can be treated as a creditor of any sort, whether actual or contingent. Craig, being some sort of a creditor, within the meaning of the Act, so that he could be bound by meetings of creditors, either was bound by some order of the Court, or he had it in his power to get himself protected, and must be treated as if he were a party represented by some particular class of creditors. As one of the creditors, or of a class of creditors, he was a party to and bound by the scheme.”

On appeal it was argued by Mr Buckley QC for the lessee that the word “creditor” in the 1870 Act did not include every person who has a contingent claim against the company, whatever may be the nature of his claim. Lindley LJ, giving the judgment of the Court of Appeal, agreed with Wright J’s approach to the meaning of “creditor”:

“Considering that that Act was passed in order to enlarge the powers conferred by sect. 159 of the Companies Act, 1862, we agree with Mr Justice Wright in thinking that the word “creditor” is used in the Act of 1870 in the widest sense, and that it includes all persons having any pecuniary claims against the company. Any other construction would render the Act practically useless” (p. 277).

Mr Snowden relied on this decision as support for an interpretation of “creditors” which would include future asbestos claimants. The decision dispels any notion that “creditors” are restricted to those with debts which are presently payable or certain to be payable in the future. However, it would not itself justify reading “creditors” in this context as having a wider meaning than creditors with a provable claim in the winding-up to meet their claim: see Lindley LJ at pp 275–277. Since schemes of arrangement under the 1870 Act could only be proposed between a company in liquidation and its creditors, it is to be expected that there should be an alignment between the meaning of “creditors” under the 1870 Act and “creditors” in a liquidation.

The power to promote schemes of arrangement was extended to all companies, not just those in liquidation, by the Companies Act 1907. Since then there has been no necessary link with the law relating to liquidations, and since 1986 the provisions governing liquidations have been contained in a different statute from those dealing with schemes of arrangements. While those treated as having provable debts in liquidation are “creditors” for the purposes of section 425, it does not follow that “creditors” need be restricted to such persons.

This was the conclusion reached by the Supreme Court of New South Wales in Re R. L. Child & Co Pty Ltd (1986) 4 ACLC 312. It was an application to convene a meeting of creditors to consider a scheme of arrangement with creditors who were defined as:

“any person who [has] or claims to have any claim against the company arising out of or having its origin in any matter occurring on or prior to 14 February 1986 or arising out of any transaction, act or omission of the company or any person on or before 14 February 1986, whether the claim be present, future or contingent or whether liquidated sounding only in damages and whether in contract or in tort howsoever arising…”

The company was insolvent, but not in liquidation, and, under the applicable insolvency rules, a person with an unliquidated claim in tort was excluded from proof in the winding-up of an insolvent company, whether his cause of action accrued before or after the liquidation date. McLelland J saw no warrant for introducing this exclusion into the meaning of “creditors” in section 315 of the Companies Code, which governed schemes of arrangements in terms similar to section 425. In reaching this conclusion, he referred to the fact that such claims were provable in the winding-up of a solvent company and observed:

“It is highly unlikely that the legislature would have intended the ambit of that expression to vary depending upon whether the company was solvent or insolvent, and to exclude persons having liquidated claims in tort from the scope of sec. 315 would make little commercial sense.”

The class of creditors entitled to prove in a solvent liquidation was widely drawn to include all contingent liabilities and did not exclude unliquidated claims in tort. McLelland J treated that provision as a “convenient guide” to the meaning of creditors in section 315. This decision was followed by Anderson J in Bond Corporation Holdings Ltd v State Western Australia (1992) 7 WAR 61 (although the decision was disapproved on other grounds by the Privy Council in Kempe v Ambassador Insurance [1998] 1 WLR 271). It is to be observed that the definition of creditors in the scheme was wide enough to include not only tort claimants with an accrued cause of action, but also those with claims “arising out of or having its origin in any matter occurring on or prior to 14 February 1986 or arising out of any transaction, act or omission of the company” on or before the same date. That formulation was clearly wide enough to include persons who had as yet suffered no loss from the “matter occurring” or the act or omission of the company, and who would therefore not have an accrued cause of action in tort.

In my judgment, “creditors” in section 425 is not limited to those persons who would have a provable claim in the winding-up of the company, although it clearly includes all those who would have such a claim. As was submitted by Mr Snowden and other counsel, one of the recognised purposes of section 425 is to encourage arrangements with creditors which avoid liquidation and facilitate the financial rehabilitation of the company: see, for example, Sea Assets Ltd v PT Garuda Indonesia [2001] EWCA Civ 1696 at para 2. This suggests that as wide a meaning as possible should be given to “creditors” in the section. Having said that, it is important to bear in mind that section 425 is designed as a mechanism whereby an arrangement may be imposed on dissenting or non-participating members of the class and such a power is not to be construed as extending so as to bind persons who cannot properly be described as “creditors”.

The provisions for CVAs are much more recent than those for schemes of arrangements. They were first introduced by the Insolvency Act 1985 and came into effect as Part 1 of the Insolvency Act 1986, a consolidating statute. They are based on recommendations contained in the report of the Review Committee on Insolvency Law and Practice (Cmnd 8558, 1982) (the Cork Report).

Although contained in the Insolvency Act and although envisaged as a mechanism for a company in financial difficulties, there is no clear requirement that creditors for the purposes of CVAs should be restricted to persons with provable debts. As a mechanism which is intended as an alternative to schemes of arrangement, there is every reason for concluding that “creditors” should have as wide a meaning in Part 1 of the Insolvency Act as in section 425.

The meaning of “creditors” in this context was considered by Knox J in Re Cancol Ltd [1996] 1 All ER 37. A landlord contended that future rent under a lease was not affected by a voluntary arrangement approved in relation to the tenant company. Knox J rejected the argument that “creditors” were restricted to those with presently enforceable claims, and did not include those with future or contingent claims, a reading which would of course have provided a much narrower class even than persons with provable claims. Knox J relied in part on the analogy with schemes of arrangement and on the meaning given to “creditors” by the Court of Appeal in Re Midland Coal, Coke and Iron Co. He observed at p 44:

“it would, in my view, be highly anomalous if company voluntary arrangements under the 1986 Act, which are intended to be an alternative to liquidation, and s.425 compromises or arrangements did not have the same potential ambit.”

Knox J therefore applied by analogy the decision of the Court of Appeal in Re Midland Coal, Coke and Iron Co that “creditors” include all persons having any pecuniary claims against the company, including those whose claims are future or contingent.

The claim for future rent in Re Cancol Ltd would be a provable debt in a liquidation, and the decision is not therefore authority for the proposition that the meaning of creditors in relation to CVAs goes wider than those with provable debts. However, some persons who do not have provable debts are clearly creditors: see rule 12.3(2) of the Insolvency Rules 1986. Thus, a person with the benefit of a costs order made in family proceedings was a creditor for the purposes of serving a statutory demand and presenting a bankruptcy petition, even though the debt was not provable: Levy v Legal Services Commission [2001] 1 FLR 435 (CA). See also Re a Debtor; JP v A Debtor [1999] BPIR 206.

Every creditor who has notice of the meeting convened to consider a CVA is entitled to vote at it. Rules 1.17(2) and 1.17(3) provide for the value to be attributed to the votes of creditors:

“1.17(2) [Calculation of votes] Votes are calculated according to the amount of the creditor’s debt as at the date of the meeting or, where the company is being wound up or is in administration, the date of its going into liquidation or (as the case may be) when the company entered administration.

1.17(3) [Limitation on voting] A creditor may vote in respect of a debt for an unliquidated amount or any debt whose value is not ascertained and for the purposes of voting (but not otherwise) his debt shall be valued at £1 unless the chairman agrees to put a higher value on it.”

The word “debt” is not defined for the purposes of this rule. While it might not obviously suggest a wholly contingent liability, it is clear from Re Cancol Ltd that it does so.

The present state of the authorities therefore shows that (i) the holder of a contingent claim is a creditor for the purposes of the provisions governing both schemes of arrangement and CVAs and (ii) the claim need not be a provable debt. The nature of contingent claims is such that a creditor for these purposes need not have an accrued cause of action. To take the simple example of an uncalled guarantee, the person with the benefit of the guarantee will be a “creditor” of the guarantor, even though there has not been, and may never be, any default on the principal debt or any call on the guarantee.

Nonetheless it is a significant step to go from saying that a person with a contingent claim on the basis of an existing contractual obligation is a “creditor” to saying that a person who has suffered no loss and who therefore has no claim in tort is a “creditor” because he may in the future suffer loss, giving him then a cause of action in tort. There is no authority, except possibly the New South Wales case of Re RL Child & Co Pty Ltd, which establishes this proposition. Nor, however, does any authority reject it.

It becomes necessary to look closely at the nature of a contingent liability. The most illuminating authority, on which Mr Snowden and other counsel heavily relied, is the decision of the House of Lords by a majority of three to two in In re Sutherland, decd, Winter v IRC [1963] AC 235. It concerned the incidence of estate duty in circumstances where the deceased had “control” of a company, as defined in the Finance Act 1940, during the five years ending with his death. In such circumstances, his shares fell to be valued by reference to the net value of the company’s assets, pursuant to sections 50 and 55 of the 1940 Act. At the date of death the assets included five ships for which the company had received capital allowances under the Income Tax Act 1952, leaving a sum as “expenditure unallowed” as defined in the 1952 Act. If, as happened after his death, the ships were sold at a price greater than the expenditure unallowed, the company became subject to balancing charges resulting in a tax liability.

For the purposes of valuing the net assets of the company, allowance had to be made under section 50 of the Finance Act 1940 for:

“all liabilities of the company (computed, as regards liabilities which have not matured at the death, by reference to the value thereof at that date, and, as regards contingent liabilities, by reference to such estimation as appears to the Commissioners to be reasonable)…”

The issue was whether the balancing charges payable on a sale of the ships was for these purposes “contingent liabilities” of the company at the date of the deceased’s death.

It was submitted for the Inland Revenue that contingent liabilities referred to an existing legal obligation under which any payment would become due in consequence of the happening of a future uncertain event or events. No legal obligation existed at the date of death, not only because it was uncertain whether the ships would ever be sold, but also because any sale, and therefore the liability to pay a balancing charge, depended on the volition of the company. The contingency was under its control. While it was conceded that as soon as a capital allowance was accepted there arose an obligation to pay in certain circumstances, it was the element of volition which meant that there was no contingent liability. Additionally, it was submitted that section 50 was not aimed at obligations arising under a statute, and was aimed primarily at contractual obligations.

Lord Reid, giving the leading majority speech, rejected the notion that a contingent liability could arise under a contract, but not under statute: pp 247–248. As to the meaning of contingent liability, he held that in Scots law and in section 50 of the Finance Act 1940, it was:

“a liability which, by reason of something done by the person bound, will necessarily arise or come into being if one or more certain events occur or do not occur.” (p 249.)

Although Lord Reid formally expressed no final view as to the meaning of contingent liability as a matter of English law, this was an English appeal on the construction of a United Kingdom statute, and there is no good basis for suggesting that it generally has a different meaning in English law.

While contingent liabilities in section 50 meant “sums, payment of which depends on a contingency, that is, sums which will only become payable if certain things happen, and which otherwise will never become payable”, he agreed with the Commissioners:

“to this extent, that this class can only include liabilities which in law must arise if one or more things happen and cannot be extended to include everything that a prudent businessman would think it proper to provide against.” (p 249)

The difference here was that by accepting the capital allowances, the company came under a statutory obligation to pay balancing charges if the ships were later sold at more than a certain amount, and it did not matter that it was a matter of choice for the company whether it sold the ships.

Lord Birkett and Lord Guest agreed with Lord Reid. Lord Birkett said at pp 253–254 of the obligation to pay the balancing charges:

“It was no less a contingent liability because the sale of the ships might not take place. The true legal position was that from the moment the appellants accepted capital allowances they were at once under a liability to pay tax in the circumstances provided for in the Income Tax Act, 1952.”

At p. 264, Lord Guest said, in terms which are particularly in point to the present case:

“The claim for initial allowances for what has been described as depreciation is the voluntary choice of the taxpayer, but, once he has obtained such allowances, he is automatically involved by the operation of law in the payment of balancing charges, if the assets are parted with at a price greater than the written down value in the circumstances defined in section 292 of the Income Tax Act, 1952.”

It appears from Lord Hodson’s minority speech, with which Lord Tucker agreed, that the critical feature was that the contingency depended on the volition of the company: see p 259. In those circumstances, it could not properly be said that there was an underlying obligation. He did however accept that a contingent liability could arise under a statute, as much as by contract.

The analysis of contingent liability contained in the majority speeches in Re Sutherland has been applied in the context of insolvency: see Re SBA Properties Ltd [1967] 1 WLR 799 (no contingent liability because the company had done nothing which could result in it being subject to the alleged liability) and Community Development Pty Ltd v Engwirda Construction Co [1969] HCA 47, (1969) 120 CLR 455 (High Court of Australia) per Owen J (employer under a construction contract is contingently liable to pay “extras” although their determination is subject to arbitration under the contract: this would, I think, be a contingent liability under the minority, as well as the majority, view in Re Sutherland). See also Re Gasbourne Pty Ltd [1984] VR 801.

In Secretary of State for Trade and Industry v Frid [2004] 2 AC 506, the House of Lords held that there could be set-off under rule 4.90 of the Insolvency Rules between an obligation which was contingent at the liquidation date to reimburse the Secretary of State for payments made under statute to former employees and a VAT credit in the company’s favour at the liquidation date. One issue was whether, for the purposes of rule 4.90 with its reference to “mutual credits, mutual debts or other mutual dealings”, a contingent liability arising as a result of a statute, rather than under a contract, was capable of set-off. The House of Lords held that it was.

The contingent liability arose in this way. The company was liable for compensatory notice pay and redundancy payments to nine employees under sections 88 and 135 of the Employment Rights Act 1996. As the company did not make the payments, the Secretary of State was liable to do so under sections 166 and 167 of the Act. On making payment, section 167(3) provided that all the rights and remedies of the employees against the company vested in the Secretary of State.

It was submitted for the liquidator that at the liquidation date there was no debt arising under section 167(3), only a possibility that such a debt would later come into existence. As to this, Lord Hoffmann, giving the leading speech, said:

“9 It is not however necessary for the purposes of rule 4.90(2) that the debt should have been due and payable before the insolvency date. It is sufficient that there should have been an obligation arising out of the terms of a contract or statute by which a debt sounding in money would become payable upon the occurrence of some future event or events. The principle has typically been applied to claims for breach of contract where the contract was made before the insolvency date but the breach occurred afterwards ( In re Asphaltic Wood Pavement Co (1885) 30 Ch D 216) or claims for indemnity by a guarantor where the guarantee was given before the insolvency date but the guarantor was called upon and paid afterwards: Jones v Mossop (1844) 3 Hare 568; In re Moseley-Green Coal and Coke Co Ltd, Ex p Barrett (1865) 12 LT (NS) 193.

10 The effect of these and similar cases was summed up by Millett J in In re Charge Card Services Ltd [1987] Ch 150, 182:

"By the turn of the [20th] century, therefore, the authorities showed that debts whose existence and amount were alike contingent at the date of the receiving order, and claims to damages for future breaches of contracts existing at that date, were capable of proof and, being capable of proof, could be set off under the section provided that they arose from mutual credits or mutual dealings. The only requirement was that they must in fact have resulted in quantified money claims by the time the claim to set off was made." ”

He held that the apparent reasoning of the Court of Appeal in Re A Debtor (No 66 of 1955) ex p. The Debtor v Waite’s Trustee [1956] 1 WLR 480, that a surety under a pre-insolvency guarantee is not entitled to set-off unless he has paid the debt before the insolvency date, was wrong and continued:

“17 This means that if the Secretary of State had agreed by contract before the insolvency date to guarantee any future liability of the company to pay compensatory notice pay or make redundancy payments to employees under the 1996 Act, the contract of guarantee would have created a contingent liability on the part of the company to reimburse the Secretary of State which was a "debt" at the insolvency date and became capable of set-off when the employees were afterwards paid. The next question is whether it makes a difference that the contingent liability existed by virtue of a statute rather than a contract and, not being consensual, that it involved no direct contract or other relationship with the employees or the company.

18…

19 If a statutory origin does not prevent set-off in the case of debts due and payable at the insolvency date, I do not see why it should make any difference that the statute creates a contingent liability which exists before the insolvency date but falls due for payment and is paid afterwards. The term "mutual debts" does not in itself require anything more than commensurable cross-obligations between the same people in the same capacity. How those debts arose--whether by contract, statute or tort, voluntarily or by compulsion--is not material.”

It seems to me that even if section 167(3) had not expressly conferred on the Secretary of State the rights and remedies of the employees of the company, the result would have been the same. The primary liability to make the payments rested with the company. The statute imposed an obligation on the Secretary of State to make the payments, if the company failed to do so. If the Secretary of State did so, she would have an enforceable right of reimbursement against the company. The analogy with a contractual guarantee was exact: see Lord Hoffmann at para 20. If a third party makes under legal compulsion a payment which is primarily due from a debtor, the third party has a common law right of reimbursement against the debtor. The liability of the company to the Secretary of State in Frid would not then strictly be created by the statute but it would arise by operation of law.

If the principles established by Re Sutherland and Frid are applied to this case, it is right in my judgment to conclude that T&N is subject to contingent liabilities to pay damages to those who have already been carelessly exposed to asbestos by the actions of T&N and who later suffer compensatable loss, resulting in claims for damages in negligence against T&N. The creditors in respect of those contingent liabilities are the persons who have been carelessly exposed to asbestos and who will have claims in negligence if they suffer loss as a result. Reverting to Lord Reid’s speech, the contingent liability to pay damages is a liability which, by reason of something done by the person (i.e. the use or distribution by T&N of asbestos or asbestos products) will necessarily arise or come into being if one or more certain events occur (i.e. the onset of asbestos-related conditions in persons previously exposed to asbestos by T&N). Lord Guest referred specifically to the contingent debtor being “automatically involved by the operation of law in the payment” of the debt once the contingency occurred. That precisely describes the situation here. The careless exposure of persons to asbestos by T&N will automatically by the operation of the law of negligence lead to the liability to pay damages, assuming the existence of the other necessary elements of a claim in negligence.

This is in one important respect a stronger case than Re Sutherland. As already noted, the majority did not regard as decisive that the liability to pay the balancing charges would arise only as a result of the company’s own choice to sell the ships. In this case there is no question of volition. There is nothing which T&N can do to incur or avoid the liability. There is no medical intervention which can prevent the development of the asbestos-related conditions in those who have been exposed to asbestos. Nature will take its course.

If a valuation to be performed under provisions identical to the Finance Act 1940 was of a controlling shareholding in an asbestos producer, rather than a shipping company, the existing exposure of the company to asbestos-related personal injuries claims in the future would, in my view, have constituted contingent liabilities. They go beyond something which “in a business sense is morally certain and for which every businessman ought to make provision.”

In my judgment, it makes no difference that the source of the liability is the common law of negligence, rather than a contract or a statute. There is no logical reason why it should make a difference. Lord Guest in Re Sutherland did not limit the source to contract or statute but referred to the operation of law. Lord Hoffmann in Frid did not limit it, but said in terms:

“How those debts arose – whether by contract, statute or tort, voluntarily or by compulsion – is not material.”

The example of a liability arising by application of the principle of reimbursement is likewise “by operation of law”. The liability in tort which Lord Hoffmann may have had particularly in mind is illustrated by the Australian case of Gye v McIntyre 171 CLR 609, to which he referred in the context of “mutual dealings”. The High Court held that a claim for damages for fraudulently inducing the insolvent company to make a contract with a third party could be set off against a liability on a loan. The loss caused by the fraud had been suffered before the liquidation date, so that there was at that date a complete cause of action in tort. This does not however mean that Lord Hoffmann’s reference to tort in the passage cited above should be confined to completed causes of action.

I was referred, by way of comparison, to cases where the liability, although arising from events prior to the liquidation date, is created by the subsequent exercise of a judicial discretion. In Glenister v Rowe [2000] Ch 76 the Court of Appeal held that a party to litigation against a bankrupt could not prove for costs incurred in the litigation prior to the bankruptcy but not covered by a costs order made before the bankruptcy, because the bankrupt would be liable only if and when the court in its discretion made a costs order. It was not therefore a contingent liability at the date of bankruptcy. (I comment in passing that, while producing a just result on the facts of the case, the decision is likely to produce an unjust result when applied to the similar provisions governing proof in the winding-up of a company.) Likewise, there are a number of Australian decisions concerning statutory provisions whereby personal liability for the debts of an insolvent company can be imposed on a director, if he has been convicted of a relevant offence. In such a case, the liability is imposed by the civil court in the exercise of its discretion. These provisions have been held not to create a contingent liability of the director at the time of his bankruptcy because any liability is dependent on a subsequent exercise of judicial discretion: see, for example, Corporate Affairs Commissioner v Karounos (1985) 3 ACLC 40.

I accept the submission that these cases are not in point to the issue as regards future asbestos claims. There is no element of discretion as regards such claims. If the ingredients of the tort of negligence, including compensatable loss, are established, the claimants are entitled to damages. They do not depend on an exercise of discretion by the court.

I conclude therefore that T&N is subject to contingent liabilities in respect of future asbestos claims, as defined in the administrators’ application and that the future asbestos claimants, being those persons who have been exposed to asbestos and who will have claims in negligence against T&N if they develop asbestos-related diseases, are “creditors” of T&N for the purposes of section 425 of the Companies Act 1985 and Part I of the Insolvency Act 1986 dealing with CVAs.

In reaching this conclusion, I emphasise that I do so on the basis of the facts relevant to asbestos claims, principally that the relevant acts or omissions of T&N are complete, the potential claimants have been exposed to asbestos and the existence of a claim in tort depends solely on whether a relevant asbestos condition develops. I have not considered circumstances where all the relevant events excluding damage have not occurred, as, for example, where a company has negligently made a product but the putative claimant has not acquired it or used it. By way of extreme example, if aero-engines are negligently manufactured and are in use but have not (yet) caused an air crash, it could hardly be supposed that there exists a contingent liability to the victims of a possible future crash: for facts of this sort, see Re R–R Realisations Ltd [1980] 1 WLR 805.

As I have mentioned, no party represented on this hearing advanced submissions against the proposition that future asbestos claimants were creditors for these purposes. However, Mr Snowden and other counsel readily accepted that it was their duty to put before the court all counter-arguments which occurred to them. They conscientiously did so and after the hearing Mr Arden supplied me with a summary of the counter arguments. I believe therefore that my decision is reached after a full consideration of the relevant issues.

It does not necessarily follow from the characterisation of future asbestos claimants as creditors for the purposes of a scheme of arrangement or a CVA that their claims are provable in a winding-up of T&N if it goes into liquidation before they have suffered any compensatable loss. This issue turns on the relevant provisions of the Insolvency Rules.

The insolvency regime, dealing with the insolvency of both individuals and companies, is contained in the Insolvency Act 1986 and the Insolvency Rules 1986 (in both cases, as amended from time to time). They contain a substantial degree of reform of the pre-existing law, which had been contained as regards individuals in the Bankruptcy Act 1914 and the Bankruptcy Rules and as regards companies in the Companies Act 1948 (and then, briefly the Companies Act 1985) and the Companies (Winding Up) Rules 1949. Under the previous regime, significant portions of the Bankruptcy Act and Rules were made applicable in the winding-up of insolvent companies. The new regime implemented many of the recommendations for reform made by the Cork Report. However, not all its recommendations were accepted, including in particular in relation to dealing with unliquidated tort claims. The reforms were introduced in the first instance by the Insolvency Act 1985 which was for the most part not brought into effect, but was consolidated with other provisions in the Insolvency Act 1986.

It is a striking feature of the present insolvency regime that while there is an almost complete correspondence between the provisions governing provable debts, the mechanics of proof and the distribution of assets in bankruptcy and in winding-up, many of the bankruptcy provisions are contained in primary legislation, while the equivalent winding-up provisions are contained in the Insolvency Rules 1986. It would appear that the draftsman of the Rules used the bankruptcy provisions in the Insolvency Act as a template. Where the corresponding provisions are largely identical, it must be taken that the Rules are intended to achieve the same result for a winding-up as applies under the Act (or equivalent Rules) in a bankruptcy. It would be very odd to construe them in different ways. Nonetheless, provisions which made good sense in a bankruptcy context may be regarded differently in the context of a winding-up.

The principal provisions as regards provable debts are Rule 12.3, which applies to bankruptcy and winding-up, Rule 13.12, which applies only to winding-up, and section 382, which applies only to bankruptcy. The relevant rule-making powers are contained in the Insolvency Act 1986: section 411 and schedule 8 (para 12) (winding-up) and section 412 and schedule 9 (para 17) (bankruptcy).

Rule 12.3(1) provides:

“[What is provable] Subject as follows, in administration, winding up and bankruptcy, all claims by creditors are provable as debts against the company or, as the case may be, the bankrupt, whether they are present or future, certain or contingent, ascertained or sounding only in damages.”

Rule 12.3(2) (“What is not provable”) specifies very limited categories of claims which are not provable; it does not include contingent claims in tort.

Rule 13.12 is one of the interpretation provisions contained in Part 13 of the Rules and provides:

“13.12(1) [Definition] “Debt”, in relation to the winding up of a company, means (subject to the next paragraph) any of the following—

(a)

any debt or liability to which the company is subject at the date on which it goes into liquidation;

(b)

any debt or liability to which the company may become subject after that date by reason of any obligation incurred before that date; and

(c)

any interest provable as mentioned in Rule 4.93(1).

13.12(2) [Liability in tort] In determining for the purposes of any provision of the Act or the Rules about winding up, whether any liability in tort is a debt provable in the winding up, the company is deemed to become subject to that liability by reason of an obligation incurred at the time when the cause of action accrued.

13.12(3) [Debt or liability] For the purposes of references in any provision of the Act or the Rules about winding up to a debt or liability, it is immaterial whether the debt or liability is present or future, whether it is certain or contingent, or whether its amount is fixed or liquidated, or is capable of being ascertained by fixed rules or as a matter of opinion; and references in any such provision to owing a debt are to be read accordingly.

13.12(4) [“Liability”] In any provision of the Act or the Rules about winding up, except in so far as the context otherwise requires, “liability” means (subject to paragraph (3) above) a liability to pay money or money’s worth, including any liability under an enactment, any liability for breach of trust, any liability in contract, tort or bailment, and any liability arising out of an obligation to make restitution.”

The bankruptcy provision which is equivalent to Rule 13.12 is section 382 of the Insolvency Act 1986. It defines “bankruptcy debt”:

“(1)

[Bankruptcy debt”] “Bankruptcy debt”, in relation to a bankrupt, means (subject to the next subsection) any of the following—

(a)

any debt or liability to which he is subject at the commencement of the bankruptcy,

(b)

any debt or liability to which he may become subject after the commencement of the bankruptcy (including after his discharge from bankruptcy) by reason of any obligation incurred before the commencement of the bankruptcy,

[(c)…]

(d)

any interest provable as mentioned in section 322(2) in Chapter IV of Part IX..

(2)

[Liability in tort] In determining for the purposes of any provision in this Group of Parts whether any liability in tort is a bankruptcy debt, the bankrupt is deemed to become subject to that liability by reason of an obligation incurred at the time when the cause of action accrued.

(3)

[References to debt or liability] For the purposes of references in this Group of Parts to a debt or liability, it is immaterial whether the debt or liability is present or future, whether it is certain or contingent or whether its amount is fixed or liquidated, or is capable of being ascertained by fixed rules or as a matter of opinion; and references in this Group of Parts to owing a debt are to be read accordingly.

(4)

[“Liability”] In this Group of Parts, except in so far as the context otherwise requires, “liability” means (subject to subsection (3) above) a liability to pay money or money’s worth, including any liability under an enactment, any liability for breach of trust, any liability in contract, tort or bailment and any liability arising out of an obligation to make restitution.”

Just as Rule 13.12 defines “debts” for the purposes of proof in a winding-up, section 382 defines debts for the purposes of proof and distribution in bankruptcy: see sections 322 and 324 of the Insolvency Act 1986.

Historically the development of rules for proving debts began with individual bankruptcy. As an individual will survive bankruptcy, it was not a necessity to include all or most debts and liabilities of the bankrupt as provable debts. If a particular debt was not provable, it would not be extinguished by the bankruptcy and could be enforced against the bankrupt and his after-acquired property. There was a balance between sharing in the distribution of the bankrupt’s property which came at the price of not being able to pursue the bankrupt in any other way, and being free to pursue the bankrupt but at the price of not sharing in a distribution of his assets on bankruptcy. This was not a matter of choice for the creditor but turned on the definition of provable debts.

Until the early 19^th century, the prevailing legal policy was that debts should not be provable either if they were difficult to quantify or if they resulted from the personal wrongdoing of the bankrupt. Claims for unliquidated damages in tort showed both characteristics, but other claims such as unliquidated claims for breach of contract or contingent claims were excluded on the basis of the first ground.

A succession of Bankruptcy Acts culminating in the Bankruptcy Act 1869 revolutionised the approach to provable claims. With a few exceptions, all claims were to be provable and it was no longer regarded as a sound basis for exclusion that the claim was difficult to quantify.

In Hardy v Fothergill (1888) 13 App Cas 351 at 355, Lord Halsbury L.C gave some account of the developments before 1869:

“My Lords, the question in this case seems to me to depend entirely upon the true construction of the 31st section of the Bankruptcy Act of 1869, but before proceeding to discuss the particular words now under construction it is not unimportant to notice the gradual steps taken by the legislature to extend the application of the bankruptcy law to future and contingent debts. Mr. Eden in a treatise published in 1826 points out that one of the most important and valuable alterations effected by the 6 Geo. 4 c. 16 was the provision which it contained with respect to proof of contingent debts. Prior to that Act contingent demands could not be proved under a commission taken out before the contingencies upon which they were made payable had taken effect. Nearly eighty years before that time Lord Hardwicke expressed a wish in which Lord Eldon afterwards concurred "that some gentleman might think of a clause which might remedy and settle the matter for the future." My Lords, from that time till the year 1869 I think the legislature has been engaged in the effort to exhaust every conceivable possibility of liability under which a bankrupt might be, to make it provable in bankruptcy against his estate and relieve the bankrupt for the future from any liability in respect thereof.”

In Re Hide, ex p Llynvi Coal and Iron Co (1871) 7 Ch App 28 at 31 James LJ described the changes made by the Bankruptcy Act 1869:

“Upon the question of the right of proof I am satisfied that there can be no real question as to the intention of the Legislature. A great number of cases occurred, before the passing of the late Act, in which the bankrupt was left liable to several claims of various kinds, and the persons who had those claims were entirely excluded from any participation in the general division of the assets. Then came the Act of Parliament, which - dealing in express terms with almost every one of the cases which had ever previously occurred, and excluding nothing but demands for damages for personal torts - provided that there should be nothing whatever for which a right to proof should not be given. Every possible demand, every possible claim, every possible liability, except for personal torts, is to be the subject of proof in bankruptcy, and to be ascertained either by the Court itself or with the aid of a jury. The broad purview of this Act is, that the bankrupt is to be a freed man - freed not only from debts, but from contracts, liabilities, engagements, and contingencies of every kind. On the other hand, all the persons from whose claims, and from liability to whom he is so freed are to come in with the other creditors and share in the distribution of the assets.”

In Flint v Barnard (1888) 22 QBD 90 at 92, concerning the Bankruptcy Act 1883, Lord Esher MR derived from Hardy v Fothergill the correct approach for the courts to the construction of these provisions:

“It seems to me that the House of Lords, in Hardy v. Fothergill, has laid down a rule of interpretation, or rather a rule of conduct, for the Court where it has to construe the Bankruptcy Act. It is true that the remarks of the Lord Chancellor relate to the Bankruptcy Act, 1869, but they are equally applicable to the later Act [Bankruptcy Act 1883], and may be paraphrased by saying that since the statute 6 Geo. 4, c. 16, till the year 1883, the legislature has been engaged in the effort to exhaust every conceivable possibility of liability under which a bankrupt might be, to make it provable in bankruptcy against his estate and relieve the bankrupt for the future from any liability in respect thereof.”

Thus a wide range of contingent or unliquidated claims become provable, with a just estimate being made of the value of the claim. Proofs of debt were therefore admissible for unliquidated damages for breach of contract (Re Sneezum, ex p Davis (1876) 3 Ch D 463), for a contingent claim in respect of a repairing covenant in a lease (Hardy v Fothergill), for a contingent claim under a guarantee (Wolmershausen v Gullick [1893] 2 Ch 514), and for an annuity payable during joint lives and for so long as the recipient should lead a chaste life (Ex p Neal, In re Batey (1880) 14 Ch D 579). The provisions for valuing such claims for the purposes of proof are now contained in section 322 (3) and (4) (bankruptcy) and Rule 4.86 (winding-up).

The same inclusive approach was adopted with regard to provable debts in a winding-up. Section 158 of the Companies Act 1862 provided in language that has changed little in subsequent provisions:

“In the event of any company being would up under this Act, all debts payable on a contingency, and all claims against the company, present or future, certain or contingent, ascertained or sounding only in damages, shall be admissible to proof against the company, a just estimate being made, so far as is possible, of the value of all such debts or claims as may be subject to any contingency or sound only in damages, or for some other reason do not bear a certain value.”

The Cork Report noted at para 1289:

“It is a basic principle of the law that every debt or liability capable of being expressed in money terms should be eligible for proof in the insolvency proceedings, so that the insolvency administration should deal comprehensively with, and in one way or another, discharge, all such debts and liabilities.”

A similar statement of principle was contained in a report of the Australian Law Reform Commission: General Insolvency Inquiry (1988):

“A comprehensive system. A basic aim of insolvency law is to deal comprehensively with all of the debts and liabilities of the insolvent. In the case of an individual insolvent, the aim is to have all claims to which the insolvent was subject at the time of the commencement of the formal administration resolved so that the insolvent can make a fresh start. This reflects the rehabilitative aim of insolvency law. In the case of a company, the aim is to deal with all the claims against a company so that its affairs can be fully would up or so that it can resume trading.”

Notwithstanding this inclusive policy, English insolvency law has experienced particular difficulty in dealing with unliquidated claims in tort. Until the reforms consolidated in the Insolvency Act 1986, such claims were not provable at all in bankruptcy or in the winding-up of an insolvent company. It was widely understood that only claims for sums liquidated by judgment or agreement before the bankruptcy or winding-up could be the subject of proof.

Provable debts in bankruptcy were governed by section 30 of the Bankruptcy Act 1914:

“(1)

Demands in nature of unliquidated damages arising otherwise than by reason of a contract, promise, or breach of trust shall not be provable in bankruptcy.

…

(3)

Save as aforesaid, all debts and liabilities, present or future, certain or contingent, to which the debtor is subject at the date of the receiving order, or to which he may become subject before his discharge by reason of any obligation incurred before the date of the receiving order, shall be deemed to be debts provable in bankruptcy.

(4)

An estimate shall be made by the trustee of the value of any debt or liability provable as aforesaid, which by reason of its being subject to any contingency or contingencies, or for any other reason, does not bear a certain value.

…

(6)

If, in the opinion of the court, the value of the debt or liability is incapable of being fairly estimated, the court may make an order to that effect, and thereupon the debt or liability shall, for the purposes of this Act, be deemed to be a debt not provable in bankruptcy.

(7)

If, in the opinion of the court, the value of the debt or liability is capable of being fairly estimated, the court may direct the value to be assessed before the court…and the amount of the value when assessed shall be deemed to be a debt provable in bankruptcy.

(8)

“Liability” shall, for the purposes of this Act, include

(a)

any compensation for work or labour done;

(b)

any obligation or possibility of an obligation to pay money or money’s worth on the breach of any express or implied covenant, contract, agreement, or undertaking, whether the breach does or does not occur, or is or is not likely to occur or capable of occurring, before the discharge of the debtor;

(c)

generally, any express or implied engagement, agreement, or undertaking, to pay, or capable of resulting in the payment of, money or money’s worth; whether the payment is, as respects amount, fixed or unliquidated; as respects time, present or future, certain or dependent on one contingency or on two or more contingencies; as to mode of valuation, capable of being ascertained by fixed rules or as a matter of opinion.”

The effect of section 30(1) was to exclude from proof unliquidated damages in tort. Such claims therefore survived a bankruptcy and could be pursued against a former bankrupt and his after-acquired property.

By section 317 of the Companies Act 1948, and its predecessor sections, the provisions of bankruptcy law as to “debts provable and to the valuation of annuities and future contingent liabilities” were made applicable in the winding-up of an insolvent company. If the company were solvent, or became solvent in the course of the winding-up (as for example, in Re Rolls-Royce Ltd [1974] 3 All ER 646), the bankruptcy provisions did not apply or ceased to apply, and provable debts were governed exclusively by section 316:

“In every winding up (subject, in the case of insolvent companies, to the application in accordance with the provisions of this Act of the law bankruptcy) all debts payable on a contingency, and all claims against the company, present or future, certain or contingent, ascertained or sounding only in damages, shall be admissible to proof against the company, a just estimate being made, so far as possible, of the value of such debts or claims as may be subject to any contingency or sound only in damages, or for some other reason do not bear a certain value.”

Accordingly, unliquidated claims in tort could be proved in the winding-up of a solvent company. If, however, the company were insolvent they could not be the subject of proof and, in the absence of joint tortfeasors or insurance available to the claimant under the Third Parties (Rights against Insurers) Act 1930, the claim would remain entirely unpaid. This represents an important difference between insolvent companies and individuals. The winding-up of an insolvent company leads almost inevitably to its dissolution and there is no equivalent to proceeding against the bankrupt after his discharge.

Shortly before the reforms were enacted in the Insolvency Act 1985, the problems posed by the exclusion of unliquidated claims in tort were considered in two decisions at first instance. In Re Berkeley Securities (Property) Ltd [1980] 1 WLR 1589, Vinelott J considered the position where tort damages became liquidated by judgment or agreement during the winding-up. He held that in those circumstances the bankruptcy rules imported by section 317 required modification to fit into the scheme of the winding-up of an insolvent company and did not preclude the admission of the claim for the liquidated sum. The claimant would not be entitled to disturb prior distributions to creditors but would be able, in effect, to catch up with prior distributions out of assets remaining with the liquidator and to participate pari passu in any future distributions.

Vinelott J did not regard it as sensible that an unliquidated claim for damages in tort should be excluded from proof in bankruptcy, although, as he acknowledged, that clearly was the legal position. He regarded it as anomalous, given that an unliquidated claim for damages for breach of contract was admissible to proof but may be just as difficult to ascertain and evaluate. He pointed to the facts of Re Great Orme Tramways Co (1934) 50 TLR 450, which concerned a claim in respect of personal injuries sustained by a passenger when a tram ran out of control. A claim for the same amount for the same injuries could be made in contract or in tort. The unliquidated claim in contract was provable, but not the unliquidated claim in tort. He drew the anomaly to the attention of the Cork Committee.

In a subsequent case, Re Islington Metal & Plating Works Ltd [1984] 1 WLR 14, Harman J disagreed with the decision of Vinelott J. He held that, on the relevant provisions, a tort claim could be proved in a bankruptcy or an insolvent liquidation only if liquidated by judgment or agreement before the bankruptcy or winding-up. He founded this on the principle that the liquidation of an insolvent company and the distribution of its assets were to be treated as notionally simultaneous and all debts were to be computed at the liquidation date (subject to the application of the hindsight principle to contingent claims, which enables the court to take account of later events in evaluating such claims). If, however, all provable debts and liquidation expenses were paid in full, Harman J held that the bankruptcy rules would cease to apply and, under section 316, unliquidated tort claims would be admitted to proof even if the claims might exceed the assets then available.

The Cork Report considered the admissibility of tort claims to proof and recommended a change in the law. It stated at para 1318:

“It has been put to us that, having regard to the elaborate rules which exist for dealing with contingent liabilities, such as annuities, it is unacceptable that tort claims should be left outside the category of provable debts. We agree. We recommend that the present rule in bankruptcy be reversed, and that all claims for damages, whether in contract or in tort, be admissible to proof in liquidation of assets, bankruptcy or winding up, provided only that the claim is liquidated by agreement or judgment before it becomes proved.” (Emphasis added)

It can be seen that the Cork Report did not recommend that unliquidated claims in tort should as such be provable, which would seem to have been the solution favoured by Vinelott J in Re Berkeley Securities Ltd (Property) Ltd at pp 1611–1612 but was not open to him on the statutory provisions as they then stood. Instead, the Cork Report adopted as its recommendations the route adopted by Vinelott J as his decision, that tort claims should be admissible to proof but only after they had been liquidated by judgment or agreement.

It is unclear from the Cork Report whether its recommendation was premised on the assumption that the cause of action in tort would be complete by the liquidation date, although not then quantified. This was not a point which had arisen or been discussed in Re Berkeley Securities Ltd (Property) or Re Islington Metal and Plating Works Ltd or, so far as I am aware, in any other English decision or commentary. It is, however, a point which has been addressed in legislation elsewhere. The Report refers to section 61(1) of the Civil Liability Act 1961 of Ireland, which amended Irish bankruptcy law to provide:

“Notwithstanding any other enactment or any rule of law, a claim for damages or contribution in respect of a wrong shall be provable in bankruptcy where the wrong out of which the liability to damages or the right to contribution arose was committed before the time of bankruptcy.”

The Cork Committee obviously considered that solution, but did not recommend its adoption. If it had been included in the Insolvency Act or Rules, there would be no doubt that future asbestos claims would be provable. Under the Irish provision, the date of accrual of the cause of action is irrelevant and all that is necessary is that a liability to damages should arise out of a wrong committed before the time of bankruptcy.

The solution adopted in the Insolvency Act and Insolvency Rules did not follow the recommendation of the Cork Report, as is apparent from the terms of section 382 and rule 13.12. It is not necessary that tort damages should be liquidated by judgment or agreement before they can be the subject of proof, but section 382(2) and rule 13.12(2) introduces special provision for tort claims and it is their proper construction which is at the heart of this issue. The Cork Report had also addressed the discharge of the bankrupt from provable tort and other claims and recommended that the bankrupt should be released from all claims admissible to proof. This recommendation was not adopted as regards claims for personal injuries: section 281(5). The position in bankruptcy with respect to a personal injury claim is therefore that, whether or not it is provable, the bankrupt does not obtain a release from it by his discharge from bankruptcy, except to such extent and on such conditions as the court may direct.

Although rule 13.12(2), as the provision expressly dealing with tort claims in the winding-up of companies, is substantially the same as section 382(2) which applies in bankruptcy, there cannot, of course, be any provisions equivalent to those which enable either personal injury claims, or claims incapable of proof, to survive the discharge of a bankrupt. In the vast majority of cases, the winding-up of a company leads to its dissolution, whereby it ceases to exist.

It is against this background that the precise meaning and effect of rules 12.3 and 13.12, and section 382, as regards tort claims arises for consideration. The fundamental issue for present purposes is whether the cause of action in tort must be complete by the liquidation date.

Sir Donald Nicholls V-C thought that this was the effect of the relevant provisions. In Re Kentish Homes Ltd [1993] 1 BCLC 1375, the only authority in which this question has been considered, albeit obiter, he said at p 1382:

“The cut-off provisions may, in general, work reasonably satisfactorily in respect of claims based on contract. Claims arising under contractual obligations incurred before the date on which the company went into liquidation are provable. As to payments under contracts made with a company after it has gone into liquidation, for example, if goods are supplied to a company pursuant to arrangements negotiated with the liquidator, in general such payments will rank for preferential treatment as expenses incurred in the winding up. Unquantified claims for damages in tort are not so favourably treated. In the past, if a company went into liquidation before a claimant had been able to quantify his claim by judgment or agreement he was left out in the cold. In Re Berkeley Securities (Property) Ltd [1980] 3 All ER 513, [1980] 1 WLR 1589 the court struggled hard to avoid this injustice. Vinelott J held that a claim for damages in tort is excluded from proof only if it has not been liquidated at the time the claimant comes in to prove. He is not entitled to disturb prior distributions to other creditors but, as regards undistributed assets, he is entitled to a dividend enabling him to ‘catch up’ with distributions already made to other creditors. In Re Islington Metal & Plating Works Ltd [1983] 3 All ER 218, [1984] 1 WLR 14, Harman J pointed out the difficulties with this solution having regard to the then statutory provisions and an established line of authority. The particular problem raised in those two cases has now been addressed by winding-up rule 13.12(2):

‘In determining for the purposes of any provision of the Act or the Rules about winding up, whether any liability in tort is a debt provable in the winding up, the company is deemed to become subject to that liability by reason of an obligation incurred at the time when the cause of action accrued.’

So far as it enables some liabilities in tort to be proved, this provision ensures justice to tort claimants. However, it still leaves a tort claimant without any remedy if his cause of action arose after the date when the company went into liquidation. In some instances it will be a matter of chance whether a cause of action in tort accrues before or after the date of the commencement of the liquidation. If a company sells and supplies dangerous goods, it will be a matter of chance whether they cause injury and damage pre- or post-liquidation, and it is only when the damage is sustained that the cause of action in tort accrues.”

The decision in Re Kentish Homes Ltd, which concerned the company’s liability to the community charge arising after the liquidation date and its status as a liquidation expense, was overruled by the House of Lords in Re Toshoku Finance UK Ltd plc [2002] 1 WLR 671. However, the passage cited above, which is not part of the reasoning for the decision, was not commented upon and is not in my view affected by the overruling of the decision.

Sir Donald Nicholls V-C’s reading of the relevant provision as regards tort claims is a natural reading and, as it seems to me, the most obvious. It was not, however, an issue in the case before him and he did not have the benefit of the detailed submissions which were addressed to me.

The same approach is taken in Muir Hunter on Personal Insolvency at 3–2699, in its commentary on section 382(2) of the Insolvency Act 1986:

“…if after the bankruptcy order, a person suffers damage caused by the bankrupt’s negligence before his bankruptcy, the injured person’s claim, in so far as it is a claim in tort, will not be a bankruptcy debt.”

Sir Donald Nicholls V-C was clearly conscious of the anomalies and even injustice which could arise if a claim in tort was provable only if the cause of action had accrued by the liquidation date. Before looking at the detailed arguments on construction, it is worth identifying the consequences in relation to asbestos claims. These claims present particularly acute difficulties because of the very long periods which may pass between exposure to asbestos and the onset of any disease or compensatable condition, and because of the impossibility of identifying the time at which the disease or condition can be said to start.

The first consequence is that if the cause of action must accrue before the liquidation date, it must be established that material injury had been suffered by that date. The start of an asbestos disease or condition does not coincide with the development of symptoms but occurs much earlier. It is impossible to identify even in the most approximate way the time when it started. In Keenan v Miller Insulation & Engineering Ltd (8 December 1987 unreported, Piers Ashworth QC sitting as a deputy High Court Judge), in which the claimant suffered from asbestosis, the evidence of one of the leading medical experts in this field was that the material injury could have occurred anywhere between 10 and 20 years after the first exposure. In cases of mesothelioma, material injury occurs with the development of the first malignant cell, but the first symptoms may not appear for many years. The evidence in Bolton Metropolitan Borough Council v Municipal Mutual Insurance Ltd (28 May 2005, unreported, Judge Kershaw QC) established that the symptoms in that particular case first appeared in January 1991, but the first malignant cell developed at some point in the three years 1979 to 1981.

In general, the courts do not have to grapple with this issue. Since the Limitation Act 1963, the important question for limitation purposes has been the claimant’s knowledge of his condition. Although the effect of the decision in the House of Lords in Arnold v Central Electricity Generating Board [1988] 1 AC 228 was that any action time-barred before 4 June 1954 remained time-barred, the date of first damage does not, on the medical evidence before the courts in the cases after Arnold to which I was referred, appear to have caused great difficulty; certainly not the difficulty which could arise in a liquidation of T&N in determining whether damage first occurred before or after the liquidation date. More difficult problems could arise in deciding, for the purposes of insurance cover, the year in which damage first occurred, although on the medical evidence before the court in Bolton Metropolitan BC v Municipal Mutual Insurance Ltd, the case in this category to which I was referred, it was not a major problem.

Secondly, assuming that the start of the relevant condition can be determined, the entitlement to prove a claim in tort and therefore the prospects of any recovery will depend on an accident of timing. Whenever a line is drawn it is inevitable that some people will be on the wrong side of it, but the consequences here are very serious. They will cause a well-grounded sense of injustice.

Thirdly, precisely the same facts may give rise to a provable claim for breach of contract but not in tort. A former employee of T&N who was exposed to asbestos during his employment and who develops a compensatable disease or condition after the liquidation date will unquestionably be entitled to prove for an unliquidated claim for his loss on the basis of a breach of contractual duty owed to him by T&N. He could not make the same claim in tort, only because his cause of action in tort had not accrued by the liquidation.

Where the claimant in contract and in tort is the same person, that consequence is an anomaly but not an injustice. The fourth consequence arises where the claimants are different. There are a number of cases involving family members of former employees. Typically an employee’s wife would wash his work clothes which had asbestos dust on them. Both develop asbestos-related conditions after the liquidation date of the employer. The employee has a claim for breach of contract. Assuming that the state of knowledge about the risks passed by asbestos was sufficient at the time of exposure to give rise to a duty of care, the wife has a claim in negligence. The employee’s claim could be proved in the liquidation of the employer but not his wife’s claim.

I was pressed with a fifth consequence. It was submitted that if all provable debts and liquidation expenses were paid in full, the balance of assets would be distributed among shareholders and no payment or provision would be made for non-provable claims, such as claims in tort accruing after the liquidation date. It was submitted that this resulted from, first, the liquidator’s statutory duty to distribute the assets in accordance with section 107 of the Insolvency Act 1986 (voluntary winding-up) and sections 148(1) and 154 and rule 4.181 of the Insolvency Rules (compulsory winding-up), and secondly, the changes made by the Insolvency Act 1986 and the Insolvency Rules 1986 which meant that there was no longer any mechanism for proving such tort claims even in a solvent liquidation.

It would indeed be extraordinary if a company’s assets could be, and were required to be, distributed to shareholders without paying tort claims which had accrued since the liquidation date, or other claims not provable in a liquidation, such as costs incurred in litigation against the company before the liquidation date but not then the subject of an order. In my judgment, this is not the position. The statutory duties of liquidators are part of, and subject to, all the provisions of the Insolvency Act and the Insolvency Rules. The voluntary liquidation of a company does not operate as an automatic stay of proceedings or the enforcement of judgments. The court may stay or restrain proceedings against the company by exercise of its powers under section 112 of the Insolvency Act 1986. This power will generally be exercised to prevent a creditor obtaining by execution an advantage over other creditors. However, where all provable debts have been paid in full and there is a surplus otherwise available for shareholders, I can see no reason why the court would restrain a tort claimant from obtaining or executing a judgment. In the case of a compulsory liquidation, section 128(1) of the Insolvency Act 1986 provides that any execution put in force after the commencement of the winding-up is void. However, it is well established that the court may exercise powers under section 130(2) to permit execution to proceed: see The Constellation [1966] 1 WLR 272 and the authorities there cited. Again, if there is a surplus which would otherwise be distributed to shareholders, I see no reason why the court would not give leave to a tort claimant to obtain or execute a judgment. This deals with the point put to me, but in a case where there was a surplus but it was insufficient to pay all tort claims in full, the court would face a major issue as to how best to deal with this situation in a fair and sensible manner. It is not an issue for this case, where there is no realistic prospect of a surplus.

In approaching the construction of the relevant provisions, I was referred to a number of authorities which make clear that Parliament is presumed not to have intended unreasonable, unjust or absurd results. So, for example, in Coutts & Co v IRC [1953] AC 267 at 281 Lord Reid said:

“In general, if it is alleged that a statutory provision brings about a result which is so startling, one looks for some other possible meaning of the statute which will avoid such a result, because there is some presumption that Parliament does not intend its legislation to produce highly inequitable results.”

In IRC v Hinchy [1960] AC 748 at 768, Lord Reid said:

“One is entitled and indeed bound to assume that Parliament intends to act reasonably, and therefore to prefer a reasonable interpretation of a statutory provision if there is any choice.”

In Mangin v IRC [1971] AC 739 at 746, Lord Donovan said:

“the object of the construction of a statute being to ascertain the will of the legislature it may be presumed that neither injustice nor absurdity was intended. If therefore a literal interpretation would produce such a result, and the language admits of an interpretation which would avoid it, then such an interpretation may be adopted.”

In R (on the application of Edison First Power Ltd) v Central Valuation Officer [2003] 4 All ER 209 concerning, in effect, double taxation, Lord Millett said at paras 116-117:

“The courts will presume that Parliament did not intend a statute to have consequences which are objectionable or undesirable; or absurd; or unworkable or impracticable; or merely inconvenient; or anomalous or illogical; or futile or pointless. But the strength of these presumptions depends on the degree to which a particular construction produces an unreasonable result.”

In the same case, Lord Hoffmann said at para 25 that the strength of presumptions against unreasonable consequences:

“depends upon the degree to which the consequences are unreasonable, the general scheme of the legislation and the background against which it was enacted.”

I turn now to the detailed issues of construction.

All counsel arguing that future asbestos claims are provable debts (the proponents) start their submissions with rule 12.3, stressing three features. First, it is the substantive provision which determines the claims which are provable by creditors in both corporate and personal insolvency proceedings. Secondly, rule 12.3(1) is cast in very wide terms which, read on their own, are apt to include claimants in the position of future asbestos claimants. Not only the proponents, but also Mr Mortimore, made this submission. Thirdly, if any categories of claims which would otherwise fall within the wide terms of rule 12.3(1) are to be excluded, it would be reasonable to expect the exclusion to be set out in this rule, and not for example in an interpretation provision. This is demonstrated by rule 12.3(2), 12.3(2A) and 12.3(3) which contain particular exclusions or qualifications to the generality of rule 12.3(1).

I agree that rule 12.3(1) is cast in wide terms. I also agree that, read on its own, it includes contingent claims such as those of the future asbestos claimants. My reasons for this view are the same as those for concluding that they are creditors within the meaning of section 425: T&N is exposed to contingent liabilities to them, as analysed in Re Sutherland.

However, it is not possible to read rule 12.3(1) on its own. The broad range of claims to which it refers are provable “as debts”. Necessarily this brings in the definition of “debt” in rule 13.12, for the purposes of a winding-up: see Re Toshoku Finance UK plc per Lord Hoffmann at para 24. It is only if claims fall within that definition that they are provable. It is by no means unusual for interpretation provisions to have a substantive effect. It does not follow from the presence of exclusions in Rule 12.3 that the definition of “debt” will not also contain restrictions. The specific exclusions and qualifications contained in rule 12.3 all relate to debts which fall within the definition in rule 13.12 and it is, I think, for this reason that they are dealt by exclusion in rule 12.3.

Although in terms an interpretative provision, rule 13.12 contains provisions with a major impact on the process of winding-up, just as its equivalent, section 382 of the Insolvency Act 1986, does in bankruptcy. Rule 13.12(1) defines “debt” by reference to time and thereby restricts the class of debts which may be proved in a winding-up. A “debt” is a debt or liability to which the company either (a) is subject at the date on which it goes into liquidation or (b) may become subject after that date by reason of any obligation incurred before that date. This gives effect to the principle of a pari passu distribution of assets, by identifying the relevant date for determining provable debts as the date on which the company goes into liquidation: see Wight v Eckhardt Marine GmbH [2004] 1 AC 147 (PC) per Lord Hoffmann at paras 28–33. Either they exist at that date or, if they are contingent at that date, they must arise by reason of an obligation incurred before that date.

All counsel are agreed, as is obvious, that the claims of future asbestos claimants are at best contingent at the liquidation date. By definition, they have suffered no injury at that date and may never do so. Most of the submissions made by the proponents adopted the approach that future asbestos claims fell within rule 13.12(1)(b). The exception was a submission by Mr Snowden, on behalf of the administrators, that these claims fell within rule 13.12(1)(a). He relied on rule 13.12(3), providing that, for the purposes of references in any provision of the Rules to a debt or liability, it is immaterial whether the debt or liability is present or future, or certain or contingent. Rule 13.12(3) therefore applies to rule 13.12(1)(a) as much as to any other provision in the Rules, so that it encompasses contingent as well as other debts to which the company is subject at the liquidation date. As to rules 13.12(1)(b) and 13.12(2), Mr Snowden submitted that they enabled a tort claimant to prove for liabilities which accrued after the liquidation date. He gave two examples. The first is a claim which is quantified by judgment or agreement after the liquidation date. The second is a claim for damages in respect of loss after the liquidation date, such as a claim in respect of a nuisance continuing after that date (as discussed by Harman J in Re Islington Metal & Plating Works Ltd).

This submission cannot stand with the terms of rule 13.12(1). The contrast between paragraph (a), which refers to any debt or liability “to which the company is subject at the date on which it goes into liquidation” and, paragraph (b), which refers to any debts or liability “to which the company may become subject after that date by reason of any obligation incurred before that date”, makes clear in my view that liabilities which are contingent at the liquidation date are addressed in paragraph (b), not paragraph (a). Such liabilities clearly include those for which the future asbestos claimants would seek to prove. I agree with Mr Snowden that a post-liquidation judgment or agreement of a provable contingent claim would fall within rule 13.12(1)(b), in accordance with the hindsight principle explained by Lord Hoffmann in Wight v Eckhardt Marine GmbH. But it would make no sense for the contingent claim to be within (a), but the liquidated amount to be within (b). As to post-liquidation loss in respect of a cause of action which arose before the liquidation, I again agree that it falls within paragraph (b). If such loss is within paragraph (b) where there is already a cause of action, all the more must contingent loss where there is no cause of action falling (if at all) within paragraph (b).

Another issue raised on rule 13.12(1)(a) was whether claims for unliquidated damages existing at the liquidation date fell within it. So, for example, if a breach of contract had occurred before the liquidation date or if there were an accrued cause of action in tort, would any claim which could be made for unliquidated damages at that date be within paragraph (a), rather than paragraph (b). Most submissions, including those of Mr Mortimore, were made on the basis that they were within paragraph (a). However, Mr Trower submitted that paragraph (a) was limited in its scope to debts and liabilities which were ascertained at the liquidation date and payable then or at a certain date in the future. He contrasted the language of paragraph (a) (“is subject at the liquidation date”) with paragraph (b) (“may become subject after that date”). This contrast suggested that paragraph (a) was restricted to those debts and liabilities which were unquestionably payable by the company. That would extend to debts which were definitely payable at a future date, because the uncertain language of paragraph (b) (“may become subject”) would not be applicable to them. However, he submitted, nothing was payable in respect of an existing claim for unliquidated damages until judgment or agreement and it might be that nothing would be found to be payable.

As a matter of impression from the terms of rule 13.12(1) there is force in this submission. It gains support from a consideration of the way express provision has been made for liabilities in tort in rule 13.12(2). Mr Snowden in his skeleton argument made the point that the draftsman appears to have assumed that unliquidated claims in tort, whether the cause in action had accrued or not, fell within rule 13.12(1)(b). However, I would conclude that an existing but unliquidated claim for damages comes within rule 13.12(1)(a). Referring to rule 13.12(3), it is immaterial whether the amount of debt or liability is “fixed or liquidated, or is capable of being ascertained by fixed rules or as a matter of opinion”. A debtor can properly be said to be “subject to” an existing but unliquidated liability even though it is not payable until liquidated by judgment or agreement. Unlike a contingent liability, it is not a liability to which the company only “may become subject”.

All the proponents, including Mr Trower, submit that rule 13.12(1)(b) is wide enough to encompass future asbestos claims. They submit that it is immaterial that, because no compensatable loss has been suffered at the liquidation date, no cause of action has accrued at that date. The claims represent debts or liabilities to which the company will become subject if compensatable loss is suffered, and therefore they are debts or liabilities to which the company may become subject after the liquidation date.

This leads to the central issues as to (a) what is meant in rule 13.12(1)(b) by the phrase “by reason of any obligation incurred before” the liquidation date in the context of tort claims and (b) the effect of rule 13.12(2). There is no difficulty in applying rule 13.12(1)(b) to a liability arising by reason of a contract made before the liquidation date. The company thereby incurs an obligation to perform its terms and any claim under the contract which does not come within paragraph (a) will be within paragraph (b). The same is true of a statutory obligation which has been incurred before the liquidation date (for an example, see R (on the application of Steele) v Birmingham City Council [2005] EWHC 783) or, picking up on other examples in rule 13.12(4), a bailment which has occurred before the liquidation date or an obligation to make restitution incurred before that date.

The approach adopted by each of the proponents, including Mr Snowden in an alternative submission, was for the most part similar. First, rule 13.12(1)(a) is directed at present or accrued claims, including claims for unliquidated damages in tort where the cause of action has accrued at the liquidation date; as noted above, only Mr Trower took a different line on this point. Secondly, the words “any obligation incurred” in rule 13.12(1)(b) are apt to include those torts which are based on a wrongful act or omission which may occur before any damage is caused. In the context of negligence, they cover the duty of care owed by the company to claimant, or alternatively the duty and its breach. By being subject to a duty of care, the company thereby incurs an obligation to compensate the claimant for foreseeable loss caused by a breach of the duty. The effect was to produce a similar approach to claims in contract and in tort. The duty of care, or its breach, prior to the liquidation date is analogous to the contract made before that date. Any damage resulting from breach of the duty of care or breach of the contract will be provable, whenever it occurs, and a contingent claim can be made in the meantime. Thirdly, the terms of rule 13.12(2) show that it is intended to inform or qualify rule 13.12(1)(b). Fourthly, it follows from the fact that a claim for unliquidated damages in tort falls within rule 13.12(1)(a), that it cannot be the legislative intention of rule 13.12(2) to confine claims in tort under rule 13.12(1)(b) to those which have accrued at the liquidation date. There are no discernible policy reasons for doing so and reliance is placed on the consequences outlined above which flow from excluding tort claims which accrue after the liquidation date. Fifthly, rule 13.12(2) is intended to expand, not restrict, rule 13.12(1)(b) in its application to tort claims. It is expressed as a deeming provision, and the normal function of a deeming provision is to include something which would otherwise be excluded.

Sixthly, the particular purpose of rule 13.12(2) is to clarify and extend rule 13.12(1)(b) for those torts where it cannot otherwise be said that the company has “incurred an obligation” before the cause of action accrues. Mr Trower and Mr Dicker submitted that its effect is to create a statutory fiction that a company is deemed to become subject to any liability in tort which does not arise by reason of an obligation already incurred as if it had become subject to that liability “by reason of an obligation incurred at the time when the cause of action accrued”. It is designed to fit certain tort claims into a structure which pre-supposes that the liability is based on an obligation incurred. Those are the torts which do not involve any “obligation incurred” prior to the accrual of the cause of action, such as conversion, defamation and trespass to land. For claims of this sort, rule 13.12(2) deems the obligation to have been incurred when the cause of action accrues. Applied in that way, the cause of action would have to accrue before the liquidation date. But Mr Trower and Mr Dicker submit further that rule 13.12(2) should be read as if the words “by reason of an obligation incurred” were in parenthesis, so that the operative part of the sub-rule reads “the company is deemed to become subject to that liability…at the time when the cause of action accrued”. In this way, any cause of action in tort arising after the liquidation date, which was not already within rule 13.12(1)(b), would be provable when the cause of action accrued.

Mr Sheldon made substantially the same submission in a slightly different way. He submitted that the effect of the deeming provision of Rule 13.12(2) is to substitute the following for 13.12(1)(b) in the case of contingent tort claims:

“(b)

any debt or liability to which the company may become subject after that date by reason of an obligation incurred at the time the cause of action accrued.”

So read, rule 13.12(1)(b) would permit any possible future tort claim to be proved, even if all the elements of the tort occurred after the liquidation date. Mr Sheldon accepted that this construction was not free from difficulty and submitted that it should be read subject to an implied limitation that the company’s tortious acts were committed prior to the liquidation date. There would have to be a solid basis for the possibility of a future claim before any value could be placed on a proof submitted in the liquidation.

By way of explanation, Mr Dicker submitted that the purpose of Rule 13.12(2) was to dispel any residual doubt as to the issue which had arisen under the previous provisions. Both Vinelott J in Re Berkeley Securities (Property) Ltd and Harman J in Re Islington Metal & Plating Works Ltd had treated a judgment or agreement as a necessary pre-condition to a proof for damages in tort, but had disagreed as to the time when it was required, before the date of proof (Vinelott J) or before the liquidation date (Harman J). The purpose of rule 13.12(2) is to reverse that requirement and make clear that the liability arises at the time of the cause of action. On that basis, rule 13.12(1) can apply in the same way as claims in contracts, with existing liabilities (i.e. an accrued cause of action) dealt with under paragraph (a) and contingent liabilities (where the cause of action has yet to accrue) under paragraph (b).

The proponents emphasised that if rule 13.12(2) was intended to exclude unliquidated damages in tort unless the cause of action had accrued at the liquidation date, it would have clearly so provided. There was no need for it if it was construed as providing for the purposes of rule 13.12(1) that a liability in tort arose when the cause of action accrued: this was the case without the need for a deeming provision. And if the cause of action had to have accrued before the liquidation date, rule 13.12(1)(b) would have no role in relation to tort claims, because such claims are within rule 13.12(1)(a).

As all counsel agreed, it is an important starting point in the construction of rule 13.12, and section 382, that they were for the first time permitting unliquidated claims in tort to be provable in winding-up and bankruptcy. Further, because the drafting of those provisions was closely modelled on provisions in earlier legislation (section 30(1) and (8)(c) of the Bankruptcy Act 1914) it was necessary, as a matter of drafting, to fit any special provision as to tort claims within that framework.

The decision to make unliquidated tort claims provable was a policy choice, and the extent to which tort claims should be provable involved policy choices. There were a number of clear possibilities. First, there was the solution, adopted under the previous insolvency regime by Vinelott J in Re Berkeley Securities (Property Ltd) and recommended in the Cork Report, of providing that tort claims would be admissible once they were liquidated by judgment or agreement. This was not adopted. Secondly, there was the solution adopted in Ireland, under which tort claims were provable “where the wrong out of which the liability to damages…arose was committed before the time of bankruptcy”. If it was intended to adopt that solution, the Irish section provided a ready precedent, but no language of that sort was used in the new provisions. A third solution was that unliquidated tort claims should be provable provided that the cause of action had accrued by the liquidation date. A fourth solution would be to provide that all unliquidated tort claims should be provable whether the wrongful acts or omissions occurred before or after the liquidation date.

A general principle that tort claims are to be provable is achieved by the reference to them in rule 13.12(4) and section 382(4), but it is rule 13.12(1) and section 382(1) which govern the timing requirements for provable claims. As Mr Mortimore stressed, the entirety of rule 13.12(1) is qualified by rule 13.12(2). This slight indication that rule 13.12(2) is intended to be a complete code of the circumstances in which tort claims are to be provable is given substantial support by its opening words:

“In determining for the purposes of any provision of the Act or the Rules about winding up, whether any liability in tort is a debt provable in the winding up…”

This language is more obviously consistent with a provision which will define the circumstances in which a liability in tort will be admissible to proof, rather than with a provision which will do no more than extend the meaning of another provision.

The language of rule 13.12(2) is, as all counsel agreed, most obviously linked to rule 13.12(1)(b). As I have already held, unliquidated claims in tort for loss already incurred at the liquidation date are probably covered by paragraph (a). Once it is accepted that unliquidated tort claims are to be provable at all, there is no difficulty in saying that claims for loss already incurred at the liquidation date are admissible to proof. The difficulty arises in relation to loss which has not then been incurred but may be incurred at a later date. Contingent claims are the subject of paragraph (b). All contingent claims are admissible to proof provided only that they arise “by reason of any obligation incurred” before the liquidation date.

The question requiring a clear answer is how those words are to be applied, for the first time, to tort claims. The purpose of rule 13.12(2) is to provide the answer. The obligation is incurred “when the cause of action accrued”. That provision can then be applied to answer the question posed by rule 13.12(1)(b): was the obligation incurred before the liquidation date? The result is that contingent tort claims are provable, provided that the cause of action accrued before the liquidation date.

I do not consider sustainable the submissions that rule 13.12(2) is to be read as if the words “by reason of an obligation” were in parenthesis or even were omitted entirely. On the contrary, as a matter of both context and grammar, it seems to me clear that the words “at the time when the cause of action accrued” qualify “by reason of an obligation incurred” rather than “became subject to that liability”.

This approach does not deprive rule 13.12(2) of purpose. First, it has the general purpose of making clear that tort claims are provable provided that the cause of action has accrued by the liquidation date. Secondly, it clarifies the position as regards claims for losses which have not occurred at the liquidation date, and may never be incurred. An example would be personal injury cases where provisional damages have been awarded or are claimed, and where the claimant has a right to apply for a further award if, but only if, he develops new diseases or conditions. Another example would be the claim for further loss from a continuing nuisance, to which Mr Snowden referred. Without a statement of the applicable principle provided by rule 13.12(2), there could be real uncertainty as to what was meant by “any obligation incurred” in this context. As was said in a different context, in the Canadian case of Smith v Canadian Broadcasting Corporation [1953] 1 DLR 510, to which Mr Mortimore referred, ““[a]ny obligation incurred” may not be very apt language to describe a liability in tort”.

The question is fairly asked by the proponents as to why rule 13.12(2) does not simply provide that a liability in tort is a “debt” only if it arises out of a cause of action which had accrued at the liquidation date. The answer, as it seems to me, is that having decided to adopt the phraseology of section 30(3) of the Bankruptcy Act 1914 for rule 13.12(1) (and section 382 (1)), rule 13.12(2) (and section 382(2)) were drafted so as to fit in with it. It may also be fairly said against the proponents that, if the intention had been to incorporate the Irish provision, why did it not use language along the lines of that provision. In fact the proponents go further and submit that the effect of rule 13.12(2) is to permit tort claims to be proved not only in cases in which the cause of action accrued after the liquidation date, but also in cases where there has been no wrongful act or omission until after the liquidation date. I find it impossible to find that meaning in the sub-rule.

The proponents rely heavily on the use of the word “deemed” in rule 13.12(2). Deeming provisions are frequently, perhaps usually, used to extend the natural meaning of a provision or even to create a statutory fiction. A good example of the latter is a provision in the legal aid regulations considered by the Court of Appeal in DEG – Deutsche Investitions und Entwicklungsgesellschaft mbH v Koshy [2001] 3 All ER 878, on which Mr Trower in particular relied. A person whose legal aid certificate was revoked was deemed never to have been an assisted person. Robert Walker LJ, with whom Aldous LJ agreed, endorsed at p 882 the approach which required the court to have regard to the legislative purpose underlying a deeming provision which introduced a statutory fiction and not to extend its effect further than was necessary to achieve that purpose.

Deeming provisions do not necessarily extend the natural meaning of a provision or create a fiction. Their purpose may be to define or clarify the circumstances relevant to the main provision. In St Aubyn v Attorney-General (No 2) [1952] AC 15 at 53, Lord Radcliffe said:

“The word "deemed" is used a great deal in modern legislation. Sometimes it is used to impose for the purposes of a statute an artificial construction of a word or phrase that would not otherwise prevail. Sometimes it is used to put beyond doubt a particular construction that might otherwise be uncertain. Sometimes it is used to give a comprehensive description that includes what is obvious, what is uncertain and what is, in the ordinary sense, impossible.”

In the decision of the High Court of Australia in Hunter Douglas Australia Pty Ltd v Perma Blinds (1969-1970) 122 CLR 49 Windeyer J said at p 65:

“the verb “deem”, or derivatives of it, can be used in statutory definitions to extend the denotation of the defined term to things it would not in ordinary parlance denote. This is often a convenient device for reducing the verbiage of an enactment. But that the word can be used in that way and for that purpose does not mean that whenever it is used it has that effect. After all, to deem means simply to judge or reach a conclusion about something…The words “deem” or “deemed” when used in a statute thus simply state the effect or meaning which some matter or thing has – the way in which it is to be adjudged. This need not import artificiality or fiction. It may be simply the statement of an indisputable conclusion, as if for example one were to say that on attaining the age of twenty-one years a man is deemed to be of full age and no longer an infant. Hundreds of examples of this usage of the word appear in the statute books.”

At p 67 he said:

“There is no presumption, still less any rule, that wherever the word “deemed” appears in a statute it demonstrates a “fiction” or some abnormality of terminology. Sometimes it does. Often it does not. Much depends upon the context in which the word appears…”

In my view rule 13.12(2) falls into the second of Lord Radcliffe’s categories. It is designed to provide the certainty which, for the reasons already given, was required.

The submission on which the proponents most strongly relied was that this construction produced a result which was unjust and absurd and which cannot have been intended. While I am sure that the framers of the legislation did not intend to produce injustice, I consider that a deliberate policy choice was made to use the liquidation date as the cut-off point for causes of action in tort. There are reasons for this choice. It will generally produce greater certainty, it may permit a liquidation to be brought to an earlier conclusion and it may be regarded as consistent with the principle that all claims are to be identified and valued as at the liquidation date.

Whether, in the light of circumstances disclosed by this case, it was the right policy choice is another matter. Where the pre-liquidation activities of the company lead to post-liquidation losses recoverable in tort, particularly where as here it is a question only of waiting to see if the loss occurs, very serious questions arise as to whether the claimants should be excluded from all participation with other creditors in a distribution of the company’s assets. It is not, however, so obvious as to how participation would best be achieved.

A system which allows all individuals who have been exposed to asbestos to claim against the contingency that they will develop compensatable injury will favour those who in fact never develop any injury against those who do so. It would result in very small amounts being paid to a very large number of people, rather than targeting the available resources to those who develop serious conditions and need and deserve substantial sums. That may not be thought to be an attractive policy choice. Some might regard it as unreasonable or even absurd. An alternative approach would be to calculate on a statistical and actuarial basis the sum needed to meet future claims and allow a proof for that total sum, thereby creating a reserve which can be applied in paying a dividend to those who in fact develop compensatable conditions.

This does no more than illustrate that the right answer in policy terms to the issues raised by this case requires careful consideration and is not necessarily to be found in the Insolvency Act and the Insolvency Rules as they presently stand.

In this connection, the difference between the bankruptcy and winding-up regimes is important. I have already made the point, as did counsel, that a claim which cannot be proved in a bankruptcy can be pursued against the bankrupt after his discharge. An exclusion from proof for causes of action in tort accruing after the commencement of the bankruptcy will not necessarily produce an injustice and may be beneficial to the claimant, depending on the debtor’s financial position after his discharge. This may strike a fair balance, provided that the debtor does emerge from bankruptcy, except to such extent and on such conditions as the court may direct. Further, in the case of personal injuries claims, Parliament provided that, even if provable, they were not released by the debtor’s discharge from bankruptcy, except to such extent and on such conditions as the court may direct. In choosing to apply the bankruptcy template of section 382 to the rules governing the winding-up of companies, an approach has been adopted which leaves no room for these mitigating factors. This does not however enable the court to construe the substantially identical terms of section 382 and rule 13.12 in radically different ways.

In the result, therefore, I conclude that future asbestos claims (as defined) are not provable debts for the purposes of winding-up and I agree with the construction of the rules reached by Sir Donald Nicholls V-C.

The proponents’ submissions also relied on a reading of “obligation incurred” in rule 13.12(1)(b) to include the situation where a duty of care in tort was engaged or broken before the liquidation date but no injury was caused until after that date, if at all. In my judgment, the words “obligation incurred” are not apt to describe the duty of care or its breach. An analysis of the tort of negligence, such as that given by Viscount Simonds in The Wagon Mound, is important. It is not just the liability in damages, but also the underlying obligation, which is incurred when damage is suffered and a cause of action accrues. The obligation in negligence is to compensate for loss caused by the defendant’s careless act or omission. While the act or omission will, if followed by material loss, lead to an obligation to compensate the victim, it is not in my view correct to say that by the careless act or omission alone the company incurs an obligation. This is not, in my view, inconsistent with my conclusion that potential tort claimants are creditors for the purposes of section 425. All that is required in that context is that there should exist “contingent liabilities” in the sense described by the majority in Re Sutherland. Unlike rule 13.12(1), it does not require that the company should already have “incurred an obligation”. As shown by the authorities to which I have referred and on which all the proponents relied, a person may be a “creditor” for the purposes of section 425 without having a provable debt as defined in the insolvency legislation.

My conclusion on the proper construction of rule 13.12 makes it necessary to consider the submissions that this construction renders the legislation in breach of the Convention. Specifically, it is submitted that it would involve a violation of article 1 of the First Protocol to the Convention either on its own or taken in conjunction with article 14 of the Convention.

By section 3 of the Human Rights Act 1998:

“So far as it is possible to do so, primary legislation and subordinate legislation must be read and given effect in a way which is compatible with Convention rights.”

The duty imposed on the court by this section requires the court to reach, if possible, a construction of legislation which is compatible with Convention rights, although it may not be justified by the usual principles of statutory construction. But it is engaged only where the construction arrived at by the application of those principles produces a result which is not compatible with Convention rights. The court must therefore first, as I have done, reach its conclusion without recourse to section 3. It must then decide whether that construction is incompatible with Convention rights. Only if it decides that it is incompatible, does section 3 apply. See Poplar Housing Association v Donoghue [2002] QB 48 per Lord Woolf LCJ at para 75.

Article 1 of the First Protocol (A1P1) provides:

“Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by the law and by the general principles of international law.

The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions of penalties.”

The proponents submit that the potential tort claims of the future asbestos claimants are “possessions” for the purposes of A1P1 and that the effect of rule 13.12, as I have construed it, violates A1P1, not in the sense that the claimants are deprived of their potential claims altogether but in the sense that there is an interference with their enjoyment of them. Alternatively, if potential tort claims are not “possessions” for these purposes, it is submitted that asbestos claims arising from accrued causes of action are possessions and that, in the case of those accruing after the liquidation date, the inadmissibility of such claims to proof involves an interference with the enjoyment of such claims. It is in each case an interference, not a deprivation of the claimants’ rights: it is only a right to prove in a winding-up and to participate with other creditors in a distribution which is denied to them. Their claims are not extinguished and in all other respects are enforceable. However, the practical effect is likely to be substantial because, except to the extent of any available insurance cover (which in this case will be inadequate) or claims against other producers or distributors of asbestos products, they will in practice recover nothing.

Future asbestos claims: A1P1

I consider first whether the potential tort claims (the future asbestos claims as defined) are “possessions” within the meaning of A1P1. If they are not possessions, then there can be no breach of the article in respect of them. The definition of future asbestos claims assumes that the claimant was before the liquidation date exposed to asbestos which could cause an asbestos-related condition for which T&N would be liable in damages. Equally, however, it assumes that no such condition has started before the liquidation date and it may never start. In any individual case, the prospects of developing a compensatable condition are likely to be very low. Unless and until such condition does start, the future asbestos claimants have no cause of action in English law and any proceedings would be struck out as disclosing no cause of action.

In a number of decisions, the European Court of Human Rights has considered the status of claims as “possessions”. In Pressos Compania Naviera SA v Belgium (1996) 21 EHRR 301, the court held that an accrued cause of action in tort was a possession. Damage was an essential element in the cause of action under Belgium law. Damage had occurred and under Belgium law the causes of action had accrued prior to the passing of retrospective legislation which deprived the claimants of their claims for compensation. On the basis that the cause of action had accrued, the claimants had a “possession” and therefore had a legitimate expectation that their claims would be determined in accordance with the general law of tort: see para 31 of the judgment. It was common ground between Miss Carss-Frisk and Mr Eadie that the test of legitimate expectation is not material to the determination of whether a claim constitutes a possession. It is the status of a particular claim as a possession which creates the legitimate expectation that it will be dealt with in accordance with domestic law.

In Kopecky v Slovakia (no 44912/98, 28 September 2004), the Grand Chamber considered the elements necessary for a claim to constitute a possession for the purposes of A1P1. In paragraph 35 of the judgment a number of relevant principles established by the practice of the Convention institutions under A1P1 are set out, including:

“(c)

An applicant can allege a violation of Art.1 of Protocol No.1 only in so far as the impugned decisions related to his "possessions" within the meaning of this provision. "Possessions" can be either "existing possessions" or assets, including claims, in respect of which the applicant can argue that he or she has at least a "legitimate expectation" of obtaining effective enjoyment of a property right. By way of contrast, the hope of recognition of a property right which it has been impossible to exercise effectively cannot be considered a "possession" within the meaning of Art.1 of Protocol No.1, nor can a conditional claim which lapses as a result of the non-fulfilment of the condition. (see Prince Hans-Adam II of Lichtenstein v Germany [GC], no 42527/98, §§ 82 and 83, ECHR 2001–VIII and Gratzinger and Gratizingerova v The Czech Republic (dec) [GC], no 39794/98, § 69, ECHR 2002–VII).”

The Grand Chamber held that the alleged possession was not an “existing possession” and turned therefore to consider whether the “claim constituted an “asset”, that is whether it was sufficiently established to attract the guarantees of Article 1 Protocol No 1” (para 42). The judgment considers the role of “legitimate expectation” in this context and stated in paragraphs 48–49:

“48…The "legitimate expectation" identified in Pressos Compania Naviera SA was not in itself constitutive of a proprietary interest; it related to the way in which the claim qualifying as an "asset" would be treated under domestic law and in particular to reliance on the fact that the established case law of the national courts would continue to be applied in respect of damage which had already occurred.

49 In a line of cases the Court has found that the applicants did not have a "legitimate expectation" where it could not be said that they had a currently enforceable claim that was sufficiently established…”

The judgment concludes on this aspect at paragraph 52:

“52 In the light of the foregoing it can be concluded that the Court's case law does not contemplate the existence of a "genuine dispute" or an "arguable claim" as a criterion for determining whether there is a "legitimate expectation" protected by Art.1 of Protocol No.1. The Court is therefore unable to follow the reasoning of the Chamber's majority on this point. On the contrary, the Court takes the view that where the proprietary interest is in the nature of a claim it may be regarded as an "asset" only where it has a sufficient basis in national law, for example where there is settled case law of the domestic courts confirming it.”

The principal question for the court was therefore “whether there was a sufficient basis in domestic law, as interpreted by the domestic courts, for the applicant’s claim to qualify as an “asset” for the purposes of Article 1 of Protocol No 1”. As Mr Eadie submitted, it is difficult to see how a claim can constitute a possession within the meaning of A1P1 if under the relevant domestic law the claim is not maintainable. There is a clear link in this context with rights of access to the courts under article 6, but the criterion for a possession under A1P1 may be expected to be stricter than for a right of access under article 6.

The earlier judgment of the Grand Chamber in Gratzinger v Czech Republic (no 39794/98, 10 July 2002), referred to in the judgment in Kopecky, concerned a claim for recovery of property confiscated under the former communist regime. The applicants had no claim under Czech law because under the terms of the Extrajudicial Rehabilitation Act of 1991 they did not satisfy one of the pre-conditions to an application, namely Czech nationality (although they had been Czech nationals at the date of confiscation). The Grand Chamber held that their claim was not a “possession” within the meaning of A1P1 because under Czech law it was not sufficiently established to be enforceable.

The Grand Chamber has again considered the relevant principles in two recent decisions. Draon v France (no 1513/03, 6 October 2005) concerned a claim for compensation in respect of the birth of a child with a disability, which was negligently not detected during pregnancy. During the course of proceedings the action was barred by new legislation applicable to pending cases. Paragraph 65 of the judgment reads:

“65 The Court reiterates that, according to its case-law, an applicant can allege a violation of Article 1 of Protocol 1 to the Convention only in so far as the impugned decisions relate to his “possessions” within the meaning of that provision. “Possessions” can be “existing possessions” or assets, including, in certain well-defined situations, claims. For a claim to be capable of being considered an “asset” falling within the scope of Article 1 of Protocol No 1, the claimant must establish that it has a sufficient basis in national law, for example where there is settled case-law of the domestic courts confirming it. Where that has been done, the concept of “legitimate expectation” can come into play.”

It was accepted that the claim was sufficiently established under French law to constitute a “possession” and that there had been an interference with the right to peaceful enjoyment of it. It was held that the interference was not justified and that there had been a breach of A1P1.

Roche v The United Kingdom (no 32555/96, 19 October 2005) concerned a claim for damages for personal injury alleged to arise from the claimant’s exposure to toxic chemicals during tests carried out on him while serving in the army. His claim under English law was barred by a certificate issued under section 10 of the Crown Proceedings Act 1947. He contended that this violated a number of Convention rights, including those under articles 6 and 14 and under A1P1. The central issue as regards those provisions was whether the certificate represented a substantive or procedural bar. The Grand Chamber, reaching the same conclusion as the House of Lords in Matthews v Ministry of Defence [2003] 1 AC 1163, held that the certificate was part of a system which precluded a claim in tort as a matter of substantive law. There was accordingly no violation of articles 6 or 14 or A1P1. In dealing with the alleged violation of A1P1 the Grand Chamber again reiterated the basic principle as regards the status of claims as possessions:

“The Court recalls that a proprietary interest in the nature of a claim can only be regarded as a possession where it has a sufficient basis in national law, including settled case-law of the domestic courts confirming it.” (para 129)

In the light of the principles established by these cases, the issue is whether future asbestos claims (as defined) have a sufficient basis in national law to constitute possessions for the purposes of A1P1. It is clear, in my judgment, they do not. Material damage is an essential element of a cause of action in negligence under English law. By definition, future asbestos claimants have not, as yet, suffered any material damage. Any claim form issued by them seeking damages in negligence would be struck out as disclosing no cause of action. Accordingly their “claims” are not possessions for the purposes of A1P1. It follows that a construction of the Insolvency Rules which does not permit future asbestos claims to be admitted to proof involves no violation of A1P1.

In his submissions, Mr Eadie suggested that the decisions of the ECtHR showed that to be recognised as a possession a claim must be both significantly established under domestic law and currently enforceable. In Kopecky and Draon, for example, both expressions may be found. Whatever the relevance of the distinction between them in other cases, it is not, I consider, a distinction which arises in this case. To say that a future asbestos claimant does not have a currently enforceable claim is literally true, but it suggests that he will have an enforceable claim in the future. That is not true, as regards many of the future asbestos claimants. They will have claims if, but only if, they develop compensatable conditions. Unless and until they do so, they have no sustainable claim in English law.

Miss Carss-Frisk relied on Ambruosi v Italy (no 31227/96, 19 October 2000), a decision of the Second Section of the Court, as showing that a claim may be a “possession”, even where an enforceable claim does not yet exist if, as she submitted, in some sense payment has been earned or an obligation of some kind has been incurred to the claimant. The applicant was a lawyer who had acted for a number of pensioners with restitution claims in respect of overpaid tax. The Italian government decided that restitution should be made. It did so and enacted a decree which extinguished the pending cases. An effect of this was to deprive the applicant of her right, if the cases had proceeded and been successful, to apply to the court for payment of her costs directly by the defendant, in view of her clients’ impecuniosity. She had already carried out work on the cases and incurred costs. The court held that the decree involved a breach of A1P1 as regards the applicant’s right to claim her costs against the defendant. The precise nature of the applicant’s rights under Italian law is not clear from the judgment and there is no substantial discussion in the judgment as to the grounds for the conclusion that the claim for fees was a possession, although it is noted (para 20) that future income constitutes a possession within A1P1 “only if it has been earned or where an enforceable claim exists”.

I do not consider that it is possible to derive any principle from Ambruosi v Italy which could assist in establishing that future asbestos claims are possessions. In any event, the applicable principles have been established by the later decisions of the Grand Chamber to which I have referred.

Future asbestos claims: A1P1 and article 14

Alternatively, as regards future asbestos claims the proponents rely on article 14 of the Convention in conjunction with A1P1. Article 14 provides:

“The enjoyment of the rights and freedoms set forth in this Convention shall be secured without discrimination on any ground such as sex, race, colour, language, religion, political or other opinion, national or social origin, association with a national minority, property, birth or other status.”

Article 14 does not create autonomous rights, but rather a principle of non-discrimination in the enjoyment of Convention rights and in the enjoyment of additional rights, falling within the general scope of Convention rights, which the State has voluntarily decided to provide. This does not diminish its importance, as it is fundamental to the values which the Convention is intended to protect: A and X v Secretary of State for the Home Department [2004] QB 335 per Lord Woolf LCJ at para 8. The application of article 14 does not necessarily require the violation of a Convention right. It is necessary, but also sufficient, for the facts of the case to fall “within the ambit” of one or more Convention articles: Stec v United Kingdom (Grand Chamber decision as to the admissibility of applications 65731/01 and 65900/01, 6 July 2005).

Miss Carss-Frisk submitted that the facts of this case are sufficiently linked to A1P1 to come within the ambit of article 14. The complaint is that rule 13.12 operates so as to prevent creditors from submitting claims in a liquidation in respect of a “contingent tort claim”, whereas other contingent personal injury claims, such as those based on breach of contract, can be proved.

The State has chosen to allow contingent claims, in principle, to be proved in a liquidation. Having chosen to do so in relation to contractual claims, and thereby created for them legal rights sufficiently well-established in domestic law to be possessions within A1P1, it is discriminatory not to extend the same right to contingent tort claims, such as future asbestos claims. For these purposes it is not necessary to establish that future asbestos claims are possessions within the meaning of A1P1.

Miss Carss-Frisk submits that asbestos personal injury claimants with contingent claims in contract and those with such claims in tort are in an analogous or comparable situation for the purposes of article 14. First, both categories are concerned to obtain compensation for the same kind of loss, based on exposure to asbestos. Secondly, persons in neither category have at the liquidation date suffered loss, and may never do so. Thirdly, the only difference is the legal basis for the claim.

Miss Carss-Frisk relied in particular on two decisions of the ECtHR concerning rights to social security benefits. In Willis v United Kingdom (2002) 35 EHHR 21, the applicant successfully argued that the refusal to pay him a widowed mother’s allowance and a widow’s payment, to which he would have been entitled if he were a woman, constituted discrimination against him on grounds of sex. The court held that the right to these benefits was a pecuniary right which constituted a possession and that the applicant was denied the right on account of his sex, contrary to article 14. In Stec v United Kingdom, an assertable right under domestic law to a welfare benefit was held to be a possession within A1P1; the importance of the decision lay in its application to non-contributory benefits. Article 14 was held to be applicable, on the basis of the relevant test as stated in para 55:

“In cases, such as the present, concerning a complaint under Article 14 in conjunction with Article 1 of Protocol 1 that the applicant has been denied all or part of a particular benefit on a discriminatory ground covered by Article 14, the relevant test is whether, but for the condition of entitlement about which the applicant complains, he or she would have had a right, enforceable under domestic law, to receive the benefit in question.”

Even if it is right to apply the principles in these decisions to claims to be pursued in litigation, I do not think that they lead to the conclusion for which Miss Carss-Frisk contends. Her submissions proceed on the basis that through the insolvency legislation the State has chosen to protect contingent claims, but has denied that protection to contingent tort claims. But it is only by choosing a broad class of claims that a distinction can be argued to arise. If the particular class of claim is looked at, namely “contingent tort claims”, it can be seen that there is no discrimination: no such “claims” may be proved by anyone. The test set out in Stec involves examining “a particular benefit” and determining whether the applicant had been denied it on a discriminatory ground. I accept the force of what Miss Carss-Frisk submits as to the common features of those who may suffer personal injury in the future, but the legal differences are not matters of mere labels. As a matter of English law, claims in tort are essentially different in a number of fundamental respects from claims in contract. In particular, in the case of employees and others with relevant contractual rights, they already have at the liquidation date an accrued cause of action for breach of contract. Claims in contract and claims in tort are no more to be taken together for these purposes than different benefits under the social security system.

In any event, and this was Mr Eadie’s submission on this point, it seems clear from the Strasbourg case-law that article 14 is inapplicable in relation to a claim, as opposed to other possessions, unless the claim has a sufficient basis in domestic law to constitute a possession within A1P1.

The application in Gratzinger v Czech Republic was made on the basis of A1P1 taken in conjunction with article 14. I have referred above to the Grand Chamber’s decision that the claim for recovery of property was not a “possession” within the meaning of A1P1. It was submitted that the pre-condition of Czech nationality to the right to make the claim was discriminatory within article 14. The Grand Chamber rejected the application under article 14 on the grounds that the “claim” was not a possession within A1P1 and article 14 was not autonomous: see paras 74 and 76. The case was not therefore within the ambit of A1P1. The case made under article 14 in conjunction with A1P1 was rejected by the Grand Chamber on the same ground in Roche v United Kingdom: para 133. The decisions in Gratzinger and Roche are all the stronger because in both cases all the facts required to constitute the claims had occurred and it was only because of particular features of the claimants (nationality and employment in the armed forces) that their “claims” had an insufficient basis in domestic law to constitute possessions. By contrast, in this case, future asbestos claims do not constitute possessions because the essential element of loss is missing.

Accordingly I reject the submission that rule 13.12, as it applies to future asbestos claims, violates A1P1 taken in conjunction with article 14. I have not here dealt with the further issue as to whether, if such claims were within the ambit of A1P1, there would be discrimination on a ground falling within article 14. I shall have to return to article 14 when dealing with the position of causes of action in tort which accrue after the liquidation date and deal there with the issue of discrimination.

Asbestos claims accrued after the liquidation date: A1P1

If, as I hold, there is no violation of A1P1, either on its own or in conjunction with article 14, involved in a construction of the Insolvency Rules which precludes future asbestos claims from being treated as provable debts, the proponents submit that there is a violation of those provisions in relation to the treatment of tort claims which in fact accrue after the liquidation date. The effect of rule 13.12 is to prevent any proof in respect of tort claims where the cause of action accrues after the liquidation date. Once compensatable loss has occurred and the cause of action has accrued, it is clear that a personal injuries claim in tort is a possession within the meaning of A1P1, assuming a relevant duty of care and breach. It is submitted that, by precluding such claims from being provable debts, rule 13.12 interferes with the enjoyment of the possession in breach of A1P1 or, alternatively, there is discrimination in breach of A1P1 read in conjunction with article 14.

Mr Eadie accepts that, once the cause of action has accrued, a personal injuries claim in tort with a substantial basis in fact and law is a possession within A1P1. He accepts also that the effect of rule 13.12 prevents full enjoyment of the possession. However, he submits that there would be no violation of A1P1. He submits that, as I have already mentioned, the existence of a claim as a possession gives rise to a legitimate expectation that the claim will be determined and treated in accordance with the settled principles of domestic law and that the State will not then interfere with those settled principles. He further submits that rule 13.12 is part of the applicable domestic law and, unless changed, will be part of such law when a relevant cause of action accrues after the liquidation date. There is therefore no interference, in breach of A1P1, with the enjoyment of the claim as a possession. A1P1 protects claims against retrospective interference.

The cases of Pressos and Draon provide clear examples of retrospective interference with settled principles of domestic law which deprived the applicants of their legitimate expectation to have their claims, which were sufficiently established as a matter of domestic law to constitute possessions, determined in accordance with the existing domestic law. Neither Miss Carss-Frisk nor Mr Eadie are aware of any case in which it has been suggested or held that the principles of domestic law applying prior to the existence of a claim, or a change in those principles prior to the existence of a claim, constituted an interference with the claim as a possession for the purposes of A1P1. However, Miss Carss-Frisk submitted that it is not right that there can only be an interference with a possession if there is a change in the law after the applicant has acquired the possession. She relied on the speech of Lord Nicholls of Birkenhead in Wilson v First County Trust Ltd (No 2) [2004] 1 AC 816. The case concerned not a claim but contractual rights under a loan agreement which was subject to regulations made under the Consumer Credit Act 1974. The rights could not be enforced because, in breach of the regulations, the contract failed correctly to state the amount of credit. The Court of Appeal held that there was an interference with the contractual rights in breach of A1P1, notwithstanding that the regulations pre-dated both the loan agreement and the coming into force of the Human Rights Act 1998. The House of Lords reversed the decision, but on a number of different grounds.

It was submitted in the House of Lords that there was no interference, in breach of A1P1, with the creditor’s contractual rights because the regulations pre-dated the agreement and the rights were, therefore, from inception subject to the limitations under the regulations. Miss Carss-Frisk relied on the rejection of this submission by Lord Nicholls at paras 38–45. However, as she acknowledged, this was a minority view. Lord Hope of Craighead at paras 106–109 disagreed. He said at paras 106–107:

“106 Article 1 of the First Protocol has a similar character. It does not confer a right of property as such nor does it guarantee the content of any rights in property. What it does instead is to guarantee the peaceful enjoyment of the possessions that a person already owns, of which a person cannot be deprived except in the public interest and subject to the conditions provided for by law: Marckx v Belgium (1979) 2 EHRR 330, 350, para 50. Here too it is a matter for domestic law to define the nature and extent of any rights which a party acquires from time to time as a result of the transactions which he or she enters into. One must, of course, distinguish carefully between cases where the effect of the relevant law is to deprive a person of something that he already owns and those where its effect is to subject his right from the outset to the reservation or qualification which is now being enforced against him. The making of a compulsory order or of an order for the division of property on divorce are examples of the former category. In those cases it is the making of the order, not the existence of the law under which the order is made, that interrupts the peaceful enjoyment by the owner of his property. The fact that the relevant law was already in force when the right of property was acquired is immaterial, if it did not have the effect of qualifying the right from the moment when it was acquired.

107 The rights of property which are in issue in this case are those set in an agreement which is regulated by the 1974 Act. The Act subjects the rights of the creditor to restrictions in some circumstances. Section 65 declares that a regulated agreement which is improperly executed cannot be enforced by the creditor except by means of an order of the court, and section 127(3) declares that it is not to be enforceable at all except upon the condition which it lays down. The agreement which was entered into in this case was from the outset an agreement which was improperly executed. So it was always subject to the restrictions on its execution which sections 65(1) and 127(3) of the 1974 Act set out. I would hold that FCT's Convention rights under article 1 of the First Protocol are not engaged in these circumstances.”

Lord Scott of Foscote was of the same view:

“168 First, article 1 of the First Protocol is directed to interference with existing possessions or property rights. FCT never had, at any stage in the history of the loan agreement, the right to enforce against Mrs Wilson the repayment of the £5,000. Neither the 1974 Act as a whole nor section 127(3) in particular constituted an interference with a pre-existing right of FCT to enforce repayment by Mrs Wilson of the £5,000. The Act, and section 127(3) prevented FCT from ever possessing that right. No authority has been cited to your Lordships for the proposition that a statutory provision which prevents a transaction from having the quality of legal enforceability can be regarded as an interference for article 1 purposes with the possessions of the party who would have benefited if the transaction had had that quality. In my opinion, the proposition should be rejected.”

Lord Hobhouse of Woodborough considered the matter in a rather different way, his answer depending on whether on the facts the lender had possession of the pledged car or was only seeking to enforce a contractual right. Lord Rodger of Earlsferry at para 178 agreed with Lord Nicholls as to the disposal of all the grounds of appeal, without further comment on this particular issue.

In the judgment of a Chamber of the ECtHR in J A Pye (Oxford) Ltd v United Kingdom (no 44302/02, 15 November 2005), it was held by a 4 to 3 majority that the application of the English law of adverse possession to deprive the applicant of its registered title to land violated A1P1. It was argued by the UK Government that there was no breach because the relevant law existed at the time of the acquisition of the property. This was rejected at para 51 of the judgment:

“51 The Court does not share the Government’s view that the operation of the legislation is to be regarded as an incident of, or limitation on, the applicants’ property right at the time of its acquisition, such that Article 1 ceased to be engaged when the relevant provisions took effect and the property right was lost after 12 years of adverse possession. It is true that the relevant provisions of the legislation existed at the time the property was acquired by the applicants and that the consequences for the applicants’ title to the land of 12 years adverse possession were known. However, Article 1 does not cease to be engaged merely because a person acquires property subject to the provisions of the general law, the effect of which is in certain specified events to bring the property right to an end, and because those events have in fact occurred. Whether it does so will depend on whether the law in question is properly to be seen as qualifying or limiting the property right at the moment of acquisition or, whether it is rather to be seen as depriving the owner of an existing right at the point when the events occur and the law takes effect. It is only in the former case that Article 1 may be held to have no application.”

But the court goes on to say at para 52:

“The provisions are also different from those examined by the House of Lords in Wilson v. The First County Trust Ltd [2003] UKHL 40 – also invoked by the Government - in which the majority held that the relevant legislation regulating the enforceability of loan agreements “bit” at the moment the transaction was concluded and that the lender accordingly had no right to enforce repayment of the loan of which he could be deprived under Article 1. By contrast, the 1925 and 1980 Acts are in the view of the Court to be seen as “biting” on the applicants’ property rights only at the point at which the Grahams had completed 12 years’ adverse possession of the applicants’ land and not as delimiting the right at the moment of its acquisition. Accordingly, the Court rejects the Government’s argument that, on this ground, Article 1 was not engaged in the present case.”

This passage involves no criticism of the majority view in Wilson v First County Trust Ltd, but appears to endorse it.

In applying the principles to be deduced from these cases, it follows in my judgment that rule 13.12, in precluding a tort claim which accrues after the liquidation date from being treated as a provable debt, involves no relevant interference with the enjoyment of the claim as a possession in breach of A1P1. Unlike the law of adverse possession, it does not have the effect of depriving the claimant of an existing claim nor does it interfere with the exercise of any existing rights. At no time will the claimant have had a right to prove in respect of his post-liquidation tort claim.

In Pennycook v Shaws (EAL) Ltd [2004] Ch 309, on which Miss Carss-Frisk also relied, the Court of Appeal considered the application of A1P1 to the statutory rights of business tenants under Part II of the Landlord and Tenant Act 1954. Arden LJ, with whom the other members of the Court agreed, observed that there were important differences between the statutory provisions under consideration in Wilson and the statutory rights of a tenant to a continuation of his tenancy or to a new tenancy, subject to the provisions of Part II of the 1954 Act. She cited the passages to which I have referred from the speeches of Lord Nicholls and Lord Hope and, referring to Lord Nicholls’ speech, she said at para 35:

“On this analysis the court must look at the substance of the claimed right to see whether the bar in this case to the exercise of the tenant’s right is a delimitation of the right or whether it represents a deprivation of rights.”

Applying that test to the business tenant’s statutory rights, Arden LJ held that the relevant provision in that case was more accurately analysed as a deprivation of a right rather than a delimitation.

I do not consider that Pennycook v Shaws (EAL) Ltd supports Miss Carss-Frisk’s submission. Applying the distinction between the deprivation of a right or its delimitation to post-liquidation tort claims, the effect of rule 13.12 is in my judgment to delimit them, for the reasons already given. The tort claimant has no right of which he is deprived.

It is in any event important, as Mr Eadie stressed, to focus on the nature of the possession in this case and the consequences under A1P1. The post-liquidation tort claims are possessions because they are sufficiently established under the applicable principles of English law. The consequence under A1P1 is a legitimate expectation that English law will not be altered after the claims come into existence in a way which deprives the claimants of their claims or adversely interferes with them. This is the principle applicable to claims which has been established by Kopecky v Slovakia and other decisions of the ECtHR. Kopecky was decided after Wilson v First County Trust and Pennycook v Shaws (EAL) Ltd but there is in any case nothing said in those cases, or in the recent decision in J A Pye (Oxford) Ltd v United Kingdom, which qualifies or casts doubt on the principle of legitimate expectation as it applies to claims. On that basis, rule 13.12 involves no breach of A1P1 as it applies to tort claims which accrue after the liquidation date, because it is part of domestic law before any such claims exist.

My conclusion is therefore that rule 13.12 does not violate A1P1 as regards tort claims which accrue after the liquidation date.

Asbestos claims accrued after the liquidation date: A1P1 and article 14

Finally, in the alternative, the proponents submit that rule 13.12 violates A1P1 taken in conjunction with article 14. First, they submit that the exclusion from proof of post-liquidation tort claims is within the ambit of A1P1, because these claims will exist as otherwise enforceable claims and will constitute possessions for the purposes of A1P1. Secondly, the treatment of tort claimants is discriminatory when compared with the treatment of creditors with claims for breach of contract.

Mr Eadie submits that this submission fails, on grounds both of ambit and of the absence of any relevant discrimination.

As to ambit, Mr Eadie submits that, although the post-liquidation tort claims are capable of being possessions within A1P1, there is still no breach of the legitimate expectation that such claims will be treated in accordance with the principles of domestic law. The decisions of the ECtHR in Gratzinger v Czech Republic and Roche v United Kingdom support this submission in its application to claims. I admit to some misgivings in its rigid application to a case where there is clear discrimination. Suppose that domestic law provided that only men could bring personal injury claims in tort, notwithstanding that in all other aspects a woman’s claim satisfied the criteria established by domestic law. It seems surprising that article 14 would not provide protection on the sole ground that this bar had existed at the time that her cause of action would otherwise have accrued.

As to discrimination, article 14 may apply only if there is “discrimination on any ground such as sex, race, colour, language, religion, political or other opinion, national or social origin, association with a national minority, property, birth or other status”. Miss Carss-Frisk submits that the difference in treatment of personal injury claims in tort and similar claims in contract constitutes discrimination on grounds of “other status”. She submits that this is a broad concept which should not be given a restricted meaning and that it is apt to describe the status of a person who has suffered injury as a result of a breach of a tortious duty of care. It defines their status as a victim of a particular type of legal wrong. Moreover, tort claimants are as between themselves subject to discrimination depending on whether their cause of action accrued before or after the liquidation date.

Miss Carss-Frisk further characterised the status in a different, but associated, way. Most of the personal injury claimants with contractual claims were employees of T&N. The distinction, and the discrimination, was between employees on the one hand and those who had not been employed by T&N on the other hand.

Miss Carss-Frisk relied on the judgment of the ECtHR in National & Provincial Building Society v United Kingdom (1998) 25 EHHR 127. Regulations imposing a tax charge on interest earned on building society accounts during a transitional period had been declared invalid in proceedings brought by Woolwich Building Society. Woolwich Building Society succeeded in a restitutionary claim for the repayment of the relevant tax. Retrospective legislation was enacted to validate the regulations, but it included an exemption in respect of proceedings for restitution commenced before 18 July 1986. This provision, on the facts, applied only to Woolwich Building Society. The applicant building societies complained that the legislation breached their Convention rights on grounds, amongst others, that it violated A1P1 taken in conjunction with article 14. They contended that they were in a materially identical situation to that of Woolwich Building Society, enjoying the same restitutionary rights, and that by not including them within the exemption there was discrimination on grounds falling within article 14. The court rejected the contention. Its judgment at para 88 states:

“not every difference in treatment will amount to a violation of this Article. Instead, it must be established that other persons in an analogous or relevantly similar situation enjoy preferential treatment, and that there is no reasonable or objective justification for this distinction.”

The court accepted that the applicant building societies were in an analogous if not identical situation as Woolwich Building Society with respect to the tax regulations but, because only Woolwich Building Society had taken proceedings, it rejected the contention that they were in fact in a relatively similar situation to Woolwich Building Society.

Miss Carss-Frisk submitted that the approach of the court in the National & Provincial case shows that the ECtHR is prepared to proceed on the basis that it is not particularly important to identify a relevant ground of discrimination. Rather, the court asks whether the comparator groups are in an analogous situation and, if so, can the discrimination be justified. Miss Carss-Frisk submitted that personal injuries claimants are in an analogous position, whether their accrued causes of action are in tort or in contract. Both have claims for damages, well-established as a matter of the applicable principles of English law, and both may obtain judgments quantifying their damages.

Miss Carss-Frisk accepted that some attention has to be paid to whether the alleged discrimination is on a ground to which article 14 applies. Mr Eadie submitted that recent decisions of the House of Lords, as well as Strasbourg decisions, had underlined the importance of this part of the analysis and had shown that, for article 14 to be engaged in any particular case, the discrimination must be on a ground falling within article 14. In Kjeldsen v Denmark (1976) 1 EHRR 711, at para 56, the ECtHR stated:

“The court first points out that Article 14 prohibits, within the ambit of the rights and freedoms guaranteed, discriminatory treatment having as its basis or reason a personal characteristic (‘status’) by which persons or groups of persons are distinguishable from each other.”

The test of personal characteristic was adopted and applied by the House of Lords in R (S) v Chief Constable of South Yorkshire Police [2004] 1 WLR 2196. Lord Steyn, with whom all other members of the House agreed on this point, said at paras 46-49:

“46 This question is important because if the different treatment is not on a relevant ground for the purposes of article 14, then this article is not applicable. In any event, identification of the ground for different treatment is material to the question of justification.

47 The different treatment afforded to the appellants and comparators was on the ground that the former had already provided samples and fingerprints to the police in a criminal investigation while the comparators had never been required to do so.

48 The list of grounds in article 14 is not exhaustive, and necessarily includes each of the specifically proscribed grounds as well as "other status". The European Court of Human Rights has interpreted "other status" as meaning a personal characteristic: Kjeldsen, Busk Madsen and Pedersen v Denmark (1976) 1 EHRR 711, 732-733, para 56. I do not understand Lord Woolf CJ [2002] 1 WLR 3223, 3238 to have expressed a different view in paragraph 47 of his judgment. On the other hand, the proscribed grounds in article 14 cannot be unlimited, otherwise the wording of article 14 referring to "other status" beyond the well-established proscribed grounds, including things such as sex, race or colour, would be unnecessary. It would then preclude discrimination on any ground. That is plainly not the meaning of article 14.

49 It is, therefore, necessary to examine whether the ground for different treatment in this case amounts to a status in the sense of a personal characteristic within the meaning of article 14.”

Lord Steyn concluded that the difference in treatment was not analogous to any of the expressly proscribed grounds such as sex, race or religion and that the provision of fingerprints and DNA samples to the police did not constitute a “status” within article 14 (para 51). In R (Hooper) v Secretary of State for Work and Pensions [2005] 1 WLR 1681, the House of Lords applied the same approach and held that discrimination by reference to whether or not a person had started legal proceedings was not a “status” within article 14: Lord Hoffmann at para 65.

In R (Carson) v Secretary of State for Work and Pensions [2005] 2 WLR 1369, the House of Lords again looked at this question. The claimant was a British citizen who had spent most of her working life in Britain and had a full record of national insurance contributions. At the date of her retirement, she was resident in South Africa. Because she was resident in South Africa, and because the United Kingdom had no relevant reciprocal agreement with South Africa, she was not entitled to annual cost of living increases in her state pension. She argued that this constituted discrimination under article 14 in the enjoyment of a possession under A1P1, on the grounds of her status, namely residence in South Africa. Lord Hoffmann referred to the need to show discrimination on the basis of a “personal characteristic”, as set out in Kjeldsen v Denmark and R (S) v Chief Constable of the South Yorkshire Police, and was content to assume that residence in South Africa was a personal characteristic: para 13. Likewise, in the conjoined appeal of Reynolds, age was treated as at least capable of following within article 14. Lord Walker of Gestingthorpe said at paras 52–54:

“52 It will be apparent that the grounds of discrimination prohibited by article 14 extend a good way beyond sex and race. Its enumeration of grounds does not in terms include residence (the ground of complaint in Mrs Carson's case) or age (the ground of complaint in Ms Reynolds' case). The residual group, "or other status" (in the French text, toute autre situation), is far from precise. The respondent Secretary of State does not contend that the grounds of residence and age cannot be included within the scope of article 14. But it is clear from the jurisprudence of the Strasbourg court that the possible grounds of discrimination under article 14 are not wholly unlimited; nor are all possible grounds of equal efficacy in establishing unlawful discrimination. These points call for some explanation, since they are relevant to these appeals.

53 In Kjeldsen, Busk Madsen and Pedersen v Denmark (1976) 1 EHRR 711, an early Strasbourg decision concerned with compulsory sex education in state primary schools, the court, at pp 732-733, para 56, interpreted "status" in article 14 as "a personal characteristic ... by which persons or groups of persons are distinguishable from each other". The fact that a number of parents objected to their children receiving sex education at school was not accepted as equivalent to a religious belief so as to make the complainants a group for the purposes of a claim under article 14 taken together with article 2 of the First Protocol.

54 It was suggested in argument that the Kjeldsen test of looking for a personal characteristic is no longer part of the Strasbourg jurisprudence. But it has recently been followed by the Fourth Section of the European Court of Human Rights in two admissibility decisions, Budak v Turkey (Application No 57345/00) (unreported) 7 September 2004 and Beale v United Kingdom (Application No 16743/03) (unreported) 12 October 2004. In Budak the only relevant difference was in the criminal procedure adopted for two different types of offence. In Beale it was the different investigatory procedures appropriate for the police (on the one hand) and trading standards officers (on the other hand). In neither case was there any personal characteristic of the claimant which could be a ground for discrimination contrary to article 14. Moreover this House has recently applied Kjeldsen in R (S) v Chief Constable of the South Yorkshire Police [2004] 1 WLR 2196, 2213, para 48, per Lord Steyn.”

It is clear from these authorities that it is an essential element of a complaint of discrimination contrary to article 14 that the ground of discrimination should be a personal characteristic. The extensive list of specific grounds of discrimination in article 14 both led to the interpretation of “other status” as personal characteristics and has given some guidance as to the underlying nature of those characteristics.

In my judgment, tort claimants do not as such possess any personal characteristics which distinguish them from other personal injuries claimants. Their distinctive features for present purposes are (i) they have been negligently exposed to asbestos by T&N, (ii) they have as a result suffered injury and (iii) the only legal basis on which they can make a claim is in negligence. It is the third feature which distinguishes them. But the nature of the legal redress available to them under the general law is not in my view to be regarded as a personal characteristic within article 14, and it certainly bears no relation to any of the characteristics specified in article 14. In my view, it is no more a personal characteristic than commencing proceedings before or after a particular date (R (Hooper) v Secretary of State for Work and Pensions) or committing or being charged with one offence rather than another (Budak v Turkey, no 57345/00, 7 September 2004).

As I have mentioned, Miss Carss-Frisk also submitted that the distinction was between employees, who have claims for breach of contract and therefore have provable claims, and other claimants. However, I do not consider that that demonstrates a personal characteristic shared by the other claimants. They are an extremely disparate group, including, by way of example only, workers “loaned” to T&N by other T&N companies, wives of T&N workers, workers in other industries such as shipbuilding and construction, children living near T&N plants, people exposed to asbestos because of temporary building works at their work-place, and consumers using products incorporating asbestos. Their exposure has been in many different countries, notably the United States as well as the United Kingdom, and they are of many different nationalities. The absence of a contract of employment with T&N cannot in my view be regarded as a shared personal characteristic. It is a fact which defines a very broad category of persons, and affects their legal rights, but it is not a personal characteristic. Miss Carss-Frisk relied on Lord Hoffmann’s inclusion of a person’s occupation as a personal characteristic (Carson, para 16) but a particular occupation is not analogous to the fact of not being employed by T&N.

I conclude therefore that article 13.12, as it applies to tort claims accruing after the liquidation date, does not breach article 14 taken in conjunction with A1P1.

My reasons for concluding that none of the challenges to rule 13.12 on the basis of Convention rights succeeds makes it unnecessary to consider whether the differences in treatment under the rule can be justified, whether under A1P1 or under article 14.

My overall conclusions are therefore, first, that future asbestos claimants (as defined) are creditors for the purposes of a scheme of arrangement under section 425 of the Companies Act 1985 and a CVA under Part I of the Insolvency Act 1986. Secondly, future asbestos claims are not provable debts in a liquidation. Thirdly, this second conclusion involves no breach of Convention rights under article 1 of the First Protocol whether taken on its own or in conjunction with article 14 of the Convention.