St Paul Travelers Insurance Company Ltd v Dargan & Anor

This is an application by St Paul Travelers Insurance Co Ltd (“St Paul”) for: (1) an order pursuant to section 181(3)(a) of the Insolvency Act 1986 (“the 1986 Act”) vesting in its favour an alleged claim by Ballast plc (“Ballast”) against Mott Macdonald Ltd (“MMD”) for breach of contract, following a disclaimer of any interest in that claim by the liquidators of Ballast; and (2) a declaration to the effect that the claim and St Paul’s interest in it are extant and valid and St Paul is entitled to commence and continue proceedings against MMD in respect of the claim as if the claim had vested in St Paul ab initio, notwithstanding the admission of MMD’s claim in the liquidation of Ballast or any other action of Ballast or its liquidators.

St Paul also seeks further relief by an amended application for which they seek the permission of the court. MMD opposes St Paul’s application. The first respondents to this application as originally issued were the liquidators of Ballast, but it was agreed between them and St Paul that they could be removed from the application.

Ballast carried on business as a civil engineering contractor. By a contract dated April 6, 2001, Ballast agreed with Machrie Ltd (a special purpose vehicle) that it would carry out design, construction and related works on two schools in Caerphilly, Gwent, one of which was Ysgol Gyfun Cwm Rhymni. MMD was appointed as Ballast’s civil, structural and environmental engineering consultant under an Appointment Agreement executed on October 26, 2001.

One of MMD’s obligations was to design plateaux for use as sports pitches. MMD’s design involved the introduction of slopes of increased gradient between certain of the plateaux and the highway boundary of a road, called Plas Road. In mid-2001, cracking occurred in the road caused by shearing within the slope. Ballast was forced to undertake works to remedy the defects in the slopes, at a cost to Ballast of more than £1 million.

Ballast was insured for the project under a contractors’ all risk policy by St Paul with an inception date of April 6, 2001. There was a £100,000 deductible under the policy, and St Paul indemnified Ballast in the amount of £935,967.16.

St Paul alleges that MMD is liable to Ballast for breach of its contractual duty of care in respect of the design work (“the Claim”). The allegations are pleaded in the draft Particulars of Claim.

MMD contends that a significant factor in the cracking was that Ballast had blocked an important culvert, a short distance uphill from the area of slope which failed, and which led to an exceptional increase of water around the slope.

In August 2001, Ballast instructed MMD to carry out the design work required to deal with the slope failure. This instruction was given without prejudice to the question of who bore responsibility for the slope failure. MMD carried out the design and rendered four invoices in connection with the work, which were rendered to Ballast between November 8, 2001 and July 30, 2002, and which have not been paid (“the Remedial Works invoices”).

MMD also had a substantial number of separate unpaid invoices outstanding from Ballast in respect of work done on the Caerphilly schools project, the Plas Road widening project, and a further project in Tower Hamlets. These other invoices were not in respect of any remedial works on the failed slope.

Ballast went into Administration on October 15, 2003, and into creditors’ voluntary liquidation on October 29, 2004. The Administrators, and then liquidators, were two partners in Deloitte and Touche, Nicholas Dargan and Nicholas Edwards (“the liquidators”).

Under the terms of the Policy, and under the general law, St Paul, having indemnified Ballast in respect of its loss, had a right of subrogation in respect of the Claim. Condition 7 of the General Conditions of the policy provided: “[St. Paul] shall be subrogated to all the Insured’s rights of recovery against any person or organisation before or after any payment under this insurance. The Insured shall execute and deliver instruments and papers and do whatever else is necessary to secure such rights. The Insured shall do nothing to prejudice such rights.”

On March 8, 2004, St. Paul’s solicitors, Masons, wrote a pre-action protocol letter to MMD, particularising the Claim. The letter noted that Ballast was in administration, and that St Paul had paid Ballast £935,967.16, and claimed against MMD on behalf of St Paul £1,042,380.16 (inclusive of interest to March 8, 2004 of £106,413). The letter also stated that the sum claimed on behalf of St Paul did not include any uninsured losses, which were currently subject to consideration by the administrators.

On June 3, 2004, MMD provided through its solicitors, Fishburns, a response to Ballast’s claim. It was accepted that part of the slope had failed, but denied that the failure was caused by any inadequacy in design. The cause was the blocking of the culvert by Ballast. The drainage and the slope at the time of the failure were part of the temporary works, for which Ballast had responsibility. There was no deficiency in MMD’s design. Ballast had failed to mitigate its loss by failing to act promptly on advice which it received from MMD following the slope failure. If, which was denied, MMD was negligent, it would seek a substantial reduction in the claim to reflect Ballast’s contributory negligence in, for example, blocking the culvert. The letter also set out the claims which MMD had against St Paul in respect of outstanding invoices, which included not only the Remedial Works invoices, but also sums which were due from Ballast to MMD in respect of the Caerphilly Schools, Plas Road and Tower Hamlets projects.

There then followed further pre-action correspondence between the parties. Ballast went into creditors’ voluntary liquidation on October 29, 2004. The administrators stayed on as liquidators. On January 14, 2005, St Paul’s solicitors wrote to the liquidators inviting them to give notice before concluding the liquidation, given that proceedings under any subrogated claim could only be brought for so long as Ballast remained in existence and on the register.

A Pre-Action Protocol meeting was held on March 30, 2005 attended by clients, solicitors and experts, but no agreement was reached.

Following the Pre-Action Protocol meeting, MMD’s solicitors wrote on June 21, 2005, dealing with issues of liability, and including further reports and other supporting material designed to show that the view of MMD’s expert (that there was no basis for any claim) was to be preferred to the view of Ballast’s/St Paul’s expert; and on June 27, 2005 dealing with quantification issues in respect of Ballast’s claim, and with MMD’s own claims in respect of the outstanding invoices.

On August 18, 2005 St Paul’s solicitors stated that in view of the time which had elapsed between the Pre-Action Protocol Meeting and the receipt of the letters of June 21 and June 27, papers were with counsel for particulars of claim to be settled.

On October 4, 2005, St Paul’s solicitors wrote to the liquidators of Ballast, stating that the issue of proceedings against MMD was imminent, and asking whether the liquidators would have any objection to St Paul issuing proceedings in the name of Ballast (against a suitable indemnity from St Paul to Ballast and the liquidators). The letter stated that if the liquidators chose not to accede to this request, St Paul would have no alternative but to commence proceedings against MMD directly, joining Ballast as second defendant, and seek an order that Ballast lend its name to the proceedings. The letter also offered the liquidators the opportunity of adding to any proceedings any claim that Ballast had in respect of uninsured losses (including the excess).

According to the liquidators, Ballast’s parent (Ballast Needham NV) had agreed with the liquidators that, provided that the dissolution of Ballast commenced by March 31, 2006, it would pay £900,000 to the liquidators for distribution to Ballast’s creditors, thus enabling a more substantial dividend to be paid than would otherwise be the case.

On November 17, 2005, St Paul’s solicitors wrote to the liquidators’ solicitors in connection with the liquidators’ proposals with regard to Ballast Needham NV, and the dissolution of Ballast. The letter stated that a dissolution would severely prejudice St Paul’s ability to pursue the subrogated claim. The beneficial interest in the proceeds of the Claim belonged to St Paul, which was a proprietary right. The liquidators were not free to ignore St Paul’s interest and agree to action such as dissolution to St Paul’s detriment. The letter required a written undertaking from the liquidators that they would not take any step to prejudice, compromise or otherwise settle Ballast’s claim against MMD without giving 14 days prior written notice. The letter also stated that, in the light of the liquidators’ refusal to co-operate in the claim against MMD, St Paul proposed shortly to commence proceedings against MMD and to join Ballast as second defendant.

On the same day, the liquidators’ solicitors wrote to St Paul to say that, having considered the documentation put forward both by St Paul and MMD, the liquidators did not consider that any claim by Ballast against MMD had any merit. As subrogated insurer, St Paul could only stand in the shoes of Ballast, and was subject to all defences. These included MMD’s claims for the amounts due to it, which were in any event automatically set off against claims by Ballast pursuant to the mandatory automatic set-off provisions arising on Ballast’s insolvency under Rule 4.90 of the Insolvency Rules. The liquidators saw no reason to dispute £549,652.49 of MMD’s claim (i.e. the invoices other than the Remedial Works invoices). As for the balance of the claim, totalling £212,034.64, given that the claim by Ballast had no merit, it followed that the Remedial Works invoices were recoverable by MMD as well. The liquidators saw no merit in St Paul pursuing litigation against MMD, and requested St Paul to confirm that it would not seek to join Ballast to any proceedings. The liquidators also made it clear to St Paul that it was their proposal to seek an early end to the liquidation and a dissolution of the company.

There then followed correspondence between the liquidators’ solicitors and St Paul’s solicitors, in the course of which one of the options proposed by the liquidators’ solicitors (in a letter of January 13, 2006) was a disclaimer under section 178 of the 1986 Act, followed by a vesting application by St Paul. In their letter in response of February 2, 2006, St Paul’s solicitors stated that their preferred route was simply to pursue a subrogated claim, but, as regards the proposal for a disclaimer, they said:

“Whether your client chooses to pursue option 1 is a decision for them and St Paul hereby reserves its position as regards the validity of any purported disclaimer of Ballast’s right of action against Mott MacDonald. In the circumstances, we feel sure that you will understand that unless your client serves a notice of disclaimer upon St Paul in respect of Ballast’s right of action by 4pm on Thursday 9 February 2006, St Paul will be left with no option but to issue proceedings against Ballast asking the Court that Ballast lend its name to the proceedings against Mott MacDonald. We attach, for your information, a copy of our client’s draft particulars of Claim dealing with both the application for use of Ballast’s name and the detailed claims against Mott MacDonald in relation to the failed slope.

In the event that your client serves such a notice of disclaimer, St Paul intends, without prejudice to the question of the validity of the purported disclaimer, to apply to the court for an order that the right of action vest in it.

Additionally, on the basis of your client’s apparent view that the right of action is property of Ballast capable of disclaimer, the only consistent approach would therefore be to conclude that Mott MacDonald’s claims in the liquidation of Ballast have been extinguished by virtue of Rule 4.90 and its proof of debt should accordingly be rejected. Please confirm by return that this is in fact your client’s position. Further, we repeat our contention expressed in our letter dated 28 November 2005 that any steps taken by your client in respect of Mott MacDonald’s claims to the detriment of St Paul’s subrogated claim would constitute a breach of your client’s fiduciary duty.”

On February 1, 2006 the liquidators had written to MMD in connection with its amended proof of debt form in the amount of £745,192.32, and said that (a) they believed St Paul was considering legal action against MMD to recover about £1 million; (b) there were numerous points of difference between both sides and the outcome of litigation was uncertain; (c) the liquidators were required to act in the best interests of creditors and would be making a first and final distribution by February 28, 2006; and (d) the likely dividend would be 1.1p in the pound, which would provide a return to MMD of £8,197.11 if its claim were accepted in full. The letter concluded:

“In view of the above, your claim may change and cannot be agreed as a certain claim. Pursuant to Rule 4.82 Insolvency Rules 1986 we can confirm, solely for the purposes of a dividend distribution (and for no other purposes), that we will admit your claim for an amount of £400,000. If you are dissatisfied with this decision you may apply to court for the decision to be reversed or varied. Any application by you must be made within 21 days of receiving this letter.”

On February 7, 2006, the liquidators filed a notice of disclaimer under section 178 of the 1986 Act. What was disclaimed was:

“…all of the Company’s interest in any claim Ballast Plc may have against [MMD] pursuant to the Appointment Agreement executed 26 October 2001 between Ballast Plc and Mott McDonald Limited for breach of contract in relation to the slope failures on the Development (as defined in the Appointment Agreement) and all other matters set out in the letter of claim from Pinsent Masons solicitors to Fishburns solicitors dated 8 March 2004.”

By application dated February 20, 2006 MMD appealed to the court to reverse or vary the liquidators’ decision and seek an order that MMD’s claim be admitted in full, alternatively in an amount greater than £400,000. The matter did not come before the court, but on February 28, 2006, the liquidators wrote “to revoke their letter of 1 February and replace it” by a letter in the same form, except that the passage quoted above was replaced by:

“… the Liquidators accept the sum of £533,000 is due from Ballast Plc in respect of unpaid fees to Mott MacDonald, and admit Mott MacDonald’s claim for a dividend to that extent.

The Liquidators acknowledge that Mott MacDonald also claims a further amount of £212,083.64 in respect of fees claimed in Invoice Nos. IN00002798, IN00011487, IN00015707, and IN00027037 and agree that the Liquidators’ admission to a dividend of the lesser amount of £533,000 is without prejudice to Mott MacDonald’s entitlement to assert that the amount of the £745,083.64 is owing from the company to Mott MacDonald.

If you are dissatisfied with this decision you may apply to court for the decision to be reversed or varied. Any application by you must be made within 21 days of receiving this letter.”

The sum of £533,000 was approximately the amount of the outstanding invoices other than the Remedial Works invoices.

On March 23, 2006, the liquidators paid a first and final dividend in respect of MMD’s admitted claim of £533,000.

Prior to issuing the present application, St Paul wrote to MMD on February 28, 2006, seeking confirmation that if a vesting order were made, the Claim would be treated as extant and valid against MMD and St Paul would be entitled to commence and continue proceedings against MMD in respect of the Claim, notwithstanding any preceding action of Ballast or the liquidators, including the admission of MMD’s claim in the liquidation. The view was expressed that the admission by the liquidators in their letter of February 1, 2006 of MMD’s claim was not intended to affect, and had not affected, St Paul’s subrogated interest in the Claim. MMD did not give the confirmation sought.

On March 30, 2006, St Paul issued this application for a vesting order and for the declaration and other relief sought.

The application, in addition to seeking the vesting order, seeks certain declaratory relief to the broad effect that if a vesting order is made, the Claim will be extant and valid as against MMD. The aim is to ensure that any issues in relation to the validity and effect of any vesting order are dealt with now, rather than in the contemplated proceedings.

If a vesting order is made in favour of St. Paul, St. Paul recognises that MMD can plead its cross-claims against Ballast as a defence or set-off in extinction or diminution of the Claim in the usual way.

The final meeting of creditors in the liquidation under section 106 of the 1986 Act was held on March 31, 2006. Ballast was dissolved, pursuant to section 201, on July 13, 2006.

St. Paul says that a vesting order is necessary because it could only pursue the Claim against MMD, in Ballast’s name, so long as Ballast continued to exist (i.e. was not dissolved): Smith (MH) (Plant Hire) Ltd. v Mainwaring [1986] BCLC 342, 343-344 (CA).

MMD’s position is that (1) it was open to St Paul to pursue its subrogated claim, joining Ballast as second defendant if the liquidators remained unwilling to agree to the proceedings: Esso Petroleum Co Ltd v Hall Russell & Co Ltd [1989] AC 643 at 663; (2) St. Paul does not have a sufficient interest in any claim by Ballast against MMD to enable it to apply for or to allow the court to grant a vesting order in St Paul’s favour; (3) even if the nature of St. Paul’s interest in the Claim might have allowed the making of a vesting order, the operation of insolvency set-off and the liquidator’s admission of a net balance in MMD’s favour means that there is no asset which remains that can be vested in St. Paul; (4) even if St. Paul is entitled to (and should have) the benefit of any vesting order, St Paul is only so entitled to the extent it paid Ballast under the policy and subject to an appropriate set off of sums that are due to MMD, all of which should be reflected in the terms of the Order.

A vesting of the Claim in St. Paul is plainly a just result. In normal circumstances, had the liquidators not disclaimed Ballast’s interest in the Claim, St. Paul would have been entitled to pursue the Claim in Ballast’s name. A vesting order effectively restores that position, with no prejudice whatsoever to MMD.

The liquidators regarded the Claim as onerous property because Ballast had no interest in the Claim, the Claim potentially caused the creditors of Ballast to lose £900,000 as it would have delayed the dissolution of Ballast, and the Claim potentially exposed the liquidators to adverse costs and disclosure obligations.

St. Paul is a person entitled to the disclaimed property. By reason of clause 7 of the Policy or (under the general law), upon St. Paul indemnifying Ballast in respect of its loss, it was subrogated to any claim of any character which Ballast was entitled to bring in proceedings against a third party to diminish his loss. St. Paul had no right to sue in its own name, but was entitled to sue MMD in the name of Ballast. If Ballast refused to allow St. Paul to use Ballast’s name as Claimant, the court would order Ballast to allow its name to be used.

St. Paul undoubtedly had a proprietary interest, by way of lien or charge, over the fruits of the Claim, and possibly also in respect of the Claim itself as a right of action, although whether an insurer has a proprietary interest in a claim to which it has been subrogated has not been decided definitively: see Napier and Ettrick v Hunter [1993] AC 713, 740 (Lord Templeman), 745 (Lord Goff of Chieveley) and 752-753 (Lord Browne-Wilkinson). On any view, it is submitted, St. Paul had a sufficient interest in the property disclaimed to have standing to apply for a vesting order.

Lloyds Bank SF Nominees v Aladdin Ltd [1996] 1 BCLC 720 does not control the present case. It was a case involving real property, where it is more appropriate to require a proprietary interest.

In order for St. Paul to have the requisite standing to make its application and for the court to grant it, it must establish that (a) it has a relevant interest in the Claim; and (b) it is “entitled to it”. Subrogation does not give an insurer a proprietary interest in a claim of the assured. If it did the interest of the insurer would persist beyond the end of the assured’s life and a prior assignment would be unnecessary.

St. Paul has no proprietary interest in the Claim and cannot therefore be entitled to it. First, St. Paul’s interest in the Claim is insufficient to allow it to make an application for a vesting order in respect of disclaimed property or to give the court jurisdiction to make such an order. This is because “the cause of action or right to recover belongs beneficially and (unless assigned) at law to the assured”: Lonrho Exports Ltd v Export Credit Guarantee Dept [1999] Ch 158, 181 per Lightman J.

A relevant interest for these purposes is a proprietary interest in the disclaimed property: Lloyds Bank SF Nominees v Aladdin Ltd [1996] 1 BCLC 720, 721.

An insurer who indemnifies the losses of an assured according to the terms of the policy is entitled to exercise, through subrogation, any claim the assured may have against the person who caused the losses. In the absence of an assignment of such claim, the claim belongs to the assured and the insurer does not have a proprietary interest in it: Central Insurance Co Ltd v Seacalf Shipping Corporation [1983] 2 Lloyd’s Rep 25, 30 per Oliver LJ.

Since any cause of action exercised by the insurer through subrogation belongs to the assured, if an assured ceases to exist prior to a purported exercise of the cause of action by the insurer, the cause of action is incapable of being exercised. In the absence of a valid assignment before, for example, a company is dissolved following a winding up, the cause of action is lost to the insurer: MH Smith (Plant Hire) Ltd v DL Mainwaring [1986] BCLC 342 (C.A.).

Although an insurer may compel the use of an assured’s cause of action against a third party it is unable to compel the assured not to use those rights: Morley v Moore [1936] 2 KB 359.

An assured may compromise any claim he has against a third party in respect of his insured losses. He may do so without reference to and in such a way as to validly bind the insurer: West of England Fire Insurance Co v Isaacs [1897] 1 QB 226. The assured’s ability to settle a claim without reference to the insurer indicates that the latter has no proprietary interest in that claim.

The assured alone can give a valid receipt and discharge to a third party against whom a judgment has been given following a successful subrogated claim: Yorkshire Insurance Co Ltd v Nisbet Shipping Co Ltd [1962] 2 KB 330, 341.

There is a cap on what an insurer may recover under a subrogated claim. The insurer may recover no more than the amount he has paid the assured in respect of the loss under the policy. This is in contrast to situations where the assured has either abandoned or assigned rights to the insurer.

If the insurer had a proprietary right in the assured’s cause of action he should be able to retain all recoveries from that cause of action if the assured’s interest therein somehow determined, for example if the assured ceased to exist or if it renounced all interest in such recoveries (outside the present context of disclaimer by liquidators). But the law will only allow the insurer to recover up to what he has paid the assured: Glen Line v Attorney General (1930) 36 Com Cas 1, 14. This is to be contrasted with the insurer’s position in respect of assignment where he has obtained the claim for himself: Compania Colombiana de Seguros v Pacific Steam Navigation Co [1965] 1 QB 101, 121.

It is accordingly well established in a number of contexts that the nature of the interest that a subrogated insurer has in the assured’s claim is not a proprietary one. The most that could be said for a different approach is that there are certain obiter dicta in Lord Napier and Ettrick v Hunter [1993] AC 713, in which certain members of the House of Lords (in the absence of full argument and since the point was unnecessary for that decision) declined to express concluded views on whether the equitable lien an insurer gains in a fund representing the compromise of a subrogated claim entailed a prior proprietary interest in the claim itself.

The presence of an equitable lien in any proceeds of settlement/litigation once they arise does not in fact mean that the insurer has a proprietary interest in the antecedent claim: (1) the well-established features of a subrogated claim (by contrast with legal assignment of such claims) are against such an analysis; (2) the equitable interest in the compromise proceeds is in any event legally explicable without a finding that it emanated from an anterior proprietary interest in the claim itself. Lord Browne-Wilkinson in Napier and Ettrick v Hunter (without expressing a concluded view) thought that the proprietary interest in the proceeds could be a proprietary consequence of the court construing as performed the specifically performable contract of indemnity which itself only provided for personal rights (at 752). This is the correct analysis, which is consistent with the essential features of subrogation as identified in the case-law.

A contract of insurance is intended to provide an indemnity but no more than an indemnity: Castellain v Preston (1883) 11 QBD 380, 388. A proprietary interest in the assured’s cause of action is unnecessary to protect the principle of indemnity that an assured shall be indemnified for his loss but receive nothing greater than an indemnity.

A cause of action may or may not be used (according often to the direction of the subrogated insurer). Equally a cause of action may or may not succeed. Even if it is successful the quantum of any remedy may or may not infringe the principle of indemnity: for example if the policy limits the loss for which the insurer must provide an indemnity in respect of and recoveries are equal to or less than the assured’s uninsured loss above this limit, the principle of indemnity is not infringed and the assured may retain those damages: Napier and Ettrick v Hunter [1993] AC 713, at 730. The presence of the cause of action alone does not unjustly enrich the assured at the insurer’s expense which is (in contrast to the situation where the insurer has taken an assignment of the assured’s claim) the foundation of subrogation. This is to be contrasted with the situation where a settlement has been reached or damages have been awarded on a subrogated claim: in such cases the infringement of the principle of indemnity may arise, and the presence of the insurer’s equitable lien in such a fund is necessary to avoid the infringement.

While there is substantial authority for the proposition that St Paul as insurer has no beneficial interest in any claim against MMD, there is no authority for the proposition that St Paul does have such an interest.

In the absence of an assignment, therefore, St. Paul cannot possess the requisite interest in the Claim in order to allow a vesting order in respect of it to be made. There has been no assignment of the Claim.

Further, in light of the disclaimer by the liquidator on behalf of Ballast of any interest in the Claim, Ballast retains no interest in the Claim which would enable it to assign it to St. Paul in the future. This is because an effect of a disclaimer is “to determine, as from the date of disclaimer, the rights interests and liabilities of the company in or in respect of the property disclaimed” (section 178(4)(a)).

In these circumstances, St. Paul has no standing to make the application that it does and the court has no jurisdiction to grant St. Paul the vesting order it seeks.

MMD claims that, at the date on which Ballast entered administration, it was owed monies by Ballast for consultancy services which it had carried out but not been paid for. MMD claims that monies are due under 3 separate contracts, namely the Caerphilly schools contract, a separate contract for the widening of Plas Road, and a contract in respect of the construction of schools in Tower Hamlets (“the Counterclaims”). The Counterclaims were initially said to total in the region of £865,000, comprising essentially 59 separate invoices. MMD lodged a proof of debt dated October 25, 2004 in the reduced sum of £761,763.13 (inclusive of VAT and interest to the date of liquidation). This was subsequently reduced, in January 2006, to £745,192.32 by the withdrawal of one invoiced sum. Of the £745,192.32, £212,083.64 (inclusive of VAT and interest), in respect of invoices 00002798, 00011487, 00015707 and 00027037 related to work carried out by MMD to remedy the slope failure at Plas Road, which is the subject matter of the Claim.

MMD’s argument is that even if a vesting order might have been made in favour of St. Paul, following the operation of insolvency set-off under Rule 4.90 and the actions of the liquidator, there remains no asset which can be vested in St. Paul.

As at the beginning of 2006, all that remained of the cross-claims between MMD and Ballast was the net balance: Stein v Blake [1996] 1 AC 243. The claim for breach of contract to which St Paul seeks to be subrogated no longer exists as a separate chose in action. The only asset surviving from the Claim and MMD’s claim against Ballast in respect of its fees is the net balance of these mutual claims following set off. To the extent that St. Paul seeks a vesting order the only asset which can conceivably be the subject of that vesting order is this net balance.

The liquidators of Ballast have already assessed the net balance in MMD’s favour. Therefore no asset exists in Ballast which can be vested in St. Paul. Since the net balance is in MMD’s favour this is not an asset but a liability of Ballast.

The letter from the liquidators of February 28, 2006 admits the net balance to be in MMD’s favour in the sum of £533,000. As at the time of the letters of February 1 and February 28, 2006, the insolvency set off had accordingly already reduced the mutual credits and debits to a solitary asset, which was established by the liquidators (i.e. by the correct forum for conducting such an exercise, pursuant to their statutory function) as being a net balance in favour of MMD.

Thus even if a vesting order might, theoretically, have been made in favour of St. Paul, no asset remains which may form the subject of that order.

St. Paul disputes, or in certain cases does not admit, the validity of the Counterclaims. St. Paul is, as insurer, unable fully to respond to the Counterclaims pending disclosure.

The liquidators’ letter of February 28, 2006 stated that they accepted the sum of £533,000 was due from Ballast in respect of unpaid fees to MMD, and admitted MMD’s claim for a dividend to that extent. The liquidators’ admission of MMD’s claim to that extent was stated to be without prejudice to MMD’s entitlement to assert that the full amount of £745,083.64 was owing from Ballast to MMD.

When Ballast went into creditors’ voluntary liquidation, Rule 4.90 (the set-off rule in company liquidation) applied in respect of Ballast’s claim against MMD and MMD’s Counterclaims against Ballast. Its effect on Ballast’s claim against MMD was that it ceased to exist as a cause of action, and was replaced by a new chose in action, a claim to a net balance: Stein v Blake [1996] AC 243, 255.

There is, therefore, either a net balance owing from MMD to Ballast (if Ballast’s Claim against MMD is sound, and overtops any valid Counterclaims of MMD), or a net balance owing from Ballast to MMD (if the value of any valid Counterclaims by MMD against Ballast exceed the value of Ballast’s claim against MMD). In practice (and absent the disclaimer), the only way of knowing whether claim and/or the Counterclaims are valid, and the quantum of each, would be for Ballast to issue proceedings on the Claim against MMD, and for MMD to counterclaim in respect of the Counterclaims.

MMD contends that the effect of the liquidators’ admission of MMD as a creditor in respect of a sum of £527,190.30 on February 28, 2006 constitutes confirmation by the liquidators, hence Ballast, that in fact the net balance is owing from Ballast to MMD. This ignores both the disclaimer by the liquidators and the effect of the vesting order if granted. Notice of disclaimer was filed and sealed by the court on February 7, 2006. It therefore took effect on that date: section 178(4)(a); Rule 4.187(4). The effect of the disclaimer was to determine as from that date the rights, interests and liabilities of Ballast in or in respect of the property disclaimed. The right to any net balance due to Ballast from MMD ceased to exist: cf. Hindcastle Ltd. v Barbara Attenborough Estates Ltd. [1997] AC 70 at 88 per Lord Nicholls as regards disclaimer of leases.

The effect of any vesting order is a “statutory recreation” of that right to the net balance: ibid at 89. Therefore, when the liquidators admitted MMD’s proof to the extent of £527,190.30 on February 28, 2006, they could not have been taking any account under Rule 4.90(2) (i.e. determining the net balance) since the right to that net balance had already been disclaimed. The letter was dealing with only one side of the account. The letter acknowledged that St Paul’s claim was unclear. The fact that the letter stated that the admission of the debt was without prejudice to MMD’s right to claim the further £212,083.64 can only have been a reference to the forthcoming proceedings by St Paul. The letter of February 1, 2006 was at best an admission limited in effect to entitlement to dividends, and in any event was revoked by the letter of February 28, 2006.

The effect of a vesting order, if made, is to vest the right to the net balance in St. Paul in the state it was in at the time on which the disclaimer took effect, i.e. February 7, 2006. The power given to the court under section 178(3) is to make an order for the vesting of “the disclaimed property” in an applicant. The disclaimed property is that which was disclaimed on February 7, 2006. Hence, what will be vested in St. Paul is the relevant property, the right to the net balance, as it existed on February 7, 2006. The liquidators’ purported actions thereafter, in respect of MMD’s proof, are irrelevant.

MMD contends that, if, contrary to its main submissions, the court decides that it can and should award a vesting order in respect of the Claim, St. Paul cannot be entitled to the entirety of any award which would have been made if the Claim had been brought by Ballast when it was solvent. For St. Paul to receive the entirety of such an award would grant it a windfall against the principle of indemnity and the operation of insolvency set off under Rule 4.90.

The vesting order should in any event be limited so as to allow recovery by St. Paul under the Claim. The relevant starting point for determining the quantum of any vesting order must be the sum which St. Paul paid to Ballast under its policy. An insurance contract is a contract of indemnity under which an assured should recoup no more than its loss. There is no basis for St. Paul to have acquired a proprietary interest in the Claim beyond the amount it paid under the insurance policy since that would infringe the principle of indemnity. The amount which St. Paul paid Ballast under the policy must then be set off under Rule 4.90 against the Counterclaims.

The Counterclaims have two components: (1) the amount of £533,000 admitted by the liquidators as owing to MMD in the liquidation in respect of certain claims; and (2) the additional claims MMD has against Ballast which the liquidators’ admission of proof expressly declined to deal with, but which it acknowledges had been reserved for MMD to pursue in the future.

This should be reflected in any order made, in the event that the court does not accept MMD’s submissions.

The effect of MMD’s contention is that the court must order that the claim is subject to the decision of the liquidators made on February 28, 2006 so that the Counterclaims are fixed in a sum of at least £527,190.30, plus whatever part of its further claim for £212,083.64 as may be admitted or adjudged due, plus interest. The result would be that St. Paul would effectively commence its proceedings from a starting point of minus £527,190.30.

The liquidators’ purported decision in respect of MMD’s proof is nothing to the point, being, first, a decision taken after the right to any net balance had ceased to exist, and secondly, taken after the disclaimer had taken effect. If the liquidators, rather than disclaiming, had assigned the right to the net balance to St. Paul on February 7, 2006, the assignment would have been subject to equities, thus to MMD’s Counterclaims. If the liquidators had then purported to admit the Counterclaims in the sum of £527,190.30, or any sum, MMD would not have been able to rely on the admission of the debt in proceedings brought by St. Paul in respect of the net balance. The admission of the proof by the liquidators would bind the liquidators, but it would not bind St. Paul in its proceedings, since St. Paul is not party to the liquidators’ decision.

St. Paul further seeks leave to amend its application to raise a further issue, in the alternative to its other contentions. The issue does not arise if St. Paul is correct in those contentions.

The issue proposed to be raised is whether, in the light of section 178(4)(b) of the 1986 Act, St. Paul needs a vesting order in respect of the Claim, or whether the Claim (or, technically, right to the net balance) could be pursued in the absence of such an order. Whilst the effect of section 178(4)(a) is that the rights and interests of Ballast in the cause of action are determined from the date of the disclaimer, thus terminating the cause of action, the effect of section 178(4)(b) is that the disclaimer is not to affect the rights and liabilities of any other person, save in so far as is necessary for the purpose of releasing Ballast from any liability.

The effect of the disclaimer is, therefore, undoubtedly to put an end to the Claim, or right to the net balance, as between Ballast and MMD. However, this does not necessarily mean that the cause of action is extinguished for all purposes as between St. Paul and MMD: cf Hindcastle v Barbara Attenborough Estates Ltd. [1997] AC 70, 88-89. St. Paul has rights of subrogation in respect of the disclaimed property, i.e. the cause of action: a right to force Ballast to lend its name as Claimant in any proceedings, and a right to the proceeds of the action. Applying the reasoning in Hindcastle v Barbara Attenborough Estates Ltd., the cause of action should be deemed to exist as concerns the rights and liabilities of St. Paul and MMD in the present case. Just as the landlord is entitled to enforce his rights against a subtenant under a lease disclaimed by the tenant, so also St. Paul should be able, in the present case, to enforce its rights vis-à-vis the disclaimed cause of action in the present case.

MMD says that the amendment which is sought does not assist St Paul. There has never been an assignment of any claim to St Paul. Absent an assignment, St Paul is not entitled to pursue the claim against MMD without joining Ballast as claimant or defendant, since the claim is Ballast’s claim. However, Ballast has been dissolved and no longer exists and in any event all its interest was extinguished on the disclaimer, and St Paul as subrogated insurer is bound by any action taken by Ballast to discharge any debt.

If St Paul were to pursue this claim against MMD, it had to do so by bringing proceedings against MMD in Ballast’s name or by joining Ballast as defendant. Despite being aware of this (and indeed having prepared draft proceedings to precisely this effect), St Paul failed to do so. It is now too late. Neither section 178(4)(b) of the 1986 Act, nor any other of the avenues now relied on can extricate St Paul from the insuperable difficulties in which it has placed itself in attempts to vex MMD further with this stale and unmeritorious claim.

By section 178 of the 1986 Act liquidators have the power to disclaim onerous property. Section 178 provides:

“(2)

Subject as follows, the liquidator may, by the giving of the prescribed notice, disclaim any onerous property and may do so notwithstanding that he has taken possession of it, endeavoured to sell it, or otherwise exercised rights of ownership in relation to it.

(3)

The following is onerous property for the purposes of this section -

(a)

any unprofitable contract, and

(b)

any other property of the company which is unsaleable or not readily saleable or is such that it may give rise to a liability to pay money or perform any other onerous act.

(4)

A disclaimer under this section -

(a)

operates so as to determine, as from the date of the disclaimer, the rights, interests and liabilities of the company in or in respect of the property disclaimed; but

(b)

does not, except so far as is necessary for the purpose of releasing the company from any liability, affect the rights or liabilities of any other person.”

The effect of the disclaimer on liabilities of other persons was considered in Hindcastle Ltd. v Barbara Attenborough Estates Ltd. [1997] AC 70, where a lease had been granted to the first defendant, and the lease had been assigned to the second defendant, whose obligations were guaranteed by the third defendant. The second defendant assigned the lease (with consent) to a company which went into liquidation and whose liquidator disclaimed the lease under section 178 of the 1986 Act. The second and third defendants were held still to be liable for the rent: the disclaimer did not determine the liability of the original lessee, and the second defendant had covenanted to pay the rent and perform the covenants. Lord Nicholls of Birkenhead considered the position where there is a landlord, who has let property to a tenant, and the tenant sub-lets to a sub-tenant: [1997] AC 70. He said (at 88-89):

“… the statute takes effect as a deeming provision so far as other persons’ preserved rights and obligations are concerned. A deeming provision is a commonplace statutory technique. The statute provides that a disclaimer operates to determine the interest of the tenant in the disclaimed property but not so as to affect the rights or liabilities of any other person. Thus when the lease is disclaimed it is determined and the reversion accelerated but the rights and liabilities of others, such as guarantors and original tenants, are to remain as though the lease had continued and not been determined. In this way the determination of the lease is not permitted to affect the rights or liabilities of other persons. Statute has so provided.

The vesting order provisions do not run counter to this analysis. If a vesting order is made, the court order operates by virtue of the statute to vest the lease in the person named on the terms fixed by the court. That the lease may have ceased to exist meanwhile is neither here nor there. If necessary, there will be a statutory recreation.

If no vesting order is made and the landlord takes possession, the liabilities of other persons to pay the rent and perform the tenant’s covenants will come to an end as far as the future is concerned. If the landlord acts in this way, he is no longer merely the involuntary recipient of a disclaimed lease. By his own act of taking possession he has demonstrated that he regards the lease as ended for all purposes. His conduct is inconsistent with there being a continuing liability on others to perform the tenant covenants in the lease. He cannot have possession of the property and, at the same time, claim rent for the property from others.

… It must be recognised, however, that awkwardness is inherent in the statutory operation: extinguishing (‘determining’) the lease so far as the bankrupt is concerned, but leaving others' rights and liabilities in respect of the same lease affected no more than necessary to achieve the primary purpose.

… The tenant’s interest in the property is determined, but not so as to affect the interest of the subtenant. Determination of the subtenant’s interest in the property is not necessary to free the tenant from liability. Hence the subtenant’s interest continues. No deeming is necessary to produce this result. Here the deeming relates to the terms on which the subtenant’s proprietary interest continues. His interest continues unaffected by the determination of the tenant's interest. Accordingly the subtenant holds his estate on the same terms, and subject to the same rights and obligations, as would be applicable if the tenant's interest had continued. If he pays the rent and performs the tenant covenants in the disclaimed lease, the landlord cannot eject him. If he does not, the landlord can distrain upon his goods for the rent reserved by the disclaimed lease or bring forfeiture proceedings. In practice, matters are likely to be brought to a head by one of the parties making an application for a vesting order.”

MMD did not dispute that the liquidators had power to disclaim the Claim, although it did argue (in the context of the argument on utility of a vesting order) that the only surviving claim following the liquidation was the net balance of the mutual claims between Ballast and MMD as at the date of liquidation: Rule 4.90, Insolvency Rules; Stein v Blake [1996] 1 AC 243. But its main argument was that St Paul had an insufficient interest to apply for a vesting order.

The powers of the court to make a vesting order in respect of disclaimed property are set out in section 181. An application for a vesting order may be made by “…any person who claims an interest in the disclaimed property…”: section 181(2)(a). By section 181(3), “the court may on the application make an order, on such terms as it thinks fit, for the vesting of the disclaimed property in, or for its delivery to … a person entitled to it or a trustee for such person…” An order vesting property in any person need not be completed by conveyance, transfer or assignment: section 181(6).

Under section 181 of the 1986 Act St Paul must be a person who “claims an interest in the disclaimed property” (i.e. the Claim), and must also be “a person entitled to” the disclaimed property.

The next question which arises is the nature of the interest which the applicant must show. In Lloyds Bank SF Nominees v Aladdin Ltd [1996] 1 BCLC 720 the applicant for a vesting order was the occupant of leasehold premises who had agreed with the lessee to take an assignment of the lease subject to the consent of the landlord. The applicant had paid the lessee £54,000 for what is described in Leggatt LJ’s judgment as the prospect of an assignment. Before consent was granted the lessee went into liquidation, and the liquidator then disclaimed the lease. The occupant sought a vesting order, relying on a decision by Mr Gavin Lightman QC (as he then was) in Re Vedmay Ltd [1994] 1 EGLR 74, in which a statutory tenant had been held to have standing to make an application for a vesting order on the basis that the disclaimed property was the lease, and in which Mr Lightman QC had said (at 75):

“The term ‘interest’ is not … confined to a proprietary interest. It extends to any financial interest in the subsistence or otherwise of the lease and includes, in particular, any interest that would be adversely affected by the disclaimer.”

Rattee J dismissed the application by the occupant in Lloyds Bank SF Nominees v Aladdin Ltd on the basis that he had no interest under section 181(2)(a), and distinguished Re Vedmay on the basis that in that case the applicant had the status of irremovability, whereas in the instant case the applicant did not have any interest in the nature of a proprietary interest. An application for permission to appeal was refused. Leggatt LJ said in a judgment with which Peter Gibson LJ agreed ([1996] 1 BCLC 720, 722):

“It seems to me that nothing that was said by Mr Lightman in Re Vedmay Ltd can be read as requiring this or any other court, to take notice of any such interest as does not constitute an interest in the property. To read the section more widely would lead to absurd results which cannot have been intended by the legislature … [T]his court cannot have any prospect of according to [the applicant] any such interest or recognising any such interest as it would be necessary for him to claim, if he was to bring himself within the provisions of s. 181.”

The decision of Rattee J is not reported and the decision of the Court of Appeal is on an application for permission to appeal and is not binding on me, although it is of persuasive authority.

The question is whether St Paul has an interest in the Claim and is a person entitled to it for the purpose of section 181. It is therefore necessary to consider the nature of St Paul’s rights as insurer in the Claim.

It is a fundamental rule in relation to all insurance contracts which are contracts of indemnity that the assured shall be indemnified, but shall never be more than fully indemnified: the insurer is entitled, when it has indemnified the assured against the loss insured, to receive by way of subrogation the benefit of all rights of the assured by means of which the loss can be or has been diminished: Castellain v Preston (1883) 11 QBD 380, 386-387; Napier and Ettrick v Hunter [1993] AC 713.

If an insured party refuses to bring an action against a third party in its own name, the insurer itself may bring it. The insured party is joined as a co-defendant and the insurer seeks an order that the assured should allow his own name to be used. In Esso Petroleum Co Ltd v Hall Russell & Co Ltd [1989] AC 643 at 663, Lord Goff of Chieveley said:

“In normal cases, as for example under contracts of insurance, the insurer will on payment request the assured to sign a letter of subrogation, authorising the insurer to proceed in the name of the assured against any wrongdoer who has caused the relevant damage to the assured. If the assured refuses to give such authority, in theory the insurer can bring proceedings to compel him to do so. But nowadays the insurer can short-circuit this cumbrous process by bringing an action against both the assured and the third party, in which (1) he claims an order that the assured shall authorise him to proceed against the third party in the name of the assured, and (2) he seeks to proceed (so authorised) against the third party. But it must not be thought that, because this convenient method of proceeding now exists, the insurer can without more proceed in his own name against the third party. He has no right to do so, so long as the right of action he is seeking to enforce is the right of action of the assured. Only if that right of action is assigned to him by the assured can he proceed directly against the third party in his own name …”

Napier and Ettrick v Hunter [1993] AC 713 concerned the nature of the insurers’ interest in the proceeds of settlement in a claim by the insured Names against the managing agents, and whether the insurers could obtain an injunction on the basis of their equitable interest in the proceeds to prevent payment to the Names. It was held unanimously that the insurers were entitled to an injunction, and that their right of subrogation gave them an equitable proprietary right in the form of a lien over the settlement monies. But there was no decision on the question whether the insurers had a proprietary right in the assured’s cause of action against the managing agents as contrasted with the damages actually recovered.

Lord Templeman considered that the insurers “had an interest in the right of action possessed” by the Names against the managing agents (at 731-732); that the insurer has an equitable interest in the right of action to the extent necessary to recoup the insurer who has indemnified the assured (at 736), and an equitable remedy to protect that interest (at 737); that an insurer has an enforceable equitable interest in the damages payable by the third party, and in order to protect the rights of the insurer under the doctrine of subrogation equity considers that the damages payable by the wrongdoer to the insured person are subject to an equitable lien or charge in favour of the insurer (at 738); and that the equitable charge is enforceable against the damages ordered to be paid, and can be enforced so long as the damages form an identifiable separate fund (at 738). But he concluded (at 740), after reading the draft speech of Lord Goff of Chieveley, that it was not necessary to decide whether the equitable lien or charge attached to the rights of action vested in the insured person against the third party, as distinct from the moneys actually recovered.

Lord Goff of Chieveley agreed that the nature of the insurer’s right over the proceeds of an action was in the nature of a lien. He saw no reason in principle why the insurer’s equitable proprietary interest should not be capable of attaching to the cause of action, as well as its proceeds, but recognised that the decisions pointed in different directions, and he left the point open: at 745.

Lord Browne-Wilkinson agreed with both Lord Templeman and Lord Goff. He said that the authorities showed that equity enforced rights of subrogation on the basis of a proprietary right of the insurer in the damages recovered from third parties (at 750-752). He went on (at 752-753):

“I do not think that the proprietary interest in the damages necessarily postulates a pre-existing proprietary interest in the cause of action. The contrary view could be reached by an argument along the following lines. Any equitable proprietary right must be based on the contract between the insurers and the assured. The implied terms of such contract are established by the decided authorities. Some of those implied terms may be inconsistent with the insurers having any right of property in the cause of action as opposed to the damages recovered. Thus, the third party can compromise the claim with the assured alone, without requiring the concurrence of the insurers. Again, the third party will obtain a good discharge for a judgment only if he pays the assured as opposed to the insurers. If the insurers have a proprietary interest in the cause of action it could be argued that the assured alone could neither effect a valid compromise nor give a good discharge: the insurers also would have to be parties. Accordingly, it could be said that the implied terms of the contract between the insurers and the assured are such that equity would not be specifically enforcing the parties’ bargain if it treated the insurers as having proprietary rights in the cause of action inconsistent with the rights of the assured and that accordingly the rights of the insurers are purely personal rights to require the assured either to pursue the cause of action against the third party or to permit the insurers to do so in his name. But there are plainly factors pointing the other way and since the question was not fully argued I prefer to express no view on the point.” (752-753)

Lord Jauncey agreed with Lords Templeman, Goff and Browne-Wilkinson, and Lord Slynn agreed with Lord Templeman.

All of the decisions referring to a trust or equity in favour of the insurer cited by Lord Templeman and Lord Goff were cases involving the insurer’s rights to the proceeds recovered by the assured: Randal v. Cockran (1748) 1 Ves. Sen. 98; Blaauwpot v. Da Costa (1758) 1 Ed. 130; Yates v. White (1838) 1 Arn. 85; White v Dobinson (1844) 14 Sim 273; Commercial Union Assurance Co v Lister (1874) LR 9 Ch App 483; Burnand v Rodocanachi Sons & Co (1877) 7 App Cas 333, 339 (but cf Simpson & Co v Thomson, Burrell (1877) 7 App Cas 279, 292-293, per Lord Blackburn); King v Victoria Insurance Co Ltd [1896] AC 250; Re Miller, Gibb & Co Ltd [1957] 1 WLR 703; Yorkshire Insurance Co Ltd v Nisbet Shipping Ltd [1962] 2 QB 330, 339-341. It does not of course follow from the fact that equitable remedies are available to a party in relation to a fund that the party has a proprietary interest in the fund, nor that subrogation necessarily confers restitutionary proprietary rights: see Burrows, Law of Restitution, 2^nd ed. 2002, pp. 60 et seq; pp. 104 et seq.

The concept of a proprietary interest of the insurer in the proceeds of recovery is more consistent with principle than the concept of a proprietary interest in the assured’s cause of action. First, there are decisions and dicta suggesting that there is no proprietary right in the cause of action. “The right of subrogation entitles the insurer to call upon the assured to permit his name to be used in a suit for the benefit of the insurer, but it does not vest the cause of action in him.” Central Insurance Co Ltd v Seacalf Shipping Corporation [1983] 2 Lloyd’s Rep 25, 30 per Oliver LJ. It has been said that the cause of action or right to recover belongs beneficially and (unless assigned) at law to the assured: Lonrho Exports Ltd v Export Credit Guarantee Dept [1999] Ch 158, 181 per Lightman J.

Second, there are decisions the basis of which is inconsistent with the assured having a proprietary right in the cause of action. An example is Smith (MH) (Plant Hire) Ltd. v Mainwaring [1986] BCLC 342, 343-344 (CA), in which it was held that insurers could not be substituted as plaintiffs in an action commenced in the name of the assured after it had been dissolved. In the absence of a valid assignment before a company is dissolved following a winding up, the cause of action is lost to the insurer:

“It has long been the law, where insurers have paid a claim, that they stand in the shoes of the assured in order to recover anything which is relevant to that claim. The law has long been that subrogation entitles the insurers to bring an action in the name of the assured against the wrongdoer to recover anything that is recoverable. The reason for that is that the right of action is vested in the assured. The cases show that an action can be brought by the insurer in its own name where it has taken a legal assignment of the cause of action from the assured. That has not been done in the present case. Thus the insurers were entitled to instruct solicitors to bring this action in the name of their assured as long as the assured existed, but in March of 1985 the assured ceased to exist when the company was dissolved. There was no company in whose name any action could be started. In my judgment that has nothing to do with the right of subrogation. It is a straightforward statement that a non-existent party cannot be a party to an action.” ([1986] BCLC 342, 343-344 per O’Connor LJ)

Kerr LJ said (at 345):

“But the right of subrogation does not have the effect of transferring to the insurers any cause of action which the assured may have against the wrongdoer. Such transfer can only be effected by a legal assignment to the insurers ….Alternatively, if the insurer encounters difficulty in persuading the assured to bring the action in respect of the claim for which he has indemnified him, or if he refuses to allow his name to be used, then he can join him in the action in order to compel him to do so, in the same way as the holder of an equitable assignment can bring an action against the debtor or wrongdoer by joining the assignor. If the assignor or, as in this case, the assured is no longer in existence, because the company has been dissolved then unfortunately for the insurer none of those things can be done by him, since he himself has no cause of action against the wrongdoer. All that he can do … is to apply to have the company restored to the register.”

Third, although an insurer may compel the use of an assured’s cause of action against a third party it is unable to compel the assured not to use those rights. In Morley v Moore [1936] 2 KB 359 an insurer had paid its assured in respect of losses caused by a third party. That third party was insured with a second insurer with whom the first had concluded an agreement that neither would pursue the other’s assured for losses caused to their own assured. Despite a definite direction by the insurer to his assured not to commence proceedings the latter was held to be entitled to do so:

“It is true that if called upon to do so the assured is obliged to sue or to allow the insurance company to sue in respect of the particular loss that they have paid, and if the assured recovers it he is obliged to hand that sum over to the insurance company because it is impressed with a trust on their behalf; but putting that trust at its highest I am unable to understand how it can be said that the cestui que trust, that is the insurance company, by taking a particular course, which is not warranted by any independent contract, and by disclaiming their own right as a cestui que trust, can impose upon the assured as another cestui que trust the very person from whom at common law he is entitled to recover as damages that which is said to be the subject of the trust. I do not think there is any such thing as a cestui que trust imposing against the will of the trustee some other cestui que trust as a substitute for himself, and I am quite sure there is no such thing as a cestui que trust not merely able to substitute somebody else against the will of the trustee, but being able to substitute such person on the terms of a different trust.”(per Sir Boyd Merriman P at 366)

Scott LJ said (at 369):

“My view is that there is no right whatever in an insurer to dictate to his assured whether he shall or shall not abstain from enforcing his remedies against a third party which go in diminution of the loss against which the policy is issued; they have an absolute right to require him to enforce his remedies, but, in my opinion, they have no right to prevent him enforcing them. Their right is a right purely consequential on the nature of the contract of indemnity, and it arises because of it being a contract of indemnity and nothing more. If the assured by some process of recovery, whether by an action at law or by an ex gratia payment, obtains a payment in diminution of the loss, the underwriters or the insurers are entitled to the excess over the amount paid by them to him by way of strict indemnity, and no more. To my mind that is the remedy of the insurers, and that is the only remedy they have in respect of the assured’s rights of recovery at common law.” (369)

Fourth, an assured may compromise any claim he has against a third party in respect of his insured losses. He may do so without reference to and in such a way as to validly bind the insurer. In West of England Fire Insurance Co v Isaacs [1897] 1 QB 226 the defendant assured compromised a cause of action against Jones in respect of losses insured by the claimant. The claimant insurer could exercise no cause of action against Jones and was restricted to his action against the assured:

“The defendant has given up this right of action against Jones, so that the plaintiffs can never recover that amount, and the course taken by the defendant has damaged the plaintiffs to that extent.” (per Lord Esher MR at 230)

Fifth, an assured alone can give a valid receipt and discharge to a third party against whom a judgment has been given following a successful subrogated claim: Yorkshire Insurance Co Ltd v Nisbet Shipping Co Ltd [1962] 2 KB 330, 341, per Diplock J.

Sixth, the insurer may only recover up to what he has paid the assured: “…subrogation will only give the insurer rights up to twenty shillings in the pound on what has been paid”: Glen Line v Attorney General (1930) 36 Com Cas 1, 14, per Lord Atkin. This is to be contrasted with the insurer’s position in respect of assignment where he has obtained the claim for himself. In such a case the underwriters could by assignment recover more than 100 per cent. of their loss, whereas by subrogation they could only recover up to 100 per cent. of their loss: Compania Colombiana de Seguros v Pacific Steam Navigation Co [1965] 1 QB 101, 121.

I accept MMD’s contention that there is substantial authority supporting the proposition that St Paul as insurer has no beneficial interest in any claim against MMD, and no direct authority for the proposition that St Paul does have such an interest.

Indeed, the argument for St Paul on this application was that St Paul claimed, and had, an interest in the Claim because it was entitled to pursue the Claim in Ballast’s name either with its consent, or if it did not consent, by seeking an order that its name be lent to the proceedings; and that St Paul had a proprietary interest, by way of a lien or charge, over the fruits of the claim and “possibly” also in respect of the Claim itself as a right of action.

The question is whether St Paul has interest or entitlement to the Claim for the purposes of section 181 of the 1986 Act. I am satisfied on the authorities and on principle that an applicant must have some form of proprietary interest in the property in respect of which a vesting order is sought and that St Paul’s right of subrogation is not a sufficient interest.

It follows that the issue on utility does not arise. If it did, I would have held that what was disclaimed was the Claim subject to any cross-claims: Stein v Blake [1996] 1 AC 243, at 259, and that if it had had any relevant interest, St Paul’s interest would have been an interest in the Claim subject to cross-claims. I do not consider that the liquidators’ letters of February 1 or February 28, 2006 can be reasonably construed as purporting to settle the account in favour of MMD, particularly in the light of (a) the references in both letters to St Paul’s subrogated claims and (b) the reference in the first letter to the admission of MMD’s claim being for dividend purposes only.

Finally, I should deal with the question raised by St. Paul in its proposed amendment, namely whether, in the light of section 178(4)(b) of the 1986 Act, St. Paul needs a vesting order in respect of the Claim, or whether the Claim (or the right to the net balance) could not be pursued in the absence of such Order. Section 178(4)(b) of the 1986 Act provides that a disclaimer does not, except so far as is necessary for the purpose of releasing the company from any liability, affect the rights or liabilities of any other person. I do not consider that there is anything in the decision in Hindcastle Ltd. v Barbara Attenborough Estates Ltd. [1997] AC 70 which would support the proposition that St Paul’s rights vis-à-vis Ballast are unaffected by the disclaimer, and survive not only the disclaimer but the dissolution of Ballast. St. Paul could not pursue the Claim in the normal way on the basis of subrogation once Ballast was dissolved (Smith (MH) (Plant Hire) Ltd. v Mainwaring [1986] BCLC 342) and it is not in the position of an assignee.

I will therefore dismiss the application.