Act: Mrs Wolffe, Advocate, instructed by Simpson & Marwick, Solicitors, Edinburgh

Alt: Mr Simpson, Advocate, instructed by Steel Eldridge Stewart, Solicitors, Cupar

CUPAR, 25 January 2008. The Sheriff Principal, having resumed consideration of the cause, varies the sheriff's interlocutor of 4 January 2007 by deleting from finding in law 3 the words "By virtue of the Third Parties (Rights against Insurers) Act 1930, the" and substituting therefor the word "The"; quoad ultra refuses the appeal and adheres to the said interlocutor; certifies the appeal as suitable for the employment of junior counsel; finds the defender and appellant liable to the pursuers and respondents in the expenses of the appeal; allows an account thereof to be given in and remits the same, when lodged, to the auditor of court to tax and report; remits to the sheriff to proceed as accords.

NOTE:

Background

[1] This is an action in which the pursuers seek damages for an alleged breach of contract by the defender in the provision of architectural services. A claim for damages was intimated to the defender in August 2000 but the present action was not raised until July 2005. On 1 May 2001 the defender granted a trust deed for behoof of his creditors. This was a protected trust deed within the meaning of schedule 5 of the Bankruptcy (Scotland) Act 1985 as amended (hereinafter referred to as "the 1985 Act").

[2] The defender raised a preliminary plea that, given the circumstances of the protected trust deed, the defender had been discharged from the pursuers' claim against him and separately that the pursuers were precluded from insisting in the action. He sought dismissal of the action.

[3] A preliminary proof was heard on these issues, although all the evidence tendered was encompassed by a joint minute of admissions. It is unnecessary to rehearse the full extent of the factual matters agreed. Suffice it to say that parties were agreed that the trust deed was a protected trust deed, which provided that the creditors acceding to it would discharge the defender of all debts due to them on the termination of the trust deed. It was also agreed that on 6 January 2005 the defender and his trustee under the trust deed were discharged as from that date. It was accepted however, firstly, that the pursuers did not accede to the trust deed and, secondly, that they did not receive either a copy of the trust deed or a copy of the notice of the execution of the trust deed which had been published in the Edinburgh Gazette, both of which were required to be sent by the trustee to "every creditor known to him" (the 1985 Act schedule 5 para 5(1)(c)).

[4] In terms of paragraph 6 of schedule 5 of the 1985 Act it is provided inter alia that a creditor, who has not been sent a copy of the notice published in the Edinburgh Gazette, "shall have no higher right to recover his debt than a creditor who has acceded to the trust deed." Before the sheriff it was accepted on behalf of the pursuers that this provision would prevent the pursuers using diligence against the defender to enforce any decree granted in this action but it was submitted that it did not preclude them seeking such a decree in the first place. While such a decree could not be enforced against the defender it could form the basis of a claim against his professional indemnity insurers in terms of the Third Parties (Rights against Insurers) Act 1930 (hereinafter referred to as "the 1930 Act") and that was the pursuers' purpose in pursuing this action. Section 1(1) of the 1930 Act provides as follows:

"Where under any contract of insurance a person (hereinafter referred to as the insured) is insured against liabilities to third parties which he may incur, then -

(a) in the event of the insured becoming bankrupt or making a composition or arrangement with his creditors;

(b) ..........

if, either before or after that event, any such liability as aforesaid is incurred by the insured, his rights against the insurer under the contract in respect of the liability shall, notwithstanding anything in any act or rule of law to the contrary, be transferred to and vest in the third party to whom the liability was so incurred."

[5] The contrary contention for the defender was that the scheme of schedule 5 of the 1985 Act was such that the pursuers were precluded from even pursuing their claim since the trust procedure had been completed and the defender discharged. This was said to follow from a proper construction of the terms of paragraph 6 of schedule 5. The 1930 Act could not come into play until such time as the debt had been constituted but, since the pursuers were now precluded from pursuing their claim, the provisions of that Act were irrelevant.

The Sheriff's Decision

[6] The sheriff adopted the pursuers' construction of paragraph 6 of schedule 5, holding that it related to questions of diligence and did not preclude the raising of the action. On the other hand he concluded that the import of the provisions of schedule 5 generally was such as to affect non-acceding creditors who had failed to put their claims into the trust proceedings and that once the defender had been discharged such discharge was equally effective in excluding the claims of the pursuers. Quite separately however he took the view that the 1930 Act gave the pursuers a free standing cause of action and that the terms of the Act were such as to amount in effect to a statutory subrogation of the pursuers to the rights of the defender against his insurer. He concluded therefore that the issues raised by the protected trust deed procedure were irrelevant. He reflected this conclusion in his third finding in law as follows:

"By virtue of the Third Parties (Rights against Insurers) Act 1930, the pursuers are not prevented from establishing the existence and measure of any liability due by the defender in respect of the subject matter at the instant action by the fact that the defender signed a protected trust deed for behoof of his creditors on 1 May 2001 and was subsequently discharged from that trust deed on 6 January 2005 ..."

Scope of the Appeal

[7] The appeal proceedings were initiated by a note of appeal on behalf of the defender in which it was contended that the sheriff had erred in law in relying upon the 1930 Act as justification for allowing the action to proceed. It was contended that, since the sheriff had found in favour of the defender on the question of the effect of the protected trust deed procedure on the pursuers' claims, the action ought to have been dismissed.

[8] During the course of the appeal hearing it became clear that the pursuers did not wholly support the sheriff's reasoning insofar as it concerned the 1930 Act. They contended however that he was wrong to have concluded that the import of the provisions of Schedule 5 of the 1985 Act were such as effectively to exclude the pursuers from pursuing their claim. While not strictly necessary, they set out their position in this regard in separate grounds of cross appeal.

Submissions for defender and appellant

[9] Mrs Wolffe for the defender submitted that the 1930 Act did not come into play until such time as a liability to make reparation to the pursuers had been established against the defender. While the liability of the defender to the pursuers arose when there was concurrence of injuria and damnum, the defender's insurer could never be liable to indemnify the defender unless and until the existence and amount of that liability had been established by judgment, arbitration or agreement. It was submitted therefore that, until that first stage had been reached, the pursuers had no cause of action against the insurers nor had any rights vested in them in terms of section 1 of the 1930 Act. Reference in this regard was made to Post Office v Norwich Union Fire Insurance Society Limited 1967 2QB 363 and Bradley v Eagle Star Limited 1989 1AC 957.

[10] It was further submitted that, even supposing liability to make reparation in a specific sum of damages had been established, the pursuers would have no better claim against the insurers than the defender himself. Any third party claim against an insurer was subject to any proper defence which the insurer could have taken against the insured. Reference in this regard was made to Scottish Widows Fund v Buist 1876 3R 1078 at 1082, Greenlees v Port of Manchester Insurance Company 1933 SC 383 at 400 and Firma C-Trade SA v Newcastle P&I Association 1991 2AC 1.

[11] In light of these authorities counsel submitted that the sheriff had erred in concluding that the question whether or not the pursuers had been discharged under the protected trust deed was irrelevant to their rights under the 1930 Act. Since the sheriff had taken the view that the pursuers were barred from pursuing their claim against the defender by the fact of the defender's discharge, it followed that there was nothing against which the defender required to be indemnified and thus nothing which the pursuers would be entitled to claim from the insurers in terms of the transfer provisions of section 1 of the 1930 Act.

Submissions for pursuers and respondents

[12] Mr Simpson for the pursuers largely accepted the submissions of his opponent regarding the various authorities referred to concerning the scope and effect of the 1930 Act. He accepted that, in a question between the parties, the defender's liability was incurred when there was a concurrence of injuria and damnum. He submitted however that from that moment the defender had a contingent right to be indemnified by his insurer if and when that liability was established and it was that right which was transferred to the pursuers in terms of section 1 of the 1930 Act. He submitted that a discharge of the defender did not preclude the pursuers from constituting their debt so as to vindicate a claim against the defender's insurers by virtue of the provisions of the 1930 Act.

[13] Counsel went on to submit however that a discussion of the 1930 Act was largely irrelevant, since the defender's discharge did not bind non-acceding creditors in the position of the pursuers. He pointed out that there was no finding in fact that the pursuers' claim had been discharged. It was not discharged under the trust deed and there was nothing in Schedule 5 of the 1985 Act which had that effect. The only possible ground upon which Schedule 5 might suggest otherwise was to be found in paragraph 10 but it was submitted that the discharge referred to in that paragraph was not binding on a non-acceding creditor in the position of the pursuers unless they had been sent a notice of discharge by the trustee. In the present case the pursuers had never received such a notice. It was submitted therefore that it was not clear upon what basis the sheriff had concluded that the discharge of the defender was effective to preclude the pursuers' claim. The sheriff's reliance on an unreported decision of Sheriff Lothian in Royal Bank of Scotland v Bird (Edinburgh 6 January 1999 - 1999 GWD 4 -175) was misconceived.

[14] So far as concerned the proper construction of paragraph 6 of Schedule 5, counsel adopted the opinion of the sheriff. He accepted that the pursuers could not do diligence against the defender but submitted that that provision did not preclude the raising of the action. He explained that his only purpose in referring to the 1930 Act had been to offer an explanation for why it was worthwhile pursuing an action which might be thought otherwise to have had no practical purpose. While he could not fully support the route by which the sheriff had arrived at his decision nevertheless he supported the result, which could be made to accord with the correct legal position simply by deleting the reference to the 1930 Act in finding in law 3.

Reply for defender and appellant

[15] In responding to these submissions counsel for the defender referred to the joint report of the Law Commission and the Scottish Law Commission (Scot Law Com No 184) on Third Parties - Rights Against Insurers (at paragraph 5.47 to 5.50) as support for the proposition that a discharge of the defender will cut off a claim even where there is an ongoing litigation. It was submitted that had the position been otherwise the cases of the Post Office and the Bradley (sup. cit.) would have been decided differently.

[16] In relation to the pursuers' submissions regarding the protected trust deed procedure, counsel emphasised that it was no part of the defender's case that the pursuers' claim had been extinguished by virtue of the defender's discharge. Rather she contended that there was a procedural bar deriving from the terms of Schedule 5 of the 1985 Act, which were intended to be a complete code for a debtor who succeeds in securing a protected trust deed. In terms of paragraph 6 of that Schedule, non-acceding creditors were to have no higher right to recover their debt than an acceding creditor. When there was a discharge the debtor was free from liability to the acceding creditors and by a series of equivalences the same result arose for non-acceding creditors. It was pointed out that it had been conceded that paragraph 6 was effective after the conclusion of the protected trust deed procedure and it was submitted that it was this provision above all which prevented the pursuers from pursuing the present action.

Discussion

[17] There is happily little dispute about the effect of the provisions of the 1930 Act and I accept the general proposition which emerges from the Post Office and Bradley cases that an insured cannot sue for an indemnity from his insurers unless and until the existence and amount of his liability to a third party has been established by action, arbitration or agreement. It is equally clear that the third party has no cause of action against the insurer until liability has been thus established. In my view however it does not follow that there are no rights of the insured to be transferred to the third party until liability has been established. It is in this one area that the parties differ in their submissions regarding the 1930 Act.

[18] The natural meaning of section 1 is that the transfer and vesting of the rights of an insured occurs on insolvency whether the establishment of the right occurs before or after that time. Both parties accept, correctly in my view, that the defender's liability to the pursuers arose when there was concurrence of injuria and damnum and in my opinion counsel for the pursuers was well founded in his submission that from that moment the defender had a right to be indemnified by his insurer contingent upon that liability being established by action, arbitration or agreement. I see no reason why such a contingent right should not vest in the pursuers in terms of the 1930 Act. The sense in that is reinforced by the fact that, once established, the insured's liability in law dates from the moment when the injury occurred and the damage was sustained (see Salmon LJ in the Post Office case at page 377 - 378).

[19] Counsel did not refer me to any authority specifically for the purpose of addressing the issue of timing, but I observe that in Bradley Lord Templeman took the view that the insured's rights against the insurer were transferred to the third party at the point of winding up even though the amount of that liability had still to be established. Lord Templeman's decision was a dissenting one but in this respect I find no clear rejection by the majority of his view and I draw support from it.

[20] It seems to me however that little if anything turns on this conclusion. The necessity of addressing the question only arises because the analysis which I have adopted was the foundation of a submission by counsel for the pursuers that the discharge of the defender would not preclude the obtaining of a decree against him as a prelude to an action by the pursuers against the insurers under the 1930 Act. However I am unable to accept that the transfer of a contingent right has that effect. There is no cause of action against the insurer unless and until the defender is found liable. The defender's liability may be elided on any number of grounds - for example by the operation of prescription - and it seems to me that a discharge of the defender in respect of the claim would be equally conclusive against such liability being established. Accordingly I agree with what was said in the joint report of the Law Commission and the Scottish Law Commission (Scot Law Com No 184) (at paragraph 5.47 to 5.50) namely that a discharge of a bankrupt insured will cut off a claim even where the third party has obtained a court judgment and a fortiori even where there is an ongoing litigation. In such circumstances the contingency under which rights were transferred to the pursuers simply would not emerge.

[21] It seems to me therefore that the sheriff was wrong to conclude that the issue between the parties could be resolved by reference only to the provisions of the 1930 Act and that the circumstances of the protected trust deed procedure were largely irrelevant. I turn therefore to look at those circumstances and to consider what are the legal effects flowing from them.

[22] Contrary to the submission which was apparently made to the sheriff, the defender now concedes that the pursuers' debt was not extinguished by virtue of the protected trust deed procedure and that the defender's discharge is not binding on them. In my view this concession was well founded. Plainly the trust deed, which makes express provision for the defender's discharge, cannot bind non-acceding creditors and in my view there is nothing in schedule 5 which provides for the debts of non-acceding creditors in the position of the pursuers to be included within the ambit of the defender's discharge. The provisions of paragraphs 10, 11 and 12 are in my view irrelevant to this question as they deal with the discharge of the trustee in respect of his intromissions and, without in any way questioning its correctness, Royal Bank of Scotland v Bird can be distinguished since the pursuers in that case were acceding creditors.

[23] At best for the defender the provisions of paragraph 6 of schedule 5 operate to put the defender in a position in which, though not formally discharged from the debts of non-acceding creditors, he is for all practical purposes free from those claims. What seems to me to be the correct analysis of the position is usefully summarised in the Stair Memorial Encyclopaedia volume on Bankruptcy (re-issue) at para.163 (pursuers' list of authorities no. 13). Having expressed the opinion that a discharge of the debtor will not bind non-acceding creditors, the author states as follows:

"However, under a protected trust deed a non-acceding or unnotified creditor has no higher right to recover his debt than an acceding creditor. This means that a non-acceding or unnotified creditor would not be able to do diligence for his debt after the winding up of the trust deed ..... The debtor would thus, in effect, be discharged." (my emphasis)

[24] As this excerpt makes clear, the debt of the non-acceding creditor is not extinguished but there is a practical difficulty in its recovery, since paragraph 6 of schedule 5 deprives the creditor of any means of enforcing its recovery from the debtor. In this latter respect I agree with the sheriff's reasons for holding that paragraph 6 is concerned with the question of diligence and does not directly preclude the raising of an action to constitute the debt in the first place.

[25] Of course it may have an indirect effect on the right of a party to raise an action since the courts are generally unwilling to allow an action to be pursued if it raises merely academic questions and has no practical purpose. The approach of the court is encapsulated in the judgment of the Lord Justice Clerk in Macnaughton v Macnaughton's Trs.1953 SC 387 at 392:

"Our courts have consistently acted on the view that it is their function in the ordinary run of contentious litigation to decide only live, practical questions, and that they have no concern with hypothetical, premature or academic questions, nor do they exist to advise litigants as to the policy which they should adopt in the ordering of their affairs. The courts are neither a debating club nor an advisory bureau."

[26] In light of the provisions of paragraph 6 of schedule 5 it might readily be argued that the present action ought to be excluded on the basis of this statement unless, as the pursuers contend, the 1930 Act provides a practical purpose in its pursuit. In my view it is in order to address that question that it remains relevant to consider the 1930 Act.

[27] Adopting that approach, it seems to me necessary to consider what the position of the pursuers would be in relation to a claim against the insurers were they to succeed in obtaining decree against the defender and I think it is this context in which the defender's argument as to the effect of paragraph 6 of schedule 5 ought properly to be seen.

[28] The common position of the parties is that, even assuming the pursuers are entitled to obtain a decree against the defender, they are not entitled to enforce payment of any sum awarded in terms of such decree against the defender personally. Since the contract between the defender and his insurers is one of indemnity, it might be argued that the defender will never incur a loss against which he requires to be indemnified. I am bound to say that I was at first attracted by a submission from counsel for the defender, which, though not exactly in these terms, was to similar effect. On further reflection however I am persuaded that that approach is unsound. My reason for thinking that derives from the very clear statement in the Post Office and Bradley cases that the third party cause of action against the insurers under the 1930 Act arises on a liability to pay being established and here I draw a distinction between a liability to pay and an ability to pay. The whole purpose of the 1930 Act was to deal with an injustice which arose precisely because the insured was not in a position to pay and when, by virtue of his bankruptcy, it was no longer possible to enforce payment (see generally Post Office at page 373 and Bradley at page 968).

[29] Of course it is clear from the authorities referred to in paragraph 10 above that the pursuers can have no better claim against the insurers than the defender himself. The case of Firma C-Trade SA v Newcastle P&I Association (sup.cit.) provides an example of circumstances in which the terms of the contract of insurance operated to exclude the insurer's liability to indemnify the insured (and thus also the third party) against a liability which had already been established. In the present case however it is not suggested that a claim by the pursuers against the insurers in reliance upon the 1930 Act could not succeed on account of any term of that contract and I therefore discount that as a ground for thinking that the present action might be deprived of any practical purpose.

[30] It follows from what I have said that in my view there is no reason why the action should be excluded on Macnaughton grounds. Notwithstanding the limitation imposed by paragraph 6 of schedule 5, there is prima facie practical purpose in pursuing the action. The claim is not one in respect of which the defender was discharged and accordingly in my opinion the sheriff was correct in allowing a proof, albeit I reach that conclusion by a different route. That difference can be reflected by my deleting the reference to the 1930 Act from the sheriff's third finding in law as suggested by counsel for the pursuers.

[31] Parties were agreed that expenses should follow success and that the appeal should be certified as suitable for the employment of junior counsel.