FIGHTING
FOR JUSTICE ………………….
A SCOTTISH SUCCESS STORY
It is often the case in formal insolvency proceedings
that the insolvency practitioner “IP” wishes
to instigate legal action to recover monies, but the element
of speculation inherent in any court action tends to mean
that creditors are unwilling to fund the action, particularly
where additional monies are required, preferring to share
in whatever the insolvency can realise from immediate asset
sales and move on.
Such stance is quite understandable, as is the level of
frustration which arises when a manifestly unjust transaction
has occurred and legal action is not instigated to correct
the injustice.
Occasionally there are instances where a stance is required
and the IP is prepared to risk his own time, and money,
and create payment arrangements with his advisers because
legal action is the only method of reversing a situation
which is unfair to creditors. This was such an occasion.
Background
Mr X was a successful businessman in Aberdeen until
late 1995 when trading difficulties were encountered. Mr
X’s principal company was subject to formal insolvency
proceedings in early 1996 with substantial debts. During
this time, Mr X’s health was deteriorating rapidly
and, without a transplant, his life expectancy was thought
to be very short. In mid 1996 he was hospitalised and in
receipt of a heavy cocktail of drugs. His lifestyle had
resulted in most of his assets being sold and he was experiencing
acute personal financial problems. In July 1996 a representative
from one of his creditors, company Y, visited him in hospital
and persuaded him to assign a whole of life policy which
had a surrender value of £70 but a pay-out on death
of £185,000. The assignation was signed. In September
1996 Mr X entered surgery for a transplant and died almost
immediately following the operation.
Company Y sought approval from Mr X’s executors to
uplift the life policy proceeds. Upon further enquiry, the
executors realised that Mr X had liabilities of approximately
£500,000 with little in the way of assets other than
the life policy. Approval was not granted to company Y.
An
unfair preference: options to consider
Michael Reid of this office was consulted by a partner
of the firm dealing with Mr X’s estate and it was
concluded that the assignation of the policy was a transaction
at an undervalue which prejudiced the position of the creditor
body. It was subsequently decided that Michael Reid should
become judicial factor over the sequestrated estate of Mr
X in order to challenge the transaction although it was
known that there were no monies to fund proceedings. After
the judicial factor appointment formalities, the position
was explained to the creditors who were invited to fund
an action against company Y who, perhaps unsurprisingly,
maintained that the transaction was fair and that they should
be entitled to the whole policy proceeds. Several creditors
agreed to provide seedcorn funding on the basis that the
judicial factor and his law agent would receive no remuneration
unless the action was successful.
Proceedings were instigated in England on the basis of section
339 of the Insolvency Act 1986 (which is the equivalent
in England of the Scottish section 242), because company
Y is registered and based in England and also because the
life policy was written under English law by an insurer
based in England.
Company Y is a fairly large company and was able to engage
legal representation which resulted in numerous hearings,
the final one being in the Royal Courts of Justice, Court
of Appeal, London in April 2004.
At
an early stage, the judicial factor had agreed a conditional
fee arrangement with his law agent and counsel, his law
agent being able to secure insurance cover for legal costs
lest the legal action was found in favour of company Y.
The insurance premiums were substantial and funded by the
judicial factor and his law agent which represented a significant
financial risk but was deemed to be appropriate on the basis
of the facts of the case.
The
arguments
Despite the circumstances of the assignation narrated
above which lent powerful emotive weight to Mr X’s
position, the court accepted that the assignation had been
signed by Mr X and was valid. Thus, the focus was upon whether
or not fair value had been paid. Company Y contended that
they had paid two amounts totalling £3,000 to Mr X
in July 1996 and given the surrender value of £70,
this represented fair value. The judicial factor’s
counsel argued that Mr X’s medical condition was well
known and that if Mr X had tried to obtain life cover for
£185,000 in July 1996 and provided full disclosure
of his medical condition to an insurer, the insurer would
have concluded that there was a high mortality risk with
the consequence that the proposal would either have been
rejected or, if accepted, the premium would have been at
grossly uneconomic rates. It was further argued that, if
steps had been taken to try and sell the policy elsewhere,
a sum well in excess of £3,000 would have been obtained.
Indeed, it is known that Mr X’s bank was keen to consider
the policy as possible security and that, with the benefit
of hindsight, each of Mr X’s creditors would probably
have paid in excess of £3,000 for a policy which matured
for £185,000 two months later. Actuarial evidence
was led for the judicial factor to the effect that, having
regard to Mr X’s life expectancy following a successful
transplant, the value of the policy at the relevant time
was at least £35,000.
Company Y argued that there was no market for the policy
at the relevant time and, even if the policy had a value
which exceeded what they had paid, the court had discretion
to substitute an actuarially assessed value for the amount
actually paid and make an order for the difference against
company Y. This would have resulted in the majority of the
policy proceeds being paid to company Y.
The court was not persuaded to company Y’s view that
they had paid fair value and awarded the full value of the
life policy, together with interest and costs, in favour
of the judicial factor. The judgement was issued on 6 July
2004 and steps are now being taken to agree/settle the legal
expenses position with company Y’s legal representatives.
Conclusion
Throughout the process, the judicial factor and his
legal representatives remained positive about the outcome
and it is regrettable that the approach adopted by company
Y resulted in an eight year delay between date of death
and release of the life policy proceeds for the benefit
of Mr X’s creditors.
The good news is that justice was seen to be done and the
decision by the judicial factor and his legal team vindicated
in terms of acting on a no win/no fee basis with appropriate
insurance cover lest company Y was successful.
The case is reported in full as Reid v Ramlort and can be
read on the Smith Bernal Casetrack website which can be
accessed on www.courtservice.gov.uk/judgments/judg_home.htm
by anyone who is interested.
It
is always a pleasure to be able to report success and thanks
are due to the splendid efforts of the judicial factor’s
legal team:
Tom Rennie, Peterkins, Aberdeen
Stephen Davis, QC and Brian Watson of the Guildhall Chambers,
Bristol.
Meston
Reid & Co.
July 2004
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