Bulletins | June 26, 2023

King v Bar Mutual Indemnity Fund

King v Bar Mutual Indemnity Fund [2023] EWHC 1408 (Ch) deals with a number of bases on which Susan King, James King and Anthony King each applied to set aside statutory demands for £219,700.00 made by the Bar Mutual Indemnity Fund. That sum was payable under an interim costs order made against the Kings by Cockerill J following a successful strike out of conspiracy proceedings. Those in turn arose out of a misrepresentation case. In addition, there were two further sets of proceedings arising from alleged professional negligence and unfair prejudice, which were still on foot at the time of the set aside applications. The applications were ultimately decided in favour of the applicants for a conventional reason, but the judgment is worth reading for the judge’s exemplary treatment of the major issues, which are examined and analysed in detail, some reading like model answers to an exam question.

The issues before Her Honour Judge Kelly (sitting as a High Court Judge) were:

(1) Whether the debt in the demands was for a liquidated sum within the meaning of s 267(2)(b) Insolvency Act 1986, the costs order providing for an interim payment which was expressed to be “subject to detailed assessment on the indemnity basis if not agreed.”

(2) Whether the Kings had a cross demand equal to or exceeding the amount of the debt (r 10.5(5)(a) Insolvency Rules 2016) (a) by reason of their professional negligence claim against members of their legal team on the basis that the BMIF was the “real defendant;” (b) against the assignor of the debt, a Mr Downes, as a result of alleged misleading submissions made by his counsel to Cockerill J in the conspiracy proceedings, or whether that allegation amounted to an attempt to inquire into the validity of Cockerill J’s judgment.

(3) Whether the debt was disputed on substantial grounds by virtue of its being subject to detailed assessment (r 10.5(5)(b) IR 2016).

(4) Whether there were other grounds on which the demand ought to be set aside (r 10.5(5)(d) IR 2016) by reference to three sub-issues: (a) that the statutory demands had been made for an improper purpose, i.e. not to recover the £219,700 but to threaten bankruptcy to force discontinuance of the professional negligence proceedings; (b) that the effect of a bankruptcy order would be to stifle the unfair prejudice proceedings and the professional negligence proceedings; and (c) that there was no useful purpose in bankrupting the Kings: they claimed they had no money or substantial assets, so bankruptcy would serve no purpose other than enabling the BMIF to avoid a liability that it was likely to have to the Kings for tens of millions of pounds.

The judge rejected the submission that the debt claimed was for an unliquidated sum. In her judgment, Cockerill J had assessed what sum should be paid on an interim basis, which meant that the interim assessment procedure had been completed. She rejected the Kings’ contention that for a debt created by a costs order to be liquidated, a detailed assessment must have taken place such that the sum was not open to later challenge. She said:

“[T]he mere fact that the £219,700 is subject to a right of assessment and may change in amount does not turn an otherwise liquidated sum into an unliquidated sum. The authorities cited above [Truex v Toll, Rocha-Afodu v Mortgage Express, Blavo v Law Society, McGuiness v Norwich & Peterborough Building Society and Axnoller Events Ltd v Brake] point towards this conclusion. This includes the authority relied upon by the Kings of Truex v Toll. Further and in any event, in my judgment the facts of that case can be distinguished. Truex concerned a debt arising out of an unassessed solicitor’s bill which needs to be determined by principles such as reasonableness and fairness. In this case, the Statutory Demand Debt was based on a court order. The court crystallised the amount payable on an interim basis at £219,700.”

She went on:

“The Kings’ argument effectively equates ‘liquidated’ with ‘final’. I do not accept that this is right as a matter of principle. The argument conflates arguments under sections 267(2)(b) IA 1986 (liquidated sum) with rule 10.5(5)(b) IR 2016 (disputed debt). The mere fact that a sum of money is subject to change does not alter its nature as a liquidated sum.

“Further and in any event, given that most costs orders will be made subject to a detailed assessment if not agreed, the Kings’ argument would essentially rule out all interim costs orders as being capable of founding a statutory demand. In my judgment, that cannot be right.”

The judge also found against the Kings on the substantial dispute ground. She relied on paragraph 11.4.4 of the Practice Direction: Insolvency Proceedings to the effect that the court would not go behind a judgment at the statutory demand stage. She held that the Kings were “in substance attacking the validity of the Statutory Demand Debt by asking this court to go behind the Costs Order.”

She also relied on the fact that the costs order was not subject to any appeal or application to set it aside. “It is therefore unrealistic,” she said, “to suggest that it is ‘disputed’”.

The judge found against the Kings on their contention that the demands should be set aside under r 10.5(5)(d). She referred to In re Majory on abuse and the more recent cases of In Re Maud and Jones v Sky Wheels Group. The mere fact that BMIF would gain a commercial advantage from pursuing bankruptcy proceedings did not mean they fell foul of the rule against abuse. It was clear from the authorities that although that might be one of BMIF’s purposes, it did not mean they were abusing the bankruptcy process if they were using it in furtherance of their stated policy to attempt to recover costs whenever possible. Nor would a bankruptcy order necessarily stifle any of the Kings’ legal actions: it was open to a trustee in bankruptcy to continue them if a bankruptcy order were made.

As to the utility of any bankruptcy, the judge accepted that, in exceptional cases, the court could exercise its discretion not to make a bankruptcy order if it was satisfied that making an order would serve no useful purpose because there would be no assets in the estate available for creditors. But, “The test is whether there is no possibility of any benefit to creditors and the burden is on the debtor to show this,” she said. Furthermore, “A debtor’s own uncorroborated evidence that they have no assets and no prospects of having any will not be sufficient: Re Field (a debtor) […]; Re Betts […].”

The judgment contains a lengthy analysis of the law on setting up a cross demand.

The Kings’ case on this point was that, although the professional negligence proceedings they had brought were against their former barristers, in reality the BMIF was the real defendant since, as insurer, it would satisfy any judgment against its insured. They valued their claim at approximately £58 million. The BMIF contested this; they also denied the existence of the requisite mutuality.

The judge found (on the evidence) that the BMIF was the true defendant. That left the question of mutuality. She embarked on an examination of the nature of a counterclaim, set-off or cross demand, concluding,

“As a matter of principle, there must be some link between the alleged counterclaim, set-off or cross demand and the statutory demand that connects the creditor and debtor. The issue the cases often have had to grapple with is the extent of this link. At the outset, it should be noted that the link required for a cross demand is less than for a counterclaim which is less in turn than for a set-off. This may be why the Kings put their case as a cross-demand.”

The judge took Popely v Popely as the starting point for her analysis. She pointed out that it was Court of Appeal authority that (1) a cross demand does not have to arise in the same set of proceedings from which the statutory demand debt arose and (2) a mutuality of the identity of parties is necessary and sufficient. She held that “The principle of mutuality (if accepted) is, in my judgment, an additional requirement to Popely’s identity of parties test: i.e. even though the parties may be identical in the subsequent claims, that may not be enough. She resolved the differing effects of the judgments in Makki v Beirut Bank and Hurst v Bennett on the basis that the latter was Court of Appeal authority, so it should be preferred over Makki. Mutuality was a requirement.

As to whether mutuality existed on the facts of this case:

Hurst v Bennett suggests that the test is whether the proceedings claimed to be capable of being a cross demand are of the same legal character as the statutory demand debt. Makki v Beirut Bank suggests that the test is whether the parties were acting in the same right and capacity. Both tests are satisfied on the facts of this case. The BMIF is acting in their capacity as insurers in both the Conspiracy and Professional Negligence proceedings. Both proceedings take issue with barristers’ conduct and both proceedings arise out of the same set of facts, i.e. the Misrepresentation Proceedings.

Insofar as Hurst v Bennett suggests that mutuality requires that the proceedings claimed to be capable of being a cross demand are able to liquidate the statutory demand debt, that cannot be right. That equates a cross demand to a set-off, whereas the cases unequivocally say that cross demands are a broader category.”

The BMIF having conceded that the Kings had a viable claim, Judge Kelly concluded in favour of the Kings on this issue, holding that the professional negligence proceedings did amount to a cross demand sufficient to set aside the statutory demand under r 10.5(5)(a).