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Restoring companies to the register: article exploring issues arising in mesothelioma litigation and the conflict between the Compensation Act 2006 and 2010.

Legal Update by Michael Ditchfield & Michael Rawlinson QC of Kings Chambers, Manchester.

This article intends to investigate probably well-rehearsed principles implied in bringing actions for personal injury against long-since defunct and even dissolved companies. 

Two relatively interesting if novel points regarding disease claims are discussed in the context of the TPRAI Act 1930 and 2010. 

RESTORING DEFENDANTS 

It is clear and well-understood that the legal identity of a company ends with its dissolution.At the end of the liquidation process a company will be dissolved.  A company will be removed from the register of companies if, as result of failure to file documents at Companies House, it is no longer deemed to be in operation. 

Both outcomes are the same in that the company no longer exists as a legal entity. 

The issue for Claimants within a personal injury framework is what to do when faced with such a Defendant. 

Recently courts have shown an increasing an unwillingness by an incumbent insurer to regard a waiver of the need to restore as a valid activity.  [See however below in the discussion regarding the TP(RAI)Act 2010] 

Prior to 1st October 2009 

If a person wished to sue such a ‘defunct’ company, an application for restoration of the company to the register for that purpose was mandated[1]

Prior to 1 October 2009 there were two distinct statutory routes by which restoration could be secured, under s.651 and 653 of the Companies Act 1985. 

Subsequently 

From 1 October 2009 matters changed under the Companies Act 2006. The process concerning LLPs applies equally to that of a Company by way of The Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009. 

Effect of Restoration 

The effect of an order under s1029 of the 2006 Act is to validate retrospectively any proceedings issued and served whilst the company was dissolved.  

See S1032(1), 

Joddrell v Peaktone Ltd [2012] EWCA Civ 1035

The case concerned a claim for noise induced hearing loss. Proceedings were issued against the Defendant and served at last known address. It then became apparent that the company had been dissolved. 

The Claimant made an application to restore under the 2006 Act which was granted.

The Defendant then sought to strike out the claim, maintaining an abuse of process in that the proceedings had been brought against a dissolved company. Its arguments were successful in the lower court. 

On appeal, the lower court’s decision was overturned and which the Court of Appeal also later sanctioned. 

According to s1032(1), the effect of the restoration under s1029 is to retrospectively validate an action commenced during its dissolution. 

Two Methods of Restoring & Limitation 

Section 1028 outlines, in part, 

 “The general effect of administrative restoration to the register is that the company is deemed to have continued in existence as if it had not been dissolved or struck off the register.” 

Section 1024 provides an administrative means of effecting restoration. The application has certain requirements have requirements, including: 

An application under this section may only be made by a former director or former member of the company;

An application under this section may not be made after the end of the period of 6 years from the date of the dissolution of the company; 

Compare Section 1029, which is of relevance in a PI claim

This application is procedurally different; 

An application may be made to the court to restore to the register a company.  –

(2) An application under this section may be made by… any person with a potential legal claim against the company or by any other person appearing to the court to have an interest in the matter.

Section 1030 deals with when an application to the Court may be made:

An application to the court for restoration of a company to the register may be made at any time for the purpose of bringing proceedings against the company for damages for personal injury;

No order shall be made on such an application if it appears to the court that the proceedings would fail by virtue of any enactment as to the time within which proceedings must be brought.

In making that decision the court must have regard to its power under section 1032(3) (power to give consequential directions etc) to direct that the period between the dissolution (or striking off) of the company and the making of the order is not to count for the purposes of any such enactment. 

In a claim for personal injury the 6-year time limit does not apply. However how would the Court proceed if there were a plain issue as to limitation’? 

Arguably the principles set out in Smith v White Knight [2002] 1 WLR 616 still apply, notwithstanding this case was brought whilst the Companies Act 1985 was in force. 

 Smith - Per curiam.  Where a restoration order is sought…by a prospective Claimant in a personal injuries action, a section 651 direction should not normally be made unless

(a) notice of the application has first been given to all those parties who may be expected to oppose the making of such a direction, including the company's insurers, and

(b) the court is satisfied (i) that it has before it all the evidence which the parties would wish to adduce on an application by the prospective Claimant  under section 33 and (ii) that an application under section 33 would be bound to succeed. 

As such, the Defendant should look to ensure that the Claimant has/will put evidence before the Court concerning any potential limitation Defence/issue and especially that if (as is most often the case with industrial disease cases) primary limitation has passed/accrued, that the Claimant has, proven on balance, the Court at any trial would look to grant discretion pursuant to s33.

Once a Company or LLP has been restored to the Register, limitation will run from dissolution to restoration.  

Recent Cases: 

Instone –v- Prosecco (Leeds) Limited 2016 EW Misc B13 (CC)_ HHJ Behrens 

An application to extend the time for service of a claim form was granted in a case where the company had not been restored to the register. The discussion in the case focused on the principles to be applied where the Claimant sought more time to serve a valid claim form.

However, the Judge did review the law relating to the effect of restoration, concluding that the company was deemed to have continued in existence as if it had not been dissolved. [see paras 30-39]. He noted that one of the directions the applicant may seek would be that time did not run whilst the company was dissolved.

The four-month time limit applicable to the validity of a claim form may be deemed to run from the date of the retrospective validation. [see 39] 

Pickering –v- Davy [2017] EWCA Civ 30 

This case gave guidance on the directions which a court might give on application to restore. These directions may be relevant to limitation and suggest a Defendant may wish to be heard regarding the terms of the restoration in a given case.

The test was set out at 40 

In the context of an application for a limitation direction, the issue is the requisite degree of likelihood that a claimant would in fact have issued proceedings if the company had not been struck off the register. If it can be seen that the claimant would not have done so, then a limitation direction is not needed to place him in the same position as if the company had not been struck off. Quite the reverse: a limitation direction would place him in a position that he would not otherwise have been in and would confer an unwarranted benefit on him. 

THIRD PARTY RIGHTS AGAINST INSURERS

The 1930 Act & its Limitations 

The 1930 Act operated by allowing a “statutory transfer” of some of the insured’s rights under an insurance policy to a third party.  That Act allowed a statutory transfer if the insured became insolvent. 

In essence it allowed a claimant, claiming against the insured, to bypass insolvency procedures and proceed against the insurance company directly. At common law no right to rely on a contract, not concerning the third party, existed. There were a number of real and significant problems:- 

A third party could not issue proceedings against the insurer without first establishing the existence and amount of the insured’s liability. This required the issue of a number of separate sets of proceedings and which would include pursuing the ‘employer’ to judgment. 

If the insured was a dissolved company the third party was required to take steps to restore it to the register in order to be able to bring proceedings. 

There was no effective right for a third party to obtain information about the insurance policy. The courts held that a right to information did not exist until after liability is established. Often this would not be until some time after the insured’s insolvency.   Until then the third party would have to conduct the litigation whilst not knowing whether any rights had been transferred under the 1930 Act and whether they were of any value.  Consequently, time and money were often wasted pursuing a worthless claim or a worthwhile claim that had to be abandoned because of the belief that there were no funds to pay a judgment. 

The third party was only able to exercise the right to obtain information against a limited number of people. These may not include the person who, in fact, has the information, eg. an insurance broker. 

It was not clear what information the third party was entitled to receive and the information provided under the 1930 Act could omit critical details. 

It was common place under the 1930 Act for insurers to agree to an action without there being a need to restore. 

There is a view that this practice will still operate in the context of proceedings under this regime. 

The 2010 Act 

What Does it Do? 

The Act allows a claimant to bring an action against an insurer in circumstances where the original (insured) defendant has become insolvent. The claimant can bring an action against the insurer directly and stands, in effect, in the shoes of the insured. 

An important development is that the claimant need not bring an action against the insured beforehand , allowing it first to go unsatisfied, but can bring an action directly against the insurer. 

 One action can be brought to (i) establish the original defendant’s liability to the claimant; (ii) establish the insurer’s liability to pay under the policy. 

In Force 

On the 1st August 2016.

Transitional Provisions

The following table will assist in determining which Act applies to a given claim:

1.

Did the insolvency process commence on or after 1 August 2016?

Yes

2010 Act applies

No

Go to question 2

2.

Was liability incurred on or after 1 August 2016?

Yes

2010 Act applies

No

1930 Act applies

 Definitions 

 “Insured” 

References to an insured are references to a person who incurs or who is subject to a liability to a third party against which that person is insured under a contract of insurance. 

“Relevant person” 

 A relevant person relates to the person who is insured.   This is the person against whom the third party wishes to bring an action but cannot do so because there is an insolvency, or similar, process in place which prevents an action, in practical or legal terms. 

“Third party” 

 This is defined in section 1 (2) as : the person to whom the rights of the relevant person are transferred to or vest in as a result of an insured becoming a relevant person.  In other words, the person who would have an action against the insured for the liability against which that person is insured if the insured were not insolvent or ceased to exist. 

Transferred rights” 

 These are rights under a contract of insurance which are transferred under s.1 of the Act. 

A relevant person is widely defined. It covers insolvency situations and situations where a company has ceased to exist because it has been struck off the register. 

A third party is the party who is the person having an action against the relevant person covered by the liability against which the relevant person is insured. 

Aims 

The 2010 Act is intended to make it easier for third party claimants to bring direct actions against (re)insurers where an insured has become insolvent. The key changes coming in are as follows: 

There will no longer be any need for the third party to "establish" the insured's liability to it first (by judgment, arbitration award or agreement). The 2010 Act will allow a third party to litigate the substantive cause of action alongside an action for an order that the insurer pay any damages awarded. 

The definition of an insolvent company has been updated;

The 2010 Act allows a third party who believes he has a right of action under the 2010 Act to obtain information about the rights transferred both before and after the issue of proceedings. Information can then be obtained on:

the identity of the insurer;

the terms of the insurance;

whether there are (or have been) proceedings issued; and

whether there is an aggregate limit of indemnity (if so, how much)and

whether there are any fixed charges which would apply to any sums paid 

The 2010 Act retains the general approach of the 1930 Act that the rights transferred to the third party will be subject to the defences which the insurer could use against the insured (eg breach of a warranty or condition precedent). However, it introduces three exceptions which are designed to defeat "technical" defences: 

Anticipated benefits of the 2010 Act 

The 2010 Act is generally expected to be procedurally better for third parties and insurers alike. As it will generally be the insurer that defends the claim against the insured in any event, the 2010 Act is considered to reflect and recognise the reality of the situation. Further potential consequences are: 

(i)                      an increase in the number of claims that are brought by third parties against insurers, as the process for obtaining payment from insurers has been made simpler, quicker and cheaper;

(ii)                     an opportunity for insurers to scrutinise the initial claim against the insured rather than simply being presented with a judgment which must be paid. Insurers will now be made a party to the proceedings so will have greater control and can ensure a proper defence is invoked. Even if the policy defence fails, insurers will be able to contest liability and quantum of the original claim under the policy;

(iii)                   an increase in requests for information from third parties who reasonably believe that an insured has incurred a liability to them, and the associated costs and administrative burden of dealing with such requests, particularly since the 28 day time limit for compliance is relatively short. Records will have to be carefully maintained;

(iv)                   a decrease in speculative claims on the basis that the disclosure provisions under the 2010 Act attempt to provide third parties with access to information in respect of cover at an early stage;

(v)                     a reduction in unnecessary court proceedings as the 2010 Act envisages a single set of proceedings to resolve all issues including the insured's liability to a third party and the insurer's liability in relation to the third party's claim; and 

(vi)                   a reduction in legal costs for third parties and insolvent companies as the procedure has been streamlined. It is unclear whether insurers will enjoy the same benefit. 

Retrospective Effect of the 2010 Act?

Neither uncommonly nor infrequently, particularly in the context of legacy disease claims, the question arises as to whether action can be brought under the principles of the 2010 Act if the previous 1930 regime prevails. 

In Redman (as Administratrix) v Zenith[2], the Court considered whether the 2010 Act applied retrospectively to claims where otherwise the remedy would have been under the less attractive terms and requirements of the 1930 Act. 

The transitional provisions set out that where, before the August 2016, the following two conditions apply, the 1930 Act applies: 

'The relevant person has incurred a liability against which that person is insured under a contract; and 

The person subject to such a liability has become a ‘relevant person’.  

The Defendants’ insurers’ succeeded in establishing that the 1930 Act applied. The Court found that, before the 2010 Act had come into force, the Company was already a ‘relevant person’ within the meaning of that Act. Its liability inter se the Claimant was already incurred. 

The Company was wound up voluntarily in 2008 before finally being dissolved on the 30 June 2016. The liability arose when the claimant sustained an actionable injury – this was before the date the 2010 Act came into force and not, as the claimant sought to argue, when the claim was compromised by agreement or judgment. 

The judgment also confirms that only the 1930 Act or the 2010 Act can apply at any one time. Moreover, the 2010 Act does not apply retrospectively. Mr. Justice Turner made clear that, if retrospective application had been Parliament’s intention then it would have been a straightforward matter to draft the 2010 Act differently. It had not. 

The judgment clarifies that, in order to rely upon the 2010 Act, either the Company must have become a relevant person after 1 August 2016 or the liability (meaning the date of actionable injury) must have been after 1 August 2016. 

The 1930 & 2010 Acts in the Context of Disease Claims 

Application of the 1930 and/or 2010 Acts may well be problematic in occupational disease claims where the actionable injury date is not clear, or could be argued to have crystallised at different key points be it at time of exposure, discovery or even symptomatic response. 

 In long tail claims, due to latency, a claimant’s cause of action is complete many years after the negligent exposure and only once damage or harm has occurred. Practitioners will need to consider whether the harm was sustained when the illness first provided symptoms or was at some other time. 

Mesothelioma and mesothelioma claims provide a good illustration of the issues and problems which may face practitioners. 

In the Trigger Litigation [BAI (Run Off) Limited v Durham the wording of specimen insurance policies was considered in order to determine which if any of the potential insurers covered the liability for development of disease. 

The issue before the Supreme Court was whether those policies responded to mesothelioma which developed as a disease during the periods of cover or which manifested itself later. 

The policy wordings differed. The main issue in dispute concerned construction of the relevant provisions and whether policies referring to injury “sustained” and/or disease “contracted” meant the insurer at the time of exposure or the insurer at the time of manifestation (i.e. when the tumour developed) was liable to indemnify the employer. The Defendants argued that liability fell to the insurer at the time of manifestation, whilst the Claimants argued that liability fell to the insurer at the time of exposure. 

Whilst the High Court originally held that all the policy wordings required insurers to respond on an exposure basis. On appeal, the Court of Appeal concluded that policies containing the words “contracted” would be determined on an exposure basis, as distinct from other policies (particularly those containing the words “sustained”) which should respond on a manifestation basis. The leading judgment of Rix LJ in the Court of Appeal reflects some concern that the result was at odds with the commercial purpose of employers’ liability insurance. However, the Court of Appeal was bound by the decision in Bolton MBC v Municipal Mutual Insurance Ltd [2006] EWCA Civ 50, a public liability mesothelioma case, which held that insurance cover is triggered when the injury “occurs”. 

Both the Claimants and the Defendants appealed to the Supreme Court. The justices decided that a wider approach to interpretation was appropriate when considering the policies providing for injury “sustained”. 

Lord Mance’s view was that: “it is necessary to avoid over-concentration on the meaning of single words or phrases viewed in isolation, and to look at the insurance contracts more broadly”. 

Setting out that words to be construed  “must be set in the landscape of the instrument as a whole” and be verified in the context of the factual and commercial background. 

Thus, in his view, whilst “sustained” may initially appear to refer to manifestation, the only approach consistent with the nature and underlying purpose of the insurance was one which looks to the initiation or causation of the accident or disease which injured the employee. The Supreme Court held that the disease may properly be said to have been “sustained” by an employee in the period when it was caused or initiated even though it only manifested itself later. 

The Supreme Court inevitably had to consider the issue of causation as no cause of action arises from exposure alone, and decided to relax the ordinary rules of causation, as applied previously in Fairchild v Glenhaven Funeral Services Ltd and Barker v Corus UK Ltd (as modified by s3 of the Compensation Act 2006). The Supreme Court held that there was sufficient causal link between the exposure and the subsequent manifestation to trigger the insurer’s obligation to indemnify the employer.  It was also made clear that manifestation must subsequently occur for damage and a cause of action to arise. 

It is uncertain exactly when a court, not so construing the terms of an insurance contract,  would consider the cause of action is first complete. This issue is highly relevant to whether the benefits under the 2010 Act accrue. 

In Bolton MBC v Municipal Mutual [2006] EWCA Civ 50, the date of harm was held to be ten years before symptoms but not at the point of exposure . The Court in Redman was not asked to determine the five or ten year issue. 

In practice, this means that the 2010 Act is unlikely to have any applicability to mesothelioma claims until symptoms appear in 2021 or 2026 (assuming the companies being pursued were dissolved before 2016). 

For asbestos related lung cancer if the ‘point of no return’ is the date when the cause of action is complete then that is a date yet to be determined but it probably will not be the five or ten year period applicable to mesothelioma. For other asbestos related illnesses, it will also be a matter for argument 

The writer understands that the issue concerning the trigger date by which a cause of action is defined or complete is again likely to re-emerge in the near future. 

A NOVEL PROBLEM IN THE CONTEXT OF MESOTHELIOMA LITIGATION 

The 2010 Act may give rise to novel unintended difficulties in mesothelioma claims where an EL insurer seeks a contribution from an unpursued former employer. 

The liability of the insurer to meet the full value of a claim remains: however, it would appear that such an EL insurer could NOT subsequently seek contribution from any other exposer. 

The Genesis of the Problem 

After the House of Lords decision in Barker v Corus the Court struck an uneasy accord with the reasoning in Fairchild v Glenhaven, acknowledging that compensation was payable on the basis of a “material increase in the risk” of injury. This was somehow equated with the principle that damage is the gateway to compensation and not risk. 

The decision led the way for tortfeasors to contend successfully that the extent of their particular increase measured the extent  of their liability measured in percentage terms. 

That of course led to an injustice for claimants, left without the ability to recover money from tortfeasors without insurance and/or defunct. Section 3 of the Compensation Act 2006 stepped into the breach. The relevant compensator was liable for 100% of the loss [s3(2)], but the common law right and the right under the Civil Liability (Contribution) Act 1978, to seek a contribution from other tortfeasors was unaffected and preserved [ss3(3) & 3(4)] 

What the 1930 Act Allowed in the Above Context 

As set out above, if a victim of exposure to asbestos could establish liability against its defunct former employer [Post Office v Norwich Union Fire Insurance Society [1967] 2 QB 363] then, provided that tortfeasor was in existence, damages could be recovered. [Bradley –v- Eagle Star Ins Co Ltd [1989] AC 957. Where it was not, then proceedings were a nullity. [Re: Workvale (No 2) [1992] 1 WLR 416]. 

This was bound to affect persons ‘injured’ many years before the relevant injury or disease emerged where their employers had long since disappeared and led to the provisions in the various Companies Acts discussed above allowing restoration to the register. Waiver of that requirement was common & the insurer would conduct the defence. 

The effect of the waiver however was that no action could be taken by the EL insurer already in the frame, for contribution against other exposers. In practice insurers did not take this point against one another. [but it would be a valid point M.H. Smith (Plant Hire) Ltd –v- D.L. Mainwaring [1986] 2 Lloyd’s Rep 244

If the point was taken inter se later insurers and the original, then the original insurer could try to restore the company itself or stop offering waivers. [a 20 year time limit then applied] 

Might things be Different Under the 2010 Act 

There is now no need to first obtain judgment against the tort feasor / employer [restored or unrestored as was previously demanded by the 1930 Act]. An action can be brought directly to the insurer’s door. 

If that is the case, then is there a need at all to restore the defunct employer/company? It is suggested that this is not necessary and is not mandated by the Act.  This must be principally as the  substantive merits may be litigated alongside the action requiring the insurer to pay damages. Equally it could be contended that the insurer therefore cannot demand restoration of the company. 

Subsequent ‘contribution’ proceedings would be against the background that there had been no restoration of the defunct company. Why would an insurer in run-off, a trading company or the self-insured overlook the nicety of the rule in M.H. Smith ? [the company should have existed at the time of the compromise agreement] 

Estimates of the value of this ‘lost’ entitlement to recovery is put at £88,000,000 per annum. 

Suggested Strategies Available to the Insurer Pursued 

One: 

Force a restoration of the defunct company by seeking a stay of the action brought against the relevant insurer. 

The insurer would rely on Part 1 CPR and demand the court ensure all parties are on an equal footing, reminding the court of 3.1(2)(f) and the power to stay “until a specified date or event” 

S3 of the 2006 Compensation Act would be frustrated if it were disentitled to seek contribution by reason of the claimant’s election not to restore. The claimant would not lose out. The purpose of the 2010 Act would not be undermined. 

The stay could be on terms such as payment of an interim award, agreement to a short time-table and requiring the insurer to pay the costs of the restoration. 

Two

Contend that, in unintentionally exonerating a potential exposer, the latter is unjustly enriched. The consequence would be contrary to the express intentions of the 2006 Act section 3. 

The contribution is sought on the basis that the compensating insurer is in effect paying more than its fair share [because of the 2006 Act] and relieving another of its obligation to compensate. The subrogated claim is pursued on equitable grounds rather than those prohibited in consequence of M.H. Smith . 

The claim would not be made subject to the 1978 Act and the contribution required to be made towards a debt rather than to damage

Three 

If, pursuant to Art 34 ECHR, the insurer can claim the status of “victim”, [see AXA General Insurance Ltd –v- HM Advocate [2012] 1 AC 868] then Article 1 rights may be engaged. 

These guarantee peaceful enjoyment of property, deprivation of which must only be in accordance with the public interest. 

The combined effect of the right to sue an insurer direct [2010 TPRAI Act] and the restriction upon insurers in their ability to restore companies to the register create a disability. The time available to the insurer to apply to restore was reduced from 20 years to 6 by dint of s. 1030(4) Companies Act 2006. 

 

  

 

 

 

[1] Please see below on the Third Parties (Rights Against Insurers) Act 2010.

 

[2] [2017] EWHC 1919

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