Glasgow (The Bankruptcy Trustee of Harlequin Property Svg Ltd) v ELS Law Ltd & Ors

Factual and Procedural Background

This judgment concerns an application for directions by the Applicant, the bankruptcy trustee of Company A pursuant to section 168(3) of the Insolvency Act 1986 and article 21(1)(g) of Schedule 1 to the Cross-Border Insolvency Regulations 2006 ("the CBIR"). The application was issued to determine the rights of various respondents to a sum of approximately £7.9 million ("the Fund"), held by the Court Funds Office, representing the net proceeds of a successful claim by Company A against the ninth Respondent ("Company B") following a trial before Judge [Last Name] in the Technology and Construction Court.

Following settlements involving the Applicant and the first to fourth Respondents ("the Legal Team") and between the Legal Team and Company B, the remaining issues concern the Applicant and the tenth, eleventh, and twelfth Respondents ("the Insurers"). Company A's claims against Company B were pursued with the benefit of insurance arrangements provided by the Insurers, including legal expenses policies and a financial guarantee policy. The Insurers claim payment of premiums totalling approximately £3,020,600.

The Insurers assert a proprietary claim over the Fund by way of a lien analogous to the solicitor's lien over judgment proceeds, alternatively relying on the principle in Ex parte James; In re Condon (1874) LR 9 Ch. App 609. The Applicant contends that the Insurers' claims rank only as unsecured claims in the bankruptcy of Company A in St. Vincent and the Grenadines.

Company A was incorporated under the St. Vincent and the Grenadines Companies Act 1994. Its main asset was a property at Buccament Bay funded by deposits from individual investors. Although over 1,900 deposits were taken, only approximately 116 units were fully completed. Deposits were not segregated and were not used exclusively for construction.

In 2014, Company A commenced proceedings against Company B for breach of contract and professional negligence. On 12 December 2016, Judge [Last Name] found in favour of Company A, awarding damages of US$11,630,970.50 plus interest and costs. Due to concerns about Company A's business methods, the judgment sum was ordered to be paid into court rather than directly to Company A.

Subsequent hearings converted the judgment sum into sterling and ordered Company B to pay Company A's costs. On 13 January 2017, sums totalling £10,540,866.84 were paid into court by Company B.

On 3 October 2016, Company A commenced restructuring proceedings under the Bankruptcy and Insolvency Act of St. Vincent and the Grenadines, appointing the Applicant as Proposal Trustee. The Applicant was later appointed interim receiver of Company A's property. On 19 January 2017, this court recognised these proceedings as foreign main proceedings under the CBIR. Following dismissal of Company A's extension applications, from 3 March 2017, the Applicant assumed the functions of bankruptcy trustee. Company A is heavily insolvent with unsecured claims estimated at around £200 million, the largest creditor being a UK compensation scheme owed approximately £29 million.

The application was issued on 16 March 2017 initially involving the first to eighth Respondents. Issues with the Legal Team and others were settled, narrowing the scope. The Insurers were joined later after the Applicant decided to contest their proprietary claims.

The Insurers claim premium payments due and assert a lien over the Fund or alternatively seek an order under the principle in Ex parte James; In re Condon. They previously sought to rely on another case but did not pursue it.

Company A obtained insurance policies with the Insurers and funding agreements with two funders ("the Funders"). The rights of all parties in respect of recoveries are regulated by a Priorities Agreement dated 31 May 2016, governed by English law, setting out the priority order for payment from recoveries.

The Priorities Agreement provides a tiered priority for distribution of proceeds, with different treatment depending on whether the proceeds arise from judgment or settlement. Clause 4 excludes insurance premiums from the proceeds for distribution following judgment, treating them independently. The Insurers assert this clause was included by mistake, based on outdated assumptions about premium recovery.

The Insurers initially argued for entitlement to payment of premiums out of the Fund but later accepted that the Priorities Agreement does not confer them an enforceable right to priority, reserving their rights to seek rectification or estoppel. For the present application, it is agreed that the Insurers do not have priority rights to the Fund for premiums.

Legal Issues Presented

1. Whether the Insurers are entitled to a proprietary lien over the Fund securing payment of premiums due to them.
2. Whether the principle in Ex parte James; In re Condon applies to grant the Insurers priority or payment out of the Fund.
3. The effect and interpretation of the Priorities Agreement on the proprietary rights of the Insurers.
4. Whether the court should extend the common law solicitor's lien to persons in the position of the Insurers.

Arguments of the Parties

Insurers' Arguments

• The Insurers claim a proprietary lien over the Fund analogous to the solicitor's lien over judgment proceeds.
• They rely alternatively on the principle in Ex parte James; In re Condon to require payment of premiums from the Fund.
• They contend that, but for their insurance, Company A could not have pursued its claim against Company B and obtained judgment.
• They assert that the Priorities Agreement was drafted based on a mistaken assumption that premiums would be recoverable directly from Company B, excluding premiums from the Fund distribution.
• They do not claim the Priorities Agreement confers enforceable priority rights but reserve rights to seek rectification or estoppel.

Applicant's Arguments

• The Applicant contends that the Insurers' claims are unsecured and rank accordingly in the bankruptcy of Company A.
• The Applicant submits that there is no general right to a lien merely because a party has expended money or work benefiting another's property.
• The Applicant argues that the solicitor's lien is a unique exception and should not be extended to the Insurers.
• The Applicant relies on insolvency law principles that prohibit elevating unsecured claims to proprietary status.
• The Applicant submits that the issue of extending liens to parties like Insurers is a matter for the legislature, not the courts.
• The Applicant argues that the Priorities Agreement excludes the Insurers' premium claims from priority out of judgment proceeds.
• The Applicant contends that the principle in Ex parte James does not apply because the Applicant is not an officer of the court and the conditions for its application are not met.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Ex parte James; In re Condon (1874) LR 9 Ch. App 609	Principle allowing court discretion to prevent trustees in bankruptcy from enforcing legal rights when contrary to natural justice.	The court held the principle did not apply as the Applicant was not an officer of the court and the conditions for its application were not met.
Re Wright's Trust [1901] 1 Ch 317	Recognition of a solicitor's lien over judgment proceeds recovered for a client.	The court acknowledged the solicitor's lien but declined to extend analogous lien rights to the Insurers.
Re Gozzett; Ex parte Messenger & Co. Ltd [1936] 1 All E.R. 79	Unsecured creditors who enhance estate value do not gain proprietary claims or priority over other creditors.	The court applied this principle to deny the Insurers a proprietary lien, treating them as unsecured creditors.
Falke v Scottish Imperial Insurance Company (1996) 34 Ch. D 234	Work or money expended to benefit property does not create a lien absent express or implied agreement.	Supported the court's rejection of the Insurers' lien claim absent contractual or statutory basis.
Angove's Pty Ltd v Bailey [2016] UKSC 47	Statutory insolvency regime mandates pro rata distribution of insolvent estates, limiting creation of proprietary claims.	The court emphasized that creating a lien for the Insurers would conflict with statutory insolvency distribution principles.
Roberts Petroleum v Bernard Kenny Ltd [1983] 2 A.C. 192	Court's discretion to ensure assets fall within statutory insolvency scheme.	Supported maintaining the statutory insolvency scheme over claims of proprietary liens.
Re Polly Peck International Plc (No.4) [1998] 2 BCLC 185	Remedial constructive trusts are generally excluded under insolvency statutory schemes.	Used to reject attempts to create priority not accorded by insolvency law.
Halvanon Insurance Co Ltd v Central Reinsurance Corpn. [1988] 1 W.L.R. 1122	Nature of solicitor's lien as court's protective charge over judgment proceeds.	Clarified the unique nature of solicitor's lien not applicable to Insurers.
Simpson v Rowe [2011] VSC 149	Recognition of barristers' lien over recovered monies in litigation in Australia.	The court noted this but found it of limited assistance in extending liens to Insurers in English law.
Paul v Speirway Ltd [1976] 1 Ch 220	Court will not elevate unsecured contractual rights to secured status by lien.	Applied to reject Insurers' attempt to claim lien contrary to the Priorities Agreement.
In Re Clarke (a bankrupt) [1975] 1 W.L.R. 559	Conditions for application of Ex parte James principle and limits on conferring preference on unsecured creditors.	Used to conclude the principle does not assist the Insurers given their unsecured position.
IPCOM GmbH & Co KG v HTC Europe Co Ltd [2013] EWHC 2880 (Ch)	Foreign representatives are not officers of the English court.	Supported the finding that the Applicant is not an officer of the court for application of Ex parte James.
R (Prudential plc) v Special Commissioners of Income Tax [2013] 2 AC 185	Courts should be cautious in extending common law principles, leaving policy matters to Parliament.	Supported the court's conclusion that extension of lien rights to Insurers is a matter for the legislature.

Court's Reasoning and Analysis

The court began by considering the general principle that no lien arises simply because a party expended work or money benefiting another's property absent express or implied agreement. This principle, supported by precedent, applies equally in insolvency, where unsecured creditors do not gain proprietary claims merely by enhancing estate value.

The court acknowledged the unique nature of the solicitor's lien, which is recognized at common law, equity, and statute, allowing solicitors to secure their fees from judgment proceeds. However, this lien is a court-protected charge tied to the solicitor's role and historic practice, not extending to other parties.

The Insurers' claim to a lien was analogized to the solicitor's lien but rejected due to fundamental differences: the Insurers have no express or implied contractual lien, and extending such a lien would conflict with the statutory insolvency regime governing pro rata distribution among unsecured creditors.

The Priorities Agreement expressly excludes premiums due to the Insurers from the Fund distribution following judgment, reflecting a contractual agreement that the Insurers' claims are unsecured in this context. The Insurers accepted this interpretation for the purposes of the application.

Regarding the principle in Ex parte James, the court found it inapplicable because the Applicant is not an officer of the English court, a prerequisite for the principle's application. Even if applicable, the principle would not assist the Insurers since they have an ordinary unsecured claim and no unfairness arises from their position.

The court further emphasized that extending lien rights to the Insurers raises significant policy issues better addressed by the legislature. This approach is consistent with the Supreme Court's caution in Prudential plc regarding judicial extension of common law principles with broad implications.

Consequently, the court held that the Insurers are not entitled to a lien over the Fund securing premiums and must prove their claims as unsecured creditors in the bankruptcy of Company A.

Holding and Implications

The court's final decision is that the Insurers' claims to premiums do not give rise to a proprietary lien over the Fund. The Insurers must rank as unsecured creditors in the bankruptcy of Company A.

The Insurers' contention that they are entitled to a lien over the Fund fails.

The decision enforces the statutory insolvency regime's principle of pro rata distribution among unsecured creditors and declines to extend the solicitor's lien by analogy to third-party insurers. The court identified no pressing need to alter the law and emphasized that any such changes are matters for Parliament.

No new precedent was set beyond affirming existing principles and the inapplicability of Ex parte James to the facts and parties involved.