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England and Wales High Court (Commercial Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> The Society of Lloyd's v Elizabeth Mary Levy & Ors  EWHC 1860 (Comm) (30 July 2004)
Cite as:  EWHC 1860 (Comm),  3 CMLR 56
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QUEEN'S BENCH DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
B e f o r e :
| The Society of Lloyd's
|- and -
|Elizabeth Mary Levy
Mark Ian Levy
Jeffrey Harcourt Johnson
Susan Rachel Johnson
Prof. M Watson-Gandy (instructed by James Barnett) for the Defendants
Hearing dates: 26-27 July 2004
Crown Copyright ©
Mr Justice Morison :
(1) An application by Lloyd's, the Claimants, for summary judgment on their claims and in respect of a counterclaim brought by the Johnsons;
(2) Three applications brought by the Defendants:
(1) permission to amend to tidy up the existing pleading to remove points which cease to be arguable in the light of the decisions of this court and the Court of Appeal and to "plead or more fully explain the defendants' case … on the remaining issues [which] the defendants rely on" namely:
(a) the registration point, namely that the security on which the Claimants' debt claim is based is unregistered;
(b) in the Levys' case, that Lloyd's are unable to prove the cause of action for unpaid premium was assigned to them "given that no stamp duty has been paid";
(c) The European Directive point
(d) In the case of the Johnsons, to raise a question on quantum
(2) An application for specific disclosure and Inspection;
(3) An application that the court should refer this case to the ECJ under Article 234 because there has been an infringement of The Insurance Companies Act 1982 and EC Directive 73/239.
(1) made an application for permission to amend their claim in the Jaffray action (made on their behalf by MFB) to plead a claim in negligent misrepresentation in reliance on the Human Rights Act 1998. This application was made on 25 October 2002, and became known as the Laws application;
(2) served Defences and Part 20 Claims in their Equitas Premium proceedings (served by Grower Freeman) relying by way of counterclaim on the proposed claim of negligent misrepresentation for which permission was being sought in the Jaffray claim: the Defences and Part 20 Claims were served on 14 November 2002.
The parties' submissions
The European Directive
"374. It is clear that detailed consideration was given each year by the audit department at Lloyd's, the Audit Committee, and the Committee as to the instructions to be given to underwriters and auditors. All this was intended to procure a system that enabled proper RITCs [Reinsurances to Close] to be produced and proper certification of solvency. But was the system actually producing a result where audit reserves were being calculated in a way that involved the making of a reasonable estimate of outstanding liabilities including IBNRs [Incurred but not Reported].
375. We have felt obliged to consider the system in detail but we can answer these questions shortly because the facts simply speak for themselves. The mere fact that ultimately, when the R & R was carried out, so many syndicates were shown to be massively under-reserved demonstrates that the system simply had not been producing reasonable estimates of outstanding liabilities over the years. The liabilities which ultimately had to be paid had in fact been incurred before the period with which this litigation is concerned. With the benefit of hindsight it is clear that IBNRs were grossly underestimated throughout the relevant period. This is not an indictment of particular underwriters or particular auditors. We have not explored the way in which estimates were made by individual syndicates or individual auditors. The simple fact is that as it turned out most syndicates were under-reserved. Mr Murray in his evidence said there was no doubt he was under-reserved, and all those involved in the writing of business which included asbestos would, unless they were covered by reinsurance, have to accept the same.
376. In, short, through the relevant period the system did not involve the making of a reasonable estimate of outstanding liabilities including unknown and unnoted losses. It follows that the answer to the question … namely whether there was in existence a rigorous system of auditing which involved the making of a reasonable estimate of outstanding liabilities, including unknown and unnoted losses, is no. Moreover the answer would be no even if the word 'rigorous' were removed. The first representation which we found to exist [namely that there was in existence a rigorous system of auditing which involved the making of a reasonable estimate of outstanding liabilities including unknown and unnoted losses in the 1981 brochure] .. is untrue."
1. each Member State shall require that any undertaking set up in its territory for which an authorization is sought shall:
- in the case of the United Kingdom:'incorporated companies limited by shares or by guarantee or unlimited', 'societies registered under the Industrial and Provident Societies Acts', 'societies registered under the 'Friendly Societies Act' the association of underwriters known as Lloyd's.
Furthermore, Members States may set up, where appropriate, undertakings under any form of known public law provided that such institutions have as their object insurance operations in conditions equivalent to those undertakings under private law;(b) Limit is business activities to the business of insurance and operation directly arising therefrom to the exclusion of all other commercial business;
(c) Submit a scheme of operations in accordance with the provisions of
(d) Posses the minimum guarantee fund provided for in Article 17 (2).
Article 101. Each Member State shall require that an undertaking having its head office in the territory of another Member State and seeking an authorization to open an agency or branch shall:(a) Submit its statutes and a list of its directors and managers;
(b) Produce a certificate issued by the competent authorities of the head office country, attesting the classes of insurance which the undertaking is entitled to carry on and that it possesses the minimum guarantee fund or, if higher, the minimum solvency margin calculated in accordance with Article 16 (3), and stating the risks which it actually covers and the financial resources referred to in Article 11 (1) (e);
(c) Submit a scheme of operations in accordance with Article 11;
(d) Designate an authorized agent having his permanent residence and abode in the host country, and possessing sufficient powers to bind the undertakings in relation to third parties and to represent it in relations with the authorities and courts of the host country; if the agent has a legal personality, it must have its head office in the host county and it must in its turn designate an individual to represent it who complies with the above conditions. The designated agent shall not be refused by the Member State except on grounds relating to repute or technical qualifications such as apply to directors of undertakings whose head offices are situated in the territory of the State in question.With regard to Lloyd's, in the event of any litigation in the host country resulting from underwritten commitments, assured persons must not be more unfavourably treated than if the litigation had been brought against businesses of a more conventional type. The authorized agent must, therefore, possess sufficient powers to enable proceedings to be instituted against him and must in that capacity be able to bind the Lloyd's underwriters concerned.
Article 112. The scheme of operations shall be accompanied by the balance sheet and profit and loss account of the undertaking for each of the past three financial years. If, however, it has not yet been in business for three financial years it shall be required to furnish them only for the financial years completed.
With regard to Lloyd's, the publication of the balance sheet and the profit and loss account shall be replaced by the compulsory presentation of annual trading accounts covering the insurance operations, and accompanied by an affidavit certifying that auditors' certificates have been supplied in respect of each insurer and showing that the responsibilities incurred as a result of these operations are wholly covered by the assets. These documents must allow authorities to form a view of the state of solvency of the Association.3. The scheme of operations, together with the observations of the authorities competent to issue authorizations, shall be forwarded to the competent authorities of the head office country. The latter authorities shall communicate their Opinion to the former within three months from the receipt of the documents; if their Opinion has not been communicated upon the expiry of this time, it shall be deemed to be favourable.
The supervisory authority of the Member State in whose territory the head office of the undertaking is situated must verify the state of solvency of the undertaking with respect to its entire business. The supervisory authorities of the other Member States shall provide the former with all the information necessary to enable such verification to be effected.
1. Each Member State in whose territory business is carried on shall require the undertaking to establish sufficient technical reserves.
The amount of such reserves shall be determined according to the rules fixed by the State, or, in the absence of such rules, according to the established practices in such State.
4. The supervisory authority of the Member State in whose territory of the head office of an undertaking is situated shall verify that its balance sheet shows in respect of the technical reserves assets equivalent to the underwriting liabilities assumed in all the countries where it undertakes business.
Article 161. Each Member State shall require every undertaking whose head office is situated in its territory to establish an adequate solvency margin in respect of its entire business.
The solvency margin shall correspond to the assets of the undertaking, free of all foreseeable liabilities, less any intangible items. In particular the following shall be considered:5. In the case of Lloyd's, the calculation of the first result in respect of premiums, referred to in paragraph 3, shall be made on the basis of net premiums, which shall be multiplied by a flat-rate percentage fixed annually by the internal auditor. This flat-rate percentage must be calculated on the basis of the most recent statistical data on commission paid.
The details, together with the relevant calculations shall be sent to the authorities of the countries where Lloyd's is established.
Article 181. Member States shall not prescribe any rules as to the choice of the assets in excess of those representing the technical reserves referred to in Article 15. Article 191. Each Member State shall require every undertaking whose head office is situated in its territory to produce an annual account covering all types of operation, of its financial situation and solvency. 2. Member States shall require undertakings operating in their territory to render periodically the returns, together with statistical documents, which are necessary for the purposes of supervision. The competent supervisory authorities shall furnish each other with the documents and information necessary for exercising supervision. Article 304. An undertaking having a structure different from any of those listed in Article 8 may continue, for a period of three years from the notification of the Directive, to carry on their present business in the legal form in which they are constituted at the time of such notification. Undertakings set up in the United Kingdom 'by Royal Charter' or 'by private Act' or 'by special public Act' may continue to carry on their business in their present form for an unlimited period.
"[The] Directive .. places a duty to regulate the insurance market within its territories upon the governments of the member states. In the case of the United Kingdom, this specifically includes Lloyd's Underwriters [Article 8.1(a)]. Lloyd's is responsible for the implementation of the Directive in the UK because it is liable as an organ or agent of the State because Lloyd's acted as such in instructing auditors, alternatively, a directly effective right arises under [the] Directive …"
The injunction remedy would be the proper protection for the Defendants'rights. If I were not persuaded that the Defendants' point was inevitably good, then the matter should be referred to the European Court. It would be a waste of costs to refuse a reference at this stage but require the matter to proceed up the domestic court hierarchy. The draft questions for the reference were included in the pleadings bundle. I reproduce them here, simply as an indication of the questions which the defendants thought should be asked of the ECJ. Were I to order a reference, then it is the Court's responsibility to settle the questions:
"1. Is the delegation of the duty to regulate the Claimant's market to the Claimant itself lawful under European Community Law and in particular Directive 73/239?
2. In the light of the decision of the Court of Appeal in Jaffray, did the UK Government or its delegate Lloyd's during that period comply with the requirements of Directive 73/239?D
3. Does Lloyd's have a duty to regulate the Claimants' own reinsurance market and has it complied with that duty and the requirements of Directive 73/239?
4. If the answer to questions 1, 2 or 3 is "no" is it lawful for the Claimant to be permitted to enforce its claims against defendants?
5. If the answer to question 4 is "no", should interim relief be awarded by this court to protect the Defendant's regulatory rights under Community Law?"
1. In order to make their case, Lloyd's must prove the assignment; any reliance on the documents evidencing the assignment will be unsustainable since Lloyd's will be unable to adduce in evidence documents which should have been but were not stamped.
2. Judges must have regard to the sufficiency of the stamp duty paid on a document before them and must ensure that proper duty is paid by refusing to admit into evidence an unstamped document.
3. The failure to pay duty does not render the document invalid, section 14(2) of the Stamp Act merely renders it inadmissible.
4. The fact that this point could have been taken in other Lloyd's litigation and was not is no answer because stamp duty points arise whenever the court is looking at an unstamped document and a court will not assume that a document has been properly admitted in evidence in the court below.
5. Lloyd's assert that the original assignment has been lost. If the original assignment was not stamped then secondary evidence of it would not be admissible.
6. If the original was stamped but has been lost then the commissioners will either re-stamp a duplicate free of charge or refund the money paid on the original.
7. The burden of proving that the document was unstamped lies on the Levys; but it is not Lloyd's case that ad valorem duty on the whole value of the cause of action was ever paid, the issue is rather whether no or merely nominal duty arose on the operative assignment, and the position is not clear.
"24. On 2 October 1996 the Completion Agreement was sent to the Stamp Office for adjudication.
25. Despite extensive searches by both Lloyd's and Freshfields Bruckhaus Deringer (Solicitors for Lloyd's) we have been unable to locate either the original Deed of Assignment or the stamped original Completion Agreement. I have been informed by Freshfields Bruckhaus Deringer that they have been able to ascertain from their account records/files whether a payment of fixed duty was made at this time. Despite this we have no reason to believe that the Completion Agreement was not adjudicated and stamped at this time.
26. Further I am informed by Freshfields Bruckhaus Deringer that they have made enquiries with the Stamp Office. However the Stamp Office has informed them that they do not retain records which date back as far as the period in which the Completion Agreement would have been adjudicated and stamped.
27. For the sake of completeness, and without prejudice to Lloyd's position that the concerns which had been raised by the Names regarding the stamping of these documents were without foundation, on 17 April 2002 four executed originals of the Completion Agreement were sent by Freshfields Bruckhaus Deringer to the Stamp Office for adjudication.
28. The Completion Agreement was returned by the Stamp Office stamped "adjudged not chargeable with any Stamp Duty" . For the sake of clarity I can confirm that the Completion Agreements which were stamped by the Stamp Office at this time were original documents. I can confirm that the original stamped Completion Agreement is available for inspection at Lloyd's.
29. Notice of the Assignment was given to the Defendants by pro forma letters before action from Lloyd's Solicitors Dibb Lupton Alsop dated 24 February 1997.
"As far as the deed is concerned nobody knows whether it was stamped or not. The difficulty is that in those circumstances the law presumes that things have been carried out correctly."
The Registration point
"(1) Subject to the provisions of this Chapter, a charge created by a company registered in England & Wales and being a charge to which this section applies is, so far as any security on the company's property or undertaking is conferred by the charge, void against the liquidator [or administrator] and any creditor of the company, unless the prescribed particulars of the charge is created or evidenced, are delivered or received by the registrar of companies for registration in the manner required by this Chapter within 21 days after the date of the charge's creation."
"Charge" and "property" are widely defined in that section and it was assumed in the argument before me that they are apt to include the security granted by the Deed of Assignment and Completion Agreement.
The Quantum point
A. The European Directive point
B Stamp Duty
C The Registration Point
"Failure to register a charge on book debts renders the charge void against a liquidator or administrator and creditors, by which is meant creditors in a winding-up or administration or secured creditors as opposed to unsecured creditors where no winding-up or administration has occurred. Non-registration does not avoid the charge as against a next line purchaser of the debt, but if he acquires the legal title without notice of the unregistered charge he has priority under the normal priority rules.
The effect of non-registration is exhausted if the debts are collected before anyone has acquired a locus standi to complain of non-registration, ie before winding-up or administration or the grant of specific security."
D The Quantum point