UK: Restoration Of Defender Companies To The Register In Scotland

Last Updated: 8 September 2017
Article by Toni Ashby and David Tait

Most Read Contributor in UK, October 2017

The issue

Agents instructed on behalf of insurers in legacy cases regularly act on behalf of dissolved insureds / defenders.

The question that is now being raised is whether it is legally competent for a company to be represented in court where it has not been restored to the Companies Register under the terms of the Companies Act 2006 ("the 2006 Act").

The current industry practice in Scotland has been that restoration should not be insisted upon in cases where there was no prospect of recovery, mainly to save costs. However, this practice has recently been questioned by the Faculty of Advocates, following a pre-trial meeting where Counsel instructed for a defender, upon learning (at the meeting) that his principal was dissolved, advised that he was not prepared to sign the pre-trial minute on behalf of that defender, in light of restoration not having been effected. Counsel then sought advice from a Faculty Office Bearer (Roddy Dunlop, QC), who confirmed that Counsel should not agree to act for a dissolved company if it has not been restored.

Guidance was then sought from the Law Society, who were unequivocal in their view that it is a very serious issue for a firm to act for a dissolved company in litigation where the fact of the dissolution is not disclosed to the Court and nothing has been done to restore the company to active status. The reasoning behind this is that a firm cannot act for a non-existent principal and that agents would be at risk of being found to be in breach of warrant of authority and found personally liable for expenses.

Given the above, agents cannot continue to act for defenders who have not been restored to the register, without risk of sanction by the court.

Implications

The primary reason for not insisting on restoration has been on account of the additional costs involved. Commercially, it makes sense to avoid what is essentially an unnecessary additional cost in most cases, particularly in low value claims.

The additional costs to the pursuer, which are ultimately passed on to the defender, are assessed in the region of £2,000 per claim, although this could be considerably more depending on individual circumstances.

Thompsons in Scotland have advised that they are preparing to litigate around 100 cases within the next two months and that restoration may now be required on a significant proportion.

The necessity of restoration also has a bearing on life cycles, and as some of the actions mentioned above will be close to time-bar, waivers would most likely be necessary to allow time for restoration to take place.

Insurers' options:

Maintain the status quo

We cannot, without significant risk and potential sanction, retain the status quo given the position of the Faculty of Advocates and the Law Society. Most, if not all Counsel will now refuse to accept instructions on behalf of a defender that is not active. It seems likely the matter will soon be drawn to the attention of the courts, who we anticipate can do nothing other than take a strict approach.

Encourage claimant firms to raise actions against insurers directly, under the 2010 Act

The Third Parties (Rights Against Insurers) Act 2010 Act ("the 2010 Act") transfers an insured party's rights against an insurer to the third party, effectively transferring the insured's liability.

The Act provides that a third party may initiate proceedings against an insurer directly without having first established the liability of the insured, and removes the need for multiple sets of proceedings to be raised.

Under the Third Parties (Rights Against Insurers) Act 1930, if the insured had been struck off the register, a third party would have to raise proceedings to restore it in order to be able to raise proceedings against it. By removing the need for the third party to sue the insured, the 2010 Act specifically removes the need for the insured to be restored to the register.

Accordingly, if an action were to be raised against an insurer on risk for the defender, it would avoid the need for restoration and an agent's authority to act could not be questioned.

In terms of procedure, the pursuer would need to identify the insurer on risk (which they do already), and raise proceedings against them instead of the insured. If there were multiple dissolved defenders, the action would be raised against multiple insurers. If there were multiple insurers on risk for a defender, then the sued insurer would be required to co-ordinate and get all of the co-insurers on board to ensure contributions on a 'time on risk' basis.

However, this applies regardless of whether the action is raised against the insured or insurer, meaning there would be little practical difference in that respect. Nevertheless, the industry would have to ensure effective coordination and that contributions were paid promptly, given the insurers will be the named parties to the actions.

There are difficulties with this option:-

Re-insurance

One significant issue with the above strategy is that the 2010 Act (section 15) does not apply where the liability incurred (referred to in section 1(1)) is itself a liability incurred by an insurer under a contract of insurance, meaning the 2010 Act does not apply to reinsurers.

Obviously this is significant given the ongoing changes in the market. One way around this would be for the action to be raised in the original insurer's name, but only if industry agreement could be secured.

Recoveries/contributions

If recoveries are necessary, restoration of the insured to the Register is essential to allow an insurer to pursue contributions in the name of the insured. Insurers can apply for restoration of their insureds, but there are restrictions.

Section 1029(2)(e) of the Companies Act allows "any person who but for the company's dissolution would have been in a contractual relationship with it" to make an application to court for restoration to the register – which would include insurers.

Section 1030(4) limits an insurer's ability to restore the company to the register to 6 years after dissolution. In many legacy cases insurers will not satisfy this timeframe, leaving them with no standing with which to restore the company, and those insurers will be left without a means by which to seek contribution from others.

It is also worth noting that the 1930 Act continues to apply where the insolvency and the incurring of liability of the insured pre-dates the 2010 Act (1.8.2016). A liability is incurred when damage occurs and the cause of action is completed. For mesothelioma claims, where the damage occurs 5 or 10 years prior to onset of symptoms, the 2010 Act is unlikely to trigger for a few years and pursuers will therefore need to continue to restore the insured to the Register under the 1930 Act.

Could insurers instruct their own agents to restore insureds a lesser cost?

As noted above, Section 1029(2)(e) of the 2006 Act allows an application to restore a dissolved company to the register to be made by any person who, but for the company's dissolution, would have been in a contractual relationship with it.

An insurer should be able to satisfy this provision given their ongoing contractual relationship with an insured in the course of an ongoing action.

However, in such cases an application to restore can only be made within 6 years of dissolution, as provided by section 1030(4). This is too short a period. In claims for mesothelioma for example the latency period between exposure and onset of disease is usually around 30-40 years, and often longer.

In terms of the costs incurred by defender agents carrying out this process (if they are within the 6 year time period), we estimate around £1,000 in a straightforward case.

Future action

In the short term, we see no option but to insist on restoration of the insured to the Register by the pursuer prior to litigation being raised. The potential risk of sanction against defender firms and their clients is too great to ignore.

Longer term, an industry wide decision on how to deal with this issue is desirable.

This inability of insurers to restore defenders to the Companies Register six years following dissolution of the defender is significant and can only be resolved by amendment of the Companies Act 2006.

It is highly likely that the current legislative framework amounts to a breach of Article 6 of the European Convention on Human Rights. Insurers in these cases have longstanding contractual and common law rights of subrogation. Nothing in the Companies Act seeks to remove those rights. This means that section 1030 (4) amounts to a procedural bar to the exercise of a substantive right and would be incompatible with Article 6. This Article confers an absolute right which cannot be interpreted restrictively.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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