Debt survives bankruptcy

Law Society of England and Wales and others v Shah and others Ch D TLR 20 December

Although a right of action against a debtor is lost once the debtor has been discharged from bankruptcy, that does not mean that the underlying cause of action was destroyed. Dixit Shah acquired a number of solicitors’ firms including those of three discharged bankrupts from which he misappropriated £12.5m. The Law Society’s compensation fund made payments totalling £12.5m to the agreed clients of the firms. Because the bankrupts had no professional indemnity insurance, cover was provided by the Law Society’s assigned risks pool, which was underwritten by St Pauls Travellers Insurance Co. Although the effect of the discharge of bankruptcy was to extinguish the Law Society’s inchoate claims, it was possible to elevate those claims to the status of ‘established’ simply by the admission of the claim in bankruptcy for the purpose of obliging the insurer to provide an indemnity against the third party’s un-liquidated and un-ascertained claim. The Court therefore allowed the Law Society the means of ascertaining that the discharged bankrupts were liable to the various clients from whom the rights of the Law Society were subrogated by the proof of debt in bankruptcy route, which then enabled the Law Society to pursue to the insurer direct.