Vesting
Cases
Raymond Saul & Co. (a firm) v Holden & Anor
[2008] EWHC 2731 (Ch) (12 November 2008)
Cite as: [2009] Ch 313, [2008] NPC 122, [2008] EWHC 2731 (Ch), [2008] WTLR 1833, [2009] 2 WLR 1257
MR. RICHARD SNOWDEN QC:
Introduction
This claim raises a point of law concerning bankruptcy and the administration of estates. The issue is whether, if a sole residuary legatee under a will becomes bankrupt but is automatically discharged from bankruptcy before the completion of the administration of the estate of the testator, the money and assets which are thereafter ascertained to form the net residuary estate are payable to him or to his trustee in bankruptcy.
The facts
The relevant facts are not in dispute and can be shortly stated. I must, however, also set out a little of the background in order to explain the positions taken by the parties at the hearing before me.
Mrs. Bertha Hemming died on 18 July 2003. Under her will, after a few minor specific bequests, she left the entire residue of her estate to her son, Mr. Bernard Hemming, who was also named as one of her executors. At the time of her death, Mrs. Hemming and her son owned a farmhouse and a cottage at Guestling, East Sussex as tenants in common in equal shares.
Mr. Hemming was adjudicated bankrupt in the Hastings County Court on 24 September 2003. The Second Defendant (“the Trustee”) was appointed trustee in bankruptcy with effect from 14 October 2003.
Mr. Hemming took a grant of probate as the sole executor of his mother’s will on 17 February 2005. Following the amendment of section 279 of the Insolvency Act 1986 by section 256 and Schedule 19 of the Enterprise Act 2002, Mr. Hemming was automatically discharged from bankruptcy on 1 April 2005.
The cottage at Guestling was sold for £125,000 in May 2005. Half of the net proceeds (representing Mr. Hemming’s personal interest in the cottage) were paid to the Trustee. The balance (representing Mrs. Hemming’s interest) was retained by the Claimants (“Raymond Saul & Co.”) who at the time were acting as solicitors for Mr. Hemming in his capacity as his mother’s executor.
On 5 July 2005 the Trustee wrote to Raymond Saul & Co. requesting that they release the further sum of £28,969.69 from the monies which they held in order to satisfy the balance then due in Mr. Hemming’sbankruptcy. On 26 July 2005 Raymond Saul & Co. replied, refusing that request.
The basis for that refusal was explored in subsequent correspondence. Raymond Saul & Co. argued that although Mr. Hemming had been the residuary legatee of his mother’s estate at the date of his bankruptcy, that status gave him no legal or equitable interest in any of the assets in her estate and would not do so until the administration of the estate had been completed. They contended that the only right which a residuary legatee has is a right to have the deceased’s estate properly administered. So, they said, the only thing that the Trustee could request was that Mrs. Hemming’s estate should be administered.
Raymond Saul & Co. also made the further point that even when Mrs. Hemming’s estate was fully administered, the Trustee would not be able to claim the assets then forming the residue. They said that this was because Mr. Hemming had been discharged from his bankruptcy, and an after-acquired property notice cannot be served in respect of any property which the bankrupt only acquires after his discharge: see section 307(2)(c) of the Insolvency Act 1986. In short, Raymond Saul & Co. contended that the proceeds of sale and the residue of Mrs. Hemming’s estate would be payable to Mr. Hemming.
The Trustee did not accept this analysis. In correspondence, her solicitors contended that Mr. Hemming had an interest in his mother’s residuary estate which had vested in the Trustee, and that the proceeds of sale of Mrs. Hemming’s half-share in the cottage belonged to the Trustee.
By a letter dated 6 September 2005 Raymond Saul & Co. indicated that if the dispute between the Trustee and Mr. Hemming could not be resolved, then as solicitors to Mrs. Hemming’s estate, they would have to commence proceedings so that the Court could determine which of the competing claims was correct. Raymond Saul & Co. suggested that in order to avoid the expense that such proceedings would involve, the Trustee should contact Mr. Hemming to resolve matters directly.
The solicitors acting for the Trustee responded on 14 September 2005, warning that if the Trustee became embroiled in proceedings over the distribution of Mrs. Hemming’s estate, she might simply choose to seek an order for possession and sale of the farmhouse at Guestling, which was Mr. Hemming’s matrimonial home. That farmhouse was said to be worth in the region of £450,000 and to be unencumbered. In these circumstances, the Trustee’s solicitors’ letter suggested that rather than there be a forced sale of the farmhouse, it would be “infinitely preferable” for Mr. Hemming simply to authorise Raymond Saul & Co. to pay the Trustee the amount needed to satisfy the bankruptcy debts and costs out of the money that they were holding. The Trustee subsequently wrote to Mr. Hemming to that effect.
Such overtures did not, however, result in resolution of the dispute. Instead, on 30 November 2005 Raymond Saul & Co. wrote again on behalf of Mrs. Hemming’s estate to the solicitors for the Trustee. They stated that they had been advised by counsel that the correct course was for them to make payment of the residue of the estate to Mr. Hemming. The letter indicated that if the Trustee did not accept that payment could be made to Mr. Hemming, then “the estate” would have no choice but to issue proceedings pursuant to CPR Part 64 for determination of the issue. The letter added that “the executor” (i.e. Mr. Hemming) would be seeking an order that the costs of such proceedings should be paid by the Trustee personally.
On 21 April 2006, Raymond Saul & Co. issued the Claim Form in this case. It seeks a determination pursuant to CPR Part 64 of the question whether they should make payment of the residue of Mrs. Hemming’s estate to Mr. Hemming as residuary beneficiary, or to the Trustee. The Defendants to the claim were Mr. Hemming and the Trustee.
Shortly thereafter, on 24 April 2006, the Trustee issued a claim in the Hastings County Court for possession and sale of Mr. Hemming’s farmhouse. In June 2006 the possession action was transferred to this Court to be heard in conjunction with the claim under CPR Part 64.
Subsequent attempts to resolve the dispute came to nothing and were overtaken by events when, on 12 April 2007, Mr. Hemming died. The First Defendant (“the Executor”) is the sole executor by appointment of Mr. Hemming’s will. In that capacity he was substituted for Mr. Hemming as a party to these proceedings. The Executor also became the executor of Mrs. Hemming’s estate by succession.
After taking up his dual role, the Executor wrote to Raymond Saul & Co. and to the Trustee in October 2007, complaining that in his view the CPR Part 64 proceedings were “completely unnecessary and pointless”. In essence, the Executor contended that someone should have advised Mr. Hemming to avoid litigation and to agree that the balance of the proceeds following the sale of the cottage should be used to discharge his bankruptcy debts and costs.
By this stage, however, the difficulty was that the fees and costs claimed by the Trustee on the one hand and by Raymond Saul & Co. on the other, meant that it might not be possible for all the liabilities in Mr. Hemming’sbankruptcy to be discharged from the monies in the hands of Raymond Saul & Co. In rough terms, the monies said by the Trustee to be required to discharge the bankruptcy debts and costs had risen to over £60,000, but the balance of the proceeds of sale of the cottage amounted only to about £50,000, of which Raymond Saul & Co. were claiming about £18,000 on account of their own fees, counsel’s fees and disbursements. This situation caused the Executor to seek to question both the Trustee and Raymond Saul & Co. as to the level and justification for their fees and costs.
At the hearing before me, the Trustee maintained her argument that she would be entitled to be paid the residue of Mrs. Hemming’s estate as and when ascertained. The Executor chose not to advance any positive case on behalf of Mr. Hemming’s estate, but instead filed a skeleton argument reiterating the view that the proceedings had been a waste of time and costs. It was Raymond Saul & Co. who advanced the argument that the residue of Mrs. Hamming’s estate should, when ascertained, be paid to the Executor on behalf of Mr. Hemming’s estate.
The relevant statutory provisions
Section 306(1) of the Insolvency Act 1986 (“section 306” and “the 1986 Act”) provides that a bankrupt’s estate vests in the trustee in bankruptcy immediately upon his appointment. Section 283(1) of the 1986 Act provides that (subject to certain provisions that are not relevant here) a bankrupt’s estate comprises,
“all property belonging to or vested in the bankrupt at the commencement of the bankruptcy”.
By virtue of section 436 of the 1986 Act (“section 436”), “property” for this purpose,
“includes money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of or incidental to, property.”
Ownership of the proceeds of sale of the cottage
Before dealing with the point raised by the Claim Form, I must first explain what was common ground. Both parties agreed that until the estate of a testator is fully administered, a residuary legatee or anyone claiming through him does not own or have any interest in any specific asset in the hands of the executor. Hence the parties were agreed that Mr. Hemming did not, at the commencement of his bankruptcy, own or have any proprietary interest in any of the specific assets in his mother’s unadministered estate.
That proposition is established by a quartet of cases of the highest authority. In Lord Sudeley v. Attorney-General [1897] AC 11 (“Lord Sudeley’s Case”), a testator’s estate at the time of his death included certain mortgages on real estate in New Zealand. He left his widow a one-quarter share of his residuary estate. His estate was still in the course of administration when his widow died. The Crown contended that the widow had a personal remedy against her husband’s executors in England, and that probate duty was accordingly payable by the widow on a one-quarter share in the value of the entire residuary estate of her late husband. The widow’s executors contended that she did not have merely a personal claim against her husband’s executors, but a one-quarter share in the New Zealand mortgages as specific property; and that since they were foreign property, their value should not have been included in any assessment for probate duty purposes.
The House of Lords unanimously held that the New Zealand mortgages were required to be included in the assessment for probate duty purposes. They held that until the assets forming the residue had been ascertained, the widow, as residuary legatee, had no right in specie to any particular assets forming part of the unadministered estate.
The point was reiterated in Dr. Barnardo’s Homes National Incorporated Association v. Commissioners for Special Purposes of the Income Tax Acts [1921] 2 AC 1 (“Dr. Barnado’s”). A testator had left his residuaryestate to a charity. His estate included some investments. During the course of the administration of the estate, the executors received income from the investments on which tax had been deducted at source. The income received was eventually handed over to the charity as part of the residue, and the charity argued that it should be entitled to a repayment of the tax deducted at source.
The House of Lords held that the charity was not entitled to repayment of the tax. Viscount Finlay stated, ([1921] 2 AC 1 at page 8),
“It appears to me that the present case is really decided by the decision of this House in Lord Sudeley’s Case. It was pointed out in that case that the legatee of a share in a residue has no interest in any of the property of the testator until the residue has been ascertained. His right is to have the estate properly administered and applied for his benefit when the administration is complete. The income from which this income tax was deducted was not the income of the charity. It was the income of the executors.”
Viscount Cave stated, ([1921] 2 AC 1 at page 10),
“When the personal estate of a testator has been fully administered by his executors and the net residue ascertained, the residuary legatee is entitled to have the residue as so ascertained, with any accrued income, transferred and paid to him: but until that time he had no property in any specific investment forming part of the estate or in the income from any such investment, and both corpus and income are the property of the executors and are applicable by them as a mixed fund for the purposes of administration.”
The same point was considered at some length by the Privy Council in Commissioner of Stamp Duties (Queensland) v. Livingston [1965] AC 694 (“Livingston”). A testator and his wife were domiciled in New South Wales. By his will, the testator left one-third of his residuary estate to his wife. At the time of his death he owned properties in New South Wales and Queensland. Whilst his estate was still in the course of administration, his widow, who had remarried, also died. The authorities in Queensland sought to levy succession duty on the executors of the widow in respect of her share of the assets of the testator in Queensland.
As a matter of construction of the Queensland statute, the Privy Council concluded that succession duty could only be levied by the authorities in Queensland if, at the date of her death, the widow had been the beneficial owner of property in Queensland: see [1965] AC 694 at page 706G. The Privy Council held that the issue was governed by the decision in Lord Sudeley’s Case and that at the date of her death, the widow had not been the beneficial owner of any specific assets forming part of her husband’s unadministered estate. Hence she had not owned any specific property in Queensland, and her estate was not liable for succession duty.
The most recent case in the quartet is Marshall v. Kerr [1995] 1 AC 148. The case concerned the application of part of the capital gains tax legislation to a settlement upon trust which had been made by the widow of a testator whose estate was, at the time, still in the course of administration. Lord Browne-Wilkinson summarised the law, ([1995] 1 AC 148 at page 165E-F),
“In English law the rights of a testamentary legatee in the unadministered estate of a testator are well settled: see Lord Sudeley v. Attorney-General [1897] AC 11 and Commissioner of Stamp Duties (Queensland) v. Livingston [1965] AC 694….A legatee’s right is to have the estate duly administered by the personal representatives in accordance with law. But during the period of administration the legatee has no legal or equitable interest in the assets comprised in the estate.”
It follows from these authorities that the Trustee has never had any proprietary interest in Mrs. Hemming’s half-share of the cottage, or in the proceeds of sale of that specific property. Accordingly, if and to the extent that the Trustee asserted any present entitlement to the proceeds of sale in the hands of Raymond Saul & Co., that claim was unjustified.
Although the Trustee could not establish that she owned the proceeds of sale of the cottage, it does not necessarily follow that her request to Raymond Saul & Co. on 5 July 2005 for payment of £28,969.69 from the proceeds of sale of Mrs. Hemming’s share of the cottage was misconceived. Apart from the balance of the proceeds of sale of the cottage, Mrs. Hemming’s estate also included the half-share in the farmhouse worth several hundred thousand pounds. Where an unadministered estate is obviously more than sufficient to meet liabilities, it is common practice for an executor to make a partial distribution on account of the residue from time to time as the administration proceeds: see Williams on Wills (8th ed., 2002) para 38.16. So, if the Trustee will be entitled to the residuary estate as and when that is ascertained, it was also open to her to request a payment of sufficient monies to discharge the bankruptcy debts from the monies that were then in hand.
As I have indicated, however, the problem appears to have been that Mr. Hemming did not agree that the Trustee had a valid claim to the residue of his mother’s estate, and he appears also not to have been willing to agree that his bankruptcy debts should be discharged from what, on the alternative view of the law, were monies that could have been paid to him on account of his entitlement to the residuary legacy.
So I turn to the issue directly raised by the claim under CPR Part 64: which of the Executor or the Trustee has the right to payment of the monies or assets that will comprise the residue of Mrs. Hemming’s estate as and when the administration of her estate is completed?
Entitlement to the residuary estate
Mr. John, who appeared for Raymond Saul & Co., accepted that, at the date of his bankruptcy, Mr. Hemming, as residuary legatee had a right to have his mother’s estate properly administered in accordance with law. He also accepted that such right was a “thing in action” and hence “property” within the meaning of section 436, and that it had vested in the Trustee pursuant to section 306.
Mr. John’s concession was plainly correct in the light of the authorities referred to above. In Livingston, Viscount Radcliffe stated, ([1965] AC 694 at page 717C-E),
“…their Lordships regard it as clearly established that Mrs. Coulson was not entitled to any beneficial interest in any property in Queensland at the date of her death. What she was entitled to in respect of her rights under her deceased husband’s will was a chose in action, capable of being invoked for any purpose connected with the proper administration of his estate…”
However, Mr. John also submitted that the right to due administration was a right that was entirely separate from any right to payment of the residue. He submitted that the residue (if any) will only come into existence at the completion of the administration of the estate, and that it is only at that moment that the right to receive the residue will actually vest in Mr. Hemming (or his estate). Hence, he said, the right to receive the residue of Mrs. Hemming’s estate never vested in the Trustee.
In support of those submissions, Mr. John referred to Dr. Barnado’s in which Lord Atkinson said, ([1921] 2 AC 1 at page 11),
“The case of Lord Sudeley v. Attorney-General … conclusively established that until the claims against the testator’s estate for debts, legacies, testamentary expenses, etc., have been satisfied, the residue does not come into actual existence. It is a non-existent thing until that event has occurred. The probability that there will be a residue is not enough. It must be actually ascertained.”
Mr. John also referred to Marshall v. Kerr in which Lord Browne-Wilkinson commented, ([1995] 1 AC 148 at page 166F-G),
“…it is crucial to appreciate that the property settled by [the legatee] comprised, not the assets in the deceased’s estate…but a separate chose in action, the right to due administration of his estate.”
Miss Mahoney, who appeared for the Trustee, disputed Mr. John’s analysis. She referred to the decision of Buckley J. in Re Leigh’s Will Trusts, Handyside v. Durbridge [1970] 1 Ch 277 (“Re Leigh”) and submitted that a residuary legatee’s right to have a testator’s estate properly administered necessarily carries with it the right to receive the residue of the estate, once ascertained. Such residue, she said, would be the “fruits” of the chose in action, and the two could not be separated. She also submitted that a residuary legatee had an “interest” in respect of the assets in the unadministered estate that was sufficient to fall within section 436.
As I have indicated, Lord Sudeley’s Case, Dr. Barnado’s and Livingston all raised the question, in the context of taxing statutes, whether a residuary legatee had a proprietary interest in particular assets in the unadministered estate of the testator. The decision in each case was that the residuary legatee had no such interest in any particular assets until completion of the administration of the estate. Having determined that issue negatively, it was unnecessary for the speeches and judgments to define the precise nature and extent of the residuary legatee’s rights.
There are, however, indications that at least some of the members of the House of Lords in Lord Sudeley’s Case thought that the right that vested in the residuary legatee on her husband’s death went beyond a limited right to compel administration of her husband’s estate. For example, Lord Davey observed ([1897] AC 11 at page 21),
“What then, are the rights of the appellants? Their right, and the only right which they could enforce adversely, is to have the administration completed and the residuary estate ascertained and realised, either wholly or so far as may be necessary for the purpose, and to have one-fourth of the proceeds paid to them.”
(emphasis added)
Likewise, in the passage I have cited from Dr. Barnardo’s, Viscount Finlay observed that a residuary legatee had,
“the right to have the estate properly administered and applied for his benefit when the administration is complete”.
(emphasis added)
That a residuary legatee’s rights extend beyond a mere right to have the estate properly administered also appears from the decision of Buckley J. in Re Leigh. In that case, the testatrix’s husband and only child had drowned in an accident. She was his administratrix and sole beneficiary under his intestacy. At his death, the husband had been the owner of 51% of the issued shares in a company called Sheet Metal Prefabricators (Battersea) Limited, and had been owed money by the company. The testatrix died not long after her husband, at a time when his estate had not been fully administered and when the shares in the company were still registered in her husband’s name. By clause 3 of her will, the testatrix bequeathed to the defendant “all shares which I hold and any other interest or assets which I may have in Sheet Metal Prefabricators (Battersea) Limited”. The executors of her will issued a summons to determine whether that specific bequest was valid or not.
It was common ground between the various interested parties who appeared that the testatrix intended that the defendant should have the shares and the debt owed by the company to her husband. The question raised by the residuary legatees was whether the testatrix was capable, when she died, of bequeathing anything answering the description in clause 3 of her will. The residuary legatees submitted (i) that the testatrix could only dispose by will of property which, at her death, she held to her own use, and, (ii) relying upon Livingston, that at her death, the testatrix did not have any legal or equitable interest in any specific assets forming part of her husband’s estate.
In dealing with the second point, Buckley J. stated that Livingston established the following propositions, ([1970] 1 Ch 277 at page 281G-282A),
“(1) the entire ownership of the property comprised in the estate of a deceased person which remains unadministered is in the deceased’s legal personal representative for the purposes of administration without any differentiation between legal and equitable interests;
(2) no residuary legatee or person entitled upon the intestacy of the deceased has any proprietary interest in any particular asset comprised in the unadministered estate of the deceased;
(3) each such legatee or person so entitled is entitled to a chose in action, viz. a right to require the deceased’s estate to be duly administered, whereby he can protect those rights to which he hopes to become entitled in possession in the due course of the administration of the deceased’s estate;
(4) each such legatee or person so entitled has a transmissible interest in the estate, notwithstanding that it remains unadministered.”
Buckley J. then continued, ([1970] 1 Ch 277 at page 282B-C),
“This transmissible or disposable interest can. I think, only consist of the chose in action in question with such rights and interests as it carries in gremio, that is to say, the right to which Lord Radcliffe refers in Commissioner of Stamp Duties (Queensland) v. Livingston, in his comment, at pp. 712, 713, on McCaughey v. Commissioner of Stamp Duties (1945) 46 S.R., N.S.W. 192. If a person entitled to such a chose in action can transmit or assign it. such transmission or assignment must carry with it the right to receive the fruits of the chose in action when they mature. The chose in action itself may be incapable of severance, but I can see no reason why a person entitled to such a chose in action should not so dispose of it through the medium of a trustee in such a way that the right to participate in its fruits is given to several beneficiaries either in fractional shares or by any other method of division that a trustee or the court can carry out.”
(emphasis added)
Although Mr. John pointed out that Re Leigh was a case on construction of a specific bequest in a will, in which a court will strive to uphold the validity of the bequest, I do not think that this affects the validity of Buckley J.’s analysis of the general principles of law. In that regard, I note that Buckley J.’s four-point summary of Livingston was quoted, with approval, by Lord Templeman in Marshall v. Kerr [1995] 1 AC 148 at pages 157F-158A.
Buckley J.’s third proposition, namely that a residuary legatee’s right to require due administration of the deceased’s estate was designed to protect the rights to which the legatee hopes to become entitled in possession, is entirely consistent with the observations of Viscount Radcliffe in Livingston as to the origins and purpose of the right to compel an executor properly to administer the estate. Viscount Radcliffe stated, ([1965] AC 694 at page 707),
“When Mrs. Coulson died she had the interest of a residuary legatee in the testator’s unadministered estate. The nature of that interest has been conclusively defined by decisions of long-established authority .. .[W]hatever property came to the executor virtute officii came to him in full ownership, without distinction between legal and equitable interests. The whole property was his. He held it for the purpose of carrying out the functions and duties of administration, not for his own benefit; and these duties would be enforced upon him by the Court of Chancery, if application had to be made for that purpose by a creditor or beneficiary interested in the estate. Certainly, therefore, he was in a fiduciary position with regard to the assets that came to him in the right of his office, and for certain purposes and in some aspects he was treated by the court as a trustee….
It may not be possible to state exhaustively what those trusts are at any one moment. Essentially, they are trusts to preserve the assets, to deal properly with them, and to apply them in a due course of administration for the benefit of those interested according to that course, creditors, the death duty authorities, legatees of various sorts, and the residuary beneficiaries.”
The authorities to which I have referred establish that upon death of a testator, a residuary legatee has an immediate entitlement, arising from the terms of the will, to have transferred to him, at the completion of the administration of the estate, such assets (if any) as then form the residue of the estate. This entitlement does not give the residuary legatee any present property interest in any of the individual assets forming the estate whilst it is being administered. Nor can it give the legatee any immediate interest of a proprietary nature in what is called “the residue of the estate”, because that is simply a concept which has no existence independent of the assets which are eventually found to comprise it, as and when the estate has been fully administered.
The residuary legatee’s immediate entitlement to future payment (if there are any assets left to form the residue) is, however, recognised and protected whilst the estate is in the course of administration by a right of action to compel the due administration of the estate. As Viscount Radcliffe explained in Livingston, the due administration of the estate, by its very nature, involves the application of the assets for the benefit of the creditors, the taxation authorities, legatees of various sorts, and (finally) the residuary beneficiaries. Because the entitlement to receive such assets as may comprise the residue in the future is the very foundation for the legatee’s right to compel due administration of the estate, it seems to me that there is no sensible basis upon which the two can be separated. The right of action would not be given to a stranger to the estate who had no possibility of receiving such assets in the future.
It is therefore correct to describe the right of the residuary legatee as a composite right to have the estate properly administered and to have the residue (if any) paid to him as and when the administration is complete. That composite right is a chose in action, which is transmissible, and accordingly falls within the first limb of the definition of “property” in section 436.
On that basis, it must follow that when a residuary legatee becomes bankrupt, the chose in action which vests in his trustee in bankruptcy is the composite right that includes the right to have the assets comprised in the residuary estate paid over to him at the end of the administration of the estate. Once that right vests in the trustee, the right will not revest in the bankrupt unless and until his bankruptcy debts and costs have been paid; and the right will be capable of being asserted by the trustee in bankruptcy against the executors, so as to preclude them from giving priority to any rival claims to the assets comprising the residue at the end of the administration.
That conclusion would be sufficient to decide this claim. But in any event I also think that Miss Mahoney is right to submit that even if a residuary legatee’s right is limited to a right to compel due administration of the estate, the legatee would nevertheless still have an immediate “interest” which would fall within the second limb of the extended definition of “property” in section 436, namely,
“every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property”.
A review of the speeches and judgments in the cases to which I have referred shows a variety of views being expressed on the question of whether a residuary legatee has an “interest” of some kind in the assets which might eventually form the residuary estate. For example, in Lord Sudeley’s Case, though denying that a legatee has a proprietary interest in any specific assets, Lord Herschell commented, ([1897] AC 11 at page 19),
“In truth, the right she had was to require the executors of her husband to administer his estate completely, and she had an interest to the extent of one-fourth in what should prove to be the residuary estate of the testator..”
(emphasis added)
Likewise, in Livingston, Viscount Radcliffe both denied that there was any separation of the legal and beneficial interest in any of the assets in the unadministered estate ([1965] AC 694 at page 712B-D), but also acknowledged the “undoubted rule” that “the interest of a residuary legatee in an unadministered estate has always been transmissible” ([1965] AC 694 at page 710D). Such views were reflected in the statement of Lord Browne-Wilkinson in Marshall v. Kerr to which I have already referred, that, “during the period of the administration the legatee has no legal or equitable interest in the assets comprised in the estate” and in Buckley J.’s four point summary of Livingston in Re Leigh.
55. These observations can be reconciled and understood when one appreciates that the word “interest”, like the word “property” is a word of many potential meanings. The word must take its meaning from the specific context in which it is used. Viscount Radcliffe made this very point in Livingston, when commenting upon criticisms that had been made of the decision in Lord Sudeley’s Case to the effect that Lord Herschell could not really have intended to deny a residuary legatee all beneficial interest in the assets of an unadministered estate. Viscount Radcliffe said, ([1965] AC 694 at pages 712B-713C),
“Criticisms of this kind arise from the fact that the terminology of our legal system has not produced a sufficient variety of words to represent the various meanings which can be conveyed by the words “interest” and “property.” Thus propositions are advanced or rebutted by the employment of terms that have not in themselves a common basis of definition. For instance, there are two passages quoted by the Chief Justice in his dissenting judgment in this case which illustrate the confusion. There is the remark of Jordan C.J. in McCaughey’s case, “The idea that beneficiaries in an unadministered or partially administered estate have no beneficial interest in the items which go to make up the estate is repugnant to elementary and fundamental principles of equity.” If by “beneficial interest in the items” it is intended to suggest that such beneficiaries have any property right at all in any of those items, the proposition cannot be accepted as either elementary or fundamental. It is, as has been shown, contrary to the principles of equity. But, on the other hand, if the meaning is only that such beneficiaries are not without legal remedy during the course of administration to secure that the assets are properly dealt with and the rights that they hope will accrue to them in the future are safeguarded, the proposition is no doubt correct. They can be said, therefore, to have an interest in respect of the assets, or even a beneficial interest in the assets, so long as it is understood in what sense the word “interest” is used in such a context.”
Viscount Radcliffe returned to this theme later in the judgment, ([1965] AC 694 at pages 716E-7127E),
“Where, as here, the question is whether a succession arose on a death in respect of a “devolution by law of any beneficial interest in property,” and the necessary limitations of the Queensland Succession Duty Act reduce that question to one whether there was a beneficial interest in Queensland property belonging to her at her death, it is necessary, to use Lord Greene’s words, to “discover the locality to be attributed to a right,” and this requirement involves a precise analysis of the nature of the right. It is not enough for this purpose to speak of an “interest” in a general or popular sense. It is apt to recall what Lord Halsbury L.C. said on this point in his speech in the Sudelev case:
“With reference to a great many things, it would be quite true to say that she had an interest in these New Zealand mortgages – that she had a claim on them: in a loose and general way of speaking, nobody would deny that that was a fair statement. But the moment you come to give a definite effect to the particular thing to which she becomes entitled under his will, you must use strict language, and see what it is that the person is entitled to; because upon that in this case depends the solution of the question. It is idle to use such phrases as … that she had an ‘interest’ in this estate.”
57. In the present context, Miss Mahoney submitted, and I agree, that the general approach of the courts has been to give the words used in section 436 a wide meaning. Miss Mahoney cited the remark of Ferris J. in In re Landau [1998] Ch 223 at page 232A, that the words of section 436 were “about as wide as they could be”. The same point was made more fully by Morritt LJ. in Re Celtic Extraction Limited [2001] Ch 475 at page 486,
“The word “property” is not a term of art but takes its meaning from its context: see Nokes v Doncaster Amalgamated Collieries Ltd [1940] AC 1014, 1051; Kirby v Thorn EMI plc [1988] 1 WLR 445, 452. In the context of insolvency there is, as Lord Atkinson observed in Hollinshead v Hazleton [1916] 1 AC 428, 436, a well established
“principle of public policy, which has found expression in the provisions of the Bankruptcy Codes of … England … as estimable and as conducive to the welfare of the community as any. It is this, that in bankruptcy the entire property of the bankrupt, of whatever kind or nature it may be, whether alienable or inalienable, subject to be taken in execution, legal or equitable, or not so subject, shall, with the exception of some compassionate allowances for his maintenance, be appropriated and made available for the payment of his creditors.”
Thus in successive statutes dealing with bankruptcy and insolvency the definition of “property” has been progressively extended {Morris v Morgan (unreported) 31 March 1998; Court of Appeal (Civil Division)
Transcript No 524 of 1998); though however wide the definition it is subject to the implied exclusion of rights of the bankrupt with respect to his body, mind or character {Heath v Tang [1993] 1 WLR 1421, 1423). It is apparent from the terms of section 436 of the Insolvency Act 1986 that the definition is to some extent circular but is not exhaustive. Further as Sir Nicolas Browne-Wilkinson V-C observed in Bristol Airport plc v Powdrill [1990] Ch 744, 759 it is hard to think of a wider definition of “property.””
Mr. John sought to counter the breadth of meaning which has been accorded to section 436 by suggesting that the intention of Parliament, when introducing the new provisions for an automatic discharge from bankruptcy after one year in the Enterprise Act 2002, had been not only to reduce the stigma and restrictions of being an undischarged bankrupt, but also to limit the extent of a bankrupt’s estate that vests in his trustee in bankruptcy.
The introduction of an automatic discharge from bankruptcy after 12 months, together with other measures, was plainly designed to reduce the stigma, restrictions and disqualifications placed upon bankrupts: see e.g. the DTI’s White Paper, “Insolvency – A Second Chance” (Cm 5234) which set out the basis for the reforms contained in the Enterprise Act 2002. It is also obviously the case, as was acknowledged by the White Paper, that by reducing the period of bankruptcy before an automatic discharge, the after-acquired property provisions in section 307 of the 1986 Act would apply for a substantially shorter period, thus potentially reducing the assets available to creditors. The White Paper expressed the view that in practice trustees did not often use their powers under section 307.
To that extent I accept Mr. John’s submissions. But in contrast to the acknowledged effect upon the operation of the after-acquired property provisions, I can find nothing in the structure of the changes brought about by the Enterprise Act 2002, or the legislative history, to suggest that Parliament also intended to make a change to the scope of the estate owned by the bankrupt which would vest in the trustee at the commencement of the bankruptcy by reason of the combined effect of sections 283, 306 and 436 of the 1986 Act. That is of course the critical issue in this case. Mr. John did not refer me to any specific materials to support his contention in this respect, and I reject it.
In summary, as I have indicated, the law has long recognised that a residuary legatee has an immediate “interest” of some kind in the assets that will in the future form the residuary estate of a testator. The precise nature of the interest is unclear, but at very least it must give the holder of the interest the right to receive the residue (if any) as and when ascertained.
Whatever the precise nature of the interest, in my view it would be entirely consistent with the statutory purpose of the bankruptcy legislation to conclude that it vests in the trustee in bankruptcy by virtue of section 306. That conclusion is also in accord with the wording of the statute. Section 436 refers to “every description of interest”: those words could not be wider. I also think that the interest can properly be described as “incidental to” the property which the residuary legatee undoubtedly owns, namely the chose in action to compel due administration of the estate: see e.g. Viscount Radcliffe’s analysis in Livingston to which I have referred in paragraph 55 above. The transmission of this interest to the trustee must therefore operate to give the trustee an entitlement to receive whatever is ascertained to be the residuary estate, in priority to the bankrupt.
Australian Authority
The result which I have reached and the reasoning which leads to it, is, I believe, supported by the decision of the High Court of Australia in Official Receiver in Bankruptcy v. Schultz (1990) 170 CLR 306 (“Schultz”). Schultz concerned the Australian Bankruptcy Act 1966. That Act provided all property that belonged to, or was vested in, a bankrupt at the commencement of his bankruptcy, or which had been acquired by him or which devolved on him after the commencement of the bankruptcy and before his discharge, vested in the Official Receiver. “Property” for this purpose was defined, in terms similar to section 436, as meaning,
“real or personal property of every description …and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property.”
The testatrix (P) left her house to the defendant (S), who was an undischarged bankrupt. The testatrix’s husband successfully sought and obtained a Court Order for provision to be made to him from the estate. At first instance, the order was that the husband be entitled to the house instead of S. S was then discharged from her bankruptcy. The order for provision to be made for the husband was then varied on appeal. The husband was given a life interest, with an interest in remainder to S.
The High Court of Australia held that the interest in remainder in the house vested in S’s trustee in bankruptcy and not in S herself. The reasoning was that the interest in remainder was derived from the right to compel due administration of the estate, and that right was a property right which had vested in the trustee in bankruptcy from the start. The High Court of Australia said, ((1990) 170 CLR 306 at pages 313-314),
“The right which any beneficiary has in an unadministered estate springs from the duty of the executor to administer the estate, to preserve the assets and to deal with them in the proper manner. Each beneficiary has an interest in seeing that the whole of the assets are treated in accordance with the executor’s duties. In that sense, the beneficiaries as a class may be said to have an interest in the entire estate. But it does not follow that each piece of property which goes to make up the estate is held on a particular trust for the beneficiary named as its intended recipient upon completion of administration… Whether or not the estate is held on a trust for the beneficiaries as a class in the usual sense in which the word “trust” is used, so as to confer a specific proprietary interest, as distinct from a general, non-specific interest, upon all beneficiaries, is not something which arises for consideration in this case.
Nevertheless, [S] acquired upon the death of [P] a right to have the deceased estate administered in accordance with the duties of the executors. Though not the legal or equitable owner of the assets which were the subject of the devise and bequest in her favour, she had, by virtue of the chose in action created by that devise and bequest, an expectation that the assets would pass to her upon completion of the administration, subject to their being realized to meet any outstanding liabilities and to defray the costs of administration, and an interest in respect of those assets. That interest was derived from and dependent upon the chose in action.
The interest is of such a kind that, when a beneficiary transmits a chose in action (or part thereof), or that chose in action passes by operation of law, such as under the Bankruptcy Act, that transmission naturally encompasses not only the chose in action but also the expected fruits of that chose in action: … In re Leigh’s Will Trusts [1970] Ch 277, at p 282.”
Practical consequences
I am also supported in my conclusion by a consideration of the problems that would arise in practice if the entitlement of a bankrupt to payment of the residue of a testator’s estate did not vest in the trustee in bankruptcy until the administration of the estate was complete.
It is obviously always a matter of chance whether a testator dies before a residuary legatee is made bankrupt. However, if the law was that the creditors of the bankrupt could only benefit from the residuary legacy if the administration of the testator’s estate was completed in the one year before the bankrupt was automatically discharged, this would in my view lead to arbitrary and undesirable consequences. It would matter, for example, whether the death occurred at the beginning of the year or close to the end of the bankruptcy.
If the death occurred at or shortly after the bankruptcy, whilst it would at least be possible for the creditors to benefit, it would become almost essential for the trustee in bankruptcy to take proceedings to compel a speedy administration of the estate in an attempt to ensure that it was completed within the year. That would be so whether or not a speedy administration would realise the best value for the assets. Apart from the potential conflict that this would cause between the duties of the executors to maximise value and the interests of other legatees (including other persons who might be interested in the residuary estate), where, as here, the bankrupt was also the executor, he would have a perverse incentive to delay the administration of the estate. Where the death occurred towards the end of the bankruptcy, it would be virtually impossible, even with all due expedition, for the administration of the estate to be completed in time. The right to due administration vested in the trustee in bankruptcy would therefore be practically worthless.
Mr. John did not dispute these points, but suggested that they were the inevitable consequence of introducing so short a period for automatic discharge of a bankrupt. As I have said, I accept that Parliament foresaw and was prepared to accept that reducing the period of bankruptcy would lead to prejudice to creditors in the reduced operation of the after-acquired property provisions in section 307 of the 1986 Act. But I see no reason to assume that Parliament even foresaw, still less that it intended to create, these arbitrary results and the conflicts that would arise between trustees in bankruptcy and executors. Such consequences would, in my view, be entirely contrary to the statutory schemes for bankruptcy and the orderly administration of estates, and thoroughly undesirable.
The result
In the result, I hold that Mr. Hemming’s entitlement to his mother’s residuary estate, including the right to receive the assets comprising that residue as and when the administration of the estate is complete, vested in the Trustee by the operation of section 306 of the 1986 Act. The Trustee thereupon became entitled, and remains entitled, to receive the assets representing the residuary estate as and when the administration of the estate is complete, in priority to the Executor.
I propose to make a declaration to that effect and will hear counsel in due course as to the precise form of order and any consequential matters.
Cork v Rawlins
2001] EWCA Civ 202 (2 February 2001) [2001] Ch 792, [2001] Lloyds Rep IR 587, [2001] EWCA Civ 202, [2001] 3 WLR 300, [2001] 4 All ER 50, [2001] BPIR 222, [2001] Lloyd’s Rep IR 587
LORD JUSTICE PETER GIBSON: This is an appeal by Alan Rawlins, the respondent to an application made under section 303(2) of the Insolvency Act 1986 (“the Act”) by his trustee in bankruptcy, Malcolm Cork.On 7th April 2000 His Honour Judge Weeks QC, sitting as a judge of the High Court in the Chancery Division, declared at the hearing of that application that the sums payable under two assurance policies effected by Mr Rawlins with Abbey Life before he became bankrupt became vested in the trustee pursuant to section 306 of the Act. The judge gave Mr Rawlins permission to appeal. The judge’s judgment is now reported [2000] BPIR 654, and I need only state such of the background facts as are necessary to make this judgment comprehensible.
Of the two policies, one, called a Living Assurance policy, commenced on 9th October 1987. It was a whole life policy on Mr Rawlins’ life and provided for earlier payment “on receipt by [Abbey Life] of proof satisfactory to [Abbey Life’s] Chief Medical Officer that the Life Assured had become disabled such that entitlement arises to the Permanent Disablement Benefit.” That benefit was “a benefit equivalent to the Death Benefit payable if the Life Assured had died on the date of receipt of such satisfactory proof.” The sum payable was £40,000. The entitlement to permanent disablement benefit was expressed to arise “if the Life Assured has become permanently disabled before his …. 60th birthday through sickness or injury contracted after the Commencement Date and is registered as disabled”. The other policy, called a MortgageMaster Endowment policy, commenced on 12th November 1990. It had a 23-year term but it provided for earlier payment on the same contingency as the earlier policy. The sum payable was £30,000. Thus in the case of the first policy the sum assured did not change, whether the event on which the sum was payable was the death or the proof of disablement. Similarly in the case of the other policy, the sum assured was the same whether it became payable at the end of the contractual term or on the earlier receipt of proof of disablement.
Mr Rawlins was a self-employed landscape gardener and also carried on a retail shop business. He specialised in the construction and sale of water features and ornamental pools. In January 1993 he had an accident whilst engaged in construction work and sustained a serious injury. He was unable to continue working. He submitted a claim under the policies to Abbey Life in the summer of 1993. On 2nd April 1996 a bankruptcy order was made against him on the petition of a trade creditor. On 19th June 1996 he allowed himself to be examined medically for the purpose of his policies. On 16th September 1996 Abbey Life accepted that it had received proof of disablement such that entitlement to the permanent disablement benefit arose under both policies.
On the making of the bankruptcy order the Official Receiver became the trustee, but Mr Cork was appointed trustee in his place on 4th March 1997. On 27th May 1997 Abbey Life by letter informed the trustee that it accepted that Mr Rawlins was permanently disabled and that £70,000 in total was available to be claimed. The trustee’s solicitors on 3rd April 1998 wrote asking whether the payment of £70,000 related to compensation for loss of earnings or for pain and suffering. On 27th April 1998 Abbey Life replied:
“The £70,000.00 benefit is neither compensation for loss of earnings nor compensation for pain and suffering.
Mr Rawlins purchased life assurance policies with a supplementary sickness benefit attached to the same. The total and permanent disability benefit provides to pay the full sums assured in the event of our Chief Medical Officer being satisfied that the claimant is disabled such that he will never work in any occupation for the remainder of his lifetime.
Our Chief Medical Officer was satisfied that Mr Rawlins’ medical condition met [these] criteria.”
The trustee claimed that he was entitled to the policy monies. Mr Rawlins disputed that claim. The trustee therefore made the application which came before the judge. Mr Rawlins was then represented by counsel other that Mr Louis Doyle who appears for Mr Rawlins on this appeal.
The Judge first considered whether the rights to the policy monies were properly comprised in the bankrupt’s estate which vested in the trustee. The Judge held that the contract between Mr Rawlins and Abbey Life in relation to each policy created one right or bundle of rights which he could have assigned before his bankruptcy and which vested in the Official Receiver on his bankruptcy. The Judge then considered whether the benefits of each policy, or any of them, were to be held for Mr Rawlins. The Judge accepted that the events on which the policy monies were payable included his permanent disablement, which was likely to involve him in pain and suffering. But he said that the monies payable under the policies were not in any way related or calculated by reference to Mr Rawlins’ pain and suffering and that all that permanent disablement did was to advance the date on which the policy monies were payable. The Judge therefore held that the monies were payable only to the trustee to be divided among the creditors and that no part of them was held by the trustee for Mr Rawlins.
Mr Rawlins on this appeal wishes to challenge the Judge’s conclusion. He initially acted in person and he has made plain in the various documents which he has submitted to this court his extreme unhappiness with the result. He objects strongly to being denied the policy monies which might have supported him in coping with his disability, and he has put forward a large number of grounds on which he sought to appeal. But sensibly he has now entrusted this appeal to legal representatives for him.
Mr Doyle in his skeleton argument advanced initially three grounds of appeal, but he has now abandoned two of them, that is to say the submission that no cause of action existed at the date of the bankruptcy order and that therefore no property vested in the Official Receiver on the making of that order, and further that the proceeds of the policies constituted income within section 310(7) of the Act so as not to form property within the bankrupt’s estate. In my judgment Mr Doyle was right not to pursue those submissions. That leaves a single ground of appeal, that is to say that the cause of action is personal to Mr Rawlins and did not vest in the trustee by virtue of the payment remaining conditional on his personal pain and suffering.
Before considering that submission it is convenient to go to the relevant provisions of the Act. Mr Doyle asked us, when considering the statutory provisions, also to take account of the effects of social change since the older authorities were decided and since the Bankruptcy Act 1914 (such as the reforms pursuant to the Beveridge Committee Report and the reforms effected by Acts such as the Welfare Reform Pensions Act 1999). He asks us to take into account the recommendations set out by the Cork Committee in its report ((1982) Cmnd 8558), the substantial implementation of which was effected by the Act, and he asks us to take into account the change in the approach adopted by Parliament in enacting it. For my part, I do not doubt that this court can look at the Cork Report to identify the mischief which the Act was intended to obviate, but the intention of Parliament falls to be ascertained primarily from the language used in the Act, and I cannot accept suggestions, based on other reforms in other fields, as to what was intended to be achieved by the Act. We were asked by Mr Doyle in particular to note from paragraphs 192(a) and 198(c) of the Cork Report that the objectives included:
(i)to offer the opportunity for rehabilitation subject to making a contribution to creditors from future earnings without reducing the insolvent and his family to undue and socially unacceptable poverty and without depriving him of the incentive to succeed in a fresh start; and
(ii)to relieve the insolvent from harassment and undue demands by creditors whilst taking into account the rights which the individual insolvent and his family should legitimately continue to enjoy.
I have to say that neither of those objectives seem to me to be in point. The first relates to the rehabilitation of the insolvent so that he can earn monies in the future and so repay creditors out of those earnings. The second relates to creditors harassing the insolvent and making undue demands. Neither seems to me to touch on the question whether an asset of this bankrupt, who cannot work again, in the form of a policy existing at the date of the bankruptcy order, is held for the benefit of creditors.
A further passage from the Cork Report relied on by Mr Doyle is in paragraph 195, where, after a reference to the insolvency procedures which had been developed over generations, it is said:
“…but it appears to us equally that some of their original objectives and the principles which inspired them have been lost sight of or blurred and there has undoubtedly been in the last half century a failure to keep pace with the needs of our days”.
That is a criticism of the previous insolvency procedures. But that does not seem to me to be in point on this appeal.
The statutory provisions relevant to the issues on this appeal are as follows.
Section 306 in Part IX of the Act provides for the bankrupt’s estate to vest in the trustee “immediately on his appointment taking effect or, in the case of the Official Receiver, on his becoming trustee”.
“The bankrupt’s estate” is defined in section 283:
“(1) Subject as follows, a bankrupt’s estate for the purposes of any of this Group of Parts comprises –
(a) all property belonging to or vested in the bankrupt at the commencement of the bankruptcy, and
(b) any property which by virtue of any of the following provisions of this Part is comprised in that estate or is treated as falling within the preceding paragraphs.
(2) Subsection (1) does not apply to –
(a) such tools, books, vehicles and other items of equipment as are necessary to the bankrupt for use personally by him in his employment, business or vocation;
(b) such clothing, bedding, furniture, household equipment and provisions as are necessary for satisfying the basic domestic needs of the bankrupt and his family.”
Bankruptcy commences on the day on which the bankruptcy order is made (section 278).
The term “property” is given an expanded meaning in section 436:
“`Property’ includes money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property.”
Section 307 deals with after-acquired property which the trustee may by notice in writing claim for the bankrupt’s estate, that is to say any property which has been acquired by, or has devolved upon, the bankrupt since the commencement of the bankruptcy. But by section 307(5) excluded therefrom is any property which, as part of the bankrupt’s income, may be the subject of an income payments order under section 310.
Section 310 relates to an income payments order which may be made by the court on the application of the trustee, claiming for the bankrupt’s estate so much of the income of the bankrupt during the period for which the order is in force as may be specified in the order.
I now turn to Mr Doyle’s submission on the footing, as he now accepts, that the rights under each policy vested in the trustee on the commencement of the bankruptcy and that that gave rise to an indivisible claim against Abbey Life.
Mr Doyle submits that the payment of monies under the policies being conditional on Mr Rawlins’ personal disability was therefore conditional on Mr Rawlins’ personal pain and suffering, and that, he argues, takes those monies outside the bankrupt’s estate. He suggested that the monies were intended as a replacement of income. But as he concedes that they do not come within section 310, even if he was right on this characterisation, which I doubt, I do not see how it helps him. Mr Doyle relies on what might be called the common law exception from the statutory definition of “property” within a bankrupt’s estate. Despite the Insolvency Act 1986 and the wide definition of property, it has been recognised at least twice by this court that an exception exists. In Heath v Tang [1993] 1 WLR 1421, Hoffmann LJ, when giving the judgment of the court (which included Sir Thomas Bingham MR and Steyn LJ), referred to the extended meaning given to property in section 436, and said at page 1423:
“Despite the breadth of this definition, there are certain causes of action personal to the bankrupt which do not vest in his trustee. These include cases in which `the damages are to be estimated by immediate reference to pain felt by the bankrupt in respect of his body, mind or character, and without immediate reference to his rights and property’: see Beckham v Drake (1849) 2 H.L.Cas. 579, 604, per Erle J and Wilson v United Counties Bank Ltd [1920] A.C. 102. Actions for defamation and assault are obvious examples.”
The authorities were recently reviewed by this court in Ord v Upton [2000] Ch 352. In that case a bankrupt after the bankruptcy order issued a writ against a doctor who had treated him before the bankruptcy order, claiming damages for negligence, including damages for pain and suffering as well as damages for loss of earnings. Aldous LJ (with whom Kennedy and Mantell LJJ agreed) referred to some further remarks of Erle J in Beckham at pages 608-609 where the reason for the exception from the property of the bankrupt of certain items were said to be
“…that the creditors cannot legitimately have looked to the pain of the bankrupt from a broken limb, or wounded affection, or blasted character, as a source of profit, they being in their nature casual and unforeseen, and unconnected immediately with property. There is a manifest distinction between damages from such sources as these last mentioned and damages in respect of contracts for labour…”
This court held that while the action in negligence was a single cause of action and a thing in action which was included in the bankrupt’s estate, the trustee held on what would appear to be a remedial constructive trust for the bankrupt the right to recover damages for pain and suffering and other personal losses.
Mr Doyle does not pursue the argument advanced below that the monies payable under the policies relate to the bankrupt’s pain and suffering or were calculated by reference to that pain and suffering. But he submits that where a policy provides that a sum is to be paid by the insurer in the event of the permanent disability of the insured, the circumstances giving rise to the payment are so inherently tied up with the pain and suffering of the insured or his person that it is wholly inequitable and contrary to the principles underpinning the Act that such monies should be appropriated by the trustee for the creditors. He prays in aid the approach of Rattee J in Haig v Aitken [2000] 3 WLR 1117, where it was held that personal correspondence of the bankrupt was of a nature peculiarly personal to the bankrupt and his life as a human being and as having a nature peculiarly private to the bankrupt. Mr Doyle further relied on the remarks of Warner J in Re Rae [1995] BCC 102 at page 112 where that judge referred to the retention of an asset (an entitlement to be considered for renewal of a fishing licence) as contrary to the purposes of the Act without that retention being explicable by reference to the bankrupt’s needs as a human being. So, Mr Doyle says, the cause of action triggered by personal disability is of a nature peculiarly personal to the bankrupt, relating to the bankrupt’s needs, as his disablement must be assumed to impact on his ability to provide for and maintain himself and his family. He asks this court to go beyond the contractual label of the chose in action and to consider the substance of the claim. He insists that the quantum of the policy monies has nothing to do with the question whether they fall within the common law exception. He says that the test is whether the contractual claim relies in any way on the pain and suffering of the bankrupt. If so, he says, the policy monies go to the bankrupt and not to his creditors.
I am unable to accept Mr Doyle’s submission for the following reasons:
(1)It is not founded directly on any authority. No case has been drawn to our attention where, on facts in any way comparable to those of the present case, an asset to which the bankrupt was contractually entitled was excepted from the bankrupt’s estate.
(2)As Mr Steven Davies QC for the trustee rightly stressed, the policies were assets which were purchased by Mr Rawlins through the payment of premiums which otherwise would have formed part of his estate available for his creditors on his bankruptcy, just as they were available immediately before his bankruptcy commenced, to be disposed of by Mr Rawlins for value or to be seized by his creditors in execution. It would be surprising if the recognition by Abbey Life after the bankruptcy order of Mr Rawlins’ claim to permanent disablement benefit arising from an accident prior to the bankruptcy made so material a change to the nature of the asset that it no longer was to form part of the bankrupt’s estate.
(3)In Beckham itself (a case including a contract of service which provided for the payment of a final sum, in the event of default, by the defaulting party), Erle J, being one of the judges giving their opinions for the benefit of the House of Lords, recognised the significance in this area of a contractual right to receive a sum of money. At page 605 he gave this example:
“Thus, in respect of promise, the assignees of a patient, if bankrupt, could not sue a surgeon for a breach of his promise to use due care in treating a wound, because the damages are assessed by reference to bodily annoyance; but the assignees of the same surgeon, if bankrupt, might sue the patient on his promise to pay remuneration for attendance, because the promise relates to property; and the assignees of a bankrupt could not sue on a breach of promise to marry, but the same assignees might, in my judgment, for the same reason, sue for a breach of promise to pay a given sum in case of refusing, on request, to complete a contract of marriage.
At page 606 he said:
“The substance of the promise, then, for the breach of which this action was brought, relates immediately to the property of the bankrupt, being for the payment of money”,
and, at page 609:
“Upon the whole then, both because the promise for the breach of which this action was brought appears to me to fall within the class of those relating to property rather than of those relating to the person, and because the measure of damages appears to me not to have immediate reference to the personal inconvenience of the bankrupt, that is to say, not to any pain to him in respect of his body, mind, or character; and also, if the consideration for his promise is to be considered because it appears to me in its nature to belong rather to the class relating to property than to the person, I think that the defendant is entitled to the judgment.”
To similar effect was Maule J at page 621. He said this:
“There is no doubt that the right to bring an action for an injury to the person, character, or feelings, of a bankrupt, does not pass to the assignees, and that the right to bring an action for the payment of money agreed to be paid to the bankrupt does pass. And it appears to me that the present action is in effect an action on a contract to pay money.”
And a little later at page 622:
“Thus, although a right of action for not marrying or not curing, in breach of an agreement to marry or cure, would not generally pass to the assignees, I conceive that a right to a sum of money, whether ascertained or not, expressly agreed to be paid in the event of failing to marry or to cure, would pass. The agreement of the parties that money shall be paid as compensation makes, as it seems to me, the right to recover that money a part of the personal estate of the bankrupt, as much as a recovery, before the bankruptcy, of a judgment in an action for an injury to the person or character of the bankrupt, would do.”
The House of Lords accepted the advice of those judges, and Lord Campbell, at page 645, referred with express approval to the passage from Maule J’s opinion which I have just cited.
(4)In any event the policy monies became payable not because of the satisfaction of a test of pain and suffering, but because of the contractual test of what my Lord, Keene LJ, rightly called “employability”. The policy monies do not relate to or represent or compensate for loss or damage to the bankrupt personally, nor are they measured by such loss or damage. Had the bankrupt’s death been a condition on which the policy monies became payable, there is no question but that the monies would have been taken by the trustee. In the present case payment is merely triggered by the permanent disablement being proved, thereby advancing the date of payment of what otherwise would not have been payable until death occurred.
(5)To my mind it would involve a considerable extension of the common law exception from the bankrupt’s estate to include within that exception an asset whose only connection with the pain and suffering of the bankrupt is that his disablement is the contractual contingency on which the monies assured have become payable. If, for social reasons or otherwise, it is thought desirable that the exception should be extended, in my opinion it is for Parliament, not for the courts, to make that extension.
I have considerable sympathy with Mr Rawlins, who has suffered so disastrous an accident that he has not been able to work since. But the policy of the Act is to return to the unfortunate creditors who gave credit to the bankrupt as much of what they are owed as can be realised out of the bankrupt’s estate, subject only to well recognised exceptions. I am satisfied that on the facts of this case the policy monies do not come within any such exception. I therefore would dismiss this appeal.
LORD JUSTICE CHADWICK: I agree. I add some words of my own because I recognise that the outcome of this case is of the greatest importance to Mr Rawlins. It is also, I think, of some general importance.
The appellant, Mr Alan Rawlins, carried on business on his own account, in partnership with his wife. In or about 1987 Mr Rawlins obtained a loan from Nationwide Building Society in order to fund the building of a bungalow on land which he owned. He was advised to provide for the repayment of that loan, in the event of his disability or illness, by an insurance policy. Acting on that advice, he took out a Living Assurance Policy with Abbey Life Assurance Company Limited. The policy (numbered 6222607A) commenced on 9th October 1987. It was a whole of life policy, providing a benefit on the death or disability of the life assured. The sum assured was £40,000. That sum was payable either on Mr Rawlins’ death or if he should become disabled such that an entitlement arose under the terms of the policy to permanent disablement benefit or living assurance benefit. Entitlement to permanent disablement benefit arose if he became permanently disabled before his sixtieth birthday, through sickness or injury contracted after the policy had commenced, and was registered as disabled. A permanent disablement was defined as to mean such disability as would prevent him from carrying out any gainful occupation at any time during his lifetime, provided that the disability was not the result of any of the causes excluded by the policy. Entitlement to living assurance benefit arose on the contraction of a contingent disability after the commencement of the policy. Contingent disability was defined to mean the diagnosis of one or more than a number of medical conditions – of which heart attack, stroke and kidney failure may be given as examples.
After building work on the bungalow had commenced, Mr Rawlins realised that he would need further funding in order to complete it. He obtained a further loan of £30,000. He was advised to protect the repayment of that loan also, and he did so. He took out a further policy, described as a MortgageMaster, with Abbey Life. That policy (numbered 203863J) commenced on 12th November 1990. It provided endowment assurance at a maturity date; but it provided also for payment of benefit in the event of death or disability before that date. The sum assured was the £30,000 needed to repay the loan; and entitlement to permanent disability benefit or living assurance benefit arose under that policy in the same circumstances as under his 1987 Living Assurance policy.
On 18th January 1993 Mr Rawlins fell and injured himself when constructing an ornamental fish pond. He was unable to work thereafter. The partnership was dissolved and the assets of the business passed over to his son. The bungalow was sold to his son and daughter. The loans from Nationwide were discharged out of the proceeds of that sale. The policies were no longer required for their original purpose and were released from any claims by the Nationwide Building Society. Mr Rawlins, however, had made claims for permanent disablement benefit under the two policies; and, after some delay, those claims were accepted by Abbey Life on 16th September 1996.
In the meantime, however, Mr Rawlins had been adjudicated bankrupt. The bankruptcy order was made on 2nd April 1996. The respondent to this appeal, Mr Malcolm Cork, an insolvency practitioner, was appointed trustee in bankruptcy with effect from 4th March 1997. Mr Rawlins has by now been discharged from his bankruptcy under the automatic provisions; but that does not affect the position in the bankruptcy.
The trustee has claimed the monies payable under the two policies. Following the judge’s decision, those monies have been paid to the trustee; they are held by him pending the outcome of this appeal. It is now accepted on behalf of Mr Rawlins that the contractual right to be paid under the two policies did vest in the trustee in bankruptcy under the provisions of section 306 of the Insolvency Act 1986; but it is said that the trustee holds that right on trust, not for the creditors, but for Mr Rawlins personally. It is submitted that the position is analogous to that which was held by this court to exist in Board v Upton [2000] Ch 352. It was held, in that case, that a cause of action in negligence for personal injuries – in which claims were made both for loss of earnings (as special damages) and for pain and suffering (as general damages) – vested in the trustee; but on terms that he would hold only those damages awarded in respect of the loss of past and future earnings as part of the bankrupt’s estate distributable amongst creditors. He was to hold damages awarded for pain and suffering as a constructive trustee for the bankrupt.
For my part, I find no assistance in the suggested analogy between a tortious claim for damages for pain and suffering and the contractual claim for monies payable under policies of insurance.
It is, perhaps, pertinent to keep in mind that if Mr Rawlins had had a claim for damages for pain and suffering against a third party in respect of the accident which caused his injury – which on the facts of this case is not suggested – he would not have been required to bring the monies payable under the policies into account when pursuing that claim: see Bradburn v Great Western Railway Company [1874] LR 10 Exch 1. The reason was explained by the House of Lords in Parry v Cleaver [1970] AC 1: see in particular the speech of Lord Morris of Borth-y-Gest, at page 31 between D and E:
“If someone makes a purely voluntary and personal decision to insure himself against accidents he is choosing to use some of his money or some of his savings in a particular way just as he would be doing if he had saved some of his money and invested it. If he insures against accidents he will hope that no accident will befall him and he will be well content to have no return from the expenditure which is involved in the payment of premiums. He may be one in whose case there is already some provision against sustaining economic loss. He may feel that in the event of accident befalling him he would welcome the receipt of a sum of money to compensate him in ways that would not be possible as a result of a successful claim at law. He may contemplate situations in which no claim against anyone would be possible or would succeed.”
Although Lord Morris of Borth-y-Gest was in the minority in relation to the result in Parry v Cleaver, that passage fairly reflects the views of all the members of the Lords.
The position which Lord Morris of Borth-y-Gest describes reflects what has happened in this case. Mr Rawlins has provided, by insurance, for the receipt of a sum of money in the event of an accident in circumstances in which, as it has turned out, he has no claim against anyone else. That was undoubtedly a prudent provision for him to make. The provision was made at a time when he could foresee that, if he became unable to work through disability, he would be unable to make the payments to the building society out of his earnings in respect of the moneys which he had borrowed.
Mr Rawlins purchased a right to payment from the insurance company, Abbey Life, so that he could discharge his liability to the building society, Nationwide, if and when the circumstances arose in which monies became payable under the policy. He purchased that right out of his own resources; resources which he might otherwise have used to make repayments under the loan, or to invest in a savings account, or in Stock Exchange securities, or in an endowment policy. Indeed, in the case of the MortgageMaster policy his purchase of the right to payment in the event of permanent disablement was one element in an endowment contract under which he purchased a right to payment on a maturity date for the purpose of discharging the loan.
The policy monies are not now required to repay the building society loan. That loan has been repaid out of other assets. But the policy monies are required for the payment of Mr Rawlins’ creditors generally. If they had been received or had become payable before the bankruptcy order was made, there is no doubt that they could – and probably would – have been used for that purpose. The creditors could have taken steps to ensure that they were; by obtaining a garnishee order or a charging order over the right to receive the monies from the building society. There is no reason in principle why the position should be any different once the bankruptcy order has been made. The right to payment was purchased so as to provide for the discharge of Mr Rawlins’ indebtedness to a particular creditor; and, that creditor having been paid out of other monies which would otherwise have come into the bankrupt’s estate, there is no hardship in requiring that the right to payment falls into the estate for the benefit of creditors generally.
It is plainly in the general public interest that persons should be encouraged to make provision against the possibility that they will be unable to meet their commitments as a result of misfortune for which they are not responsible. But if public policy requires that they should be encouraged to do so by permitting them to shelter that provision from the claims of their creditors, then it is for Parliament to say so. It is not, in my view, for the courts to distort the bankruptcy code in order to achieve that result.
For those reasons, I also would dismiss this appeal.
LORD JUSTICE KEENE: I agree with both judgments which have been delivered. I too would dismiss this appeal.
Dennison v Krasner
[2000] EWCA Civ 112 [2000] BPIR 410, [2000] Pens LR 213, [2000] OPLR 299, [2000] 3 All ER 234, [2001] Ch 76, [2000] 3 WLR 720, [2000] EWCA Civ 112
LORD JUSTICE CHADWICK:
1. These two appeals raise common questions: whether the rights to a retirement annuity and associated benefits under an annuity contract or personal pension arrangements effected by an individual in respect of whom a bankruptcy order is subsequently made under the Insolvency Act 1986 vest in his trustee in bankruptcy; and, if so, whether payments derived from those rights can be the subject of an income payments order under section 310 of that Act. The first of those questions was answered by Mr Justice Ferris in the affirmative in In re Landau [1998] Ch 223; the second was answered in the negative. His decision has been followed consistently in the Chancery Division. The present appeals provide the first opportunity, so far as I am aware, for this Court to consider whether or not that decision was correct. Notwithstanding the enactment of section 11 of the Welfare Reform and Pensions Act 1999 – which will, in effect, reverse the decision in In re Landau in relation to bankruptcies commencing after the section is in force – the question remains of practical importance in relation to bankruptcies which commence before that date.
The underlying facts: Krasner v Dennison
2. Mr Dennison was formerly a chartered accountant and a partner in Geo H Jackson & Co. In the 1970’s the partners of that firm formed a company, Jackson Financial Services Limited, for the purpose of taking deposits from clients of the firm and lending on to other clients. The company was not authorised to carry on banking or deposit taking business. On 3 June 1992 it was wound up by the High Court on a petition presented by the Bank of England. Mr Dennison found himself personally responsible for the liabilities of the company. Following presentation of the petition, Mr Dennison resigned from the partnership; although he remained a consultant until October 1993. On 3 June 1994 his proposals for an individual voluntary arrangement were rejected by his creditors. He presented his own petition for bankruptcy; and a bankruptcy order was made on that petition on 8 June 1994. On 10 June 1994, Mr Krasner, a licensed insolvency practitioner who had been the Nominee in relation to the proposed voluntary arrangement, was appointed trustee in bankruptcy (with effect from the date of the bankruptcy order) by the Secretary of State. Mr Dennison was then 65 years of age.
3. Mr Dennison had made provision for his retirement. On 21 April 1983 he had entered into a “Personal Pension Plan” (policies 3899161A/V) with Standard Life Assurance Company, under which he paid annual premiums of £11,000 (22 x £500) from 25 March 1983 until 25 March 1994. On 31 March 1989 he entered into a “Personal Pension Scheme” (policies K199167001/5), again with Standard Life, in return for a single premium of £10,000 paid on 3 April 1989. On 16 December 1993 he purchased from Equitable Life Assurance Society (policy ANN0010929/1) an immediate annuity of £12,750 for the remainder of his life, with a further annuity equal to half that amount for his widow, should she survive him. On the following day, 17 December 1993, he elected that the benefits under the Standard Life policies should vest with immediate effect. As a result, both Standard Life policies are now, also, in payment. The annuity payable under policies 3899161A/V is £27,525 gross (with a widow’s pension of £9,175 p.a.); and the amount payable under policies K199167001/5 is £1,590 (with a widow’s pension of £530 p.a.).
4. On 8 June 1997 Mr Dennison was discharged from bankruptcy under the automatic provisions in section 279 of the Insolvency Act 1986.
The underlying facts: Lawrence v Lesser
5. Mr Lesser is also a former chartered accountant. On 18 August 1994 he was adjudged bankrupt on his own petition. He was then 60 years of age. An insolvency practitioner was appointed trustee in bankruptcy at a meeting of creditors held on 27 October 1994. The present trustee, Mr Lawrence, was appointed in his place on 6 April 1998. Mr Lesser was discharged from bankruptcy on 18 August 1997 under the automatic provisions.
6. At the date of the bankruptcy order, Mr Lesser was in receipt of the following vested annuities: (i) annuities of (together) £2,983 under Scottish Widows’ policies 1805821 and 2200459; (ii) an annuity of £854 under London Life policies V781988P and VF23184R (renumbered XF23184B); (iii) annuities of (together) £4,494 under Royal Insurance policies CP4948736 and CP4948711; (iv) an annuity of £1,782 under Prudential Holborn policy 0912 572110; and (v) an annuity of £935 under Sun Life of Canada policy 30614606A. In addition, he was entitled to benefits under five Crusader Life policies, LB6070168, LB6070169, LK6070170, LD6070171 and LB6070172, purchased on 28 November 1986 in consideration for the payment of annual premiums of £3,500 (5 x £700); and under Commercial Union policy A12159840 purchased on 2 August 1986 in consideration for a single premium of £1,000. Benefits under those policies were not in payment at the date of the bankruptcy order. In 1996 Mr Lesser, without reference to the trustee, elected to receive cash sums under the Crusader Life policies (together £10,448) and to take fixed five year annuities (together £3,165). The annuity contracts, issued by Britannia Life as successor to the undertaking of Crusader Life were renumbered 631962, 631982, 631992, 632009A and 632100J. The benefits under the Commercial Union policy A12159840 vested, at the trustee’s election, on 7 April 1998. The trustee received a cash sum of £975 on that date; and there is now an annuity payable of £279 or thereabouts.
The annuity contracts
7. The policies taken out by Mr Dennison and Mr Lesser before 1 July 1988 were written as annuity contracts for approval under Section 226 of the Income and Corporation Taxes Act 1970 (“ICTA 1970”). Those policies are (i) Mr Dennison’s Standard Life policies 3899161A/V, (ii) Mr Lesser’s Crusader Life policies 6070168/72, (iii) Mr Lesser’s London Life policies V781988P and VF23184R, (iv) Mr Lesser’s Commercial Union policy A12159840 and (v) Mr Lesser’s Sun Life policy 0614606.
8. Section 226, together with the other sections in Chapter III (“Retirement Annuities”) of Part IX ICTA 1970, gave valuable relief from tax in respect of annuity contracts taken out by way of provision for old age. Relief from income tax was given (to the extent prescribed in section 227 ICTA 1970) in respect of a “qualifying premium” paid by an individual, who was (or would have been, but for an insufficiency of profits or gains) chargeable to income tax in respect of relevant earnings from any trade, profession, vocation, office or employment, under an annuity contract “for the time being approved by the Board [of Inland Revenue] as having for its main object the provision for the individual of a life annuity in old age”. Further, any annuity payable to the same individual was to be treated as earned income of the annuitant to the extent to which it was payable in return for any amount on which qualifying premium relief had been given. An insurance company was exempt from tax on income and chargeable gains in respect of investments and deposits of so much of its annuity fund as was referable to pension annuity business (that is to say, the making of annuity contracts approved under section 226 ICTA 1970) – see section 314 ICTA 1970.
9. Section 226(2) ICTA 1970 required that the Board should not approve a contract unless certain conditions were satisfied. Those conditions included the requirement that the contract should include “provision securing that no annuity payable under it should be capable in whole or in part of surrender, commutation or assignment”.
10. It is a feature of all the annuity contracts which I have described that they contain a restriction on alienation. By way of example it is sufficient to refer, first, to provisions 15(i) and (iii) of the Policy Provisions contained in Standard Life booklet ML9 which are incorporated in Mr Dennison’s Standard Life policies 3899161A/V:
“15 Inland Revenue Requirements
(i) This policy is approved as an Annuity Contract by the Commision- ers of Inland Revenue under section 226 of the Income and Corporation Taxes Act 1970 as amended and no alteration shall be permitted unless approved by the Commissioners of Inland Revenue.
…
(iii) This policy and the benefits payable hereunder shall not be capable in whole or in part of commutation or surrender (except as provided under section 226(2) Income and Corporation Taxes Act 1970 or section 26 Finance Act 1978) nor shall any annuity be capable of assignment (except by Will) away from the Person Assured , . . .”
11. The purpose of that restriction, as paragraph 15(i) suggests, was to ensure that those policies – which were purchased in April 1983 – qualified, and continued to qualify, for approval under section 226 ICTA 1970. There is a similar restriction in condition 7 of the Conditions relating to Mr Lesser’s Crusader Life policies; in clause 9 of his London Life policies; in section 2 of the policy provisions annexed to his Commercial Union policy; and in the General Provisions annexed to his Sun Life policy.
12. Section 226 ICTA 1970 was replaced (in relation to contracts made before 1 July 1988) by sections 619 and 620 in Chapter III (“Retirement Annuities”) of Part XIV of the Income and Corporation Taxes Act 1988 (“ICTA 1988”). In effect, the “section 226 regime” was continued in relation to existing contracts; but was not available in relation to contracts made on or after 1 July 1988.
The personal pension arrangements
13. Chapter IV (“Personal Pension Schemes”) of Part XIV ICTA 1988 introduced, with effect from 1 July 1988, a new regime in relation to provision for old age made under “personal pension arrangements”. Personal pension arrangements are arrangements made by an individual in accordance with a “personal pension scheme”. A personal pension scheme, in that context, is a scheme whose sole purpose is the provision of annuities, income withdrawals or lump sums under arrangements made by individuals in accordance with the scheme. Provision is made in Chapter IV, Part XIV ICTA 1988 for approval of a personal pension scheme by the Board of Inland Revenue. Tax relief is given in respect of contributions paid by an individual under approved pension arrangements – see section 639 ICTA 1988. An insurance company is exempt from corporation tax on income and chargeable gains in respect of so much of its long term business fund as is referable to pension business – see section 438 ICTA 1988. Pension business includes the making of contracts approved under section 620 ICTA 1988 (existing section 226 ICTA 1970 contracts) and contracts made under approved pension arrangements within Chapter IV, Part XIV ICTA 1988 – see section 431B ICTA 1988.
14. The requirements for the approval of a personal pension scheme under Chapter IV, Part XIV ICTA 1988 are similar to those formerly contained in section 226 ICTA 1970. The relevant provisions are in section 633 (“Scope of benefits”), section 634 (“Annuity to member”) and section 635 (“Lump sum to member”) ICTA 1988. Section 634(6) ICTA 1988 provides that an annuity payable under an approved scheme must not be capable of assignment or surrender (except that an annuity for a term certain may be assigned by will or by the annuitant’s personal representatives in the distribution of his estate). Section 635(5) ICTA 1988 provides that the right to payment of a lump sum payable under an approved scheme must not be capable of assignment or surrender.
15. The policies taken out by Mr Dennison and Mr Lesser after 1 July 1988 were by way of arrangements under approved personal pension schemes within Chapter IV, Part XIV ICTA 1988. Those policies are (i) Mr Dennison’s Standard Life policies K199167001/5 (written under the Standard Life Personal Pension Scheme for the Self-Employed), (ii) Mr Dennison’s Equitable Life policy ANN0010929 (written under the Equitable Personal Pension Scheme), (iii) Mr Lesser’s Scottish Widows’ policy 2200459 and, I think, also his policy 1805821 (written under Scottish Widows’ Appropriate Personal Pension Scheme), (iii) Mr Lesser’s Prudential Holborn policy 0912 572110 (written under the Prudential Holborn Personal Pension Scheme), and (iv) Mr Lesser’s Royal Insurance policy CP4948736 and, I think, also his policy CP4948711 (written under the Royal Life Personal Retirement Plan).
16. Each of the personal pension schemes to which I have referred includes a rule prohibiting alienation of benefits. An example is Rule 14.2 of the Rules governing the Standard Life scheme, under which policy K199167001 was issued to Mr Dennison in May 1989:
“14.2 Assignment
Rights to a lump sum retirement benefit under the Scheme may not be assigned or surrendered.
No pension secured with a Member’s Fund may be assigned or surrendered. The only exception is that a pension which continues to a person’s estate after his or her death may be assigned by his will or by his personal representatives in distributing his estate . . .”
17. The same prohibition appears (as rule 14.2) in the Integrated Model Rules annexed to Mr Dennison’s Equitable Life policy ANN0010929; and in the Rules governing Mr Lesser’s Scottish Widows’ policies. A similar restriction is found in Condition 1(iii) of Mr Lesser’s Royal Life Personal Retirement Plan; and in provision 14.2 of the Prudential Holborn Scheme.
These proceedings
18. On 2 May 1996 Mr Krasner issued an originating application in the Croydon County Court – to which Mr Dennison and Standard Life were respondents – seeking a declaration that the Standard Life policies 3899161 and K199167001/5 formed part of the bankrupt’s estate and had vested in the trustee; and an order that Standard Life pay to the trustee all monies due under those policies. The proceedings were transferred to the High Court on 22 August 1996. On 8 May 1997 the application was amended to claim a similar declaration in respect of the Equitable Life policy ANN010929/1; and Mrs Margaret Dennison and Equitable Life were added as respondents. On 1 September 1997 the application was adjourned to the Judge. Neither Standard Life nor Equitable Life have taken any active part in the proceedings.
19. The application in Krasner v Dennison came before Mr Justice Blackburne on 7 July 1999. At the invitation of both parties, he took the view that he should follow the decision of Mr Justice Ferris in In re Landau [1998] Ch 223; and, accordingly, made the declarations sought by the trustee in bankruptcy. He granted permission to appeal to this Court.
20. Mr Lesser’s trustee commenced proceedings on 8 March 1999, by originating application in the Southend County Court. He sought a declaration that the rights and benefits under the policies which I have described (and any other policies to which Mr Lesser was entitled at the date of the bankruptcy order) vested in the trustee; and an order requiring Mr Lesser to pay over to the trustee monies received by him under those policies (said to amount together to £36,764). The application in Lawrence v Lesser was heard by His Honour Judge Yelton on 6 September 1999. In the light of the decision in In re Landau he made the declaration and the order sought. Mr Lesser appealed to a single Judge of the High Court, under section 375(2) of the Insolvency Act 1986 and rule 7.48(2) of the Insolvency Rules 1986. That appeal came before Mr Justice Jacob on 16 November 1999. He dismissed the appeal, but granted permission to appeal to this Court.
21. It is in those circumstances that there are now before us (i) an appeal by Mr Dennison from the order made by Mr Justice Blackburne on 7 July 1999 in the proceedings Krasner v Dennison, and (ii) an appeal by Mr Lesser from the order made by Mr Justice Jacob on 16 November 1999 in the proceedings Lawrence v Lesser. In neither appeal (for reasons which are understandable) do we have the benefit of a reasoned judgment in the court below. The reasons for the orders which are the subject of these appeals are to be found in the judgment of Mr Justice Ferris in In re Landau.
The vesting of a bankrupt’s estate in his trustee
22. Before turning to the judgment in In re Landau it is convenient to refer to the provisions in Part IX (“Bankruptcy”) of the Insolvency Act 1986 (“IA 1986”) relevant to the vesting of property in the trustee in bankruptcy.
23. Section 306 IA 1986 provides for the vesting of the bankrupt’s estate in the trustee immediately on his appointment. It is in these terms:
“306(1) The bankrupt’s estate shall vest in the trustee immediately on his appointment taking effect or, in the case of the official receiver, on his becoming trustee.
(2) Where any property which is, or is to be, comprised in the bankrupt’s estate vests in the trustee (whether under this section or under any other provision of this Part), it shall so vest without any conveyance, assignment or transfer.”
24. In that context the “bankrupt’s estate” is defined by section 283(1) IA 1986:
“283(1) Subject as follows, a bankrupt’s estate for the purposes of any of this Group of Parts [Parts VIII to XI IA 1986] comprises –
(a) all property belonging to or vested in the bankrupt at the commencement of the bankruptcy, and
(b) any property which by virtue of any of the following provisions of this Part [Part IX IA 1986] is comprised in that estate or is treated as falling within the preceding paragraph.
. . .
(4) References in any of this Group of Parts to property, in relation to a bankrupt, include references to any power exercisable by him over or in respect of property . . . and a power exercisable over or in respect of property is deemed for the purpose of any of this Group of Parts to vest in the person entitled to exercise it at the time of the transaction or event by which it is exercisable by that person (whether or not it becomes so exercisable at that time).
. . .
(6) This section has effect subject to the provisions of any enactment not contained in this Act under which any property is to be excluded from a bankrupt’s estate.”
25. In that context, the commencement of the bankruptcy means the day on which the bankruptcy order is made – see section 278 IA 1986. “Property” is defined, in section 436 IA 1986, to include:
“. . . money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property;”
26. The basic provision, therefore, is that all property (including things in action, present or future, vested or contingent) belonging to or vested in the bankrupt at the date of the bankruptcy order vests in the trustee immediately on his appointment – sections 283(1)(a) and 306(1) IA 1986. In the interim, between the making of the order and the appointment of a trustee, the official receiver is receiver and manager of the bankrupt’s estate – see section 287(1) IA 1986. Property not belonging to or vested in the bankrupt at the date of the bankruptcy order, but acquired by him subsequently (“after-acquired property”), does not vest in the trustee unless and until it becomes comprised in the bankrupt’s estate by virtue of some other provision in Part IX IA 1986 – see section 283(1)(b) IA 1986.
27. After-acquired property becomes comprised in the bankrupt’s estate under the provisions in section 307 IA 1986. The section is in these terms, so far as material:
“307(1) Subject to this section and section 309, the trustee may by notice in writing claim for the bankrupt’s estate any property which has been acquired by, or has devolved upon, the bankrupt since the commencement of the bankruptcy.
(2) . . .
(3) Subject to the next following subsection, upon the service on the bankrupt of a notice under this section the property to which the notice relates shall vest in the trustee as part of the bankrupt’s estate; and the trustee’s title to that property has relation back to the time at which the property was acquired by, or devolved upon, the bankrupt.
(4) …
(5) References in this section to property do not include any property which, as part of the bankrupt’s income, may be the subject of an income payments order under section 310.”
28. Section 309 IA 1986, to which section 307 IA 1986 is made subject, requires that, except with the leave of the court, a notice under section 307 shall not be served after the end of the period of 42 days beginning with the day on which it first came to the notice of the trustee that the property in question had been acquired by, or had devolved upon, the bankrupt. Section 307(4) IA 1986, to which section 307(3) is made subject, protects the title of persons who themselves acquire after-acquired property from the bankrupt in good faith, for value and without notice of the bankruptcy.
29. Section 307(5) IA 1986 excludes from the operation of section 307(3) “property which, as part of the bankrupt’s income, may be the subject of an income payments order under section 310 IA 1986”. Section 310 is in these terms, so far as material:
“310(1) The court may, on the application of the trustee, make an order (“an income payments order”) claiming for the bankrupt’s estate so much of the income of the bankrupt during the period for which the order is in force as may be specified in the order.
(2) The court shall not make an income payments order the effect of which would be to reduce the income of the bankrupt [when taken together with any payments to which subsection (8) applies] below what appears to the court to be necessary for meeting the reasonable domestic needs of the bankrupt and his family.
(3) An income payments order shall, in respect of any payment of income to which it is to apply, either –
(a) require the bankrupt to pay the trustee an amount equal to so
much of that payment as is claimed by the order, or
(b) require the person making the payment to pay so much of it as is
so claimed to the trustee, instead of to the bankrupt.
(4) . . .
(5) Sums received by the trustee under an income payments order form part of the bankrupt’s estate.
(6) An income payments order shall not be made after the discharge of the bankrupt, and if made before, shall not have effect after his discharge . . .
(7) For the purposes of this section the income of the bankrupt comprises every payment in the nature of income which is from time to time made to him or to which he from time to time becomes entitled, including any payment in respect of the carrying on of any business or in respect of any office or employment [and any payment under a pension scheme but excluding any payment to which subsection (8) applies.
(8) This subsection applies to –
(a) payments by way of guaranteed minimum pension; and
(b) payments giving effect the bankrupt’s protected rights as a
member of a pension scheme.
(9) In this section, “guaranteed minimum pension” and “protected rights” have the same meaning as in the Pension Act 1993.]”
[The words within the square brackets, in subsections (2), (7), (8) and (9), were added by the Pensions Act 1995]
30. At first sight the scope of section 310 IA 1986 seems reasonably clear. It applies to property (“income of the bankrupt”) which would not, but for an order under the section, form part of the bankrupt’s estate. It does not apply to property which already (absent any order under the section) does form part of the estate. There are four factors which point to that conclusion. First, the order is made on the application of the trustee. There would be no need for the trustee to apply for an order “claiming for the bankrupt’s estate” property that was already comprised in the estate. Second, the effect of the order is that sums received by the trustee under it form part of the bankrupt’s estate – see section310(5) IA 1986. There would be no need for that provision if the property was already comprised in the estate. Third, section 310(3) IA 1986 provides that the order must be addressed either (a) to the bankrupt, requiring him to make a payment to the trustee of an amount out of the payment which he has received or (b) to the person who would otherwise be making the payment to the bankrupt, requiring him to make a payment to the trustee instead of to the bankrupt. That provision clearly contemplates that the monies to be paid to the trustee pursuant to the order would not be payable to him but for the order. Fourth, there is nothing in the section which enables the bankrupt to apply for an order against the trustee; as there would need to be if the section was intended to apply to property which (absent any order under the section) was already part of the estate.
31. It follows that the property to which section 310 applies (“income of the bankrupt”) is not property within section 283(1)(a) IA 1986 (“property belonging to or vested in the bankrupt at the commencement of the bankruptcy”). Property belonging to or vested in the bankrupt at the commencement of the bankruptcy does form part of the bankrupt’s estate; unless it is expressly excluded from the estate by some other provision in section 283 itself – see, for example, section 283(2) (tools of the trade), section 283(3) (property held on trust), section 283(3A) (assured, protected and secure tenancies) – or by some other enactment (section 283(6) IA 1986). Property excluded under sections 283(2) and (3A) is the subject of specific “claw-back” provisions -see section 308 and 308A IA 1986. Section 310 IA 1986 is not part of that scheme. The section is plainly intended to apply to after-acquired property, to which the bankrupt had no entitlement at the date of the bankruptcy order. Further, the property to which the section does apply (“income of the bankrupt”) is taken out of the provisions of section 307 IA 1986 by subsection (5) of that section. So it is after-acquired property which can only be claimed for the estate by means of an income payments order.
32. With these considerations in mind it is not difficult to identify the nature of the property which is within section 310 IA 1986. It is described in section 310(7) as originally enacted:
” .. . . every payment in the nature of income which is from time to time made to [the bankrupt] or to which he from time to time becomes entitled, including any payment in respect of the carrying on of any business or in respect of any office or employment . . .”
33. The section is clearly intended to apply to income to which the bankrupt had no entitlement at the date of the bankruptcy order; but to which he becomes entitled during the course of his bankruptcy – say, as earnings from his profession or employment. That income is to be made available to meet the claims of his creditors in the bankruptcy; save to the extent that it is needed to meet the reasonable domestic needs of the bankrupt and his family – see section 310(2) IA 1986. The bankrupt is not to be the slave of his trustee; but, if he is earning during the bankruptcy, he may be required to provide for his creditors out of his earnings. The income to which the section applies is not restricted to earnings; it includes other income which the bankrupt may receive during the bankruptcy – say, an allowance from a parent or other relative, or income under a discretionary trust. But the section is not intended to apply to income which the bankrupt receives by virtue of some right to which he was entitled at the date of the bankruptcy order. In such case the right, and the income received by virtue of that right, forms part of the bankrupt’s estate under the provisions of section 283(1)(a) IA 1986. There is no need for the trustee to have recourse to section 310 IA 1986 in those circumstances.
In re Landau (a bankrupt)
34. It is convenient, now, to examine the decision in In re Landau [1998] Ch 223. At the date of the bankruptcy the bankrupt was entitled to a pension, payable in the future on his attaining the age of 65 years, under a policy which had been approved as an annuity contract for the purposes of section 226 ICTA 1970. The bankrupt, a former solicitor, was aged 61 years when the bankruptcy order was made in 1990. He was discharged under the automatic provisions in 1993. The annuity became payable when he attained age 65 years in the following year. He claimed the annuity payments. The trustee, after some equivocation, claimed to be entitled to elect under the policy to commute part of the annuity for a tax free lump sum; and to take that lump sum and the reduced annuity as part of the bankrupt’s estate. The policy contained the familiar restriction against alienation; required as a condition of Revenue approval.
35. Mr Justice Ferris, at [1998] Ch 223, 231E-G, identified three main issues for decision: (i) whether, if the restriction on alienation were disregarded, the policy would constitute “property belonging to or vested in [the bankrupt] at the commencement of the bankruptcy”, so as to form part of the estate by virtue of section 283(1)(a) IA 1986; (ii) if so, whether that result was precluded by the restriction on alienation in the policy; and (iii) whether, if the policy vested in the trustee as part of the bankrupt’s estate, was it nevertheless within the scope of section 310 IA 1986 so as to be available to meet the claims of creditors only if and insofar as an income payments order were made. The bankrupt having been discharged from his bankruptcy, it was too late to make such an order – see section 310(6) IA 1986.
36. The judge decided the first of those issues in favour of the trustee. He pointed out that the `bundle of contractual rights’ under the pension policy to which the bankrupt had been entitled at the commencement of the bankruptcy fell within the description `things in action . . . whether present or future or vested or contingent’; and so had to be regarded as within the definition of `property’ in section 436 IA 1986. It was immaterial that the policy was not in payment at the commencement of the bankruptcy. At the commencement of the bankruptcy the bankrupt had a present right to require the pension provider to make payments under the policy in the future. It was that right – and the associated rights to elect when payments should commence – which formed part of the bankrupt’s estate for the purposes of section 283(1)(a) IA 1986; and which vested in the trustee immediately on his appointment, under the provisions of section 306 IA 1986.
37. There is no challenge, on the present appeals, to the conclusion reached by Mr Justice Ferris on the first of the issues which he decided. If I may say so, Mr Justice Ferris was plainly right to reach the conclusion which he did; and for the reasons which he gave. The decision not to challenge that conclusion was correct.
38. Mr Justice Ferris decided the second of those issues in favour of the trustee also. He pointed out, correctly in my view, that the provisions of section 226 ICTA 1970 – under which the policy with which he was concerned had been written – were of limited relevance to the question which he had to decide. Those provisions did not, of themselves, purport to make the rights under the policy inalienable; they simply provided the background against which the policy itself fell to be construed. The policy was plainly intended to satisfy the requirements for approval under section 226 ICTA 1970; so, in the case of ambiguity (if any) it would be appropriate to construe the policy in a sense which gave effect to that intention. But the answer to the question “did the restriction on alienation prevent the rights under the policy vesting in the trustee in bankruptcy” lay in the terms of the policy itself. In In re Landau, the relevant term was in paragraph 11 of the schedule: “This policy cannot be surrendered and no annuity can be assigned or commuted except as provided in provisions 8 and 9 of this schedule.” The judge held that, as a matter of construction, the prohibition against assignment in paragraph 11 did not extend to transmission by operation of law; in particular the prohibition did not seek to prevent the vesting of the rights under the policy in a trustee in bankruptcy pursuant to section 306 IA 1986 – see [1998] Ch 223, 237B-C.
39. The third of the issues for decision in In re Landau was whether, if the policy vested in the trustee as part of the bankrupt’s estate, was it nevertheless within the scope of section 310 IA 1986 so as to be available to meet the claims of creditors only if and insofar as an income payments order were made; an order which, on the facts in In re Landau, the court could not make. Mr Justice Ferris decided that issue in favour of the trustee. He was satisfied that “on the ordinary meaning of the language used in section 310” that section had no application to property or income which has vested in the trustee in bankruptcy under section 306 IA 1986. I have already indicated, earlier in this judgment, why I share that view. But, after referring to a number of authorities on the effect of section 51(2) of the Bankruptcy Act 1914 – which he described as the statutory predecessor of section 310 IA 1986 – and its predecessors, Mr Justice Ferris posed the question: “whether the decisions on section 51(2) of the Act of 1914 and its predecessors oblige me to give a similar effect to section 310, notwithstanding the view I take as to the ordinary meaning of the words used in section 310.” He answered that question in the negative. He held that the right to payment of the annuity payable under the policy with which he was concerned vested in the trustee as part of the bankrupt’s estate on his appointment and that section 310 IA 1986 had no application to it when it became payable.
The issues on these appeals.
40. I have referred to the judgment in In re Landau [1998] Ch 223 at some length because – as I have already indicated – it is in that judgment that the reasons for the orders which are the subject of the present appeals are to be found. The issues raised in the present appeals, as identified in the notices of appeal lodged on behalf of Mr Dennison and Mr Lesser and summarised in the skeleton arguments submitted by their respective counsel, are these:
(1) Do the statutory restrictions which restrict assignment of pensions policies prevent such policies from constituting `property belonging to or vested in the bankrupt at the commencement of the bankruptcy’ so as to form part of the bankrupt’s estate by virtue of section 283(1) IA 1986?
(2) If the policies do vest in the trustee as part of the bankrupt’s estate, are they or the annuities payable under them caught by section 310 IA 1986, so that (notwithstanding that they have vested in the trustee) the income under them belongs to the bankrupt and becomes available to the creditors only if an income payments order is made under that section?
3(i) If the effect of IA 1986 is that pension policies vest in a trustee in bankruptcy, without the Court having jurisdiction as to whether some or all of the pension should be paid to the bankrupt, would that constitute a breach of Schedule 1, Part II of Article 1 of the European Convention of Human Rights (sic)?
(3)(ii) If the effect of IA 1986 is that the policies in existence as at the date of the coming into force of that Act vest in the trustee in bankruptcy without the Court having jurisdiction as to whether some or all of the pension should be paid to the bankrupt, would that constitute a breach of the said Article 1?
(3)(iii) In either case (3)(i) or (3)(ii) does IA 1986 admit of any construction which does not produce this result?
41. The reference in Mr Dennison’s skeleton argument to “Schedule 1, Part II of Article 1 of the European Convention of Human Rights” is to be understood as a reference to Article 1 of the First Protocol to the European Convention on Human Rights. The First Protocol to the Convention is incorporated as Part II of Schedule 1 to the Human Rights Act 1998. The Act does not come into force in England and Wales until 2 October 2000.
Do the statutory restrictions which restrict assignment of pensions policies prevent such policies from vesting in the trustee in bankruptcy as part of the bankrupt’s estate?
42. This is, in effect, a re-formulation of the second of the three issues determined by Mr Justice Ferris in In re Landau [1998] Ch 223. As Mr Justice Ferris pointed out, the answer lies not in the statutory provisions, contained in section 226 ICTA 1970 and, now, in Chapter IV, Part XIV ICTA 1988, but in the terms of the policies themselves and (I would add) in the general law. The statutory provisions do not restrict the alienation of rights or benefits under retirement annuity contracts or under personal pension schemes. Those provisions do not, and do not purport to, do anything other than prescribe the conditions which must be satisfied before a retirement annuity contract or a personal pension scheme can be approved by the Board of Inland Revenue and so qualify for favourable tax treatment. It is appropriate to have those provisions in mind when construing the terms of the policies; but, unless the policies themselves have the effect, on their true construction and having regard to the general law, that, on the bankruptcy of the policyholder, the rights and benefits thereunder do not vest in his trustee, the question posed must be answered in the negative. There is nothing in the provisions in section 226 ICTA 1970 and in Chapter IV, Part XIV ICTA 1988 which leads to a different conclusion.
43. Section 226 ICTA 1970 was first enacted as section 43 of the Finance Act 1956. That section was enacted in order to give effect to recommendations in the Report of the Committee on the Taxation Treatment of Provisions for Retirement (1954, Cmnd. 9063, “the Millard Tucker Report”). The problem to which section 43(2) of the Finance Act 1956 (re-enacted as section 226(2) ICTA 1970) was addressed is identified at paragraph 201 of the report:
“The object of the requirement suggested in paragraphs 160 and 164 above that, with certain exceptions, benefits should take the form of non-commutable pensions is to ensure that they are taxable. That object might be wholly or partly defeated if the pensioner could assign his pension for a lump sum, either to somebody liable to a lower rate of tax, or, by way of surrender, to the person by whom it is paid, or otherwise. We therefore recommend that pensions should be non-assignable, as well as non-commutable, and that this should be made a condition of automatic approval. It may not always be possible, however, to prevent the assignment of a pension when it is required by operation of law. This might happen, for example, where the Court is making provision for the maintenance of a divorced wife or the children, or, with some types of pension, in bankruptcy proceedings. The position depends on the terms of the particular contract under which the pension is paid. The mere fact that the pension may be assigned or charged by operation of law, without the consent of the pensioner, should not disqualify the scheme from automatic approval.” [emphasis as in original text]
44. It is clear, therefore, that the Committee accepted that the requirement that pensions should be non-assignable – which, as they recommended, should be a condition of approval for favourable tax treatment – would not prevent the transfer of rights by operation of law; in particular, by operation of the bankruptcy legislation. As the Committee recognised “The position depends on the terms of the particular contract under which the pension is paid.”
45. What, then, is the position under the retirement annuity contracts and personal pension schemes in the present case? The relevant restriction is limited to a contractual prohibition against assignment. There is no provision which seeks to make void a purported assignment. There is no provision which seeks to forfeit a pension in the event of bankruptcy.
46. The starting point, as it seems to me is the long established principle that it is contrary to the public interest to allow a party to contract out of the operation of the bankruptcy code – see Ex parte Mackay, In re Jeavons (1873) 8 Ch App 643, applied in British Eagle International Airlines Ltd v Compagnie Nationale Air France [1975] 1WLR 758 (HL). It was this principle which led Mr Justice Joyce to hold, in In re Fitzgerald [1903] 1 Ch 933, that a contract by a wife to settle property on an inalienable trust for her husband (if he survived her) was void and inoperative. As he put it, at page 940:
“But according to the law of England an inalienable trust cannot be created in favour of a man even for his maintenance. A mere prohibition of alienation cannot effectually be imposed except in the case of a married woman’s separate property: Brandon v Robinson (18) Ves. 429; Graves v Dolphin 1 Sim.66; Younghusband v Gisborne (1844) 1 Coll. 400. It is contrary to the policy of the law in this country that property should be settled so as to continue in the enjoyment of a bankrupt notwithstanding bankruptcy.”
47. It is, to my mind, unarguable that a mere restriction against alienation in an annuity contract, or in a pensions scheme, can prevent the benefits under that contract, or under that scheme, from vesting in a trustee in bankruptcy.
48. The need to protect certain classes of pension benefits from the claims of creditors has been recognised by Parliament for at least 130 years. Where it has thought it right to provide such protection, Parliament has enacted that an assignment of the pension rights shall be void. Examples are found in the Naval and Marine Pay and Pensions Act 1865, in the Army Act 1955 and, now, in the Superannuation Act 1972. Section 5(1) of the last named Act provides an illustration of the statutory formula that has traditionally been employed:
“5(1) Any assignment (or, in Scotland, assignation) of or charge on, and any agreement to assign or charge, any benefit payable under a scheme made under section 1 of this Act shall be void.”
49. The courts have given effect to that formula by holding that it precludes vesting in a statutory assignee or trustee in the event of bankruptcy. In the light of that legislative history, I would not, myself, adopt the reasoning of Mr Justice Ferris in In re Landau [1998] Ch 223, at page 237B-C, in so far as he accepted the argument of counsel for the trustee that the relevant restriction against assignment in the policy which he had to consider did not purport to extend to vesting in a trustee in bankruptcy by operation of law. I would prefer to base my conclusion on the principle – which Mr Justice Ferris treated as an additional ground for his decision on this issue – that an attempt to provide, by contract, that benefits will be inalienable on a bankruptcy must fail on grounds of public policy.
50. An early example of a more explicit prohibition against vesting in the trustee on bankruptcy can be found in section 14(1) of the Police Pensions Act 1921, which was before the court in In re Garrett [1930] 2 Ch 137. That section provided not only that any assignment of the pension payable under the Act should be void, but (in express terms) that, on the pensioner’s bankruptcy, the pension should not pass to “any trustee or other person”. It is that formula which has been adopted in more recent legislation. Examples are to be found in sections 48(1) and (2) of the Social Security Pensions Act 1975 (in respect of a guaranteed minimum pension) and in sections 2(7) and (8) of the Social Security Act 1986 (in respect of payments to give effect to protected rights). The latter provisions are in these terms :
“2(7) Every assignment of or charge on and every agreement to assign protected rights or payments giving effect to protected rights shall be void.
2(8) On the bankruptcy of a person who is entitled to protected rights or a payment giving effect to protected rights, any protected rights or payment the assignment of which is or would be made void by subsection (7) above shall not pass to any trustee or person acting on behalf of his creditors.”
51. The provisions in sections 48(1) and (2) of the Social Security Pensions Act 1975 and in sections 2(7) and (8) of the Social Security Act 1986 were re-enacted as sections 159(4) and (5) of the Pension Schemes Act 1993; and the same protection from creditors was extended to other rights under an occupational pension scheme by section 91 of the Pensions Act 1995 – see, in particular, section 91(5):
“91(5) Where a bankruptcy order is made against a person, any entitlement or right of his which by virtue of this section cannot . . . be assigned is excluded from his estate for the purposes of Parts VIII to XI of the Insolvency Act 1986 . . .”
52. The position, therefore, is that Parliament knows well how to provide, when it thinks fit, that the general public interest that a restriction on alienation shall not be enforceable against creditors in a bankruptcy should yield to some more specific element of public policy requiring the protection of pension rights. It has done so, over many years, in relation to what may be described, generically, as public service pensions. It did so, in 1975, in relation to guaranteed minimum pensions provided by an occupational pension scheme. It extended that protection in 1986 to protected rights under an occupational pension scheme; and, in 1995, to rights generally under an occupational pensions scheme. It did not think fit to do so, in relation to retirement annuity contracts or personal pension schemes, until the enactment of section 11 of the Welfare Reform and Pensions Act 1999. In particular, it did not think fit to do so when it enacted (or re-enacted) the provisions which first appeared in section 43 of the Finance Act 1956. That must, I think, be taken to have been a deliberate legislative choice. It is not, in my view, to be circumvented by giving a strained construction to the definition of property in section 436 IA 1986; or in refusing to give effect to the clear words of sections 283(1) and 306 of that Act.
53. For those reasons I would decide the first issue of the issues raised on these appeals in the negative.
If the policies do vest in the trustee as part of the bankrupt’s estate, are they or the annuities payable under them caught by section 310 IA 1986, so that (notwithstanding that they have vested in the trustee) the income under them belongs to the bankrupt and becomes available to the creditors only if an income payments order is made under that section?
54. For the purposes of section 310 IA 1986 “the income of the bankrupt” comprises “every payment in the nature of income which is from time to time made to him or to which he from time to time becomes entitled, including any payment in respect of the carrying on of any business or in respect of any office or employment and any payment under a pension scheme . . .” – see section 310(7). The words which I have emphasised were added by section 122 of, and paragraph 15 in schedule 3 to, the Pensions Act 1995. Strictly, perhaps, they do not assist in the interpretation of section 310 IA 1986 as it was at the date of the bankruptcy orders made in respect of Mr Dennison and Mr Lesser. But it would, I think, be artificial to ignore them.
55. I have already explained why I take the view that section 310 IA 1986 can have no application to income which the bankrupt would have been entitled to receive by virtue of some right to which he was entitled at the date of the bankruptcy order. In such case the right, and the income received by virtue of that right, forms part of the bankrupt’s estate under the provisions of section 283(1)(a) IA 1986. The property to which section 310 applies (“income of the bankrupt”) is not property within section 283(1)(a) IA 1986 (“property belonging to or vested in the bankrupt at the commencement of the bankruptcy”). The words “including . . . any payment under a pension scheme” have to be read in the context of the bankruptcy legislation as a whole. In that context it is clear that those words refer to pension payments the right to receive which do not vest in the trustee on the making of the bankruptcy order – for example, payments made under a public service pension scheme to which section 5(1) of the Superannuation Act 1972 applies.
56. I find support for that view in the circumstances in which the words “including . . . any payment under a pension scheme . . .” were introduced by the Pensions Act 1995. That Act, as I have already pointed out, extended the protection against the claims of creditors in a bankruptcy, previously afforded by section 159(5) of the Pension Schemes Act 1993 to “protected rights” and “guaranteed minimum pension” payable under an occupational pension scheme, to all accrued rights under such a scheme. But, at the same time, the Act provided for the court to have power, on the application of the trustee in bankruptcy, to redress the position if satisfied that those rights had been obtained by the making of excessive contributions to the scheme – see section 95 of the Pensions Act 1995. Further, the Act gave additional protection to “protected rights” and “guaranteed minimum pension” – see paragraph 41 in schedule 3, which introduces a new subsection, subsection (4A), into section 159 of the Pension Schemes Act 1993. The new subsection 159(4A) of the 1993 Act required that no order should be made by any court the effect of which would be that a person entitled to receive payments in respect of protected rights or guaranteed minimum pension would be restrained from receiving “anything the assignment of which would be made void” by sections 159(1) or (4). In effect, therefore, the power of the court to make an income payments order under section 310(1) IA 1986 in respect of payments of that description – payments which, plainly, could not form part of the bankrupt’s estate but which would, prima facie, comprise “income of the bankrupt” within sections 310(1) and (7) IA 1986 – was curtailed. The legislative intention was reinforced by the amendment made to section 310(7) IA 1986 by paragraph 15 in schedule 3 to the Pensions Act 1995. That amendment introduced the additional words “and any payment under a pension scheme” into section 310(7) IA 1986; but qualified those words by excluding any payment to which subsection (8) applies. Section 310(8) – introduced by the same amending provision – applied to payments in respect of protected rights and guaranteed minimum pension under an occupational pension scheme. It is clear, therefore, that when Parliament amended section 310(7) IA 1986 so as to include an express reference to payments under a pension scheme it did so in the context of the changes it was making to the protection from the claims of creditors in a bankruptcy of rights under occupational pension schemes – rights which it had decided should not form part of the bankrupt’s estate. There is no reason to think that the introduction of the additional words “any payment under a pension scheme” into section 310(7) IA 1986 reflected any legislative concern to reverse what would otherwise be the plain meaning of the section as originally enacted; namely that payments the right to receive which did form part of the bankrupt’s estate were outside the scope of section 310 IA 1986 altogether.
57. The 1995 pension law reforms followed the Report of the Pension Law Review Committee (Cm 2342-1), under the chairmanship of Professor Roy Goode (as he then was). It is, I think, interesting to note the views expressed by the Goode Committee at paragraphs 4.14.33 to 4.14.35 under the general heading “Attachment of Pension Rights”. It must be kept in mind that, in expressing those views, the Committee was directing its observations to occupational pension schemes. The Committee was not concerned, in those paragraphs, with personal pension schemes – see paragraph 2.5.8 of the Report. [Note: The distinction between occupational pension schemes and personal pension schemes is made in section 1 of the Pension Schemes Act 1993.] The relevant paragraphs in the Report are these:
“4.14.33 As noted above, future pension rights are in principle an asset of the scheme member and as such are available to be taken in execution to satisfy a judgment debt and to be distributable among creditors in the scheme member’s bankruptcy. But since scheme rules nearly always provide for rights of pensions not in payment to cease on levy of execution, attachment of earnings or bankruptcy there is in practice no asset or pension income capable of being attached or otherwise being made available to creditors. Accordingly the same factor that precludes assignment renders the asset represented by future pension entitlements immune from the claims of a member’s creditors. The position is otherwise, of course, where the scheme has come into payment, as regards sums that have been paid over by the trustees to the beneficiary or have become due for payment. These are income in the hands of the scheme member and do not enjoy any greater protection from creditors than any other income of the scheme member.
4.14.34 It may be thought unfair to creditors that the asset represented by future pension rights should not be attachable. But it has to be remembered that employers do not establish schemes in order to benefit creditors of scheme members, nor is substantial tax relief given for that purpose. To allow future pension payments to be attached by execution creditors or made a bankruptcy asset would be to frustrate that fundamental purpose. The evidence submitted to us shows a broad consensus in favour of exempting future pension entitlements from the claims of creditors.
4.14.35 We therefore consider that the immunity currently granted by the Social Security Pensions Act 1975 to [guaranteed minimum payments] and entitlements to protected rights payments should be extended to cover all pension entitlements. This would not preclude execution creditors from attaching money in the hand paid to the scheme member, nor would it prevent trustees in bankruptcy from exercising their normal statutory right to apply for an income payments order requiring the bankrupt to pay over income in excess of what is necessary for meeting the reasonable domestic needs of his family. Except as provided by statute there is no reason why pension payments made or due to a scheme member should be treated differently from other income in the scheme member’s hands or enjoy any special immunity. But exemption of the asset represented by the future pension rights would give statutory effect to the protective trust provisions so widely adopted in scheme documents, enabling trustees to pay future benefits to a spouse or other dependant instead of to the scheme member.”
58. Those paragraphs bring out the points: (i) that, in principle, future pension rights are an asset which will pass to the trustee in bankruptcy; (ii) that, in the case of an occupational pension scheme, that result can be avoided by provisions in the scheme rules analogous to protective trusts; (iii) that the immunity granted to guaranteed minimum pensions and protected rights payments – that is to say, exclusion from the bankrupt’s estate – should be extended to all pension entitlements under occupational pension schemes; and (iv) that it is to income from pension entitlements which enjoy that immunity that the provisions of section 310 IA 1986 – enabling the court to make income payments orders – are intended to apply.
59. The foundation of the appellants’ argument on this second issue is the decision of the Court of Appeal in Ex parte Huggins, In re Huggins (1882) 21 ChD 85. The bankrupt had been Chief Justice of Sierra Leone. On his retirement in 1879 he was granted a pension. He returned to England and, as Sir George Jessel, Master of the Rolls, put it, at page 89 . . . “was induced to enter into a bottle washing speculation, and the result was, what might have been expected, it has brought him to ruin and bankruptcy”. The Master of the Rolls identified as “the only question” . . . “whether his creditors in the bottle washing-business are entitled to take the pension which he has so hardly earned to pay the debts which he has contracted with them”. The trustee applied for, and obtained, an order that the pension had vested in him as part of the property of the bankrupt, and for a direction what proportion of that pension should be set aside for payment of the creditors and what proportion for the bankrupt’s maintenance. The importance which the appellants attach to the decision lies in the fact that the Court of Appeal was willing to treat as “income” for the purposes of section 90 of the Bankruptcy Act 1869 income derived from property (the pension rights) which, as the court held, had vested in the trustee under section 17 of that Act.
60. Sections 89 and 90 of the Bankruptcy Act 1869 were in these terms:
“89. Where a bankrupt is or has been an officer of the army or navy, or an officer or clerk or otherwise employed or engaged in the civil service of the Crown, or is in the enjoyment of any pension or compensation granted by the Treasury, the trustee during the bankruptcy, and the registrar after the close of the bankruptcy, shall receive for distribution amongst the creditors so much of the bankrupt’s pay, half-pay, salary, emolument or pension as the court, upon the application of the trustee, thinks just and reasonable, to be paid in such manner and at such times as the court, with the consent in writing of the chief officer of the department under which the pay, half-pay, salary, emolument, pension, or compensation is enjoyed, directs.
90. Where a bankrupt is in the receipt of a salary or income other than as aforesaid, the court upon the application of the trustee shall from time to time make such order as it thinks just for the payment of such salary or income, or of any part thereof, to the trustee during the bankruptcy, and to the registrar if necessary after the close of the bankruptcy, to be applied by him in such manner as the court may direct.”
61. Those sections were subsequently re-enacted as sections 53(1) and (2) of the Bankruptcy Act 1883; and as sections 51(1) and (2) of the Bankruptcy Act 1914. They may properly be regarded as the fore-runner of what is now section 310 IA 1986. The appellants submit that, in the circumstances that the Court of Appeal was prepared to hold, in 1882, that pension payments could be income within section 90 of the Bankruptcy Act 1869 notwithstanding that the rights to those payments had vested in the trustee in bankruptcy under section 17 of that Act, so, now, it should be held that pension payments are “income” within section 310 IA 1986, notwithstanding that the rights to those payments have vested in the trustee under section 306 IA 1986.
62. Ex parte Huggins was followed – albeit, latterly, with some reluctance – over the period of one hundred years or more prior to the enactment of the new bankruptcy code now found in IA 1986. In In re Garrett [1930] 2 Ch 137 – a case in which the pension payable under the Police Pensions Act 1921 did not vest in the trustee – Mr Justice Farwell held that section 51(2) of the Bankruptcy Act 1914 applied “both to property that vests in the trustee under s. 18, sub-s. 1, and also to property not so vesting”. That decision was approved by the Court of Appeal in In re Landau [1934] Ch 549. In In re Tennant’s Application [1956] 1 WLR 874 the Court of Appeal did not find it necessary to decide whether the right to payments made by a husband to a former wife under covenant did or did not vest in the wife’s trustee in bankruptcy because, as Lord Evershed, Master of the Rolls, put it at page 882:
“. . . the monthly sums with which we are here concerned constitute income within section 51(2) [of the Bankruptcy Act 1914], and if the property in those sums did vest in the trustee (as I do not decide) then the effect of the vesting is controlled and qualified by section 51(2), so that the trustee’s rights and powers in regard to them are limited to those stated in that subsection.”
63. Both Lord Evershed, Master of the Rolls, (at page 878) and Lord Justice Jenkins (at page 884) expressed the view, in In re Tennant’s Application, that, but for the earlier decisions which were binding upon them, they would have held that section 51(2) of the Bankruptcy Act 1914 applied only to cases where the right to receive the salary or income did not vest in the trustee under the general vesting provisions of that Act. Lord Evershed, Master of the Rolls, reiterated that view in In re Cohen [1961] Ch 246, at page 260. He indicated, at page 266, that the position in relation to income the right to receive which had vested in the trustee merited reconsideration by Parliament – or by the House of Lords in its judicial capacity. Lord Justice Upjohn, who had himself doubted Ex parte Huggins when sitting at first instance in In re Tennant’s Application, agreed with the views expressed by the Master of the Rolls in In re Cohen – see page 267.
64. It may be said, therefore, that the position under the bankruptcy law in this country, as it stood up to the enactment of the new code in 1985, was that the “income” of a bankrupt fell to be dealt with under section 51(2) of the Bankruptcy Act 1914 notwithstanding that it was income the right to receive which had vested in the trustee in bankruptcy under section 53 of that Act. The reason, as explained by Lord Justice Jenkins in In re Tennant’s Application, at page 883, was that it had been held in Ex parte Huggins (1882) 21 ChD 85 that the section “controlled and qualified the operation of the vesting provisions of the Act with respect to any income to which the section applied”. But it must also be said that the Court of Appeal had expressed a strong view, in 1956 and in 1961, that the matter required reconsideration.
65. The question, therefore, is whether this court is obliged to follow Ex parte Huggins, notwithstanding the changes which have been made in the new bankruptcy legislation; or whether it may properly take the view that those changes reflect an intention, upon the reconsideration by Parliament of the position, that the law as expressed in Ex parte Huggins should be altered. I have no doubt that the changes reflect an intention to alter the law. It is important to have in mind that the treatment of after-acquired property – that is to say, property which did not belong to or was not vested in the bankrupt at the commencement of the bankruptcy – has been altered by the new legislation. The position under the 1914 Act and its predecessors was that property which was acquired by or devolved on the bankrupt after the commencement of his bankruptcy but before his discharge was part of the “property of the bankrupt divisible amongst his creditors” for the purposes of section 38 of the Bankruptcy Act 1914; and so vested automatically in the trustee – see section 38(a) and section 53(1) of the Act, and their statutory predecessors, sections 15(3) and 17 of the Bankruptcy Act 1869. The effect, therefore, was that any payment, whether by way of salary or income or otherwise, would, when received by the bankrupt and in the absence of some other provision, become part of the property of the bankrupt divisible amongst his creditors. It would, plainly, be oppressive and unworkable if every payment of salary received by the bankrupt in the course of his bankruptcy were immediately to become property divisible amongst his creditors and had to be treated as if it had vested in the trustee. In those circumstances it is easy to see why, as Lord Justice Jenkins pointed out in In re Tennant’s Application [1956] 1 WLR 874, at page 883, section 51(2) of the 1914 Act was thought to have the role of controlling and qualifying the vesting provisions of that Act. The section was needed for that purpose.
66. There is no need for section 310 IA 1986 to fulfil that role in the new legislation. After-acquired property does not automatically form part of the bankrupt’s estate – see section 283(1)(a) IA 1986. It does so only if a notice is served by the trustee in bankruptcy under section 307(1) IA 1986. But after-acquired property which, as part of the bankrupt’s income, could be the subject of an income payments order under section 310 IA 1986, cannot be the subject of a notice under section 307(1) – see section 307(5) IA 1986. Section 310 provides a separate regime in relation to after- acquired property which is in the nature of income. Such property does not form part of the bankrupt’s estate unless it is received by the trustee under an income payments order. Section 310 does not control and qualify the vesting provisions in sections 306 or 307 IA 1986; it supplements those provisions. It applies to property which would not otherwise fall within those provisions. There is no need, and no justification, for construing section 310 IA 1986 as having any application to property which has vested in the trustee on his appointment under section 306(1).
67. For those reasons I would answer the second issue raised by these appeals, also, in the negative.
Does the vesting of the pension policies (including those in force prior to 1986) in the trustee in bankruptcy, in circumstances in which the Court has no jurisdiction to direct that some or all of the pension should be paid to the bankrupt, constitute a breach of Article 1 of the First Protocol to the Convention?
68. Article 1 of the First Protocol to the European Convention on Human Rights is in these terms:
“Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.
The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.”
69. The appellants accept, of course, that the Article does not yet have the force of law in England and Wales. Nor is the court yet required, or entitled, to give effect to section 3(1) of the Human Rights Act 1998; which requires that, so far as it is possible to do so, primary and secondary legislation must be read and given effect in a way which is compatible with Convention rights. But the appellants submit, correctly, that, in construing the relevant provisions of IA 1986 the court should follow the approach indicated by Lord Diplock in Garland v British Rail Engineering Ltd [1983] 2 AC 751, at page 755A-B, and construe the words of the statute, if they are reasonably capable of bearing such a meaning, as intended to carry out an international obligation which the United Kingdom has assumed under a treaty or convention and not so as to be inconsistent with that obligation.
70. In order to achieve the result for which the appellants contend it would be necessary either (i) to construe the words in section 436 IA 1986 which define “property” in such a way as to exclude rights under retirement annuity contracts and personal pension schemes, or (ii) to construe the words in section 283(1)(a) IA 1986 (which define the bankrupt’s estate for the purposes of Part IX of the Act) in such a way as to exclude such rights where the contract or scheme contains a restriction on alienation, or (iii) to construe the words in section 306 IA 1986 (which provide for the vesting of the bankrupt’s estate in the trustee in bankruptcy immediately on his appointment) in such a way as to exclude such rights where the contract or scheme contains a restriction on alienation, or (iv) to construe section 310 IA 1986 so as to apply to income of, or derived from, property which has vested in the trustee in bankruptcy under section 306 IA 1986. We were not, I think, asked to attempt the tasks set under (i) or (ii) of that analysis. The appellants recognise, perhaps, that that would be to attempt the impossible. Nor do I think that it is possible to achieve the result for which the appellants contend – the exclusion from the vesting provisions in section 306 IA 1986 of rights under a contract or scheme which contains a restriction on alienation – by any process which can be described as the construction of section 306 itself. The submission, as I understand it (and it would not, I think, be unfair to take the view that it was not advanced with the same display of confidence or enthusiasm as the submissions under the first and second issues raised by these appeals), was that we were bound to construe section 310 IA 1986 in accordance with proposition (iv) in order to avoid an inconsistency between the legislation enacted in 1986 and the United Kingdom’s obligations under the Convention.
71. For that submission to succeed it would be necessary to be persuaded of two matters: first, that what I have held to be the true construction of section 310 IA 1986 (without regard to the convention obligations imposed on the United Kingdom by Article 1 of the First Protocol) is inconsistent with those obligations; and second, that the words used in the statute are reasonably capable of bearing the meaning for which the appellants contend. I am not persuaded of either of those matters.
72. The relevant prohibition in Article 1 of the First Protocol is against deprivation of possessions “except in the public interest and subject to the conditions provided for by law”. The reference to “the general principles of international law” in the latter part of the second sentence has no application to the taking by a State of the property of its own nationals – see paragraph 66 in the judgment of the European Court of Human Rights in James v United Kingdom (1986) 8 EHRR 123, at page 151. Further, it can hardly be said that a deprivation of property effected under the relevant provisions of the bankruptcy legislation – in the present case, by section 306 IA 1986, read in conjunction with sections 283(1)(a) and 436 IA 1986 – was not in accordance with “the conditions provided for by law”. The relevant question, as it seems to me, is whether the vesting in the trustee in bankruptcy of the bankrupt’s rights under retirement annuity contracts and personal pension schemes, in circumstances which exclude the power of the court to make an income payment order under section 310 IA 1986, is in the public interest. In that context it is relevant to have in mind that national authority is, in principle, better placed than the international judge to appreciate what is in the “public interest”; and so must be allowed a certain margin of appreciation – see the observations of the European Court of Human Rights in James v United Kingdom at paragraph 46 (8 EHRR 123 142):
“. . . the decision to enact laws expropriating property will commonly involve considerations of political, economic and social issues on which opinions within a democratic society may differ widely. The Court, finding it natural that the margin of appreciation available to the legislature in implementing social and economic policies should be a wide one, will respect the legislature’s judgment as to what is `in the public interest’ unless that judgment be manifestly without reasonable foundation.”
73. Examination of the historical treatment of pension rights under the law of England, to which I have referred earlier in this judgment, leads to the following conclusions. First, that Parliament has, for a long time, recognised a need to exclude certain pension rights (in particular, rights under public service pensions) from the full operation of the bankruptcy law – see, for example, the Naval and Marine Pay and Pensions Act 1865, the Police Pensions Act 1921, the Army Act 1955 and the Superannuation Act 1972 (and its statutory predecessors). Second, that, when this has been done, the courts have had power to make income payment orders in respect of the payments to be made in respect of those pension rights – see sections 89 and 90 of the Bankruptcy Act 1869, sections 51(1) and (2) of the Bankruptcy Act 1914 and, now section 310 IA 1986. Third, that, more recently, Parliament has thought it right to extend that regime, first, to protected rights and rights to minimum guaranteed pension under occupational pension schemes – see sections 48(1) and (2) of the Social Security Pensions Act 1975, sections 2(7) and (8) of the Social Security Act 1986 and sections 159(4) and (5) of the Pension Schemes Act 1993 – and, latterly, to rights generally under an occupational pension scheme – see section 91 of the Pensions Act 1995. Fourth, that, even more recently, Parliament has extended the regime to rights under retirement annuity contracts and personal pension schemes – see section 11 of the Welfare Reform and Pensions Act 1999. Fifth, that the extension to pension rights generally, whether under occupational pension schemes or under personal pension schemes, is to be made subject to the safeguards against abuse that were enacted, in the Pensions Act 1995, as sections 342A to 342C IA 1986 and re-enacted (in a revised form) in section 15 of the Welfare Reform and Pensions Act 1999.
74. This, then, cannot be said to be an area in which Parliament has been inactive over the past twenty five years. Clearly, Parliament has been responding to a perception of what the public interest requires in this field. It has done so against a background of judicial decisions, over very many years, that the public interest requires, generally, that a bankrupt’s property should be available to answer the claims of his creditors. In my view it would be quite impossible to hold that Parliament did not take full account of what, in its view, the public interest required when, in 1986, it enacted section 310 IA 1986 in the form in which it did; or that, for Parliament to have failed to provide that the courts should have power to make income payments orders in respect of income derived from property which had vested in the trustee in bankruptcy would have been inconsistent with the United Kingdom’s obligations under Article 1 of the First Protocol of the Convention.
75. That conclusion makes it unnecessary to consider, at any length, whether the words used in the statute are reasonably capable of bearing the meaning for which the appellants contend. But, for the reasons which I have already given, I am not persuaded that the words used are reasonably capable of bearing that meaning.
76. It follows that I would answer the third issue raised by these appeals in the negative; and that, accordingly, I would dismiss these appeals.
LORD JUSTICE MAY:
77. I agree that these appeals should be dismissed for the reasons given by Lord Justice Chadwick.
LORD JUSTICE KENNEDY:
78. I agree.
Order: Both appeals dismissed, with costs – Minute order to be lodged – Permission to appeal on both cases refused, with costs.
(Order does not form part of the approved judgment)
Malcolm v Mackenzie & Ors
[2004] EWCA Civ 1748 [2005] ICR 611, [2004] EWCA Civ 1748, [2005] 1 WLR 1238, [2005] WLR 1238
Lord Justice Chadwick:
This is an appeal from an order made on 26 February 2004 by Mr Justice Lloyd, sitting as Vice-Chancellor of the County Palatine of Lancaster, in proceedings brought by Mr William Malcolm against his trustee in bankruptcy, Mr Graham Petersen, an insolvency practitioner and a partner in the firm of Benedict Mackenzie. The appeal raises the question whether the treatment of benefits accrued under a self-employed retirementannuity contract as an asset available to meet the claims of creditors in a bankruptcy – in accordance with domestic law as, hitherto, it has been understood to be prior to the coming into operation of section 11(1) of the Welfare Reform and Pensions Act 1999 – gives proper effect to the rights conferred by article 14 of the European Convention on Human Rights and Fundamental Freedoms.
The underlying facts
The underlying facts are not in dispute. It is convenient to take them from the judgment below, [2004] EWHC 339 (Ch):
“2. Mr Malcolm was a graphic designer. He went into partnership with two other men. Being self-employed rather than an employee, there was no employer’s occupational pension scheme through which pension benefits could be provided for him. Instead he entered into a contract on 1 June 1986 with the Second Respondent [Allied Dunbar plc] under the regime then in existence for tax-approved pension provision by the self-employed. This was a retirement annuity contract, under section 226 of the Income and Corporation Taxes Act 1970. He continued to make contributions under this contract until 1993.
3. Differences arose between the partners, and the partnership came to an end. One of the three died, and the other two were faced with liabilities which they could not pay. Insolvency proceedings followed in relation to both of them and the estate of the third was also administered as an insolvent estate. In Mr Malcolm’s case, the Inland Revenue presented a bankruptcy petition and on 11 December 1996 he was made bankrupt. At first no trustee in bankruptcy was appointed. In 1998, with effect from 19 October, Mr Graham Petersen was appointed as his trustee in bankruptcy. He is a partner in the firm named as the First Respondent [Benedict Mackenzie]. He ought to be so named himself, as trustee in bankruptcy, but no point is taken on that.
4. The effect of this appointment was that his assets vested in his trustee in bankruptcy, under the Insolvency Act 1986, section 306. On 11 December 1999 Mr Malcolm was discharged from bankruptcy automatically under the 1986 Act. However, his debts have not all been paid, and those assets that had vested in the trustee in bankruptcy remain vested in him for the purpose of paying those debts. The trustee in bankruptcy’s position is that the benefit of the pension contract is one such assets, and probably the only one worth anything.
5. On September 2000 Mr Malcolm attained the age of 60, at which, under the terms of the retirement annuity contract, it would be possible for benefits to be drawn. The main benefit is an annuity. Under clause 9(2), however, there is an option to commute part of the pension and take it as a lump sum. This option is almost invariably taken, since the lump sum is taken free of tax. Clause 9(1) allows the transfer value of the contract to be applied towards another contract (the so-called open market option).
6. In July 2002 the trustee in bankruptcy sought to obtain the benefit of the retirement annuity contract from the insurer, by the application of the transfer value towards a personal pension scheme, part of which he would then have commuted for a lump sum and the rest would have been paid by way of an annuity. Mr Malcolm asserted that the trustee in bankruptcy was not entitled to it. Allied Dunbar issued a cheque but then stopped it. After some correspondence, Allied Dunbar told Mr Malcolm that they would pay the transfer value to another pension provider at the direction of the trustee in bankruptcy unless he started court proceedings to prevent them. On 5 February 2003 he issued the application notice which is before me.”
These proceedings
Mr Malcolm acted in person in the proceedings before Mr Justice Lloyd. The application, by notice dated 5 February 2003 issued in the Crewe County Court, sought injunctions against both Benedict Mackenzie and Allied Dunbar plc restraining the transfer “of my pension fund to others”. As the judge recorded (at paragraph 8 of his judgment) Allied Dunbar plc indicated that it was content to be bound by whatever order the court should think fit to make and took no part in the proceedings. At a directions hearing in October 2003, the judge ordered that notice of the proceedings be given to the Department of Trade and Industry and the Department of Work and Pensions – on the grounds that Mr Malcolm seemed to him to be contending that the relevant provisions of domestic legislation were incompatible with his Convention Rights. The two Government Departments took the opportunity to intervene. They appeared by counsel at the hearing before the judge, as they have on this appeal. The judge also had the benefit of assistance from an advocate to the court, appointed by the Attorney-General at his request.
The judge dismissed Mr Malcolm’s application and refused permission to appeal. An application for permission was made to this Court (Lord Justice Neuberger) on 18 May 2004 at an oral hearing. In giving judgment on that application ([2004] EWCA Civ 584) Lord Justice Neuberger pointed out that Mr Justice Lloyd had identified three points raised by Mr Malcolm:
“The first was that his pension fund should not form part of his estate under the insolvency legislation as it stood at 1996 (the date of his bankruptcy). The second argument was that, even if the first argument was wrong, Mr Malcolm was entitled to the benefit of s11 of the Welfare Reform and pensions Act 1999 (“s11″). Mr Malcolm’s third argument was that, if his first and second arguments were wrong, then he was entitled to rely on Article 14 of ECHR.”
Lord Justice Neuberger took the view that there was no real prospect of persuading the Court of Appeal that Mr Justice Lloyd had been wrong to decide the first two of those points against Mr Malcolm; but he was persuaded that permission should be granted in relation to the third point – namely the reliance on article 14 of the Convention. So it is that the appeal to this Court was limited to that ground. Mr Malcolm has been represented before us by counsel instructed by the Bar Pro-Bono Unit. The Court is grateful for the assistance he has been able to give.
The Convention on Human Rights
It was accepted in this Court that – as the judge had held – Mr Malcolm could not rely on the provisions enacted in the Human Rights Act 1998; in particular, he could not rely on section 6 of that Act to complain of any act done by a public authority (which, in this context, would have included his trustee in bankruptcy) before 2 October 2000 when the 1998 Act came into force. This was not a case in which section 22(4) of that Act had any application. On the basis of that concession – which, as it seems to me, was rightly made in the light of the decision of the House of Lords in Wilson v First County Trust (No 2) [2003] UKHL 40, [2004] 1 AC 816 – it must follow that section 3(1) of that Act has no application; and that it would not be open to the Court (even if it would otherwise have been minded to do so) to make a declaration of incompatibility under section 4 of the 1998 Act. In the event, therefore, although we heard submissions from counsel for the two Government Departments, the basis upon which they had been invited to intervene has fallen away.
Mr Malcolm, through his counsel, did not seek to pursue arguments based on the provisions of the 1998 Act. His case was that, even where the Act does not apply, the provisions of the European Convention on Human Rights were to be used as an interpretative tool. He relied on observations of mine, in Krasner v Dennison and others, Lawrence v Lesser [2001] Ch 76, 107A-B, paragraph 69, that:
“. . . in construing the relevant provisions of the [Insolvency Act 1986] the court should follow the approach indicated by Lord Diplock in Garland v British Rail Engineering Ltd [1983] 2 AC 751 at 755, and construe the words of the statute, if they are reasonably capable of bearing such a meaning, as intended to carry out an international obligation which the United Kingdom has assumed under a treaty or convention and not so as to be inconsistent with that obligation.”
It is in that context that we were referred to article 14 of the Convention and to article 1 of the First Protocol.
Article 14 of the Convention is in these terms:
“The enjoyment of the rights and freedoms set forth in this Convention shall be secured without discrimination on any ground such as sex, race, colour, language, political or other opinion, national or social origin, association with a national minority, property, birth or other status.”
Article 14 confers no independent or ‘freestanding’ right not to be subjected to discriminatory treatment. Its object and effect is to secure the enjoyment, without discrimination, of the other rights conferred by the Convention. The right in relation to which Mr Malcolm claims that he suffers discriminatory treatment is that conferred by article 1 of the First Protocol:
“Every natural and legal; person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.
The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.”
The judge accepted that Mr Malcolm’s rights under the retirement annuity contract into which he entered on 1 June 1986 were “possessions” in that context. So he was entitled not to be deprived of those rights, save in the public interest and subject to the conditions provided for by law. And, if he were to be deprived of those rights in circumstances which subjected him to discriminatory treatment, he was entitled to invoke article 14.
Differential treatment in relation to pension rights
The judge identified as the real point in the case “the contrast between the position of the self-employed and that of employed persons as regards the impact of bankruptcy on their pension provision”.
At paragraphs 12 to 14 of his judgment the judge described, in general terms, the difference in structure between an occupational pension scheme – which, in order to comply with the conditions for tax approval under current legislation, “must be set up by way of a trust, with a trust deed and rules” – and retirement annuity contracts and personal pension schemes – which “take effect in contract”. He explained that the real distinction was not between employees and the self-employed. The real distinction was between the treatment, on bankruptcy, of the rights of a person entitled to benefits out of a trust fund, under an occupational pension scheme, and the treatment of the contractual rights under a bilateral arrangement such as a retirement annuity contract or a personal pension scheme. But, of course, the self-employed were unable to arrange for their retirement benefits to be provided out of a trust fund under the rules of an occupational pension scheme.
The judge explained the distinction at paragraphs 16 and 17 of his judgment, in terms which I gratefully adopt:
“16. A common feature of an occupational pension scheme is a forfeiture provision, under which, if a member becomes bankrupt, his or her right to benefit is forfeited, and the equivalent benefits are then held by the trustees on discretionary trusts under which the benefits may be paid to him or applied for his or her benefit. In practice, I understand, it is very common for the discretion to be exercised in favour of the member so that, despite bankruptcy, he or she will in fact receive the pension benefits. Because this is a matter of discretion, however, there is no asset of the bankrupt that can vest in the trustee in bankruptcy. This is a development of a type of provision that used to be common in private trusts, reflected in section 33 of the Trustee Act 1925. Its validity in the context of an occupational pension scheme was upheld in Kemble v Hicks [1998] PLR 141. It was not the subject of any legislation until 6 April 1997 when section 92 of the Pensions Act 1995 came into force. This provided that entitlement to a pension from an occupational pension scheme may not be forfeited but, by way of exception, permitted forfeiture by reference to the bankruptcy of the person entitled to the pension. This did not impose such a provision on an occupational pension scheme, but it declared the validity of such provisions which were common. They were not universal, and Patel v Jones [2001] BPIR 919 is an example of a scheme from which such a provision was absent.
17. By contrast, the position of an individual with a retirement annuity contract or a personal pension scheme was different. This is what Mr Malcolm complains of. Because the pension is provided under contract, not by way of trust, there are no trustees upon whom a discretion can be conferred to apply the relevant benefits according to any discretion. The benefit of the contract is undoubtedly an asset of the insured person. Accordingly in Re Landau [1998] Ch 223, Ferris J held that both the cash lump sum and the continuing annuity payable under a retirement annuity contract were property of the bankrupt which vested automatically in the trustee in bankruptcy under the Insolvency Act 1986. In consolidated appeals against later decisions following Re Landau, reported as Krasner v Dennison [2001] Ch 76, the Court of Appeal approved the decision and held that it applied to a personal pension scheme as well. In Patel v Jones, mentioned above, the same result was held to follow in relation to an occupational pension scheme without a forfeiture clause. In Rowe v Saunders [2002] EWCA Civ 242, [2002] 2 All ER 800, the Court of Appeal followed Krasner v Dennison and held that the provisions in question were not inconsistent with article 1 of the First Protocol to the European Convention on Human Rights.”
Judgment in In re Landau (a bankrupt), reported at [1998] Ch 223, was handed down in December 1996. The distinction between the treatment, on bankruptcy, of the rights of a person entitled to benefits under an occupational pension scheme, and the treatment of the rights under a personal pension scheme was recognised in a Green Paper (Cm.4179) presented to Parliament some two years later. The distinction was described as “unfair” (ibid, paragraph 48):
“The pension rights of a member of an occupational pension scheme who becomes bankrupt are usually protected from seizure to pay off creditors. Personal pension holders do not enjoy the same protection. We believe that this is unfair. It is only reasonable to expect that everyone who has made a genuine attempt to save for their retirement should have their rights protected, regardless of the type of pension arrangement they have. We therefore propose that all tax-approved private pension rights should be exempt from the bankruptcy process, thus falling outside the jurisdiction of the trustee in bankruptcy.”
The Welfare Reform and Pensions Act 1999
Prospective effect was given to the proposal made in the Green Paper by section 11 of the Welfare Reform and Pensions Act 1999. Section 11(1) is in these terms:
“Where a bankruptcy order is made against a person on a petition presented after the coming into force of this section, any rights of his under an approved pension arrangement are excluded from his estate.”
In that context, “approved pension arrangement” has the meaning given by section 11(2). The expression includes an occupational pension scheme, a retirement annuity contract and a personal pension scheme in respect of which approval has been given under the relevant provisions in Part XIV of the Income and Corporation Taxes Act 1988 or their statutory predecessors.
Section 11 of the Welfare Reform and Pensions Act 1999 was brought into force on 29 May 2000, by statutory instrument (SI 2000/1382) made under section 89 of that Act. There were obvious policy reasons why the section should not have been given retrospective effect – as the judge explained at paragraph 21 of his judgment. The judge held that it could have no application to Mr Malcolm’s bankruptcy, which had commenced some three and a half years before that date. As I have said, Mr Malcolm has been refused permission to appeal from the judge’s conclusion on that point. So Mr Malcolm gains no assistance from the change in the law. The change can, of course, be taken as an indication that Parliament recognised that the distinction between the treatment, on bankruptcy, of the rights of a person entitled to benefits under an occupational pension scheme, and the treatment of the rights under a personal pension scheme was unsatisfactory; but it is as clear as can be that Parliament decided to leave the position as it was in respect of pre-existing bankruptcies.
The judge’s decision in relation to article 14 of the Convention
The judge identified the point, as it had been argued before him, at paragraph 24 of his judgment:
“The third ground on which Mr Malcolm contends that the trustee in bankruptcy is not entitled to take the benefit of the retirement annuity contract relies on the human rights dimension, and is expressed by reference to article 14 of the European Convention on Human Rights, prohibition of discrimination. He says that because he could only use a retirement annuity contract for his pension provision, under which the benefits vest on bankruptcy in his trustee in bankruptcy, whereas an employed person holding benefits under an occupational scheme does not lose his benefits on bankruptcy, the actions of the trustee in bankruptcy are discriminatory and against equality of human rights, and they put Mr Malcolm in an extremely disadvantaged position upon retirement as compared with a member of an occupational pension scheme.”
But, as the judge pointed out, it was not open to the trustee in bankruptcy to act otherwise. As the law stood before 29 May 2000 – or, at the least, as it was understood to be in the light of the decision in In re Landau (supra) – the retirement annuity contract did vest in the trustee under section 306 of the Insolvency Act 1986; it was an asset of substantial value and he was bound to take steps to realise that value for the benefit of creditors. The judge observed, correctly, that “although Mr Malcolm complains of the actions of the trustee in bankruptcy, he is really complaining about the law under which the trustee in bankruptcy can and must take steps to realise his pension benefits and distribute them to creditors”.
At paragraphs 26 to 44 of his judgment the judge addressed the question whether or not Convention rights were directly enforceable, in this case, under the provisions of the Human Rights Act 1998. He held that they were not. As I have said, the relevant events had occurred before the 1998 Act came into force on 2 October 2000; and this was not a case in which section 22(4) of that Act had any application. It was accepted, in this Court, that the judge was right to take that view. That was sufficient to dispose of the point – as the judge recognised at paragraph 52 of his judgment:
“For those various reasons, therefore, I hold that Mr Malcolm is unable to complain of what happened before 2 October 2000 because his claim is not brought in the limited circumstances in which the Human Rights Act 1998 has retrospective effect. I also hold that he cannot get round this difficulty by arguing that the complaint is of an act done since 2 October 2000. From that conclusion it follows that his application must fail.”
Nevertheless, the judge went on to consider the argument that the treatment of a self-employed person – in relation to pension rights in the event of his bankruptcy – was discriminatory when compared to the treatment of an employee in relation to rights under an occupational pension scheme. He directed himself by reference to the guidance given by this Court in Wandsworth Borough Council v Michalak [2002] EWCA Civ 271, [2003] 1 WLR 617, as explained by Lord Justice Laws in R (Carson) v Secretary of State for Work and Pensions [2003] EWCA Civ 787, [2003] 3 All ER 577, 604b-c, paragraph [61]. He posed the question: “are the circumstances of the claimant and the chosen comparator so similar as to call (in the mind of a rational and fair minded person) for a positive justification for the less favourable treatment of the complainant in comparison with the chosen comparator”.
As I have said, the judge explained that, on a true analysis, the true comparison was not between the self-employed and employees – as Mr Malcolm had originally sought to argue – because a substantial proportion of employees were not members of occupational pension schemes and not all occupational pension schemes contain forfeiture provisions. As the judge put it: “The chosen comparator, being the person who Mr Malcolm says is otherwise equivalent to him, but who does not (in practice) suffer the loss of pension rights on bankruptcy, is an employee who is a member of an occupational pension scheme, being one which includes a forfeiture provision in the event of bankruptcy among its terms”.
The judge recognised the force of the argument based on paragraph 48 of the Green Paper (Cm.4179), to which I have already referred. It can be said that the Government itself has characterised the difference in treatment as unfair. But he went on to say this, at paragraphs 59 and 60 of his judgment:
“59. However, it is necessary to examine more closely the basis of the difference of treatment. As I have said, the difference does not arise from any legislative provision. It stems from the fact that occupational pension schemes are established by way of trust, with trustees, so that it is possible to include among the trusts and powers in the trust deed or rules a provision for forfeiture in the event of bankruptcy, whereas a retirement annuity contract, like a personal pension scheme, is a bilateral contract, with no possibility of such a provision which would be valid in law. Such a provision in an occupational pension scheme was recognised as valid by the Pensions Act 1995, as from 1997, but in 1996, at the time of Mr Malcolm’s bankruptcy, it was a matter of general trust law. Similarly, the impossibility of achieving the same effect in relation to benefits under a retirement annuity contract was the result of ordinary principles of contract law. It may perhaps be that, if the point had been thought about, a trust structure could have been devised under which the benefits of a retirement annuity contract or personal pension scheme could have been provided, and which could have included a forfeiture clause. I do not know whether this would have complied with the fiscal rules for approval of such contracts or with the law on forfeiture provisions. At all events, even if such an approach would have been possible, it was not adopted in this case nor, so far as I am aware, in any case.
60. So the difference of which Mr Malcolm complains results from the different legal structure used for two types of pension provision, and from the fact that it is open to those establishing an occupational pension scheme to include a forfeiture clause, under which, on the face of it, the member does lose his pension benefits on bankruptcy, but he does so in a way in which, on the one hand, they cannot be made available to his trustee in bankruptcy and thus to his creditors, and on the other the benefits are available to be applied for his benefit, and in practice they usually are so applied.”
The judge accepted that a difference in treatment in respect of pension rights under the insolvency code – which had the effect of treating the rights of employees in a different way to the rights of the self-employed – would infringe article 14 of the Convention. If the rights were otherwise the same, the differential treatment would properly be regarded as discriminatory on the grounds of status. But, as the judge pointed out, the difference in treatment stems not from any differential provision in the insolvency code, but from the fact that, under the general law, the rights of an employee under an occupational pension scheme which includes a provision for forfeiture on bankruptcy are not the same as the rights of a self-employed person under a retirement annuity contract or a personal pension scheme. The judge held that the need to identify the chosen comparator as one “who is not only employed but a member of an occupational pension scheme, and one which includes a forfeiture clause” required “the introduction of too many factors for the comparison to be appropriate or relevantunder article 14”. Accordingly, as he said at paragraph 66 of his judgment, he would have dismissed the claim even if he had been persuaded that Mr Malcolm were able to rely on an unlawful act done before 2 October 2000 in these proceedings.
This appeal
The appeal in this Court was advanced by counsel (who had not appeared below) on the basis of arguments which differed from those which had been put before the judge, either by Mr Malcolm in person or by the advocate to the court; and on the basis of arguments which differed from those which had persuaded Lord Justice Neuberger to grant permission to appeal. When this was pointed out to him, counsel sought permission to amend the appellant’s notice so as to include, as additional grounds of appeal, the points raised in his skeleton argument. After hearing full argument on those additional grounds we were not persuaded that there was any real prospect of success on an appeal (on those grounds alone) and so refused permission. We indicated that we would give our reasons in a written judgment.
It was recognised, before this Court, that the Insolvency Act 1986 treats pension rights in the same way, whether the bankrupt was an employee or self-employed. If those assets form part of the bankrupt’s estate – as defined by section 283(1) of the Act – they vest in the trustee in bankruptcy under section 306 immediately on appointment. An example of the vesting of employee’s rights under an occupational pension scheme under section 306 of the Act is found in Patel v Jones [2001] BPIR 919, to which the judge referred.
If assets do not form part of the bankrupt’s estate, then they do not vest in the trustee under section 306 of the Act. If the assets do not form part of the bankrupt’s estate, the trustee’s rights are confined to a claim for after-acquired property, under section 307 of the Act; or to making an application for an income payments order, under section 310. In the latter case, the application must be instituted before the discharge of the bankrupt. An example of rights under an occupational pension scheme which did not vest under section 306 of the Act is found in Kemble v Hicks [1998] PLR 141. Before section 11 of the Welfare Reform and Pensions Act 1999 came into force, the question turned in each case, as Mr Justice Rattee made clear in his judgment in Kemble v Hicks (ibid, page 145, at paragraph 11), on the nature and effect of the particular forfeiture provision in the scheme.
Starting from that position, counsel sought to persuade the Court that section 283(1) of the Insolvency Act 1986, read in conjunction with section 436 of that Act, should be construed so as to exclude from the bankrupt’s estate any rights of his under a pension arrangement approved under section 226 of the Income and Corporation Taxes Act 1970 or under Part XIV of the Income and Corporation Taxes Act 1988 – so, in effect, anticipating or pre-empting section 11(1) of the Welfare Reform and Pensions Act 1999.
As I have said, section 283(1) of the Insolvency Act 1986 defines the phrase “bankrupt’s estate”:
“Subject as follows, a bankrupt’s estate for the purposes of any of this [second] Group of Parts [Insolvency of Individuals; Bankruptcy] comprises –
(a) all property belonging to or vested in the bankrupt at the commencement of the bankruptcy, and
(b) any property which by virtue of any of the following provisions of this Part [Part IX] is comprised in that estate or is treated as falling within the preceding paragraph.”
Section 283(2) excludes from the bankrupt’s estate (a) such tools, books, vehicles and other items of equipment as are necessary to the bankrupt for use personally by him in his employment, business or vocation and (b) such clothing, bedding, furniture, household equipment and provisions as are necessary for satisfying the basic domestic needs of the bankrupt and his family. Sections 283(3) and (3A) exclude property held by the bankrupt on trust for any other person, rights of nomination to vacant ecclesiastical benefices and certain tenancies. Section 283(4) is in these terms (so far as material):
“References in any of this Group of Parts to property, in relation to a bankrupt, include references to any power exercisable by him over or in respect of property . . .”
“Property” is given a wide meaning by section 436 of the Act:
“‘property’ includes money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property.”
If the “bankrupt’s estate” is to be read so as to exclude rights of the bankrupt under a pension arrangement approved under section 226 of the Income and Corporation Taxes Act 1970 or under Part XIV of the Income and Corporation Taxes Act 1988 – that is to say, is to be read so as to exclude rights under an “approved pension arrangement” as that phrase is now defined in section 11(1) of the Welfare Reform and Pensions Act 1999 – without the need to rely on section 11(1) of the 1999 Act, it is necessary either (i) to construe “property” in such a way as to exclude contractual pension rights (notwithstanding that those rights are, plainly, “things in action”) or (ii) to construe the expression “property belonging to or vested in the bankrupt” – in the context of section 283(1) of the Insolvency Act 1986 – in such a way as to exclude property which comprises contractual pension rights.
I accept, of course, that – independently of the requirement in section 3 of the Human Rights Act 1988 (which has no application in the present case) – words in a domestic statute should be construed in a manner which is consistent with Parliament’s assumed intention to give effect to the United Kingdom’s obligations under an international treaty or convention – and, in particular, obligations under the European Convention on Human Rights – rather than in a manner which is inconsistent with those obligations. But that is subject to the qualification that the words must be reasonably capable of bearing the meaning which it is sought to put upon them.
In the present case, I am not persuaded that, to construe the provisions in sections 283(1) and 436 of the Insolvency Act 1986 so as to include within the bankrupt’s estate contractual pension rights vested in the bankrupt at the commencement of the bankruptcy would be inconsistent with the obligations imposed on the United Kingdom by article 14 of the Convention. It seems to me that, upon a true analysis, the differential treatment in bankruptcy of the contractual pension rights of the self-employed and the pension rights of those employees who are members of an occupational pension scheme set up by way of trust which (under the trust provisions) provides for forfeiture of rights on bankruptcy is not a difference of treatment based on discrimination on the ground of status – or on any other ground which offends that article. For the reasons already set out, the differential treatment under the Insolvency Act 1986 does not arise from a difference in the treatment of persons (of differing status) having the same or similar rights. The differential treatment arises because contractual pension rights fall within the description of property for the purposes of the Act and the rights of a beneficiary under an occupational pension scheme (after forfeiture on bankruptcy) do not fall within that description. In the latter case, the bankrupt had no relevant property within section 436 of the Act. His right to be considered as an object of the discretionary trust which arose on forfeiture was not a “thing in action” for the purposes of that section. Nor, as it seems to me, was it an “interest . . . arising out of, or incidental to, property” for the purposes of that section.
But, even if that analysis is wrong, the appellant faces a hurdle which he cannot surmount in this Court. The words in sections 283(1) and 436 of the Insolvency Act 1986 must be reasonably capable of bearing the meaning which it is sought to put upon them. That is to say the words must be reasonably capable of being construed in such a way as to exclude contractual pension rights from the definition of “property” in section 436 of the Act or (in some other way) to exclude contractual pension rights from the scope of the expression “property belonging to or vested in the bankrupt” in section 283(1) of the Act. This Court has held, in Krasner v Dennison (supra), that that is not a possible construction. At paragraph [70] of my judgment in that case (ibid, 107B-F), in addressing the related argument that the vesting of personal pension policies in the trustee in bankruptcy constituted a breach of article 1 of the First Protocol to the Convention, I said this:
“In order to achieve the result for which the appellants contend it would be necessary either (i) to construe the words in section 436 IA 1986 which define “property” in such a way as to exclude rights under retirement annuity contracts and personal pension schemes, or (ii) to construe the words in section 283(1)(a) IA 1986 (which define the bankrupt’s estate for the purposes of Part IX of the Act) in such a way as to exclude such rights where the contract or scheme contains a restriction on alienation, or (iii) to construe the words in section 306 IA 1986 (which provide for the vesting of the bankrupt’s estate in the trustee in bankruptcy immediately on his appointment) in such a way as to exclude such rights where the contract or scheme contains a restriction on alienation, or (iv) to construe section 310 IA 1986 so as to apply to income of, or derived from, property which has vested in the trustee in bankruptcy under section 306 IA 1986. We were not, I think, asked to attempt the tasks set under (i), (ii) or (iii) of that analysis. The appellants recognise, perhaps, that that would be to attempt the impossible. . . .”
The other members of the Court (Lord Justice Kennedy and Lord Justice May) expressed agreement with that analysis. It was approved by this Court in Rowe v Sanders [2002] EWCA Civ 242, [48]–[50], [2002] BPIR 847, 858, and noted at [2002] 2 All ER 800.
Conclusion
As I have said, the matter has been argued before us on grounds which the judge was not asked to consider. In my view the judge was correct to reach the conclusion which he did on the arguments before him for the reasons which he gave. The appeal was not pursued on the single ground for which permission was given by Lord Justice Neuberger. It must be dismissed. The further grounds advanced in this Court do not lead to any other conclusion. Permission to appeal on those further grounds – and permission to amend the appellant’s notice so as to raise those grounds – is refused.
Lord Justice Tuckey:
I agree.
Lord Justice Mummery:
I also agree.
ORDER: Appeal dismissed. Permission to add additional grounds and permission to appeal refused.
(Order does not form part of approved Judgment)
Mulkerrins v. Pricewaterhouse Coopers
[2003] UKHL 41 [2003] 1 WLR 1937, [2003] 4 All ER 1, [2004] PNLR 5, [2003] BPIR 1357, [2003] WLR 1937, [2003] UKHL 41
LORD BINGHAM OF CORNHILL
My Lords,
I have had the advantage of reading in draft the opinions of my noble and learned friends Lord Walker of Gestingthorpe and Lord Millett. I am in full agreement with them and for the reasons which they give I would allow the appeal and make the order which Lord Walker proposes.
LORD NICHOLLS OF BIRKENHEAD
My Lords,
I have had the opportunity of reading in draft the speech of my noble and learned friend Lord Walker of Gestingthorpe. For the reasons he gives, with which I agree, I would allow this appeal and make the order he proposes.
LORD MILLETT
My Lords,
Ms Mulkerrins claims damages from her former professional advisers PricewaterhouseCoopers (“PwC”) for having negligently failed to protect her from bankruptcy. Her claim has yet to be tried and her allegations have not been established. Even allowing for this, however, she has been shamefully ill-served by her former advisers, by the law of insolvency, and by the civil justice system.
At the beginning of the story Ms Mulkerrins owned a freehold property where she ran a small but profitable business as the proprietor of a nursing home. She faced the prospect of bankruptcy as a result of the failure of a business which she and her husband had formerly carried on together. The situation was tailor-made for an individual voluntary arrangement (“IVA”). Bankruptcy would destroy the business and yield relatively little for the creditors. An IVA, on the other hand, would preserve the business and enable the creditors to receive payments from the income of the nursing home. She consulted PwC, who were licensed insolvency practitioners, and on their advice made all the necessary arrangements to enter into an IVA with a view to avoiding bankruptcy.
Despite this Ms Mulkerrins has been made bankrupt and the nursing home has been closed down by the Official Receiver, who did not have the funds to carry it on. She alleges that this would not have happened but for PwC’s negligence. Her attempts to obtain redress have been thwarted at every turn. First, she had to fight off her trustee-in-bankruptcy, who somewhat implausibly claimed that her cause of action had vested in him for the benefit of the creditors. She won that round when the district judge in the Reading County Court sitting in Bankruptcy ruled that her trustee had no interest in the claim (because her creditors had none). He did not appeal and she duly brought proceedings against PwC. They strongly objected to being sued by their own former client. Taking advantage of their own alleged wrong in failing to take the necessary steps to prevent her bankruptcy in the first place they insisted that, now that she had become bankrupt, they should be sued by her trustee. This was more than a little impudent, even brazen. It meant that Ms Mulkerrins had to fight the same battle all over again. She effectively won again before the deputy judge in the High Court ([2000] BPIR 506), but PwC had greater determination (or resources) than the trustee, and this time she was taken to the Court of Appeal ([2001] BPIR 106), where she lost. Her action has been struck out. She has now been discharged from bankruptcy and the trustee has been released, with the result that the Official Receiver has become trustee in his place: see section 300(2) of the Insolvency Act 1986. He is under the trustee’s ordinary duty to realise the assets of the bankrupt estate for the benefit of the creditors. Relying on the decision of the Court of Appeal he has conducted an auction of Ms Mulkerrins’ claim and proposes to distribute most of the proceeds to the creditors, despite the fact that they are bound by an order of the bankruptcy court that it is an asset in which they have no interest at all.
Ms Mulkerrins has thus lost her business, had her claim for redress struck out, and faces the prospect of losing the value of her business for a second time. But for an order of a district judge she would now be suffering the ultimate misfortune of being a party to a leading case in your Lordships’ House brought to resolve one of the more intractable problems in the law of insolvency. This is the problem which was recently considered by the Court of Appeal Ord v Upton [2000] Ch 352 namely to what extent does a “hybrid” claim of a bankrupt vest in his trustee on bankruptcy. A hybrid claim is constituted by a single cause of action which is partly for personal injury or loss of reputation (to which the creditors are not entitled) and partly for financial loss (to which they normally are).
Ms Mulkerrins claims damages for having been made bankrupt. Her claim is a “hybrid” one, for she claims damages for loss of reputation as well as damages for loss of assets and earning capacity. By far the greater part of her claim, however, is for financial loss arising from the closure of the business by the Official Receiver. This would not have occurred but for the bankruptcy, and was a readily foreseeable and indeed virtuallyinevitable consequence of the making of the bankruptcy order. She seeks to be placed in the financial position she would have been in if PwC had acted with proper skill and care and she had been made the subject of an IVA instead of a bankruptcy order.
The first question is: what was the effect of the order of the bankruptcy court? The dispute which it was called upon to decide was whether the chose in action which represented Ms Mulkerrins’ claim against PcW was an asset which had vested in the trustee for the benefit of the creditors or remained vested in Ms Mulkerrins for her own benefit. The District Judge held that the trustee had no interest in the claim. On appeal to the High Court the deputy judge considered that this referred to the beneficial interest; he held that the effect of the district judge’s order was that title to sue had vested in the trustee but he held it in trust for Ms Mulkerrinsand not for the creditors: [2000] BPIR 506. This was rejected by the Court of Appeal: [2001] BPIR 106. Jonathan Parker LJ observed at para 61 that:
“….the district judge was not in any way concerned with accountability, or with the beneficial ownership of the cause of action. She was concerned only with the legal ownership: with the question – who can sue PwC? The district judge was not contemplating that the Trustee would be accountable for anything. She was contemplating that it would be Mrs. Mulkerrins who would sue, not the Trustee.”
This is true so far as it goes, but it is not the whole truth. The district judge was certainly dealing with the legal title to the chose in action – the right to sue PwC. But she was not dealing with the bare legal title. She ruled that the trustee had no interest in the claim, and her reasoning shows that she meant no interest at all whether at law or in equity. She considered that the claim had not vested in the trustee because it was not an asset which was available to the creditors, that is to say it was not part of the bankrupt estate. She did not overlook the basic rule that, with few exceptions, the property of a bankrupt vests in his trustee for the benefit of his creditors; or that at least so much of a chose in action as represents a claim to compensation for financial loss vests in him. To her credit she recognised that Ms Mulkerrins’ claim was of an unusual kind, as neither the deputy judge nor the Court of Appeal seems to have done. It was a claim for damages for being made bankrupt. As she put it, “the bankruptcy itself is the cause of action”. The district judge did not consider that a claim of this character could vest in the trustee for the benefit of the creditors; though she seems to have considered that this was a matter of timing which made the cause of action after acquired property.
Both the deputy judge and the Court of Appeal thought that the district judge’s decision was wrong. The cause of action did not arise after the bankruptcy order but in the same instant as the bankruptcy order. The Court of Appeal distinguished between “the Ord v Upton world”, which they thought was the real world, and “the artificial world” created by the district judge’s order. As between the parties to a judicial decision, however, it does not matter whether the decision is right or wrong. As I observed in Crown Estates Commissioners v Dorset County Council [1990] Ch 297, 305 res judicata (or to give it its full name estoppel per rem judicatam) is a form of estoppel which gives effect to the policy of the law that the parties to a judicial decision should not afterwards be allowed to re-litigate the same question, even though the decision may be wrong. If it is wrong, it must be challenged by appeal or not at all. As between themselves, the parties are bound by the decision, and may neither re-litigate the same cause of action nor re-open any issue which was an essential part of the decision. The doctrine comes into its own only when the decision is wrong; if it is right, it merely serves to save time and costs.
The district judge’s order, therefore, bound the trustee and through him the creditors. As between Ms Mulkerrins and the creditors, her claim against PwC and its proceeds belonged to her and did not form part of the bankrupt estate available to them. The Court of Appeal, with respect, overlooked the fact that, whatever world PwC inhabited, the trustee and the creditors lived in the world created by the district judge’s order.
PwC, of course, were not parties to the proceedings in the bankruptcy court. They were not given notice of the proceedings and took no part in them. They are not, therefore, bound by the order of the district judge. But this does not mean that they can simply ignore it or that they are unaffected by it. It means only that they cannot be prejudiced by it. They cannot re-litigate the issue, not because it is res judicata as against them, but because they have no legitimate interest in doing so.
The general rule is that the benefit of a contract may be assigned to a third party without the consent of the other contracting party. If this is not desired, it is open to the parties to agree that the benefit of the contract shall not be assignable by one or either of them, either at all or without the consent of the other party. There is nothing objectionable in this; a party is entitled to insist that he deal only with the particular party with whom he has contracted: see Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85, 105, per Lord Browne-Wilkinson. But unless he takes the precaution of including in the contract a prohibition of assignment, he has no right to object to it. A debt is freely assignable both at law and in equity without the debtor’s consent. Section 136 of the Law of Property Act 1925 requires notice of the assignment to be given to the debtor if it is to be effective at law; it does not require his consent.
An assignment of a claim for unliquidated damages in tort may be open to challenge on the grounds of maintenance and champerty; but not on the ground that such an assignment needs the consent of the proposed defendant. It is now established that a trustee may properly discharge his duty to obtain the best price for the assets of a bankrupt estate by assigning the bankrupt’s claim against a third party. It is common ground that PwC could not have prevented the trustee from re-assigning Ms Mulkerins’ claim against them back to her had the district judge’s decision gone the other way.
The reason that the debtor’s consent is not required to an assignment of a debt is that the assignment cannot prejudice him. The assignment is subject to equities, which means that any set-off which the debtor may have against the assignor can be asserted against the assignee. On bankruptcy the trustee is in no better position than his bankrupt; a creditor’s right to sue his debtor vests in his trustee subject to equities. It would have been inappropriate to allow PwC to take any part in the proceedings in the bankruptcy court. They were brought to resolve a dispute between Ms Mulkerrins on the one hand and her creditors, represented by the trustee, on the other. PwC were debtors with an adverse interest to Ms Mulkerrins and her estate. They could not be prejudiced by the vesting of Ms Mulkerrins’ claim vesting in her trustee; and a fortiori they could not be prejudiced if it remained in her. They had no legitimate interest in the question to be decided.
In the event no question of assignment arose. The district judge held that the claim did not vest in the trustee but remained vested in Ms Mulkerrins despite her bankruptcy. PwC are being sued by their own former client, the very person to whom they owed a duty of care. In the circumstances their protests have a very hollow ring to them.
So far I have been content to assume that the decision of the district judge may have been wrong. But it should not be assumed that it was. Ms Mulkerrins’ claim is an unusual one, for she complains of PwC’s failure to prevent the making of a bankruptcy order against her. She claims damages representing the difference between her financial position as a result of the bankruptcy order and the financial position she would have enjoyed if she had entered into an IVA instead. Treating this claim as being wholly or mainly a claim in respect of financial loss, and even assuming that (contrary to the view of the district judge) it was not after-acquired property, it would be very surprising if a claim of this character could be made available to the creditors. They would be claiming damages for the making of the very bankruptcy order under which their claim arose. The greater part of their claim would represent damages for the closure of the nursing home, even though it was a going concern when it supposedly vested in the Official Receiver and was closed down by him. The creditors have received the full value of the bankrupt estate. The damages which Ms Mulkerrins claims represent the value of what she lost by the making of the bankruptcy order; but while this could have been available to the creditors under an IVA, it could never have been made available to them in a bankruptcy.
The Court of Appeal assumed that the claim vested in the trustee because it was wholly or largely a claim for financial loss, without considering the particular nature of the claim. The question has not been argued before us and is not covered by authority. I prefer to express no concluded view upon it, but to leave it open for decision when the need arises, while expressing the view that it should not be taken to be concluded by the judgment of the Court of Appeal in the present case.
It is sufficient to dispose of this case by saying that, right or wrong, the district judge’s order bound the trustee and through him the creditors. Ms Mulkerrins’ claim must be taken to form no part of the bankrupt estate available to her creditors, and she is at liberty to pursue it in her own name and for her own benefit. In agreement with my noble and learned friend, Lord Walker of Gestingthorpe, whose speech I have had the advantage of reading in draft and with which I agree, I would allow the appeal.
LORD SCOTT OF FOSCOTE
My Lords,
I have had the advantage of reading the opinions of my noble and learned friends Lord Millett and Lord Walker of Gestingthorpe. I agree with them and for the reasons they give I, too, would allow this appeal and make the order Lord Walker has proposed.
LORD WALKER OF GESTINGTHORPE
My Lords,
On the making of a bankruptcy order the bankrupt’s estate vests automatically in the trustee in bankruptcy as soon as he becomes trustee. The bankrupt’s estate is widely defined, subject to some exceptions (including business equipment and household necessities) as comprising:
“all property belonging to or vested in the bankrupt at the commencement of the bankruptcy”.
Property is widely defined as including
“money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property”.
That is the effect of sections 283, 306 and 436 of the Insolvency Act 1986, which replaced similar but by no means identical provisions in a succession of earlier statutes.
However, the wide language used in successive statutes to describe the bankrupt’s estate was from an early stage interpreted by the court as excluding rights of action which are classified as personal to the bankrupt, rather than relating to his property. The most notable early case was the decision of your Lordships’ House in Beckham v. Drake (1849) 2 HL Cas 579, but the report of counsel’s argument in that case refers to numerous authorities going back to the time of Lord Mansfield. The point was explained as follows by Erle J, one of the judges who advised the House (at page 604),
“This was an action on a contract for hiring and service, whereby the plaintiff was to serve for seven years, and the defendant to pay weekly wages during that time; and the breach was a dismissal during the seven years. The plaintiff, after this breach, and before the commencement of the action, became bankrupt; and the question is, whether this cause of action passed from the plaintiff to his assignees.
The general principle is, that all rights of the bankrupt which can be exercised beneficially for the creditors do so pass, and the right to recover damages may pass though they are unliquidated …
This principle is subject to exception. The right of action does not pass where the damages are to be estimated by immediate reference to pain felt by the bankrupt in respect of his body, mind or character, and without immediate reference to his rights of property. Thus it has been laid down that the assignees cannot sue for breach of promise of marriage, for criminal conversation, seduction, defamation, battery, injury to the person by negligence, as by not carrying safely, not curing, not saving from imprisonment by process of law …”
The line of authority includes the decision of your Lordships’ House in Wilson v United Counties Bank Ltd [1920] AC 102. Major Wilson had left England on active service soon after the beginning of the first world war, leaving his business affairs (which seem to have been in a fairly precarious state) in the hands of his bank. The jury found that the bank had failed in its duty to supervise his business affairs and to take reasonable steps to maintain his credit and reputation. Major Wilson was made bankrupt and he and his trustee in bankruptcy joined in an action against the bank. The jury awarded damages of about £45,000 for depreciation in the bankrupt’s business and estate caused by the bank’s negligence (although the House was not unanimous as to whether this finding was justified on the evidence) and £7,500 for damage to his credit and reputation. The former sum was recoverable by the trustee in bankruptcy, and the latter by the bankrupt personally, even though (as Lord Atkinson observed at page 128) the damages arose from the same breach of contract.
Wilson v United Counties Bank Ltd can therefore be described as a hybrid claim, the term used by Aldous LJ in Ord v Upton [2000] Ch 352, 366. That case was concerned with a claim which a bankrupt labourer (aged 30 at the time of his bankruptcy) brought against a doctor who had treated him, some years before his bankruptcy, for back pain. Liability was admitted and the claim was substantial, including over £170,000 for loss of past earnings and over £730,000 for loss of future earnings. The Court of Appeal, following the decision of the Supreme Court of British Columbia in re Bell (a bankrupt) [1998] BPIR 26, held that both parts of the claim for loss of earnings formed part of the estate, and that Mr Ord himself was entitled only to the damages for pain and suffering. Aldous LJ (with whom Kennedy and Mantell LJJ agreed) summarised the decision as follows (at page 371),
“The authorities are only consistent with the conclusion that the trustee is entitled to the damages for past and future loss of earnings and is not entitled to the damages for pain and suffering. As there is a single cause of action, it vested in the trustee. There is in my view nothing in that conclusion which imposes practical difficulties with which the law cannot deal. The trustee as constructive trustee would have to account to the bankrupt for the property which he obtained inadvertently or by arrangement in an action which vested in him for the benefit of the creditors. The idea that the cause of action should vest in the bankrupt would not be acceptable and compulsory joinder of both could lead to difficulties when the claim for loss of earnings was small compared with the potential costs of the litigation. In such a case the trustee, if the cause of action vested in him, would have to consider carefully his duty to the bankrupt and would probably, if requested, assign the cause of action to him”.
The most recent authority is the decision of the Court of Appeal in Grady v HM Prison Service [2003] EWCA Civ 527, 11 April 2003. It concerned a claim for unfair dismissal made by an administrative officer who had been a bankrupt about a year after the termination of her employment. The Court of Appeal (in a judgment of the court delivered by Sedley LJ) observed (at para 14) that there is “no bright line” between personal rights of action and those which form part of a bankrupt’s estate, but (para 24) that all the reasoning in the authorities
“tends to place on the non-vesting side of the line a claim which is primarily directed at the restoration of a contractual relationship in which the claimant’s skill and labour are the essential commodity”.
The Official Receiver, who was given leave to intervene in this appeal, has (both in his petition for leave and in his printed case) placed before your Lordships some thoughtful and well-researched submissions, including a helpful survey of Commonwealth and United States authorities. He has drawn attention to the apparently anomalous results which can flow from accidents of timing of different stages in the prosecution of a right of action, and to the practical problems which may arise from a trustee in bankruptcy prosecuting a hybrid right of action, partly on behalf of the creditors and party on behalf of the bankrupt himself. But in the event your Lordships did not find it necessary, and did not consider it appropriate to hear all argument on these points. That is because the very unusual facts of the present appeal permit it to be disposed of on much narrower grounds, and make it an unsuitable case for exploration of the wider issues.
The appellant, Ms Barbara Mulkerrins, is an experienced state registered nurse. In 1995 she was separated from her husband (Mr Woodward, to whom she is no longer married). She was running a small nursing home in Berkshire providing specialised 24-hour care for four mentally disabled adults. Ms Mulkerrins was the sole proprietor of the business, and owned the freehold of the property, subject to a mortgage. The residents were paid for by a care association, and the high level of fees (£650 per resident per week) reflected the labour-intensive nature of the business.
Considered on its own, the nursing home was financially viable. But Ms Mulkerrins had outstanding debts, for which she and her husband were both liable, in connection with a property business. On 25 October 1994 a builders’ merchant presented a bankruptcy petition against Ms Mulkerrins in the Reading County Court. After some adjournments it was due to be heard on 26 June 1995. Ms Mulkerrins consulted insolvency practitioners, Coopers & Lybrand, now PriceWaterhouseCoopers (“PwC”). Mr Rutlen of PwC advised her to apply to the county court for an individual voluntary arrangement (“IVA”) under Part VIII of the Insolvency Act 1968. He advised that she had a good chance of obtaining an IVA under which she would for a period of three years pay to her creditors £500 a month out of the profits of the nursing home business. Ms Mulkerrins accepted that advice. She paid PwC an amount on account of their charges and PwC undertook to prepare an IVA proposal with a partner in PwC as the nominee. PwC attended the hearing on 26 June 1995 and an interim order was made suspending the bankruptcy proceedings. The petition was adjourned to the next open date (subsequently fixed as Monday 21 August). An application to continue the interim order was to be made on Friday 18 August. The nominee was required to lodge a report with the court by Wednesday 16 August.
Then, as the deputy judge (Mr Jules Sher QC) said in his judgment ([2000] BPIR 506, 508) disaster struck. Ms Mulkerrins was due to go to Ireland for about a fortnight for a family reunion on the 25th anniversary of her father’s death. Her case (which PwC denies) is that she asked Mr Rutlen whether she should attend court on either the Friday or the Monday and was told that it was unnecessary. She went to Ireland. PwC did not lodge the nominee’s report on the Wednesday. It reached the court by post on the Thursday (with a letter stating that the nominee did not propose to attend, but requesting continuation of the interim order) but these documents did not get placed before the district judge. On Friday 18 August no one appeared and the district judge discharged the interim order. On Monday 21 August there was again no appearance, and Ms Mulkerrins was adjudicated bankrupt.
She heard this news by telephone on Thursday 24 August. By then the Official Receiver had learnt of the existence of the nursing home (which was apparently unknown to the petitioner) and had visited it. He formed the view that the business must be closed down at once. He arranged with Berkshire Social Services for the residents to be moved to other accommodation and on the afternoon of 23 August he obtained an order from the district judge authorising him “in the absence of the bankrupt” to close down the business. The order records that the district judge heard representations by telephone from solicitors instructed by PwC. The residents were moved out on 24 August. There was subsequently an application (paid for by PwC) to annul the bankruptcy order, but it failed. In any case the nursing home business had by then effectively ceased to exist.
Naturally enough, Ms Mulkerrins was extremely upset. She wished to sue PwC for breach of their professional duty. Towards the end of 1995 Mr Blake of KPMG was appointed as her trustee in bankruptcy. There were some without prejudice discussions between Ms Mulkerrins’ solicitors, Mr Blake, and PwC and its solicitors (particulars of these discussions were ordered to be struck out of Ms Mulkerrins’ reply). But nothing significant came of them and on 19 August 1998 (just before her discharge from bankruptcy) Ms Mulkerrins issued a writ against PwC. Her statement of claim was served on 17 May 1999. It claimed general damages for “loss of status and business reputation” and special damages for the loss of her assets, including the nursing home.
The considerable interval between the issue of the writ and the service of the statement of claim is explained, at least in part, by discussions which took place between Ms Mulkerrins and Mr Blake. Each claimed to be the proper person to prosecute the claim against PwC. In order to resolve the difference of opinion Ms Mulkerrins made an application to the Reading County Court. It was an ordinary application in her bankruptcy proceedings, made under section 303 of the Insolvency Act 1986, sub-sections (1) and (2) of which provide as follows:
“(1) If a bankrupt or any of his creditors or any other person is dissatisfied by any act, omission or decision of a trustee of the bankrupt’s estate, he may apply to the court; and on such an application the court may confirm, reverse or modify any act or decision of the trustee, may give him directions or may make such other order as it thinks fit.
(2) The trustee of a bankrupt’s estate may apply to the court for directions in relation to any particular matter arising under the bankruptcy”.
There was a contested hearing before District Judge Henson on 3 February 1999 (that is, about 10 months before Ord v. Upton was decided by the Court of Appeal). Both sides were represented by counsel. The district judge heard argument, adjourned for a short while to consider the matter and then gave judgment. There is no official transcript but there is a full note prepared by the trustee in bankruptcy’s solicitor. A covering letter from the solicitor indicates that it was common ground between counsel that there could only be one cause of action in respect of the damage to her reputation and the financial loss, and that it was therefore a question as to whether the entire cause of action vested in the trustee in bankruptcy or in Ms Mulkerrins.
The district judge’s reasoning is recorded as follows in the note:
“I have to say that I agree with the Applicant. The bankruptcy itself is the cause of action and could not accrue until the bankruptcy order was made. I do not think the argument that the cause of action arose before the bankruptcy order, as a result of which the bankruptcy order was inevitable, is convincing and I do not believe the definition of property can include the bankruptcy of this person”.
The relevant part of the order was the declaration that
“The Respondent has no interest in the following chose in action namely a right of action by the Applicant against Coopers & Lybrand (a firm) for personal injuries, loss and damage arising out of her bankruptcy which was caused by their negligence and breach of contract as licensed insolvency practitioners”.
The heading to the order as drawn up contains two errors. It refers to section 303 (2) (rather than section 303 (1)) and it refers to the respondent as KPMG (rather than Mr Blake). But no one has suggested that either error casts any doubt on the substance of the order. Mr Knowles QC (appearing in your Lordships’ House for PwC) accepted that “no interest” means what it says – that is no interest at all, legal or equitable.
There is no suggestion that this order was in any way collusive. On the contrary, it was clearly made after vigorous argument. It has never been appealed, probably because the trustee in bankruptcy had no funds available. At a hearing which took place before another district judge at the end of 2001, it was suggested that the order of 3 February 1999 might be discharged or revoked under section 375 (1) of the Insolvency Act 1986, which provides that every court with bankruptcy jurisdiction may review, rescind or vary any order made by it in the exercise of that jurisdiction. But it would be extraordinary to contemplate rescinding an order which has now stood for over four years, and has been acted on in litigation which has now reached your Lordships’ House. Mr Davies QC for the Official Receiver very properly recognised that that is no longer a practical possibility.
PwC were not given notice of the hearing on 3 February 1999 and did not know that it was taking place. The first they heard of it was in a letter dated 1 April 1999 from Ms Mulkerrins’ solicitor. The absence of notice to PwC is at the heart of their submission that the order of 3 February 1999 was wrong, that it does not bind PwC, and that it should for practical purposes be ignored. The Official Receiver (who became involved in the matter again after Mr Blake’s discharge) did indeed appear to disregard the order in negotiations which he conducted, during 2001, for the assignment of the cause of action in which (according to the order of 3 February 1999) he had no interest.
On 7 September 1999 PwC applied to strike out part of Ms Mulkerrins’ claim. This application overlapped a preliminary issue which had been directed by the Master. On the very eve of the hearing before the deputy judge the Court of Appeal handed down judgment in Ord v Upton. This led to rapid reassessment of both sides’ arguments and the enlargement of the scope of the strike-out application.
In his judgment the deputy judge referred to the two elements of Ms Mulkerrins’ claim as the personal loss and the financial loss. He was satisfied that PwC’s breach of contract (if eventually established at trial) occurred on Friday 18 August 1995 at the latest. He rejected the submission that the right of action could be regarded as after-acquired property (which does not vest automatically in the trustee in bankruptcy but may be acquired by him under section 307 of the Insolvency Act 1986, subject to the qualifications set out in that section). The deputy judge listed, and proceeded to reject, four arguments which had been relied on by Mr Krolick on behalf of Ms Mulkerrins (page 516):
“(1) The decision of the Reading County Court in Bankruptcy is binding upon the defendants;
(2) In the alternative, it is an abuse of process to assert that the cause of action is vested in the trustee in bankruptcy;
(3) The defendants are estopped from denying the cause of action is vested in the claimants;
(4) The decision of the Reading County Court in Bankruptcy was correct, and the cause of action is vested entirely in the claimant”.
The deputy judge then turned to a fifth argument, which he himself had prompted (at page 520):
“Although, as I have held, the defendants are not bound by the Reading County Court judgment, the [trustee in bankruptcy] is; and, once the time for appealing that judgment went by, the position as between the claimant and him became permanent and clear; as between the two of them it was she who was entitled to the claim against the defendants and all the damages that might be awarded in pursuance of that claim. The corollary is that, as against the claimant, the [trustee in bankruptcy] was not entitled to such damages for the benefit of the creditors. In short, once the time for appealing had gone by, the claimant’s beneficial entitlement to the claim against the defendants was unassailable. The defendants are not bound by the judgment of the Reading County Court but they cannot challenge the fact that it was made and the consequence that the claimant became beneficially entitled to the claim and its proceeds.
The same is not true of the legal title to the claim. That, as I have held, was vested in the [trustee in bankruptcy] and, as the defendants are not bound by the judgment, they remain entitled to assert, as they do of course assert, that the legal title remains vested in the [trustee in bankruptcy]. If he sued, and recovered, he would hold the proceeds upon trust for the claimant. Even in the absence of the Reading County Court proceedings, he would have been a trustee of that part of such proceeds as represented damages in respect of the personal loss: see Ord v Upton. The effect of the Reading County Court judgment was to extend her beneficial entitlement from the damages in respect of the personal loss to all the damages recovered, irrespective of whether they represented personal or financial loss”.
The deputy judge then referred to the decision of Scott J in Weddell v Pearce & Major [1998] Ch 26, and to some well-known authorities discussed by Scott J in his judgment. The deputy judge concluded that Ms Mulkerrins’ proceedings were not a nullity, but that the Official Receiver should be joined as a defendant. On that basis, he dismissed the strike-out application and determined the preliminary issue in favour of Ms Mulkerrins.
PwC appealed to the Court of Appeal ([2001] BPIR 106), which took the same view as the deputy judge had taken on the arguments raised in Ms Mulkerrins’ respondent’s notice. But the Court of Appeal took a different view on what had become the main issue. Jonathan Parker LJ (with whom Kennedy and Laws LJJ agreed) referred in his conclusions (paragraph 60) to what he called the Ord v Upton world, and then (in paragraph 61) to what he called the artificial world of the Reading judgment (sc of 3 February 1999). He said,
“The difficulty with this [the deputy judge’s approach], to my mind, is that the district judge was not in any way concerned with accountability, or with the beneficial ownership of the cause of action”.
That is so, up to a point. On 3 February 1999 Aldous LJ’s judgment in Ord v Upton lay in the future, and the notion of a trustee in bankruptcy being accountable (as a constructive trustee) in respect of part of the recovery to be achieved by prosecuting a right of action was, I think, unheard of. But it is, with respect, incorrect to say that the district judge was not in any way concerned with the beneficial ownership of the right of action and (as the Lord Justice went on to say) that she was concerned only with legal ownership. The fact is that she was concerned with both legal and beneficial ownership, viewed globally and without any need for differentiation between them. That was the all-or-nothing choice which counsel had placed before her as their agreed position. Whether it was right or wrong, the order of 3 February 1999 clearly and decisively determined the issue between the only two possible contenders for the right of action against PwC. But the Court of Appeal treated it as an “artificial world” and concluded that the deputy judge’s reasoning was fallacious. The Court of Appeal allowed the appeal, determined the preliminary issue against Ms Mulkerrins, and dismissed her action.
In his oral submissions to your Lordships Mr Knowles concentrated (as I have already mentioned) on the fact that PwC had not had notice of the hearing on 3 February 1999. He accepted that if the trustee in bankruptcy had made a legal assignment of his right of action to Ms Mulkerrins, or if Ms Mulkerrins had obtained the right to sue in the trustee’s name, PwC would have had to put up with the consequences, unwelcome though they were. But in the absence of such an assignment PwC could, he said, object to being faced with a claimant who has legal aid, and is likely to be unable to pay PwC’s costs if her claim ultimately fails. This potential problem about costs gave PwC a sufficient interest to give them standing to oppose the making of the order, had they known of the application.
In my opinion this submission is mistaken, for reasons which were explained by Lord Hoffmann in Stein v Blake [1996] AC 243, 260:
“It is a matter of common occurrence for an individual to become insolvent while attempting to pursue a claim against someone else. In some cases, the bankruptcy will itself have been caused by the failure of the other party to meet his obligations. In many more cases, this will be the view of the bankrupt. It is not unusual in such circumstances for there to be a difference of opinion between the trustee and the bankrupt over whether a claim should be pursued. The trustee may have nothing in his hands with which to fund litigation. Even if he has, he must act in the interests of creditors generally and the creditors will often prefer to receive an immediate distribution rather than see the bankrupt’s assets ventured on the costs of litigation which may or may not yield a larger distribution at some future date. The bankrupt, with nothing more to lose, tends to take a more sanguine view of the prospects of success. In such a case the trustee may decide, as in this case, that the practical course in the interests of all concerned (apart from the defendant) is to assign the claim to the bankrupt and let him pursue it for himself, on terms that he accounts to the trustee for some proportion of the proceeds.
It is understandable that a defendant who does not share the bankrupt’s view of the merits of the claim may be disappointed to find that notwithstanding the bankruptcy, which he thought would result in a practical commercial decision by an independent trustee to discontinue the proceedings, the action is still being pursued by the bankrupt. His disappointment is increased if he finds that the bankrupt as plaintiff in his own name has the benefit of legal aid which would not have been available to the trustee. Similar considerations apply to an assignment of a right of action by the liquidator of an insolvent company to a shareholder or former director. In such a case there is the further point that the company as plaintiff can be required to give security for costs. The shareholder assignee as an individual cannot be required to give security even if (either because he does not qualify or the Legal Aid Board considers that the claim has no merits) he is not in receipt of legal aid”.
Lord Hoffmann concluded that the systemic defect, if there was one, lay in the arrangements for legal aid and costs orders and not in the law of insolvency. His observations were directed to a different situation (where the trustee in bankruptcy assigned a right of action for financial loss which had undoubtedly vested in him) but they are also relevant to the present case.
PwC’s grievance about its likely inability to recover its costs, if Ms Mulkerrins is ultimately unsuccessful, would not in my opinion have given it the right to be heard on the application under section 303 of the Insolvency Act 1968. Under rule 7.7(4) of the Insolvency Rules 1986 the district judge could no doubt have directed that notice of the application should be given to PwC, but that would in my opinion have been a very unusual step to take. The district judge cannot be criticised for not having taken it. The hearing was an exercise of the court’s supervisory jurisdiction over the bankruptcy process, and PwC was a stranger to that process, with interests directly opposed to those of both the creditors and the bankrupt herself. Even if PwC had happened to be a creditor, the conflict of interest would have reduced their claim to be heard on a question of this sort (compare the practice of the Chancery Division on a summons to consider whether trustees should take proceedings against a defendant who happens to be a beneficiary, as explained in In re Moritz [1960] Ch 251 and In re Eaton [1964] 1 WLR 1269; and, on a comparable situation in the Companies Court, Smith v Croft (No 2) [1988] Ch 114, 185-6).
If (as I think) PwC had no right to be heard on the question of entitlement to the right of action, it is irrelevant that PwC was not bound by the district judge’s order in such a way as to create an estoppel per rem judicatam. There is a statement in Spencer Bower, Turner and Handley, Res Judicata 3rd ed (1996), p 130, para 251, that
“An English judicial decision which operates upon a thing by effecting a disposition of it determines its status and may be set up by, or against, any member of the English public, as conclusive in rem”.
But it is simply not necessary to explore this difficult area. In relation to the points raised in Mr Krolick’s respondent’s notice in the Court of Appeal it may be accepted that the order of 3 February 1999 was erroneous, and that it does not bind PwC by estoppel per rem judicatam or indeed by any other form of estoppel. But as the deputy judge said, the order certainly did bind the trustee in bankruptcy who was the only other possible contender for title to the right of action. The substantial effect of the order was not to assign the right of action, but to declare that it had not been affected by the bankruptcy. From the moment that the right of action arose, it was at all material times in the legal and beneficial ownership of Ms Mulkerrins. If the trustee in bankruptcy, as the only possible rival claimant, was bound by the order, its practical effect was not open to challenge by PwC.
It was not necessary for the deputy judge to direct that the Official Receiver (who is now performing the residual functions of the trustee in bankruptcy) should be joined as a defendant to the proceedings. For these reasons and for the further reasons given in the speech of Lord Millett, with which I agree, I would allow the appeal and restore the deputy judge’s order, other than his direction for joinder of the Official Receiver.
Dear v Reeves
[2001] 1 BCLC 643, [2001] 3 WLR 662, [2001] EWCA Civ 277, [2002] Ch 1, [2001] BPIR 577
LORD JUSTICE MUMMERY :
The issue on this appeal is whether, on the true construction of sections 283 and 436 of the Insolvency Act 1986 Act (the 1986 Act), a right of pre-emption belonging to or vested in a bankrupt at the commencement of the bankruptcy is “property.” If it is property, the right forms part of the bankrupt’s estate; it vests in the trustee in bankruptcy immediately on his appointment taking effect; and it is available to meet the claims of the creditors. If it is not property, it remains vested in the bankrupt.
The interpretation provisions contained in section 436 state that
“property” includes money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of , or incidental to, property.”
As Sir Nicolas Browne-Wilkinson V-C said in British Airport PLC v. Powdrill [1990] Ch 744 at 759D-
” It is hard to think of a wider definition of property.”
The Facts
The point of construction arises in an unusual factual and procedural context.
“Melville”, Addison Road, Sarisbury Green, Southampton (the Property) consists of a bungalow and some backland with possible development value. It was acquired in 1988 by Ms Karen Robinson and Mr Geoffrey Dear as their home. They had been in a relationship since 1986. The contract to purchase at the price of £187,500 was originally made by Karen Robinson’s then employer, Mr Reeves, on 26 February 1988. The completion date was in August 1988. Mr Reeves assigned the contract to Ms Robinson and Mr Dear, subject, however, to the terms of a Deed of Pre-emption dated 1 August 1988.
By the Deed Ms Robinson and Mr Dear ( “the Grantor”) gave an undertaking to Mr Reeves (“the Grantee”)
” …for a period of Twenty years from 1st day of August 1988 not to sell the [Property]….or agree or offer to do so to any person without first offering to sell the same by notice (” the Offer Notice”) in writing to the Grantee at a price to be determined in manner hereinafter provided…”
The Deed then contained provisions spelling out the consequences of giving an offer notice.
It was agreed in clause (4) that-
“The right of pre-emption hereby granted is capable of assignment by the Grantee and is binding on the personal representatives and successors in title of the Grantor.”
Provision was made for the Grantee to register the right against the title to the Property at HM Land Registry.
The provisions as to the determination of the sale price included the following
” (11) (a) The price of the Property shall be the value of the Property in the open market and with vacant possession as between a willing vendor and a willing purchaser regard being had to all the circumstances at the time of the service of the pre-emption notice save that the price of the property shall exclude any value attributed to the land shown hatched on the plan annexed.”
The hatched land at the back of the bungalow is the part of the Property having possible development value.
Finally it was agreed that-
“This deed shall cease to be of any effect following the marriage according to the laws of England of the said Karen Denise Robinson to the said Geoffrey John Dear.”
The Property was transferred to them as beneficial joint tenants, but a further deed was executed on the same date declaring that the Property was held as to 50% for Ms Robinson’s infant son, Aaron, and 25% each for her and Mr Dear. Mr Dear challenges the validity of that deed in pending proceedings.
Mr Dear and Ms Robinson never did marry each other. Instead, Ms Robinson married a US citizen. She went to live in the USA for several years. The marriage ended in divorce.
Mr Dear also left the Property for a while, but he continued to pay the mortgage and outgoings. He later returned to live in part of the Property. He still lives there. Ms Robinson (with Aaron, who reached the age of 18 on 19 May 2000) returned to live in the Property in 1996, but they have since left. Ms Robinson started proceedings for the sale of the Property under section 14 of the Trusts of Land and Appointment of Trustees Act 1996. It is in those proceedings that Mr Dear has made a Part 20 Claim that the Trust Deed is not binding on him and that he and Ms Robinson hold the Property in equal shares.
Things have not gone well for Mr Reeves. Once it was thought that he was rich. Then on 22 March 1993 he was made bankrupt on a creditor’s petition owing £7m. Mr Barry Knight was appointed trustee on 22 August 1994. Mr Reeves was discharged from his bankruptcy in 1996.
Mr Dear and Mr Reeves have fallen out about the right of pre-emption. Mr Dear started proceedings for a declaration that the right of pre-emption was no longer binding, as “offer notices” had been served and Mr Reeves had failed to exercise them.
The Judgments
All the proceedings came before HHJ Rudd in the Southampton County Court in March 1999 and resulted in judgments on 1 and 3 March 1999 to the following effect:-
The Judge declined to grant the declaration sought by Mr Dear against Mr Reeves, holding that no offer notices had been served. He rejected the submissions of Mr Dear that letters dated 10 July 1992, 11 May 1993 and 10 July 1993 constituted “offer notices.”
He granted the order sought by Ms Robinson for the immediate sale of the Property.
The Part 20 claim by Mr Dear challenging the validity of the Trust Deed has not yet been heard. Doubts have arisen as to whether it was procedurally correct for the judge (a) to make an order for the sale of the Property before determining who was entitled to the beneficial interests in it and (b) to decide the claim for a declaration regarding the right of pre-emption in the absence of the trustee in bankruptcy of Mr Reeves. At the hearing the judge himself raised the point whether the trustee should be joined, but, when counsel for Mr Dear made an application for an adjournment for that to be done, he rejected it without deciding whether the right of pre-emption was vested in Mr Reeves or in his trustee.
Permission to Appeal
These questions surfaced on the applications by Mr Dear for permission to appeal against the refusal of the declaration and against the order for the sale of the Property. The renewed applications for permission were heard on 15 June 2000 by Clarke LJ who made the following orders:-
i) The application in the pre-emption action was adjourned to be heard inter partes on the basis that argument was to be confined to the limited point whether the right of pre-emption was vested in Mr Reeves or in his trustee in bankruptcy. This point turns on the legal analysis of the nature of the right conferred by the Deed and on the construction of the 1986 Act.
ii) The application in the action for an order for the sale of the Property was adjourned to be heard at the same time as i) above, the respective appeals to follow if permission were granted. The issue on that application is whether there is a real prospect of demonstrating that the judge was wrong not to postpone the sale of the Property, so as to preserve the benefit of the development value of the Property. It is common ground that the sale of the Property on the order of the court would trigger the right of pre-emption.
The Appeal Hearing
Everybody was represented at the adjourned hearing of the applications for permission, except the trustee in bankruptcy. In order to save costs he sent in written submissions asserting that the right of pre-emption is vestedin him and that he has never re-assigned it to Mr Reeves. Mr Reeves has now dropped his original contention that if, contrary to primary submission, he was divested of the right on his bankruptcy, the trustee had expressly re-assigned it to him so as to give him the requisite status to contest Mr Dear’s claims.
Initially, Mr Higgins, on behalf of Mr Reeves, objected to the court entertaining argument on an issue which the court below had not decided. Although he could not claim that it was a new point, since it had been raised by the judge himself in the court below, he submitted that the appeal should be dismissed without deciding this point and leaving it for decision by another court, possibly in other proceedings, with the prospect of yet more appeals. He submitted that this court’s decision on that point would not affect the outcome of Mr Dear’s attempt to appeal against the judge’s refusal of the declaration, as Clarke LJ had already refused permission to appeal on the offer notice points on which the judge had decided the case against him. A ruling on the bankruptcy point would not produce a different result, as the trustee does not seek to have the decision of the judge reversed and Mr Dear has already failed in his attempts to appeal the decision.
It was pointed out (and Mr Higgins accepted) that the bankruptcy point can be decided without more evidence. Mr Higgins also agreed that the point will have to be decided by a court at some time. After taking further instructions from his client he agreed that this court should decide the point at this hearing. I am in no doubt that this is the sensible course. Time and costs will be saved in a case in which the total legal costs already exceed the likely value of the equity in the Property.
It was also agreed that the application for permission to appeal against the order for sale should await the decision on the bankruptcy point, in the hope that, once it is known whether the right is vested in Mr Reeves or the trustee, it will be easier to reach a compromise on the future of the Property. As an encouragement to those negotiations we announced our decision at the close of argument. It is that the pre-emption right is vested in the trustee. The outstanding application was adjourned by consent, on the basis that the written reasons for this decision would be handed down before the resumed hearing of that application (assuming, of course, that it has not been settled in the meantime).
The Bankruptcy Point
Mr Higgins contended that the right of pre-emption is not property. There is no property capable of vesting in the trustee unless and until Ms Robinson and Mr Dear serve a valid offer notice. That has not happened. There is nothing that Mr Reeves can do to make that happen. The grantor of a right of pre-emption is under no positive obligation to sell. He is only under a negative obligation to refrain from selling the property without first giving the grantee the opportunity to purchase it in preference to any other buyer. The grantee is free to accept or reject the offer as he chooses. Until the grantor decides to sell there is only a possibility or hope that the grantee might have an interest. That possibility or hope is insufficient to amount to either a thing in action or a future or contingent interest incidental to property capable of vesting in the trustee.
The judgments of this court in Pritchard v. Briggs [1980] Ch 338 were relied on in support of the proposition that a right of pre-emption does not create an interest in land from the time of its creation. Until there is at the very least a decision to sell, it is no more an item of property, either vested or contingent, than, for example, the hope of a person who is a beneficiary under a will of a living testator. Templeman LJ, after identifying points of similarity and difference between an option and a right of pre-emption, said at p.418
“The grant of the right of pre-emption creates a mere spes which the grantor of the right may either frustrate by choosing not to fulfil the necessary conditions or may convert into an option and thus into an equitable interest by fulfilling the conditions…..The holder of a right of pre-emption is in much the same position as a beneficiary under a will of a testator who is still alive, save that the holder of the right of pre-emption must hope for some future positive action by the grantor which will elevate his hope into an interest….”
Goff LJ rejected counsel’s contention that a right of pre-emption created an interest in land ” because it fetters one of the important rights inherent in ownership, that of freedom of alienation .” He said at p.389
” I cannot accept that, however, because a right of pre-emption gives no present right, even contingent, to call for a conveyance of the legal estate. So far as the parties are concerned, whatever economic or other pressures may come to affect the grantor, he is still absolutely free to sell or not. The grantee cannot require him to do so, or demand that an offer be made to him. Moreover, even if the grantor decides to sell and makes an offer it seems to me that so long as he does not sell to anyone else he can withdraw that offer at any time before acceptance.”
At p. 390 he cited and adopted the following passage from the judgment of Street J in the Australian case of Mackay v. Wilson (1947) 47 SR (NSW) 315 at p.325
” But an agreement to give the first refusal or a right of pre-emption confers no immediate right upon the prospective purchaser. It imposes a negative obligation on the possible vendor requiring him to refrain from selling the land to any other person without giving to the holder of the right of first refusal the opportunity of purchasing it in preference to any other buyer. It is not an offer and in itself imposes no obligation on the owner of the land to sell the same. He may do so or not as he wishes. But if he does decide to sell, then the holder of the right of first refusal has the right to receive the first offer, which he also may accept or not as he wishes. The right is merely contractual and no equitable interest in the land is created by the agreement.”
At p.394 Goff LJ concluded that, unlike an option to purchase, a right of pre-emption does not create an interest in land. Stephenson LJ agreed with Templeman LJ at p.423B.
It is important to note two points. First, Pritchard v. Briggs was not an insolvency case. The issue on the nature of a right of pre-emption arose for decision in a dispute over the priority of two registrations on the Land Charges Register, one of an option to purchase land, the other of a right of pre-emption of the same land. The decision was that, as the right of pre-emption did not create a present or contingent interest in land, it did not take precedence over an option which was an interest in land; and that the registration of the option under the Land Charges Act 1925 accordingly took priority over the prior registration of the right of pre-emption.
Secondly, the reasoning in Pritchard v. Briggs has been forcefully criticised as “technically questionable” and as leading to an unjust result in that case. Megarry & Wade on The Law of Real Property (6th Edition by Charles Harpum) criticises the decision at para 12-062 for
” …..introducing the novel conception of a contingent interest in land which ranks as such not from its creation but only from the occurrence of the contingency. The court stressed that the differentiating factor in a right of pre-emption was its dependence upon the owner’s own volition, i.e. his willingness to sell; but it is difficult to see why that should make it so different from numerous other contingencies, volition-dependent or otherwise which the law allows to be attached to interests in land.”
A footnote to this passage adds this comment-
” It is not explained whether every volition-dependent condition is incompatible with an interest in land. If A gives to B an option to purchase if A or his successors cease to reside on it within 20 years, can this bind the successor?”
In the following paragraph 12-063 it is pointed out that the legislation on registration implies that a right of pre-emption should rank as an interest in land from the time of its creation, like an ordinary option, and doubts the validity of the distinction drawn between the two in what, it is suggested, are only obiter dicta in Pritchard v. Briggs.
Mr Higgins also cited the judgment of Knox J in Re Campbell [1997] Ch 14, an insolvency case in which it was held that the prospect of receiving an award of compensation from the Criminal Injuries Compensation Board for injuries suffered as a result of a criminal assault was not a thing in action and was not “property” within the meaning of section 436 of the 1986 Act. The applicant for compensation was adjudicated bankrupt. When, 2 years later, she was awarded compensation, it was paid to her. She refused to hand it over to the trustee, who claimed that it was part of her estate which had vested in him on his appointment. This contention was rejected by Knox J who said at p.18
” Treating the matter purely as a matter of construction I am quite unable to accept that the word “property”, when it is used in that definition of property, is intended to describe anything other than an existing item. In other words I do not accept that it is susceptible of referring to something which has no present existence but may possibly come into existence in the future.”
He distinguished between, on the one hand, the case in which there is in existence property ( e.g .a trust fund) in respect of which there is a contingent and future interest and, on the other hand, “the possibility of achieving an interest in something which presently does not exist but may exist in the future.” The former falls within the definition of property, but not the latter. He concluded at p.22 that the bankrupt’s pending application for compensation was a hope of receiving an award which fructified two years later, but it
“…was not at the date when she became bankrupt part of her property in such a way as to vest in the trustee when she became bankrupt.”
Mr Higgins submitted that in this case there was no property in existence at the date when Mr Reeves was adjudicated bankrupt, to which the right of pre-emption might attach. Unless and until a valid offer notice was served there was only a possibility of achieving an interest in something.
Conclusion
I am in no doubt that the right of pre-emption conferred by the deed of 1 August 1988 is “property” within the definition in section 436 of the 1986 Act and that it is accordingly vested in the trustee. The judge was wrong in treating it as still vested in Mr Reeves.
In Bristol Airport PLC v. Powdrill (supra) at p. 758 H-759B Sir Nicolas Browne-Wilkinson stated that, on the correct approach to construction, it is legitimate and necessary to bear in mind the “manifest statutory purpose” of the provisions and, if the words permit, to adopt the meaning “which gives effect to, rather than frustrates, the statutory purpose.” The purpose of divesting the bankrupt of his property, with certain express statutory exclusions, and vesting the bankrupt’s title to it in the trustee is to enable the trustee to realise the bankrupt’s estate for the benefit of the creditors and to distribute it among the bankrupt’s creditors in accordance with the statutory scheme contained in Chapter IV of Part IX of the 1986 Act. The right of pre-emption does not fall within any of the express statutory exclusions.
The distinguishing feature of a right of property, in contrast to a purely personal right, is that it is transferable : it may be enforced by someone other than the particular person in whom the right was initially vested. This right of pre-emption has that feature: it is expressly made assignable by clause (4) of the Deed. It is true that it may be difficult to put a value on it, as the grantor may never decide to sell the Property, but it is not necessary for a right to have any present or immediate value for it to be “property” within section 463. The relevant question is whether it is, in its legal nature, property. If it is, it only falls outside the bankrupt’s estate by some specific exclusion: see de Rothschild v. Bell [2000] QB 33 at p.48H-49B. As a matter of common sense (if that factor is allowed to feature in these proceedings) I would add that the very fact that (a) Mr Dear and Mr Reeves are in dispute about the continuing validity of the right and that (b) Mr Reeves and the trustee are in dispute about entitlement to the right indicates that the right must be worth litigating about and that it is considered by those most concerned to have a value.
It is a “thing in action” in the sense that
i) there exists a negative obligation, which would not exist but for the Deed of pre-emption;
ii) it is binding on the grantor, who obliged not to sell the Property to anyone without first making an offer to the grantee;
iii) in the event of a decision of the grantor to sell the Property, the obligation is enforceable by legal action by the grantee or his assignee;
iv) in such an action the grantee could obtain an injunction to restrain sale of the Property to another person, until the grantor has first made an offer to the grantee and the grantee has failed or refused to take up the offer; and, if the grantor sells the Property to another person without first offering it to the grantee, he may be liable in damages to the grantee for breach of contract.
I am also of the view that the right of pre-emption conferred on Mr Reeves can properly be described as an “interest” which is “future…..contingent… [and]….incidental to property” within the meaning of section 436. This is not a case like Re Campbell where there was no property in existence at the date of the appointment of the trustee. In this case the Property existed at that date. The right to first refusal of it , when a decision is made to sell it, can properly be characterised as a “future” interest, as it can only vest in possession at a future date when the grantor decides to sell the Property; and it is a “contingent” future interest in the Property in the sense that it is entirely dependent on a future contingency which is uncertain, as the grantor may never decide to sell the Property.
I would distinguish Pritchard v. Briggs (supra). It is a decision on the construction of the Land Charges Act, which has a different statutory objective and the provisions referring to an “interest” are more narrowly drafted than those in the 1986 Act. It has not been contended on this appeal that that case was wrongly decided. It is neither necessary nor appropriate for this court to hold that it was wrongly decided. I would accept, however, that the reasoning in the judgments in Pritchard v. Briggs may require re-consideration. I see the force of the criticisms quoted from Megarry &Wade. I would add that I also see difficulties in regarding a right of pre-emption as similar to the hope of a person who is a beneficiary in the will of a living testator. Under the general law there is no fetter on the freedom of a testator during his lifetime to decide on whom he wishes to include as a beneficiary in his will and whom he wishes to exclude from it. He cannot be prevented from deciding to change his will and he will not incur any legal liability for so doing. In the case of a right of pre-emption, the grantor is free to decide not to sell the property, but, if he decides to sell it, he is legally bound to offer it first to the grantee. If he does not do so, he is liable to the grantee for breach of contract.
Result
I would vary the order of the judge by declaring that the right of pre-emption vested in the trustee in bankruptcy of Mr Reeves and by adding the trustee as party. Counsel should prepare a draft order for the consideration of the court.
LORD JUSTICE MAY:
I agree
ORDER: As per minute of order, prepared by counsel.
(Order does not form part of approved Judgment)
Khan v Trident Safeguards Ltd. & Ors
[2004] BPIR 881, [2004] ICR 1591, [2004] IRLR 961, [2004] EWCA Civ 624
Lord Justice Wall:
Introduction:
We have before us three appeals by Mr. Arfan Khan from decisions of the Employment Appeal Tribunal (EAT) given on 25 February 2003 in a constitution chaired by HH Judge McMullen QC. They all raise the same point. Mr. Khan was adjudged bankrupt on his own petition by order of Mr. Registrar Baister sitting in Bankruptcy in the High Court of Justice at 13.52 on 16 December 2002. Did he, therefore have the status after that date to prosecute appeals to the EAT from decisions of the Employment Tribunal (ET) that his former employer, Trident Safeguards Limited (Trident) had not (1) racially discriminated against him; (2) victimisedhim and / or (3) unfairly dismissed him?
The EAT decided that, because he had been adjudged bankrupt, Mr. Khan did not have the status to prosecute any of his three appeals. It therefore dismissed them. However, it gave him permission to appeal in all three cases. It did so principally because, on 5 December 2002 it had reached a similar decision, and given permission to appeal to this court in a case called Grady v HM Prison Service (EAT/67/02ST) (Grady). Miss Grady had brought proceedings for unfair dismissal, breach of contract, wrongful dismissal and disability discrimination against her former employer. These had been struck out by an ET in a decision promulgated on 14 November 2001. Miss Grady had then been adjudicated bankrupt on 31 January 2002, and remained bankrupt when her appeal was heard by the EAT.
Miss Grady’s appeal was heard in this court on 1 April 2003 in a constitution comprising Thorpe and Sedley LJJ and Richards J. The reserved judgment of the Court, [2003] EWCA Civ 527, allowing the appeal, was delivered by Sedley LJ on 11 April 2003, and is reported at [2003] 3 All ER 745.
It will be immediately apparent from this chronology that when the EAT granted permission to appeal in the three cases before us, the decision of this court in Grady was awaited. In giving its judgment dismissing the appeals, the EAT naturally relied on its reasoning in Grady, buttressed, however, by the fact that on 29 August 2002, in a case called Ellison v Petrie Tucker & Partners Ltd [2002] EAT / 0795/01, a differently constituted EAT, chaired by HH Judge Read QC, had reached a similar conclusion in a case involving unfair dismissal, a request for a review and an order for costs.
Counsel for Trident, Mr. David Preston, accepted in argument that the effect of this court’s decision in Grady was that the EAT has jurisdiction to entertain Mr. Khan’s appeal against the ET’s decision that he had not been unfairly dismissed by Trident. The concession was, I think, rightly made. That appeal, accordingly, must be allowed, and remitted to the EAT to be determined in the usual way.
Mr Preston argues, however, that different considerations apply to the appeals relating to race discrimination and victimisation.
Before examining the decision of this court in Grady, and the earlier cases on the status of bankrupts to initiate or continue proceedings it is, in my judgment, necessary, despite Mr. Preston’s concession in relation to the appeal on unfair dismissal, to analyse with some care the nature and status of each of the appeals which is before us in order to identify the relief which Mr. Khan was seeking in the ET, the legal and factual basis upon which he sought it and the basis upon which he seeks to appeal the ET’s decision in each case. I propose to do so by identifying the appeals, quite simply, as the first, the second and the third appeal.
All three appeals stem from Mr. Khan’s employment by Trident, which is a company providing security guards for a broad range of organisations including banks, universities and art galleries. Mr. Khan began employment with Trident as a security officer on 11 June 1999. After September 1999, he worked almost exclusively at a student hall of residence in London (159 Dover Street) where Trident was contracted to provide security officers.
Between February and August 2000, Mr. Khan issued six originating applications (known as Form IT1s) in the ET in which he complained of direct discrimination and victimisation under the Race Relations Act 1976 (RRA 1976). The Respondents to those proceedings were Trident and four of its senior employees. It appears these applications were consolidated in about early June 2000.
The claims were heard by the London South ET over six days (27-30 November 2000, 27-28 June 2001) with a seventh day (29 June 2001) in chambers. In an unanimous decision, promulgated on 1 October 2001 (and running to some 114 paragraphs over 22 pages of single spaced A4), all Mr. Khan’s claims were dismissed.
It is of importance to note that on 8 June 2000 and on 17 November 2000, a regional Chairman, Mr. R Peters, gave detailed interlocutory directions in the proceedings prior to the hearing starting on 27 November 2000. Those directions, inter alia, carefully defined the issues in the case. It is apparent from the decision of the ET promulgated on 1 October 2001 that Mr. Khan appealed one or both of the orders of 8 June 2000 and 17 November 2000, although we do not know on what basis. All we know is that the appeal was dismissed by the EAT sometime before the ET resumed its hearing on 27 June 2001.
Mr. Khan filed a lengthy notice of appeal against the 1 October 2001 decision running to some 38 pages. This included a number of complaints about the conduct of the ET Chair, Ms C Hyde. In accordance with EAT practice, Ms Hyde and the members sitting with her were invited to respond to Mr. Khan’s complaints. All three did so – Ms Hyde at some length on 10 May 2002.
The complaints which Mr. Khan makes, are extreme, even by the standards of the disappointed litigant in person. Apart from describing Ms Hyde as “nothing more than respondents lackey, a crooked and bent judiciary” he accuses her of race discrimination against him (on the basis that both she and counsel for Trident were black). But perhaps his most extreme allegation is that the Tribunal re-wrote the decision after 11 September 2001 in order to find against Mr. Khan whom, as a Muslim of Pakistani origin, they saw as a member of the group responsible for the terrible events of that day.
Those who chair ETs and their lay members all have to have broad backs, and frequently have to deal with litigants in person who accuse them of bias and race discrimination. This allegation, however, reflects on Mr. Khan, not on Ms Hyde or her colleagues. The only word I can use to describe it (apart from saying that it is wholly unsupported by the passage in the notice of appeal in which it appears) is irrational. It certainly could not, in my judgment, form the basis of a ground of appeal.
Mr. Khan’s appeal was listed by way of preliminary hearing before a constitution of the EAT chaired by Mrs Recorder Cox QC on 24 June 2002. A preliminary hearing in the EAT is a without notice sifting procedure in which an appellant has to satisfy the EAT that there is an arguable point of law for the EAT to consider at a full hearing. It appears from the EAT’s judgment that only one of the six originating applications (2301012 / 2000) was before it. The case seems to have been in a thoroughly ill-prepared state. The EAT was lacking many documents.
Mr. Khan had the advantage of representation by a member of the Employment Law Appeal Advice Service (ELAAS). Having heard from ELAAS, the EAT adjourned the preliminary hearing of the appeal and directed the production of Ms Hyde’s notes of the hearing before the ET. It also made orders for the production of documentation likely to assist it at the adjourned hearing.
Nothing appears to have happened since, apart from (1) a polite and well reasoned request, dated 16 December 2002 from Ms Hyde to the EAT, apologising for the delay and asking it to reconsider its direction that she produce her notes; (2) a letter from the Registrar dated 9 January 2003 to Mr. Khan and to Trident directing them to explain which parts of the notes are deemed necessary and (3) a Fax from Mr. Khan to the Registrar dated 23 January 2003, making a legitimate complaint about the delay, insisting that all of the Chair’s notes are required and making further irrational and intemperate complaints about Ms Hyde. Inter alia he says:
“After six months the chairman probably has come to the conclusion that no matter how much she fabricates or manipulates the notes it is still not to her heart’s contents, accordingly she needs pointers to which parts she should pay more attention. I see her letter in that light and spirit. How can the EAT claim to act as independent and impartial if it makes substantial contribution to this despicable behaviour of the Chairman, who has even after six months not made available her notes but in fact has endeavoured to stifle appellant’s appeal.”
The EAT’s pragmatic order of 25 February 2003 setting the first appeal down to be heard immediately as an “Inter partes preliminary hearing” and then dismissing it was not based on any knowledge of what the appeal was about. That is plain from the following comment by HH Judge McMullen:
“We know nothing of this case but accept from (Counsel for Trident) that it is a case of direct discrimination and victimisation under (RRA 1976).
(Counsel)’s clients are anxious that they be not vexed further in the EAT by way of (Mr. Khan’s) actions whilst he is bankrupt. We see force in that, since two of his cases may now be on their way to the Court of Appeal. The practical approach which we have adopted in the previous case should be adopted in this case.”
Irrespective of Mr. Khan’s status to prosecute the first appeal, I regard its current state as highly unsatisfactory. Ignoring for the moment Mr. Khan’s irrational beliefs about Ms Hyde and the ET members, and his assertion that she would fabricate or manipulate her notes, the fact remains that the events which give rise to the appeal occurred in 1999 and 2000, and that Mr. Khan’s as yet unresolved appeal is from a decision of the ET promulgated on 1 October 2001. Such a time-scale is not acceptable.
The issues in the first appeal
In application 2301012 / 2000, as summarised by Mr. Peters in the first schedule to the order made on 8 June 2000, Mr. Khan’s complaint was that Trident had racially discriminated against him by paying him less than three colleagues who did the same job but were of a different race and ethnic origin. Mr. Khan is of Pakistani origin: two of the comparators were white, and one was black. He also alleged that he had been victimisedby Trident since raising the allegation with its managing director.
Trident’s defence, which was accepted by the ET, was that two of the three employees in question were being paid at an incorrect rate due to an administrative error, which had since been corrected. They had previously worked on sites which attracted a higher global hourly payment, and this had not been corrected when they moved sites. Trident denied the third employee was being paid at a different rate.
Mr. Peters summarises the next two complaints (2302339/00 and 2302340 /00, the respondents to which were Trident and Mr. R Shaw) in the following terms:
The Applicant makes two complaints of unlawful direct race discrimination and unlawful discrimination by way of victimisation. In the latter complaint the protected act is that the Applicant claimed race discrimination as to unequal pay. The act of alleged discrimination is being telephoned by Mr. Shaw requiring the Applicant to attend work after the Applicant had previously telephoned work to say that he would be unable to attend because he was unwell. The Applicant’s comparator is Mr. Ciaron Robertson (white Scottish). The case is resisted on its facts and in particular that there is no record of a telephone call from the Applicant saying that he was unable to attend because he was unwell.
Mr. Peters then summarises two further complaints (2302341/00 and 2302344/00) as follows:
The Applicant makes complaints of unlawful race discrimination and unlawful discrimination by way of victimisation. The protected act is again because the Applicant had raised an issue of unequal pay. The act of alleged discrimination is that on 28 January 2000 allegations were made against the Applicant of theft by Mr. King.
The Applicant names four comparators who were also employed by (Trident) at the same work place whom he says were not accused of theft (names given)
The Respondents (Trident and Mr. King) resist the complaint on the facts in particular denying the Applicant was accused of theft as set out in the Notice of Appearance.
Finally, Mr. Peters sets out at some length particulars of Mr. Khan’s claim of victimisation. This appears to centre around an incident on 1 January 2000 in which Mr. Khan was assaulted by a fellow employee. He complains that his assailant was taken home immediately in a company car, whilst he was left injured at the site of the assault. He complains further that no action was taken against his assailant.
In my judgment, it is apparent from Mr. Peters’ summary that what Mr. Khan was claiming from the ET was monetary compensation for race discrimination and victimisation. In the first IT1 (the only originating application apparently before Mrs. Cox QC and her members in the EAT at the preliminary hearing of the appeal) the race discrimination he was alleging was based precisely on the claim that he was being paid less than colleagues of different race or ethnic backgrounds.
It is clear from the painstaking extended reasons of the ET in the reasons promulgated on 1 October 2001 that it accepted Trident’s version on the facts. Their findings of fact run from paragraphs 34 to 99 of the decision. Since this appeal goes primarily to jurisdiction, it is unnecessary for me to analyse those findings or the directions of law which the Tribunal gave itself. It is, however, only fair to the ET to point out that paragraphs 102 to 114 of the judgment are spent setting out the ET’s conclusions in what strikes me as an entirely rational fashion.
The Second Appeal (EAT reference: 1413/01: Court of Appeal reference 2003/1137)
This was the substantive appeal before the EAT on 25 February 2003. It has its origins in a Form IT1 issued by Mr. Khan on 1 March 2001 alleging unlawful direct race discrimination and victimisation. In addition to Trident, it named three other respondents. They were North British Housing (NBH) the Housing Association which operated 159 Great Dover Street, where Mr. Khan was employed; Mr. Paul Noke; and Ms Juliet Rodgers, who were employees of NBH. The allegation made by Mr. Khan against NBH, Mr. Noke and Ms Rodgers was that, pursuant to RRA section 33, they had aided Trident to commit the acts of unlawful discrimination alleged.
On 11 July 2001 there was a hearing before an ET Chairman, Mr. Peters, who had, of course, given directions in the preliminary stages of the hearing before the ET which formed the subject of the first appeal. Once again, Mr. Peters helpfully identified the issues. The alleged act of discrimination was requiring Mr. Khan to work 16 hours per day alternating between five and four days a week. Mr. Khan alleged that his comparators, of black African ethnic origin only worked 14 hours a day, three days on and three days off.
Mr. Peters summarised the complaint of discrimination by way of victimisation in the following way: the protected acts were the various ET proceedings commenced in February 2000, and the alleged act of discrimination was the change in hours of employment which took place in December 2000. The applicant had previously worked twelve hours per day but was required to work sixteen hours per day at 159 Great Dover Street. Mr. Peters summarised Trident’s defence as being that there was no difference in treatment: all guards (apart from the guard who only worked at weekend) were required to work 14 hours per day and the different shift pattern changed for all guards on the site after the applicant had left the site. Secondly, Trident’s case was that the change in hours had nothing to do with the Tribunal proceedings but were related to a re-tendering exercise imposed by NBH.
Mr. Peters records the defences of NBH, Mr. Noke and Ms Rodgers as being, in effect, that Mr. Khan’s complaints had nothing to do with them. NBH had merely specified the hours they required guards at the premises: they had no knowledge of the proceedings, and in any event, changes in hours were a matter for the applicant and Trident.
The hearing took place over 5 days at the London South ET (6,7,8,12 and 13 February 2002) and the reserved decision was promulgated on 13 March 2002. In view of the allegations of bias against Mr. Peters which Mr. Khan makes in the notice of appeal, it is worthwhile pointing out that it emerged during the course of the hearing that the complaint was in fact out of time – it had not been brought within the three month period required by section 68 of RRA 1976. Despite this, the Tribunal exercised its discretion to hear the application.
In a careful judgment running to some 26 pages the ET rejected Mr. Khan’s case. It found in particular that a letter to Mr. Khan stating that his shifts would start at 1600 hours rather than 1800 hours (thereby apparently lengthening his shift by two hours) was a simple typographical error. It found that there was no case against NBH, Mr. Noke and Ms Rodgers.
There was then an application for costs against Mr. Khan. For reasons which are not clear, Mr. Khan was not present on 13 February 2002 when the ET announced its decision, and the application for costs was heard in his absence. The discretion of ETs to award costs is not unfettered, and it is highly unusual for an order for costs to be made. ETs pride themselves on being an open forum (there is no fee for instituting proceedings) to which impecunious or economically disadvantaged litigants should have access to prosecute arguable cases without the fear that they will be penalised in costs by their employers if they lose. Accordingly, rule 14 of Schedule 1 of the Employment Tribunals (Constitution and Rules of Procedure) Regulations) (the ET Rules, 2001) provides that:
“Where, in the opinion of the tribunal, a party has in bringing the proceedings or a party or a party’s representative has in conducting the proceedings, acted vexatiously, abusively, disruptively, or otherwise unreasonably, or the bringing or conducting of the proceedings by a party has been misconceived, the tribunal shall consider making, and if it so decides, may make (orders for costs) ”
The maximum lump sum which the ET can award for costs is £10,000. It can also, however, order a detailed assessment of a party’s costs. In the instant case, the ET dismissed all Mr. Khan’s claims, and ordered Mr. Khan to pay costs of £10,000 to Trident and the whole of the costs of NBH, Mr. Noke and Ms Rodgers, to be assessed by way of detailed assessment on an indemnity basis if not agreed. As Mr. Khan had not been present when the application was made, implementation of the order was deferred to enable Mr Khan to make a written application with reasons as to why such awards of costs should not be made. Mr. Khan does not appear to have done so.
Mr. Khan filed a notice of appeal. At a preliminary hearing before the EAT in a constitution chaired by Judge Serota QC on 25 September 2002 the EAT dismissed all Mr. Khan’s grounds bar one. Mr. Khan did not address them on the order for costs and allegations of bias and misconduct which he had made against Mr. Peters had been previously struck out by the EAT after Mr. Khan had failed to provide an affidavit supporting them.
Judge Serota and his colleagues on 25 September 2002 plainly supported the manner in which Mr. Peters conducted the hearing, notably in the way in which he dealt with a late and prolix witness statement served by Mr. Khan shortly before the hearing, much of which was irrelevant. The EAT pointed out that the ET had not acceded to an application made during the course of the hearing to strike out Mr. Khan’s claim for failing to serve an appropriate statement. The EAT found that Mr. Khan had been given every assistance to present relevant evidence. The EAT rejected arguments that the hearing was unfair and that the ET’s finding were perverse. It also rejected his complaint about the London South Tribunal as venue, on the ground that he should have made this complaint at the time.
The one issue on which the EAT discerned an arguable point of law was the proposition that the order made by Mr. Peters on 18 July 2001 was not a case management order made pursuant to rule 4 of Schedule 1 to the ET Rules 2001, but was a Pre-Hearing Review held pursuant to rule 7. The consequence, if this is correct, is that Mr. Peters should not have presided over the final hearing. I will return to this point at the end of this judgment.
The Third Appeal: EAT reference 1413/01: Court of Appeal reference2003/1138
As this is the appeal which it is common ground must be allowed in any event I can take it quite shortly. Trident terminated Mr. Khan’s employment on 23 March 2002 on the ground that there had been a complete breakdown in the implied term of mutual trust and confidence in the contract of employment between Trident and Mr. Khan. Trident’s procedures provided for an internal appeal which confirmed the decision.
Mr. Khan issued a Form IT1 on 19 June 2002 claiming unfair dismissal and victimisation under RRA 1996. He sought reinstatement and re-engagement. Trident’s IT3 denied that the dismissal was either unfair or an act of victimisation.
The application was heard by the ET at London Central on 9 October 2002 in a constitution chaired by Mrs. E.M. Prevezer. The extended reasons were promulgated to the parties on 3 December 2002. Mr. Khan’s claim was dismissed, and he was ordered to pay Trident’s costs in the sum of £7,800. On 25 February 2003 the EAT dismissed Mr. Khan’s appeal on the jurisdiction issue.
The circumstances in which Mr. Khan was adjudicated bankrupt
On 12 August 2002 Trident served a statutory demand on Mr. Khan, having obtained a judgment in the Lambeth County Court for its costs in the proceedings chaired by Mr. Peters. It rather looks, however, as if Mr. Khan decided, as he puts it in his written submission to us, to “take charge of the situation” by filing a bankruptcy petition himself on 16 December 2002, less than a fortnight after the extended reasons of the London Central ET were promulgated on 3 December 2002. We have not seen either the petition or the Statement of Affairs. Mr. Khan is described in the order as unemployed.
The insolvency legislation and the relevant case law
Although by virtue of section 306(1) of the Insolvency Act 1986 (the Act of 1986) Mr. Khan’s estate now vests in the Official Receiver; and although by virtue of section 283(1)(a) of the Act of 1986 his estate comprises all property belonging to or vested in him on 16 December 2002; and although by virtue of section 436 of the Act of 1986 his property includes his three originating applications against Trident, the question, on the authorities, is whether or not those three choses in action are, to use the time-honoured words of Earl J in Beckham v Drake (1849) 2 H.L. CAS 579, 604 cases in which “the damages are to be estimated by immediate reference to pain felt by the bankrupt in respect of his body mind or character, and without reference to his rights of property”.
In accordance with the view of this court in Grady, I approach this question on the basis that there can be no distinction between the claim and the appeal. As Sedley LJ put it in Grady [2003] 3 All ER 745 at 749, paragraph [20]:
“The appeal, brought as of right, was a continuation of the claim once it had failed at first instance. Either both fall or neither falls within the material meaning of a thing in action.”
Speaking for myself, of all the authorities contained within the bundles provided for us, I found most helpful the decision of this court in Ord v Upton [2000] Ch 352 in which Aldous LJ, giving the leading judgment, analysis the previous case law. Mr. Ord was adjudicated bankrupt in 1995. The bankruptcy was not discharged until December 1997. In February 1997 Mr. Ord issued a writ against a doctor who had been treating him for back pain in 1991. His action was in negligence and the damages he claimed fell under two heads; (a) loss of earnings; and (b) general damages for pain and suffering. His trustee in bankruptcy, Mr. Upton, claimed entitlement to the damages for financial loss up to the date of the discharge of the bankruptcy order. Mr. Ord contended that no part of the cause of action or the damages vested in his estate on bankruptcy. That dispute was referred to the Chancery Division for resolution.
The judge (HH Judge Behrens sitting as a Judge of the Chancery Division) decided – see [2000] Ch 352, 358 – that Mr. Ord’s cause of action:
…. does constitute property part of which is vested in the trustee and part of which is vested in Mr. Ord, as follows: 1.1 the claim for loss of earnings in respect of the period up to the date of Mr. Ord’s discharge from bankruptcy (15 December 1997) vests in the trustee; and 1.2 the claim for pain and suffering, loss of amenity, loss of mobility and all losses after the date of discharge, continue to vest in Mr. Ord. 2. Any liability pursuant to the Social Security (Recovery of Benefit) Act 1997 for recoupment of the incapacity benefit should be discharged from the part vested in the trustee; any liability for the recoupment of the mobility component of the disability living allowance should be discharged out of the part vested in Mr. Ord.
After a citation of the well-known passage in the judgment of Hoffman LJ in Heath v Tang [1993] 1 WLR 1421 at 1423 under the heading “the Bankrupt as plaintiff” which I need not set out, Aldous LJ analyses Mr.Ord’s cause of action. He says ([2000] Ch 352 at 361):
In modern parlance, Mr. Ord’s claim is a single cause of action. However, I cannot accept (Mr. Ord’s) submission that the cause of action is personal. It is a claim for damages for injury to his body and mind and also his capacity to earn and therefore be considered as a “hybrid” claim, in part personal and in part relating to property. I have come to the conclusion that such an action vested in the trustee. It would only have remained with Mr. Ord if it fell within an exception established by the authorities to be excluded from the definition of property now found in section 436 of the Act of 1986. To do so it must relate only to a cause of action personal to the bankrupt. All causes of action which seek to recover property vest in the trustee whether or not they contain other heads of damage to which the bankrupt is entitled. The authorities to which I now turn lead to that conclusion.
After an extensive review of the authorities, Aldous LJ concludes with the following paragraph ([200] Ch 352 at 371):
“The authorities are only consistent with the conclusion that the trustee is entitled to the damages for past and future loss of earning and is not entitled to the damages for pain and suffering. As there is a single cause of action, it vested in the trustee. There is in my view nothing in that conclusion which imposes practical difficulties with which the law cannot deal. The trustee as constructive trustee would have to account to the bankrupt for the property, which he obtained inadvertently or by arrangement in an action, which vested in him for the benefit of the creditors. The idea that the cause of action should vest in the bankrupt would not be acceptable and compulsory joinder of both could lead to difficulties when the claim for loss of earnings was small compared with the potential costs of the litigation. In such a case the trustee, if the cause of action vested in him, would have to consider carefully his duty to the bankrupt and would probably, if requested, assign the cause of action to him.
This court in Grady distinguished Ord v Upton on the basis on the unique nature of the claim for unfair dismissal. In paragraph 25 ([2003] 3 All ER 745 at 751) of this court’s judgment, Sedley LJ said:
In our judgment a claim for re-instatement consequent on an unfair dismissal, and indeed a significant element of the compensation which can be awarded in lieu of these, is not a thing in action of the kind which forms part of the bankrupt’s estate, even though the eventual fund (if an award is made) may be. It is a claim of a unique kind, which offers the restoration to the claimant of something which only the claimant can do. To vest it in the trustee in bankruptcy would be of no appreciate benefit to the creditors except to the extent that it might produce a money settlement (which would represent not a concession but a liquidation of the bankrupt’s claim to her job). For the rest, the creditors will probably be better served if the bankrupt can get her job back or a similar job in its place, and that is something the trustee cannot do in her stead. Mr. Johnson rightly does not fall back on the circular proposition that in that case the trustee can always re-assign the claim to the bankrupt.
Was counsel for Miss Grady right to accept that her claims for disability discrimination under the Disability Discrimination Act 1995 (DDA 1995) vested in her trustee and could not be pursued by her?
Counsel for Miss Grady accepted in this court ([2003] 3 All ER 745 at 748h-j) that her claims for wrongful dismissal and disability discrimination under DDA 1995, being in substance money claims, had vested by operation of law in her trustee in bankruptcy and could not be pursued except by the trustee or by means of re-assignment to her. It is in my judgment necessary therefore to look at the substance of a claim for disability discrimination and the remedies available in relation to it, both to understand why the concession was made and to compare a claim for disability discrimination with a claim for race discrimination and victimisation.
Sections 4 and 5 of DDA 1995 make it unlawful for an employer to discriminate against a disabled person. Under section 5(1) a employer discriminates against a disabled person if –
(a) for a reason which relates to the disabled person’s disability, he treats him less favourably that he treats or would treat others to whom that reason does not or would not apply; and
(b) he cannot show that the treatment in question is justified.
Under DDA 1975 section 5(2) an employer also discriminates against a disabled person if –
(a) he fails to comply with a section 6 duty imposed on him in relation to the disabled person; and
(b) he cannot show that his failure to comply with that duty is satisfied.
Section 6 applies where any arrangements made by or on behalf of an employee; or any physical feature of premises occupied by the employer place the disabled person at a substantial disadvantage in comparison with persons who are not disabled. In these circumstances it is the duty of the employer to take “such steps as it is reasonable, in all the circumstance of the case, for him to have to take to prevent the arrangements or feature having that effect.”
The remedies provided by section 8(2) to (5) of DDA 1995 are as follows:
“(2) Where an employment tribunal finds that a complaint presented to it under this section is well-founded, it shall take such of the following steps as it considers just and equitable –
(a) making a declaration as to the rights of the complainant and the respondent in relation to the matters to which the complaint relates;
(b) ordering the respondent to pay compensation to the complainant
(c) recommending that the respondent take, within a specified period, action appearing to the tribunal to be reasonable, in all the circumstances of the case, for the purpose of obviating or reducing the adverse effect on the complainant of any matter to which the complaint relates.
(3) Where the tribunal orders compensation under sub-section 2(b), the amount of the compensation shall be calculated by applying the principles applicable to the calculation of damages in claims in tort….
(4) For the avoidance of doubt it is hereby declared that compensation in respect of discrimination in a way which is unlawful under the Part may include compensation for injury to feelings whether or not it includes compensation under any other head (my emphasis).
(5) If the respondent to a complaint fails, without reasonable justification, to comply with a recommendation made by an employment tribunal under subsection 2(c) the tribunal may, if it thinks it just and equitable to do so –
(a) increase the amount of compensation required to be paid to the complainant in respect of the complaint, where an order was made under subsection 2(b); or make an order under subsection 2(b) ….
In the light of these provisions, counsel for Miss Grady was, in my judgment, right to accept that her claim under DDA 1995 was in substance a money claim and had thus vested in her trustee. Although part of the remedy is a declaration, and the ET has power to make a recommendation that the employer take remedial steps, it has no power to enforce the recommendation: it simply increases the award of damages, or makes an award if it has not done so previously.
It is also significant, in my judgment, that whilst DDA 1995 section 8(4) gives the tribunal the power to include compensation for injuries to feelings, compensation is calculated on the basis of damages in tort. This, to my mind, makes it clear that as in Ord v Upton, the claim is hybrid.
Claims for race discrimination and victimisation
In my judgment, similar considerations apply to claims for race discrimination and victimisation. Indeed the similarities in the structure and language of the legislation are clear. Under section 1 RRA 1976 a person discriminates against another for the purposes of the Act if –
(a) on racial grounds he treats that other less favourably than he treats or would treat other persons; or
(b) he applies to that other a requirement or condition which he applies or would apply equally to persons not of the same racial ground as that other but –
(i) which is such that the proportion of persons of the same racial group as that other who can comply with it is considerably smaller than the proportion of persons not of that racial group who can comply with it; and
(ii) which he cannot show to be justifiable irrespective of the colour, race, nationality or ethnic or national origins of the person to whom it is applied; and
(iii) which is to the detriment of that other because he cannot comply with it.
Victimisation is defined in section 2 RRA as less favourable treatment where the person victimised has:
(a) brought proceedings against the discriminator or any other person liable under this Act; or
(b) given evidence or information in connection with proceedings brought by any person against the discriminator or any other person under this Act; or
(c) otherwise done anything under or by reference to this Act in relation to the discriminator or any other person; or
(d) alleged that the discriminator or any other person has committed an act which (whether or not the allegation so states) would amount to a contravention of this Act,
or by reason that the discriminator knows that the person victimised intends to do any of those things, or suspects that the person victimised has done, or intends to do, any of them.
The remedies provided on a complaint to an ET being well founded are set out in section 56:
“(1) Where an Employment Tribunal finds that a complaint presented to it …. is well founded, the tribunal shall make such of the following as it considers just an equitable –
(a) an order declaring that the rights of the complainant and the respondent in relation to the act to which the complainant relates;
(b) an order requiring the respondent to pay to the complainant compensation of an amount corresponding to any damages he could have been ordered to pay by a county court…. to pay to the complainant if the complaint had fallen to be dealt with under section 57
(c) a recommendation that the respondent take within a specified period action appearing to the tribunal to be practicable for the purpose of obviating or reducing the adverse effect on the complainant of any act of discrimination to which the complaint relates.
The reference to section 57 is to claims brought outside the employment field, and the section provides that, as in cases of disability discrimination, damages in respect of an unlawful act of discrimination may include compensation for injury to feelings, whether or not they include compensation under any other head.
Conclusion on the jurisdiction point
I have come to the conclusion that Mr. Khan’s claims relating to race discrimination and victimisation are “hybrid” within Ord v Upton and, accordingly, vest in the Official Receiver. Although the nature and amount of compensation which Mr. Khan was seeking in these two applications and both unclear, and although the claims in the ET never progressed to the compensation stage, it is to my mind reasonably clear that Mr. Khan was asserting (inter alia) that he was being discriminated against on the grounds that he was being made to work longer hours for less pay than his comparators. That seems to me, in substance, a money claim even though, had the claims been established, it would have been open to the ET to have awarded him both his lost earnings and compensation for injury to his feelings.
In this context therefore, I do not see any distinction in principle between claims for disability discrimination and claims for race discrimination and victimisation. Were the matter left to me, therefore, I would therefore dismiss the first and the second appeals on the jurisdiction point.
Mr. Khan referred us to the decision of the House of Lords in Mulkerrins v Price Waterhouse Coopers (a firm) [2003] UKHL 41, 1 WLR 1937 in which a claim for damages brought by a bankrupt against a firm of accountants for negligence in failing to achieve an individual voluntary arrangement (IVA) for her, as a consequence of which she had been adjudged bankrupt, was held to vest in her, rather than in the trustee, notwithstanding its “hybrid” nature. However, I do not think that this case assists Mr. Khan. This is because, in my judgment, it turns on what Lord Walker of Gestingthorope described in his speech at paragraph 26 as its “very unusual facts”, notably a decision by a district judge in the Reading County Court that as between the claimant and her trustee in bankruptcy the trustee had no interest in chose in action represented by the claim.
After a review of the authorities, beginning with Beckham v Drake (supra), Wilson v United Counties Bank Ltd [1920] AC 102 Ord v Upton (supra) and Grady Lord Walker comments:
The Official Receiver, who was given leave to intervene in this appeal, has, (both in his petition for leave and in his printed case) placed before your Lordships some thoughtful and well-researched submissions, including a helpful survey of Commonwealth and United States authorities. He has drawn attention to the apparently anomalous results which can flow from accidents of timing of different stages in the prosecution of a right of action, and to the practical problems which may arise from a trustee in bankruptcy prosecuting a hybrid right of action, partly on behalf of the creditors and partly on behalf of the bankrupt himself. But in the event, your Lordships did not find it necessary, and did not consider it appropriate to hear all argument on these points. This is because the very unusual facts of the present appeal permit it to be disposed of on much narrower grounds, and make it an unsuitable case for exploration of the wider issues.
In my judgment, as applied to the facts of the instant case, Aldous LJ’s analysis in Ord v Upton is unaffected by the decision in Mulkerrins v Price Waterhouse Coopers (a firm). In any event, as Arden LJ points out in her judgment, it is binding on this court.
Wider Issues
As Buxton and Arden LJJ (whose judgments I have had the opportunity of reading in draft) take a different view on Mr. Khan’s capacity to prosecute the first and the second appeals, the result will be that all three appeals will be allowed. In these circumstances, I propose to explain, quite shortly, why I am unable to share their view. In so doing, I am conscious that all three appeals will now fall to be dealt with by the EAT on any points of law which they disclose. Nothing which follows, therefore, should in any way be perceived as seeking to influence the manner in which the EAT goes about its task in hearing and disposing of them.
Speaking for myself, and whilst acknowledging that Arden LJ has infinitely more experience and knowledge of bankruptcy law and practice than myself, I am, I have to say, reluctant as a general proposition to permit litigants who are bankrupt to select and litigate those parts of hybrid claims which have vested in their trustees, but which can be said to be “personal” to them. This must particularly be so, I think, in the case of a litigant whose bankruptcy has been precipitated by an unpaid bill for costs held by a tribunal to have been incurred as a consequence of his unreasonable conduct of the very litigation he wishes to pursue.
This is not, of course, to say that a bankrupt litigant should be denied access to justice. Aldous LJ makes it clear in the final paragraph of his judgment in Ord v Upton which I have cited in paragraph 47 above, that there will be cases where the cause of action has vested in the trustee in bankruptcy and where the trustee will need to consider carefully whether or not to assign it back to the bankrupt.
In the instant case, we know that the Official Receiver has stated that he does not intend to prosecute either of the two race discrimination / victimisation claims. The question which then arises is whether or not the ET or the EAT, faced with a bankrupt applicant / appellant in a race discrimination or victimisation claim should either enquire into the position of the Trustee, alternatively adjourn the proceedings to give the applicant / appellant time either to persuade the trustee to assign the cause of action to him or to apply in the Chancery Division for an order compelling the trustee do so.
It is thus clear that the vesting of a bankrupt’s cause of action in the trustee is by no means the end of the litigation road for the bankrupt. It is equally clear that the law imposes a filter. In a hybrid claim such as the present, the options are those set out in the previous paragraph. In those cases where the bankrupt’s property is involved, the intervention of the bankruptcy thus provides a sensible filtering mechanism. In no sense can it be said that access to the court or a hearing is being denied.
This, in my judgment, makes it unnecessary to consider any of the arguments Mr. Khan advances in the instant appeals in relation to Article 6 of the European Convention on Human Rights, which, in my judgment, is not engaged on the facts of this case. At the same time, however, it seems to me that this court should be cautious in allowing the sensible filter imposed by the estate vesting in the trustee to be by-passed save in clear cases, of which, in the employment field, this court has found an application for unfair dismissal to be one.
Inevitably, however, the question of an assignment of the cause of action to the bankrupt brings into play the merits of the bankrupt’s case, and a consideration of what his case is about. I freely acknowledge that there may well be cases in which the ET or the EAT will have carefully to consider the potential injustice to a litigant who is being prevented from pursuing his rightful claim by virtue of the fact that his hybrid claim has vested in an unreasonable or intransigent trustee. I am quite satisfied, however, that the first and second appeals before us do not come into that category.
As to the first appeal, Mr. Khan plainly lost on the facts. His allegations of bias and corruption against Ms Hyde and the members of the tribunal in the first appeal simply do not bear examination. His only point in the second appeal is that the Chairman who conducted the proceedings had previously conducted a pre-trial review under rule 7 of the ET Rules 2001 and was thus disqualified from sitting. We have not, of course, heard argument on this point, although because the document was not in our papers, we sent for the order made by Mr. Peters on 18 July 2001. Having read it, I would, speaking for myself, take a great deal of persuading that this was anything other than a sensible order for case management directions made under rule 4 of the ET Rules 2001. It was certainly not an order made under rule 7(4), (5) or (6) and I cannot see anything in it which would invoke rule 7(9).
It must, I think, be remembered that appeals to the EAT lie only on questions of law: – see Employment Tribunals Act 1996, section 21(1). Race discrimination and victimisation claims require the application of the relevant provisions of RRA 1976 and the principles derived from certain well known authorities to the facts of the particular case. That is what has happened here. In order for the EAT to interfere with findings of fact made by the ET, an appellant has to show that those findings were perverse.
I, of course, agree with every word in the passage of the judgment of the criminal division of this court in R v Saunders (2000) 1 Cr. App 458 cited by Arden LJ in paragraph 85 of her judgment, and with the speech of Lord Steyn in Anywanu v South Bank Student Union [2001] 1 WLR 638, 647, paragraph 24. The latter was a race discrimination case, in which the ET had struck out the applicants’ claims. Dealing with the decision to strike out, Lord Steyn said: –
Discrimination cases are generally fact sensitive, and their proper determination is always vital in our pluralistic society. In this field perhaps more than any other the bias in favour of a claim being examined on the merits or demerits of its particular facts is a matter of high public interest.
Mr. Khan’s claims were not struck out. To the contrary, his first application was heard over a period of six days, and his second over a period of five. Not only were his applications not struck out; in the order made by Mr. Peters on 18 July 2001 which forms the basis of Mr. Khan’s case in the second appeal, the Chairman refused applications by NBH, Mr. Noke and Ms Rodgers to be dismissed from the proceedings – an order which was plainly in Mr. Khan’s favour. Equally, the EAT, in the constitution chaired by Judge Serota on 25 September 2002, heard and rejected Mr. Khan’s submission that the ET’s findings of fact were perverse.
I do not, of course, resile from my acceptance of the proposition set out in paragraph 43 above that in considering the jurisdiction point no distinction should be drawn between the claim and the appeal. But when considering the quite different exercise as to whether or not a bankrupt litigant should be permitted to sever the personal elements of an otherwise hybrid claim, the court must, I think, look at realities. The question here is whether or not Mr. Khan should be permitted to pursue the two appeals which I have analysed, and whether or not those appeals contain points of law which are capable of being argued. In my judgment, R v Saunders is simply not in point, and Lord Steyn’s concerns in Anywanu have been met by the hearings in the ET and the findings of the ET on the second appeal.
In short, whilst I am satisfied that both the first and the second appeal fall to be dismissed for want of jurisdiction, the merits cross-check which this court conducted in paragraph [4] of Grady results, in my judgment, in the clear conclusion that it would in no sense be unjust to Mr. Khan to dismiss the first and second appeals on the basis of Aldous LJ’s analysis in Ord v Upton.
In my judgment, therefore, the EAT was correct in holding, as it did, that race discrimination and victimisation fall into the same category as disability discrimination, and that, on bankruptcy, all three of those causes of action vest in the trustee. Were the matter left to me, therefore, I would dismiss the first two appeals and allow the third, which should be remitted to the EAT for hearing.
Lady Justice Arden :
Appeal No. 2003/1138 (EAT reference 1413/01)
Following the decision of the Court in Grady v Prison Service [2003] 3All ER 745, this appeal must be allowed in so far as the EAT dismissed Mr Khan’s claim for unfair dismissal. I refer below to the claim in these proceedings based on victimisation for the purposes of the Race Relations Act 1976.
Appeals No. 2003/1136 and 2003/1137 (EAT references 1413/01 and 0458/02
The sole issue on these appeals is whether the EAT was right in law in holding that Mr Khan, who became bankrupt on 16 December 2002, could no longer continue to prosecute these proceedings. In each case the proceedings were for race discrimination and victimisation. Put another way, the question is whether those causes of action vested in Mr Khan’s trustee in bankruptcy on the making of the bankruptcy order against him.
The Insolvency Act 1986 provides in material part:-
“306(1) The bankrupt’s estate shall vest in the trustee immediately on his appointment taking effect or, in the case of the official receiver, on his becoming trustee.
…
283(1) Subject as follows, a bankrupt’s estate for the purposes of any of this Group of Parts comprises:
(a) all property belonging to or vested in the bankrupt at the commencement of the bankruptcy; and
…
436 In this Act, except where the context otherwise requires …
‘property’ includes … things in action …”
Notwithstanding these provisions, it is well-established that “personal” causes of action do not form part of the bankrupt’s estate or vest in his trustee. These include cases where:
“the damages are to be estimated by immediate reference to pain felt by the bankrupt in respect of his body, mind or character, and without immediate reference to his rights of property.” (per Erle LJ in Beckham v Drake (1849) 2 HL Cas 579 at 603-4).
The foregoing is not a comprehensive list of “personal” causes of action.
In Ord v Upton [2000] Ch.352, the bankrupt sought to bring proceedings in negligence for damages suffered by him as a result of medical treatment. He claimed damages for loss of earnings and for pain and suffering. This court held the cause of action was “hybrid” since it included both a personal claim and a claim to the bankrupt’s property (his earning capacity). It also held that the whole cause of action vested in the trustee. However, the trustee would hold any damages for pain and suffering as a constructive trustee for the bankrupt. In the recent case of Mulkerins v Pricewaterhouse Coopers[2003] 1 WLR 1937, the House of Lords left open the question whether Ord v Upton was correctly decided. It is, however, binding on this court.
In Grady, where the claim was for unfair dismissal, this Court in effect distinguished Ord v Upton. Sedley LJ, giving the judgment of the court, pointed out that the remedies for unfair dismissal were reinstatement, re-engagement and compensation. If the complainant sought the two former remedies, the tribunal had to consider them in that order. Compensation would be recoverable only if there was no order for reinstatement or re-engagement. Wall LJ has already set out paragraph 25 of the judgment of Sedley LJ, and so I need not repeat it. It is clear from that passage that Sedley LJ recognised that if compensation was awarded it might form part of the bankrupt’s estate. He did not, however, hold that in consequence the claim was a “hybrid” one which therefore vested in the trustee. The principal basis for the distinction in Grady’s case was that the substance of the claim was for personal relief, a point highlighted by the order in which the tribunal was required to consider the appropriate form of remedy.
As Wall LJ points out in paragraph 58 of his judgment, those features do not obtain in race discrimination proceedings. The primary relief is a declaration as to the rights of the parties, and also an order for compensation, which may include but is not limited to compensation for injury to feelings.
Accordingly, I agree that in this case Ord v Upton cannot be distinguished and that in principle a claim for race discrimination is a “hybrid” one for the purposes of that decision.
However, in my judgment, the critical question is not what relief Mr Khan could in theory seek but what relief he is in fact seeking. His present claim would clearly encompass a claim for a declaration and for compensation for injured feelings only. In my judgment, Mr Khan should in principle be permitted to limit his claim for relief to those items. If he does so, the claim ceases, in my judgment, to be a “hybrid” one. As to the grant of permission to amend the claims, I do not consider it relevant that Mr Khan became bankrupt on his own petition. Moreover, if his appeals are unmeritorious, they should be disposed of on that basis and not on an issue of standing which can be resolved by amendment. The trustee is not prejudiced as he has already made it clear that he does not wish to pursue these claims and any future orders as to costs made against Mr Khanwould not be provable in his present bankruptcy. There is, as Buxton LJ has said, a public interest in claims of this kind being fully examined. Buxton LJ has referred to the speech of Lord Steyn in Anyanwu v South Bank Student Union [2001] 1 WLR 638[24]. I would also refer to R v Saunders (2000) 1 Cr. App 458, in which the criminal division of this court also made some important observations about racism. Although this was in the context of sentencing for racially motivated offences, its observations were about racism generally and thus relevant also to a case where a court is considering a civil claim for race discrimination. This court said:
“One of the most important lessons of this century, as it nears its end, is that racism must not be allowed to flourish. The message must be received and understood, in every corner of our society, in our streets and prisons, in the services, in the workplace, on public transport, in our hospitals, public houses and clubs, that racism is evil. It cannot co-exist with fairness and justice. It is incompatible with democratic civilization. The courts must do all they can, in accordance with Parliament’s recently expressed intention, to convey that message clearly …”
I would, however, make it a condition of the grant of leave that Mr Khan complies with any outstanding orders of the Employment Appeal Tribunal with respect to documents within 21 days of the date of the order of this court. In appeal A1/2003/1136, the Employment Appeal Tribunal made an order on 24 June 2002 (Mrs Recorder Cox QC, with Mr J C Shrigley and Mr G H Wright MBE) inter alia that “all the originating applications and notices of appearance and any further particulars served in respect of those applications should be part of the bundle for the resumed preliminary hearing, together with any relevant or admissible documents which the appellant himself wishes to ask the Employment Appeal Tribunal to consider … [and] … the Employment Appeal interlocutory orders of 1 June and 15 November 2000 and any recent decisions accompanying those orders should also be part of the Tribunal’s bundle.” (judgment, paragraph 5). Likewise in appeal A1/2003/1137, the Tribunal made an order in the following terms:
“The respondents do be informed by the appellant of any additional documents to be included in the court bundle no later than 23 October 2002 and thereafter the respondents do lodge no later than 6th day of November 2002.”
We have not been informed whether these orders have been complied with. Accordingly, the conditions imposed by this court should be expressed to be to the extent that the orders of the Tribunals to which I have referred have not been fully complied with. If Mr Khan wishes to make any application for an extension of the 21 day period, he must do so to the Employment Appeal Tribunal. I would also impose a condition that Mr Khanfiles with the Employment Appeal Tribunal and serves on the respondents within 21 days the form of application (ITI) duly amended to show that the relief claimed is limited to a declaration and compensation for his injured feelings.
So far as I could see, these are the only conditions which this court can usefully impose but if counsel for Trident considers that there are other conditions which can be properly imposed by this court he can draw that matter to the attention of the court when this judgment is handed down.
It is likewise unnecessary for me to deal with the question of whether the orders under appeal violated article 6 of the European Convention on Human Rights. I would, however, add that, if I had reached a different conclusion on the question whether Mr Khan had standing in his race discrimination claims, I would have held that it was open to him to seek an order from the bankruptcy court that the trustee assign the causes of action to him: see Smith & Williamson v Sims Pipes, 17 March 2000, Court of Appeal, unreported. (It is difficult to see how the trustee could resist that claim on being granted any appropriate indemnity, but this is a provisional view as the trustee is not a party to this appeal). Mr Khan has not taken the step of making an application to the bankruptcy court, and his failure to do so would be a relevant consideration in determining whether any violation of article 6 had occurred.
As respects the victimisation claim in Appeal No. 2003/1138, I would be content to allow the appeal against the Employment Appeal Tribunal’s dismissal of this part of his claim provided that Mr Khan agrees to limit his claim to a claim for a declaration and compensation for his injured feelings. The order should be conditional upon his filing with the Employment Appeal Tribunal and serving on the respondents within 21 days the form of application (ITI) duly amended to show that the relief claimed is limited to a declaration and compensation for his injured feelings.
Accordingly, I would allow the appeals on the basis set out above.
Lord Justice Buxton:
I agree that these appeals should be allowed in the terms proposed by my Lady. Since the court is divided, I venture to add some words of my own. In so doing I gratefully adopt the account of the tangled history of these matters that is set out by Wall LJ. That account is, if I may say so, particularly necessary because the point of some potential difficulty to which this appeal gives rise depends on a close analysis of the nature of the process that the bankrupt wishes to pursue.
It will be convenient first to deal shortly, as does my Lord in his §§ 38-40, with the appeal in respect of unfair dismissal. As my Lord has set out, in Grady v Prison Service [2003] 3 All ER 745[24] this court held that a claim for unfair dismissal did not vest in the trustee in bankruptcy, because it is a claim that is primarily directed at the restoration of a contractual relationship in which the claimant’s skill and labour are the essential commodity; and, at §25, that the claim was of a unique kind which offers the restoration to the claimant of something which only the claimant can do. Any financial remedy thus appears to have been seen as merely a substitute for or corollary of the principal remedy of reinstatement, and accordingly not raising the issue of whether the claim might be hybrid under the analysis of this court in Ord v Upton [2000] Ch 352. As a matter of authority, therefore, the unfair dismissal claim in appeal A1/2003/1138 cannot be stayed, and must be remitted to the EAT for the continuation of the appeal in that court.
The reasoning in Grady however applies only to unfair dismissal, and to what was seen by this court as the unique nature of such a claim. The other complaints made by Mr Khan, of race discrimination and victimisation, must be considered under the general law relating to bankruptcy that Grady leaves untouched. That law, which has been formulated in the context of orthodox causes of action at common law, is not easy to apply to the jurisprudentially somewhat different claims under the Race Relations Act.
The remedies available in respect of a claim for racial discrimination, including victimisation, are, by section 56 of the Race Relations Act 1976, an order declaring the rights of the complainant; an order for compensation (including, by section 57(4), for injury to feelings); and a recommendation for remedial action on the part of the respondent. Such claims have at least the following significant characteristics:
i) The action does not lie in tort, but is a discrete statutory procedure: see Mangera v Ministry of Defence [2003] EWCA Civ 801 [23]-[24].
ii) Although formulated as a claim to uphold individual rights, as will be seen from the remedies provided the procedure has a distinct element of discipline or at least guidance directed at the employer: even though, as my Lord points out in his §54, the sanction for failure by the employer to obey such guidance is not a public law remedy of enforcement, but only the private law remedy of payment of damages to the claimant.
iii) However, in line with the public interest in the determination of such issues referred to in (ii) above, it has been recognised that claims under the Race Relations Act should be fully investigated, and not subjected to summary process in cases that, on their facts, might fall at that hurdle if brought under other chapters of the law: see for instance the observations of Lord Steyn in Anyanwu v South Bank Student Union [2001] 1 WLR 638[24].
So far as the position of bankrupt claimants in common law actions is concerned, in Heath v Tang [1993] 1 WLR 1421 at p 1423A this court adopted the test formulated by Erle J in Beckham v Drake (1849) 2 HL Cas 579 at 604, that there are excluded from the property that passes to the trustee choses in action where “the damages are to be estimated by immediate reference to pain felt by the bankrupt in respect of his body, mind or character, and without immediate reference to his rights of property”. Obvious examples of such claims were said to be actions for defamation and assault. However, even in a case of assault a claim for loss of past and future earnings is not personal, in the sense understood in Heath v Tang, but relates to the bankrupt’s property. Accordingly, the assertion in a particular action of a claim for such losses, in addition to the undoubtedly personal claim for pain and suffering, renders the single chose that the action constitutes hybrid. The chose in action thus vests in full, including its personal element, in the trustee: Ord v Upton [2000] Ch 352 at p361A.
This principle accordingly requires close attention to the nature of the relief claimed in any given case. Where there is a money claim, but in the form of relief that is merely the expression in money terms of an undoubted personal claim, such as pain and suffering in assault or general damage in defamation, then the action remains a personal one. However, if a claim is added for a distinct pecuniary loss, such as the loss of earnings in Ord vUpton; or special damage in defamation; then the whole chose becomes hybrid, and the whole of it passes under the control of the trustee.
Putting together as best I can these two unconnected chapters of the law I have, not without difficulty, reached the following conclusions.
First, the “public” nature of the claim cannot assist the bankrupt. Parliament has chosen the, somewhat roundabout, method of asserting public values through the medium of private litigation. Accordingly, whether that litigation is pursued, and in what form, is the choice of the private litigant, under the rules applying to private litigation. When that litigant or would-be litigant is bankrupt, there is no obvious reason, if otherwise the chose in action would vest in his trustee, why the decision of the litigant to launch proceedings to discipline his employer should prevail over a contrary decision taken by his trustee.
Second, so far as a claimant is concerned, a central aspect of his complaint; the reason why the conduct complained of is offensive; and the reason why special statutory provisions have been introduced in respect of such conduct; is, or at least logically should be, the damage to his mind, standing and personal rights that is inherent in any discriminatory conduct. In that respect, a complaint of discrimination comes very close to a complaint in respect of defamation, that this court saw in Heath v Tang as a paradigmatic example of a personal claim.
However, third, there is also available the possibility of compensation for purely financial loss, albeit loss caused by discriminatory conduct. And I respectfully agree with my Lord, in his §60, that such compensation is indeed sought by Mr Khan in the two applications still under active consideration in this appeal. That suffices to make those applications hybrid under the rule in Ord v Upton, and, as they currently stand, to make it impossible to pursue any aspect of them without the sanction of Mr Khan’s trustee.
Fourth, Mr Khan, if I understand him aright, seeks to keep his actions alive by withdrawing or disclaiming any desire on his part to seek any remedy that renders his claim hybrid. In order to achieve that end he would, I think, have to limit himself to a claim for a declaration of discriminatory conduct under section 56(1)(a) and a claim for injury to feelings under section 57(4) of the 1976 Act. Both of those can be said with confidence, in the words of Erle J, not to have immediate reference to the bankrupt’s rights of property. Neither of them claim, nor unlike an order under section 56(1)(c) might potentially lead to, monetary compensation of the sort that excluded the bankrupt’s action in Ord v Upton. Nor, in circumstances where apparently the trustee is not interested in pursuing any part of Mr Khan’s claim, would it be abusive for Mr Khan to abandon claims that at least in theory might enure for the benefit of his creditors. Nor can I see that it can be wrong in itself for a litigant to abandon his money claim if that frees the court to entertain a different claim which, it is agreed on all sides, would always have been open to him, bankrupt or not. Nor is that course precluded by the attitude taken to the disability discrimination claim in Grady, even if, as a concession, that in any way bound us: because it is clear that the applicant in that case wished to maintain her full money claim.
Fifth, however, if Mr Khan were to take that step he would need the permission of the EAT to do so, permission that certainly would not be automatically forthcoming. The relevant considerations are in my view as follows.
First, Mr Khan finds himself in this predicament because he chose to petition for bankruptcy. But, as the account in §41 above indicates, it was Trident who had originally put the process in motion. To that extent, therefore, the bankruptcy that they now relie on to exclude these proceedings cannot be laid entirely at Mr Khan’s charge. Second, the claims envisaged as surviving were not in fact made in terms in either of Mr Khan’sapplications, which concentrated on his financial loss. But it was a necessary premise of those applications that discrimination had taken place, and I would not hold it against a litigant in person that that was not so alleged in terms. And in the course of investigating the claim as it was before it the ET necessarily addressed the root issue of discrimination. Third, as my Lord has set out in detail, the prospects of any of Mr Khan’s complaints succeeding in front of the EAT are very much less than promising.
I would normally be much persuaded by that latter factor when considering whether the indulgence that Mr Khan seeks should be granted to him. I am, however, strongly influenced in this chapter of the law by the approach to discrimination issues that has been authoritatively set out in the House of Lords, as referred to in § 98 (iii) above. As Lord Steyn put it, the proper determination of discrimination claims is always essential in our pluralistic society. In our case, of course, Mr Khan’s claims have already been determined in great detail by the ET. He cannot claim not to have had his day in court. But to the extent that he otherwise has a right to complain to the EAT about the conduct of those hearings, I do not think that it would be right to shut him out just because he is a bankrupt whose trustee has no interest in pursuing claims that Mr Khan does not now make.
If the matter were left to me, therefore, I would remit appeals 2003/1136 and 1137 to the EAT with directions that the appeals should continue on the basis that the only relief available to Mr Khan should he be successful would be that set out in §105 above.
This conclusion makes it unnecessary to consider Mr Khan’s further complaint that it would be a breach of article 6 for him to be prevented from asserting what is essentially a statutory claim. That article is potentially engaged in a case of differential access to an appellate structure (see Belgian Linguistics (1968) 1 EHRR 252[8]), but the jurisprudence both of the European Commission and of this court has held that control of litigation on the part of bankrupts is not necessarily inconsistent with article 6 (see M v UK (1987) 52 DR 269 and Krasner v Dennison [2000] 3 All ER 234, both drawn to our attention by Mr Preston). At the same time, however, that jurisprudence stresses the importance of proportionality to the rules and remedies provided by the national state. Without, as I say, deciding the matter, I would find some difficulty in regarding as proportionate to the recognised and important object of control of the administration of the bankrupt’s estate a rule that in practice shut the bankrupt out from complaining about an act of racial discrimination, the eradication of which is a common priority goal of all states subscribing to the Convention: as the Strasbourg Court emphasised in Sander v UK (2000) 31 EHRR 44[23].
In re Hughes
[1970] IR 237
Kenny J
Section 66 of the Solicitors Act, 1954, provides that regulations made with the concurrence of the Chief Justice shall make provision about the opening and keeping by solicitors of accounts at banks for clients’ moneys. Section 67, sub-s. 1, provides that a banking company shall not, in connection with any transaction on an account of a solicitor kept with them or with another banking company (other than an account kept by a solicitor as trustee for a specified beneficiary), incur a liability or be under an obligation to make inquiry or be deemed to have knowledge of a right to money paid or credited to the account which they would not incur in the case of an account kept by a person entitled absolutely to the money paid or credited thereto. However, sub-s. 2 of s. 67 provides that, despite sub-s. 1, a banking company which keeps an account of a solicitor for moneys of clients shall not, in respect of a liability of the solicitor to the banking company, not being a liability in connection with that account, have or obtain any recourse or right, whether by way of set-off, counterclaim, charge or otherwise, against moneys standing to the credit of that account.
Section 68 provides that “where a solicitor keeps in a bank an account for moneys of clients . . . neither the State nor any person shall have or obtain any recourse or right against moneys standing to the credit of that account in respect of a claim or right against the solicitor until all proper claims of the clients . . . against those moneys have been fully satisfied.”
Regulations under s. 66 of the Act of 1954 were made by the Incorporated Law Society of Ireland on the 3rd November, 1955: see Solicitors’ Accounts Regulations, 1955 (S.I. 218 of 1955). These provide that a solicitor who receives clients’ money shall open and keep a client account at a bank, and that he shall, without unnecessary delay, pay clients’ money into this account (except in the five cases specified) and that the money is not to be drawn from the account except in the five cases mentioned. Money drawn from the account for a client is not to exceed the total of the money held for the time being in such account on account of such client. The term “client” is defined by regulation No. 2 as “any person on whose account a solicitor holds or receives clients money”; and “client account” is defined as “a current or deposit account in a bank in the name of the solicitor in the title of which the word ‘client’ appears”; and “clients money” is defined as “money which a solicitor receives as a solicitor or agent or in connection with his practice as a solicitor on account of some other person, but does not include, (a) money to which he is, or in the case of a firm, one or more of the partners are, alone entitled; or (b) money held or received on account of a trust of which the solicitor is a solicitor-trustee.” The Solicitors’ Accounts Regulations (S.I. 252 of 1957) fixed the 1st July, 1958, as the date when the regulations relating to clients’ accounts were to come into force. The regulations of 1955 have been amended on a number of occasions but none of these are relevant to this application.
Joseph N. Hughes, a solicitor practising in Dublin, had his bank accounts with the Munster and Leinster Bank at their Inchicore branch until April, 1957, when he transferred his current account to the Rathgar branch of that bank where he opened a client account. Between the 17th of July and the 11th of October in 1958 he lodged £2,633 11s. 4d., which he had received from or on account of seven clients, to the credit of the client account. Between those dates he withdrew sums from the client account and applied them for purposes not authorised by the regulations and on the 11th October, 1958, he lodged £863, which were his own moneys, to the credit of that account.
Paragraph 17 of the 5th Schedule to the Act of 1954 provides that where the Incorporated Law Society are satisfied that dishonesty of a solicitor has occurred, they may apply to the High Court for an order directing either (a) that no banking company shall, without leave of the High Court, make any payment out of a banking account in the name of the solicitor or his firm, or (b) that a specified banking company shall not, without this leave, make any payment out of a banking account kept by such company in the name of the solicitor or his firm. An order under this clause relating to Mr. Hughes’s accounts with the Munster and Leinster Bank Limited was made on the 17th October, 1958, and on the following 17th November Mr. Hughes was adjudicated a bankrupt. On that date the client account was £1,396 11s. 0d. in credit and claims for £2,495 by the persons, some of whose moneys Mr. Hughes had lodged to the client account, have been admitted in this bankruptcy. In two cases, the amount of the claims admitted exceeds the amount lodged by Mr. Hughes to the client account. The amount due to a Mr. T. Cogley is £472 7s. 0d. but the total amount lodged by Mr. Hughes for Mr. Cogley’s money seems to have been £32 7s. 0d. In my opinion, a client creditor of a solicitor cannot successfully claim payment out of the client account of any amount in excess of that which was lodged to the account in respect of moneys which the solicitor received from or for him. If the amount lodged in respect of a client exceeds the amount found due in the bankruptcy, the effect of s. 68 is that the balance must be used to satisfy the claims of other clients whose moneys have been lodged to that account.
After Mr. Hughes had been adjudicated bankrupt, Mr. Justice Budd appointed the Official Assignee to be a trustee of the client account in place of the solicitor. As the amount to the credit of that account was not sufficient to pay the claims of the clients whose moneys had been lodged to this account, the Official Assignee has now applied for a decision on the following two questions:
1. Whether the sum of £1,396 11s. 0d. (the amount to the credit in the client account) belongs (a) to those of the said client creditors of the bankrupt whose moneys were most recently lodged in the account or (b) to all the said client creditors of the bankrupt in rateable proportions.
2. Whether, in particular, the sum of £863 of his own moneys lodged by the bankrupt in the said account on the 11th October, 1958, belongs (a) to those of the said client creditors of the bankrupt whose moneys were most recently lodged in the account or (b) to all the said client creditors of the bankrupt in rateable proportions.
I have been told that there is no reported decision in Ireland on the nature of a client account, on how it is to be dealt with when the solicitor has lodged his own moneys to its credit and on how it is to be divided between the client creditors when it is not sufficient to pay their claims. The application of the rule in Clayton’s Case 7 and of the principle decided in Re Hallett’s Estate 8have also been discussed. I have been informed that another judge of the High Court has expressed doubt about the correctness of the order made by Mr. Justice Budd by which the Official Assignee was appointed a trustee of the money standing to the credit of the client account and has also suggested that when a solicitor lodges any of his own moneys to the credit of that account, it ceases to be a client account.
Section 267 of the Irish Bankrupt and Insolvent Act, 1857, provides that all the personal estate and effects and all debts due or to be due to the bankrupt become absolutely vested in the Official Assignee when the adjudication is made. Does the sum standing to the credit of the client account become vested in him for the benefit of all creditors? In Re a Solicitor 9 the High Court in England decided that when a solicitor becomes bankrupt, the client account is property held in trust for another person and does not vest in the trustees in bankruptcy. I do not think, however, that that decision concludes the matter because it was based upon a provision in the English Bankruptcy Act of 1914 that the property of the bankrupt which is divisible among his creditors does not include “property held by the bankrupt on trust for any other person.” In Ireland the property of the bankrupt which vests in the Official Assignee under s. 267 of the Act of 1857 passes to him subject to all equities which affected it at the date of the bankruptcy: see In re Nolan and Stanley, Bankrupts .10 I think that the effect of s. 68 of the Act of 1954 is that the Official Assignee does not, on the adjudication of a solicitor, get any valid claim to the moneys standing to the credit of a client account until all the claims of the clients in respect of their moneys which have been lodged to that account have been satisfied. In this case, the credit balance in the client account is not sufficient to satisfy the claims of clients and the Official Assignee has not a valid claim against any of the credit balance. I think I should add that the legislation dealing with solicitors’ client accounts in England does not include anything similar to s. 68 of our Act of 1954 and that English decisions are, therefore, not of assistance in dealing with the legal position in this country.
Did, however, the payment by Mr. Hughes of £863, his own moneys, to the credit of this account on the 11th October, 1958, deprive it of its character as a client account? On that date Mr. Hughes made two other lodgments of £977 19s. 8d. and £32 7s. 0d., which were clients’ moneys, to the credit of the account; but the only inference that can be drawn from the dates (his bank account was frozen on the 17th October, 1958) is that he knew that the Incorporated Law Society were making inquiries about his client account and that the sum of £863 was intended by him to be a replacement of part of the moneys which he had wrongly withdrawn. The doubt about this matter arises, I think, from the decision in James Roscoe (Bolton) Ltd. v. Winder .11 In that case a purchaser of a business as a going concern agreed that he would get in the debts due to it and pay them to the vendor. He lodged them to the credit of his general account and then drew cheques on it so that at one stage there was a balance of £25 18s. 0d. only to its credit. He subsequently made lodgments to the account and the question was whether the vendors of the business could validly claim the total amount standing to the credit of the general account on the ground that the principle in Re Hallett’s Estate 12 applied because trust moneys had been lodged in it. The High Court decided that payments into a general account cannot, without proof of express intention, be appropriated to replacement of trust moneys which have been improperly mixed with that account and then drawn out: see also Snells Principles of Equity, 26th Ed. at p. 313, which has the authority of having been edited by Mr. Megarry (now Mr. Justice Megarry). But in this case the only possible inference is that Mr. Hughes intended the £863 to be a replacement of moneys which he had wrongfully withdrawn from the client account, and so it did not cease to be a client account.
Should the £1,396 11s. 0d. standing to the credit of the client account be used to discharge the claims of the client creditors whose moneys were most recently lodged or should it be applied in paying rateably all the creditors whose moneys were lodged to the account? This issue was considered by Lord Justice Baggallay in his judgment in Re Hallett’s Estate. 13 He said that when moneys standing to the credit of a mixed account are not sufficient to pay all those whose claims arise under trusts, or are based upon trust moneys having been lodged to the account, the moneys should be applied between them in accordance with the rule in Clayton’s Case 14: see also In re Stenning. 15 That was a decision on a mixed account and the principle applies with greater force to a client account.
In my opinion, the sum standing to the credit of the client account should be applied in paying the claims of those creditors against it whose moneys were most recently lodged to its credit immediately prior to the bankruptcy. The questions will be answered as follows:
1. The sum of £1,396 11s. 0d. to the credit of the client account should be paid to those of the client creditors of the bankrupt whose moneys were most recently lodged in the account.
2. The £863 lodged by the bankrupt to the credit of the client account was paid in by him with the intention of replacing moneys which he had wrongly withdrawn from that account before that date and should be dealt with as part of the amount to the credit of that account.
In re McCafferty
1974 IR 471
Kenny J.
In 1923 William McCafferty held three farms in County Donegal from the Earl of Leitrim on yearly tenancies. On the 24th September, 1923, he executed a deed by which he charged the lands with payment of sums advanced by the Ulster Bank to him. He was adjudicated a bankrupt on the 23rd September, 1927, and his interest in the lands was disclosed in the statement of affairs. The court messenger visited the lands shortly after the adjudication. On the 1st May, 1931, the lands became vested in the Land Commission under the Land Acts but nothing was done by the Official Assignee or any of the creditors in connexion with a sale of the lands or to get possession of them. On the 7th May, 1937, the bank transferred its charge to the bankrupt’s wife in consideration of £200 paid by her. On the 18th April, 1953, the lands were vested by the Land Commission in the bankrupt and became the subject matter of three folios under the Registration of Title Act. The bankrupt remained in possession of the lands until the 26th April, 1966, when he conveyed them to his nephew James McCafferty. The bankrupt, who died on the 13th November, 1966, never obtained a certificate of conformity.
James McCafferty has made an agreement to sell the lands and, on investigating the title, the purchaser discovered the bankruptcy. The Court has been asked to decide whether the Official Assignee now has any interest in the lands.
Section 268 of the Irish Bankrupt and Insolvent Act, 1857, (so far as relevant) reads:”When any person shall be adjudged a bankrupt . . . all lands, tenements, and hereditaments . . . wheresoever the same may be situate, to which any such bankrupt . . . is entitled, and all interest therein to which such bankrupt . . . is entitled, and of which he might have disposed, and all such lands, tenements, and hereditaments as he shall purchase, or shall descend, be devised, revert to, or come to such bankrupt, before he shall have obtained his certificate . . . shall become absolutely vested in the assignees for the time being for the benefit of the creditors of such bankrupt . . .”
Lands owned by a bankrupt which are subject to a rent do not vest automatically in the assignees on adjudication. The effect of the provisions8 of s. 271 of the Act of 1857 is that the Official Assignee may elect whether he will have them vested in him, and the Court may compel him to make this decision: Hanway v. Taylor 9; In re Burke’s Estate.10 Until he elects, they remain vested in the bankrupt.
Section 9, sub-s. 3, of the Land Act, 1931, provided that the tenant of every holding included in a list of vested holdings should be deemed on the appointed day to have entered into a subsequent purchase agreement for the purchase of the holding from the Land Commission at the standard price. The appointed day in this case was the 1st May, 1931. Section 28, sub-s. 2, of the Act of 1923 imposed on the tenant an obligation to pay an annual sum equivalent to the standard purchase annuity for the holding and, when the holding was vested by the Land Commission in the tenant, the payments were to be treated as if they had been made in respect of the purchase annuity. The effect of the Act of 1931 was that the yearly tenancy ceased to exist on 1st May, 1931, and the estate resulting from the subsequent purchase agreement, an equitable fee simple created by s. 9, sub-s. 3, of the Act of 1931, became absolutely vested in the Official Assignee for the benefit of the creditors on that day. I do not accept the argument that the Official Assignee had a right to elect whether he would take this equitable fee simple. The privilege given by s. 271 of the Act of 1857 relates only to lands to which the bankrupt is entitled and which are subject to a rent or are held under a lease. The annual sum11 payable under the Act of 1923 was not rent, and a tenant who is deemed to have entered into a subsequent purchase agreement does not hold the lands under a lease or an agreement for a lease.
It has been argued that the interest of the Official Assignee has now become barred under the Statute of Limitations, 1957, and the earlier limitation Acts. There is no reported case on the question whether these Acts operate to extinguish his title. The adjudication of a person as a bankrupt stops the Statute of Limitations running against all claims which can be proved in the bankruptcy because the proceedings are for the benefit of all the creditors; but the title of the Official Assignee arises when there has been an adjudication and he has not a claim which is provable in the bankruptcy. If property is in the possession of a person appointed by the Court, a title cannot be acquired by anyone else; but the Official Assignee was never in possession of the lands and did not make any application to have the lands sold or to eject the bankrupt. There is no reason in principle why the Statute of Limitations should not operate against the Official Assignee to extinguish his title. The difficult question is whether possession by the bankrupt of property which he owned at the date of adjudication or which he acquires afterwards is adverse to the claim of the Official Assignee, or whether he should be regarded as a licensee of it: see Hughes v. Griffin .12 It is impossible to state a test by which the question whether possession is adverse or not may be decided in all cases. In my view the possession by a bankrupt of freehold land which belonged to him at the date of the bankruptcy or which he subsequently acquired is adverse to the Official Assignee. The fact that the freehold estate is a graft on the tenant’s interest does not help the Official Assignee because he never elected to take the tenancy.
The existence of the charge in favour of the Ulster Bank which affected the freehold interest did not prevent the bankrupt’s estate in the lands becoming vested in the Official Assignee on the 1st May, 1931. Claims under the charge by Mrs. McCafferty may still be enforceable because she lived on the lands until 1966. As this aspect of the case was not argued and as she supports the claim by James that the title of the Official Assignee has been extinguished, I do not propose to express any opinion on it.
Therefore, I shall declare that the Official Assignee now has no estate or interest, arising under the bankruptcy of William McCafferty, in the lands described in Folios 29751, 29756 and 29758 for County Donegal.
Re Ryan
[1939] IR 284
HANNA J. :
The facts of this case are rather unusual and raise a new question in Irish Bankruptcy law.
William Ryan was adjudicated bankrupt upon his own petition on January 8th, 1925. His then estate was realised and his creditors were paid two dividends, one of two and fourpence and two-fifths of a penny, and one of fourpence and two-fifths of a penny, in the pound, and there is still a balance of £408 due to those creditors. The bankrupt has not passed his final examination, nor has he obtained a certificate of conformity.
At some subsequent period, without the knowledge of the Assignee, he commenced trading again, and on January 11th, 1939, he presented a petition praying that his personal property might be protected by the Court, and the usual order for protection was made. He then presented a petition for arrangement, offering his creditors two and sixpence in the pound. This was rejected by the creditors as inadequate, whereupon Ryan was adjudicated a bankrupt for the second time.
On March 10th, 1939, the Official Assignee intervened by letter and claimed the assets disclosed in the second bankruptcy as after-acquired property in the first bankruptcy and available for the creditors therein. Thereupon one of the creditors of the second bankruptcy, Messrs. Rowntree and Company (Ireland). Limited, brought this motion before the Court to restrain the Official Assignee from intervening in the second bankruptcy on behalf of the creditors of the first bankruptcy and to restrain him from claiming the stock-in-trade of the bankrupt as after-acquired property available for the creditors of the first bankruptcy.
I was at first inclined to be of the opinion that, as an adjudication in bankruptcy alters the status of the individual until he has been discharged from bankruptcy, this status could not be twice altered by means of a second adjudication which seemed to me to be a nullity. On consideration of the matter I find that prior to 1864 there were two cases which so decided, namely, Martinv. O’Hara (1) and Till v. Wilson (2). But in Morgan v.Knight (3) it was expressly decided by a Court consisting of Erle C.J., Williams, Willes and Keating JJ., that a second adjudication under such circumstances was not a nullity a decision which, in the case of Ex parte Watson, In re Roberts (1) was taken by the full Court to have definitely settled the point. The principle of this decision has been accepted in the consideration of the cases of Barker v. Furlong (2) and In re Clark (3). In these cases the subsequent trading appears to have been with the knowledge of the Assignees, but I do not think this fact alters the principle established. Accordingly in this case, although the subsequent trading was unknown to the Assignees, I hold that the second adjudication was valid.
For the creditor it was argued that, notwithstanding the wide terms of s. 267 of the Bankruptcy Act of 1857, after-acquired property did not vest in the Assignee until he had intervened, and that, until that event, the property was in all senses that of the bankrupt. The terms of s. 267 are as follows:
“When any person shall be adjudged a bankrupt . . . all the personal estate and effects of such bankrupt . . . present and future, wheresoever the same may be, and all property which he may purchase, or which may revert, descend, be devised, or bequeathed or come to him, before such bankrupt shall have obtained his certificate . . . in pursuance of the adjudication made in that behalf, and all debts due or to be due to him, shall become absolutely vested in the Assignees for the time being for the benefit of the creditors of the bankrupt.”
The mere reading of this section would seem, from its wide terms, to vest automatically in the Assignee any property of the bankrupt acquired after the adjudication. However, it has been clearly decided by a series of cases that the Assignee, in order to effect the vesting of the property in himself, must intervene and claim, or enter into possession, or do some unequivocal act tantamount thereto. If he intervenes where there has been a second adjudication in my opinion he is entitled to the property for the benefit of the creditors of the first bankruptcy even though it defeats the creditors of the second bankruptcy. It is so established by the cases of Cohen v. Mitchell (4), see the judgment of Fry L.J. at p. 268; In re Clark (3); In re Ball (5); and In re Doyle (6).
The letter of March 10th, 1939, from the Assignee is, in my opinion, a definite intervention and claim by him to the after-acquired property within the meaning of these decisions, and, if there was nothing further in the case, it would entitle him to seize for the benefit of the creditors in the first bankruptcy.
On the facts of this case it would seem manifestly unjust that the goods supplied by the applicants, Messrs. Rowntree & Co., to stock the bankrupt’s shop should be now taken in payment of the old debts of 1925. It may be an answer to this that creditors who trade with an undischarged bankrupt do so at their own risk. This grievance was met in England by s. 39 of the Bankruptcy Act, 1914, whereby on a subsequent adjudication the trustee of the preceding bankruptcy is limited to the right of proving in the subsequent bankruptcy for the balance of the debts due under the preceding bankruptcy. Our bankruptcy law does not contain any such provision although this change was, among many others, recommended by the Report of the Irish Bankruptcy Commission published in the year 1928.
By reason of this settled state of the law, adverse to the applicants’ case on the preceding grounds, they endeavoured to base their right to restrain the Assignee on the further ground that, by reason of the protection of the Court granted to the bankrupt on January 10th 1939, as an arranging debtor under s. 343 of the Act of 1857, the Assignees are not entitled to seize. Under the order pursuant to that section the property of the debtor is “protected from process until further order.” Having regard to the order of the Court dismissing his petition, with the second adjudication in bankruptcy the protection came to an end. It was only a suspensory order which expires by reason of his adjudication in bankruptcy, for thereupon s. 267 comes into operation eo instanti and vests the property in the Assignee. During the continuance of the order for protection of the property from process the Assignee could not have intervened save by some act which would be a process of the Court from which the order protected the arranging debtor. But there is nothing in the Act, or in any principle of law, that can project the operation of the protection after the adjudication in bankruptcy.
A further argument was submitted that, by reason of the suspension of the creditors’ rights against the trader during the protection period, there was some equity, or principle of estoppel, upon which the Court should act to restrain its own officer from now intervening and seizing the goods of the second bankruptcy which would have been available to those creditors. If the protection were projected into the subsequent period the Court would, of course, restrain the Assignee, but I can see no principle in law or equity upon which I could now estop the Assignee. It is unfair to the creditors of the second bankruptcy, but, in my opinion, it is the law in this country.
As I am of opinion that the Assignee intervened, he has the right to seize this property as after-acquired property of the first bankruptcy, and accordingly the motion must be dismissed.
In re Casey, a Bankrupt
Supreme Court 21 December 1990
The bankrupt was a beet farmer who supplied the beet to Comhlucht Siuicre Eireann Teo (the company). The terms of the contracts entered into from time to time between the bankrupt and the company allowed the bankrupt to obtain various goods on credit, and these were set off against the beet to be supplied. In April 1981, a contract was entered into which provided that previous credits would be payable out of sums due from the company, and were a charge against his account with the company. The adjudication in bankruptcy took place in July 1981. The company was informed of the adjudication by letter from the Official Assignee of 12 November 1981. The letter indicated that sums due to the bankrupt should be forwarded to the Official Assignee. The company applied to claim in bankruptcy for the sums owed by the bankrupt. In the High Court, Hamilton P held that the letter from the Official Assignee had terminated the contract between the company and the bankrupt and that the company was not entitled to what would amount to a preference in the bankruptcy: (High Court, 21 July 1986) (1987) 5 ILT Digest 43. On appeal HELD by the Supreme Court (Finlay CJ, Griffin and O’Flaherty JJ) allowing the appeal: (1) the adjudication in bankruptcy could not have the effect of terminating the contract between the company and the bankrupt, but instead it amounted to a novation of the contract so that the Official Assignee became entitled to the bankrupt’s rights and obligations under it, unless these were disclaimed; (2) the Official Assignee’s letter did not amount to a disclaimer of the contract under s.97 of the 1872 Act , and was precisely to the contrary effect; and therefore, by virtue of the terms of the contract, the company had no liability in the bankruptcy and was entitled to prove in the bankruptcy as a creditor against the estate for the balance between the value of the beet supplied by the bankrupt and the goods supplied on credit.
Siroko v Murphy
[1955] IR 77
MAGUIRE C.J. :
This is an action for breach of warranty in the sale of linseed oil. It was commenced by civil bill in the Circuit Court but was transferred to the High Court. After notice of trial had been served and the action set down for trial, but before it came on for trial the plaintiff became a bankrupt. When the case came into the list in October, 1953, application was made on behalf of the plaintiff for an adjournment on the ground that as he was a bankrupt he had not sufficient funds to carry on the action. The President of the High Court adjourned the trial to the Hilary term, 1954. It came on early in the month of January, 1954, when it was adjourned for the purpose of enabling the defendant to ascertain whether the Official Assignee desired to continue the action. In a letter dated the 23rd January, 1954, the Official Assignee intimated to the defendant’s solicitor that he did not propose to apply to the Court for liberty to prosecute the action. The President thereupon dismissed the action with costs.
The plaintiff now appeals to this Court on the ground that the President had no jurisdiction to dismiss the action and that in the interests of justice his application for an adjournment should have been granted or that at most the action should have been stayed until further order. It is furthermore contended that he should not have been ordered to pay the costs.
It is plain upon all the authorities, and, I may add, all the text-book writers, that when the plaintiff became a bankrupt this action, not being for a mere personal wrong, was by act of law assigned to the Assignee in Bankruptcy. The plaintiff thereupon became incapable of conducting it: see Jackson v. North Eastern Railway Co. (1): Warder v.Saunders (2): Wolff v. Van Boolen (3).
The present position is correctly stated in Wylie’s Judicature Acts (1906 ed.), at p. 348:”That where a sole plaintiff becomes bankrupt he cannot continue the suit; that any steps taken by him subsequently will be discharged upon the defendant’s application; that the assignees must obtain an order to continue the proceedings in their own names, or in the name of the bankrupt, giving security for the costs, if from the state of the action that course be more convenient, as where the action had been set down for trial.”
The proper course for the defendant to have adopted when he learned of the bankruptcy was to move the Court to stay or dismiss the action. He would have been entitled to such an order on showing that the Official Assignee had decided not to apply for liberty to continue the action. As however it was admitted by the plaintiff when the case came on for trial, that he was a bankrupt and it was clear from the letter produced that the Official Assignee had decided not to apply for liberty to continue the action the President was entitled to treat it as if such a motion had been brought. It is clear that the application for an adjournment was properly refused. The only questions are whether the President should merely have stayed the proceedings and whether he should have given costs to the defendant.
In Jackson v. North Eastern Railway Co. (1) Mallins V.-C. had granted an extension of time to serve notice of trial to a plaintiff who had become a bankrupt in the course of the proceedings. The defendant moved to discharge the order and the notice of trial. The Vice-Chancellor refused this application. The Court of Appeal reversed this order and set aside and discharged the order and the notice of trial.
In Warder v. Saunders (2) the plaintiff was adjudicated bankrupt after action brought and his trustee declined to proceed with the action. A summons was taken out by the defendants to dismiss the action. In an affidavit the trustee stated the fact of the bankruptcy and said that after duly considering the matter he was of opinion that there was not a good cause of action. At the hearing it being admitted that the plaintiff had been adjudicated a bankrupt since action brought Cave J. ordered that the action be stayed until further order, but without costs.
On appeal this order was affirmed. Denman J. declined to express a confident opinion on the question whether the action might not even have been dismissed, stating that he could conceive a case where this might be going too far.
North J., however, had no such doubts, stating his view that the Judge might have stayed the action altogether. He took the view that the case was governed by Jackson v.North Eastern Railway Co. (1):”I quite agree with the Master of the Rolls that the bankrupt cannot continue the action as plaintiff. It is said that this is a hardship, for that if the plaintiff were allowed to proceed he might recover a large sum for his creditors and a surplus for himself. But, on the other hand, he might not, and we must look at the case practically. The trustee has to get in the assets, and to distribute them amongst the creditors. It is impossible that he can do so when an action affecting the amount of the assets is pending under the control of the bankrupt. I think the trustee has a right to say that a claim which is good shall be enforced, and a claim which is not good shall be abandoned, and the estate wound up on that footing. The balance of convenience is not in favour of keeping the action open if the trustee declines to proceed, and I think that practically it is best not to give the plaintiff the opportunity of keeping it open. On the authority of Jacksonv. North Eastern Railway (1) I should dismiss this action.”
In Wolff v. Van Boolen (2) application was made by the defendants to stay proceedings on the ground of the plaintiff’s bankruptcy. Kekewich J., at p. 503, said:”If he” [the defendant] “had instituted this action being a bankrupt, so that the debt he seeks to recover would be in the trustee, the action would be wrong in its inception. It seems to me that the same rule must apply if he becomes bankrupt during the proceedings; an assignment takes place by act of law of the right of action, and he becomes incapable of conducting it.” The order made was:”Unless the official receiver obtains an order to carry on the proceedings . . . on or before” a date fixed “the action to stand dismissed with costs.”
The reasoning of North J. in the passage cited from Warder v. Saunders (3) applies in this case.
This Court is of opinion that the President acted correctly in dismissing the action and his order doing so will be affirmed. The Court, however, is of opinion that as the ground for dismissing the action is that the plaintiff is no longer entitled to carry it on by reason of his bankruptcy he should not have been ordered to pay the costs.
It would seem, although it is not necessary to deal with the matter here, that had the defendant taken steps to bring the Official Assignee formally before the Court he might have been entitled to an order for his costs.
The order of the High Court will be affirmed with the variation that there will be no order as to costs in either Court.
Lehane -v- Yesreb Holding Ltd
[2017] IEHC 512
JUDGMENT of Ms. Justice Costello delivered on the 24th day of July, 2017
Introduction
1. The plaintiff is the Official Assignee in the estate of Sean Dunne who was adjudicated a bankrupt on the 29th July, 2013. Prior to that, he was adjudicated bankrupt on his own petition in the United States on the 23rd March, 2013. In these proceedings, the plaintiff claims that Walford, Shrewsbury Road, Dublin 4 (“Walford”) was beneficially owned by the bankrupt on the date of his adjudication and therefore that it vested in the Official Assignee for the benefit of the creditors of the estate pursuant to s. 44 of the Bankruptcy Act 1988.
2. The bankrupt contracted to purchase Walford on the 1st July, 2005, and paid the purchase price of €57,950,000 to the vendors but the bankrupt did not take a deed of conveyance of Walford from the vendors, Caroline Crowley and Aiden Walsh, in whom the legal title remained. By a memorandum of agreement dated the 22nd March, 2013, between the bankrupt (as trustee for his wife, Gail Dunne) and the defendant, the bankrupt agreed to sell Walford to the defendant for the sum of €14 million. By deed of conveyance dated 29th March, 2013, the vendors of Walford in 2005, conveyed Walford to the defendant. The defendant is a limited liability company registered in Limassol in Cyprus and is ultimately beneficially owned by the bankrupt’s son, John Dunne.
3. The plaintiff’s case is that the bankrupt was the beneficial owner of Walford as of the 1st July, 2005, and that he remained the beneficial owner as of March, 2013, and that the transactions whereby the property was purportedly transferred to the defendant was a series of sham transactions. He pleads that the transfer on the 29th March, 2013, to the defendant was entered into with a view to delaying, defeating or defrauding the creditors of the bankrupt who at the time of the purported transfer was the lawful and beneficial owner of Walford. It is pleaded that the defendant was not a bona fide purchaser for value without notice and the plaintiff seeks declarations that Walford forms part of the estate in bankruptcy of Sean Dunne pursuant to s. 44 of the Bankruptcy Act 1988 and a declaration that the defendant was not a bona fide purchaser for value in good faith within the meaning of the Bankruptcy Act, 1988 in respect of any interest it claims in respect of Walford. He also seeks a declaration that the conveyance of the 29th March, 2013, is void and of no effect by reason of the provisions of ss. 57 to 59 of the Bankruptcy Act 1988 as amended and, in the alternative, that it is void and of no effect by reason of the provisions of s. 74 of the Land and Conveyancing Law Reform Act 2009.
4. The proceedings were commenced by way of plenary summons on the 9th December, 2016. However, on the 6th December, 2016, the defendant contracted to sell Walford to Celtic Trustees Ltd. On the 6th December, 2016, Celtic Trustees Ltd transferred to the defendant’s solicitor the sum of €12,112,500, being the entirety of the purchase price less capital gains withholding tax. On the 15th December, 2016, the defendant conveyed its title to Walford to Celtic Trustees Ltd and on the 23rd December, 2016 the deed was lodged in the Registry of Deeds for registration. On or about the 25th January, 2017 the Deed of Conveyance and Assurance was registered in the Registry of Deeds.
5. In view of the fact that the plaintiff had commenced these proceedings the defendant and Celtic Trustees Ltd entered into an escrow agreement whereby the purchase monies would be held in an escrow account pending the determination of the plaintiff’s claim against the defendant.
6. On the 23rd February, 2017, the plaintiff obtained a Mareva injunction restraining the defendant and any party having notice of the making of the order from dealing with reducing or transferring the funds the subject matter of the escrow agreement dated 20th December, 2016, between the defendant, Celtic Trustees Ltd and Lenz Staehelin, the escrow agent in Geneva, Switzerland.
7. Celtic Trustees Ltd applied and was joined as a notice party to these proceedings. The parties reached an agreement that the defendant would give an undertaking in terms of the Mareva injunction granted on the 3rd February, 2017, while reserving its right to apply to be discharged from its undertaking. The plaintiff confirmed the terms of his undertaking as to damages and confirmed that it was supported by the principal creditor of the bankrupt, Ulster Bank. The defendant disclosed its ultimate beneficial owner and so this issue also was resolved.
The Issue
8. The only issue to be determined at the hearing of the motion was the application by the defendant for the partial release of funds to enable it to finance its defence of the proceedings.
Submissions Of The Defendant
9. The defendant says that it has no other assets or funds other than the monies held in the escrow account. It says it is incapable of raising debt financing as it has sold Walford and its only asset is the money in the escrow account. The account is frozen and therefore it has no prospect of raising debt finance.
10. Mr. Charalampos Charalampous, a director of the sole corporate director of the defendant, swore an affidavit on behalf of the defendant confirming these facts and exhibiting the defendant’s abridge financial statements for the year ended 31st December, 2016. These show that as at 31st December, 2016, the shareholder’s deficit was €12,724,879. I am satisfied that the defendant has demonstrated that it has no other assets with which to discharge its legal expenses and thus would not be able to fund its defence if the order sought is refused.
11. The defendant emphasises the fact that the plaintiff claims that the beneficial interest in Walford has vested in him. Specifically, in these proceedings the plaintiff makes no claim to the monies held in escrow. Therefore there is no proprietary claim insofar as the monies in escrow are concerned.
12. The defendant relies upon three English authorities, two of the Court of Appeal and one of the High Court, to support the proposition that it should be entitled to access the funds to pay its reasonable legal and other fees in defending the proceedings.
13. In Halifax Plc v. Chandler [2001] EWCA Civ 1750 Clarke L.J. stated that a freezing injunction is not granted in order to provide the claimant with security for its claim and that ordinarily the order permits the defendant to spend money on legal expenses. He quoted with approval the decision of Sir Thomas Bingham MR in Sundt Wrigley Co. Ltd. v. Wrigley (unreported, 23rd June 1993) where he stated that: –
“…since the money is the defendant’s, subject to his demonstrating that he has no other assets with which to fund the litigation, the ordinary rule is that he should have resort to the frozen funds in order to finance his defence….”
Lord Justice Clarke approved the statement of Gee in the fourth edition of Mareva Injunctions and Anton Piller Relief at p. 318 where the author stated: –
“The court will always be concerned to ensure that a Mareva injunction does not operate oppressively and that a defendant will not be hampered in his ordinary business dealings any more than is absolutely necessary to protect the plaintiff from the risk of improper dissipation of assets. Since the plaintiff is not in the position of a secured creditor, and has no proprietor claim to the assets subject to the injunction, there can be no objection in principle to the defendant’s dealing in the ordinary way with his business and with other creditors, even if the effect of such dealings is to render the injunction of no practical value.”
14. In the case of Furylong Ltd v. Masterpiece Technology Ltd [2004] EWHC 3103 (Ch) Mr. Justice Park considered an application by the defendant to authorise the expenditure of money in connection with its defence to the claim brought against it by the plaintiff where the order provided that: –
“This order does not prohibit the respondents from spending a reasonable sum for legal advice and representation.”
The defendant wished to instruct a VAT expert who was not a lawyer as part of its defence. It was therefore argued that amounts expended upon obtaining advice from this expert were not amounts for “legal advice”. Mr. Justice Park held at paras. 11 and 12 of his judgment as follows: –
“11. …the court ought to be very slow to second guess the judgment of the defendant about how it wishes to equip itself and how it wishes to put together a professional team to resist a large claim which has been brought against it.
12. I would accept that the form of the order referring to a ‘reasonable sum’
for legal advice and representation, does leave scope for the court which, in appropriate cases, it must implement to say that a sum being sought to be expended for legal advice and representation is not reasonable. Nevertheless, I accept Mr. Graham’s submission that the underlying purpose of a freezing order is to prevent a dissipation of assets and not to prevent the payment of money on legal costs. Broadly a defendant should be given a considerable latitude to decide for itself how it wishes its defence to be prepared and presented. That is what Masterpeice wishes to do here. I am not prepared to substitute a different view of my own, where I to hold one (which I do not) for the view of Masterpiece’s directors and solicitors about how it wishes to resist this very large claim against it.”
He acceded to the application to authorise the sum of £40,000 as a reasonable sum for the defendant to spend on legal advice and representation in the context of a claim brought against it for an amount in excess of £7 million pounds.
15. The third case referred to by the defendant was Frédéric Marino v. FM Capital Partners Ltd [2016] EWCA civ. 1301. In this case, the Court of Appeal emphasised that the position is that a defendant who has resources of his own which are not effected by a good arguable claim by the claimant that they are his (the claimant’s) property should be required to use those unaffected resources to finance his legal defence and to meet his living expenses. The court held that the onus was on the defendant to persuade the court that he, the defendant, has no, or inadequate, assets of his own, unaffected by proprietary claims, so that he potentially has good grounds to argue to be allowed to have recourse to the proprietary assets the subject matter of the claim.
Submissions of The Plaintiff
16. The plaintiff accepted that his claim in these proceedings was to Walford and not to the proceeds of sale. In separate proceedings which I discuss below, Celtic Trustees Ltd pleads that if and insofar as the plaintiff had an interest in Walford, it was overreached and attaches to the proceeds of sale, the monies now held in escrow. The plaintiff contests this, but insofar as this argument may be successful and if the fund is depleted by paying the defendant’s legal costs, then he will be prejudiced if the defendant is permitted to access the monies to pay for the defence of the proceedings. He also criticises the fact that there was no attempt to estimate the costs and no mechanism to ensure that exorbitant costs were not charged. Ultimately it is a matter for the court as to whether and on what terms the court permits the defendant to access the funds.
Discussion
17. I accept the submissions of the defendant that the plaintiff’s claim in these proceedings is not a proprietary claim to the monies. I also accept that ordinarily it would therefore be entitled to access the funds to pay its reasonable legal expenses in defending the claim for the reasons enunciated in the decisions cited by the defendant.
18. The concern in this case arises from a second set of proceedings instituted by Celtic Trustees Ltd against the Official Assignee where Celtic Trustees Ltd seeks a declaration that it has acquired good title to Walford. In these proceedings entitled “The High Court Record No. 2017/2146P Between Celtic Trustees Ltd, plaintiff and Christopher Lehane as Official Assignee in Bankruptcy in the Estate of Sean Dunne, defendant” at para. 13 and 14 of the statement of claim it is pleaded: –
“Contrary to the position adopted by the Official Assignee CTL has acquired good title to the property, and neither Sean Dunne nor the Official Assignee have any interest in the Property.
To the extent that Sean Dunne, the Official Assignee or any other person had any beneficial or other equitable interest in the property prior to the conveyance to CTL, which is denied, under Section 21 of the Land and Conveyancing Law Reform Act, 2009, the conveyance to CTL dated 15th December, 2016 overreached any such equitable interest. As a result, any such equitable interest ceased to affect CTL’s legal estate in the Property, irrespective of whether CTL had notice of any such equitable interest, and any such equitable interest now attaches only to the proceeds arising from the said conveyance.”
19. Thus, in these proceedings, Celtic Trustees Ltd raises the argument that the interest of the Official Assignee in Walford, assuming the property vested in him for the purposes of the argument, was over reached and therefore his interest attaches to the proceeds arising from the conveyance, i.e. the monies held in the escrow account. The Official Assignee does not make this case. In fact, in his defence to the claim of Celtic Trustees Ltd he pleads at para. 13: –
“It is denied that the plaintiff is entitled to rely on Section 21 of the Land and Conveyancing Law Reform Act, 2009 as pleaded at para. 14 or at all. The Property was vested in the Defendant by reason of the Bankruptcy Act, 1988 and insofar as any purported transactions in relation to the Property are set aside, it remains vested by operation of statute and not by way of an equitable interest.”
It is clear that the plaintiff maintains that by virtue of the provisions of s. 44 of the Bankruptcy Act, 1988 he is entitled to the property and he is not making a claim to the proceeds of the sale by the defendant to Celtic Trustees Ltd in 2016.
Nonetheless, one possible outcome of the multiple litigation surrounding Walford (and there are other cases which have not been referred to in this judgment) is that the plaintiff may be entitled to the monies in the escrow account rather than Walford itself. Another possible outcome is that the plaintiff may be successful in his applications and may obtain a declaration that Walford is vested in him, in which case Celtic Trustees Ltd will be entitled to recover the monies held in the escrow account. Thus, if the fund is reduced it may be at the ultimate expense of the plaintiff or Celtic Trustees Ltd.
20. Under the terms of the escrow agreement, the monies may not be released to fund the defence of the defendant to these proceedings without the consent of Celtic Trustees Ltd. They have indicated that they will grant their consent, subject to the submission of invoices to their solicitors for their consideration. So, Celtic Trustees Ltd, one of two parties who may be prejudiced by the relief sought by the defendant, is agreeing to the release of funds to pay the defendant’s reasonable expenses.
21. In the circumstances, I do not believe that the potential prejudice to the plaintiff outweighs the prejudice to the defendant if the relief were refused. Even if it did, the English authorities underscore the fact that the purpose of a freezing order is to prevent dissipation of assets. The order does not confer any security on the plaintiff.
22. Once the defendant satisfies the court that it has no or insufficient assets from which to fund its defence of the proceedings, then the defendant is entitled to access the funds which would otherwise be frozen in order to fund its defence where the claim in the proceedings is not a proprietary claim to the frozen funds. In this regard the defendant must act reasonably and the funds may not be improperly dissipated under the guise of paying excessive legal expenses. I am conscious of the caution of Mr. Justice Park in Furylong that the court should be slow to impose its views on the manner in which the defendant approaches the defence of the proceedings. For this reason, I propose in principle to permit the defendant to draw from the fund to meet its reasonable legal expenses in defence of the proceedings.
23. I am aware that the defendant and Celtic Trustees Ltd are to agree procedures whereby the two parties can agree on the amounts to be withdrawn from the fund in accordance with the escrow agreement. Given that it is intended to put in place such an arrangement, I believe that it would be appropriate to take advantage of this fact in circumstances where it may ultimately be the plaintiff rather than Celtic Trustees Ltd who may be at a loss of the monies from the fund. I therefore propose to take the defendant up on its offer to place estimates before the court of the legal costs to assist me in finalising the order.
24. I shall adjourn the application for further submissions from all parties on the means, if any, to be ordered by the court to assess the reasonable legal expenses of the defendant in its defence of these proceedings.
O’Donnell & anor -v- Lehane
[2016] IEHC 205
JUDGMENT of Ms. Justice Costello delivered on 18th day of April, 2016.
1. On 12th December, 2011, before Kelly J. in the High Court in proceedings entitled The Governor and Company of the Bank of Ireland v. Brian O’Donnell and Mary Pat O’Donnell, [Rec. no. 2010/610 S] [2011 No. 5 COM] (“the summary summons proceedings”) the plaintiff (“the Bank”) obtained judgment against the defendants in the sum of €71,575,991.29 together with costs of the proceedings when taxed and ascertained. The defendants failed to pay the sum due to the Bank on foot of the judgment and the Bank brought petitions to bankrupt each of the defendants to the summary summons proceedings based upon the judgment of 12th December, 2011. Ultimately, on 2nd September, 2013, Charleton J. in the High Court adjudicated Mr. Brian O’Donnell and Dr. Mary Patricia O’Donnell bankrupt on foot of the petitions presented by the Bank. In this judgment they are referred to as the Bankrupts.
2. By virtue of the positions in s. 44 of the Bankruptcy Act 1988, as amended, all of the property belonging to each of the Bankrupts vested in the Official Assignee for the benefit of the creditors of the Bankrupts. The property of the Bankrupts included the chose in action comprised in the summary summons proceedings referred to above.
3. The Bankrupts say that on 30th June, 2014, they became aware that the learned trial judge was a personal shareholder in the Bank for a period of time including the period when he presided as the trial judge in respect of the summary summons proceedings. They wished to appeal the judgment obtained on 12th December, 2011, on the grounds, inter alia, of objective bias on the part of the learned trial judge. In view of the fact that the time for appealing the judgment had long since expired, it was necessary for the Bankrupts first to apply to the Supreme Court for leave to extend time to appeal the order. By notice of motion issued on 23rd July, 2014, the Bankrupts applied to the Supreme Court for leave to extend time to appeal the order of Kelly J. dated 12th December, 2011, in the summary summons proceedings. As this was prior to their adjudications, they had capacity to issue the motion at that time.
4. The Official Assignee, the respondent to this motion, was not a party to the motion before the Supreme Court. However, as the motion was heard by the Supreme Court after the moving parties had been adjudicated bankrupt, the Official Assignee intervened in the appeal. He asserted that the right to appeal the summary summons proceedings vested in the Official Assignee pursuant to ss. 3 and 44 of the Bankruptcy Act 1988 and he did not wish to pursue it. On that basis he submitted that the appellants/Bankrupts did not have a locus standi to bring the application.
5. He submitted that the appellants could have brought an application to the High Court in bankruptcy requiring the Official Assignee to apply for the extension of time to appeal but they had not done so. However, he accepted that the Supreme Court could consider an extension of time application by its nature and, while maintaining that the correct forum was elsewhere, submitted that if the parties and the Court believed that the matter could be determined more quickly and less expensively by the Court determining the motion for extension of time, he would not interfere.
6. As the Court adjourned the motion to allow for legal submissions and proceeded to hear the motion, it is to be concluded that this was the basis upon which the motion continued and was dealt with by the Supreme Court.
7. Denham C.J. delivered the judgment of the Court on 8th December, 2015. While noting that certain actions personal to a bankrupt do not vest in the Official Assignee, she stated:-
“37. As Hoffman L.J. said in Heath v. Tang at p. 701:-
‘The consequences for the bankrupt’s right to litigate do not seem to us inconvenient or productive of justice. The bankruptcy court acts as a screen which both prevents the bankrupt’s substance from being wasted in hopeless appeals and protects creditors from vexatious challenges to their claims.’
38. In this case the extension of time application is in relation to the proposed appeal in a case about property claimed to be owned by the appellants who are bankrupts. It is not personal litigation. It is thus a matter for the Official Assignee.
39. In spite of the appropriate forum for an application regarding litigation by a bankrupt being an application to the Official Assignee, or thereafter an application to the Bankruptcy Court, in the special circumstances of this case, the Court exercises its discretion and determines the application for an extension of time for leave to appeal in this case.
40. However, it is emphasised that the appropriate route is to request the Official Assignee to commence or continue litigation. If the Official Assignee refuses then the bankrupt may apply to the Bankruptcy Court. The Bankruptcy Court may then assess the situation, with the benefit of submissions from the Official Assignee. All such applications should be made in that manner. Thus, if there are claims where the litigation may be hybrid, i.e. some of which relates to the estate and some of which may be personal claims, the Bankruptcy Court can hear and determine such applications. However, it was accepted that in the circumstances of this case that the Supreme Court should hear and determine an application seeking an extension of time.
However, for clarity, it is stressed that applications in relation to proceedings in an estate in bankruptcy, either commencing or continuing litigation, are firstly a matter for the Official Assignee, and thereafter the Bankruptcy Court.
41. The only issue for the Court to determine is whether the appellants have locus standi to move the application.
42. In the proceedings in issue, the order of the High Court of 12th December, 2011, relates to property in the estate of the appellants, who are bankrupts. Thus, the property is vested in the Official Assignee. Therefore, it is for the Official Assignee to determine whether these proceedings are to be continued or not.
43. The appellants do not have locus standi to bring this application, the property and the right to litigate being vested in the Official Assignee.
44. The appellants raised the issue that the order of the 12th December, 2011, founded the bankruptcy decision. I am satisfied that this is not relevant. I agree with, and would apply, the analysis in Heath v. Tang [1993] 4 All ER 694 where Hoffmann L.J. stated at p. 700:-
‘Is there anything different about the judgment upon which the bankruptcy petition was founded? It is submitted that the difference is that in such a case the bankrupt does have an interest, because if he can get rid of the judgment he may be able to have the bankruptcy order annulled on the ground that it should never have been made. Whether it is set aside or not will depend upon whether apart from the judgment the bankrupt would have been solvent or whether an order would in any event have been made on the application of supporting creditors: see Re Noble (a bankrupt), ex p the bankrupt v Official Receiver [1964] 2 All ER 522, [1965] Ch 129. On the other hand, it may equally be said that if only the bankrupt could pursue a claim for a large sum which he claims to be owing to him he would be able to pay all his creditors and have the bankruptcy annulled on that ground. It is clear, however, that this is not a ground upon which he may bring proceedings. Furthermore, an exception for the petitioner’s judgment would give rise to anomalies in cases in which the defence was a claim of set-off, such as the applicant Mr. Heath asserts in this case.’
45. The appellants have made submissions raising issues of objective bias of the High Court judge, and fraud in relation to the parties. On these issues I agree with the analysis of Hoffman L.J. in Heath v Tang where he stated at p. 701.
‘[The bankrupt] criticises the conduct of the trial and contends that the decision against him was obtained by false evidence and fraud. The trustee does not wish, or is not in a position, to pursue the appeal. In my judgment [the bankrupt] has no locus standi to do so and his application must be refused.’
The fundamental principle in law is that the right to litigate is vested in the Official Assignee and it is for him to decide whether to litigate or not.
46. Accordingly, in this case the right to seek an extension of time for leave to appeal vests in the Official Assignee. The appellants have no locus standi.
47. The Official Assignee has indicated that he does not intend to proceed with this appeal.
48. Consequently, I would dismiss the application of the appellants on the grounds that they do not have locus standi to bring the motion.”
8. Thus the application issued by the Bankrupts in July, 2014 for leave to extend time to appeal the order of 12th December, 2011, has been dismissed by the Supreme Court.
9. In response to this decision, the Bankrupts sought belatedly to mend their hand by addressing the issue of locus standi .They requested the Official Assignee to assign the chose in action to them so that they could lodge a motion to extend time to appeal before the Supreme Court and pursue the appeal if successful. The Official Assignee did not agree to assign the chose in action and accordingly the Bankrupts brought a notice of motion where they each sought the following orders:-
“1) That the Official Assignee shall permit the Applicants lodge a motion to extend time to appeal before the Supreme Court against the Judgment Order of 12th December 2011 (perfected 14th December 2011) and the appeal if successful;
2) And/or in the alternative the Official Assignee shall assign the chose in action regarding the Judgment Order of 12th December 2011 (perfected 14th December 2011) to the Applicants so that they may lodge a motion to extend time to appeal before the Supreme Court and pursue the appeal if successful”.
10. It is thus clear that the purpose of the motion before this Court is to enable the Bankrupts to bring a new motion before the Supreme Court to extend time to appeal the judgment of 12th December, 2011.
11. At the hearing of the motion the Bankrupts argued that the Supreme Court merely determined that they lacked locus standi to pursue the litigation due to their bankruptcies. If the Official Assignee conducted the litigation he would have locus standi or, in the alternative, if he assigned the chose in action to them they would have locus standi. Either way, a new application could then be brought before the Supreme Court for leave to extend time in which to appeal and, if successful, to conduct the appeal.
12. This is impermissible and is based on a misunderstanding of the judgment and order of the Supreme Court. The issue of locus standi was the ground upon which the Supreme Court reached its decision but the decision itself was to dismiss the application to extend time for leave to appeal. Thus, the issue whether there should be an extension of time in which to appeal the judgment and order of the High Court has been determined by the Supreme Court whether the motion is brought by the Official Assignee or the Bankrupts. Even if the Bankrupts subsequently acquired the required locus standi by the assignment of the summary summons proceedings to them, it is not now open to them to bring the self same application before the Supreme Court again. To do so would amount to an abuse of process. It follows that any relief granted pursuant to the notice of motion would serve no purpose. I therefore refuse the application and dismiss the notice of motion.
13. As it is not necessary for my decision to consider whether or not to make an order pursuant to either ss. 61(7) or 71 of the Bankruptcy Act 1988, I have not dealt with the arguments raised by the parties on these issues and leave the issues raised to be determined on another occasion.
Mehigan v. Duignan (No.2)
[1999] IEHC 135, [1999] 2 ILRM 216, [1999] 2 IR 593
THE HIGH COURT
BANKRUPTCY
IN THE MATTER OF A PETITION FOR ADJUDICATION OF BANKRUPTCY BY
DAVID F. MEHIGAN
APPLICANT
AGAINST
JOHN DUIGNAN
RESPONDENT
Judgment of Ms. Justice Laffoy delivered on the 22nd day of March, 1999.
1. In this matter the Respondent seeks to have the Applicant’s petition to have him adjudicated a bankrupt dismissed on the ground that the Court could not be satisfied that the requirements of Section 11(1) of the Bankruptcy Act, 1988 (the Act of 1988) have been complied with.
2. The Applicant has presented his petition under Section 11 as a creditor relying on an act of bankruptcy which it is alleged occurred within three months before the presentation of the petition and the facts on which he relies as evidence of an act of bankruptcy within that period are that: –
(i) on 8th October, 1996 the Applicant, as Official Liquidator of Mantruck Services Limited, obtained judgment in this Court against the Respondent for the sum of £91,239.80 and costs,
(ii) the costs were subsequently taxed in the sum of £117,275.46,
(iii) on 11th September, 1998 the Applicant caused two orders of fieri facias to be issued out of this Court directed to the County Registrar of the County of Westmeath in respect of the said respective sums of £91,239.80 and £117,275.46 and interest thereon at the Court rate,
(iv) on 30th September, 1998 the County Registrar for the County of Westmeath made returns to the said orders of fieri facias certifying that there were no goods to meet the respective amounts due on foot of the said orders in her bailiwick, and
(vi) the petition, which was dated 8th December, 1998, was presented on 11th December, 1998 and subsequently was duly served on the Respondent.
3. The said orders of fieri facias have been exhibited in this application and there was endorsed on each a statement in the following terms:-
“…..the said John Duignan is a gentleman and his place of abode is No. 3, St. Patrick’s Terrace, Mullingar, Co. Westmeath in your bailiwick.”
4. In response to the petition, the Respondent filed an affidavit sworn by him on 10th February, 1999. He was cross-examined on that affidavit in this Court on 8th March, 1998. The Respondent also filed an affidavit sworn by Lorraine Connaire on 10th February, 1999. Ms. Connaire was not cross-examined on her affidavit.
5. In her affidavit, Ms. Connaire averred that a letter addressed to the Respondent was delivered at her home, 3 St. Patrick’s Terrace, Patrick Street, Mullingar, Co. Westmeath in September 1998. She opened the letter and found that it was a letter dated 23rd September, 1998 from the Circuit Court Office, Mullingar. She exhibited a copy of the letter, which was a notice dated 23rd September, 1998 addressed to the Respondent at 3 St. Patrick’s Terrace notifying him of the lodgement of the orders of fieri facias at the suit of the Applicant and that, unless the relevant amount was paid within four days, the County Registrar would proceed to levy execution. Ms. Connaire averred that she replied to the County Registrar by letter dated 24th September, 1998 and she exhibited a copy of the letter in which she stated as follows:-
“Please note that there is nothing belonging to him at this address. This is my family home, and everything in this house belongs to me and my family.
John Duignan as far as I know normally resides at Kilglass, Strokestown, Co. Roscommon.
I trust this explains the situation to you and please ensure no one from your office calls to my home and upsets me or my family.”
6. Ms. Connaire also averred that she contacted the Circuit Court Office personally and was assured by a member of the staff that no further action would be taken in the matter. Finally, she averred that no sheriff or other officer or Court messenger attended at her premises following receipt of the said notice and her reply thereto.
7. On the basis of the cross-examination of the Respondent I find that the Respondent was aware that the notice dated 23rd September, 1998 addressed to him was delivered to 3 St. Patrick’s Terrace and that the letter dated 24th September, 1998 was sent to the County Registrar at his instigation. That letter was misleading in two respects, in that it was not the case that there was nothing belonging to the Respondent at 3 St. Patrick’s Terrace and it was not the case that the Respondent at that time normally resided at Kilglass, Strokestown, Co. Roscommon. I find that, although the Respondent at the time was not exclusively residing at 3 St. Patrick’s Terrace, he was there a substantial portion of the time. In general, I find the Respondent’s testimony to be replete with untruths and false innuendo.
8. The Respondent contended that the evidence adduced by the Applicant fell short of satisfying the Court that the Respondent had committed an act of bankruptcy within three months of the presentation of the petition on two grounds: first, the wrong address for the Respondent had been given in the orders of fieri facias and the wrong information had been given by the Applicant to the County Registrar; and, secondly, the returns to the orders of fieri facias by the County Registrar were wrongful and irregular. It was contended that the returns to the orders could be set aside by the Court or disregarded.
9. The issuing of execution orders, including orders of fieri facias , is one of the methods by which courts enforce their decisions. The issuing of such orders on foot of judgments and orders of this Court is governed by the Rules of the Superior Courts, 1986. Order 42, Rule 16 of the Rules of the Superior Courts provides as follows:-
“The address and description of the party against whom any execution order shall issue or such other description of him as the solicitor for the party issuing same may be able to give shall be endorsed on such order, but the party against whom such order shall issue shall not be allowed to take advantage of the want of such endorsement, it shall not be necessary to state the place of abode of either party in the body of such order.”
10. That rule is, in substance, in the same terms as the 106th General Order of 1854 which was in force when The Law Relating to Sheriffs in Ireland , by Dixon & Gilliland was published in 1888. Apropos of the 106th General Order, the authors stated at page 224:-
“It is quite clear that…. the plaintiff or his attorney is not bound to specify or point out the defendant’s goods or property liable to the execution: all he is bound to do is to endorse on the writ of execution the address and residence of the defendant, or such other description of him as he may be able to give the sheriff. If he does this the law then casts on the sheriff the obligation of using due and reasonable diligence for the purpose of ascertaining what property the defendant is possessed of liable to the execution. Thus it would appear that the endorsement….. amounts to no more than a statement by the solicitor for the purposes of affording assistance to the sheriff, leaving it to his discretion whether he will act on it or not.”
11. As I have already indicated, I find that in September 1998 the premises at 3 St. Patrick’s Terrace were for a substantial part of the time the Respondent’s abode. Therefore, I hold that the wrong address was not endorsed on the orders of fieri facias and that wrong information was not furnished to the sheriff. In any event, even if the Respondent’s averment that he “ordinarily resided and had a dwellinghouse at Kilglass” and his testimony that he only used the premises at St. Patrick’s Terrace as an occasional residence, an office and an accommodation address were true, the orders of fieri facias would not have been rendered invalid by the statement of the Respondent’s description and place of abode endorsed thereon.
12. The basis of the Respondent’s contention that the returns to the orders of fieri facias were wrongful and irregular and should be disregarded is the assertion that the County Registrar did not act with due diligence in the performance of the duty imposed by the orders and, in particular, did not enter the premises at St. Patrick’s Terrace, did not try to identify the goods of the Respondent therein and did not give an intimation to the Respondent of intention to levy execution. In relation to this ground, the Respondent relies on the decision of the Northern Ireland Court of Appeal In Re. Alexander, Bankrupt , (1966) N.I. 128.
13. The decision of the Northern Ireland Court of Appeal in In Re. Alexander is succinctly summarised in the head-note in the following terms:-
“A return of no goods made by a sheriff who has done nothing to ascertain whether the debtor has any goods to seize is not a return within the meaning of Section 21(5) of the Bankruptcy (Ireland) Amendment Act, 1872, and an adjudication grounded upon such a return may be annulled under Section 29 of the Irish Bankrupt and Insolvent Act, 1857.”
14. Section 21(5) of the 1872 Act was amended in Northern Ireland in 1929 by the Bankruptcy Amendment Act (Northern Ireland), 1929 and the provision, as amended, which was under consideration by the Northern Ireland Court of Appeal, was as follows:-
“5. That execution against the debtor has been levied by seizure of his goods under process in an action in any court or in any civil proceedings in the High Court, and the goods have been either sold or held by the sheriff for twenty-one days; or a return of no goods has been made by the sheriff in the case of any such execution .”
15. The words to which I have added emphasis were introduced by the 1929 amendment. In relation to those words, Lord McDermott, L.C.J., stated as follows at page 139:-
“When paragraph 5 of Section 21 speaks of a return of no goods having been made ‘in the case of any such execution’ it is, I think, quite impossible to say that these words are capable of being read as reference to some initial phase of execution in the sort of suit that has been mentioned earlier in the paragraph. The kind of execution with which both limbs of the paragraph are concerned is that which has proceeded beyond the issue and delivery of the writ and which includes some positive act in the performance of his duty by the sheriff. The words ‘any such execution’ can mean nothing less in this context. They must be related to execution which, as it were, has got the length of action against the judgment debtor, and it therefore follows that a return of no goods that has been made by a sheriff who has done nothing to ascertain if the debtor has any goods to seize is not a return within the meaning of paragraph 5. Take the case (not this case by any means) of a sheriff who lets the writ lie on his desk for a week and then endorses a return of no goods without doing anything. The writ is good. The return is good on its face. But on such facts it is not a return made in the case ‘of any such execution’. Not only has there been no seizure followed by sale or retention, but there has been no effort at all to subject the debtor and his premises to any kind of search or enquiry. And if the actual defaulter is not the sheriff but a bailiff in his service who makes no effort to discharge his duty and fraudulently sends in a report that there is nothing to seize, the result must surely be the same. This is quite a different ground from that of mere falsity. In essence it means that there has been no ‘such execution’, and I see no reason why that should not be alleged and proved under Section 129. If it is, then on the true construction of paragraph 5 of Section 21, there would appear to be no act of bankruptcy.”
16. Later Lord McDermot, having stated that the findings of fact made by the trial Judge could not be regarded as a bona fide attempt at execution, went on to say at page 142:-
“The court is here dealing with its own process and should not be astute to accept something colourable, a mere ‘going through the motions’ of execution as a genuine attempt at enforcement.”
17. The provision of the Act of 1988 which corresponds to Section 21(5) of the Act of 1872, and the provision relied upon by the Applicant here, is Section 7(1)(f) which provides:-
“An individual…. commits an act of bankruptcy in each of the following cases –
1 ….. (f) if execution against him has been levied by the seizure of his goods under an order of any court or if a return of no goods has been made by the sheriff or county registrar whether by endorsement of the order or otherwise;”
18. In my view, the absence of the words “in the case of any such execution”, which are to be found in the second limb of Section 21(5) of the Act of 1872, as amended in 1929 in Northern Ireland, from the second limb of Section 7(1)(f) is of no materiality and the decision In Re. Alexander is not distinguishable on that account only. It is clearly implicit in Section 7(1)(f) that the return of no goods made by the sheriff or county registrar referred to therein is a return on foot of execution under an order of any court. In principle, a return nulla bona which has been made without a bona fide attempt at execution must be open to challenge by a debtor as not constituting a “return of no goods” within the meaning of Section 7(1)(f) so as to amount to an act of bankruptcy. However, in this jurisdiction the sheriff or county registrar would have to be before the Court and would have to have an opportunity to be heard on such a challenge, given that such a challenge would impugn the conduct of a public officer in the performance of a duty reposed in him by a court. It is not necessary on this application to consider how that could be achieved in a proper procedural fashion.
19. In this case, all the evidence before the Court establishes is that Ms. Connaire, with the connivance of the Respondent, deflected the County Registrar away from No. 3 St. Patrick’s Terrace by furnishing information which was untrue. It would absurd if a debtor could rely on specific inactivity of a sheriff or county registrar which was induced by false information furnished to him by, or with the connivance of, the debtor. That is all there is in this case and, in the circumstances, the Respondent, on whom the onus lies has not established that the returns dated 30th September, 1998 were made other than on foot of a bona fide attempt at execution so as not to amount to an act of bankruptcy within the meaning of Section 7(1)(f).
20. Accordingly, being satisfied that the Applicant has satisfied the requirements of Section 11(1) of the Act of 1998, I propose to sign an Order adjudicating the Respondent bankrupt.