Judgments - Circuit Systems Ltd. (In Liquidation) and Another v. Zuken-Redac (U.K) Ltd. (Formerly Racal-Redac (U.K) Ltd.)
Norglen Ltd. and Others (A.P) (In Liquidation) v. Reeds Rains Prudential Ltd. and Others

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These cases both happened to have concerned trustees in bankruptcy, but the powers of liquidators have been given a similar construction and in Guy v. Churchill (1888) 40 Ch.D. 481 Chitty J. held that there could be no objection to an assignment in return for a share of the proceeds, which "apart from the bankruptcy law. . . is plainly void for champerty." In the face of this line of authority, counsel for both appellants accepted that apart from the impact of legal aid and the effect on the defendant's right to security for costs, the assignments could not be challenged.

          4. Legal aid

          The chief question in both appeals was therefore whether the assignments were void or unenforceable because they would enable a company to benefit indirectly from legal aid. This, as I have said, was the view of the Court of Appeal in Advanced Technology Structures Ltd. v. Cray Valley Products Ltd. [1993] B.C.L.C. 723.

          Hirst L.J. said that the assignment was:

    "a mere stratagem or device to enable the company to carry on the proceedings, with the support of Mr. Pratt's [the assignee] legal aid, which manifestly neither they nor he could afford to do otherwise. . . The sole purpose of the assignment was therefore to tap the resources of the legal aid fund, which are available to Mr. Pratt only because of his own impecuniosity."

This, said Hirst L.J., demonstrated that the assignment was "a sham." The give effect to the assignment would conflict with "the underlying policy of the Act," which was that "legal aid should not be available to corporate plaintiffs."

          Leggatt L.J. said:

    "When Parliament decided that legal aid should not be available to corporations, it cannot have been its intention that a corporation should be able to nominate an employee, to whom it has assigned a right of action, to conduct the litigation on its behalf with the assistance of legal aid for which he was eligible."

Glidewell L.J. agreed with both judgments.

          Mr. Rupert Jackson and Mr. Roger Henderson, counsel for the appellants in the Norglen and Circuit Systems appeals respectively, relied upon this reasoning but explained it somewhat differently. They both accepted, as Morritt J. had done in the Norglen case, that when Hirst L.J. described the assignment as a "sham," he could not have meant what is ordinarily meant by that expression, namely, a transaction which is not what it pretends to be: Snook v. London and West Riding Investments Ltd. [1967] 2 Q.B. 786. The transaction was intended to be exactly what it purported to be, namely a transfer to the assignee of the legal and beneficial interest in the cause of action in return for the right to a share in the proceeds. If it was unenforceable, it could only be because such a transaction was in some way illegal or contrary to public policy.

          Mr. Jackson said that the introduction of legal aid for individuals in 1949 had the effect of restricting the power of liquidators and trustees to assign causes of action. They could no longer assign them to individuals on terms that the company or bankrupt's estate would receive part of the proceeds if it was intended that the action should be pursued with the benefit of legal aid. Such a restriction on the statutory power to sell the assets of the company or bankrupt had to be implied in order to make the insolvency legislation consistent with the Legal Aid and Advice Act 1949 and subsequent legislation to the same effect. Alternatively, the policy expressed in the Legal Aid and Advice Act 1949 had created a head a public policy which required such assignments to be treated as invalid.

          Mr. Henderson said that the Legal Aid Act 1988 prohibited the grant of legal aid to a corporation and that it followed, upon the true construction of that Act, that a grant of legal aid to an assignee for the benefit of the company, as in a case like this, would also be unlawful. The assignment had therefore been executed for an unlawful purpose and was unenforceable under the principle that the courts would not lend their assistance to the achievement of an unlawful purpose.

          My Lords, these two very different arguments advanced in support of the decision of the Court of Appeal in Advanced Technology Structures Ltd. v. Cray Valley Products Ltd. [1993] B.C.L.C. 723 illustrate the difficulties in analysing its reasoning. If the question is whether a given transaction is such as to attract a statutory benefit, such as a grant or assistance like legal aid, or a statutory burden, such as income tax, I do not think that it promotes clarity of thought to use terms like stratagem or device. The question is simply whether upon its true construction, the statute applies to the transaction. Tax avoidance schemes are perhaps the best example. They either work (Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1) or they do not (Furniss v. Dawson [1984] A.C. 484.) If they do not work, the reason, as my noble and learned friend Lord Steyn pointed out in Inland Revenue Commissioners v. McGuckian [1997] 1 W.L.R. 991, 1000, is simply that upon the true construction of the statute, the transaction which was designed to avoid the charge to tax actually comes within it. It is not that the statute has a penumbral spirit which strikes down devices or stratagems designed to avoid its terms or exploit its loopholes. There is no need for such spooky jurisprudence.

          Wallersteiner v. Moir (No. 2) [1975] 1 Q.B. 373, upon which Mr. Henderson relied, is a good example of such straightforward construction applied to the legal aid legislation. The question was whether Mr. Moir would be entitled to legal aid to bring a derivative action on behalf of a company against its majority shareholder. The Court of Appeal held that as he was asserting the company's cause of action on the company's behalf, the effect of what is now section 2(10) of the Legal Aid Act 1988 prevented the grant of legal aid.

          But the question of whether, upon the true construction of that subsection, the Legal Aid Board is entitled to make legal aid available to the assignees in these appeals, is not a matter which is before your Lordships for decision. In fact, Mr. Jackson and Mr. Henderson were not even agreed upon the answer. Mr. Jackson proceeded upon the assumption that if the assignment was valid, the Board could properly grant legal aid. Taking this position appeared to him to give better support to his argument that, in order to avoid such a result, the liquidator's power to assign should be restricted. Mr. Henderson, on the other hand, submitted that the grant of legal aid to the plaintiff in his appeal was unlawful and he mentioned that judicial review proceedings had been instituted against the Board to enforce this claim. This position appeared to him to support the argument that the assignment was an attempt to further an unlawful purpose.

          For reasons which I shall give in a moment, I do not think that it is necessary for your Lordships to decide whether Mr. Jackson or Mr. Henderson is right. The Legal Aid Act 1988 appears on its face to be concerned with whether the party to whom aid is provided is an individual or a corporation and not with how he got his cause of action or what he is going to do with the proceeds. The Lord Chancellor is given power in section 34(1) to make regulations "for preventing abuses" of the Act and the Board has power under section 15(3)(a) to refuse representation for the purpose of proceedings if in all the circumstances it appears to the Board "unreasonable" that the applicant should be granted representation. In Reg. v. The Law Society, Ex parte Nicholson, (unreported), 22 February 1985, Hodgson J. decided that a legal aid committee could not refuse legal aid under this provision solely on the ground that the applicant had acquired the cause of action by assignment from an insolvent company, without having regard to the other circumstances of the case. But there is no doubt that such an assignment is a matter which the Legal Aid Board is entitled to take into account. Furthermore, since the grant of legal aid in these appeals, the Lord Chancellor has pursuant to section 34(1) of the Legal Aid Act 1988, made the Civil Legal Aid (General)(Amendment)(No. 2) Regulations 1996 (S.I. 1996 No. 1257) which insert a new Regulation 33A into the Civil Legal Aid (General) Regulations 1989:

    "Without prejudice to regulation 28 [requirement of eligibility on the merits] an application may be refused where it appears to the Area Director that

    (a) any cause of action in respect of which the application was made has been transferred to the applicant by assignment or otherwise from a body of persons corporate or unincorporate, or by another person who would not be entitled to receive legal aid; and

    (b) the assignment or transfer was entered into with a view to allowing the action to be commenced or continued with the benefit of a legal aid certificate."

This regulation might appear to reverse Reg. v. The Law Society, Ex parte Nicholson and permit a refusal on the specified ground irrespective of the other circumstances of the case. But your Lordships' Appellate Committee invited the comments of the Legal Aid Board on the issues in these appeals and received a helpful letter, which was made available to the parties, from the Board's legal adviser Mr. Colin Stutt. He said that the powers to make regulations conferred upon the Lord Chancellor by section 34(1) did not entitle him altogether to proscribe legal aid in the circumstances stated in the new regulation 33A. It followed that in his view the Board would still have to have regard to all the circumstances of the case. If the Board had to take a general view of the merits of the application, the answer was by no means obvious. One view was that an assignment by an insolvent company was "simply an abuse of the legal aid scheme:" people who chose to take the advantages of limited liability had to accept the disadvantages, including the absence of state benefits such as legal aid. On the other hand, another view was that this was a harsh and unrealistic judgment. Few people who decided to incorporate their businesses would realise that the result could be a form of outlawry, excluding them from access to justice. In most of the assignment cases which came before the Board, the individual was a shareholder who had an overwhelming interest in the outcome of the proceedings and a claim which had strong merits. Considerations of this kind frequently persuaded Area Committees to grant legal aid to assignees despite the discretion to refuse conferred by rule 33A. Mr. Stutt said that the discretion entrusted to the Board by the new rule was "problematic" and any guidance from your Lordships by way of clarification of the law would be welcome.

          Looking at the matter in a wider perspective, Mr. Stutt also drew your Lordships' attention to the proposals for reform of civil legal aid announced by the Lord Chancellor on 18 October 1997. These include the abolition of civil legal aid for money claims and the substitution of a right to enter into conditional fee agreements with solicitors. Such agreements would be open to companies as well as individuals and would remove the difference in treatment which has given rise to these appeals.

          My Lords, I think that the way in which this matter comes before your Lordships makes it undesirable for the House to express any opinion on the way in which the Legal Aid Board should deal with cases such as the present under the existing scheme. The Board has not been a party to these proceedings and although your Lordships will, I am sure, have been assisted by Mr. Stutt's letter, the legality of the Board's exercise of its public powers and discretions is not an issue in either of these appeals. It is concerned solely with the validity, as a matter of private law, of the assignments by the two companies to Mr. and Mrs. Rodgers and Mr. Basten respectively. For this purpose, the question of how the Board should have exercised its discretion in granting them legal aid or whether, as a matter of construction of the Legal Aid Act 1988, it had such a discretion, is not relevant. For the Board either had such a power or it did not. If Parliament conferred such a power, there seems to me no ground for saying that it must be taken impliedly to have prohibited such assignments or that the Act requires this to be done as a matter of public policy. The Act recognises in general terms the possibility of abuse but leaves it to the rule-making power of the Lord Chancellor and the discretion of the Board to identify such abuses and deal with them. The legal aid scheme can look after itself and does not require the courts to strike down private transactions which would otherwise be valid. On the other hand, if upon the true construction of the Act there is, as Mr. Henderson argues, no power to grant legal aid to assignees in the position of Mr. and Mrs. Rodgers or Mr. Basten, then there is by definition no possibility of abuse. The foundation for an argument that the assignments are for an illegal purpose disappears. They are valid as a matter of insolvency law and give the assignees a cause of action but there is no mischief in them because they do not enable the companies to derive benefits from legal aid. Mr. Henderson said that although this might in theory be true, it was in practice very difficult to challenge the exercise of discretion by the Legal Aid Board. The fact was that legal aid had been granted and his clients had the disadvantage of being faced by a legally aided plaintiff. But this argument seems to me fallacious, because to say that the Legal Aid Board has a discretion in the matter means that there are circumstances in which it could properly grant legal aid. In that case, as I have said, the question of whether such a grant would be an abuse of the scheme is a matter for the Lord Chancellor's regulations and the Board. For these reasons, Advanced Technology Structures Ltd v. Cray Valley Products Ltd [1993] B.C.L.C. 723 was in my view wrong to hold that the assignment was invalid.

          Like the Court of Appeal in the Norglen case, I also think that there is nothing in the point that the assignment is invalid because it deprives the defendants of the right to apply for security for costs under section 726 of the Companies Act 1985. For better or worse, the law entitles a defendant to be protected against incurring irrecoverable costs in litigation brought against him by an impecunious company but not by an impecunious individual. But that cannot prevent companies from assigning property to individuals.

          It follows that the Circuit Systems appeal, in which the only issue is the validity of the assignment, must in my opinion be dismissed.

          5. Conduct of the liquidator

          Mr. Peter Smith advanced an alternative argument for the appellants in the Norglen appeal based on what he said was misconduct on the part of the liquidator in assigning the company's cause of action to Mr. and Mrs. Rodgers. He said that until the hearing before Morritt J. the liquidator took no steps to set aside the purported transfer of the company's property to Mrs. Rodgers, he gave Mr. and Mrs. Rodgers uncontrolled conduct of the litigation which deprived the company of the value of the restrictive covenant and forced through the assignment in the face of opposition from creditors. My Lords, I make no comment upon the factual basis of any of these allegations because, even if true, they have no present relevance. The liquidator had a statutory power to assign the company's cause of action and has exercised that power. If his exercise of the power was a breach of duty to the company and its creditors, that is a matter of which the creditors may complain in the Companies Court. It does not affect the validity of the assignment.

          6. Discretion and security for costs

          There are two further points which arise only in the Norglen appeal. Both concern the exercise of the discretion to substitute Mr. and Mrs. Rodgers as plaintiffs pursuant to R.S.C. Ord. 15, r. 7(2). The rule reads:

    "Where at any stage of the proceedings in any cause or matter the interest or liability of any party is assigned or transmitted to or devolves upon some other person, the Court may, if it thinks it necessary in order to ensure that all matters in dispute in the cause or matter may be effectually and completely determined and adjudicated upon, order that other person to be made a party to the cause or matter and the proceedings to be carried on as if he had been substituted for the first mentioned party."

Mr. Jackson accepted that if, as I think, the assignment was effective to transfer the cause of action from the company to Mr. and Mrs. Rodgers, their joinder as parties was necessary. They were the only people who could prosecute the action. But Mr. Jackson submitted that the rule gives the court a discretion and that the Court of Appeal failed to consider the exercise of that discretion in two ways. First, he says that it should simply have refused to make an order on the ground that the prosecution of the action by the Rodgers would be an abuse of legal aid. Alternatively, he says that the order should have been subject to a condition that Norglen provide security for costs in the amount ordered by Morritt J.