Mulkerrins (formerly Woodward (FC)) (Appellant) v. Pricewaterhouse Coopers (a firm) (formerly trading as Coopers & Lybrand) (a firm) (Respondents)
30. 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.
31. 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.
32. 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:
33. 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.
34. The district judge's reasoning is recorded as follows in the note:
The relevant part of the order was the declaration that
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.
35. 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.
36. 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.
37. 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.
38. 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):
39. The deputy judge then turned to a fifth argument, which he himself had prompted (at page 520):
40. The deputy judge then referred to the decision of Scott J in Weddell v Pearce & Major  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.
41. PwC appealed to the Court of Appeal ( 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,
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.
42. 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.
43. In my opinion this submission is mistaken, for reasons which were explained by Lord Hoffmann in Stein v Blake  AC 243, 260:
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.
44. 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  Ch 251 and In re Eaton  1 WLR 1269; and, on a comparable situation in the Companies Court, Smith v Croft (No 2)  Ch 114, 185-6).
45. 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
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.