Judgments - Mulkerrins (formerly Woodward (FC)) (Appellant) v. Pricewaterhouse Coopers (a firm) (formerly trading as Coopers & Lybrand) (a firm) (Respondents)

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    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:

    "(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".

    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:

    "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.

    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):

    "(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".

    39. 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".

    40. 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.

    41. 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.

    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 [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.

    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 [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).

    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

    "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.

    

 
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