CIVIL PROCEDURE: BACK TO BASICS 24: THE BANKRUPT CLAIMANT (PERSONAL INJURY LITIGANTS IN PARTICULAR)
I am writing this primarily because of a conversation I had with a law graduate who thought the term “bankruptcy” was a generic term to cover anyone who was hard up. The very basic point about what bankruptcy is, and the consequences for a claimant in litigation, need setting out. Although the term “bankrupt” is often used in a very vague sense, it has a specific legal meaning, and profound legal consequences. (There is some explanation of the process, and consequences of bankruptcy, in GOV.UK Guide to Bankruptcy.)
WHAT IS BANKRUPTCY?
Bankruptcy requires an order from the court. In simple terms it means that all the bankrupt’s assets belong to the trustee in bankruptcy (who will be appointed by the court). An ongoing legal action may be an “asset” for these purposes. A bankrupt cannot, therefore bring, or continue, legal proceedings. The bankruptcy is discharged after 12 months. However all the assets that were held by the bankrupt prior to the bankruptcy remain vested in the Trustee in bankruptcy.
(The irony is that, as we saw in a judgment last week, an individual without any assets at all is unlikely to be made bankrupt. The court will not make an order as it will serve no useful purpose).
A BANKRUPT CANNOT BRING CIVIL PROCEEDINGS
A good example of this is the judgment In Khan -v- Khan & Ambala Foods Limited  EWHC 2625 (Ch). Master Bowles struck out an action on an abuse of process on the grounds that the claimant was bankrupt and had no authority to issue proceedings.
“The second ground of abuse, however, is one that I find to be made out. That ground stems from the bankruptcy of the Claimant and the consequent vesting of his causes of action, if any, in his trustee in bankruptcy.
The Claimant was declared bankrupt on his own petition, in respect, I gather, of credit card debts, on 20th February 2013. It is common ground that all the Claimant’s claimed causes of action had accrued by that date and, accordingly, that they constituted ‘property’ of the bankrupt, for purposes of his bankruptcy and formed part, therefore, of his estate, for that purpose.
The consequence of that, by reason of section 306 of the Insolvency Act 1986, is that, upon the appointment of a trustee in bankruptcy taking effect, or upon the official receiver becoming trustee, all the Claimant’s causes of action vested in his trustee and the Claimant, himself, was, correspondingly, divested of those causes of action.
In this case, no trustee was appointed, as such, but, rather, as was confirmed upon behalf of the Claimant, the official receiver became the trustee in bankruptcy, pursuant to the procedure set out in section 293 of the Insolvency Act, whereby, if the official receiver elects not to call a meeting of creditors within the twelve week period prescribed by that section, he serves notice of that decision upon the court and upon known creditors and whereby, upon that service, he becomes the trustee.
The result, or consequence, of the foregoing is that, as from, at latest, May 2013, the Claimant has not retained the causes of action upon which, in these proceedings, commenced in October 2014, he purports to rely, and that, inevitably, these proceedings fall to be struck out as an abuse of process, as being proceedings doomed to failure. For the same reason, the proceedings, likewise, have no realistic prospect of success and the Defendants are, in consequence, entitled to judgment against the Claimant upon his Claims.
In the face of this situation, Mr Willmer made the only submission open to him, namely that, rather than, at this stage, striking out the Claim, or giving judgment upon the Claim to the Defendants, I should, instead, stay the Claim, in order to give the official receiver, as trustee, the opportunity, if so advised, to adopt the Claim.
TEN KEY POINTS TO NOTE IN RELATION TO THE PERSONAL INJURY CLAIMANT
1. YOU MUST ASK THE CLIENT WHETHER THEY ARE BANKRUPT
A client may not think it relevant, or not appreciate the significance. They have to be asked, specifically. Not only in relation to bankruptcy but in as to any other form of arrangement with their creditors. It can be embarrassing (and expensive) to find out shortly before trial that they client is bankrupt and
2. TELL THE CLIENT TO INFORM YOU IF THEY DO GO BANKRUPT
In the Eaton case the claimant went bankrupt after being injured. It is not clear whether he failed to inform his solicitors or no-one appreciated the significance of this.
3. IF THE CLIENT GOES BANKRUPT YOU HAVE TO CONSIDER THE POSITION OF THE TRUSTEE IN BANKRUPTCY
The situation here is complex:
- The right of action vests in the trustee in bankruptcy.
- The general damages vest in the claimant personally and do not form part of the trustee’s find.
- If the claim contains any element of special damages the whole claim passes to the trustee. Any general damages recovered will belong to the bankrupt.
4. YOU HAVE TO READ KERRY ON THIS POINT
Kerry Underwood wrote a detailed article on this point Personal Injury: Acting for Bankrupts in June 2014.
5 CONSIDER THE VALIDITY OF ANY RETAINER/ATE INSURANCE AFTER BANKRUPTCY
This point is considered by Kerry who points out that there is no authority on this point. “However it seems to me that if the chose of action can be assigned, then the retainer, which is undoubtedly parasitic upon the chose, must also be capable of assignment”
6. READ THE INSOLVENCY DIRECT GUIDANCE
As we have already seen there is useful guidance in the Insolvency Direct technical manual
“31.9.41 Special damages and general damages
Often, in correspondence or papers relating to a claim, the official receiver will see reference to ‘special damages’ and ‘general damages’.
Generally speaking, for the purposes of deciding who owns which part of any claim, special damages are ‘property’ which vest as part of a bankruptcy estate and general damages are ‘personal’ and thus remain in the ownership of the bankrupt.
31.9.42 Actions which involve damage to both the bankrupt’s person and property (amended July 2012)
Many events lead to damage to the bankrupt’s property and their person. For example, a typical road accident may lead to an injury to the bankrupt’s body (for example, whiplash) and, also, damage to the bankrupt’s property (damage to the car) and/or the need to incur additional (and otherwise unnecessary) expenses (damage to the financial position – which is a property damage). Following the relevant case law (see paragraph 31.9.37), this may cause a problem in deciding whether the action vests in the official receiver, as trustee, or not.
It used to be the case that such an action would be, effectively, ‘split’ between the personal damage and the property damage, and each claim pursued separately (one by the bankrupt and the other by his/her trustee) [note 11]. This way of deciding matters is not, however, considered good law any longer (see paragraph 31.9.43).
31.9.43 Current approach to actions which involve damage to both the bankrupt’s person and property – a ‘hybrid’ claim
It has been held that where a right of action involves damage to both the person and property of the bankrupt, there is only one cause of action, with different ‘heads’ of damage. The right cannot be split [note 12] (see paragraph 31.9.44 for a limited exception to this principle).
This position was confirmed, and somewhat advanced upon, in a later case [note 13], where such an action (referred to in the judgment as a ‘hybrid’ claim) was held to be an action that would vest in a bankrupt’s estate, with any damages awarded for the personal element of the claim being held on a constructive trust (see paragraph 31.9.200) for the benefit of the bankrupt by his/her trustee.”
7. KNOW ABOUT “HYBRID” CLAIMS
Most personal injury claims will be “hybrid” claims. Useful examples are given in the Insolvency Direct manual.
“31.9.46 Examples of hybrid actions (amended July 2012)
Examples of hybrid actions are as follows:
An assault causing a bodily injury (personal) and damage to spectacles or clothing (property).
A car crash causing a broken ankle (personal) and the resultant need to pay a third party to carry out household tasks such as shopping/cleaning/gardening (property)
A car crash causing whiplash (personal), damage to a vehicle (property) and the need to use public transport at additional cost whilst the car was being repaired (property).
A fall causing a strained back (personal), the need to spend money travelling to the hospital (property) and to pay for a private physiotherapist (property).
Medical negligence leading to an arm injury (personal) and loss of earnings (property).
An assault on a taxi driver causing a bodily injury (personal), post traumatic stress (personal), damage to the taxi (property) and an inability to work (loss of earnings – property).
A fall in the street leading to a broken arm (personal) and damage to a laptop computer (property).
A wrongful arrest (personal) where the bankrupt’s front door was destroyed in the arrest (property).
An action would be a hybrid action even if the property damages were directly connected to the personal damages – as in the second and fourth examples above.
31.9.47 Getting the bankrupt’s advisors to agree to the position in a hybrid claim
Where the official receiver is dealing with a ‘hybrid’ claim he/she should, as a first step, write to the bankrupt’s advisors, setting out the position outlined in paragraphs 31.9.42 to 31.9.45, asking them to form a view on whether the claim vests in the trustee of the bankruptcy estate, or not. Ideally, the position should be agreed.
The official receiver may use the letter attached at Annex C to this chapter for this purpose.”
8. REMEMBER THAT IF THE ACTION STARTS/CONTINUES WHILST THE CLAIMANT IS BANKRUPT YOU WILL HAVE TO RECTIFY THE SITUATION IMMEDIATELY
In Eaton it was decided that such proceedings were not a nullity. If the claimant had been litigating in the full knowledge that something was amiss it could have been an abuse of process. However the action was adjourned to allow either:
- The annulment of the bankruptcy.
- The trustee to file an application for an order substituting him as bankrupt.
- The claimant to take an assignment of the the cause of action and make an application notice for an order giving him permission to amend the claim form and/or particulars of claim to plead his right by assignment.
If any of these things did not happen within a three month period then the action would be struck out as an abuse of process.
9. THIS APPLIES TO FATAL ACCIDENT CLAIMANTS TOO
This is made clear in the Insolvency Direct manual.
“31.9.67 Claims under the Fatal Accidents Act 1976
Where a death is caused by a wrongful act or neglect such as would (if death had not ensued) have entitled the deceased to bring an action for damages, the person liable shall still be liable to an action for damages despite the death of the person [note 30]. Such a action is for the benefit of the dependants of the person whose death was caused [note 31].
An action may include (or consist entirely) of a claim for damages for bereavement [note 32]. A claim which is entirely for bereavement is personal to the bankrupt and would not form part of the bankruptcy estate. Where a claim is partly in respect of bereavement and partly in respect of a claim for financial losses resulting from the death, it would be a hybrid claim (see paragraph 31.9.43) and would vest in the official receiver, as trustee.”
10. THIS MAY NOT JUST APPLY TO CLAIMANTS BUT ALSO TO CARERS WHO GO BANKRUPT
I have seen several cases where a carer in a personal injury has been made bankrupt and the trustee has sought to claim that part of the damages which are, technically, held on trust for the carer. This highlights the importance of identifying, precisely, what the care element of a settlement is, even in circumstances where the claimant has no real interest in this because the carer does not want the damages.