BANKRUPTCY OF CLAIMANT DID NOT RENDER ACTION INVALID OR AN ABUSE OF PROCESS

In Eaton -v- Mitchells & Butler PLC (30th April 2015) (reported today on Bailli) His Honour Judge Keyser QC had to consider the effect of bankruptcy upon the validity of a claim.

“It is remarkable that the case had proceeded all the way to a two-day trial, conducted (as I am told) by leading counsel for the claimant, without the point ever being noticed.”

THE CASE

The claimant was seriously injured in August 2007. In November 2007 he was made bankrupt.  He issued proceedings in November 2010 for damages for personal injury. A defence was filed. Both sides knew of the bankruptcy. Neither side conisdered its relevance. The claimant was successful on a trial on a preliminary trial as to liability and various interim payments made thereafter.  At this late stage the defendant took a point as to the validity of the proceedings given the bankruptcy and applied to appeal the judgment on the grounds that the proceedings were invalid.

KEY POINTS

• Proceedings issued by a bankrupt were not a nullity.
• The proceedings were, potentially, an abuse of process. However the judge granted a three month adjournment to allow the claimant to regularise the position.

THE DECISION

Proceedings were not a nullity

The judge considered the law relation to this issue at length.

1. In this lengthy consideration of the cases, I have to some extent been reinventing the wheel. I think it would have sufficed to refer to a short and, so far as concerns me, binding consideration of this point by Nugee J in Munday v. Hilburn [2014] EWHC 4496 (Ch). That case was materially similar to this case. It involved the commencement of proceedings by a discharged bankrupt in circumstances where the cause of action was vested in the trustee in bankruptcy. There was a complication regarding a jointly owned cause of action, but that is not critical for present purposes. Much of the judgment concerned abuse of process but at [47] – [50] Nugee J held that the lack of a cause of action on the part of the claimant when the proceedings were commenced did not make the proceedings a nullity or, as he well put it, incurably bad. That conclusion was based on what might be called the Hendry v. Chartsearch Ltd line of authorities. Nugee J cited that case and Smith v. Henniker-Major & Co, as well as other decisions in the Court of Appeal and the High Court that I have not felt it necessary to refer to, and showed that the approach in those cases has been treated as binding and authoritative in the Court of Appeal and that it had direct application to the case before him, which is materially identical to the case before me. It is in my judgment far too late to rely on the incantation of Ingall v. Moran as an answer to what is clearly established law. In these circumstances it is unnecessary for me to say more on Ingall v. Moran, which can now be regarded as good authority only for its narrow ratio but not for its wider ratio. However, among the observations that might be made about that case I mention two. First, it related to a question of the capacity in which the plaintiff sued, which is different from the question in this case. Second, it may be that its wider ratio depended on a rule of practice that plainly no longer applies, because as the Court of Appeal has consistently recognised in recent decisions a case is not incurably bad because it relies on a cause of action that does not vest until after the proceedings have been commenced.

The claim was not an abuse of process: but the claimant needed to take steps

1. I turn to the second basis of the application, namely that the claim should be struck as being an abuse of process. It is well established that it is an abuse of process of the court for a claimant to commence proceedings or to continue them at a time when he knows that the cause of action is not vested in him. I have already referred to the relevant passages in Pickthall. In Munday v. Hilburn Nugee J held that Pickthall was authority only for the proposition that it is an abuse for a claimant to issue proceedings knowing that he does not have a cause of action at the date of issue: see [16] and [19] – [20]. Nugee J also referred to the Pathania case; at [20] he said that it was authority for the proposition that “it is an abuse not only to issue proceedings knowing that the cause of action is not vested in you but to continue them”. At [45] Nugee J referred to the case before him and said this (the italics are mine):

“It follows, in my judgment, that there was in fact no abuse of process established either in the claimant’s issuing these proceedings or in continuing these proceedings. I think it is important to add that this does not mean that the Court is powerless to stop claims going forward where a claimant in fact has no standing but due to erroneous advice of his lawyers wrongly believes he does. In order to succeed at trial, a claimant must, of course, not only show that there is a good claim vested in someone but that it is vested in him. If, therefore, it an be shown that the claim, whether good or bad, is incontrovertibly not vested in him and for that reason the action is doomed to failure, whatever its merits, the court must be in a position to stop the claim proceeding to trial. I do not see any procedural difficulty in this. The defendant in an appropriate case can apply to strike the claim out on the basis that the statement of case discloses no reasonable cause of action, see CPR rule 3.4(2)(a), or can apply for what is often called reverse summary judgment, see CPR Part 24, or can apply to have the matter determined as a preliminary issue. All that I have decided is that he cannot strike out on the basis that there is an abuse of the Pickthall type unless he establishes that the claimant either brought or continued the action knowing that the cause of action was not vested in him. Of course, if the Court rules, despite the claimant’s advisers’ best endeavours, that the cause of action is not vested in him, then it would constitute an abuse for the claimant to continue with the action thereafter, at any rate if the position could not be cured.”

1. For the defendant Mr. Mitchell accepts that the claimant did not know when he issued proceedings that the cause of action was not vested in him; it was a point that passed everyone by. However, he submits that he now knows that he has no cause of action and that it would be an abuse of process for him to continue the proceedings with that knowledge. Therefore, the proceedings should be struck out. Mr. Mitchell’s primary submission is that strike-out must follow immediately and as a matter of principle. His secondary position in the alternative is that it would be wrong to defer the matter, because there is no evidence of any realistic prospect that the proceedings can be cured. The application for annulment was made a little over five-and-a-half months ago. It has been twice adjourned. There is no evidence that the monies are available to pay the debts and expenses of the bankruptcy. There is no evidence that the trustee is ready and willing to take over the proceedings. How long, he asks, is the matter to be allowed to go on?

2. I have read and taken into account the evidence filed in support of the application to annul the bankruptcy and the evidence contained in what has been called the “bankruptcy bundle” forming one of the bundles for this hearing. Mr. Grundy accepts that there is no formal evidence before the court as to the up-to-date position. The evidence relates to the position in December last year. Mr. Grundy pretty much implied, though he stopped short of conceding, that there is no real likelihood that the bankruptcy will be annulled on 6 May. He tells me – and from him I accept – that the figure provided to the claimant’s solicitors as required to be paid for annulment is £23,529. He humorously remarked that, if the defendant were to make an interim payment on account of damages, the claimant would be able to afford the cost of obtaining annulment. Mr. Mitchell was entitled to respond with equal humour that the defendant is not required to pay for the rope for its own gallows. Mr. Grundy suggested that the claimant’s efforts to raise the funds necessary to obtain an annulment have not been assisted by the defendant’s present application. There is no evidence before me as to what efforts have been made latterly to raise money or as to the effect that the application has had on those efforts. However, it is inherently probable that the fact that there is a pending application to have the proceedings struck out as incurably bad or a nullity has been less than helpful. Mr. Grundy also said that communications with the trustee have been marked by misunderstanding and have been less than productive. He told me without demur that the claimant values his claim at about £3 million and that the defendant’s counter-schedule is about £500,000.

3. The position, in my judgment, is as follows. First, the claimant cannot be permitted to pursue the proceedings substantively, now that it is known that he has no standing to pursue them. Second, it does not follow, and there is no rule of law requiring, that the axe must fall forthwith and without delay. It is obvious that the court cannot entertain conduct that abuses its process. Nevertheless, the question of strike-out remains discretionary. Merely to say “Never mind” and to wink at the continued conduct of the proceedings without a vested cause of action would be a manifestly wrongful exercise of the discretion; as I say, one cannot allow a substantive pursuit of proceedings that would constitute an abuse. But there is no reason of principle why a stay cannot be imposed for the purpose of giving a reasonable opportunity to cure the defect in the proceedings, now that I have ruled that it is capable of cure. The authorities to which I have referred, including in particular the decision in Pathania and the judgment of Nugee J in Munday v. Hillburn, make it clear that the abuse is to allow the claimant to continue with the proceedings if the position cannot be cured.

4. There are two obvious ways in which the proceedings might be cured. The first is annulment of the bankruptcy, with a re-vesting of the cause of action in the claimant; see section 282(4) of the Insolvency Act 1986, and Nugee J in Munday at [62]. The second is substitution of the trustee as claimant. There is a third possible route of cure, namely the assignment of the cause of action by the trustee to the claimant. That would require an amendment of the claim outside the limitation period. My present view, which I express tentatively, is that that is unlikely to be a productive course. I have regard to Haq v. Singh in that regard. It seems to me likely that the correct approach would be, if there were an assignment, to require the commencement of a new claim. Two things prevent me from saying anything definitive on this point or from purporting to rule on it. First, the matter has not been the subject of full argument before me. Second, this is a personal injury claim, which might possibly raise different questions on post-limitation amendment from those which arose in Haq v Singh. The short point is that I have no such application before me and I think it imprudent to purport to rule on such an application in advance of it being made.

5. The present situation needs to be seen in the context of the proceedings as a whole; I refer to the summary given earlier in this judgment. I have regard to the duration of the proceedings, to the steps that have been taken in them, and to the unhappy oversight on the part of all that has led to the circumstances that now obtain. I have regard to the prejudice that would be caused at this stage by the loss of a perfectly good claim. On the other hand, I have regard to the prejudice that would be caused to the defendant by simply allowing these proceedings to go into prolonged limbo where they are incapable of being pursued. It seems to me that the proper course is to grant a reasonable but defined period within which, in the light of my judgment, efforts can be made to regularise the claim. A period of three months seems to me to be appropriate. The period must be long enough to enable sensible though urgent communications to take place with the trustee and to enable concentrated efforts to be made to raise funds, if that course is thought amenable now that the legal position has been clarified. I am at the present time unwilling to countenance any longer period, having regard to the time that has already elapsed since the application for annulment was made, to the lack of recent evidence, and to the nature of the further information I have received as to what has and has not been achieved since the application was made.

6. The order that I propose to make is as follows. First, I shall declare that the proceedings are not a nullity in the sense of being incurably bad by reason of the fact that when they were commenced the cause of action was vested not in the claimant but in his trustee in bankruptcy. Second, I shall declare that the continued conduct of these proceedings by the claimant will be an abuse of process unless the irregularity in their constitution, namely that the cause of action is not vested in the person pursuing them, is remedied. I shall order that, unless by 4pm on 30 July 2015 one of the following shall have occurred, namely (a) the claimant’s bankruptcy shall have been annulled and the cause of action against the defendant re-vested in him or (b) the claimant’s trustee in bankruptcy shall have filed an application notice for an order substituting him as claimant or (c) the claimant shall have taken an assignment of the cause of action and shall have filed 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, the claim shall stand struck out as being an abuse of process. As I hope I have made clear, an order in those terms does not purport to be a predetermination of either of the possible applications mentioned.

1. For these reasons, the application to strike out the claim as being a nullity must fail.