IN THE HIGH COURT OF
JUSTICE
CHANCERY DIVISION
Royal Courts
of Justice
The Strand
London WC2A 2LL
Wednesday 23 May 2001
B e f o r e:
_____________________
_____________________
MR DAVID MARKS (instructed
by Messrs Isadore Goldman) appeared on behalf of THE APPLICANT TRUSTEE
MR J LITTMAN (instructed by Messrs Charles Crook & Jones) appeared on behalf
of THE DEFENDANT
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This is an application by Mr Solomons, the Trustee in Bankruptcy of Mr Williams who is now a discharged bankrupt, for the payment to the trustee of the sum of £68,798 odd received by Mr Williams in consequence of the settlement of certain proceedings. In order properly to understand the background to this application it is necessary to go into the circumstances in some detail.
On 29 October 1990 American Express (Europe) Ltd started proceedings against Mr Williams in respect of a debt owing to them of £10,000. On 20 November 1990 they obtained judgment against Mr Williams for £10,602.71, together with costs. A statutory demand in the usual form was served on Mr Williams on 11 January 1991.
On 18 March 1991 a petition was presented, made returnable on 13 May 1991 at 10am in the sum of £8,362.
Before the hearing of the petition, Mr Williams instructed a firm of solicitors called Pictons to attend on his behalf at the hearing of the petition and to pay off the petitioning creditor. He gave, so far as the evidence goes, Pictons sufficient funds, £8,362, plus £100 in relation to their expenses, to carry out this operation. It must be accepted that if Pictons had turned up on the hearing of this petition and had tendered the petition debt to the petitioning creditor, the petition would have been dismissed. Inexplicably (at least so far as these proceedings are concerned), they failed to attend and the bankruptcy order was made.
On 13 May 1991, the Official Receiver wrote the usual letter requiring the bankrupt to attend for interview on 21 May.
On 27 May 1991, Mr Williams had an interview with the relevant person at Pictons. At that interview he was advised to instruct other solicitors. It seems clear that he was advised by Pictons that he had a claim (or a potential claim) against them. On 29 May 1991 he took advice from a firm called Turner and Debenhams (to whom I shall refer hereafter as "Turners") in relation to the bankruptcy. It appears that Mr Williams gave Turners instructions to take proceedings either to annul or to review the bankruptcy order. The preparation for such an application went as far as the preparation of a draft witness statement for Mr Williams, which is before me, dated 31 May 1991, which explains the circumstances in which the bankruptcy order had been made. In that witness statement Mr Williams sets out in summary his financial position. He says that he has paid Pictons by way of two cheques drawn on his company, Hybrid Concepts Ltd. He says that the solicitor at Pictons had said he would attempt to negotiate a reduction in the petition debt with American Express and make arrangements for payment over a period of time.
For reasons which do not directly appear from the papers before me, Turners took no steps to apply either to annul the bankruptcy under section 282 of the Insolvency Act 1986 or to take any proceedings for its review.
The chronology moves on to the steps which Mr Williams then took. It appears that during 1991 he was contemplating an individual voluntary arrangement. It is plain that by 5 September 1991, when he wrote to his trustee, he was contemplating an annulment of the bankruptcy on the basis of an IVA proposal. The letter says this:
I do indeed intend to seek annulment of my bankruptcy on the basis of a voluntary arrangement with my creditors. You will shortly be hearing from David Pilgrim, solicitor, of Pilgrim Hales & Company, 54 Harper Street, Bedford in respect of this application. I have also had preliminary meetings with Messrs Booth White of Watford with a view to preparing the necessary documentation.
Accordingly, by this stage any annulment of the bankruptcy was contemplated to be in the context of an IVA. It has been suggested to me by Mr Marks, who appears on behalf of the trustee, that the reason for this was that any annulment or review would have failed in all probability because it would not have been possible for Mr Williams to demonstrate solvency. That may or may not be the case but, for whatever reason, the proposal for the IVA did not go ahead.
By April 1992, Mr Williams had, understandably, considered claims against both Pictons and Turners. He was advised by counsel that Pictons had been negligent, but that damage to his companies which flowed from the consequences (as Mr Williams put it) of his insolvency would be difficult to prove. In a written opinion dated 8 April 1992 (wrongly dated 8 April 1991), counsel said this:
There are formidable hurdles to be overcome if the second area of damage is to be recoverable. The first is that of causation. I note that Mr Williams was not in fact registered as director of Hybrid Concepts Limited. Further, I note that both Hybrid and John Williams Marketing Limited were able to continue trading after Mr Williams was adjudicated bankrupt. It may therefore be difficult to argue that either company was prevented from pursuing the project by reason of the adjudication alone.
It was always the position that Mr Williams' case is that he has suffered very substantial losses caused in large part by prejudice arising from Mr Williams' insolvency, including the withdrawal of various supporters of that company's projects caused to Hybrid Concepts Ltd.
In his opinion, counsel advised as to the ownership of the causes of action against the solicitors. In paragraph 21 of his opinion he said this:
I am also asked to consider whether there is any impediment to Mr Williams commencing proceedings at this stage. There are two. The first is procedural. An undischarged bankrupt may commence an action personally in respect of any cause of action arising after his adjudication until such time as his trustee intervenes. The present cause of action, whether pleaded in tort or contract, arose before the adjudication. If the cause of action arose before the adjudication, then the bankrupt may only pursue personal claims, which have no immediate relation to the value of his estate. For these purposes the present claim has two aspects. The first, the pecuniary damage suffered by Mr Williams' estate vests in the trustee. The second, the injury caused by mental distress remains personal to Mr Williams. It follows that while the claim for damages relating to mental distress may be pursued by Mr Williams personally, the claim for pecuniary damages must be pursued by the trustee.
The second impediment is a practical one. At present the loss suffered by Mr Williams in trying to discharge the bankruptcy is continuing. This part of his claim cannot yet be quantified. It would not be prudent to commence proceedings until such time as the extent of this loss becomes clear, although the limitation period should be kept firmly in mind.
Counsel's advice concentrates on the position of Messrs Pictons and says nothing explicitly about Turners. So far as the law as then understood is concerned, I do not think it is suggested that that advice can be criticised. The advice was that so far as Pictons were concerned, the cause of action in negligence arose before the bankruptcy. It was therefore an existing cause of action and, save insofar as it related to Mr Williams' personal distress caused by the bankruptcy, it vested in the trustee. As the law is now understood, in those circumstances the whole of the cause of action is vested in the trustee and the trustee will account to the bankrupt in respect of that part of the claim which is purely personal: see Ord v. Upton [2000] 2 WLR 755.
I should record that in cross-examination which took place before me at the hearing of this application Mr Williams said that by 1997 he had forgotten that this advice had been given by counsel back in 1992.
It appears that in fact there was a substantial deficiency in the bankruptcy since the final report of the trustee identifies unsecured creditors in the sum of £64,345 and states that after taking into consideration the costs of the bankruptcy there will be insufficient funds available to pay any distribution to the unsecured creditors. There appear to have been two principal reasons for this. The first is that, although the statement of affairs prepared at the outset of the bankruptcy valued Mr Williams' jointly owned house at £215,000, the depression in the property market at the beginning of the 1990s had the effect of devaluing this asset. The mortgagees obtained a possession order and sold the property for £172,000. This price was insufficient to discharge the mortgage borrowings and there was accordingly no surplus available for the bankruptcy.
In August 1992 Mr Williams' then trustee, Mr Thompson, wrote to Mr Williams' solicitors, Taylor Walton. Plainly there had been a preceding telephone conversation. First, he refers to a previous letter of 28 July 1992, which I do not believe has been made available to me. Mr Thompson then said:
I have read counsel's advice and note that he considers any legal action started in respect of events which occurred before the bankruptcy order would need to be taken in the name of the trustee. Events which occurred after the date of the bankruptcy order could be taken up by Mr Williams. A claim for pecuniary damages, which would have occurred pre-bankruptcy, would have to be pursued by the trustee, whereas the claim for damages relating to mental distress would be considered to be post-bankruptcy and therefore could be started by Mr Williams. It is my understanding that if any action was started by the trustee he would not be entitled to legal aid. There is at present a balance in hand of approximately £6,000. It is the duty of a trustee to maximise assets for the benefit of creditors. Any court action would only be considered by a trustee if the merits of the case were very strong and benefit creditors. I intend to write to the petitioning creditors, American Express, in order to ascertain the relevant facts and dates prior to the granting of the petition. When I have this additional information to hand, I will review the matter with my solicitors in order to ascertain the merits of the case.
On 16 September the trustee wrote again to Mr Williams' solicitors saying that he had not yet received the information required from American Express.
In the interim it is not clear what happened, but by 15 March 1994 it is clear that Mr Williams' solicitors had come to the conclusion that it was prudent to obtain an assignment of the causes of action from the trustee. They wrote on 15 March 1994. The first paragraph of the letter indicates clearly that there are now sets of proceedings in contemplation:
As you will be aware from our previous correspondence, we are instructed by Mr Williams in relation to two prospective negligence actions against separate firms of solicitors. These claims arose out of events causative of, and succeeding on, his adjudication as bankrupt. Mr Williams' particular concern in instructing us to write to you is that the cause of action against Messrs Pictons being a pre-bankruptcy matter if presently vested in you as trustee in bankruptcy. Given the very reasonable prospects of success in any action, Mr Williams is understandably very keen to proceed as soon as possible. However, in order to reach the stage at which proceedings can be issued, a considerable amount of further work is required, especially by Mr Williams himself. The litigation itself would be very time-consuming for Mr Williams. He needs to ensure that his efforts are rewarded in lieu of attempting to earn a living. He has instructed us to propose that any claimants currently vested in you as trustee might be assigned to him. Mr Williams accepts that he may be unwilling to consent to such a consignment in the absence of a provision for the benefit of Mr Williams' creditors. We would suggest that this benefit could be in the form of a percentage of any award of damages which Mr Williams ultimately obtains. In the circumstances you are agreeable to an assignment to Mr Williams of any actions presently vested in you, Mr Williams would agree to a reassignment of a proportion of all or any awards relating to pre-bankruptcy claims. As you confirm in your letter of 4 August 1992, any post-bankruptcy claims are vested in Mr Williams himself.
The letter concludes with a request to seek the agreement of the creditors, having regard to the provisions of Part I of Schedule 5 of the 1986 Act.
On 21 March 1994, Mr Thompson wrote back to Mr Williams' then solicitors saying that he noted the contents of the letter, but that he had completed the administration of the bankruptcy in 1993 and been released at the final meeting of creditors on 12 July 1993. He told the solicitors that, following his release, any remaining responsibilities in the bankruptcy revert to the Official Receiver and in this case the Official Receiver's office in St Albans. The letter concludes:
However, I note that the bankruptcy order against your client was made on 13 May 1991 and the bankrupt can normally expect to obtain automatic discharge of the bankruptcy on the third anniversary of the date of the bankruptcy order which will be 13 May 1994.
That is indeed what happened.
There is nothing in the correspondence to suggest that Mr Williams' then solicitors took the matter up with the Official Receiver.
The proceedings against the two firms of solicitors were finally commenced in 1995. The Statement of Claim was served in October 1995 and the defence was served in February 1996. The Statement of Claim shows that instead of the two actions contemplated, this was a single action against Pictons and Turners. So far as Pictons were concerned, their negligence was said to reside in their failure to compromise the claim from American Express in a manner which they had said they would, and, secondly, to fail to turn up in the manner which I have indicated on the hearing of the petition in order to discharge the petition debt.
So far as Turners were concerned, their negligence is said to reside in the failure to seek review or rescission of the bankruptcy order under section 375 of the 1986 Act. I think it has been common ground (at least in the discussions before me) that included in this pleading is a failure to make an application to annul under section 282 for what it is worth.
The particulars of loss and damage are as follows. First of all, a failure to develop a product line for digital television signal processing. It said that Mr Williams lost potential investors, including Merthyr Borough Council, British Steel Industry Limited and British Coal Enterprise Limited. There is no explicit reference to Mr Williams' companies, but it is common ground that that development would have been made through the medium of one or other of the two companies.
On 27 February 1995, before the proceedings were started, Mr Williams had been advised by counsel that there was a question of ownership of the cause of action, at least so far as Pictons were concerned. The note of the conference with counsel which took place on 27 February 1995 is so far as relevant as follows:
JC [counsel] asked why no application had been made to annul the bankruptcy order. MR [the solicitor] explained to JC the involvement of Turner and Debenhams which then led on to the question of the advice given by previous counsel, with Mr Williams observing that it had been the previous counsel who had suggested an action against Turner and Debenhams. Of course, Mr Williams had been prevented for the duration of his bankruptcy from suing Pictons because this was a pre-bankruptcy cause of action which required the trustee in bankruptcy's authority. This had not been forthcoming. Counsel was unclear as to the sequence of events leading to the instruction of previous counsel by Taylor Walton. Mr Williams explained that his solicitors predecessor had instructed previous counsel because he had been the barrister originally dealing with the matter. It was then explained how Turner's error or omission had amounted to negligence. Counsel asked why proceedings had not been instituted against Turner and Debenhams, and in particular why Turner and Debenhams had not been sued in the same proceedings with Pictons. Mr Williams again explained the rationale behind the separate treatment of the two defendants. Counsel advised that Turner and Debenhams should be joined. He also advised this was confirmation of his advice that a summary judgment application would not succeed.
In evidence before me, Mr Williams did not accept that it had been brought home to him that he did not own the cause of action against Pictons.
On 23 April 1996, Pictons made a payment in in the proceedings. This was a negligible payment in of some £150. On 9 September 1996, Mr Williams was again advised by junior counsel that he had a good claim which should not be surrendered, except to a substantial award of damages. Counsel advised:
Whilst it does not affect the advisability of Mr Williams proceeding with his claim, which represents a claim in excess of £1.2 million, an interesting point arises as to whether any damages awarded to Mr Williams should be apportioned as between the first of solicitors. The first firm caused his bankruptcy. The second firm failed to retrieve him from the position that the first solicitors got him into. Put in layman's terms, one firm of solicitor got him into a mess and the other firm failed to get him out of it. It seems to me at least arguable that the firms of solicitors may be jointly and severally liable for the damage with, if anything, a stronger claim against the first firm of solicitors, Pictons.
The final paragraph of the opinion under the heading "Generally" state:
It is my view that the Legal Aid Board would be entirely justified in supporting this claim to trial unless and until a substantial sum is paid into court on behalf of the firms of solicitors.
The trial was fixed for 1 July 1997. On 6 May 1997, Mr Williams took the advice of leading counsel. Leading counsel said that there was a strong case against Pictons for negligence and breach of contract; that paragraph 7(2) of the Statement of Claim, which I have not quoted, which relates to the agreement for stage payments was very weak, but that the claim for failure to turn up would succeed. Leading counsel also advised that he had more doubts about the claim against Turners. He was also concerned about the claim for damages since he considered that Mr Williams' claim was essentially for loss caused to the companies, and in particular Hybrid Concept Ltd, and he considered (as I understand the note of the conference) that the expert's report on this subject was "castles in the air".
On 16 May 1997, a much more substantial payment in was made. It was unapportioned between the solicitors and between the various causes of action against the solicitors and was of £100,000. Mr Williams took the further advice of leading counsel in conference. His previous leading counsel had by then left the Bar. On 30 May 1997, leading counsel advised that she considered that it would be easy to prove negligence against Pictons; that the problem was one of causation (from which I infer also that the problem was one of loss). In relation to Turners, she advised that there was a better than 50% chance of proving negligence and pointed out that Turners knew full well that it was of the utmost importance to protect Mr Williams by having the bankruptcy order annulled. She referred to grounds advanced by Turners for saying that the bankruptcy order would not have been annulled or probably also reviewed for a number of reasons, but expressed the view that there would be a more than 50% chance of persuading the judge that there would have been success in an application either to annul or to review. A passage follows in the attendance note which is of some significance:
Mr Williams confirmed that he was no longer in receipt of state benefits. He said that he is getting his Wembley accountant to deal with the issue of the taxation. One problem which was acknowledged is that no one knows how the £100,000 is to be attributed, ie whether the majority is attributed to Pictons' negligence or to that of Turner and Debenhams. It is possible that we could apply for an extension of time for acceptance of the payment in on the basis that it is embarrassing. However, this will probably gain no benefit for Mr Williams and he might then be responsible for the extra costs of the Legal Aid taxation.
The question arises as to why this was an issue at all if Mr Williams was unaware of the fact that Pictons cause of action vested in his trustee. Mr Williams told me that he did not understand why apportionment as between the two firms of solicitors was a problem. On 2 June 1997, he wrote a letter to his solicitors, the material part of which is as follows:
I am, however, aware that the intention of 21 days' grace to consider the payment into court is intended to give a reasonable period to consider the options. Whereas I confirm my instructions that I wish to accept the offer, I request you to examine further any means of having it increased. Significant expenditure has been incurred by Richard Ellis in preparing his brief interim report and by Derek Parry in responding to the defendant's report. This expenditure will have been wasted if no use is made of the results. Accordingly, I would ask if these papers, even in their current form, might not be disclosed as a negotiating lever, be it all too little too late. I am encouraged by leading counsel's opinion that Pictons' admission of liability can be used to justify apportioning a large part of the damages to Turner and Debenhams, reducing to a minimum my exposure to the official receiver. Leading counsel is prepared to state this in written advice, together with ide ntification of the nature of the damages for Inland Revenue purposes. I will provide you with my accountant's opinion on the damages' question later today. I am confused by junior counsel's comment about threatening the Official Receiver with apportioning of costs and would be pleased to have solicitor's understanding on this. In conclusion, I refer to our discussion last week in respect of the amount to be withheld from the £100,000 by your firm for payment of immediate costs. I understood from you that this sum would only be retained till such time as it was received from the defendants. I now understand there is some doubt as to whether full payment of costs will be received and that I will be expected to pay any shortfall. I would be pleased to receive clarification on this matter.
The question about apportionment as between the causes of action against the two firms of solicitors is a matter which had concerned Mr Williams for some time. On 14 May 1997, Taylor Walton, his solicitors, had written to the Official Receiver:
As you will know from previous correspondence, we act for Mr Williams. Following his discharge, proceedings for negligence and/or breach of contract were commenced against Pictons who acted for Mr Williams in connection with the bankruptcy proceedings brought against American Express and Turner and Debenhams who were consulted with a view to applying to the court to have the bankruptcy annulled. The proceedings are now well advanced and the trial has been fixed for 1 July. Our client has the benefit of a legal aid certificate to pursue these actions. The purpose of this letter is to ask you to confirm that should out client be successful he need not account to you for any damages which he may be awarded.
There is an attendance note of a telephone call with Mr Williams some six days later. The solicitor records this:
I explained to him the significance of payments into court and said that I would be writing to him as well to further explain this. I said that he should not overlook the potential claim of the Official Receiver. If the Official Receiver does not wish to claim any monies, John said that he was minded to accept the £100,000, not because it was a reasonable amount, but because of the stress that this case is causing him. I said I would get in touch as soon as I heard from the Official Receiver. I thought that even if the Official Receiver did maintain a claim, he could not possibly maintain a claim for the full £40,000 or whatever it is that he needs to pay off the creditors in full and I explained why (see subsequent letter for details). I said that perhaps offering him £10,000 with him keeping £90,000 might be a solution.
I should pause here to observe that it seems perfectly clear that the Official Receiver had been told about the two distinct sets of proceedings at this stage.
A point which was not clearly argued in front of me, but which seems to me to be of immediate relevance, is whether the after-acquired property in this case was the cause of action against Turner and Debenhams, in which case the notice should have been given (as I will come to later) within 42 days of the date on which it became clear that the Official Receiver had been told about the proceedings against Turners. I shall return to this topic when I come to consider the section 307 notice.
Mr Williams said in evidence before me that he did not accept that the attendance note accurately reflected the terms of the advice which he had received in that telephone call. In particular, he did not accept that it had been communicated to him that there was a potential claim by the Official Receiver.
His solicitors wrote again to him on 20 May, the same day as the telephone call, and made the position clear as follows:
You must not forget, too, that in this case there is the potential claim by the Official Receiver. I wrote to him last week to ask him to confirm that he would not be claiming any part of the damages which you recover, but have yet to hear from him. If he does not agree to waive his claims, then we will have to argue that he will only be entitled to a small portion of any damages you recover, partly because he has not invested any costs in the action and partly because it can, it seems to me, be fairly argued that a proportion, perhaps even the larger proportion of the damages are attributable to Turner and Debenhams' negligence rather than Pictons'. The action against Tuner and Debenhams is a post-bankruptcy cause of action and I do not believe it can be said to relate back to the date of the bankruptcy. If this is right, and this is something we will have to ask junior counsel to advise on, then any damages attributable to Turner and Debenhams' negligence will not be the subject of any claim by the receiver.
Mr Williams told me in his oral evidence that he considered that this advice reflected the "nuisance value" of a claim by the Official Receiver. A further attendance note from 22 May 1997 records that Mr Williams said he would be prepared to accept £95,000 -- in other words, £5,000 to the Official Receiver, if there is still a claim by him with the balance to him. That goes some way to confirm the evidence that Mr Williams gave me.
On 23 May, the following day, there was further advice from the solicitors by telephone. This attendance note records:
Mr Williams is certainly moving towards the point where he is seriously considering a settlement and not taking the matter to court. If Mr Williams could clear £100,000 he would certainly accept it, he says. I said that I had tried to get hold of the OR today and had not been able to, so we were still not sure whether he would be making a claim. Although I have not checked the figure, he tells me that the maximum claim would be £43,000 and in my view it is very unlikely that they would be entitled to claim this amount The tax aspect was more complicated, but I thought it likely that at least £ 70,000 of this sum would be liable to tax, probably at 40%. What we therefore needed to do is to try and persuade the defendants to give a tax indemnity.
The figure of £43,000 came from the estimated deficiency in the IVA. On 27 May 1997, Mr Williams' solicitors pressed the Official Receiver for an answer to the letter which I have quoted.
My findings as to Mr Williams' state of mind are these. At the date of the payment in -- indeed, at all material times -- he was aware of a potential claim by the Official Receiver or by his trustee in relation to the cause of action against Pictons. This was because the cause of action was vested, as Mr Williams understood it, in the trustee. Mr Williams suggested that he was not concerned since the trustee had shown no interest up till then in pursuing it. For that he relied particularly upon the early letter from KPMG Peat Marwick McLintoch, which I have quoted, on 4 August 1992. I do not find that there was any consciousness at all of the possibility of a notice under section 307 of the Insolvency Act in relation to the claim against Turners. It seems to me that there was a general understanding that post-bankruptcy causes of action vested in Mr Williams. That is why Mr Williams was so anxious to attribute as much as possible of the payment in to the Turner & Debenhams' cause of action.
The evidence is not entirely satisfactory on this aspect of the case and I have paid, I hope, proper attention to the answers which I was given by Mr Williams in cross-examination. I do not accept, however, the other contention which was advance on his behalf to the effect that he thought that it was more likely than not that the trustee was not interested in the Pictons' cause of action or that the trustee had shown little interest in it. It seems to me that the anxiety which is visible throughout the correspondence to which I have referred in relation to the Pictons' cause of action shows that it was regarded as a real problem. Indeed, the extent of the problem becomes clear since leading counsel was actually required to advise as to an apportionment and as to the strength of the respective causes of action when she advised on the settlement.
The advice in writing on the subject need only be quoted as to paragraph 9:
By the time of the conference the defendants had already rejected the counter-offer. The merits of the case on the available evidence were discussed in full with the client. In essence, my advice was that such losses as the client may prove were likely to be held to have been caused by the negligence of Turner and Debenhams rather than by the admitted negligence of Pictons. There was, in my view, considerable merit in Pictons' argument that although the client was adjudicated bankrupt as a result of their negligence, the effective cause of the client's losses, if any, was the negligence of Turner and Debenhams who had a duty to act, and should have acted, to have bankruptcy annulled, but completely failed to do so.
It has been objected in submissions before me, I think with some justification, that that paragraph, and indeed the remainder of the opinion, does not pay any attention to the likelihood of success of an application to annul or to review in the circumstances of this particular case, absent an IVA. Be that as it may, the trustee accepts that no apportionment to the Pictons' cause of action greater than 50% should in any event be made.
On 26 June there was a notice of acceptance of the payment in. The payment in had been received and paid over to Mr Williams by 30 June. On 15 July the Official Receiver replied to a letter from Mr Williams' solicitors of 24 June as follows:
As you will appreciate, this is a fairly complex matter and advice is currently being sought to determine whether the Official Receiver's ex officio trustee has a claim to all or any part of the amount of £100,150 recently paid into court.
He promised to keep the solicitors informed.
On 17 July the Official Receiver wrote again, requesting further information as follows:
(1) Did your client accept the sum of £100,150 in full and final settlement of his claims against both defendants?
(2) Did the trial fixed for 1 July 1997 take place? If so, what was the outcome of the hearing and have the proceedings been concluded?
(3) I note from the advice on settlement that the payment into court was by both defendants. Are you able to split the figure to show how much each party contributed?
(4) Finally, if the sum of £100,150 has been accepted as a full and final settlement, is there any basis by which portions of that amount can be attributed to different causes of damage? I am particularly concerned to differentiate damage to the person from sums arising from loss or damage to property. This might include loss of earnings. I note that in your letter to KPMG Pete Marwick, dated 15 March 1994, you conceded that the cause of action against Messrs Pictons being a pre-bankruptcy matter is presently vested in our as trustee. You went on to request on behalf of your client an assignment of the relevant claims and proposed a percentage of any resulting damages to be contributed for the benefit of the bankruptcy creditors. Mr Anthony Tott of KPMG responded by informing you he was no longer trustee and referred you to the Official Receiver. Can you please therefore let me know on which date you first brought this matter to the attention of the Official Receiver? The right of action would continue to vest in the trustee, irrespective of Mr Williams' discharge from the bankruptcy. In view of the fact that no assignment of th e right of action took place, it may be the case that apportionment of the damages received by your client should be contributed to the benefit of the bankruptcy creditors. This would depend in part on the nature of the damages received.
The reply, which was sent on 13 August, is as follows. As to the numbered paragraphs it is pointed out that the sum was accepted in full and final settlement; that there was no trial; that the payment in full was by or on behalf of both defendants and that it was not possible to split the payment to show how much each defendant contributed. The Official Receiver was referred to counsel's advice for the question of attribution. The letter concludes:
From a review of our files, it appears that the date on which we first brought this matter specifically to the attention of the Official Receiver was by our letter dated 14 May 1997. It is appreciated that, as you state, the right of action will continue to vest in the trustee, irrespective of Mr Williams' discharge from bankruptcy. It is, however, understood that the damages received by our client cannot be used for the benefit of bankruptcy creditors unless the Official Receiver contributes to the cost of bringing the proceedings. Despite our request in 1992 to the trustee in bankruptcy that he confirm whether proceedings would be brought on our client's behalf, he finally informed us in March 1994 he was no longer trustee. Proceedings were thereafter commenced against Pictons and shortly after that Turner and Debenhams were joined as second defendant.
A request is made for a contribution to the costs of the action.
Mr Solomons was then appointed trustee in place of the Official Receiver who had been acting as ex officio trustee. On 15 September 1997 the section 307 notice was served. The service of the section 307 notice was well outside the time limit fixed for service of such a notice in relation to the damages paid to Mr Williams. The period is fixed by section 309 of the 1986 Act as 42 days, unless extended by the court. Accordingly, permission of the court is required under section 309 of the Insolvency Act 1986 for the extension of time for this notice to take effect in relation to the damages as after acquired property.
It was submitted on behalf of Mr Williams that although the general power under section 376 of the Act to extend time is expressly stated to be capable of exercise either before or after the time limit has expired, that is not the case in relation to the time limit under section 309. Section 309 provides:
(1) Except with the leave of the court, a notice shall not be served under section 307 after the end of a period of 42 days beginning with the day on which it first came to the knowledge of the trustee that the property in question had been had been acquired by or had devolved from the bankrupt.
Section 376 provides:
Where, by any provision in this group of Parts or by the rules, the time for doing anything is limited, the court may extend the time either before or after it has expired on such terms, if any, as it thinks fit.
Section 309 is in the same group of Parts as section 376 and there seems to me to be no reason why I should not give section 376 its plain meaning. I conclude that the time under section 309 is capable of extension with the permission of the court, even after it has expired.
I have first to identify the relevant period of time. It seems to me that this is the period down to the application to extend time.
In Phelps v. Spen-Smith (1.5.2000), a decision of Mr Peter Whiteman QC, sitting as a Deputy Judge of the Chancery Division, of which I have been given a transcript, in paragraph 61 Mr Whiteman, dealing with the question of various chose in action sought to be "clawed back" under section 307 of the Act, said:
In my judgment, the proceeds of such a cause of action would be equated with the cause of action itself. Therefore as the cause of action was in existence at the date of the bankruptcy order, the cause of action and the proceeds thereof would not constitute after acquired property: see Trustee of the Property of Jones v. Jones [1997] Ch 159. That the proceeds from the causes of action were not after acquired property as they derived from causes of action which pre-dated the bankruptcy order is thus a point which the claimant could have taken against trustee in bankruptcy if the latter had sought to recover them as after acquired property.
It seems to me that that reasoning operates equally in relation to the cause of action itself. The after acquired property in the action against Turners was not the damages but was the cause of action. That cause of action accrued, and was drawn to the attention of the official receiver one month before the receipt of the damages as the correspondence which I have quoted above makes clear. Accordingly, the application here is to extend time not for a period from the receipt of damages down to the date on which the section 307 notice was in fact given, but a somewhat longer period, by an application made more than two years later.
I think it is accepted on all sides that, as it is expressed in Muir Hunter at page 3157, paragraph 3996, under the heading "Extension of Time Limits under this section and section 376" (this is a footnote to section 309):
As observed above, the time limits in this section are important from the point of view both of the bankrupt and the persons dealing with him. The opening words of subsection (1) 'except with the leave of the court' seem to be exclusively directed to the question of the time limits and would permit their extension presumably only for good cause shown. The question then arises whether the very wide and unspecific power under section 376 to extend time limited for doing anything before or after it expired should be read as operating in tandem with the opening words of subsection (1) or the latter provisions should be regarded as the sole source of the power to extend time.
No answer is in fact provided to that interesting question but does not need to be. It seems to me that "good cause" must have reference to the circumstances of the particular bankruptcy. The relevant factors include the period of delay both in serving the notice under section 307 and seeking an extension of time; the merits of the application having regard to the overall position of the bankrupt; the prejudice caused to the bankrupt by the lateness of the application; and the reasons for the delay. Accordingly, it seems to me that a substantial deficiency or a bankruptcy in which there is no dividend, as there was no dividend in this case, for the unsecured creditors is, on the face of it, a good reason for making an order under section 307. Such an order should not, however, be made if it causes prejudice to the bankrupt which is disproportionate to the advantage conferred on the creditors.
That brings me to what I regard as the most difficult point on the facts. I have referred to the former trustee's letter of 4 August 1992, where he refers to counsel's advice, which can only be the advice of the first junior counsel instructed, which does not refer to the action against Turners. I have also referred to the letter to the letter from Mr Williams' solicitors on 15 March 1994 and to the response from the trustee in pointing out his ceasing to act on 21 March 1994. However, it seems to me that the letter of 14 May 1997 makes the position quite clear. The previous correspondence referred to in the letter of 14 May 1997 is no doubt this earlier correspondence. In those circumstances, the latest possible date for the acquisition by the relevant knowledge of the Official Receiver is 14 May 1997. Thus the exercise of the power under section 307 was too late, having regard to the date of that letter to the Official Receiver. The suggestion that the delay in seeking a retrospective extension of time is attributable to the investigations being carried out by the Trustee and to his attempts to obtain funding for proceedings is no doubt correct. But Mr Williams' solicitors had made it quite clear that they considered that the section 307 notice was out of time from the outset, and no intimation of an application for a retrospective extension was given until these proceedings were started, a substantial delay on any view.
By the time the application for a retrospective extension was made, Mr Williams had spent the money. I consider that in those circumstances it would not now be right for the trustee to rely upon his section 307 notice. I therefore refuse permission to extend time.
That leaves the position of the cause of action against Pictons which, it is common ground, vested in the Official Receiver as pre-bankruptcy property. In my view, the contention advanced by the trustee that 50% of the settlement is attributable to that cause of action is, if anything, very generous to Mr Williams. Since the trustee has quite clearly accepted that 50% only of the settlement is to be allocated to the cause of action against Pictons, I consider that at this stage the trustee has a claim against Mr Williams in relation to 50% of the settlement monies received only.
I now come to the nature of the relief which is sought against Mr Williams. Mr Marks on behalf of the trustee puts his claim firmly upon Trustee of the Property of Jones & Sons .v Jones [1997] Ch 159. This much-discussed case is concerned with the treatment of the profits arriving from the exploitation by the bankrupt of money vesting in the trustee. The facts of the case can be taken from the headnote:
In 1984 a firm of potato growers got into financial difficulties and the partners committed an act of bankruptcy. Judgment creditor presented a bankruptcy petition. A receiving order was made. In November 1984 the partner was adjudicated bankrupt. After the act of bankruptcy, but before the adjudication, the defendant, the one of one of the partners opened an account with commodity brokers in order to deal in potato futures and paid in the proceeds of cheques totalling £11,700 drawn by her husband on a joint bank account in his name and that of one of the other partners. The defendant received £50,760 from her dealings, which were paid into a deposit account with a banker. The Official Receiver, relying on sections 37 and 38 of the Bankruptcy Act 1914 informed the banker of his claim to the money in the account and the defendant immediately demanded its release to her. There was an interpleader and the money was paid into court. The judge ordered the money to be paid out to the trustee.
The principal judgment of the Court of Appeal is that of Millett LJ, with whom Nourse and Beldam LJJ agreed. Millett LJ accepted that the defendant, Mrs Jones, had not become a trustee of the money which she had withdrawn from the account since she had no title to it at all. He did not accept the proposition that for that reason the trustee was unable to recover the profits which she made from her dealing in the money which she did not own. At page 167D he said:
The defendant was not a constructive trustee. She had no legal title to the money. She had not title to it at all. She was merely in possession, that is to say in a position to deal with it, even though it did not belong to her. Counsel for the defendant says that it follows that she cannot be made liable to any kind of proprietary claim.
Millett L.J. referred to the authorities cited to support that proposition. He continued:
But those were cases in which the payment was valid when made and passed a good though defeasible title to the recipient. He obtained legal title to the money and, since he was not a trustee, equitable title as well.
In this case had I been prepared to extend the period of time in relation to the Turners claim, this would have been a case in which a good but defeasible title to the damages would have passed to Mr Williams, and there would have been potentially a remedy by way of equitable tracing since, for reasons which I shall indicate briefly at the end of this judgment, I consider that Mr Williams owed a fiduciary duty in any event sufficient to support a tracing claim by his trustee. However, that point does not arise since I have not permitted the power under section to be exercised late. Millett LJ continued:
If he made a profit from the use of his own money, he is entitled to keep it. If he became bankrupt the money would form part of his estate and the debtor's trustee would have to prove in his bankruptcy the amount claimed. The present case is entirely different. The defendant had no title in law or in equity. If she became bankrupt the money would not vest in her trustee. But this would not be because it was trust property, it would be because it was not her property at all. If she made a profit, how could she have any claim to the profit made by the use of someone else's money? In my judgment, she could not. If she were to retain the profit made by the use of the trustee's money then in the language of the modern law of restitution she would be unjustly enriched at the expense of the trustee. If she were a constructive trustee of the money, a court of equity as a court of conscience would say that it was unconscionable for her to lay claim to the profit made by the use of her beneficiary's money. It would, however, be a mistake to suppose that the common law courts disregarded considerations of conscience. Lord Mansfield CJ, who did much to develop the early law of restitution at common law, founded it firmly on the basis of good conscience and unjust enrichment. It would, in my judgment, be absurd if a person with no money at all were in a stronger position to resist a proprietary claim by the true owner than one with a bare legal title. In the present case equity has no role to play. The trustee must bring his claim at common law. It follows that if he has to trace his money, he must rely on common law tracing rules and that he has no proprietary remedy. But it does not follow that he has no proprietary claim. His claim is exclusively proprietary. He claims the money because it belongs to him at law or represents profits by the use of money which belonged to him at law. The trustee submits that he has no need to trace since the facts are clear and undisputed. The defendant did not mix the money with her own. The trustee's money remained identifiable as such throughout. But of course he does have to trace it in order to establish that money that he claims represents his money.
The next stage of Millett LJ's analysis demonstrates how the assets then in the possession of Mrs Jones represented the sum of £11,700.
Counsel for the defendant acknowledges that the trustee can successfully trace his money into her account at Raphaels whose concession in respect of the £11,700 acknowledges this. I do not understand how his concession that the trustee is entitled to £11,700 of the money in court is reconcilable with his submission that the only course of action available to the trustee is an action for money had and received. I say this for two reasons. In the first place the trustee has never brought such an action and any such action will now be long out of time. In the second place, in an action for money had and received, it would be irrelevant what the defendant had done with the money after she had received it. Her liability would be based on her receipt of the money and she would be personally liable to a money judgment for £11,700. But while the trustee would be entitled to a money judgment for that sum, he would not be entitled to any particular sum of £11,700 such as the money in court in specie. But in my judgment the concession that the trustee can trace the money at common law is rightly made. There are no factual difficulties of the damage proof fatal in this court to the common law claim in Agip v. Jackson [1991] Ch 547. It is not necessary to trace the passage of the money through the clearing system or the London Potato Futures Market. The money which the defendant paid into her account with the commodity brokers represented the proceeds of cheques that she received from her husband. Those cheques represented money in the bankrupt's joint account at Midland Bank which belonged to the trustee.
In Lipkin Gorman v. Karpnale [1991] 2 AC 548, 573, Lord Goff of Chieveley held that the plaintiffs could trace or follow their property into its product but this involves a decision by the owner of the original property to assert his title to the product in place of his original property. In that case the original property was the plaintiff's chose in action, a debt owed by the bank to the plaintiffs. Lord Goff held at page 574:
'The plaintiffs could trace their property at common law in that chose in action or in any part of it into its product, that is cash drawn by Cass from the client account to the bank.'
Accordingly, the trustee can follow the money in the joint account at Midland Bank which had been vested by statute in him into the proceeds of the three cheques which the defendant received from her husband. The trustee does not need to follow the money from one recipient to another or follow it through the clearing system. He can follow the cheques as they pass from hand to hand. It is sufficient for him to be able to trace the money into the cheques and the cheques into their proceeds.
In Agip v. Jackson I said that the ability of the common law to trace an asset in the changed form in the same hands was established in Taylor v. Plumer.
He sets out the quotation on which he relied and continues:
In this it appears that I fell into a common error for it has since been convincingly demonstrated that although Taylor v. Plumer was decided by a common law court, the court was in fact applying the rules of equity. But this is no reason for concluding that the common law does not recognise claims, substitute assets or their products. Such claims were upheld by this court in Banque Belge pour l'Etranger v. Hambrouck [1921] 1 KB 321 and by the House of Lords in Lipkin Gorman v. Karpnale [1991] 2 AC 548.
The relevant part of the judgment concludes with an observation of the illogicality of the existence of different rules of tracing law and in equity.
In the present case the position is as follows. A cheque for something over £68,798.36 was drawn by the solicitors acting for Mr Williams in Mr Williams' favour. It was paid by Mr Williams into his Pathfinder account with the Co-operative Bank on 27 June 1997. The account was then in credit to the extent of £968.74 and the cheque was paid in at the same time as two debit entries amounting to £134.85 were made. It is said that at that stage the money in Mr Williams' Pathfinder account plainly represents the money paid by the solicitors, subject only to the small balance of £968 less £134. Thereafter, the money was laid out generally in relation to various matters, but one can concentrate for present purposes upon two transfers, one of £12,000 odd, which was made out of Mr Williams' current account on 16 July 1997, which was itself maintained by transfers from the Pathfinder account, and a further payment of £25,312, which was also money paid towards the purchase of his house. It appears therefore that there has been a substantial admixture with other funds of Mr Williams. It is urged upon me nonetheless by Mr Marks for the trustee that it is plain that the sum expended at least upon the house is pro rata to be viewed as the product of the original sum paid over to Mr Williams.
It seems to me that legal tracing is defeated by the mixing which took place in the present case. That does not mean that there is no action against Mr Williams for money had and received. There plainly is. As is made clear by Goff and Jones' Law of Restitution, chapter 2, under the sub-heading "Money Claims at Common Law" on page 96:
The common law claim is based upon the plaintiff being able to show that the defendant received its money. It is not necessary for the plaintiff to take the further step of proving that the defendant still has the money.
In the present case I do not believe on ordinary principles, applying the remarks made by Millett LJ in Jones v. Jones and the principles which he describes to be derived from Agip Africa v. Jackson, that it is possible to trace these monies at law into the substantial asset purchased by Mr Williams, which was the house. I accept that the trustee has an action for money had and received against Mr Williams on which, in principle, judgment can be given for half the proceeds of the original settlement. In my judgment, therefore, this application fails as to 50% of the sums received by Mr Williams, but succeeds to this extent in relation to the remaining 50%, that the trustee is entitled to a money judgment in relation to that sum, but not in relation to any relief in respect of Mr Williams' house. I shall hear counsel on the appropriate form of order.
Before leaving this judgment, there are two matters with which I should deal. If I am wrong as to the question of the extension of time for the exercise of the power under section 307 of the Insolvency Act 1986, I am satisfied that it would be possible to trace an equity in relation to the sums realised in respect of the claim against Turners. This is anomalous, since I do not accept that there is any power to trace an equity in respect of the sums recovered against Pictons. The reason is that I am satisfied that the provisions of section 291 and 333 of the Insolvency Act 1986 create a sufficient fiduciary relationship vis-a-vis the trustee to support a claim for equitable tracing and that Mr Williams was aware of the Trustee's potential claim. However that may be, as I have indicated, that aspect of the claim fails.
The other matter to which I should refer is a submission that was made to me by Mr Littman on Mr Williams' behalf. Mr Littman submitted that there was included in the sum of money accepted in settlement here an element attributable to distress caused to Mr Williams by the bankruptcy proceedings and by their aftermath. He relied heavily upon the evidence which Mr Williams gave under cross-examination, and also upon Mr Williams' stated reasons in the correspondence to which I have referred for accepting the payment in. It was put I think that it would go some way to compensating Mr Williams for the distress which he had suffered.
I do not accept that the sum of money recoverable can be dealt with in this way. It is not a matter for the subjective appreciation of Mr Williams, but a matter for the objective assessment of the sum which should be attributed to general damages in relation to the claims against the firms of solicitors. It is well understood that a claim in respect of mental distress in an action for negligence against solicitors is not recoverable: see the decision of the House of Lords in Johnson v. Gore-Wood [2001] 1 All ER 481. There the claim for damages for mental distress and anxiety was struck out in an action for negligence on a solicitor's retainer.
In those circumstances, I cannot apportion any part of the £100,000 to a purely personal award which would justify me in taking it out of the ambit of the trustee's claim in the manner contemplated by Ord v. Upton. This application succeeds to the extent I have indicated.