England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Mr Kevin Prosser QC
Case No HC0C01922

		Royal Courts of Justice Strand, London, WC2A 2LL
		27/10/2011

The Master of the Rolls:

1. This is the judgment of the court to which all members have contributed.
2. The question raised by this appeal is this. If a trustee in bankruptcy assigns a claim on terms that the bankrupt's estate will receive a share of any recovery on the claim, can he safely assume that no order for costs will be made against him if the claim fails?
3. Mrs Janan Harb claims to have secretly married the late HRH the King of Saudi Arabia ("the King") in 1968. In May 2003, several years after they had separated, her solicitors sent a draft statement to the King, setting out the basis of a claim which she was bringing against him under section 27 of the Matrimonial Causes Act 1973.
4. Some five weeks later, she claims to have met the King's son, HRH Prince Abdul Aziz Bin Fahd Bin Abdul Aziz ("the Prince"), and that he orally agreed to pay her £12 million and transfer to her two properties in Cheyne Walk, Chelsea in exchange for her withdrawing certain allegations made in the draft statement, withdrawing the section 27 application, and in discharge of the King's promises to provide for her during her life. Mrs Harb says that she duly complied with her obligations under the agreement but that the Prince did not. This is the claim in issue.
5. On 7 April 2008 Mrs Harb became bankrupt on her own petition. Her estate consisted of assets valued at around £200,000 and liabilities of over £3.5 million. There is no creditors' committee. Upon her bankruptcy, the claim vested in Mrs Harb's trustee in bankruptcy (now Mr Stephen Hunt) pursuant to sections 306 and 311(4) of the Insolvency Act 1986 ("the 1986 Act"). The six year limitation period for bringing the claim was running and would have expired in June 2009. Mrs Harb was keen that the claim should be brought because if it were successful her creditors would be paid in full; and there would be a substantial surplus for her.
6. The trustee took the view that the claim had a reasonable prospect of success; although he had not been able to make detailed investigations. Accordingly on 15 June 2009, shortly before the limitation period was about to expire, the trustee issued the claim against the Prince ("the claim"), which was served on him outside the jurisdiction. The Prince applied to set aside service, relying on the State Immunity Act 1978. In effect, his case was that, at the time of the alleged agreement in 2003, he had plenipotentiary powers as sovereign on behalf of his father, the King of Saudi Arabia.
7. The trustee knew that he would need to obtain After the Event ("ATE") insurance to cover his liability for the Prince's costs if the claim failed, and third party funding in respect of his own costs. He thought that he would be able to do so. Suffice it to say that that his hopes in that respect were not fulfilled. He was unable to obtain ATE insurance and he was unable to find third party funding. So he discontinued the claim against the Prince.
8. For the purpose of the present application, it was common ground that the claim is not a vexatious one, and we have not been addressed in any detail on the merits of the claim. However, it is worth pointing out that, even on the basis of this very short summary, it is not without its legal difficulties. First, of course, there is the question of the Prince's contention that he has the protection of the 1978 Act. On the face of it, at least, the strength of the contention that the 1978 Act hurdle can be surmounted depends on an assessment of the evidence, which so far has only been lodged by the Prince. At this stage, it is impossible to assess the strength of the competing arguments on the point.
9. However, quite apart from this, the claim faces a second problem. Following the passing into law of section 2 of the Law of Property (Miscellaneous Provisions) Act 1989, there are obvious problems about a claim framed in contract, when the alleged agreement is oral and involves, inter alia, an obligation to transfer land. It is true that the pleaded agreement does not simply relate to land but also to money, but it is nonetheless a single alleged contract, which, at least on the basis of current authority, would appear to fall foul of section 2 of the 1989 Act – see Grossman v Hooper [2001] EWCA Civ 615, [2001] 2 EGLR 82, and Kilcarne Holdings Ltd v Targetfollow (Birmingham) Ltd & Anor [2004] EWHC 2547 (Ch), [2005] 2 P&CR 8.
10. Whatever problems the claim might face, Mrs Harb was aggrieved by the trustee's decision to discontinue the claim and she applied to the court to set aside the notice of discontinuance, joining the trustee, and also the Prince (who has played no part on this appeal, although he appeared by counsel below). In a succinct and clear judgment, given on 22 March 2011, Mr Kevin Prosser QC ("the deputy judge") sitting in the Chancery Division, allowed the application and set aside the notice of discontinuance – see [2011] EWHC 714 (Ch). He held that the trustee had no power to discontinue the claim but ought to have applied to the court for directions under section 302 (2) of the 1986 Act. In his judgment he said, at para 41:

"On any such application Mr Hunt would explain that although the Claim was not vexatious and was potentially very valuable, he was no longer able to pursue it. On the other hand, Mrs Harb (who would no doubt be joined in the application) would explain that she was willing and able to purchase the Claim for a more than merely nominal price. It would occur to the court that, if Mrs Harb was willing to purchase the Claim, then so too might one or more of the creditors; moreover, the possibility of the Prince being willing (notwithstanding his claim to immunity) to make a payment to Mr Hunt to settle the Claim could not be ruled out either. In those circumstances the court, having regard to the best interests of the creditors and of Mrs Harb as persons interested in the estate, and giving some weight to the public interest that bankruptcy should not be too readily available as a means of stifling claims which may have substance, would direct that before serving notice of discontinuance Mr Hunt should invite offers from Mrs Harb, the creditors and the Prince with a view to assigning to, or settling with, the highest bidder (so that Mr Hunt would receive more than his costs if any of the assignment or settlement) instead."

11. Accordingly the deputy judge set aside the notice of discontinuance and directed that the proceedings relating to the claim should be adjourned for a reasonable period while trustee invited offers for the claim, but that if no such offers were received he could serve a fresh notice of discontinuance. Paragraphs 9(a) – (h) of the order drawn up to give effect to his judgment ("the order") set out a sensible procedure whereby the trustee would seek offers for the claim, give notice of the offers and any decision to the bidders, who would then have an opportunity to challenge the decision in court. Thus far there is no complaint about his decision.
12. However in the final paragraph of his judgment the deputy judge said:

"In response to a request for guidance from Mr Hunt, I add that Mr Hunt would in my view be entitled to reject any offer to purchase the Claim on terms that all or part of the net proceeds of a successful Claim will be paid to him or applied for the benefit of the creditors. This is because the purchaser would in my view be acting as the mere nominee or delegate of Mr Hunt, who would accordingly continue to be at risk of liability for costs. And Mr Hunt would also be entitled to give preference, in the offer process, to the creditors and Mrs Harb over the Prince. For example he might decide to accept an offer made by a creditor or Mrs Harb if it equals or is not substantially less than any offer made by the Prince, or he might decide to give the creditors and Mrs Harb the opportunity to match or beat the Prince's offer even though his is the highest, and for that purpose to inform them of the amount to match or beat."

13. This indication was embodied in paragraph 9 (i) of the order, which was to this effect:

"The [trustee] may reject any offer … on terms that all or any part of the net proceeds of a successful claim will be paid to him or applied for the benefit of the creditors on the grounds that the purchaser would in pursuing the claim after sale be acting as the mere nominee or delegate of the [trustee] who would accordingly continue to be at risk of liability for costs."

It is against that paragraph of the deputy judge's order that Mrs Harb appeals.

14. An insolvency practitioner may become involved as an office holder in a variety of different situations. He may, for example, be appointed as the liquidator of an insolvent company; as the administrator of an insolvent company; as a receiver of a charged asset; or as an administrative receiver under a debenture. Or, as in this case he may be appointed as a trustee in bankruptcy.
15. If he is appointed as a liquidator or administrator of an insolvent company then in the ordinary way the company's assets, including any choses in action such as legal claims, remain the property of the company. Nothing vests in the liquidator or administrator. If the liquidator or administrator wants to pursue a claim, he will do so in the name of the company. He personally will not be a party to the action. If he is appointed as the receiver of a charged asset he will be (or be deemed to be) the agent of the chargor. Any claim will be brought in the name of the chargor. Likewise in the case of an administrative receiver.
16. In the case of a claim brought by a liquidator the liquidator will have taken the decision to institute (or continue) the proceedings and will normally have had control of their management. He will not, of course, stand to benefit personally from any recovery; save to the extent that the recovery may enable his own professional fees to be paid. In such a case then although there is jurisdiction to make a third party costs order against him that jurisdiction will only be exercised in exceptional circumstances, such as where there has been some form of impropriety: Metalloy Supplies Ltd v MA (UK) Ltd [1997] 1 WLR 1613. Impropriety is not a pre-requisite of a third party costs order, even against a liquidator, although it is a powerful factor in the exercise of the court's discretion one way or the other: Dolphin Quays Development Ltd v Mills [2008] EWCA Civ 385 [2008] 4 All ER 58, para 65. The fact that a liquidator stands to benefit to the extent of his professional fees does not turn him into the real party to the litigation: Dolphin [2008] 4 All ER 58, para 79.
17. Although we know of no comparable case involving an administrator, there is no reason to suppose that the position of an administrator is any different. The case of a receiver (or administrative receiver) bringing proceedings to enforce a contractual right forming part of the security stands on the same footing as an action brought by an insolvent company at the direction of a liquidator: Dolphin Quays [2008] 4 All ER 58, para 82.
18. There is no rule to the effect that whenever an insolvent corporate litigant is ordered to pay the costs of legal proceedings the officer or agent responsible for their conduct should be directed to pay the costs: Dolphin Quays [2008] 4 All ER 58, paras 84, 85.
19. The legal position of a trustee in bankruptcy is different. As already mentioned, pursuant to sections 306 and 311(4) of the 1986 Act the bankrupt's estate vests in the trustee personally. If the trustee wishes to pursue a claim which the bankrupt had before the bankruptcy he will do so in his own name because the claim will have vested in him. He will therefore be a party to the proceedings. Like any other trustee pursuing litigation on behalf of a trust the trustee in bankruptcy will, in principle, be liable for the costs of the proceedings: both his own and, if the claim fails, any costs awarded to the successful party. No third party costs order is necessary. If he acted reasonably he will be entitled to an indemnity from the trust fund; but if the trust fund is a bankrupt estate that may be of limited value. This, then, is quite unlike other forms of insolvency in which an insolvency practitioner might be appointed as office holder.
20. There is case-law in which it has been held that where a trustee in bankruptcy assigns a claim in return for a substantial share in the recovery on the claim he is at risk of a third party costs order being made against him if the claim fails: see per Laddie J in Hamilton v Official Receiver [1998] BPIR 602, followed by Registrar Baister in Osborn v Cole [1999] BPIR 251. In both those cases, the court upheld an office-holder's refusal to sell a claim in return for a share of the proceeds if the claim succeeded; in each case, the ground for the refusal was that the office-holder could be liable for the costs of the defendant to the claim if the claim failed.
21. The basis for Laddie J's conclusion that the office-holder in Hamilton [1998] BPIR 602 could be liable for costs in this way was the House of Lords decision in Aiden Shipping Co Ltd v Interbulk Ltd (The Vimeira (No 2) [1986] 1 AC 965. In that case, the provisions of section 51(1) of the Senior Courts Act 1981, which provides that the court has "full power" to decide "by whom and to what extent" any costs are to be paid, were authoritatively considered. Lord Goff described the section as being "expressed in very wide terms", so that it "ensur[es] that the court has, as far as possible, freedom of action", subject to the rule committee's powers "to control the exercise of discretion" through, now, the CPR and Practice Directions – [1986] 1 AC 965, 975F-H.
22. The essential contention advanced on behalf of Mrs Harb is that the approach of Laddie J was wrong in Hamilton [1998] BPIR 602, and that the deputy judge in this case should have decided that there was no risk of the trustee being liable for the Prince's costs, if the claim was assigned to her, and then she pursued it against the Prince and failed.
23. At any rate at first sight, it would be a little surprising if, at a very early stage of the proceedings in question, without being given specific jurisdiction to do so by the CPR, a court could restrict the discretion of the judge who in due course tries the claim, when it comes to any decision on how the costs of the claim should be borne. The breadth of that discretion is famously wide and flexible, as is clear from innumerable judgments, section 51(1) of the 1981 Act, and the observations of Lord Goff. It is well known that litigation can take many unexpected twists and turns, and many unexpected events can occur during its progress, and pre-empting the prospective trial judge's discretion is therefore particularly undesirable. Lord Goff's reference to the rules of court highlights the point that there are, for instance, cost-capping provisions in the CPR (see CPR 44.18-20), and either they do not apply or they have not been invoked in this case.
24. This is not even a case where there is a specific draft contract or arrangement with a specific proposed assignee, so the court could at least have considered a particular arrangement. The deputy judge was being asked to make a decision which not only ran into the problems just mentioned, but it would have been a decision based on assumed or incomplete facts.
25. Accordingly, the case for Mrs Harb has to be that, almost as a matter of general principle, and almost irrespective of what the facts may be, a trustee in bankruptcy who assigns to the bankrupt the right to pursue a claim against a defendant cannot be liable for the defendant's costs if the claim fails. (We say "almost" whatever the facts may be, because we accept that such a contention could be perfectly workable if, for instance, it was subject to specific exceptions, such as the existence of bad faith).
26. In the absence of any binding authority, we find that submission very hard to accept. For instance, where a trustee transfers his right to pursue a claim to an impecunious assignee on terms which would involve the trustee receiving a substantial proportion of the proceeds if that assignee is successful, it would seem unjust if the defendant, were he successful in those proceedings, should never be able to contend that the claim was primarily that of the trustee and was pursued for the benefit of the trustee, who should not then be able to hide behind the assignee to avoid liability for costs. We are not, of course, saying that such an argument should succeed; the point we are making is that it would be wrong in principle and unfair on the defendant if he was precluded in advance from being even able to run such an argument at the end of the case, in circumstances where the court does not know what offers the trustee has received and what the terms of those offers are.
27. A number of arguments have been raised on behalf of Mrs Harb to attempt to meet this point. First, it is said that the courts have recognised that there are good policy reasons for encouraging trustees in bankruptcy to assign causes of action – see e.g. Ramsey v Hartley [1977] 2 All ER 671, 682-5, Stein v Blake [1996] AC 243, 260, Official Referee v Davis [1998] BPIR 771, Norglen Ltd (in liquidation) v Reeds Rains Prudential Ltd [1999] 2 AC 1, 11-12,and Faryab v Smith [2001] BPIR 246, paras 38-44. We accept that trustees are often encouraged, even sometimes required, to consider selling or transferring, or even actually to sell or transfer, causes of action, and that this can be a beneficial course. We also accept that the attraction of such a course to a trustee, and the ability to require him to do so, will be reduced or circumscribed, if he cannot be sure of being safe from an order for costs being made against him.
28. However, at least in the absence of unusual circumstances, that does not seem to us to be a reason for changing or cutting down the wide jurisdiction of the court when it comes to assessing costs at the end of the proceedings the subject of the assignment. The defendant is also entitled to have his normal rights as a litigant, taken into account. Certainly, it must be wrong to cut those rights down before the court even knows the number of offers, the identity of the offerors, the amounts offered, and the other terms of the offers for the assignment of the claim.
29. It is also worth pointing out that it would always be open to a trustee who receives an offer which involves him largely (or exclusively) being paid through the proceeds of the claim (if successful) to try and look to the creditors, who would, of course, be the real beneficiaries of such an arrangement, to underwrite any liability for costs which he might otherwise have.
30. Mr Deacock, for Mrs Harb, also sought to draw support from the decisions of the Court of Appeal in Symphony Group Ltd v Hodgson [1994] QB 179, 192-3, and of the Privy Council in Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] UKPC 39, [2005] 4 All ER 195, paras 25, 28 and 29. In our view, those cases, if anything, undermine his case, as they emphasise the importance of maintaining flexibility and ensuring judicial discretion when it comes to awarding costs at the end of a trial. In Dymocks [2005] 4 All ER 195, para 25, for example, reference was made to the principle that awarding costs is "inevitably to some extent fact-sensitive", and to what "justice will ordinarily require" (emphasis added)
31. Mr Deacock also suggested that it was illogical for a trustee to be at risk on costs if he assigns a claim for a share of the proceeds, but not if he assigns for a lump sum. To an economist, the two sorts of payment may have some similarity, but, in the former case, the trustee can fairly be said to be someone who "is to benefit from [the proceedings]" and, at least arguably, one of "the real part[ies]" (Dymocks [2005] 4 All ER 195, para 25) to the litigation, whereas in the latter case, he cannot.
32. At this stage, therefore, it is plainly inappropriate for the court to grant the sort of pre-emptive costs relief which Mr Deacock seeks on behalf of Mrs Harb. However, for the same sort of reasons, we think that the more limited case advanced on her behalf, namely that para 9(i) of the order should discharged, is well founded.
33. However, just as it is not right at this stage for the court to consider imposing a restriction on the prospective trial judge's discretion as to costs, so it would be wrong to decide whether to make an order in the terms of (or similar terms to) para 9(i) of the order, before one even knows the existence, number, provenance and terms of any offers which the trustee may receive for the claim. On behalf of the trustee, Ms Page said that the terms of the paragraph are not necessarily binding and therefore would have no real effect: even if that is right, they would have no point, and should be deleted for that reason.
34. Accordingly, we would dismiss the appeal but we would delete para 9(i) of the order.
35. Finally, it is right to say that we expressly leave open the question whether the court would have power in an appropriate case to give a direction similar to para 9(i), where it had all the offers which the trustee had received, and thought it just to make such an order. In Faryab [2001] BPIR 246, para 40, Robert Walker LJ, when deciding to order a trustee to assign a claim to the bankrupt, referred to the fact that "there [was] a public interest element in such cases" (although he also said that he did "not attach much weight to this"), and added that "[b]ankruptcy should not be too readily available as a means to stifle claims which may have substance".
36. In an appropriate case, it is at least conceivable that at an appropriate stage in the proceedings the court would have jurisdiction to make the sort of order for which Mr Deacock primarily argues, but that is a matter for another day.