Case No: CO/3416/1999
IN THE SUPREME COURT OFJUDICATURE
Royal Courts of Justice
Wednesday 29 November 2000
B e f o r e :
LORD JUSTICE PILL
MR JUSTICE BUTTERFIELD
- v -
Ian Richard Flack
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
- - - - - - - - - - - - - - - - - - - - -
Robert Jay QC (instructed by the Treasury Solicitor) appeared for the Applicant
William Hoskins (instructed by Langshaw Kyriacou) appeared for the Respondent
- - - - - - - - - - - - - - - - - - - - -
As Approved by the Court
Crown Copyright ©
LORD JUSTICE PILL:
1. This is an application, made with appropriate authority, under section 42(1) of the Supreme Court Act 1981. A civil proceedings order is sought against Ian Richard Flack ("the respondent").
2. Section 42(1) provides that the court may make such an order if it is satisfied that the respondent has:
"... habitually and persistently and without any reasonable ground --
(a) instituted vexatious proceedings, whether in the High Court or any inferior court, and whether against the same person or against different persons; or
(b) made vexatious applications in any civil proceedings whether in the High Court or any inferior court, and whether instituted by him or another; ..."
An interim order was made by consent on 11 May 2000. The respondent was to take no further steps in proceedings without the consent of a Chancery judge.
3. There has been a long trading relationship between SOL Group Ltd ("SOL") and the respondent and companies controlled by him. SOL had two trading subsidiaries, Precision Tool and Instrument Co Ltd and Scientific Optics Ltd. They manufacture high precision optical components and have supplied them to the respondent's companies, Ringsights Defence Ltd and Ringsights Holdings Ltd, for subsequent military use. SOL has had considerable difficulty in obtaining payments for its goods. By 1998, the SOL group of companies were owed almost £50,000 by the Flack group of companies. In 1997, because of cash flow difficulties, SOL entered into a creditors voluntary arrangement ("the CVA"), which did not include Mr Flack. Also during 1997, SOL had taken over the running of the subsidiary companies already named and those companies became dormant. Reference is made to the fact that a number of the respondent's companies have been placed in administrative receivership to support the submission that the respondent is well versed in insolvency law and practice.
4. A considerable amount of litigation has arisen out of those basic facts and the relationship between the respondent and SOL. The applicant's view of the respondent's motivation is succinctly put in the affidavit sworn by Mr Lutterodt, a solicitor employed by the Treasury Solicitor's Department with the conduct of this application on behalf of the applicant, on 5 May 2000, paragraph 4:
"SOL's position is that Mr Flack is pursuing a vendetta against it in order to eradicate the indebtedness of his companies and also his own personal indebtedness in respect of legal costs which he has been ordered to pay SOL and to drive SOL into liquidation."
A detailed affidavit has been sworn by Mr Michael Hunter, group financial director of SOL.
5. The litigation falls into two phases, submits Mr Jay QC, for the applicant. In the first, the respondent was acting in person and had a number of actions and applications struck out under the Court's summary jurisdiction. In the second phase, the respondent has been represented by solicitors, Messrs Lawrence Graham. Applications have disclosed a cause of action but the applicant's case is that the respondent uses litigation not as a means of advancing proper commercial ends but as the vehicle for harassing into submission those with whom he in dispute. The respondent replies that since March 1999, he has acted with the guidance of specialist legal advice.
6. On behalf of the applicant, Mr Jay submits that the case is unusual in that the respondent is not a paradigmatic vexatious litigant. In using that expression, Mr Jay has in mind the statement of Lord Bingham CJ in HM Attorney-General v Barker (unreported, 16 February 2000), paragraph 22:
"From extensive experience of dealing with applications under section 42 the court has become familiar with the hallmark of persistent and habitual litigious activity. The hallmark usually is that the plaintiff sues the same party repeatedly in reliance on essentially the same cause of action, perhaps with minor variations, after it has been ruled upon, thereby imposing on defendants the burden of resisting claim after claim; that the claimant relies on essentially the same cause of action, perhaps with minor variations, after it has been ruled upon, in actions against successive parties who if they were to be sued at all should have been joined in the same action; that the claimant automatically challenges every adverse decision on appeal; and that the claimant refuses to take any notice of or give any effect to orders of the court. The essential vice of habitual and persistent litigation is keeping on and on litigating when earlier litigation has been unsuccessful and when on any rational and objective assessment the time has come to stop."
7. Mr Jay accepts that phase 2 requires close analysis because the respondent has not been without causes of action and has acted with the benefit of legal advice. That is not decisive, submits Mr Jay; the underlying motive has to be considered and the respondent has been acting without a genuine commercial motive. The respondent's campaign against SOL, it is submitted, has no proper commercial objective but only an intention to undermine the CVA. The respondent's motive is important in this context. The Court is invited to look more widely than would a trial court at motivation in the context of the history of the matter.
8. Phase 1 may be dealt with briefly because the respondent now accepts that the proceedings he brought were misconceived. It was faintly argued by Mr Hoskins on his behalf that the respondent had a genuine sense of grievance at that stage but I find no substance in that. Having issued on 5 August 1998 an invoice in the sum of £47,720 on SOL for "optical tooling etc in the possession of the debtor", the respondent, on the following day issued a statutory demand based on the invoice. He must have known that the debt was disputed and also that tooling which had been sold to a Belgian company was not his property. SOL's application for an injunction restraining winding-up of the company came before Lloyd J on 5 October. The respondent did not appear, claiming that he was ill. Lloyd J stated:
"It seems to me clear that there are disputes not only as to the basis of any claim but also as to whether Mr Flack is indeed the owner of the goods in the light of this slightly curious chain of title and in the light of certificates of ownership issued at Mr Flack's earlier request in 1994 to the Belgian company FN. In those circumstances it seems to me that those facts, together with the very peremptory approach of Mr Flack in raising his demand at the end of July, issuing an invoice on 5th August and issuing a statutory demand on 6th August, makes this a very suspect position on his part,"
Lloyd J ordered the respondent to pay the costs of the application on an indemnity basis stating that "where it is clear that to use the winding-up procedure would be an abuse of process and at any rate where the materials from which that is apparent have been known to the respondent before the issue of the proceedings, then indemnity costs are appropriate to deter people from threatening an abuse of process in this respect."
9. The respondent applied to set aside the grant of the injunction by Lloyd J. That application was dismissed. An application for leave to appeal to the Court of Appeal was dismissed by that Court on 15 February 1999.
10. On 22 October 1998 the respondent's newly incorporated company Wessex Collections Ltd issued a winding-up petition against SOL in relation to an alleged debt of £161,652.50. On 26 October SOL applied for an injunction restraining the respondent from taking further steps on the petition and the application came before Rattee J on 30 October. Shortly before that date, Wessex Collections Ltd made it known that it was willing to consent to an order that the petition be struck out. Giving judgment (6056/1998, 30 October 1998) Rattee J stated:
"The applicant seeks further, a very unusual order, that Mr Flack should pay the costs of the applicant of the petition and the present motion on an indemnity basis, the purpose of that application plainly being that, so far as is disclosed by information available to the applicant relating to the respondent company, it is a shelf company, acquired by Mr Flack off the shelf and is not going to be in a position to meet any order for costs made against it.
As Mr Boardman, on behalf of the applicant, submitted, it is clear from the evidence that not only is the debt on which the petition is purportedly based disputed by the applicant, but the respondent, in the person of Mr Flack, who appears from the evidence to be the only person, as I have said, who operates the respondent company, knew at all times that the debt was disputed. Indeed the evidence strongly suggests - and there is no evidence to rebut it - that the petition was presented not only as an abuse of the process of the court, because it was based on a disputed debt, but was presented in bad faith on the part of Mr Flack, in that there are grounds in the evidence I have seen to support the proposition made by the applicant that not only is the debt disputed, but Mr Flack - and, therefore, the respondent - knew that it was indeed a wholly bogus debt in the sense that its existence seems quite inconsistent with other evidence given by Mr Flack himself in other proceedings relating to the background from which the respondent now says that this debt has arisen. ...
I also accept his submission that, if I am satisfied that this petition was presented by the respondent company, acting by Mr Flack, in bad faith, then the Court is justified in taking the exceptional course of making an order for costs against Mr Flack, as well as against the respondent company.
In my judgment the evidence does support the proposition that, indeed, the presentation of this petition was an act performed by the respondent company by Mr Flack in bad faith, as part of a protracted course of action on Mr Flack's part to bring pressure to bear on the applicant company by what is now, unfortunately, a succession of legal proceedings alleging debts due from, or liabilities owed by, the applicant company to Mr Flack, or companies which he uses as his alter ego, which debts and liabilities, so the applicant company says - and certainly in the present case there is evidence to support that - are concocted by Mr Flack in a attempt to further his battle against the applicant company.
In my judgment the evidence therefore does indicate that this petition is not only an abuse of the process of the court, being based on a disputed debt, but was presented by the respondent company in bad faith, acting by Mr Flack, and Mr Flack, having been given in the correspondence I have seen clear notice that the applicant company intended to seek an order for indemnity costs against him, has not chosen to appear to make any representations as to why such an order should not be made. Neither he, nor the company is represented before me."
The learned judge struck out the petition and added that "in the exceptional circumstances of this case the evidence justifies me making also an order that Mr Flack personally pays those costs on the same basis." (Costs of the petition and the motion on an indemnity basis).
11. On 11 December and 23 December 1998 SOL issued statutory demands against the respondent in the sums of £1,907.50 and £11,126.34. These were based on the costs orders in the first winding-up petition. To set these demands aside, the respondent argued that he had cross-claims against SOL including a renewed claim with respect to the value of the tooling. By an affidavit sworn on 4 March 1999, the respondent also wrongly claimed that his statutory demand upon SOL was the subject of appeal. Permission to appeal had in fact been refused on 15 February. On 7 May 1999, District Judge Keogh dismissed the respondent's applications to set aside the statutory demands against him. The judge also rejected a late advanced claim based on the purchase by the respondent from creditors of SOL of debts due from SOL. The respondent was represented by counsel before the district judge.
12. In March and April 1999, the respondent had purchased at a discount and taken assignment of debts owed by SOL to a number of companies. The sum involved was in excess of £20,000. Those purchases gave him standing to question the status of the 1997 CVA. On 25 May, the respondent issued an originating application under section 7 of the Insolvency Act 1986 ("the 1986 Act") seeking documents and other information in relation to the CVA and the application was amended on 22 June to include a claim that the CVA was invalid in that the debts which had been treated as those of SOL were in fact the debts of its subsidiaries. There had been no novation of the debts to SOL and no CVA's had been entered into by the subsidiaries.
13. On behalf of the applicant it is submitted that the purchases were made only to bring further pressure upon SOL by giving the respondent standing to intervene in the conduct of the CVA, to increase the costs incurred by SOL and to make it less likely that he will be pursued by any liquidator of SOL. It is submitted that the respondent's position in the bankruptcy appeal and the Insolvency Act application is contradictory in that in the former he claims to set off debts purchased by him against SOL's claim for costs against him, which assumes a valid CVA, whereas in the latter he contends that the CVA is invalid. That, it is submitted, is vexatious conduct. It is further submitted that any application to question the validity of the CVA should have been brought under section 6 of the Insolvency Act 1986. Any such application would have been out of time and section 7 was inappropriate for that purpose. Had the respondent been in good faith, the difficulties with the CVA could have been aired in discussion with the supervisor without the need for litigation.
14. The respondent's appeal against the dismissal by District Judge Keogh of the respondent's application to set aside SOL's statutory demands against him was heard by His Honour Judge Howarth, sitting as a deputy high court judge, on 23 June 1999. That was one day after the respondent had amended his Insolvency Act application to include the claim that the CVA was invalid. Counsel for the respondent argued that a procedure should be followed whereby the respondent had the opportunity to set off against the money owed to SOL which formed the basis of the statutory demands the sums due to him by reason of his purchase of debts owed by SOL.
15. The judge regarded the procedural position as "finely drawn". At least twice in his judgment he asked himself "what is to be done?" Finally, he agreed to adjourn the hearing of the appeal against the finding that the statutory demands against him should stand to enable the respondent's cross- claims arising out of the CVA to be considered. The judge was aware that the cross-claims might be against not SOL but its subsidiaries. Judge Howarth's ruling did of course have the effect of delaying the bankruptcy proceedings.
16. On 25 August 1999, the supervisor of the CVA, not surprisingly, made an application seeking the directions of the court. That application, together with the respondent's section 7 application, came before Evans-Lombe J on 26 January 2000. Whether or not it was appropriate for consideration under section 7 of the 1986 Act, the judge considered the novation issue upon the supervisor's application. After a long hearing, the judge indicated that the answer to the question whether there was a valid CVA was "likely to be no". Counsel for the supervisor of the CVA had accepted that the situation was very uncomfortable. The judge indicated that a scheme needed to be devised to save the situation, which involved fresh CVAs for SOL and its two subsidiaries. On behalf of the applicant it is submitted that the whole procedure was no more than a part of the respondent's vendetta against SOL because the other creditors were content that their position was safeguarded, notwithstanding the absence of novation.
17. The matter came before Evans-Lombe J again on 15 February 2000 and was adjourned following lengthy submissions. On 11 April 2000, the proposed new CVAs were approved in meeting by the overwhelming majority of the creditors, HM Customs and Excise being easily the major creditor. A small minority, including the respondent, voted against. On 28 April the respondent issued applications under sections 6 and 7 of the 1986 Act seeking to challenge the new CVAs. However, at a hearing on 16 June 2000 the respondent's application that he should have permission to pursue those objectives was not pursued by him. On 26 July 2000, Evans-Lombe J dismissed the respondent's appeal from Judge Keogh in the bankruptcy proceedings. The statutory demands have been met.
18. It is also submitted on behalf of the applicant that the respondent has sent misleading circulars and letters to creditors of SOL. He has prevaricated over the payment of sums acknowledged to be due, though the sum currently due and payable by way of costs is not alleged to be large. SOL has had to make thirty people redundant and its engineering capacity has been cut by half, it is submitted, as a result of the respondent's activities.
19. Understandably Mr Jay has stressed the importance to the applicant's case of the motivation of the respondent. The respondent's conduct since March 1999 should be considered against the background of his earlier misconceived actions. His conduct during phase 2 has had no proper commercial objective, Mr Jay submits. Its object has been to undermine the CVA or CVA's upon which the continued operation of SOL depends.
20. In reply to the submission that since March 1999 the respondent has been represented by legal advisers expert in this branch of the law and has acted with the benefit of their advice, Mr Jay states that the applicant would if necessary be prepared to accept that the solicitors do not have actual knowledge of the respondent's motives, notwithstanding the primary case that the respondent's true motives are transparent. I note that in a letter of 30 March 1999 to the solicitors for the supervisor, Lawrence Graham state that they did not act for the respondent, believing presumably that they were acting for one or more of his companies. However in his affidavit sworn on 11 May 2000, Mr J R Verrill, partner in Lawrence Graham states that:
"The proceedings presently on foot, namely Mr Flack's application under section 7 in relation to the CVA of the SOL Group Ltd and section 6 applications in relation to subsidiaries are not meretricious as Mr Grant, Mr Lutterodt and Mr Hunter would have the court believe. They are applications which have been discussed with and have the support of counsel and my firm and as a senior insolvency lawyer I believe that they raise issues which need to be resolved."
21. I have to say that during the period when they were acting in proceedings which have given rise to the present application, I would not find it possible to conclude that experienced insolvency practitioners would be unaware of the circumstances which gave rise to the proceedings, including the motivations involved. Lawrence Graham no longer act for the respondent.
22. Mr Jay relies upon the statement of Wright J in Re Chaffers (1897) 45 WR 365 at 366:
"The consideration of whether a person has habitually and persistently instigated vexatious legal proceedings without any reasonable ground does not depend on a minute examination of whether in each particular action there was a reasonable ground; we must consider the number of actions brought, their general content and their results."
23. In Re Vernazza  1 WLR 622 was a case in which the respondent to an application such as the present had brought actions claiming in one form or another that a consent judgment ought to be set aside and that he was still owed the sum claimed in the compromised action. It was in that context that Lord Parker CJ stated at p 624:
"In considering whether the proceedings are vexatious one is entitled to, and must look at, the whole history of the matter, and it is not determined by whether the pleading discloses a cause of action. Indeed, that is the principle applied under the rules of court when application is made to strike out a pleading. Though the pleading may be in order, the court in its inherent jurisdiction, is entitled to look at affidavits as to the history of the matter, and if, in the light of that history the action is vexatious, the pleading can be struck out and the action dismissed."
Mr Jay submits that the post-March 1999 proceedings are vexatious notwithstanding the presence of a cause of action and notwithstanding the fact that they have in part been successful, at least to the extent that the bankruptcy appeal was adjourned for a considerable time and fresh CVA's were required to be negotiated.
24. Mr Jay also relies on the principle that it is an abuse of process to use litigation as a means of oppressing or harassing one's opponents. In Speed Seal Ltd v Paddington  1 WLR 1327, Fox LJ cited with approval, at page 1335, the statement of Lord Evershed MR in In re Majory  Ch 600, 623:
"The so-called `rule' in bankruptcy is, in truth, no more than an application of a more general rule that court proceedings may not be used or threatened for the purpose of obtaining for the person so using or threatening them some collateral advantage to himself, and not for the purpose for which such proceedings are properly designed and exist."
25. I have come to the conclusion that a civil proceedings order ought not to be made in this case. My conclusions are:
1. The pre-March 1999 proceedings were vexatious.
2. They have not been repeated and this is not a case where the mischief identified in Barker has been continued since that date.
3. The post-March 1999 proceedings should nevertheless be considered against the background of the earlier vexatious conduct.
4. The attempt to link the bankruptcy proceedings with the insolvency proceedings, though not in my view deserving of success, could not be described as vexatious. Indeed Judge Howarth, sitting as a Deputy High Court Judge, considered that on balance it was the correct way to proceed and accordingly adjourned the bankruptcy proceedings.
5. Purchasing debts owed by SOL could not be said to be vexatious conduct. Judge Howarth considered the attempt to create a set-off to be legitimate.
6. Using a position as creditor thereby acquired to bring proceedings under the Insolvency Act cannot of itself be considered vexatious in present circumstances. Though technical, the objections to the CVA had merit, as Evans-Lombe J in effect found and subsequent events confirmed.
7. Assuming his motive was to make difficulties for SOL, the respondent was fortunate first in that a judge was prepared to allow him to pursue Insolvency Act applications without determining the bankruptcy application against him and, secondly, in the discovery that the CVA had not been correctly set up.
8. In making what he has of those events, the respondent cannot in my judgment be said to have instituted vexatious proceedings, habitually and persistently and without any reasonable ground, within the meaning of section 42(1).
9. I accept that the respondent's motivation is a factor to be considered and also that the whole history of the matter must be kept in mind. An improper motive may convert an otherwise legitimate action into one which for present purposes is vexatious. The conversion should not lightly be undertaken however in the circumstances described.
10. In my judgment, the respondent's conduct falls short of conduct which requires that his access to the courts be curtailed to the extent which would follow from a civil proceedings order under section 42(1) of the 1981 Act. For the reasons given, the borderline between taking advantage of events to thwart the intentions of SOL and instituting vexatious proceedings without any reasonable ground has not been crossed.
26. I also record the undertaking given by counsel on behalf of the respondent that any further litigation in respect of SOL and its affairs undertaken by him will be through solicitors and, if appropriate, counsel. That does not of course ensure that any further proceedings will not be classified as vexatious but it provides some protection against the mischief at which section 42(1) is aimed.
27. I would refuse this application.
MR JUSTICE BUTTERFIELD:
28. I agree.