England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
IN BANKRUPTCY

		Royal Courts of Justice Strand, London, WC2A 2LL
		06/03/2009

Mrs Justice Proudman:

1. This is an appeal against a Bankruptcy Order made by Chief Registrar Baister on 14^th July 2008. The petition was presented on 29^th October 2007 by Mr Truex, a solicitor, against his former client Mrs Toll in respect of his costs and charges.

The facts

2. Mrs Toll retained Mr Truex in September 2006 to act for her in matrimonial proceedings. A final ancillary relief order had been made in the Family Division in April of that year. Mr Truex instructed counsel and dealt with various matters including a hearing on 7^th December 2006 when the case was listed for a further hearing on 19th March 2007 as to permission to appeal the April Order. Mrs Toll did not accept the advice of Mr Truex about the necessity for this hearing and a disagreement arose. On 12^th March 2007 Mrs Toll presented Mr Truex with a list of perceived complaints about his services.
3. Mr Truex issued four invoices to Mrs Toll in respect of fees totalling £14,971.25. The first two invoices were dated 9^th October 2006 and 8^th November 2006. Mrs Toll paid 5 sums (the last one on 23^rd November 2006) which cleared the first two invoices. However no payments were made in respect of the subsequent invoices dated 17^th January 2007 and 15^th March 2007.
4. On 15^th March 2007 Mr Truex applied to come off the court record, on the grounds of Mrs Toll's refusal to accept his advice and, as an additional and separate matter, her non-payment of his fees.
5. At the hearing on the 19^th March 2007 Mrs Toll sought an adjournment because she was unrepresented. Singer J conducted an inquiry to investigate the circumstances in which Mr Truex was ceasing to act. He was evidently concerned to discover whether the situation was Mrs Toll's fault, and whether her application was a delaying tactic. Mrs Toll attended that hearing, and at Singer J's request Miss Stephanie Wells, an assistant solicitor employed by Mr Truex, attended for questioning later on the same day.
6. Transcripts of both those hearings were before Chief Registrar Baister. Mrs Toll is of Russian extraction and English is not her first language. The transcripts show that she has some difficulty in expressing herself clearly in English. In some places she also said that she did not understand what was said to her.
7. Mr Truex served a statutory demand dated 16^th August 2007 for his outstanding fees. Mrs Toll neither complied with it nor applied to set it aside and Mr Truex issued a bankruptcy petition based on the alleged debt and referring to the statutory demand. The first hearing of the petition was on 18^th December 2007. Mrs Toll did not attend and the Registrar adjourned the hearing to 8^th February 2008.
8. On 6^th February 2008 Mrs Toll gave Notice of her intention to oppose the bankruptcy petition. The grounds included:

"1. There is a substantial dispute about the money said to be owed" and

4. Bill to be reviewed under the assessment procedure".

Mr Truex filed an affidavit in support of his petition stating that at the hearing before Singer J Mrs Toll had agreed that the fees specified in the invoices were due and owing.

9. The hearing of the petition was further adjourned with directions for both parties to file and serve evidence. Mr Truex served evidence, Mrs Toll did not. There was to be a review on 18^th April 2008 but neither party was required to attend. On 8^th March Mrs Toll instructed her present solicitors. Emergency Public Funding was provided to cover the bankruptcy proceedings and also proceedings to be issued for assessment under s. 70 of the Solicitors Act 1974. The case was re-listed for the 4^th June 2008 when Deputy Registrar Briggs gave further directions for evidence and adjourned the matter to 14^th July 2008. In particular there was a direction that Mrs Toll file and serve a witness statement and all evidence on which she wished to rely by 18^th June 2008. Again, she adduced no evidence in compliance with this Order.
10. On 18^th June 2008 Mrs Toll issued proceedings in the Supreme Court Costs Office for an Order under s. 70(3)(a) of the Solicitors Act 1974 for a detailed bill and detailed assessment in relation to the two outstanding invoices. Mrs Toll was by then substantially out of time to bring such proceedings which have to be commenced within 12 months of delivery of the bill sought to be reviewed. After that date, no order may be made under the section save in "special circumstances".
11. On 14^th July 2008 the Chief Registrar made the Bankruptcy Order and, as a result, on 26^th July 2008 Master Simons stayed Mrs Toll's application, with liberty to either party to apply. As I have said, Mrs Toll chose not to give evidence and all the facts and matters I have alluded to are matters of record or appear from evidence given by or on behalf of Mr Truex.

The Order of Chief Registrar Baister

12. The Chief Registrar made the Order, in his own words, "very reluctantly". He considered the case to be a borderline one. For the same reason he also gave permission to appeal.
13. It is common ground that he was correct to state that solicitors' costs which have not formed the subject of a judgment, assessment or agreement are not a liquidated sum for the purpose of founding a bankruptcy petition.
14. However (and this is at the root of the dispute before me) he also took the view that he could make a Bankruptcy Order if there was evidence that Mrs Toll had accepted Mr Truex's invoices. He therefore looked for, and found in the transcripts of the hearing on 19^th March 2007, an admission of the fees claimed in the two outstanding invoices.
15. He held that Mrs Toll had (to use his own words "just about") admitted the invoices at the hearing before Singer J. He felt, he said, driven to that conclusion because Mrs Toll had put in no evidence, despite directions that she should do so. She could have explained the context of what she had said to Singer J or shown (if such was the case) that there had been a pattern of asking for a breakdown of costs or otherwise established that the invoices were genuinely in dispute. He viewed Mrs Toll's application out of time to have the costs statutorily assessed with, as he put it, "something of a jaundiced eye", having regard to the date when the statutory demand was served, the progress of the petition proceedings and the total absence of evidence from Mrs Toll. He concluded that there was no bona fide dispute, and he said that even if he was wrong about that it was inconceivable that Mrs Toll did not owe Mr Truex a sum exceeding the statutory minimum of £750.

Provisions of the Insolvency Act 1986

16. The petition is founded on s. 267 of the Insolvency Act 1986 which provides that a petition may be presented if, but only if, certain requirements are met at the date of presentation. For present purposes the relevant requirements are as follows:

a) the debt is at least equal to the bankruptcy level of £750,

b) the debt is for a liquidated sum,

c) the debt is one which the debtor appears to have no reasonable prospect of being able to pay and

d) there is no outstanding application to set aside a statutory demand served in respect of the debt.

S. 268 deals with service of a statutory demand. A statutory demand which is neither complied with nor set aside enables the petitioning creditor to satisfy the court as to inability to pay under s. 267 (2) (c). It is common ground that it does not assist him as to whether the debt founding the petition is for a liquidated sum.

What is the nature of a solicitor's bill?

17. Muir Hunter on Personal Insolvency quotes a statement by Mr Registrar Simmonds in an unreported case (Re Le Winton, July 31st 2007) to the following effect:

"…in order to convert what is clearly an unliquidated sum to a liquidated sum there must be…clear and unequivocal conduct or agreement on the part of the debtor to demonstrate acceptance of those bills of costs such as to forego the right of assessment and to convert them to a liquidated sum."

This was the principle that the Chief Registrar sought to apply in the present case. It was only his doubts about how clear Mrs Toll's agreement was that gave rise to his reluctance. The appellant challenges the principle as understood by the Chief Registrar and, in the alternative, his application of it.

18. In In re a Debtor (no 88 of 1991) [1993] Ch 286 Sir Donald Nicholls V.-C appeared to find no defect of principle in a statutory demand based on an untaxed solicitors' bill. However there had been a number of cases in which it was explained that the basis of a solicitor's bill was a demand for reasonable remuneration for services rendered which, until taxed, or the reasonableness of the remuneration claimed was otherwise determined, was a bill for a sum unquantified and thus unliquidated: see e.g. In Re Laceward Ltd [1981] 1 WLR 133 at 137, Re a Debtor No 32 of 1991 (no 2) [1994] BCC 524 at 527. Indeed in the latter case Vinelott J held that it was an abuse of process for a firm of accountants to serve a statutory demand for the amount of their bill.
19. Curiously, however, less than two months after giving judgment in No 32 of 1991 (no 2) Vinelott J, without reference to his earlier decision, allowed statutory demands to lie despite the debtors' argument based on the right to taxation of the underlying bill: Re a debtor No 833 of 1993 and No 834 of 1993 [1994] NPC 82. I have been provided with a transcript of this case, as the report in New Property Cases is too short to indicate the Judge's reasons. He plainly placed reliance on the decision of Sir Donald Nicholls V.-C to which I have already referred, and particularly the statement that:

"The possibility that the amount of the bills might be reduced on a taxation which has still not been initiated is not a sufficient reason in this case for setting aside the demand."

Vinelott J commented,

"Solicitors would be placed in an intolerable position if no statutory demand could be served as long as it was open to the client to apply for taxation."

At the end of his judgment he added "for completeness",

"…there is nothing to prevent [the debtors] from now applying for leave to tax the bill. If leave is given and the bill is taxed down, they will be entitled to repayment of an excess over the amount of the taxed bill which they have paid. What they cannot do is to defer paying any substantial part of the bill until the process of applying for leave and, if leave is granted, taxing the bill as being completed."

20. It is thus the implication that, unless it could be said that assessment would reduce the undisputed debt below the bankruptcy threshold, a sufficient debt was established to found a petition. That, submitted Mr Preston, Counsel for Mr Truex, was the issue in the present case. He said that the two decisions of Vinelott J are not inconsistent because in the first case the debtor's conduct did not, and in the second case it did, constitute an admission as to the rate of charging. He submitted that it follows in the present case from the fact that Mrs Toll paid the first two of Mr Truex's invoices in full that an agreed rate was established. On that basis, he argued, the Chief Registrar properly found in the light of her admissions that there could not have been less than £750 due in respect of the later invoices. Thus there was sufficient quantification for the Chief Registrar to conclude that there was a debt for a liquidated sum.
21. The question of the nature of a solicitor's untaxed bill came squarely before the Court of Appeal in Thomas Watts & Co v. Smith [1998] 2 Costs LR 59. In that case, Sir Richard Scott V-C, with whom Schiemann LJ agreed, said:

"It is a fact that [the client] never entered into any contract to pay the sums as claimed. He engaged Thomas Watts & Co as his solicitors but was not asked to and did not agree any particular rate of remuneration. The solicitors are entitled to reasonable and fair remuneration for the work they have done. It is too late for [the client] to apply with any prospect of success for the bills now to be submitted for taxation…

But the position of the plaintiff firm is not, in my judgment, one in which they can simply ask the court, without any further investigation, to underwrite the amount they have chosen to claim in their three invoices. It may be that the amounts are reasonable. It may be that in one, or other, or several respects, the amounts are inflated…

In my judgment, in a case such as this, where solicitors are applying for payment of their bill, the situation is analogous to one in which a plaintiff is applying for an unquantified sum which has to be quantified by a judicial process before judgment can be awarded for the appropriate amount."

22. In Turner & C v. O Palomo SA [2000] 1 WLR 37, a differently constituted Court of Appeal said that the decision in Watts was "clearly correct". The main issue in that case was whether, after the statutory period for the client to claim assessment under the Solicitors Act 1974 had expired, the solicitor was conclusively entitled to the amount claimed in his bill. Having considered Re Park, Cole v. Park (1889) 41 Ch D 326, Jones & Son v. Whitehouse [1918] 2 KB 61 and Harrison v. Tew Evans LJ, giving the judgment of the Court, said (at 355-367):

"…the position apart from the Act is broadly as follows. If the solicitor wishes to be paid and is not in funds he will need to sue and prove that his charges were either expressly agreed or are reasonable charges. If he is in funds and purports to deduct the amount of his bill but the client challenges the deduction, the solicitor will still need to prove that the charges were either expressly agreed or were reasonable charges. The question is whether the client loses these rights to challenge the amount of the bill after the period for taxation has passed….

"…a client who is sued by his solicitor for the amount of his charges is entitled to challenge the reasonableness of the sum claimed, notwithstanding that the period during which he may apply for an order for taxation under what is now s. 70 of the 1974 Act has expired.

"Nor do we consider that the solicitor is disadvantaged by the possibility that the client is entitled to have the reasonableness of the charges assessed by the court after the statutory periods for taxation have expired. He can himself claim an order for taxation under s. 70(2), without any time limit, and obtain a form of summary judgment when the taxation certificate is issued…

"We do not see any difficulty in holding that the solicitor's claim is for a reasonable sum, whether by statute or at common law, and not for a liquidated sum. Again in accordance with general principles, the burden of proving that the sum is reasonable rests upon him. This is supported, if authority is needed, by the judgments in Re Park [Re Park, Cole v. Park (1889) 41 Ch D 326] and Jones & Son v. Whitehouse [[1918] 2 KB 61]…"

23. The approach adopted in Turner was again confirmed by the Court of Appeal in R (on the application of Joseph) v. Manches & Co [2002] EWCA Civ 188.
24. None of Watts, Turner or Joseph concerned a bankruptcy petition. However it would seem to follow as a matter of principle that a claim for solicitors' fees not as yet judicially assessed or determined is not a claim for a liquidated sum which can be the subject of a bankruptcy petition under s. 267 of the Insolvency Act 1986, even if the period for challenge under the 1974 Act has expired. Commentators (e.g. Muir Hunter (above)) therefore express the view that the earlier decisions to the contrary are inconsistent with the decisions of the higher courts and have been overtaken by them.
25. It is indisputable that the sum claimed becomes a liquidated sum once the fees have been assessed by the costs judge or determined in an action. The issue in the present case is as to what else can convert a solicitor's unassessed bill into a debt capable of founding a bankruptcy petition.

In what circumstances is the sum claimed in a solicitor's bill converted from unliquidated to liquidated?

26. Mr Macpherson, Counsel for the appellant, submitted that it was insufficient to find a bare admission, agreement or acknowledgement that Mr Truex's invoices were correct. Where a debt is of an unliquidated sum because it has not been judicially assessed or determined that sum can only become liquidated if the client is bound by the admission, agreement or acknowledgment relied upon. Thus Mr Macpherson said that one must look for a waiver of the right to assessment or determination. In order to constitute such a waiver, the client's conduct must be supported by consideration or give rise to an estoppel.
27. Doubtless a bare admission coupled with failure over a long period to challenge the bill would be strong evidence that the bill was reasonable. However, submitted Mr Macpherson, such conduct would not be enough to convert the amount of the bill from an unliquidated to a liquidated sum. In Park, Stirling J said of similar conduct that it did not preclude investigation of the bill, despite the fact that without further explanation the circumstances "would probably be held to be conclusive against" the client. Re Park was a strong case in which the late client had taken delivery of the bill more than 12 months before he died, had made no objection to it and had paid a large proportion of it on account. Even so, his executors were held to be entitled to dispute it.
28. I tested Mr Macpherson's proposition by asking Mr Preston in what circumstances a client could change his mind about paying a bill, in other words, what in the absence of consideration or estoppel would constitute waiver of the right to assessment or determination? He responded that the client could change his mind, but only on reasoned grounds and where the dispute as to the bill was a genuine one.
29. If that were right, the sum claimed would start life as unliquidated and then, because the client admitted it, it would become liquidated and then the next day, month or year (if the client changed his mind on reflection or advice) it would revert to being unliquidated. To my mind Mr Preston's answer conflates the pre-requisite that the debt founding the petition must be for a liquidated sum with the separate issue whether, on the hearing of that petition, there is a genuine dispute about the debt.
30. It seems to me that there is logic in Mr Macpherson's submission that an agreement converting an unliquidated debt into a liquidated one must be a binding agreement. That would mean an agreement for consideration, that is to say an agreement as to a fixed amount, or an agreement as to hourly rates and time spent in consideration of future services, or a compromise agreement, or conduct giving rise to an estoppel according to established principles.
31. I turn to the authorities to see whether this conclusion is reflected in them. In Turner, Evans LJ said at 366:

"Nothing [in the Solicitors Act 1843], or its successors, takes away the need for the solicitor to prove that his fees are reasonable, if they are challenged, absent any express agreement as to what they should be."

32. Despite Mr Preston's submission to the contrary, it seems to me that the kind of agreement that the Court of Appeal had in mind was a prospective agreement. I derive this from the example considered on the following page (367) of the report, namely where the hourly rate has been agreed and where the client expressly agreed to pay for as many hours as the solicitor in fact worked. Where an agreement of that kind, or an agreement to pay a fixed sum, is made at the outset, or where further work is only undertaken on condition that the client agrees to pay outstanding invoices, there is consideration for the agreement and the client cannot resile from it. My conclusion in this regard is supported by the type of agreement referred to by Sir Richard Scott V.-C in the first line of the quotation from Watts cited above.
33. In Re a Debtor No 32 of 1991 (no 2) (above), Vinelott J said of the situation where a demand is made for payment of reasonable remuneration for services rendered (at 527):

"I do not say that a statutory demand can never properly be presented in such a case- that the creditor must always quantify his claim by obtaining a judgment before serving a statutory demand. There may be cases where the minimum sum due can be ascertained by reference to some objective standard. There may be cases where the rate of charging is agreed and the minimum time that had to be spent on the task for which remuneration is sought can be similarly established; or advance or periodic payments may have been agreed. But these cases must be regarded as exceptional."

34. This passage seems to me to be contemplating a situation where the proper amount of the bill can be established by a purely arithmetical process. The alternative interpretation allows the bankruptcy judge to take a view whether or not the bill is good. He could therefore make a value judgment that the client's case on assessment had so little merit that it could not possibly succeed, at any rate as far as £750 of it was concerned.
35. Again as a matter of logic I would agree with Mr Macpherson that this latter interpretation appears to confuse the question of what is a liquidated sum with whether there is any genuine defence in relation to the bill.
36. In my judgment whether a sum is liquidated and whether there is a defence to the claim are separate issues and the first must be determined before the second is addressed. Accordingly any admission, acknowledgment or agreement converting the amount claimed from an unliquidated to a liquidated sum must be one from which the client has bound himself not to resile. A mere acknowledgment would be insufficient to bind him to forego judicial assessment or determination.
37. On this basis it was not possible to say that any part of the work done by Mr Truex had been quantified, or was quantifiable by the bankruptcy court as a mere matter of arithmetic. It seems to me that the Chief Registrar conflated the issue of whether there was a genuine dispute about a liquidated debt with that of whether the sum claimed was liquidated in the first place. The bill as a whole was capable of challenge as to quantum, was thus for an unliquidated sum and did not fulfil the requirement of s. 267. The same point applies to the Chief Registrar's alternative finding that there could not be a genuine dispute as to at least £750 of the costs.
38. I would however add that I reach the above conclusion of law with some hesitation for the following reasons. Turner, Watts and Joseph were not bankruptcy cases and judges of the calibre of Sir Donald Nicholls V-C and Vinelott J evidently thought it was permissible to found bankruptcy proceedings on a solicitor's unassessed bill of costs. My conclusion runs counter to the established practice of experienced registrars in bankruptcy. The case before me had a very short time estimate as the principal legal issue was taken late in the day. While I do not blame the parties or their legal advisers, some matters may have been insufficiently explored. I had to ask the parties to find and address me on some of the cases, including the two decisions of Vinelott J to which I have referred. Some of the submissions were sought and received after conclusion of the oral hearing.
39. I have a further concern. In answer to a question put to him by the Court, Mr Macpherson maintained that it is not possible to contract out of the assessment provisions of the Solicitors Act 1974. That issue is not before me and although Mr Macpherson put in a written submission I have not heard argument on it. If he is correct, no agreement even for consideration could prevent a solicitor's client from applying for assessment under the Act. The effect would be that the Court might well find a contractual agreement conclusive only in the context of the assessment exercise itself. The words "absent any express agreement" in Turner must have some meaning. One meaning that could be ascribed to the phrase is that the client had expressed himself in such a manner that the process of assessment could not reduce the bill below the £750 threshold. In other words, the bankruptcy judge could take his own view of the matter.
40. However it seems to me that the fact (if such is the case) that public policy requires the client to be able to seek assessment of a solicitor's bill even after having reached an otherwise binding agreement is merely a reason why the court ought not to make a bankruptcy order on a petition likely to be the subject of assessment under the Act. The availability of assessment does not prevent an otherwise binding agreement converting what was previously the solicitor's mere estimate of proper costs into a liquidated sum capable of founding a petition under s. 267 of the 1986 Act.

Estoppel

41. Mr Preston made the additional submission that if there was an admission by Mrs Toll, she was bound to it by estoppel. Mr Truex had acted to his detriment in incurring the cost of the statutory demand and the petition. I dismiss this argument on the short ground that seeking to enforce the debt itself cannot constitute a sufficient alteration of position to found an estoppel. If it could there would be an estoppel in virtually every case.

Informal application for assessment

42. I should also deal with a further point made by Mr Macpherson. He said that the statement in Mrs Toll's Notice of intention to oppose the bankruptcy petition, "4. Bill to be reviewed under the assessment procedure", amounted to an application for assessment of that bill. The Chief Registrar should therefore necessarily have referred the matter to the costs judge. At that time Mrs Toll would have been within the 12 month limit prescribed by the 1974 Act in respect of one of the two invoices. I accept that an application for assessment may be made informally, as in Brian Connolly v. Harrington (Liquidator of Chelmsford City Football Club (1980) Ltd 17^th May 2002 (unreported). However it is stretching the interpretation of Mrs Toll's Notice too far to construe it as an application for assessment. I read it as a plain statement that a separate application has been, or is about to be, made. I therefore reject that submission.

Was there a clear and unequivocal admission of the invoices?

43. I now turn to the position if, contrary to what is said above, the Chief Registrar was entitled to find that an admission of liability was sufficient to found the petition. The question would then arise whether the Chief Registrar correctly applied his own test, that is to say, whether there was a clear and unequivocal admission that the sums claimed in the invoices were due.
44. The Chief Registrar referred to four passages from the transcript in his judgment. He held, correctly in my view, that the first two were insufficient to amount to such an admission. The two passages on which he did rely start at p. 10 of the first transcript, as follows:

"Mr Justice Singer: They were asking you to pay…outstanding costs.

Mrs Toll: Yes, and I- which I said I am happy to pay; and, more than that, I came with a friend who actually was willing to lend me money to pay these costs, and also- we did not ever discuss costs really because…to discuss because they just did not want to talk to me really…"

"Mr Justice Singer: …you would have known that your lawyers…first of all took the view that this hearing would be necessary, and, secondly, were asking you for costs, which you had not in fact paid, despite what they say were a number of requests, both written and oral, since 25^th January. Taking that into account, it seems to me that I would normally not grant an adjournment.

Mrs Toll: Well, I can prove that I did- I was going to pay them, and I came to discuss it, and after that I asked the Law Society [to whom she had previously told Singer J that she had complained about Mr Truex] to call them and ask them if they still can meet me and we can solve this sort of difficulty.

Mr Justice Singer: Is there anything in this affidavit that you dispute?

Mrs Toll: I dispute that I refused to pay- it wasn't true, even if I…"

45. To my mind neither of these passages contains a clear and unequivocal admission that the sums claimed were due. Mrs Toll's mind was primarily directed to her grievances against Mr Truex. The question of payment of his bills was inextricably linked with her desire to obtain an explanation, satisfactory to her, of the work that he had done, in other words, the work that was the foundation for the bills. Her statements that she intended to pay the bills were qualified by the word "discuss" in relation to payment. It seems plain to me that she did not mean discussion as to the time and method of payment, but discussion of the costs in relation to her ongoing dispute about the work. In short, she was happy to pay, but only if persuaded that the bill was a proper one.
46. In coming to this conclusion I take into account exchanges contained in the later transcript during cross-examination of Miss Wells:

"Mr Justice Singer: …Would you like to see the letters that were sent asking you for money?

Mrs Toll: Yes, I know that, but I just, we never discussed, and I came to discuss the money…

Mr Justice Singer: Does that ask you to pay by a certain date?

Mrs Toll: Yes, but I wanted answer to my questions, which I couldn't…

Mr Justice Singer: Did you pay?

Mrs Toll: I came to discuss it, because…I said I'm happy to pay but I would like to find, to have explanation what exactly he is doing for me…And I didn't get an explanation."

47. The Chief Registrar's "jaundiced eye" in approaching the genuineness of Mrs Toll's claims was understandable for all the reasons that he gave. Nevertheless it seems to me that the question whether Mrs Toll admitted the invoices is separate from and precedes the question whether there was any genuine dispute of the claim, whether up to the threshold amount or at all. In my judgment there was no such clear or unequivocal admission.
48. Accordingly, if I am wrong as to the principle that an unliquidated sum does not become liquidated by a mere admission unsupported by consideration or estoppel, the appeal would succeed on this ground in any event.

Conclusion

49. Accordingly I would allow Mrs Toll's appeal.