England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		The Rolls Building 7 Rolls Building Fetter Lane London EC4A 1NL
		25/01/2018

MASTER TEVERSON:

1. There are two applications before me. The first is made on behalf of the Claimant, Mortgage Trust Limited, by an application notice dated 30 May 2017. It is (1) for an order (if and in so far as may be necessary) that any stay imposed on these proceedings by CPR 15.11 be lifted and (2) for an order that judgment be entered in favour of the Claimant in default of acknowledgement of service, alternatively in default of defence, for damages in the sum of £205,828.05, alternatively to be assessed.
2. The second application is in the nature of a re-active application. It is made by Ms Kerry Smith by an application notice dated 5 July 2017. It is for an order striking out the claim under CPR 3.4(2). Ms Smith was not when this application was issued an individually named Defendant. She was however in substance a Defendant as a person who was an equity partner in Willmett Solicitors, the Defendant firm, at the time when the Claimant's cause of action against Willmetts Solicitors accrued. On 14 September 2017 Ms Kerry Smith was on her application added as an individually named Defendant to the claim.
3. The claim in these proceedings was issued on 31 July 2013. The Claim was brought by Mortgage Trust Limited naming Willmett Solicitors (a firm) as Defendant.
4. The claim arises out of an application for a mortgage made to the Claimant by a Mr Philip Barker on behalf of a company known as Rigsby Residential Limited in about August 2007. The loan was applied for to be used in connection with the purchase of a property known as 1b, The Grove, Woking, Surrey for £650,000.
5. The Defendant firm was retained to act in relation to the transaction by the Claimant as well as acting for the borrower. The partner handling the transaction was a Mr Jonathan Gilbert. In August 2007 the Claimant transferred £422,400 to the Defendant for the purpose of making the mortgage advance having received a certificate of title signed by Mr Gilbert. The Claimant was told by Mr Gilbert the transaction had completed. In fact it never did. The Claimant's case is that the Defendant did not complete a purchase or secure the advance by registering any charge. It claims against the Defendant for breach of trust, breach of fiduciary duty and/or breach of contract and /or negligence in acting as solicitors for the Claimant.
6. Mr Gilbert resigned as a partner from the firm in March 2009. It transpired that Mr Gilbert had given undertakings to mortgage lenders which were not honoured giving rise to claims for compensation and damages against Willmett which by the date it went into administration in December 2009 totalled around £30 million
7. The firm ceased to trade and the employees were made redundant on 2^nd December 2009. In addition intervention solicitors were appointed by the Solicitors Regulation Authority with effect from 17 December 2009.
8. The firm, after a year, moved out of administration into compulsory liquidation. An order for the winding up of the firm was made on 10^th December 2010 in the Manchester District Registry pursuant to the provisions of the Insolvent Partnerships Order 1994 and the Insolvency Act 1986.
9. The firm had two tiers of insurance cover; £2 million primary cover provided by Travelers Insurance Company Ltd ("Travelers") and £8 million top up cover provided by Royal Sun Alliance ("RSA"). Both insurers adopted the position that they were entitled to aggregate the claims made against the firm as a result of the actions of Mr Gilbert. This limited the indemnity cover provided in the relevant policy year to a total of £10 million. By the time of the liquidation the total value of claims made against the firm had increased to around £50 million.
10. As explained by Mr Bloom in his evidence filed on behalf of the Claimant in support of its application, Travelers' decision to contend that it was entitled to aggregate claims led to proceedings being commenced in the Commercial Court in 2011 by another mortgage lending institution in proceedings entitled Godiva Mortgages Ltd v Travelers Insurance Company Ltd (folio 2011/534.
11. Mr Bloom says that the matter was viewed as being of some importance and the Law Society was given permission to intervene. Mr Bloom says:-

"While such proceedings were ongoing, it was logical to await the outcome as it appeared at that time to [the Claimant] that the only prospect of recovery against Willmett lay with insurers."

12. Mr Bloom goes on to explain that in view of the running of limitation, it became necessary for Mortgage Trust to issue and serve its proceedings. The proceedings were issued on 31^st July 2013 towards the end of the 6 year primary limitation period.
13. Mr Bloom says that the liquidators were served as were a number of the partners including Ms Kerry Smith. Mr Bloom says that Ms Smith was served personally on 14 August 2013. (The reference in paragraph 24 of Mr Bloom's 6^th witness statement to 14 August 2014 is a typographical error).
14. Mr Bloom says that none of those known to be equity partners filed acknowledgements of service. He says he understands that two persons claiming to be salaried partners did file acknowledgements.
15. On 6 September 2013 the Claimant made the first of a number of requests for a default judgment to be entered against Willmett with damages to be assessed.
16. This request was refused on 3 October 2013.
17. On 3 December the Claimant renewed its request for default judgment. This renewed request was also refused at my direction. The Claimant was notified by letter dated 13 January 2014 that formal leave of the Court was still required to continue the claim against the firm under section 130(2) of the Insolvency Act 1986 as applied by section 221(5).
18. On 9 June 2014 the Claimant applied to the Companies Court for leave to continue the claim. The application was supported by a witness statement of Mr Bloom dated 28 March 2014 with a statement of truth verified on 12 May 2014. In paragraph 20 of that statement Mr Bloom stated:-

"Given the undetermined issue of insurance cover, [the Claimant] did not at first advance its claim. However, in view of slow progress on that issue and the expiry of limitation, it became necessary for it to issue and to serve its proceedings. Apart from seeking any default judgment available to it, it is not intended that the case should be further progressed before the outcome of Godiva's case in the Commercial Court is known."

19. On 5 September 2014 Registrar Derrett in the Companies Court ordered that Mortgage Trust Limited be at liberty to continue the action against Willmett Solicitors notwithstanding the winding up order. It was however ordered that no monetary judgment was to be enforced against Willmett Solicitors without the leave of that Court.
20. The Claimant then renewed its request for default judgment to be entered.
21. On 10 November 2014, I directed the Claimant to apply by Part 23 application notice for any stay imposed by CPR 15.11 to be lifted and for judgment in default and for the application to be made on notice to the liquidators.
22. No such application was made until the first of the two applications that are now before me some two and a half years after the Claimant was directed to apply by Part 23 application notice. Mr Bloom says at paragraph 27 of his 6^th witness statement:-

"Given the undetermined issue of insurance cover, [the Claimant] did not, whilst it was unclear as to whether it would be possible to enforce any judgment obtained, further progress the present claim."

23. He continues:-

"[The Claimant] wishes to do so now however as the AIG matter has now been resolved by the Supreme Court and it would be appropriate for [the Claimant] once again to seek Travelers' formal position on aggregation once more."

24. I shall refer to this as "the first explanation".
25. Mr Bloom continues:-

"Furthermore, it has come to [the Claimant's] attention that Ms Smith was an equity partner at the time of the events which give rise to the present claim. Unlike the case of some of the partners in Willmett, Ms Smith was not in fact made bankrupt and did not enter into an individual voluntary arrangement. I confirm that Ms Smith has been made aware of this application."

26. I shall refer to this as the second explanation.
27. I am bound to say I do not find the first explanation a credible one. Mr Hugh Jackson appearing on behalf of the Claimant submitted that on an application of this type where evidence has not been tested by cross-examination, the court is not in a position to make findings of fact and needs to proceed very carefully with the evidence where issues are in dispute. I accept that as being the right approach. This does not however preclude the court from looking at the evidence filed on behalf of the Claimant to see whether or not it is credible.
28. Mr Bloom explains in his evidence how after the conclusion of the criminal trial at Southwark Crown Court involving Mr Gilbert and others, the Godiva proceedings were settled by a Tomlin Order. In paragraph 39 of his 7^th witness statement, Mr Bloom refers to receiving a letter dated 10 November 2014 from DWF LLP, the firm of solicitors which then represented Travelers. Mr Bloom exhibits a copy of that letter in which DWF point out to Mr Bloom's firm that Godiva made a contribution of £800,000 to Travelers' costs of the litigation.
29. Mr Bloom says the outcome of the Godiva claim was very unsatisfactory because it had not resolved the issue of concern to the Law Society namely the true construction of the aggregation provisions under the minimum terms of insurance.
30. Mr Bloom says however that Godiva was not the sole case of relevance to aggregation before the courts and that there were further important proceedings which were finally determined by the Supreme Court in a judgment given on 22 March 2017 reported in the Supreme Court under the name AIG Europe Ltd v Woodman and others [2017] UKSC 18.
31. Mr Bloom says in paragraph 27 of his 6^th witness statement that "the AIG matter has now been resolved by the Supreme Court and it would be appropriate for [the Claimant] once again to seek Travelers' formal position on aggregation once more".
32. There is however no evidence that between 22 March 2017 when the Supreme Court decision was published and 30^th May 2017 when the Claimant made its application supported by the 6^th witness statement of Mr Bloom that any steps had been taken on behalf of the Claimant to take the issue up with Travelers or its solicitors. On the contrary, DWF solicitors by email dated 16 June 2017 to Ms Smith's solicitor, Mr Petchey, confirmed that they had heard nothing from Richard Pearlman LLP since their letter of 10 November 2014. DWF wrote on 16 June 2017 to Richard Pearlman LLP having been sent a copy of Mr Bloom's witness statement dated 30^th May 2017 by Howell Jones LLP acting for Ms Smith. DWF said:-

"To save you the trouble of writing to our client, or to us, seeking our client's position, we thought we would write to you, and copy the letter to Howell Jones LLP and inform you that our client's position remains unchanged from that set out in Fishburn's letters to you of 19 January 2010 and 8 February 2010. Our client's case on aggregation was correct in 2010 and is correct now."

33. Further evidence that the Claimant was not relying on the outcome of the AIG decision is contained in a letter written by Richard Pearlman LLP dated 22 May 2017 to Howell Jones. On 18 May 2017 Richard Pearlman LLP had written to Ms Smith seeking an undertaking that she would not take steps to dispose of Flat 74, Kennet Street which Ms Smith had acquired as part of a court order ancillary to divorce. In their letter of 22 May 2017 Richard Pearlman LLP wrote to Howell Jones:-

"It is not our intention in this letter to go into matters raised by you since they are not relevant to the undertaking which we have sought, save to correct your assumption that the insurance cover which we referred to in our previous letter was insurance cover for our client. What we were in fact referring to was the insurance cover available to your own client and the refusal of Travelers to make any further payments, thereby rendering it pointless to our client pursuing the claim to judgment after that point. ...my emphasis)

Whilst on the matter of insurance, the decision in AIG is obviously relevant as between your client and the indemnity insurers but as we have intimated that any judgment obtained by our client would be enforced against the asset which has been identified, we fail to see its relevance to our client. Our client of course is not obliged to satisfy its judgment from any insurance cover available to your client; it is completely free to enforce its judgment against the partners and their assets."( my emphasis)

34. I accept it might be argued that this does not wholly undermine the first explanation because by the time of this correspondence the Claimant had learnt from Ms Smith's former husband that Ms Smith had been an equity partner in the firm and hence attention had switched to enforcement against her assets. The reference however to the refusal of Travelers to make any further payments "rendering it pointless to our client pursuing the claim to judgment after that point" is evidence that the Claimant had in reality abandoned the idea of attempting to establish a liability against the indemnity insurers under the Third Parties (Rights Against Insurers) Act 1930.
35. In support of the first explanation for its delay in prosecuting the claim, the Claimant relies on a witness statement from Mr Christopher Berwick made on 13 September 2017. Mr Berwick is the Operations Manager of First Mortgaging Servicing which is a division of Paragon Mortgages Limited which like the Claimant is a member of the Paragon Group of Companies. Mr Berwick says that from 2013 onwards until after the handing down of judgment by the Supreme Court in AIG Europe Ltd the progress and outcome of the Godiva Mortgage proceedings and the AIG Europe claim was on various occasions discussed with solicitors and counsel. He says this was in the context of a claim which concerned more than 100 mortgage transactions. He says precisely the same issues apply to the claim against Willmett.
36. I accept that on a general level the Claimant and its solicitors were following the AIG litigation. I do not accept so far as these proceedings were concerned it was intended to re-activate them in order to try and pursue third party rights against insurers. As pointed out by Mr Matthew Bradley, counsel for Ms Smith, Mr Berwick does not state in terms that the proceedings were put on hold pending the outcome of the AIG litigation.
37. In my view, the only inference that can properly be drawn is that following the receipt of the letter from DWF dated 10^th November 2014 the Claimant decided that it was pointless to try and establish any liability against the indemnity insurers. The receipt of that letter coincided with the direction from the court that any application for a default judgment should be made by a Part 23 application notice.
38. In my view it was not the publication of the Supreme Court's decision in AIG that led to the attempt to reactivate these proceedings, it was the information provided to the Claimant by Mr David Pickup.
39. The issue which in my view falls to be determined is whether the Claimant should be permitted to reactivate these proceedings in the light of the information received from Mr Pickup so as to be able to obtain a judgment enabling it to recover against Ms Smith's personal estate.
40. Both counsel referred to the dicta of Neuberger J (as he then was) in Annodeus Entertainment Ltd v Gibson (unreported 2 February 2000) identifying a number of potentially relevant factors in considering whether an action should be struck out on the grounds of delay. It was pointed out in Audergon v La Baguette Ltd (Court of Appeal 23 January 2002) by Jonathan Parker LJ that although helpful, there is a danger inherent in adopting a judicially-created checklist. Accordingly, it seems to me one must look at all the relevant circumstances.
41. I have considered first whether this is a case in which it can be said that there has been not merely delay on the part of the Claimant but also an abuse of process.
42. It seems to me that the circumstances in the present case come close to being an abuse of process but do not quite cross that line. In particular I have considered whether what the Claimant did was in effect to "warehouse" proceedings until it was convenient to pursue them. In Arbuthnot Latham Bank Ltd v Trafalgar Holdings [1998] 1 WLR 1426 at 1437, Lord Woolf referred to the unofficial practice of banks and others faced with a multitude of debtors from whom they are seeking to recover moneys to initiate a great many actions and then select which of those proceedings to pursue at any particular time. That is not what happened here but it can be argued that following the rejection of its renewed request for a default judgment, the Claimant should either have proceeded to apply for a default judgment by Part 23 application notice, or to have discontinued the proceedings or to have obtained the authority of the court to the proceedings being adjourned generally with permission to restore. The failure of the Claimant to adopt any of those three courses in my view came close to being an abuse of the court process.
43. I prefer instead to determine the applications before the court taking into account all the circumstances including the position of Ms Smith.
44. Here, there are a number of relevant considerations of a kind that the court has to consider when deciding whether to dismiss a claim for want of prosecution.
45. The first is the length of the delay. Looked at from Ms Smith's perspective, the proceedings were served on her in August 2013. The next time she was contacted by the Claimant's solicitors in relation to the proceedings was on 18^th May 2017 when she was required to give an undertaking not to dispose of Flat 74, 20 Kennet Street. Looked at from the court's perspective, the proceedings involved complete inactivity between November 2014 and May 2017.
46. Secondly, there is the lack of any good reason for the Claimant not to have proceeded in making an application for default judgment in November 2014 if it intended to pursue these proceedings to judgment in order to obtain rights by virtue of the Third Parties (Rights Against Insurers) Act 1930 against the indemnity insurers. The fact that the Claimant had waited until nearly the end of the expiry of the primary limitation period before issuing the proceedings, put the Claimant under a higher duty to prosecute the claim with diligence. The obtaining of a judgment would not have obliged the Claimant to attempt to enforce it against the insurers. It would however have brought these proceedings to a close merging them in the judgment.
47. On behalf of the Claimant it was submitted that the effect of the delay is not to prevent there being a fair trial of the issues in the action. It was submitted that there is in reality no defence to the claim.
48. I agree that the type of prejudice with which the court is concerned is not whether the claim can be tried fairly, but the effect on the business and personal position of Ms Smith.
49. One important circumstance relied upon by the Claimant is that it was not aware until so informed by Mr David Pickup in April 2017 that Ms Smith had been an equity partner in Willmett solicitors when the Claimant's cause of action accrued. The Claimant says that it was led into thinking that Ms Smith was a salaried partner and not an equity partner by a statement in paragraph 2 of an affidavit sworn by Mr Berryman one of the partners on 7 April 2009 in which Ms Smith is referred to as being one of the salaried partners.
50. That statement did however only refer to the persons who were the "present equity partners". It was for example known that Mr Gilbert had been an equity partner but had resigned in March 2009. The position of Ms Smith was that she had resigned as an equity partner in May 2008 and for a while became a salaried partner.
51. It is true that Ms Smith when served with the proceedings did not choose to volunteer that she had been an equity partner. Nor on the other hand is there any evidence that she actively misled the Claimant.
52. It was open to the Claimant when issuing the proceedings or at any time thereafter to have requested the partners to have provided a copy of a partnership membership statement. This is provided for by paragraph 5B of Practice Direction 7A. For the purposes of that paragraph "partnership membership statement" is a written statement of the names and last known places of residence of all the persons who were partners in the partnership at the time when the cause of action accrued being the date specified in the request made by the party seeking a copy of a partnership membership statement. If the partners are required to provide a copy of a partnership membership statement, the partners must do so within 14 days of receipt of the request: paragraph 5B.2.
53. It was submitted on behalf of the Claimant that by not choosing to acknowledge service or defend that Ms Smith had in effect delegated the defence of the proceedings to the liquidators. It was argued that had the Claimant applied for and obtained a judgment in default in November 2014, Ms Smith would not have had any grounds on which to apply to have it set aside.
54. It was further submitted that the effect of the delay had in fact been beneficial to Ms Smith because whilst at the time of issue the Claimant's loss stood at £481,978.95, the Claimant had been able to mitigate its loss to £205,825.05 by being able to achieve realisations from other properties owned by the borrower.
55. In my view, the court should look not at what the position would have been had a judgment been obtained, but at the effect of the delay as of now on Ms Smith.
56. For that purpose it is necessary to review carefully the evidence filed by Ms Smith and what is or can be said in response to it. In summary, Ms Smith is a solicitor in a family law practice. She left Willmett in October 2009 and set up in Henley as a sole practitioner. She faced the very real threat of bankruptcy as a result of the actions of Mr Gilbert. In September 2010 she sought the urgent assistance of the Law Society in relation to the stance being taken in relation to aggregation by the indemnity insurers. Ms Smith's hope was that the Godiva proceedings would result in her not being left uninsured.
57. The settlement of the Godiva proceedings in October 2014 without the issue of aggregation being determined left Ms Smith knowing that she remained exposed.
58. Ms Smith was not however contacted again on behalf of the Claimant until by letter dated 18^th May 2017. Ms Smith's evidence is that in the intervening period of two and a half years she had come to believe that the threat of enforcement against her personal estate had either gone away or was negligible. Mr Pickup's evidence is that as at November 2014, Ms Smith discussed with him and others her on-going exposure to claims arising out of Willmett. He also refers to a Form E in which Ms Smith said that the flat at 74 Kennet Street had been transferred to him in July 2015 because of the risk that she was still under with respect to Willmett. I see no reason however to reject Ms Smith's evidence that by 2016 she no longer believed the Claimant's claim posed a realistic threat to her.
59. Ms Smith separated from her second husband, Mr Pickup in January 2016 and they were divorced in March 2017. In July 2016 Ms Smith took out a loan facility from Novitas in order to fund her legal costs in return for granting Novitas an interest in the financial settlement ancillary to her divorce. Notice of assignment was given to Mr Pickup.
60. As part of the financial settlement reached in March 2017, Flat 74 Kennet Street was to be transferred to Ms Smith. Ms Smith's plan was and is to sell the flat and to repay the sum of around £160,000 required to repay Novitas. The balance of the sale proceeds, Ms Smith intends to use to provide a deposit to purchase another property for herself and her children.
61. Ms Smith says in her evidence that the financial settlement between her and Mr Pickup concluded on 23^rd March 2017. Under the settlement, Flat 74 was to be transferred to her on 3^rd April 2017. It was on 10^th April 2017 that Ms Rachel Jones, Mr Pickup's new partner, contacted the Claimant's solicitors ostensibly in her position as a solicitor with DWF acting for Royal and Sun Alliance.
62. I am not directly concerned with the propriety of the conduct of either Ms Rachael Jones or Mr David Pickup. Nor can the Claimant be criticised for seeking to make use of the information provided to it.
63. The issue for me is whether the Claimant's delay in seeking to reactivate these proceedings has caused serious and significant prejudice to Ms Smith. In my view the evidence of Ms Smith demonstrates clearly that it has. In addition to the financial steps taken by Ms Smith in connection with her divorce, I consider that this is an exceptional case in which it would be wrong to allow any judgment obtained by the Claimant to be enforced against the personal estate of Ms Smith. Ms Smith has been living for around 10 years with the potential effects on her of Mr Gilbert's conduct. There is evidence before the court as to the effect on her health. She was visibly distressed in court before me and had to leave court.
64. I recognise that the Claimant is a commercial victim of Mr Gilbert's conduct. It seems to me however that its decision not to pursue its application for a judgment in November 2014 and to leave the proceedings in abeyance until May 2017 came close to an abuse of process and when combined with the substantial and significant prejudice to Ms Smith caused by that inactivity, leads firmly to the conclusion that these proceedings should be struck out.
65. I have reached this conclusion without taking into account the possible effect of the delay on Ms Smith's ability to bring an individual claim against Travelers. It seems to me unlikely that Ms Smith would ever have taken on such a claim.
66. In my view the particular factors relevant to this case are (1) the decision made by the Claimant in November 2014 not to pursue any application for judgment (2) the lack of any further steps being taken in these proceedings until May 2017 (3) the significant and substantial prejudice thereby caused to Ms Smith were the court now to allow a judgment to be entered or enforced against her.
67. This makes it unnecessary for me to determine whether the Claimant needed permission to lift any stay under CPR 15.11. It seems to me that even if the effect of the requests for judgment was to prevent the automatic stay under CPR 15.11 from operating, that once those requests had been refused, there was a clear obligation on the part of the Claimant either to renew its application for a judgment (whether default or summary) or to discontinue the proceedings or to obtain the sanction of the court to the proceedings being adjourned generally with permission to restore. If after an extended period, without any of those courses having been taken, the court were asked to allow the proceedings to be reactivated, the court would be bound to determine whether or not the proceedings should instead be struck out for want of prosecution.