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||Neutral Citation Number:  EWHC 77 (Ch)
||Case No: 187 of 2017
IN THE HIGH COURT OF JUSTICE
||Bristol Civil Justice Centre
2 Redcliff Street, Bristol, BS1 6GR
B e f o r e :
HHJ PAUL MATTHEWS
(Sitting as a Judge of the High Court)
|| Barry John Ward (acting as liquidator of Brady Property Developments Ltd)
||- and -
||(1) Nicholas Hutt
(2) David Loughlin
(3) John O'Boyle
James Couser (instructed by Gardner Leader LLP) for the First and Second Respondents
Stuart Cutting (instructed by Moore & Tibbits Solicitors) for the Applicant
Hearing date: 11 January 2018
HTML VERSION OF JUDGMENT APPROVED
Crown Copyright ©
HHJ Paul Matthews :
- This is an application by notice dated 9 November 2017 by Nicholas Hutt and David Loughlin, the first and second respondents to a claim (formally an 'application') made against them in the liquidation of Brady Property Developments Ltd ("the company") by the applicant acting as liquidator of that company. By that application, the first and second respondents seek an order that the claim against them be struck out and/or that summary judgment be entered in their favour and that the applicant pay their costs.
- The application is supported by two witness statements of Andrew James Shipp (dated 9 November 2017 and 21 December 2017) and exhibits, and opposed by a witness statement of the applicant dated 4 January 2018. The solicitor to the third respondent, Deanne Marie Hamilton, has also made a witness statement, dated 3 January 2018, taking a neutral position. The application was argued before me on 11 January 2018, by Mr James Couser for the first and second respondents and Mr Stuart Cutting for the applicant. Mr Crispin Hayhoe held a watching brief for the third respondent, who was not a party to this application. He addressed me on a few small points of detail, but Mr Couser objected to my hearing him on any substantive matters in dispute, and I did not do so.
The present claim
- The claim itself, within which this application is made, was begun by an application notice in Form IAA issued on 10 May 2017 in the Birmingham district registry of the High Court, Chancery Division. It made a claim against all three respondents for a declaration that a payment of £160,000 to them on or about 2 June 2012 was void as a preference, and an order that the respondents repay that sum to the applicant. On 22 August 2017 District Judge Kelly, sitting in the Birmingham District Registry, ordered that the claim be transferred to the County Court at Bristol, and gave various directions. Particulars of claim were served and filed, dated 20 September 2017. As I have said, the first and second respondents on 9 November 2017 issued the present application in this claim. When the matter came before me I ordered that it be transferred from the County Court to the High Court District Registry, as it seemed to me to raise important matters of principle and practice, especially in relation to the effects of discontinuance.
- The particulars of claim plead that the company purchased a property at 15 Garnet Street, Bristol, on 22 July 2008 for £138,000 (see at ). They further plead that the company sold a ground floor flat at 92 The Nursery, Bristol, on 8 February 2011, and the first and second respondents instructed that the proceeds of sale be paid to a company called Diamond Partners Investments UK Ltd ("Diamond"), of which they were two of the three shareholders, and the sole directors. Out of those proceeds £39,000 were paid to the second respondent and £63,000 to the first respondent, in each case in satisfaction or partial satisfaction of the company's liability to each of them ().
- In March 2011 the company agreed to sell 15 Garnet Street to Diamond. The price was subsequently reduced to £170,000 (). The sale completed on 13 May 2011, and the net proceeds of £169,521.97 were transferred to the company's account with RBS, £96,954.51 being used to discharge RBS's mortgage over Garnet Street (). On 20 May 2011 £4557.77 were transferred to the first respondent to satisfy the balance of the company's liability to him. On 27 May 2011 £93,875 were transferred to the company by its solicitors acting on the sale of a top floor flat at 92 The Nursery (). On 2 June 2011 the company transferred £160,000 to HLM Properties ("HLM") (). This is the payment complained of as a preference.
- The company and HLM had the same bankers, RBS (). The company and HLM owned properties over which RBS held mortgages. RBS was putting increasing pressure on the company, primarily in relation to the properties owned by HLM (). HLM was the company's largest unsecured creditor, being owed £180,414. The other unsecured creditors were the first respondent (£67,558), the second respondent (£39,000), and the third respondent (£30,000). The debts of the first and second respondents were paid off from the proceeds of sale of the ground floor flat at 92 The Nursery and of Garnet Street (). HLM was under significant pressure from RBS, and the partnership's liability was that of the partners personally (). When the sum of £160,000 was paid to HLM on 2 June 2011, the company's only creditors were HLM (£179,810) and the third respondent (£30,000), and it had no further assets ().
The application to strike out
- In very brief terms, the application to strike out and/or for summary judgment is based on (1) an alleged failure to comply with CPR rule 38.7, (2) the rule in Henderson v Henderson (1843) 3 Hare 100, (3) abuse of process more generally, and (4) the alleged weakness of the claim. The background and procedural history are very important. The applicant brought an earlier claim against the first and second respondents in their capacity as directors of the company, essentially in respect of misfeasance allegations. This claim came for trial before me in May 2017. However, the claim was discontinued on the second day of the trial, in circumstances which I must shortly relate.
The original claim
- The original claim was one for a declaration that the respondents as company directors had breached certain provisions in the Insolvency Act 1986 and the Companies Act 2006, and for orders that the respondents pay certain sums to the company in respect of their breach of fiduciary duty. It arose out of transactions with the properties already mentioned, 15 Garnet Street and 92 The Nursery. The company itself was ordered to be wound up on the petition of the third respondent, John O'Boyle, by order of the High Court, Birmingham District Registry, dated 15 May 2013. On 5 June 2013 the court ordered that the matter be transferred to the County Court at Bath. Mr Ward was appointed liquidator of the company on 25 October 2013.
- The origins of the first claim were these. The three present respondents and a Mr Brady were the four equal shareholders in, and also directors of, the company. In a nutshell, the present third respondent complained that although all four of the shareholders and directors were owed money by the company in the run-up to its going into liquidation, the other three had so arranged matters that they were paid off, but that he was not. The liquidator investigated the position, and eventually brought the first claim.
- District Judge Goddard ordered the transfer of the matter to the County Court at Bristol on 21 June 2016. On 20 July 2016 Mr Ward filed a second witness statement. In this statement he explained that, following the service of the second statement of the second respondent, the focus of the application was now changed. A preference claim that had previously been advanced by the liquidator against the first and second respondents was withdrawn (by simply deleting the relevant passage in the particulars of claim), and the focus shifted to the property known as 92 The Nursery. I shall have to return to that.
- In summary form, the applicant liquidator's case in the first claim was as follows. The first two respondents knew or ought to have concluded by 31 March 2010 that there was no reasonable prospect of the company avoiding insolvent liquidation. The sale of 15 Garnet Street to Diamond was a "substantial property transaction" requiring the approval of the majority of shareholders, but in breach of section 190 of the Companies Act 2006 that approval was not given. The so-called Duomatic principle did not apply, because at the time the company was insolvent. The respondents caused £160,000 of the proceeds of sale to be paid to another entity, a partnership between the three respondents, known as "HLM Properties", in breach of their various duties to the company. They also caused the company to make payments of £4558 to the second respondent and £7154 to Mr Brady in breach of their various duties to the company. In February 2011 the respondents caused the proceeds of sale of 92 The Nursery to be paid to Diamond in breach of their various duties to the company. Finally, the respondents failed to cooperate with the applicant by not complying with his request to deliver up the company's books and records, in breach of section 235 of the Insolvency Act 1986.
- Again in summary form, the respondents' defence was as follows. The sale of 15 Garnet Street was authorised by a majority of the shareholders of the company, namely the respondents and Mr Brady, holding 75% of the shares. They relied on section 195 of the Companies Act 2006. The proceeds of sale were used to satisfy a debt owed by the company to HLM Properties. The balance of proceeds of sale of 92 The Nursery was used to discharge the company's loan account with Diamond. Finally, the respondents did cooperate with the liquidation process, providing all relevant information to the applicant, and offering him access to 2 boxes of company records and accounts. But in any event section 235 of the Insolvency Act 1986 created a criminal offence which could only be adjudicated upon by means of a criminal prosecution, and not by the present proceedings. In addition, the respondents said that they acted honestly and reasonably and therefore ought to be excused for any breaches of duty.
The trial and the discontinuance
- On the first day of the hearing, Mr Cutting opened the case on behalf of the applicant. During the opening, I asked Mr Cutting how the allegation of non-cooperation was relevant to the allegation of breaches of duty. After considering the matter, Mr Cutting abandoned the claim under section 235 of the Insolvency Act 1986.
- In relation to the Garnet Street payment, the property had been subject to a charge to the Royal Bank of Scotland in the sum of £90,000. But the applicant believed that a second property had been sold at the same time for £92,000. Mr Cutting referred me to a meeting note dated 21 November 2011 at which the respondents were present with their accountants. It said (in part):
"The second flat was sold post year end for £92,000 and 15 Garnet Street was also sold post year end £170,000."
- The balance from the sale of 15 Garnet Street would only have been £72,000 after paying off the charge to the bank. So Mr Cutting said that the rest of the £160,000 paid to HLM must have come from elsewhere, such as the sale of this second flat. The respondents admitted the payment, saying that HLM was under pressure. The applicant said that these were irrelevant considerations to be taken into account. Moreover, there was no evidence, other than the say-so of the respondents, that HLM was a creditor of the company at all. There was no reference in the company's accounts.
- In relation to the proceeds of sale of 92 The Nursery, paid to Diamond on 8 February 2011, Diamond's bank statement showed the receipt of £102,270.34. It also showed payments out to the first two respondents by cheque of £39,000 on 15 February 2011 and a further £63,000 on 17 February 2011. The second respondent's second witness statement at paragraph 6 said that a large debt was owed by the company to Diamond. But again there was no evidence of any loan. At the same time the company's own annual accounts showed that there were debts due from the company to all three respondents. These appeared in the company's accounts to 31 March 2009, when note 4 showed that £39,000 was due to the first respondent, £67,000 was due to the second respondent and £30,000 was due to the third. In the company's accounts ending March 2010 the position was the same. But in the accounts for the following year, ending March 2011, the notes to the accounts showed a different picture. By 31 March 2011, nothing was due to either of the respondents, although the sum of £30,000 was still owing to Mr O'Boyle. The two cheque payments from Diamond's bank account to the respondents were made in February 2011. This therefore suggests that the payment out of Diamond's bank account was being treated as satisfying the first two respondents' personal claims against the company, rather than a claim by Diamond itself, as the second respondent asserted in his second witness statement.
- In the notes to the 2012 accounts, there was a statement that the sum of £4558 had been paid to the second respondent during the year. This, said Mr Cutting, was the balance of his loan account with the company. The same note showed that nothing was then owed by Mr Sean Brady to the company, whereas in the accounts to 2011 the notes to the accounts showed that the sum of £7154 was owed by him. Accordingly, said Mr Cutting, this showed that the debt owed by Mr Brady had been written off during the year ending 2012.
- Having opened the claim, Mr Cutting asked for an adjournment for the rest of the day, in order to prepare a further witness statement for the applicant, and also particulars of claim on causation and loss. Mr Couser consented to this course. As it appeared that the trial timetable would accommodate this adjournment, I granted it. The applicant's third witness statement dated 8 May 2017 was subsequently served and filed later that day, together with a further revised draft order which in effect withdrew the claim for a transaction at an undervalue in respect of 15 Garnet Street and the allegations of misfeasance in respect of both that property and 92 The Nursery.
- On the second day of the trial, 9 May 2017, the applicant was cross examined, taken through various documents, and accepted that none of the transactions that he was complaining about had caused the company any loss. I adjourned the hearing again in order to enable the applicant to receive further advice from his legal team. As a result of that, and in fact during the adjournment itself, a notice of discontinuance was filed, and the claim came to an end. The applicant agreed to pay indemnity costs to the first and second respondents. There was no suggestion made at any time to me that the applicant was contemplating the issue of further proceedings against the respondents.
The issue of the new claim
- Yet, on 10 May 2017, the day following the discontinuance of the original claim, the new claim was issued, not in the County Court (or even Chancery District Registry) at Bristol, but instead in the Chancery District Registry in Birmingham. The applicant, the liquidator, says that he did this because Birmingham District Registry was the seat of the liquidation, whereas Bristol was the place where the original claim was being tried. The first and second respondents to the new claim were the original respondents, and the third respondent was Mr O'Boyle (the petitioning creditor in the winding up petition, but otherwise not a party to the first claim). As I have said, the first and second respondents now apply to strike out the new claim, on three grounds, and alternatively apply for summary judgment.
Ground 1: CPR, r 38.7
- The first ground on which the application is now made to strike out the new claim arises under rule 38.7 of the CPR. This states:
"A claimant who discontinues a claim needs the permission of the court to make another claim against the same defendant if –
(a) he discontinued the claim after the defendant filed a defence; and
(b) the other claim arises out of facts which are the same or substantially the same as those relating to the discontinued claim".
- The applicant accepts that he discontinued the claim after the respondents had filed their defence. However, he says that the claim is not made against the same defendants, because they are sued in different capacities to the original claim. The original claim was against the first and second respondents in their capacities as directors of the company. The new claim is against all three respondents as partners in the firm HLM Properties. Secondly, the applicant says that the new claim does not arise out of facts which are substantially the same as those relating to the discontinued claim.
- The first question is therefore whether rule 38.7 is engaged or not. I deal with the two disputed points in turn.
- In my judgment, so far as the new claim is brought against the first and second respondents, it is brought against "the same defendant" within the meaning of rule 38.7 (a). The fact that the capacity in which the liability is alleged to arise is or may be different is nothing to the point. In both the original and the new claims, the same respondent/defendant is alleged to be personally liable to the applicant. Unlike a limited company, a partnership in English law is not a legal person distinct from the persons who are its members. A claimant who sues an English partnership sues, and sues only, the persons who at the material time are the partners, that is, are members of the partnership. So the legal persons who are alleged to be personally liable in the new claim are the same legal persons as were alleged to be liable in the original one. That is quite sufficient to satisfy the criterion of "the same defendant" within rule 38.7(a).
Same or substantially same facts
- The next question is whether the new claim arises out of "facts which are the same or substantially the same as those relating to the discontinued claim". The first and second respondents say that it does. In his first witness statement, Mr Shipp puts it this way:
"48. Both applications relate to the use by the first and second respondents of the proceeds of sale of 15 Garnet Street and 92 The Nursery. Within the original application, the applicant failed to properly investigate the circumstances surrounding the use of the sale funds from the 2 properties before commencing his application. As a result, it appears the applicant was not aware, or entirely failed to take into account, the fact that HLM Properties received the proceeds of sale of 15 Garnet Street, when he made the original application. However, he certainly was aware of this fact at the latest when he had served on him the second witness statement of Nicholas Hutt dated 14 June 2016.
49. Indeed, the second witness statement of Barry Ward dated 30 July 2016, at paragraph 23, acknowledged the fact that his originally pleaded claim was now incorrect. To repeat my paragraph 20 above, paragraph 23 of Mr Ward's second witness statement states 'I originally believed the sale proceeds of 15 Garnet Street were used to repay money owed to the respondents by Brady. Now it seems that the sale proceeds were used to repay money Brady allegedly owed to HLM (although I have seen no evidence of this). As explained in the respondent's own evidence, the sale proceeds of £160,000 for 15 Garnet Street (an asset of Brady) were transferred to HLM in their entirety purely because the respondents were trying to preserve their own liabilities to RBS in respect of HLM. This was carried out at a time when the respondents knew that money was owed to Mr O'Boyle as a creditor of Brady. Accordingly the respondents failed to ensure that creditors were paid pari passu and accordingly were actually misfeasant in transferring the sale proceeds of 15 Garnet Street to HLM. In view of this new information that has come to light from the respondent's evidence, I will be adjusting the case advanced against them accordingly'.
50. It is therefore clear at the time he made this statement, over 9 months before trial, that Mr Ward had knowledge that funds to the sum of £160,000 were paid by the company to HLM in June 2011 and if it is correct such payment constituted a preference, then this should have been obvious to the applicant at that time.
51. The original application of course included a claim against Mr Hutt and Mr Laughlin that payments had been made to them by the company which amounted to preferences. These claims were withdrawn by the applicant on or around 20 July 2016.
52. At that time, the applicant was fully aware of the full factual position, the reasons why the 2 properties were sold by the company, and why the funds were paid to HLM Properties. When the applicant withdrew his claim that payments made to Mr Hart and Mr Laughlin were preferences, he could easily have applied at that time to have amended his claim to include the payments made to HLM, without prejudicing any party, or the trial date. However, he failed to do so and it is far too late for him to attempt to do anything about that now as permitting that enables him to vex the respondents in respect of matters that all occurred years ago."
- The liquidator says that the claim does not arise out of facts which are the same or substantially the same as in the first claim. He says that the preference claims in the original claim (which were in fact dropped before the trial) related to the payments to the respondents reducing their directors' loan accounts. Although reference to the £160,000 payment to HLM Properties was made, this was on the basis that it was part of a wider claim for breach of statutory duty and misfeasance against the first and second respondents as directors. The new claim is a claim against the partnership HLM Properties as the recipient of the payment of £160,000 as a preference contrary to section 239 of the Insolvency Act 1986.
- The explanation for not seeking to amend the original claim to bring in the new claim prior to discontinuance is that it was considered to be "procedurally neater" to deal with it separately. The first claim was only against the first two respondents, whereas the present claim is against all 3 respondents, including Mr O'Boyle, all partners in HLM Properties. So it would have been necessary for Mr O'Boyle the third respondent to have been involved in the application to amend, and for further amended statements of case and perhaps evidence to be filed. Even so, that is not an explanation for not having informed the court at the time of the discontinuance that this was (at the least) being contemplated.
- The liquidator says that for the original claim, based on misfeasance and breach of director's duty, it would have been necessary to prove the payment and receipt, and also that the directors of the company misappropriated the company's assets in making the payment, but not that the recipient was a creditor. However, for the new claim the liquidator would need to show not only the payment and receipt of the money, and that the recipient was a creditor but also that there was an intention to prefer that creditor. The respondents say that the original claim at inception actually included a preference claim (albeit for different sums that that now claimed) against the first and second respondents as recipients, but this was later changed to a misfeasance claim against the same respondents as directors. The focus of the claimant changed but the underlying facts and consequence were the same.
- In my judgment, the substance and the reality is that where the respondents as directors pay themselves as creditors the liquidator has a choice of courses of action. He could have chosen the route of a preference claim. He did choose that route in respect of two other payments. Then he dropped it. Instead, in the original claim at trial he pursued the respondents for misfeasance as directors. That was the liquidator's choice. I do bear in mind the need in a preference claim to show an intention to prefer the creditor. But that is a minor point in the present context, and may well be inferred from the primary facts proved. On the whole, in my judgment the second claim arises out of substantially the same facts as the first.
- Accordingly, rule 38.7 is engaged. The applicant accepts that he did not seek the permission of the court before commencing the new claim, much less obtain that permission. Indeed, even today no such application has been made. It is therefore necessary to go on and consider the consequences of this.
Is the new claim a nullity?
- Originally, the first and second respondents said that, the permission of the court not having been first obtained, the new claim must be a nullity. As to this, on the one hand, it is clear that there is a general reluctance on the part of the courts to hold that failure to comply with a procedural requirement such as obtaining permission renders legal proceedings a nullity: see eg R v Secretary of State for the Home Department, ex p Jeyeanthan  1 WLR 354, 358-62. On the other hand, it is also clear that the legislator may expressly or by necessary implication so provide if it wishes: see eg Seal v Chief Constable of South Wales Police  1 WLR 1910, HL. It is therefore a question of construction of the relevant legislation in each case. Do the rules make it in effect a precondition of valid proceedings that permission has been obtained in advance? Some textbooks and cases refer to the difference between so-called 'directory' and 'mandatory' language. But this simply pushes the enquiry a stage further on, as that is just a shorthand way of explaining the difference in consequences if the procedural requirement is not complied with. In itself, it does not answer the question.
- In the present case, the requirement for permission is contained in one of the rules of the CPR, and not (as in some other cases) in primary legislation as well. However, CPR rule 3.10 provides:
"Where there has been an error of procedure such as a failure to comply with a rule or practice direction –
(a) the error does not invalidate any step taken in the proceedings unless the court so orders; and
(b) the court may make an order to remedy the error."
On the face of it, therefore, wherever a provision of the CPR requires permission to be obtained before taking a step, a failure to obtain permission does not of itself invalidate that step. In shorthand, it is an irregularity rather than a nullity.
- In Re Saunders  Ch 60, the plaintiffs brought claims in tort and contract against the defendants, but discovered that before the issue of proceedings the defendants had been made bankrupt. Section 285(3) of the Insolvency Act 1986 requires that after the making of a bankruptcy order no creditor of the bankrupt in respect of a provable debt shall commence any legal proceedings against the bankrupt except with the leave of the court. The plaintiffs sought that leave. Lindsay J held that insolvency proceedings begun without having first obtained leave were not an irretrievable nullity, but capable of redemption by granting leave retrospectively: see at 82B-83F.
- In Wilton UK Ltd v Shuttleworth  EWHC 2195 (Ch), HHJ Davis-White QC had to deal with the validity of service of a claim form and particulars of claim in proceedings under part 7 of the CPR brought as a derivative claim under Chapter 1 of Part II of the Companies Act 2006, where permission of the court to continue the proceedings had not first been obtained under section 261 of that Act and CPR rule 19.9A. So that was a case involving a permission requirement imposed by both primary legislation and also the procedural rules. The judge referred to a number of cases, including Seal v Chief Constable of South Wales Police  1 WLR 1910 and (in some detail) Re Saunders  Ch 60. He held, in the context of the particular legislation,
"65. … that the failure to obtain permission does invalidate steps thereafter taken but that the court does have jurisdiction retrospectively to validate the same."
- In the light of the decisions of Lindsay J in Re Saunders  Ch 60 and HHJ Davis-White QC in Wilton UK Ltd v Shuttleworth  EWHC 2195 (Ch), and especially bearing in mind that the requirement for the court's consent was contained only in the CPR, and not in any other legislation as well, Mr Couser conceded that he could not realistically maintain that the second claim was a nullity from the beginning. I think he was right to do so. On the other hand, he maintained that it was nonetheless an irregularity, and that the claim was liable to be struck out under CPR rule 3.4 (2) (c).
- I accept that submission. So the next question is whether the court can or should give permission, or (the other side of the coin, on these facts) whether the claim should be struck out. The first and second respondents say, amongst other things, that the limitation period for bringing such a claim against them has now expired, and therefore it is too late to bring the claim.
- The test that the court should apply in deciding whether to give permission under r 38.7 is not entirely clear, but there is at least some assistance in the authorities. In Hague Plant Ltd v Hague  EWCA Civ 1609, the judge at first instance, having to decide whether to permit a re-amendment of the claimant's statement of case, considered the scope and effect of rule 38.7. He held that there was an analogy with the making of a fresh claim after discontinuance under rule 38.7. He further held that under that rule it was only "in exceptional circumstances" that the court should allow an abandoned claim to be reinstated. He ultimately refused permission to amend to the claimant, who appealed to the Court of Appeal.
- Briggs LJ, with whom Christopher Clarke and Sharp LJJ agreed, discussed the analogy with rule 38.7 in these terms:
"60. In my judgment there is indeed an analogy between the re-introduction of a claim previously abandoned in the same proceedings and the making of a fresh claim after discontinuance of a similar claim based on the same or substantially the same facts, as is controlled by Part 38.7. Both types of conduct, unless closely controlled by the court, tend to undermine the public interest in finality in litigation. But Part 38.7 imposes that control not in terms by the requirement to show special circumstances, but rather by the requirement that such fresh proceedings may only be brought with the Court's permission. In that respect they equate the bringing of fresh proceedings with the re-introduction of an abandoned claim by amendment, since amendment itself requires the court's permission. Beyond that, it seems to me that the rule leaves it to the court to decide whether to grant or refuse permission having regard, as I have said, to the public interest in finality.
61. It is true that the Notes to the current edition of the White Book use the phrase 'exceptional circumstances' as characteristic of the sort of explanation likely to be required in an application for permission under Part 38.7, but it is dangerous in my view to erect that as a test imposed by the rules, not least because of its inherent uncertainty. To that limited extent the judge may have mis-described the ambit of the court's discretion to give such permission. The real question for the judge was whether, having abandoned the de facto directorship claim in the light of Jean Angela's Defence (in which the other defendants precisely concurred) a sufficient explanation was offered for its re-introduction to overcome the court's natural disinclination to permit a party to re-introduce a claim which it had after careful consideration decided to abandon."
- In Kazakhstan Kagazy plc v Zhunus  1 WLR 467, Leggatt J also had to deal with an application by claimants to re-amend particulars of claim. The defendants contended that certain claims, known as the "Manx law claims", had already been discontinued. The claimants denied that. The judge held that those claims had indeed been discontinued. He then set out rule 38.7, and said this:
"34. If there had been a material change of circumstances since the Manx law claims were discontinued and the claims were shown now to have a real prospect of success, then there would in principle be a basis for seeking the permission of the court to amend the particulars of claim again in order to put the Manx law claims back in. I think it plain, however, that there has not been a material change of circumstances and that at the present time there are no reasonable grounds for making the Manx law claims; nor do those claims have a real prospect of success."
- In addition, the commentary in the notes to the CPR in the White Book says this:
"The court is likely to give permission, for example, where the claimant was misled or tricked by the defendant, where important new evidence has come to light or where there has been a retrospective change in the law (eg a Supreme Court case overruling a Court of Appeal decision which had led the claimant to discontinue). All these examples are, of course, unusual cases and assume that the limitation period has still not expired."
- The reference to limitation in those notes recalls the position where application is made to amend the statement of case to plead a new cause of action or to add a defendant after a relevant limitation period has expired. CPR rule 17.4 (made pursuant to the Limitation Act 1980, s 35) applies where a party applies to amend his statement of case in certain ways and a relevant limitation period has expired. Rule 17.4 (2) then provides that
"The court may allow an amendment whose effect will be to add or substitute a new claim, but only if the new claim arises out of the same facts or substantially the same facts as a claim in respect of which the party applying for permission has already claimed a remedy in the proceedings."
- The phrase "arises out of the same facts or substantially the same facts" is almost exactly the same as that to be found in rule 38.7(b). Rule 17.4 refers to a new claim for which a relevant limitation period has now expired, but which is based on facts which were already pleaded in relation to an existing claim. This is put forward as a threshold minimum requirement for the court to be able to give permission for the amendment. Obviously the defendant will not be taken by surprise, the relevant facts being already pleaded against him despite the expiry of the limitation period.
- In rule 38.7 the factual matrix is different, because the discontinuance means that there is no longer an existing claim. Instead, the comparison is with the former claim. Nevertheless, in the same way, the defendant cannot claim to be taken by surprise, because he or she has already had to meet that claim, even though it has now been discontinued. In this rule, though, the threshold requirement for permission arises in all cases, there being no mention of any limitation problem.
- However, as it seems to me, if the limitation period has in fact expired by the time permission is sought, and the second claim has not yet been issued, the second claim would have no reasonable grounds of success, and (in accordance with the dicta of Leggatt J in the Kazakhstan case) it would not be right to give permission. The question then is whether the position should be different if, in breach of the rule, the claimant who discontinued had in fact issued (without permission) before the limitation period expired. That is this case.
- At first sight, it seems absurd and unjust that the claimant could be better off by breaking the rule then by following it. The courts should not reward or otherwise encourage rule breaking. The claimant prays in aid by analogy the old rule under the RSC that an amendment to a statement of case related back to the date of the original document: see Sneade v Wotherton Barytes & Lead Mining Co  1 KB 295, 297. This rule was criticised in later years (see eg Liff v Peasley  1 WLR 781, 799, per Brandon LJ), and section 35 of the Limitation Act 1980 was passed in part in order to deal with such criticism. But in any event there are, it seems to me, two answers to this argument.
- The first is that it is simply an argument by analogy, and in my judgment the analogy is not good enough to govern my decision on rule 38.7. This is not an amendment of an existing claim. It is a fresh claim repeating one that was made earlier, and then voluntarily given up. The policy which should apply is not self-evidently the same as that which should apply where a claimant does not give up a claim, but seeks to bolster it by amendment. The second answer is that authorities on the more modern CPR take the view that (at any rate where the Limitation Act 1980, s 35, does not apply) there is no longer any firm rule of law about so-called 'relation back'. Instead, it is simply a convenient rule of practice which should not apply where it is inappropriate: British Credit Trust Holdings v UK Insurance Ltd  EWHC 2404 (Comm), ; Football Association Premier League Ltd v O'Donovan  FSR 31, . In my judgment, for the reasons already given, it would be inappropriate in the present case.
- Accordingly, the claimant who has previously discontinued a sufficiently similar claim within CPR rule 38.7, and who then issues without permission before the limitation period has expired should not be treated more favourably than the claimant who does not issue first, but seeks permission only after the limitation period has expired. In both cases, permission should normally be refused. Certainly, in the present case I would refuse it if I were asked (but I have not been). There are similarities with the rule in Henderson v Henderson, which I am about to discuss. In functional terms, rule 38.7 may be considered as a rule-based equivalent to the rule in Henderson for discontinuance cases.
Ground 2: Henderson v Henderson
- Because the original claim was discontinued, rather than dismissed, the first and second respondents did not seek to argue that here there was any kind of issue estoppel. Accordingly, the second point advanced by the first and second respondents is that the new claim falls foul of the rule in Henderson v Henderson (1843) 3 Hare 100. This is, in substance that a claimant must bring forward the whole of his case at one attempt, and not try to litigate parts of it as and when convenient. I was referred to the decision of the Supreme Court in Virgin Atlantic Airways Limited v Zodiac Seats UK Ltd  AC 160.
- In that case, Lord Sumption (with whom all the other judges agreed on this aspect), said
"17. Res judicata is a portmanteau term which is used to describe a number of different legal principles with different juridical origins. As with other such expressions, the label tends to distract attention from the contents of the bottle. The first principle is that once a cause of action has been held to exist or not to exist, that outcome may not be challenged by either party in subsequent proceedings. This is 'cause of action estoppel'. It is properly described as a form of estoppel precluding a party from challenging the same cause of action in subsequent proceedings. Secondly, there is the principle, which is not easily described as a species of estoppel, that where the claimant succeeded in the first action and does not challenge the outcome, he may not bring a second action on the same cause of action, for example to recover further damages: see Conquer v Boot  2 KB 336. Third, there is the doctrine of merger, which treats a cause of action as extinguished once judgment has been given upon it, and the claimant's sole right as being a right upon the judgment. Although this produces the same effect as the second principle, it is in reality a substantive rule about the legal effect of an English judgment, which is regarded as 'of a higher nature' and therefore as superseding the underlying cause of action: see King v Hoare (1844) 13 M & W 494, 504 (Parke B). At common law, it did not apply to foreign judgments, although every other principle of res judicata does. However, a corresponding rule has applied by statute to foreign judgments since 1982: see Civil Jurisdiction and Judgments Act 1982, section 34. Fourth, there is the principle that even where the cause of action is not the same in the later action as it was in the earlier one, some issue which is necessarily common to both was decided on the earlier occasion and is binding on the parties: Duchess of Kingston's Case (1776) 20 St Tr 355. 'Issue estoppel' was the expression devised to describe this principle by Higgins J in Hoysted v Federal Commissioner of Taxation(1921) 29 CLR 537, 561 and adopted by Diplock LJ in Thoday v Thoday  P 181, 197-198. Fifth, there is the principle first formulated by Wigram V-C in Henderson v Henderson(1843) 3 Hare 100, 115, which precludes a party from raising in subsequent proceedings matters which were not, but could and should have been raised in the earlier ones. Finally, there is the more general procedural rule against abusive proceedings, which may be regarded as the policy underlying all of the above principles with the possible exception of the doctrine of merger.
18. It is only in relatively recent times that the courts have endeavoured to impose some coherent scheme on these disparate areas of law. The starting point is the statement of principle of Wigram V-C in Henderson v Henderson (1843) 3 Hare 100, 115. This was an action by the former business partner of a deceased for an account of sums due to him by the estate. There had previously been similar proceedings between the same parties in Newfoundland in which an account had been ordered and taken, and judgment given for sums found due to the estate. The personal representative and the next of kin applied for an injunction to restrain the proceedings, raising what would now be called cause of action estoppel. The issue was whether the partner could reopen the matter in England by proving transactions not before the Newfoundland court when it took its own account. The Vice-Chancellor said:
'In trying this question I believe I state the rule of the Court correctly when I say that, where a given matter becomes the subject of litigation in, and of adjudication by, a Court of competent jurisdiction, the Court requires the parties to that litigation to bring forward their whole case, and will not (except under special circumstances) permit the same parties to open the same subject of litigation in respect of matter which might have been brought forward as part of the subject in contest, but which was not brought forward, only because they have, from negligence, inadvertence, or even accident, omitted part of their case. The plea of res judicata applies, except in special cases, not only to points upon which the Court was actually required by the parties to form an opinion and pronounce a judgment, but to every point which properly belonged to the subject of litigation, and which the parties, exercising reasonable diligence, might have brought forward at the time... Now, undoubtedly the whole of the case made by this bill might have been adjudicated upon in the suit in Newfoundland, for it was of the very substance of the case there, and prima facie, therefore, the whole is settled. The question then is whether the special circumstances appearing upon the face of this bill are sufficient to take the case out of the operation of the general rule.'
[ … ]
20. The implications of the principle stated in Henderson v Henderson were more fully examined by the House of Lords in Arnold v National Westminster Bank plc  2 AC 93. The question at issue in that case was whether in operating a rent review clause under a lease, the tenants were bound by the construction given to the very same clause by Walton J in earlier litigation between the same parties over the previous rent review. The Court of Appeal had subsequently, in other cases, cast doubt on Walton J's construction, and the House approached the matter on the footing that the law (or perhaps, strictly speaking, the perception of the law) had changed since the earlier litigation. Lord Keith of Kinkel began his analysis by restating the classic distinction between cause of action estoppel and issue estoppel:
'Cause of action estoppel arises where the cause of action in the later proceedings is identical to that in the earlier proceedings, the latter having been between the same parties or their privies and having involved the same subject matter. In such a case the bar is absolute in relation to all points decided unless fraud or collusion is alleged, such as to justify setting aside the earlier judgment. The discovery of new factual matter which could not have been found out by reasonable diligence for use in the earlier proceedings does not, according to the law of England, permit the latter to be re-opened. (104D-E)
Issue estoppel may arise where a particular issue forming a necessary ingredient in a cause of action has been litigated and decided and in subsequent proceedings between the same parties involving a different cause of action to which the same issue is relevant one of the parties seeks to re-open that issue.' (105E)
The case before the committee was treated as one of issue estoppel, because the cause of action was concerned with a different rent review from the one considered by Walton J. But it is important to appreciate that the critical distinction in Arnold was not between issue estoppel and cause of action estoppel, but between a case where the relevant point had been considered and decided in the earlier occasion and a case where it had not been considered and decided but arguably should have been. The tenant in Arnold had not failed to bring his whole case forward before Walton J. On the contrary, he had argued the very point which he now wished to reopen and had lost. It was not therefore a Henderson v Henderson case. The real issue was whether the flexibility in the doctrine of res judicata which was implicit in Wigram V-C's statement extended to an attempt to reopen the very same point in materially altered circumstances. Lord Keith of Kinkel, with whom the rest of the Committee agreed, held that it did.
21. Lord Keith first considered the principle stated by Wigram V-C that res judicata extended to 'every point which properly belonged to the subject of litigation and which the parties exercising reasonable diligence might have brought forward at the time.' He regarded this principle as applying to both cause of action estoppel and issue estoppel. Cause of action estoppel, as he had pointed out, was 'absolute in relation to all points decided unless fraud or collusion is alleged'. But in relation to points not decided in the earlier litigation, Henderson v Henderson opened up
'the possibility that cause of action estoppel may not apply in its full rigour where the earlier decision did not in terms decide, because they were not raised, points which might have been vital to the existence or non-existence of a cause of action' (105B).
He considered that in a case where the earlier decision had decided the relevant point, the result differed as between cause of action estoppel and issue estoppel:
'There is room for the view that the underlying principles upon which estoppel is based, public policy and justice, have greater force in cause of action estoppel, the subject matter of the two proceedings being identical, than they do in issue estoppel, where the subject matter is different.' (108G-H)
The relevant difference between the two was that in the case of cause of action estoppel it was in principle possible to challenge the previous decision as to the existence or non-existence of the cause of action by taking a new point which could not reasonably have been taken on the earlier occasion; whereas in the case of issue estoppel it was in principle possible to challenge the previous decision on the relevant issue not just by taking a new point which could not reasonably have been taken on the earlier occasion but to reargue in materially altered circumstances an old point which had previously been rejected. He formulated the latter exception at 109B as follows:
'In my opinion your Lordships should affirm it to be the law that there may be an exception to issue estoppel in the special circumstance that there has become available to a party further material relevant to the correct determination of a point involved in the earlier proceedings, whether or not that point was specifically raised and decided, being material which could not by reasonable diligence have been adduced in those proceedings. One of the purposes of estoppel being to work justice between the parties, it is open to courts to recognise that in special circumstances inflexible application of it may have the opposite result.'
This enabled the House to conclude that the rejection of Walton J's construction of the rent review clause in the subsequent case-law was a materially altered circumstance which warranted rearguing the very point that he had rejected.
22. Arnold is accordingly authority for the following propositions:
(1) Cause of action estoppel is absolute in relation to all points which had to be and were decided in order to establish the existence or non-existence of a cause of action.
(2) Cause of action estoppel also bars the raising in subsequent proceedings of points essential to the existence or non-existence of a cause of action which were not decided because they were not raised in the earlier proceedings, if they could with reasonable diligence and should in all the circumstances have been raised.
(3) Except in special circumstances where this would cause injustice, issue estoppel bars the raising in subsequent proceedings of points which (i) were not raised in the earlier proceedings or (ii) were raised but unsuccessfully. If the relevant point was not raised, the bar will usually be absolute if it could with reasonable diligence and should in all the circumstances have been raised.
23. It was submitted to us on behalf of Virgin that recent case-law has re-categorised the principle in Henderson v Henderson so as to treat it as being concerned with abuse of process and to take it out of the domain of res judicata altogether. In these circumstances, it is said, the basis on which Lord Keith qualified the absolute character of res judicata in Arnold v National Westminster Bank by reference to that principle is no longer available, and his conclusions can no longer be said to represent the law.
24. I do not accept this. The principle in Henderson v Henderson has always been thought to be directed against the abuse of process involved in seeking to raise in subsequent litigation points which could and should have been raised before. There was nothing controversial or new about this notion when it was expressed by Lord Kilbrandon in Yat Tung. The point has been taken up in a large number of subsequent decisions, but for present purposes it is enough to refer to the most important of them, Johnson v Gore-Wood & Co  2 AC 1, in which the House of Lords considered their effect. This appeal arose out of an application to strike out proceedings on the ground that the plaintiff's claim should have been made in an earlier action on the same subject-matter brought by a company under his control. Lord Bingham took up the earlier suggestion of Lord Hailsham of St. Marylebone LC in Vervaeke v Smith  1 AC 145, 157 that that the principle in Henderson v Henderson was 'both a rule of public policy and an application of the law of res judicata'. He expressed his own view of the relationship between the two at p 31 as follows:
'Henderson v Henderson abuse of process, as now understood, although separate and distinct from cause of action estoppel and issue estoppel, has much in common with them. The underlying public interest is the same: that there should be finality in litigation and that a party should not be twice vexed in the same matter. This public interest is reinforced by the current emphasis on efficiency and economy in the conduct of litigation, in the interests of the parties and the public as a whole. The bringing of a claim or the raising of a defence in later proceedings may, without more, amount to abuse if the court is satisfied (the onus being on the party alleging abuse) that the claim or defence should have been raised in the earlier proceedings if it was to be raised at all. I would not accept that it is necessary, before abuse may be found, to identify any additional element such as a collateral attack on a previous decision or some dishonesty, but where those elements are present the later proceedings will be much more obviously abusive, and there will rarely be a finding of abuse unless the later proceeding involves what the court regards as unjust harassment of a party. It is, however, wrong to hold that because a matter could have been raised in earlier proceedings it should have been, so as to render the raising of it in later proceedings necessarily abusive. That is to adopt too dogmatic an approach to what should in my opinion be a broad, merits-based judgment which takes account of the public and private interests involved and also takes account of all the facts of the case, focusing attention on the crucial question whether, in all the circumstances, a party is misusing or abusing the process of the court by seeking to raise before it the issue which could have been raised before.'
The rest of the Committee, apart from Lord Millett, agreed in terms with Lord Bingham's speech on this issue. Lord Millett agreed in substance in a concurring speech. He dealt with the relationship between res judicata and the Henderson v Henderson principle at pp 58H-59B as follows:
'Later decisions have doubted the correctness of treating the principle as an application of the doctrine of res judicata, while describing it as an extension of the doctrine or analogous to it. In Barrow v Bankside Members Agency Ltd  1 WLR 257, Sir Thomas Bingham MR explained that it is not based on the doctrine in a narrow sense, nor on the strict doctrines of issue or cause of action estoppel. As May LJ observed in Manson v Vooght  BPIR 376, 387, it is not concerned with cases where a court has decided the matter, but rather cases where the court has not decided the matter. But these various defences are all designed to serve the same purpose: to bring finality to litigation and avoid the oppression of subjecting a defendant unnecessarily to successive actions. While the exact relationship between the principle expounded by Sir James Wigram V-C and the defences of res judicata and cause of action and issue estoppel may be obscure, I am inclined to regard it as primarily an ancillary and salutary principle necessary to protect the integrity of those defences and prevent them from being deliberately or inadvertently circumvented'."
- It is therefore clear that the principle exemplified by the decision in Henderson v Henderson is properly to be treated as part of the rules of res judicata; hence the formulation of the summary of the relevant rules in paragraph 22 of the judgment of Lord Sumption, set out above. It was accepted at the hearing by the first and second respondents that there could be no question here of any issue estoppel because the first claim had been discontinued. Yet they argued that the principle in Henderson v Henderson could nevertheless apply. But, since there was no decision on the first occasion and the Henderson principle is part of the rules of res judicata, I struggle to see how the principle is relevant.
- On the other hand, where the claim does not progress so far as to be decided, but is instead discontinued, there are the rules in part 38 of the CPR. The relevant rule, which I have already set out and discussed, is rule 38.7. This deals with the situation where, if there had been a decision on the first claim, there could have been an argument, if a second claim were brought, that some aspect of res judicata should apply, whether it was because of cause of action estoppel, issue estoppel, or the Henderson principle. Rule 38.7 provides that in circumstances where the claim is to be brought against the same defendant as before and based on the same or substantially the same facts, there is a requirement to obtain the permission of the court before bringing the fresh claim. As it seems to me, that is sufficient protection for defendants facing a second bite at the cherry. It enables the court to intervene and prevent injustice, in exactly the same way as the court may do in the case of res judicata.
- I may test the matter in this way. Let us suppose that the liquidator in the present case had in the first claim expressly made a claim to set aside the payment of £160,000 to the first and second respondents as a preference. Let us further suppose that that claim was still extant at the time of the discontinuance. Subsequently the liquidator launches the second claim against the same defendants for exactly the same relief based on the same facts. This would be an obvious case for the application of rule 38.7. It is hard to see what additional function could be served by the application of the Henderson principle. But, in my judgment, since the first claim had not in fact been decided, the Henderson principle would not be relevant. If that is right, the position cannot be stronger for the first and second respondents if the first claim might have made, but did not expressly make, the £160,000 preference claim before discontinuing.
- Accordingly, the Henderson principle does not apply, and I do not accede to the application to strike out the second claim so far as it is based on that principle.
Ground 3: Abuse of process
- The third ground on which the second claim is attacked is that it is an abuse of process. The first and second respondents say that, even if the £160,000 claimed is recovered from the respondents, it would simply be repaid to them in accordance with the statutory scheme of distribution: see Mr Shipp's witness statement, at -. In other words, the money would go round in a circle. The only person who would benefit from this circular action is the applicant himself, the liquidator, who when the monies recovered came into his hands would be able to use them to pay his own outstanding legal and professional fees before paying the creditors, ie the respondents. Accordingly, it cannot be said that the applicant is pursuing the claim in the interests of the creditors of the company. It is therefore an abuse of process.
- The applicant liquidator says that he is seeking to recover property wrongfully paid away by the company to prefer one creditor over others, and that he is doing this in pursuance of his statutory duties as liquidator. In his skeleton argument he says he is not
"looking to simply line his pockets because he is 'doubly out-of-pocket' [in the phrase of counsel for the first and second respondents]. Firstly, insurance covers the applicant's liability for the respondents' costs of the original claim. Secondly, the applicant seeking [sic] to fulfil his statutory duties as liquidator."
He goes on to say that
"the fact that the preference payment will be 'repaid by the three individuals in their roles as partners of HLM Properties, only to be repaid to them' as asserted by Mr Shipp (see paragraph 68 of his first statement) is not and should not be the paramount consideration of the court."
- I accept that the applicant is seeking to pursue his statutory duties. But I cannot ignore the fact that, even he does pursue them, the only economic benefit, so far as I can see, likely to accrue will accrue to the applicant himself. This is because, if the claim is successful against the three respondents, and, even assuming that there were no outstanding costs and fees to be deducted from the sum so recovered by the applicant liquidator as the monies passed through his hands, the monies so recovered would be paid back to the three respondents, in part as to a repayment of the debt owed to the third respondent, but subject to that to the three respondents as members of the company. But the third respondent, who on the face of it looks to be better off because he has his outstanding debt repaid, also has to pay the costs of these proceedings, both his own and a share of those of the applicant. In these circumstances, the fact that the applicant has insurance cover for liability to pay the respondents' costs is neither here nor there.
- I note that the third respondent's solicitor Deanne Hamilton in making a witness statement dated 3 January 2018 on his behalf did not see fit to support the applicant liquidator against the first and second respondents' application to strike out the claim. If he was to be so much better off by this litigation being pursued, why would he not do so? I further note that the applicant has not disclosed the amount of his fees and costs so far, despite a sensible suggestion by Mr Shipp (first witness statement, ) that he do so. This is plainly a relevant consideration, and it would have been easy for the applicant to comply. In these circumstances, I cannot even be satisfied that the third respondent will have his outstanding debt paid at all. Indeed, I may even be entitled to draw an inference adverse to the applicant as a result of his not having supplied this information: see eg Thames Valley Housing Association v Elegant Homes (Guernsey) Limited  EWHC 1288 (Ch), . But I do not need to. On the material which the parties have chosen to make available to me, I consider that this fresh claim is an abuse of process.
Conclusion on strike out
- I have held that CPR rule 38.7 applies, has not been complied with, that I should not give permission under that rule, and that the claim is more generally an abuse of the process. In all circumstances, therefore, I will strike out the second claim.
- The alternative application for summary judgment was, somewhat unusually, not put on the basis of the lack of merits of the claim itself. Indeed, the first and second respondents accepted at the hearing that they could not ask for summary judgment on the usual substantive basis that the claim lacks "reality" (see Three Rivers DC v Bank of England (No 3)  AC 1, , per Lord Hobhouse). Instead they sought it as an extension of the abuse of process argument. They relied on all matters previously mentioned, that is, the contravention of rule 38.7, the rule in Henderson v Henderson, the money going round in a circle, and the fact that the applicant would be able to recoup his costs and fees out of any recovery. They also referred to the decision in Jameel v Dow Jones & Co Inc  QB 946. That was a case of alleged libel.
- The Court of Appeal in that case (Lord Phillips MR, Sedley, Jonathan Parker LJ) struck out the claimant's claim, saying
"69. If the claimant succeeds in this action and is awarded a small amount of damages, it can perhaps be said that he will have achieved vindication for the damage done to his reputation in this country, but both the damage and the vindication will be minimal. The cost of the exercise will have been out of all proportion to what has been achieved. The game will not merely not have been worth the candle, it will not have been worth the wick.
70. … It would be an abuse of process to continue to commit the resources of the English court, including substantial judge and possibly jury time, to an action where so little is now seen to be at stake. …"
- Whilst I quite see the potential relevance of this part of this decision to the present case, I do not see it as supportive of any application for summary judgment. The first and second respondents accepted at the hearing that I did not have the material before me that would enable me to make a conventional decision to award summary judgment to them. In the light of my decision on the application to strike out the claim, it is not necessary for me to deal with it further, and I do not do so.
- Accordingly, I will strike out this claim as against the first and second respondents. I will hear counsel on the form of the order.
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