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|Judgments - Circuit Systems Ltd. (In Liquidation) and Another v. Zuken-Redac (U.K) Ltd. (Formerly Racal-Redac (U.K) Ltd.)|
Norglen Ltd. and Others (A.P) (In Liquidation) v. Reeds Rains Prudential Ltd. and Others
Lord Hoffmann Lord Clyde
(FORMERLY RACAL-REDAC (U.K.) LTD.)
I have had the advantage of reading in draft the speech to be delivered by my noble and learned friend, Lord Hoffmann. For the reasons which he gives, I would dismiss both of these appeals.
LORD LLOYD OF BERWICK
I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Hoffmann. For the reasons he has given, I would dismiss these appeals.
I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Hoffmann. For the reasons he gives, I would dismiss these appeals.
1. Companies and legal aid
The cost of obtaining justice in England, only too often prohibitive, is a current social problem which goes to the roots of civil society. The provision of a system of justice to resolve disputes between citizens is one of the most ancient and important duties of the state. But the cost of litigation is today so high that the majority of people are in practice unable to seek redress for the wrongs they have suffered. This applies not only to individuals but also to companies with modest resources. The position of a defendant, particularly when opposed by a legally aided or impecunious plaintiff, is equally unenviable. These two appeals both concern companies which went into insolvent liquidation while pursuing claims in legal proceedings and could not afford to continue. Individuals who lack means are in principle entitled to legal aid. But since its inception in 1949, the legal aid scheme has altogether excluded companies from its scope. Section 2 of the Legal Aid and Advice Act 1949 said that legal aid was to be available to "any person whose disposable income does not exceed four hundred and twenty pounds a year." (The limit is now set by regulations made under section 34 of the Legal Aid Act 1988.) But section 17(1) of the Act of 1949 provides:
That remains the position today: see section 2(10) of the Legal Aid Act 1988.
2. The two cases
I start by summarising the history of the two cases.
(a) Norglen Ltd. v. Reeds Rains Prudential Ltd.
Mr. and Mrs. Rodgers and Mrs. Rodgers's parents, Mr. and Mrs. Franks, acquired Norglen Ltd. as an off-the-shelf company in 1984. It was capitalised at £1,000, at first shared equally between the Rodgers and the Franks and later transferred to Mr. and Mrs. Rodgers in equal shares. The sole purpose of the company was to undertake a single speculation in property. It has not otherwise traded. With the aid of a loan from a bank it bought a large house near Manchester Airport called Heald Green House, together with some surrounding land, for £65,000. It then converted the property into 12 self-contained flats and sold them on long leases. The venture was not a great success. The cost of the land and conversion was about £783,000 and the sale of the flats brought in £726,000. This left the company owing some debts, including £80,000 to the Manchester City Council by way of repayment of building grants, but without any assets except the retained freehold of Heald Green House, subject to the leases, and about 1.8 acres of surrounding land which was surplus to needs.
Mr. Rodgers instructed Prudential Property Services ("Prudential") advise him on the prospects of obtaining planning permission for the development of the surplus land, a matter which was critical to its value, and to act as sole selling agents. The director of Prudential with whom he dealt was a Mr. Jonathan Sharp. Mr. Rodgers says that Mr. Sharp told him that the prospects of obtaining planning permission were remote and introduced him to a Mr. Richardson, who said he wanted to use the land to graze his children's ponies. Mr. Richardson offered £10,000 for the land with a covenant not to erect any structure on the land without the consent of Norglen, as owners of the freehold of Heald Green House, but subject to a right to the release of the covenant on payment of a third of the increased value if planning permission for development was obtained at any future date. Mr. Rodgers says that on the advice of Mr. Sharp he accepted this offer and sold the land to Mr. Richardson on 12 May 1988.
Mr. Richardson immediately transferred the land to Metier Property Holdings Ltd. ("Metier"), a company which he controlled and which was engaged in putting together a large-scale development on adjoining land later acquired from the Manchester City Council for £400,000 an acre. Mr. Rodgers says that Norglen was the victim of a fraud to which Mr. Sharp and Mr. Richardson were parties. He claims that they told him lies about the potential use and value of the land. He says that in fact, whether itself developed or not, it was valuable as giving access to the proposed development site. In November 1991 Norglen commenced proceedings against Prudential, Mr. Sharp, Mr. Richardson and Metier, claiming rescission of the sale of the land and damages for fraudulent misrepresentation and conspiracy. The allegations are strenuously denied but there is no suggestion that the action is not brought in good faith.
In May 1992 the defendants applied to for an order that Norglen give security for costs. On 9 October 1992 District Judge Fish held that the defendants were entitled to security under section 726 of the Companies Act 1985, but ordered that it should take the form of an undertaking by Mr. and Mrs. Rodgers to be personally liable for any costs of the defendants which the company might be ordered to pay. The defendants appealed, saying that the assets of Mr. and Mrs. Rodgers were insufficient to constitute adequate security. But before the appeal was heard, Norglen was compulsorily wound up on a creditor's petition. After a meeting of creditors, Norglen acting by its liquidator assigned to Mr. Rodgers the legal and beneficial interest in the company's cause of action against the defendants. The consideration was an undertaking to apply the proceeds of the action to paying the company's creditors and the costs of the liquidation and then accounting to the company for half the balance.
Mr. Rodgers applied for and was granted legal aid to apply to be substituted as plaintiff instead of Norglen and, if successful, to prosecute the action. His summons came before Morritt J. at the same time as the defendant's appeal against the order for security made by the District Judge. The judge held, following the decision of the Court of Appeal in Advanced Technology Structures Ltd. v. Cray Valley Products Ltd.  B.C.L.C. 723, that the assignment of the cause of action should not be recognised or given effect because it was a "sham," on the ground that the sole or main purpose of the assignment was to enable the action to be carried on for the benefit of the company with the legal aid available to Mr. and Mrs. Rodgers as individuals. The application for substitution was therefore dismissed and the learned judge went on to allow the defendants' appeal against the security for costs order and ordered Norglen to provide security in a total sum of £74,000. The question of whether Norglen could provide this sum was complicated by the fact that on 7 June 1989 Norglen had purported to transfer its only asset, the freehold of Heald Green House with the benefit of the restrictive covenant over the land sold to Mr. Richardson, to Mrs. Rodgers. At the suggestion of the learned judge, Mrs. Rodgers executed a declaration that she held the property in trust for Norglen and Mr. Rodgers executed an assignment of the cause of action to himself and Mrs. Rodgers jointly. On the basis that Norglen was beneficial owner of the land and covenant, he found that it had substantial value (figures in the region of £200,000 had been mentioned) and that the order for security would not necessarily stifle the action.
Norglen appealed to the Court of Appeal (Sir Thomas Bingham M.R., Hobhouse and Aldous L.JJ) which allowed its appeal and made the order substituting Mr. and Mrs. Rodgers as plaintiffs. It distinguished the Advanced Technology Structures case on its facts and held that an assignment of a cause of action was not invalid solely on the ground that its purpose was to enable the action to be prosecuted on terms that the company would benefit from success. The court also held that there was no jurisdiction to make an order for security for costs against Mr. and Mrs. Rodgers and that it would not in the circumstances be right to make an order against Norglen, which was dropping out of the action. Against these orders the defendants appeal to your Lordships' House.
(b) Circuit Systems Ltd. v. Zuken-Redac (U.K.) Ltd.
I can deal more shortly with these proceedings, since the only point at issue is the validity of the assignment by the plaintiff company to its former managing director, Mr. Basten. The company was formed by Mr. Basten in 1983 to carry on the business of designing and supplying printed circuit boards. It used computer aided design hardware and software supplied by the defendant company, then known as Racal-Redac (U.K.) Ltd ("Racal"). After being modestly profitable until 1985, the company suffered heavy losses and in 1988 ceased to trade. Mr. Basten says that its failure was caused by deficiencies in the computer systems supplied by Racal and on 22 March 1988 the company commenced proceedings against Racal, alleging breach of contract and misrepresentation. Immediately afterwards it went into creditors's voluntary liquidation. For a while Mr. Basten funded the prosecution of the action by the liquidator but in 1989 he was unable to continue. On 12 April 1990 the company acting by the liquidator assigned to Mr. Basten the benefit of the company's contracts with Racal, together with its causes of action. The consideration was payment of £1 and the right to 40 per cent. of the proceeds of certain causes of action. Mr. Basten applied for and obtained legal aid to prosecute the causes of action which had been assigned to him. Racal consented to his joinder as an additional plaintiff but amended its defence to plead, in paragraph 21B, that the assignment was "void and of no effect" because it was "for the sole or dominant purpose" of enabling the action to be prosecuted with the benefit of legal aid and to avoid liability to give security for costs under section 726 of the Companies Act 1985. The question of the validity of the assignment was ordered to be tried as a preliminary issue. At the time of the trial of the issue before Judge Richard Havery Q.C., the Norglen case had been decided by Morritt J. but the appeal had not yet been heard. He found that the purposes of the assignment were twofold: first, "to enable the company to tap the resources of the Legal Aid Fund, which would not otherwise be available to it" and secondly, to give Mr. Basten a cause of action which reflected the fact that he was the sole beneficial shareholder in the company. Following the Advanced Technology Structures Ltd case, he held that the assignment was a "stratagem or device which the court would not countenance" and was invalid.
By the time the appeal from this decision was heard, the Norglen case had been before the Court of Appeal. A differently constituted court (Staughton, Simon Brown and Thorpe L.JJ) held that the Norglen court had been wrong to distinguish Advanced Technology Structures Ltd on its facts; the two cases were indistinguishable and in conflict. They elected to follow Norglen, held the assignment valid and allowed the appeal. Racal appeals against that decision.
3. Assignment of causes of action in bankruptcy
The law is traditionally hostile to the assignment of causes of action in return for a share of the proceeds. Such transactions were described as champerty (division of the field) and regarded as illegal and unenforceable. It is unnecessary to examine the reasons: judges said that it would encourage malicious suits, but treating such arrangements as criminal was also, before the introduction of legal aid, an effective way of preventing poor people from obtaining legal redress. The position of liquidators and trustees in bankruptcy is however quite different. The courts have recognised that they often have no assets with which to fund litigation and that in such case the only practical way in which they can turn a cause of action into money is to sell it, either for a fixed sum or a share of the proceeds, to someone who is willing to take proceedings in his own name. In this respect they are of course no different from many other people. But because trustees and liquidators act on behalf of creditors, the courts have for the past century construed their statutory powers as placing them in a privileged position.
So in Seear v. Lawson  15 Ch.D. 426, 433, Sir George Jessel M.R. said:
Nearly a century later, in Ramsey v. Hartley  1 W.L.R. 686, 698, Lawton L.J. said: