House of Lords - Mulkerrins (formerly Woodward (FC)) (Appellant) v. Pricewaterhouse Coopers (a firm) (formerly trading as Coopers & Lybrand) (a firm) (Respondents)

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Session 2002 - 03
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Judgments - Mulkerrins (formerly Woodward (FC)) (Appellant) v. Pricewaterhouse Coopers (a firm) (formerly trading as Coopers & Lybrand) (a firm) (Respondents)

HOUSE OF LORDS

SESSION 2002-03
[2003] UKHL 41

OPINIONS

OF THE LORDS OF APPEAL

FOR JUDGMENT IN THE CAUSE

Mulkerrins (formerly Woodward) (FC) (Appellant) v . Pricewaterhouse Coopers (a firm) (formerly trading as Coopers & Lybrand (a firm)) (Respondents)

ON

THURSDAY 31 JULY 2003

The Appellate Committee comprised:

Lord Bingham of Cornhill

Lord Nicholls of Birkenhead

Lord Millett

Lord Lord Scott of Foscote

Lord Walker of Gestingthorpe

HOUSE OF LORDS

OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT

IN THE CAUSE

Mulkerrins (formerly Woodward (FC) (Appellant) v. Pricewaterhouse Coopers (a firm) (formerly trading as Coopers & Lybrand) (a firm)) (Respondents)

[2003] UKHL 41

LORD BINGHAM OF CORNHILL

My Lords,

    1. I have had the advantage of reading in draft the opinions of my noble and learned friends Lord Walker of Gestingthorpe and Lord Millett. I am in full agreement with them and for the reasons which they give I would allow the appeal and make the order which Lord Walker proposes.

LORD NICHOLLS OF BIRKENHEAD
My Lords,
    2. I have had the opportunity of reading in draft the speech of my noble and learned friend Lord Walker of Gestingthorpe. For the reasons he gives, with which I agree, I would allow this appeal and make the order he proposes.

LORD MILLETT

My Lords,

    3. Ms Mulkerrins claims damages from her former professional advisers PricewaterhouseCoopers ("PwC") for having negligently failed to protect her from bankruptcy. Her claim has yet to be tried and her allegations have not been established. Even allowing for this, however, she has been shamefully ill-served by her former advisers, by the law of insolvency, and by the civil justice system.

    4. At the beginning of the story Ms Mulkerrins owned a freehold property where she ran a small but profitable business as the proprietor of a nursing home. She faced the prospect of bankruptcy as a result of the failure of a business which she and her husband had formerly carried on together. The situation was tailor-made for an individual voluntary arrangement ("IVA"). Bankruptcy would destroy the business and yield relatively little for the creditors. An IVA, on the other hand, would preserve the business and enable the creditors to receive payments from the income of the nursing home. She consulted PwC, who were licensed insolvency practitioners, and on their advice made all the necessary arrangements to enter into an IVA with a view to avoiding bankruptcy.

    5. Despite this Ms Mulkerrins has been made bankrupt and the nursing home has been closed down by the Official Receiver, who did not have the funds to carry it on. She alleges that this would not have happened but for PwC's negligence. Her attempts to obtain redress have been thwarted at every turn. First, she had to fight off her trustee-in-bankruptcy, who somewhat implausibly claimed that her cause of action had vested in him for the benefit of the creditors. She won that round when the district judge in the Reading County Court sitting in Bankruptcy ruled that her trustee had no interest in the claim (because her creditors had none). He did not appeal and she duly brought proceedings against PwC. They strongly objected to being sued by their own former client. Taking advantage of their own alleged wrong in failing to take the necessary steps to prevent her bankruptcy in the first place they insisted that, now that she had become bankrupt, they should be sued by her trustee. This was more than a little impudent, even brazen. It meant that Ms Mulkerrins had to fight the same battle all over again. She effectively won again before the deputy judge in the High Court ([2000] BPIR 506), but PwC had greater determination (or resources) than the trustee, and this time she was taken to the Court of Appeal ([2001] BPIR 106), where she lost. Her action has been struck out. She has now been discharged from bankruptcy and the trustee has been released, with the result that the Official Receiver has become trustee in his place: see section 300(2) of the Insolvency Act 1986. He is under the trustee's ordinary duty to realise the assets of the bankrupt estate for the benefit of the creditors. Relying on the decision of the Court of Appeal he has conducted an auction of Ms Mulkerrins' claim and proposes to distribute most of the proceeds to the creditors, despite the fact that they are bound by an order of the bankruptcy court that it is an asset in which they have no interest at all.

    6. Ms Mulkerrins has thus lost her business, had her claim for redress struck out, and faces the prospect of losing the value of her business for a second time. But for an order of a district judge she would now be suffering the ultimate misfortune of being a party to a leading case in your Lordships' House brought to resolve one of the more intractable problems in the law of insolvency. This is the problem which was recently considered by the Court of Appeal Ord v Upton [2000] Ch 352 namely to what extent does a "hybrid" claim of a bankrupt vest in his trustee on bankruptcy. A hybrid claim is constituted by a single cause of action which is partly for personal injury or loss of reputation (to which the creditors are not entitled) and partly for financial loss (to which they normally are).

    7. Ms Mulkerrins claims damages for having been made bankrupt. Her claim is a "hybrid" one, for she claims damages for loss of reputation as well as damages for loss of assets and earning capacity. By far the greater part of her claim, however, is for financial loss arising from the closure of the business by the Official Receiver. This would not have occurred but for the bankruptcy, and was a readily foreseeable and indeed virtually inevitable consequence of the making of the bankruptcy order. She seeks to be placed in the financial position she would have been in if PwC had acted with proper skill and care and she had been made the subject of an IVA instead of a bankruptcy order.

    8. The first question is: what was the effect of the order of the bankruptcy court? The dispute which it was called upon to decide was whether the chose in action which represented Ms Mulkerrins' claim against PcW was an asset which had vested in the trustee for the benefit of the creditors or remained vested in Ms Mulkerrins for her own benefit. The District Judge held that the trustee had no interest in the claim. In the High Court the deputy judge considered that this referred to the beneficial interest; he held that the effect of the district judge's order was that title to sue had vested in the trustee but he held it in trust for Ms Mulkerrins and not for the creditors: [2000] BPIR 506. This was rejected by the Court of Appeal: [2001] BPIR 106. Jonathan Parker LJ observed at para 61 that:

"….the district judge was not in any way concerned with accountability, or with the beneficial ownership of the cause of action. She was concerned only with the legal ownership: with the question - who can sue PwC? The district judge was not contemplating that the Trustee would be accountable for anything. She was contemplating that it would be Mrs. Mulkerrins who would sue, not the Trustee."

    9. This is true so far as it goes, but it is not the whole truth. The district judge was certainly dealing with the legal title to the chose in action - the right to sue PwC. But she was not dealing with the bare legal title. She ruled that the trustee had no interest in the claim, and her reasoning shows that she meant no interest at all whether at law or in equity. She considered that the claim had not vested in the trustee because it was not an asset which was available to the creditors, that is to say it was not part of the bankrupt estate. She did not overlook the basic rule that, with few exceptions, the property of a bankrupt vests in his trustee for the benefit of his creditors; or that at least so much of a chose in action as represents a claim to compensation for financial loss vests in him. To her credit she recognised that Ms Mulkerrins' claim was of an unusual kind, as neither the deputy judge nor the Court of Appeal seems to have done. It was a claim for damages for being made bankrupt. As she put it, "the bankruptcy itself is the cause of action". The district judge did not consider that a claim of this character could vest in the trustee for the benefit of the creditors; though she seems to have considered that this was a matter of timing which made the cause of action after acquired property.

    10. Both the deputy judge and the Court of Appeal thought that the district judge's decision was wrong. The cause of action did not arise after the bankruptcy order but in the same instant as the bankruptcy order. The Court of Appeal distinguished between "the Ord v Upton world", which they thought was the real world, and "the artificial world" created by the district judge's order. As between the parties to a judicial decision, however, it does not matter whether the decision is right or wrong. As I observed in Crown Estates Commissioners v Dorset County Council [1990] Ch 297, 305 res judicata (or to give it its full name estoppel per rem judicatam) is a form of estoppel which gives effect to the policy of the law that the parties to a judicial decision should not afterwards be allowed to re-litigate the same question, even though the decision may be wrong. If it is wrong, it must be challenged by appeal or not at all. As between themselves, the parties are bound by the decision, and may neither re-litigate the same cause of action nor re-open any issue which was an essential part of the decision. The doctrine comes into its own only when the decision is wrong; if it is right, it merely serves to save time and costs.

    11. The district judge's order, therefore, bound the trustee and through him the creditors. As between Ms Mulkerrins and the creditors, her claim against PwC and its proceeds belonged to her and did not form part of the bankrupt estate available to them. The Court of Appeal, with respect, overlooked the fact that, whatever world PwC inhabited, the trustee and the creditors lived in the world created by the district judge's order.

    12. PwC, of course, were not parties to the proceedings in the bankruptcy court. They were not given notice of the proceedings and took no part in them. They are not, therefore, bound by the order of the district judge. But this does not mean that they can simply ignore it or that they are unaffected by it. It means only that they cannot be prejudiced by it. They cannot re-litigate the issue, not because it is res judicata as against them, but because they have no legitimate interest in doing so.

    13. The general rule is that the benefit of a contract may be assigned to a third party without the consent of the other contracting party. If this is not desired, it is open to the parties to agree that the benefit of the contract shall not be assignable by one or either of them, either at all or without the consent of the other party. There is nothing objectionable in this; a party is entitled to insist that he deal only with the particular party with whom he has contracted: see Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85, 105, per Lord Browne-Wilkinson. But unless he takes the precaution of including in the contract a prohibition of assignment, he has no right to object to it. A debt is freely assignable both at law and in equity without the debtor's consent. Section 136 of the Law of Property Act 1925 requires notice of the assignment to be given to the debtor if it is to be effective at law; it does not require his consent.

    14. An assignment of a claim for unliquidated damages in tort may be open to challenge on the grounds of maintenance and champerty; but not on the ground that such an assignment needs the consent of the proposed defendant. It is now established that a trustee may properly discharge his duty to obtain the best price for the assets of a bankrupt estate by assigning the bankrupt's claim against a third party. It is common ground that PwC could not have prevented the trustee from re-assigning Ms Mulkerins' claim against them back to her had the district judge's decision gone the other way.

    15. The reason that the debtor's consent is not required to an assignment of a debt is that the assignment cannot prejudice him. The assignment is subject to equities, which means that any set-off which the debtor may have against the assignor can be asserted against the assignee. On bankruptcy the trustee is in no better position than his bankrupt; a creditor's right to sue his debtor vests in his trustee subject to equities. It would have been inappropriate to allow PwC to take any part in the proceedings in the bankruptcy court. They were brought to resolve a dispute between Ms Mulkerrins on the one hand and her creditors, represented by the trustee, on the other. PwC were debtors with an adverse interest to Ms Mulkerrins and her estate. They could not be prejudiced by the vesting of Ms Mulkerrins' claim vesting in her trustee; and a fortiori they could not be prejudiced if it remained in her. They had no legitimate interest in the question to be decided.

    16. In the event no question of assignment arose. The district judge held that the claim did not vest in the trustee but remained vested in Ms Mulkerrins despite her bankruptcy. PwC are being sued by their own former client, the very person to whom they owed a duty of care. In the circumstances their protests have a very hollow ring to them.

    17. So far I have been content to assume that the decision of the district judge may have been wrong. But it should not be assumed that it was. Ms Mulkerrins' claim is an unusual one, for she complains of PwC's failure to prevent the making of a bankruptcy order against her. She claims damages representing the difference between her financial position as a result of the bankruptcy order and the financial position she would have enjoyed if she had entered into an IVA instead. Treating this claim as being wholly or mainly a claim in respect of financial loss, and even assuming that (contrary to the view of the district judge) it was not after-acquired property, it would be very surprising if a claim of this character could be made available to the creditors. They would be claiming damages for the making of the very bankruptcy order under which their claim arose. The greater part of their claim would represent damages for the closure of the nursing home, even though it was a going concern when it supposedly vested in the Official Receiver and was closed down by him. The creditors have received the full value of the bankrupt estate. The damages which Ms Mulkerrins claims represent the value of what she lost by the making of the bankruptcy order; but while this could have been available to the creditors under an IVA, it could never have been made available to them in a bankruptcy.

    18. The Court of Appeal assumed that the claim vested in the trustee because it was wholly or largely a claim for financial loss, without considering the particular nature of the claim. The question has not been argued before us and is not covered by authority. I prefer to express no concluded view upon it, but to leave it open for decision when the need arises, while expressing the view that it should not be taken to be concluded by the judgment of the Court of Appeal in the present case.

    19. It is sufficient to dispose of this case by saying that, right or wrong, the district judge's order bound the trustee and through him the creditors. Ms Mulkerrins' claim must be taken to form no part of the bankrupt estate available to her creditors, and she is at liberty to pursue it in her own name and for her own benefit. In agreement with my noble and learned friend, Lord Walker of Gestingthorpe, whose speech I have had the advantage of reading in draft and with which I agree, I would allow the appeal.

LORD SCOTT OF FOSCOTE

My Lords,

    20. I have had the advantage of reading the opinions of my noble and learned friends Lord Millett and Lord Walker of Gestingthorpe. I agree with them and for the reasons they give I, too, would allow this appeal and make the order Lord Walker has proposed.

LORD WALKER OF GESTINGTHORPE

My Lords,

    21. On the making of a bankruptcy order the bankrupt's estate vests automatically in the trustee in bankruptcy as soon as he becomes trustee. The bankrupt's estate is widely defined, subject to some exceptions (including business equipment and household necessities) as comprising:

"all property belonging to or vested in the bankrupt at the commencement of the bankruptcy".

Property is widely defined as including

"money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property".

That is the effect of sections 283, 306 and 436 of the Insolvency Act 1986, which replaced similar but by no means identical provisions in a succession of earlier statutes.

    22. However, the wide language used in successive statutes to describe the bankrupt's estate was from an early stage interpreted by the court as excluding rights of action which are classified as personal to the bankrupt, rather than relating to his property. The most notable early case was the decision of your Lordships' House in Beckham v. Drake (1849) 2 HL Cas 579, but the report of counsel's argument in that case refers to numerous authorities going back to the time of Lord Mansfield. The point was explained as follows by Erle J, one of the judges who advised the House (at page 604),

"This was an action on a contract for hiring and service, whereby the plaintiff was to serve for seven years, and the defendant to pay weekly wages during that time; and the breach was a dismissal during the seven years. The plaintiff, after this breach, and before the commencement of the action, became bankrupt; and the question is, whether this cause of action passed from the plaintiff to his assignees.

The general principle is, that all rights of the bankrupt which can be exercised beneficially for the creditors do so pass, and the right to recover damages may pass though they are unliquidated …

This principle is subject to exception. The right of action does not pass where the damages are to be estimated by immediate reference to pain felt by the bankrupt in respect of his body, mind or character, and without immediate reference to his rights of property. Thus it has been laid down that the assignees cannot sue for breach of promise of marriage, for criminal conversation, seduction, defamation, battery, injury to the person by negligence, as by not carrying safely, not curing, not saving from imprisonment by process of law …"

    23. The line of authority includes the decision of your Lordships' House in Wilson v United Counties Bank Ltd [1920] AC 102. Major Wilson had left England on active service soon after the beginning of the first world war, leaving his business affairs (which seem to have been in a fairly precarious state) in the hands of his bank. The jury found that the bank had failed in its duty to supervise his business affairs and to take reasonable steps to maintain his credit and reputation. Major Wilson was made bankrupt and he and his trustee in bankruptcy joined in an action against the bank. The jury awarded damages of about £45,000 for depreciation in the bankrupt's business and estate caused by the bank's negligence (although the House was not unanimous as to whether this finding was justified on the evidence) and £7,500 for damage to his credit and reputation. The former sum was recoverable by the trustee in bankruptcy, and the latter by the bankrupt personally, even though (as Lord Atkinson observed at page 128) the damages arose from the same breach of contract.

    24.     Wilson v United Counties Bank Ltd can therefore be described as a hybrid claim, the term used by Aldous LJ in Ord v Upton [2000] Ch 352, 366. That case was concerned with a claim which a bankrupt labourer (aged 30 at the time of his bankruptcy) brought against a doctor who had treated him, some years before his bankruptcy, for back pain. Liability was admitted and the claim was substantial, including over £170,000 for loss of past earnings and over £730,000 for loss of future earnings. The Court of Appeal, following the decision of the Supreme Court of British Columbia in re Bell (a bankrupt) [1998] BPIR 26, held that both parts of the claim for loss of earnings formed part of the estate, and that Mr Ord himself was entitled only to the damages for pain and suffering. Aldous LJ (with whom Kennedy and Mantell LJJ agreed) summarised the decision as follows (at page 371),

"The authorities are only consistent with the conclusion that the trustee is entitled to the damages for past and future loss of earnings and is not entitled to the damages for pain and suffering. As there is a single cause of action, it vested in the trustee. There is in my view nothing in that conclusion which imposes practical difficulties with which the law cannot deal. The trustee as constructive trustee would have to account to the bankrupt for the property which he obtained inadvertently or by arrangement in an action which vested in him for the benefit of the creditors. The idea that the cause of action should vest in the bankrupt would not be acceptable and compulsory joinder of both could lead to difficulties when the claim for loss of earnings was small compared with the potential costs of the litigation. In such a case the trustee, if the cause of action vested in him, would have to consider carefully his duty to the bankrupt and would probably, if requested, assign the cause of action to him".

    25. The most recent authority is the decision of the Court of Appeal in Grady v HM Prison Service [2003] EWCA Civ 527, 11 April 2003. It concerned a claim for unfair dismissal made by an administrative officer who had been a bankrupt about a year after the termination of her employment. The Court of Appeal (in a judgment of the court delivered by Sedley LJ) observed (at para 14) that there is "no bright line" between personal rights of action and those which form part of a bankrupt's estate, but (para 24) that all the reasoning in the authorities

"tends to place on the non-vesting side of the line a claim which is primarily directed at the restoration of a contractual relationship in which the claimant's skill and labour are the essential commodity".

    26. The Official Receiver, who was given leave to intervene in this appeal, has (both in his petition for leave and in his printed case) placed before your Lordships some thoughtful and well-researched submissions, including a helpful survey of Commonwealth and United States authorities. He has drawn attention to the apparently anomalous results which can flow from accidents of timing of different stages in the prosecution of a right of action, and to the practical problems which may arise from a trustee in bankruptcy prosecuting a hybrid right of action, partly on behalf of the creditors and party on behalf of the bankrupt himself. But in the event your Lordships did not find it necessary, and did not consider it appropriate to hear all argument on these points. That is because the very unusual facts of the present appeal permit it to be disposed of on much narrower grounds, and make it an unsuitable case for exploration of the wider issues.

    27. The appellant, Ms Barbara Mulkerrins, is an experienced state registered nurse. In 1995 she was separated from her husband (Mr Woodward, to whom she is no longer married). She was running a small nursing home in Berkshire providing specialised 24-hour care for four mentally disabled adults. Ms Mulkerrins was the sole proprietor of the business, and owned the freehold of the property, subject to a mortgage. The residents were paid for by a care association, and the high level of fees (£650 per resident per week) reflected the labour-intensive nature of the business.

    28. Considered on its own, the nursing home was financially viable. But Ms Mulkerrins had outstanding debts, for which she and her husband were both liable, in connection with a property business. On 25 October 1994 a builders' merchant presented a bankruptcy petition against Ms Mulkerrins in the Reading County Court. After some adjournments it was due to be heard on 26 June 1995. Ms Mulkerrins consulted insolvency practitioners, Coopers & Lybrand, now PriceWaterhouseCoopers ("PwC"). Mr Rutlen of PwC advised her to apply to the county court for an individual voluntary arrangement ("IVA") under Part VIII of the Insolvency Act 1968. He advised that she had a good chance of obtaining an IVA under which she would for a period of three years pay to her creditors £500 a month out of the profits of the nursing home business. Ms Mulkerrins accepted that advice. She paid PwC an amount on account of their charges and PwC undertook to prepare an IVA proposal with a partner in PwC as the nominee. PwC attended the hearing on 26 June 1995 and an interim order was made suspending the bankruptcy proceedings. The petition was adjourned to the next open date (subsequently fixed as Monday 21 August). An application to continue the interim order was to be made on Friday 18 August. The nominee was required to lodge a report with the court by Wednesday 16 August.

    29. Then, as the deputy judge (Mr Jules Sher QC) said in his judgment ([2000] BPIR 506, 508) disaster struck. Ms Mulkerrins was due to go to Ireland for about a fortnight for a family reunion on the 25th anniversary of her father's death. Her case (which PwC denies) is that she asked Mr Rutlen whether she should attend court on either the Friday or the Monday and was told that it was unnecessary. She went to Ireland. PwC did not lodge the nominee's report on the Wednesday. It reached the court by post on the Thursday (with a letter stating that the nominee did not propose to attend, but requesting continuation of the interim order) but these documents did not get placed before the district judge. On Friday 18 August no one appeared and the district judge discharged the interim order. On Monday 21 August there was again no appearance, and Ms Mulkerrins was adjudicated bankrupt.