Issuing proceedings without owning the cause of action—Eaton v Mitchells & Butler

In Eaton v Mitchells & Butler plc, the court was asked to strike out proceedings commenced by a discharged bankrupt in circumstances where the underlying cause of action was, and remained to be, vested in the claimant’s trustee in bankruptcy.

Original news

Eaton v Mitchells & Butler plc [2015] Lexis Citation 173, [2015] All ER (D) 103 (Aug)

A claimant issued personal injury proceedings, and won the trial on liability. Prior to the trial on damages came the realisation that the accident—and therefore the underlying cause of action—vested in the claimant’s trustee in bankruptcy, where a bankruptcy order had been made following the accident. The County Court was asked to strike out the proceedings as a nullity, or alternatively that it was an abuse of process for the proceedings to continue. The judge dismissed the application, giving the claimant three months in which to regularise the situation.

Briefly, what were the facts of the case?

Mr Eaton commenced proceedings against Mitchells & Butler plc (M&B) in respect of serious injuries he suffered in an accident. The trial of liability occurred five years after the accident, resulting in judgment being entered in Mr Eaton’s favour, with the amount of damages to be subsequently decided by the court. Mr Eaton valued his claim at £3m, whereas M&B valued it in the region of £500,000.

It was disclosed during the proceedings that, three months after his accident, and before the proceedings were issued, Mr Eaton had been adjudged bankrupt on his own petition. However, despite this disclosure, no one involved in the case appreciated its effect—that the cause of action (being a hybrid claim as it sought damages for both personal injuries and consequential losses) had vested in the official receiver as Mr Eaton’s trustee in bankruptcy (trustee) under section 306 of the Insolvency Act 1986 (IA 1986). The cause of action had neither been assigned by the official receiver (OR) to Mr Eaton, nor was the OR a party to the proceedings.

The impact of Mr Eaton’s bankruptcy was picked up two years after the trial of liability by Mr Eaton’s new solicitors, and they informed M&B’s solicitors of this development.

M&B filed an appellant’s notice seeking permission to appeal the decision in the trial of liability. In response, Mr Eaton made an application seeking an annulment of his bankruptcy under IA 1986, s 282(1)(b) on the ground that the debts and expenses of the bankruptcy estate had been paid in full notwithstanding that—at that time—they had not. M&B applied to strike out the proceedings.

What were the legal issues that the judge had to decide?

His Honour Judge Keyser QC, sitting in the county court at Wrexham, had to decide the following issues:

  • Were the proceedings a nullity on the basis that the cause of action did not vest in Mr Eaton when he began them? (the first issue)
  • If they were not a nullity, would it be an abuse for Mr Eaton to continue with his claim in the knowledge that the cause of action did not vest in him? (the second issue)
  • Could the issue be regularised and, if so, in what way? (the third issue)

What arguments were put forward?

M&B submitted as follows:

  • first, that the proceedings were a nullity, relying principally on Ingall v Morgan [1944] 1 KB 160, in the sense that, as Mr Eaton did not own the cause of action when the proceedings were commenced, they were fundamentally flawed and could not be saved
  • second, in the alternative, that continuation of the proceedings by Mr Eaton in the knowledge that the cause of action did not vest in him was an abuse of process and that the proceedings should therefore be struck out immediately either as a matter of principle, or alternatively because the proceedings could not be cured—there was no evidence that Mr Eaton’s annulment application would be successful

Mr Eaton’s case was that the proceedings were not a nullity, and that the decisions in cases such as Ingall v Morgan were of no application in the current case. Notwithstanding that, it was accepted that the proceedings still had to be—and could be—regularised.

What did the judge decide and why?

The first issue

The judge did not agree that the proceedings were a nullity. As a preliminary matter the expression ‘nullity’ meant something else—in this case, the claim was regularly issued and the proceedings were not a nullity. M&B’s actual complaint was that Mr Eaton did not have title to sue at the time the claim was issued, which was a different thing.

On that latter point, Ingall v Morgan dealt with narrow circumstances concerning whether a personal representative had title to sue before taking a grant of administration. The circumstances in the present case were different, and there was a chain of authority concerning bankruptcy cases (including Pickthall v Hill Dickinson [2009] EWCA Civ 543, [2009] All ER (D) 235 (Jun), Haq v Singh [2001] EWCA Civ 957, [2001] All ER (D) 394 (May), Pathania v Adedeji [2014] EWCA Civ 681, [2014] All ER (D) 01 (Jun), and Munday v Hilburn [2014] EWHC 4496 (Ch)) where the decisions were inconsistent with Ingall v Morgan. There was no problem in itself of Mr Eaton having issued the proceedings when the cause of action vested in the OR.

The second issue

It was accepted by M&B that Mr Eaton did not know at the time of issue that the cause of action did not vest in him. The abuse of the Pickthall v Hill Dickinson kind did not therefore apply.

The judge agreed that the proceedings could not continue in their current state now that Mr Eaton was aware of the effect of the cause of action vesting in his trustee (Pathania v Adedeji). However, there was no rule of law that meant that the proceedings had to be struck out immediately.

The third issue

The judge commented that there were two obvious ways to cure the defect—the annulment of the bankruptcy, or the substitution of the OR as claimant in the proceedings.

A possible third option was for Mr Eaton to take an assignment of the cause of action from the OR. However, in this case, the judge’s view (it was not a point decided by him) was that was unlikely to be productive—the limitation period would have expired and, following Haq v Singh, the court would probably not permit any amendment to the pleadings dealing with the assignment.

Taking everything into account, the judge gave Mr Eaton three months in which to regularise the situation.

To what extent is this judgment helpful in clarifying the law in this area?

Insolvency professionals, particularly those specialising in personal insolvency, will already be aware that hybrid claims vest in trustees.

This case confirms that, where an individual (whether or not discharged from bankruptcy) commences a claim based on a cause of action that vests in his trustee, those proceedings are not a nullity.

Whether the court will then permit an amendment to the proceedings in circumstances where the individual’s bankruptcy has been annulled, or the trustee takes over the claim, will depend on whether the individual knew that the cause of action did not vest in them at the time the proceedings were issued. If they actually knew (as opposed to ought to have known), it is unlikely that an amendment will be permitted, as to commence (Pickthall v Hill Dickinson) or continue with (Pathania v Adedeji) proceedings in those circumstances will be an abuse.

What practical lessons can those advising take away from this case?

The judge was amazed by just how far along this case had proceeded before the effect of Mr Eaton’s bankruptcy was finally appreciated.

While the outcome of this case will perhaps be unsurprising to insolvency professionals, it emphasises the need for non-insolvency litigators to ask at the time of being first instructed by an individual—and prior to issuing any claim:

  • whether the individual has been adjudged bankrupt since the cause of action arose
  • if he has, whether the cause of action has vested in his trustee
  • if it has, whether the cause of action has re-vested in the individual as a result of him taking an assignment from his trustee, or the bankruptcy order being annulled under IA 1986, s 282—discharge from bankruptcy does not in itself result in any re-vesting

If the cause of action remains vested in the individual’s trustee, enquiries should be made of the trustee to decide on how to proceed.

Stephen Leslie, solicitor in the Lexis®PSL Restructuring & Insolvency team.

Further Reading

If you are a LexisPSL subscriber, click the link below for further information:

What assets vest in the trustee in bankruptcy and what steps does the official receiver/trustee in bankruptcy need to take?

How do you annul a bankruptcy order and who can make the application?

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First published on LexisPSL Restructuring and Insolvency

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