Ongoing litigation and bankruptcy proceedings

Ongoing litigation and bankruptcy proceedings
The Court of Appeal decision in Pathania v Adedeji offers a timely reminder of the effect that bankruptcy proceedings can have on ongoing litigation, especially where the bankrupt is the claimant, as well as giving an overview of what constitutes an abuse of process.

Original news

Pathania v Adedeji and others [2014] EWCA Civ 681

The Court of Appeal dismissed an appeal by a defendant who was seeking to have an order made against him struck out on the basis that the claimant had been made bankrupt during the course of the litigation, had not disclosed the bankruptcy order and it was therefore questionable whether he had standing to continue with the claim.

What happened in the case?

The appellant, Dr Adedeji, was a defendant in proceedings issued by Mr Pathania. The proceedings were (broadly speaking) issued as Dr Adedeji owed money to Mr Pathania advanced to him under a loan agreement and the repayment of the loan had become due. The proceedings were contested as Dr Adedeji asserted he had been induced by Mr Pathania to sign the loan documents. Eventually judgment was given in favour of Mr Pathania—albeit a separate claim to the monies had arisen from Barclays Bank, this was not part of the appeal, nor is it strictly relevant to this analysis.

During the course of the proceedings, but six months before Mr Pathania obtained judgment against Dr Adedeji, Mr Pathania was made bankrupt. This was not disclosed to the court or to the other parties to the proceedings.

After judgment was made against Dr Adedeji, he made an application to appeal the order. The grounds for the appeal were not on the basis of any merits in his defence, but on the basis that a bankrupt claimant cannot maintain legal proceedings under his own name and must appoint a trustee in bankruptcy to do so. Dr Adedeji asserted that Mr Pathania lacked capacity to continue with the claim which would vitiate the outcome of the proceedings.

What is the legal position?

The Court of Appeal looked at the two main authorities on this point. The first case is Heath v Tang, where the court held that where a claimant becomes bankrupt, the underlying claim does not abate but the action is stayed unless the trustee is willing to be substituted. Absent any such arrangement with the trustee, the bankrupt does not have standing to continue the claim as it will vest in the trustee. In circumstances where the bankrupt is the defendant, no such issue arises and any such claim will be stayed as the claimant can simply prove in the bankruptcy under IA 1986, s 285(3).

The second case the court looked at was Pickthall v Hill Dickinson. In this case the bankrupt commenced proceedings against the defendant knowing the claim vested in his trustee. This approach was adopted as the underlying claim had limitation issues and, therefore, the claimant bankrupt issued the proceedings. The court held this was clearly an abuse of process and allowing the claim to proceed (or even allow modification of it to the trustee as the claimant) would allow the bankrupt claimant to benefit from the abuse.

What did the Court of Appeal say?

The Court of Appeal dismissed Dr Adedeji's appeal. It could see clear distinguishable factors from the case of Pickthall v Hill Dickinson. The court noted that the abuse depends on the actual knowledge of the lack of title to the cause of action—not what the bankrupt ought to have known, thus a subjective test. On the facts of this case it was questionable whether:

  1. the Official Receiver (OR) consented to P continuing with the proceedings and was therefore fully aware of them, and
  2. whether the OR had been appointed as trustee at all and therefore whether the claim had actually vested in the OR

In addition, the subsequently appointed trustee eventually assigned the claim back to the bankrupt. Therefore the objective of the bankrupt (getting judgment against Dr Adedeji) could still have been achieved without the abuse. The Court of Appeal therefore could distinguish the case from Pickthall v Hill Dickinson. For Dr Adedeji to succeed in his appeal, it was not enough for him to say that Mr Pathania's cause of action had vested in the trustee/the OR. Dr Adedeji would have to show that Mr Pathania knew that the claim vested in the OR and that he knew this before the judgment was entered.

What does this case tell us?

The case is a good reminder about the effect that bankruptcy proceedings can have on ongoing litigation, especially where the bankrupt is the claimant. It also draws a distinction on what would constitute an abuse of the proceedings—which would be the bankrupt (in the knowledge that the claim has vested in the trustee/OR) commencing or continuing with the claim. The bankrupt's actual knowledge is key and must be assessed on a case by case basis.

Further reading

If you are a LexisPSL Subscriber, click the links below for further information on bankruptcy and vesting of the bankrupt's property:

What assets vest in the trustee in bankruptcy and what steps does the official receiver/trustee in bankruptcy need to take? (Subscriber access only)

What vests/what doesn't vest in the trustee in bankruptcy—checklist (Subscriber access only)

Not a subscriber? Find out more about how LexisPSL can help you.

Benn Richards, solicitor in the Lexis®PSL Restructuring & Insolvency team.

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