Bennett v Bank of Scotland

This is another chapter in the history of the long-running litigation between the Bank of Scotland (the Bank) and Mr & Mrs Bennett. For the last 10 years the Bank has been trying, so far without much success, to enforce its security in order to recover money lent by it in 1991 to the company (Galloway Seafood Co Limited), through which Mr & Mrs Bennett carried on a business until it failed.

The latest development has occurred in the course of the Bank’s efforts to enforce a personal guarantee given to the Bank by Mr Bennett in respect of the loan to the company. It has thrown up an unusual procedural point: is it an abuse of process for the Bank, as a judgment creditor of Mr Bennett under an existing, but possibly unenforceable, judgment, to pursue a second action based on the first judgment in order to obtain and enforce a second judgment against Mr Bennett by, for example, bankruptcy proceedings?

Section 24 of the Limitation Act 1980 is relevant:

The general principles regarding actions on an existing judgment as an abuse of process were stated by Leggatt LJ in ED & F Man (Sugar) v. Haryanto (Court of Appeal Transcript 17 July 1996) and agreed by Morritt and Brooke LJJ:

Before the judge below (Patten J), who held that the Bank’s second action was not an abuse of process, it was common ground,

Re A Debtor, a first instance decision by HHJ Paul Baker QC, sitting as a High Court Judge, is authority for the proposition that insolvency proceedings (in that case corporate insolvency) based on a statutory demand for monies due under a previous judgment are an “action on a judgment” within s 24 rather than a method of enforcing or executing the judgment. They are barred by s 24 if brought more than six years after the judgment was obtained.

After the close of oral argument on this appeal another case was decided, contradicting what was previously common ground. In Ridgeway Motors (Isleworth) Ltd v. Altis LTL 21 May 2004 HHJ Rich QC, sitting as a High Court Judge, held that, in the light of the House of Lords’ ruling in Lowsley v. Forbes [1999] AC 329 that s 24(1) only applies to the bringing of a fresh action and does not include proceedings by way of execution of a judgment in the same action, Re A Debtor was wrongly decided. We have received from the parties further written submissions, from which it appears that the law on the s24 point is no longer common ground. I shall refer later to the effect, if any, of the shift of ground on the decision under appeal.

The Bennett litigation has already been to the House of Lords on an “O’Brien point” as one of the conjoined appeals reported under the name Royal Bank of Scotland v. Etridge (No 2) [2002] 2 AC 773. Mrs Jane Bennett, the wife of the appellant, succeeded in the House of Lords in defending possession proceedings by the Bank to enforce a second charge taken over the Bennetts’ matrimonial home 15 Elthiron Road, Fulham SW6 (the House) to secure their guarantee liability.

The House of Lords upheld the findings of the trial judge (Mr J Munby QC) [1997] 1 FLR 801- 7 February 1997) that (a) Mr Bennett had exercised actual undue influence over his wife in respect of the giving of the guarantee and (b) the Bank had constructive notice of his impropriety. Until the House of Lords gave their decision on 11 October 2001 the Bank had continued to act on the basis that, as was held by the Court of Appeal (on 21 December 1998) on the Bank’s successful appeal from the decision of Munby J ([1999] FCR 641), it had an enforceable charge over the property. As it now finds itself with no enforceable charge against the property, the Bank wishes to enforce its personal claims against Mr Bennett, including, if possible, bringing bankruptcy proceedings.

Mr Bennett’s appeal, brought with the permission of the judge, is from an order of 11 November 2003. Patten J dismissed Mr Bennett’s application dated 9 June 2003 to strike out, either under CPR Part 3.4 or Part 24, as an abuse of process the second action begun against him by the Bank on 10 May 2001. A default judgment was obtained by the Bank on 26 September 2001 in the sum of £187,753.30 (the 2001 Judgment). The Bank’s claim was for the sum of £124,039.60, which was due under an earlier order of Master Gowers dated 11 May 1995 (the 1995 Judgment), together with just under £60,000 interest.

On 24 April 2003 the Bank served a statutory demand on Mr Bennett based on the 2001 Judgment. Mr Bennett issued an application dated 6 June 2003 to set aside the statutory demand. The Bank has made no progress with the bankruptcy proceedings, as Patten J set aside, under CPR 13.3, the 2001 Judgment at the same time as he refused to strike out as an abuse the proceedings in which a default judgment had been obtained. The judge held that the interest included in the default judgment was incorrect, as it was more than six years interest contrary to s 24(2). The Bank has not appealed against the setting aside of the 2001 Judgment. This appeal is only concerned with the judge’s refusal to put an end to the proceedings altogether by striking them out as an abuse of process.

In order to explain the abuse of process point it is necessary to say more about the circumstances and history of the 1995 Judgment. On 27 October 1993 the Bank made a written demand under the guarantee. The Bank had already made a formal claim for payment from the company and had appointed receivers over it on 8 October 1993. No repayment was made.

On 11 April 1994 the Bank began proceedings (Ch 1994 G 2043) against Mr & Mrs Bennett under the guarantee dated 12 August 1991.The guarantee was up to a limit of £150,000. Mr Bennett did not reply to the claim form and did not defend the proceedings. The Bank obtained the 1995 Judgment against Mr Bennett by default, but, for the reasons mentioned later, it did not enforce it within the period of six years from date on which it was issued. Bankruptcy proceedings presented a special problem for the Bank, as it claimed to be a secured creditor. It is accepted by Mr Yell, appearing for Mr Bennett, that bringing bankruptcy proceedings within the period of six years from the 1995 Judgment would have been pointless. Under Rule 6.5 of the Insolvency Rules the Court may grant an application to set aside a statutory demand if

In order to protect its position in case it ultimately lost the possession proceedings, the Bank started the second set of proceedings on 11 May 2001, just 1 day before the expiration of 6 years from the date of the issue of the 1995 Judgment. It did not serve the proceedings on Mr Bennett at that time, as the decision of the House of Lords on the possession proceedings was still awaited.

The Bank was able to take the possession proceedings, as the loan to the company had been secured by a second legal charge over the House on 1 October 1991. Mr & Mrs Bennett had acquired the House in joint names in May 1986, but it was transferred into the sole name of Mrs Jane Bennett on 5 September 1990, subject to a first legal charge granted in favour of the Halifax Building Society in May 1986.

Instead of taking steps to enforce the 1995 Judgment against Mr Bennett, the Bank concentrated on the enforcement of the second charge against the property vested in Mrs Bennett. Down to the decision of the House of Lords the Bank understandably acted on the basis that it had a charge against the property as security for the company loan and the guarantee.

Mr Bennett has no substantive defence to the claim under the 1995 Judgment. His main point is that the second action against him should be struck out as an abuse of process, as the Bank has already obtained the 1995 Judgment against him under the guarantee. It is using the present proceedings to obtain against him a second judgment for the sole purpose of circumventing the inconvenient fact that, according to Re A Debtor, the enforcement of the 1995 Judgment is statute barred under s 24 of the 1980 Act. The Bank has allowed it to become statute barred by its inordinate delays in its perpetual litigation. It is now 10 years since the Bank first instituted proceedings under the guarantee. Mr Bennett argues that the Bank should have enforced the 1995 Judgment within 6 years of obtaining it. It could have done so by charging order, garnishee proceedings, or attachment of earnings. If it had done so, the second action against him would have been unnecessary. The effect of the second action, if allowed to continue, is that the Bank will have two identical judgments. The effect of the second judgment will be to deprive him of a limitation defence to the first judgment in circumstances in which the court has no statutory discretion to extend the limitation period. If the Bank is entitled to bring a second action in these circumstances, what is there to stop it bringing successive actions on judgments, thereby indefinitely prolonging the limitation period?

Actions on domestic judgments are certainly an unusual method of enforcement. It is, however, clear from s 24 (1) of the 1980 Act, the principles stated by Leggatt LJ cited in paragraph 4 above and other authorities, when applied to the facts of this case, that (a) the 1995 Judgment created a new debt; (b) the Bank, as a judgment creditor, was entitled to bring proceedings based on the judgment debt, independently of the original guarantee debt on which the 1995 Judgment was founded; (c) the limitation period applicable to the 1995 Judgment is 6 years from the date of the judgment; and (d) the Bank commenced its second action within that limitation period. The second action based upon an existing judgment is permissible and is not itself an abuse. Apart from the abuse of process point, Mr Bennett has no defence to the second action.

The Bank had a legitimate purpose for bringing the second action: in case the possession proceedings failed, it wished to keep alive the possibility of bankruptcy proceedings against Mr Bennett so that the trustee in bankruptcy could make an application under s 423 of the Insolvency Act 1986 (the 1986 Act) to set aside the transfer of the House to Mrs Bennett as a transaction defrauding creditors.

Mr Bennett’s case is that the Bank’s purpose is futile. Mr Yell raised the spectre of a host of future objections and difficulties (such as costs, delays and limitation problems) that the Bank would encounter in any kind of proceedings contemplated against Mr Bennett, quite apart from the assertion that he has no money. For example, Mr Yell contended that (a) the Bank has no standing under s 424(1)(c), as “a victim of the transaction”, to make the application to set aside the transfer of the House; and (b) an application under s 423 would fail, as it is now statute barred, whether it is brought by the Bank or the trustee. The transfer took place more than 12 years since the date of the relevant transaction. The Bank does not accept that the application would be statute barred, certainly so far as the trustee in bankruptcy is concerned, as the limitation period would not start to run until the date of the bankruptcy order: see Muir Hunter on Personal Insolvency (1987) at para 3-2942 at p. 3344. Mr Yell says that this would not be the case, as the trustee would effectively be bringing the application on behalf of the Bank and that would be an abuse of process, if it was done in order to avoid the bar on an application by the Bank itself as a victim creditor of Mr Bennett. Re Ng (A Bankrupt) [1997] BPIR 267 was cited.

The practical position on all these points is that they can be raised and are properly decided if and when a s 423 application is made. The fact that they might be taken and might well succeed does not, in my view, make the second action, which the Bank has instituted within the limitation period, an abuse of process.

A similar response is available to Mr Yell’s further contention that the second action will, if allowed to continue, enable the Bank to circumvent the restriction on the recovery of interest under s24(2) of the 1980 Act, which becomes statute barred after 6 years. But the time bar on the recovery of interest does not make the action based on the first judgment an abuse of process. Indeed the Bank accepts that it should not claim more than 6 years interest and that, if it does, Mr Bennett would have a limitation defence to that part of the claim under s 24(2) of the 1980 Act.

Similar points objecting to the abusive character of the second action based on the 1995 Judgment were made on (a) the circumvention of the restrictions on the enforcement of judgments in RSC Order 46 r 2(1) (contained in Schedule 1 to the CPR); (b) the possibility of the recovery of compound interest contrary to the Judgments Act 1838; and (c) the risk of successive costs orders in obtaining successive judgments. So far as these points affect the quantum recoverable by the Bank, they can be raised in the defence to the action, now that the default judgment has been set aside. They do not, however, support the contention that it is an abuse of process to bring, within the available relevant limitation period, a second action for the recovery of a judgment debt owed by Mr Bennett.

I have reached the conclusion that Patten J rightly rejected Mr Bennett’s strike out application. I agree with the judge’s ruling ( in paragraph 37) that it cannot be an abuse of process per se to commence a second action with the object of preserving one’s rights to take bankruptcy proceedings, absent some other factors which, in the particular circumstances of the case, render that unjustifiable. As he pointed out (in paragraph 38), by s 24(1) Parliament has permitted a party with the benefit of an earlier judgment to commence proceedings on that judgment any time within six years of the judgment being obtained. There is no obvious policy argument brought into play merely by the institution of such proceedings.

I also agree with Patten J that, looking at the position when the Bank started the second action, there was no abuse of process: according to authority (i.e. Re A Debtor) the limitation period for an action on the 1995 Judgment was about to expire; the Bank had in its favour a possession order from the Court of Appeal, but it was unable to advance bankruptcy proceedings against Mr Bennett by virtue of the terms of Rule 6.5 of the Insolvency Rules nor was there any need to do so as long as its charge remained intact; and there is no provision in the 1980 Act or in the Insolvency Rules allowing the six year period to be extended to deal with temporary problems of uncertainty.

In those circumstances, if the Bank wished to preserve its right to proceed in bankruptcy against Mr Bennett in the event of the appeal to the House of Lords going against it, it had no alternative but to issue a second set of proceedings. The delays involved were not culpable. They were the result of the time taken to conclude the possession proceedings against Mrs Bennett. Until the conclusion of those proceedings in the House of Lords it was not known for certain whether or not the Bank was a secured or unsecured creditor. If the Bank was a secured creditor, as it contended, there was no need for it to resort to insolvency proceedings against Mr Bennett and any attempt to do so by service of a statutory demand would have brought the Bank up against the provisions of Insolvency Rule 6.5(4) (c) that the court may grant an application to set aside a statutory demand, if it appears that the creditor holds some security in respect of the debt claimed by the demand. In those circumstances it would have been inconsistent of the Bank to seek to make Mr Bennett bankrupt, while it was asserting and seeking to enforce a security right in the possession proceedings contested by Mrs Bennett.

In my judgment, the correctness of Patten J’s judgment is unaffected by the fact that it is no longer common ground between the parties that bankruptcy proceedings based on the 1995 Judgment were unavailable to the Bank after the expiration of six years from the 1995 Judgment. It was contended by Mr Yell that the decision in Ridgeway put the Bank in a difficult position on the appeal. The essential question on abuse of process was whether there was a legitimate purpose to be served in bringing and pursuing the second set of proceedings. As Re A Debtor was wrongly decided, the second action served no purpose at all. It should therefore be struck out. That would leave the Bank with whatever rights it has to enforce the 1995 Judgment. The Bank’s subjective belief as to what the law was when it started the second action was irrelevant to the issue of abuse of process.

In my judgment, the Ridgway decision does not alter the position on abuse of process. In the state of the law as it was agreed to be at the hearing before Patten J, the proceedings were not an abuse of process. Nor is it an abuse of process for the Bank to continue the proceedings in order to protect its position. There are conflicting decisions at first instance as to the effect of the six year limitation period in s 24(1) on the right of a judgment creditor to bring insolvency proceedings against the debtor. The decision in Re A Debtor was not cited in Lowsley and it has not been expressly overruled. It may well be that it is no longer good law. The second action may turn out to have been unnecessary after all. That may have costs consequences for the Bank. But I am not persuaded that the second action is pointless and has become an abuse of process. The position might have been otherwise if Mr Bennett had conceded that it was not too late for the Bank to enforce the 1995 Judgment by bankruptcy proceedings. Unless or until that has been agreed (and I recognise that Mr Bennett is under no obligation to concede that that is the case) or the Bank has been repaid all that is owed, Mr Bennett has not established that it is an abuse of process for the Bank to keep the second proceedings on foot in order to protect its position on the enforcement of its rights for the recovery of the monies due to it.

I would dismiss the appeal.

I agree.

I also agree.