Irwin & Anor v Lynch & Anor

Daniel Lynch Limited is a company of which Daniel Bernard Lynch (the first respondent) and Jane Olwyn Lynch (the second respondent) are the two directors. It went into administration, the administrator being appointed by the directors on 30 December 2004. Mr Gerald Irwin, the appellant, is the administrator. The administration has been extended a number of times.

On 14 August 2007 Mr Irwin issued an ordinary application against the respondents, seeking relief arising from three separate matters, only one of which is in issue on this appeal. The respondents bought a property called Barrells Hall, which required a great deal of work to be done to it. In October 2002 they and the company entered into a building contract under which the company would do the necessary work to make the property habitable. The contract was, it seems, amended in April 2003. Mr Irwin says that the contract was a transaction at an undervalue, because the fixed price was far too low for the work involved. By the application he sought a declaration that it was a transaction at an undervalue and that the respondents were guilty of misfeasance and breach of trust in causing the company to enter into the contract and therefore were liable to compensate the company.

The other aspects of the claims are, first, a claim that certain payments to the first respondent amounting to £850,000 in the year preceding the administration were voidable preferences within section 239 of the Insolvency Act 1986 and were therefore repayable. The second remaining claim was that certain dealings with a related company were a voidable preference or a transaction at an undervalue and that the respondents were responsible for those dealings and were therefore liable to compensate the company.

No exception is taken to the claim as against the £850,000, although it is resisted on its merits. As for the other aspects of the claim, it was said that the consequential claim for compensation against the respondents personally was not one which Mr Irwin, as administrator, could make. An administrator is not someone who, under section 212 of the Insolvency Act, can bring a misfeasance claim. That is restricted to the Official Receiver, a liquidator, a creditor and a contributory (see section 212 (3)). One may wonder why that is so. The answer may be that an administrator is not normally expected to remain in office for long so that, unless the company emerges from administration as a viable undertaking, there would be a liquidator in place before long who could bring a claim under section 212. At all events, it is accepted that Mr Irwin cannot make the claims for compensation in these respects, although he can pursue claims under section 238 and 239 as such because of the definition of “office-holder” in section 238(1).

On this basis the respondents applied to strike out the claim against them personally as regards the Barrells Hall contract and also as regards the intercompany dealings. That application was made in December 2009 or January 2010. Mr Irwin's response was to apply for leave to add and/or substitute the company as a claimant under Civil Procedure Rules, rule 17.4(4) and rule 19.5. The respondents resisted this, but ultimately only as regards the Barrells Hall contract, the difference being that for that claim (but only for that claim) the respondents contended that the claim was already time-barred under the Limitation Act.

HHJ Cooke, sitting in the Birmingham District Registry of the Chancery Division, accepted that submission. In his order made on 29 January this year he permitted the amendment only on the basis of striking out the reference to the Barrells Hall contract in the personal claim against the respondents. He gave permission to appeal himself.

The grounds of appeal and the original skeleton argument settled by counsel who appeared below for Mr Irwin complained of the judge's misapplication of CPR rule 19.5(3)(b). Later Mr Irwin instructed Mr Khangure QC, who argued the case on appeal. He put in a fresh skeleton argument raising two additional points. The first is that the case was within the ambit of the rules about substitution of parties in cases of mistake; and the second is that, the personal claim being for breach of trust, it would not in any event have been barred by limitation.

At a very late stage Mr Irwin's solicitors applied for permission to amend their grounds of appeal to rely on these additional points. We have heard argument on the original grounds of appeal. For my part, I am satisfied that the appeal should be allowed on those grounds. It is therefore unnecessary to consider the application to amend the grounds of appeal. The appeal has been argued in a commendably succinct and well-focused way, especially, if I may say so, by Mr Morgan for the respondent.

The case requires us to revisit CPR rule 19.5 and the law concerning amendment after a limitation period has expired. This area of law has been considered in a good many cases since the Limitation Act 1980 set out a new regime in section 35. The most relevant recent case is Parkinson Engineering v Swan [2009] EWCA Civ 1366. That was a case, in a sense, the converse to the present. The company there was in liquidation. The company brought proceedings against its former administrators. They had the benefit of a release under the Insolvency Act, section 20. That was a cast iron defence to the claim by the company. However, if an exactly similar claim were brought on behalf of the company by the liquidator under section 212 and if the court granted permission, that claim could continue despite the statutory release. The judge in that case permitted the liquidator to bring proceedings under section 212 and to be substituted by amendment as the claimant in the existing proceedings, thereby overcoming the limitation defence which was otherwise available.

The distinction between this case and that is that in that case the company had a claim against the defendants but the defendants had a complete defence to it, whereas here Mr Irwin does not have a relevant claim against the respondents because section 212 does not give him the necessary locus standi to bring it. The company, on the other hand, does have a good claim, subject to proof on the merits.

The relevant law starts with section 35 of the Limitation Act 1980. For the purposes of that section a claim by the company is for the same cause of action as that asserted by Mr Irwin, but involves the additional substitution of a new party, so it is a new claim as defined in section 35(2). Therefore, if it were allowed to be made under section 35(1), it would be deemed to be commenced at the same date as the original claim and would therefore not be open to a limitation defence by contrast with proceedings brought for the first time now. Accordingly, it is subject to subsection 35(3) and to the rules of the court made for the purpose. One has to read the rules with the section. Conditions in subsection (5) have to be satisfied as well as any imposed by the rules. The relevant condition in subsection (5)(b) is explained in subsection (6)(b). These provisions are as follows:

That is the provision pursuant to which the relevant rules of courts have been made from time to time since 1980. The present rule is CPR rule 19.5, of which I need to consider sub-rule (2) and sub-rule (3)(b).

“(2)

The court may add or substitute a party only if – (a) the relevant limitation period was current when the proceedings were started; and (b) the addition or substitution is necessary.

(3)

The addition or substitution of a party is necessary only if the court is satisfied that –

…

(b)

the claim cannot be carried on by or against the original party unless the new party is added or substituted as claimant or defendant…”

In my judgment in Parkinson Engineering v Swan at paragraph 9 I said of these rules:

“The text is not quite the same as that of the section, but the rule must be construed as being no wider than is permitted by the section. The effect, on the facts of this case, is that paragraph (3)(b) has to be satisfied, it being shown 'that the claim cannot properly be carried on by or against the original party' without the substitution.”

The same appears to me to apply in the present case.

On behalf of the respondents, Mr Morgan submitted that the substitution would not cure the defect by reason of which the claim cannot properly be carried on by the original party because that claim cannot be properly carried on at all and never could have been. An argument to the same effect was presented unsuccessfully in Parkinson Engineering, but he sought to distinguish that because in that case the original claim was valid, though subject to a complete defence, whereas in the present case he says the claim is vitiated by a lack of locus standi on the part of Mr Irwin, who could never properly assert the claim at all as distinct from the company doing so in its own name.

In support of his argument that section 35(5)(b) and (6)(b) and rule 19.5(3)(b) are to be read narrowly, he showed us, on the one hand, some passages from the report of the Law Reform Committee in 1977 (Cmnd 6923) which led indirectly to the passing of the 1980 Act, and, on the other hand, some of the many cases decided under the 1980 Act.

In the relevant section of the report, paragraphs 5.16 to 5.29, the committee concluded that there were some cases not covered by the then existing rule (which was RSC Order 20, rule 5) in which it ought to be possible to add a party, whether plaintiff or defendant, outside the limitation period. The committee set out five such examples at paragraph 5.20. However, they were not sure that they had identified all possible instances. They therefore recommended that the new legislation should give the rule-making authority power to cover by rules specific cases within the scope of a formula embodied in the primary legislation. They did not put forward a draft themselves, but set out at paragraphs 5.27-28 their overall conclusion, which included that the post-limitation joinder of a new party should be capable of being permitted under the new rules in the circumstances identified and “in other analogous circumstances”.

The history from their report onwards is set out helpfully and more generally in the judgment of Lord Collins of Mapesbury in Roberts v Gill [2010] UKSC 22 from paragraphs 27-37. Mr Morgan pointed out correctly that the committee in its report spoke only of adding a party, but the fact is that the Act and the rules have always, since then, provided for addition or substitution. Mr Morgan also showed us that, in Adelson v Associated Newspapers [2007] EWCA Civ 701, where the issue arose under rule 19.5(3)(a) of substitution of a party in a case of mistake, Lord Phillips of Worth Matravers (Lord Chief Justice) reviewed the history of the relevant rules for 1965 onwards at paragraphs 20-43 as well as the treatment of these provisions in decided cases, some concerning a change of claimant and others a change of defendant. For reasons given at paragraphs 22-26 of that judgment, the Court of Appeal held that, in construing the Civil Procedure Rules as regards the substitution of parties which follow closely section 35, it is necessary to have regard to the jurisprudence in relation to RSC Order 20 rule 5. That showed the court that there was a continuity of legislative intention and provision as regards the case of substitution on grounds of mistake.

By contrast, in relation to cases other than mistake the rules are now not in the same form as they were under the Rules of the Supreme Court. In my judgment, while it may be useful to have regard to the historical development of the legislation and the rules on this topic, the court's task on this appeal is, as the judge's was below, to construe CPR rule 19.5(2) and (3)(b) in the light of section 35 of the 1980 Act and in accordance with normal principles of construction. Whether or not the members of the Law Reform Committee would have foreseen what is found to be allowed under the current regime is not of any assistance either way.

Mr Morgan also submitted that the wider reading of rule 19.5(3)(b) would mean that it would rarely be necessary to resort to rule 17.4 or rule 19.5(3)(a) in a case of mistake. As to that, we do not have to decide the position, but it occurs to me that, if a party sought to use rule 19.5(3)(b) in what was really a case of mistake but in which rule 17.4 or rule 19.5(3)(a) could not for some reason be satisfied, the court, in considering the exercise of its discretion, might well take a dim view of an attempt to escape the limits imposed in the express provisions dealing with mistake cases by resort to this other, arguably more general, provision, even if the court found that the case fell within the language of rule 19.5(3)(b) as a matter of its natural reading.

Considering the application to amend in the light of these considerations, I am not persuaded by the distinction which Mr Morgan seeks to draw between a case where the original claimant has a cause of action, even if one to which there is a cast iron defence on the basis of which the claim could be struck out, and another where there is a proper cause of action but the claim is not the right party to bring it because he does not have the necessary locus standi, and the claim could be struck out on that basis.

Mr Morgan submitted that to allow a substitution on such a case would permit the possibility of a claim being brought by a complete stranger against the relevant defendant and then, outside the limitation period, that claim being sought to be adopted or validated by the substitution of the relevant company as claimant.

Mr Irwin is not, of course, a complete stranger. His task is to collect in the assets of the company for the benefit of it and its creditors, and the claim which he asserted was avowedly brought on the part of the company. For my part, the idea of a complete stranger bringing such a case seems rather fanciful. If for some reason it were to prove real, it seems to me that the court would be likely to regard it as an unsuitable exercise of the court's discretion to substitute the company as claimant outside the limitation period for a complete stranger who had brought a case within the limitation period, which could no doubt have been struck out because he had no right to bring the claim. It seems somewhat unlikely that if this hypothetical complete stranger were to bring proceedings within the limitation period, it would in fact assert the same cause of action as that which the company could itself assert but had chosen not to.

It seems to me that the present case is one in which the substitution is necessary for the determination of the original claim because the particular claim cannot be maintained unless the company is substituted as claimant. The original claim is a claim that the respondents were in breach of duty in causing the company to enter into the contract, thereby causing the company loss. The claim, as amended with the substituted claimant, is identical. The original claim cannot be maintained successfully; the new claim can be maintained successfully, subject obviously to proof of the facts. If it is so asserted, it is the identical claim but with a substituted and correct claimant.

It seems to me that some of what I said at paragraph 28 of Parkinson Engineering applies here with all the necessary consequential changes.

“The original action, asserting the company's claim against the former administrators, cannot be determined without the substitution of the liquidator whereas if brought by the liquidator under section 212 it can. Without that substitution it could only, and would be bound to, be determined in favour of the defendants because of the section 20 defence. The claim would be struck out, because of that defence, and it could not be decided on its merits, either way, as the proceedings stand. In terms of the rule, it cannot properly be carried on by the original party, the company, whereas it can be maintained and carried on if the liquidator is substituted. No more than minimal change is necessary to the statement of case: substitution of references to the liquidator as claimant and references to the company in the third rather than the first person, so to speak, together with consequential changes as regards the relief sought. It is the same claim, in every respect, despite the fact that it is asserted by the liquidator on behalf of the company, rather than in the name of the company itself.”

Here the original claim was liable to be struck out, as it has indeed been, because of lack of standing, but I see no good reason to regard the reason for the striking out as being a critical distinction between that case and this. I would also reject the contention that the cause of action is not the same because of the identity of the claimant. Sometimes the identity of the party might be, indeed often it might be, a vital distinction, but here Mr Irwin plainly asserted the company's cause of action and asserted it on behalf of the company, just as the substituted liquidator did in Parkinson Engineering. So the cause of action is identical; it is already pursued for the benefit of the company, but it is doomed to failure because of the lack on Mr Irwin's part of the necessary locus standi. It seems to me that it is possible and appropriate for the court to exercise its discretion under rule 19.5 to allow the joinder of the company so as to assert the relevant claims.

The judge referred to a judgment of the Privy Council on appeal from Canada where the liquidators of a bank had sued on a cause of action vested in the bank. The Canadian courts had refused leave to amend to add the bank as a plaintiff on appeal. The Privy Council said that there was power to amend to allow an amendment to add the bank as a party and that it should have been exercised and it allowed the appeal. The case is Kent & Ors v La Communaute des Soeurs de Charite de la Providence [1903] AC 220. The report does not set out the then Canadian rule as regards permitting amendment to add or substitute parties, and it was no doubt in more general terms than the present relevant English rule, nor was there any limitation issue in the case. But it seems to me that if there had been a limitation issue, and if the facts of that case had arisen under a situation in which a rule such as rule 19.5 had to be applied, the facts would just as well have come within rule 19.5 as, in my judgment, the facts of the present case do.

I would therefore respectfully differ from the judge who distinguished the case from Parkinson Engineering and held that there was no power to allow the amendment. In my judgment, there was such power and it should have been exercised. I therefore consider that the grounds of appeal are well made out and would allow the appeal.

I agree.

I agree.