McGuire v Rose & Anor

This is the judgment of the court.

This is a wrapped-up application for an extension of time for appealing and for permission to appeal, with the appeal to follow if permission is granted, all in relation to a decision of Lewison J given on 28^th July 2010. In that decision he dealt with various matters, the principal one of which was an application under section 304 of the Insolvency Act 1986 for permission to bring proceedings against a trustee in bankruptcy. The appellant is the bankrupt, Mr McGuire, and the respondent is his trustee in bankruptcy, Mr Rose. In the course of this application Mr McGuire sought permission to adduce fresh evidence. At the hearing before us Mr McGuire was represented by Miss Angharad Start, instructed by the Bar Pro Bono Unit. We are very grateful for her very helpful submissions and for the focus that she brought to this appeal. We also allowed Mr McGuire to address us briefly at the end of Miss Start’s submissions. Mr Rose was represented by Mr John Briggs.

We can deal with the extension of time for appealing briefly. Mr McGuire lodged a notice of appeal just within the time for appealing, but failed to accompany it with a sealed order. By the time he remedied this problem another 3 months had elapsed. However, we do not need to consider that aspect of the matter in this case because, as Mr Briggs frankly and sensibly accepted, in this matter the real question is whether an appeal would have sufficient prospects of success. It is unnecessary to dwell on this further, and we extend the time for appealing to the date which would make this appeal one which was made in time. That enables us to pass on to consider the application for permission to appeal.

This is a second appeal, and in accordance with principle permission will only be granted if there is an important point of principle (or practice) involved or if there is some other compelling reason for an appeal.

The background to this appeal is a somewhat tortured history in which Mr McGuire has challenged both his bankruptcy as such and the conduct of his bankruptcy by the trustee ever since he was adjudicated bankrupt on 14^th November 1996. The relevant parts of the history can be summarised as follows – this summary is taken from the facts recited in the judgment of Lewison J.

The principal assets in Mr McGuire’s estate were properties known as 1, 5, 6 and 8 Sea Cliff, Sheringham, Norfolk, 51 Vicarage Square, Grays, Essex and a house in France. After his bankruptcy his sister Joan unfortunately died of cancer (in August 1999). Mr McGuire was the residuary beneficiary under her will and the trustee in bankruptcy claimed that interest as after-acquired property. The sisters had two properties – 3 Sea Cliff, Sheringham and 43 Camelot Close, London SE28.

Mr McGuire challenged the administration of his estate in various respects and brought proceedings about alleged sales at an undervalue, the correct accounting by the executors of his sister’s estate for their fees, and the reasonableness of his trustee in bankruptcy’s fees. He started proceedings against his trustee and those claims were struck out by Master Teverson on 18^th December 2006 on the grounds that the relevant claims were vested in Mr McGuire’s estate and not in him, and that procedurally his recourse was to apply to the bankruptcy court.

Mr McGuire duly applied to Norwich County Court acting in the exercise of its bankruptcy jurisdiction. He made four applications:

In his judgment the judge observed that the main force of the applications was that arising from the section 304 application, and his decision deals with that. The hearing before Lewison J was itself an appeal from a decision of DJ Sparrow, who had dismissed the application. Lewison J said that the district judge’s reasoning in so doing was flawed. The District Judge had treated the relevant question as being whether or not Mr McGuire could establish a reasonable case that his claims would result in a surplus in the estate, but had held that Master Teverson’s prior decision concluded that question against Mr McGuire. Lewison J said that that reasoning was wrong. The district judge ought to have arrived at his own conclusion on the point, not Master Teverson’s. Having so determined, Lewison J set about exercising the discretion under section 304 afresh. He considered that the deficiency in the estate was some £85,000 (including interest) and held that:

“25 …in my judgment the real question is whether Mr McGuire has a real prospect of succeeding in recovering £85,000 or more.”

Having set that question he then set about analysing the prospects of recovery, and the possible amounts of recovery across Mr McGuire’s various claims (on a “best case” basis) and came to the conclusion that some claims were worth little (assuming they existed at all), others were pointless, various claims that there were sales at an undervalue were unsustainable on the facts (and in particular in the absence of independent evidence about value) and that the trustee was likely to have defences under section 23 of the Trustee Act 1925 and in limitation. He concluded:

“49.

Thus, making all the assumptions in favour of Mr McGuire which I properly can, I do not consider there is a real prospect that he will succeed in turning a deficiency into a surplus. In addition, I take into account Mr Briggs’ submission that before granting permission to bring any proceedings, I must be satisfied that the proceedings will be properly and proportionately conducted. I am not so satisfied. Despite the strong warnings that I gave to Mr McGuire in my judgment on the application for permission to appeal not to engage in the mud-slinging that had been a characteristic of his conduct in the case so far, the two bundles he prepared in support of the appeal repeated all the old allegations for which I had refused permission to appeal. I regret to say that Mr McGuire has become obsessive about this litigation and cannot be trusted to conduct it proportionately or properly.”

For those reasons he dismissed the appeal from the district judge.

Mr McGuire’s grounds of appeal, apparently prepared without the assistance of lawyers, was a long discursive document which accused Lewison J of bias and of missing the point. One of the points that was said to have been missed was that there should be a trial to expose the court’s failure to protect and preserve the assets in the estate. He also set out some other grounds which are not at all easy to follow. Had the matter been left there it would have been very difficult if not impossible to discern any valid grounds of appeal at all. However, Miss Start brought some focus to the appeal and her skeleton argument and oral submissions contained an identifiable case on which we are able to rule. We do so on the footing that the content of her submissions amounts to the substance of the proposed appeal. Mr McGuire’s additional submissions did not add any points with which it is necessary to deal.

Section 304 of the 1986 Act provides for actions to be brought against the trustee in bankruptcy in respect of defaults or shortcomings, and expressly allows the bankrupt to bring proceedings but subject to the filter of having to get the permission of the court. Lewison J was considering the application of that filter. The relevant parts of the section read:

“304  Liability of trustee

(1)

Where on an application under this section the court is satisfied—

(a)

that the trustee of a bankrupt's estate has misapplied or retained, or become accountable for, any money or other property comprised in the bankrupt's estate, or

(b)

that a bankrupt's estate has suffered any loss in consequence of any misfeasance or breach of fiduciary or other duty by a trustee of the estate in the carrying out of his functions,

the court may order the trustee, for the benefit of the estate, to repay, restore or account for money or other property (together with interest at such rate as the court thinks just) or, as the case may require, to pay such sum by way of compensation in respect of the misfeasance or breach of fiduciary or other duty as the court thinks just.

This is without prejudice to any liability arising apart from this section.

(2)

An application under this section may be made by the official receiver, the Secretary of State, a creditor of the bankrupt or (whether or not there is, or is likely to be, a surplus for the purposes of section 330(5) (final distribution)) the bankrupt himself.

But the leave of the court is required for the making of an application if it is to be made by the bankrupt or if it is to be made after the trustee has had his release under section 299.”

Miss Start’s analysis of the proposed appeal is based on the following criticisms of the judgment below:

Section 304(2) clearly, in its terms, allows for the possibility of the bankrupt making an application under the section even if it is not apparent that there would be a surplus for him – see the words “An application under this section may be made by [various people] or (whether or not there is, or is likely to be, a surplus for the purposes of section 330(5) (final distribution)) the bankrupt himself” (our emphasis). Despite that, it seems from the face of the judgment that Lewison J approached this matter on the footing that Mr McGuire needed to demonstrate that there would be a surplus and, since he could not do so, his application would not be allowed (or at least that was one reason for it). This is apparent from various parts of his judgment:

“20.

DJ Sparrow said correctly in accordance with the second criterion laid down by Hart J [in Brown v Beat] that he would not permit Mr McGuire to advance his claims unless there was a real prospect that success in them would result in a surplus to the estate. Otherwise, it was essentially a matter for the creditors whether they wished all or any of those claims to be pursued…

24.

… In giving permission to appeal I said that in making his appeal, Mr McGuire would have to persuade the appeal judge … fourt, that he has a real prospect of turning the shortfall into a surplus …

49.

Thus, making all the assumptions in favour of Mr McGuire which I properly can, I do not consider there is a real prospect that he will succeed in turning a deficiency into a surplus.”

In addition, there is the extract from paragraph 25 cited above.

Those words do seem to carry the suggestion relied on by Miss Start. Mr Briggs sought to say that Lewison J cannot have ignored the fact that the statute expressly excludes the requirement of a surplus, and what the judge was doing was adding a gloss that was appropriate to his particular case, bearing in mind its background. He pointed out that immediately before the hearing before the district judge the creditors had met, been informed of the estate and of a deficiency in the estate, even as against the trustee’s expenses and remuneration. It would, he said, be odd for the judge not to be following the test which he had just set out from Brown v Beat, which refers to a “benefit to the estate”. The creditors had approved the trustee’s release in a meeting which was referred to in the district judge’s judgment. He therefore invited us to read Lewison J’s judgment as if the references to surplus were in fact a reference to benefit to the estate in the sense of a return to creditors.

We do not think that the judge’s references to surplus can be taken to have meant a surplus over the fees and remuneration so as to give some return for creditors. That appears not only from the context of the words which we have cited, but it also appears from paragraph 25 of the judgment:

“25.

The deficiency as regards creditors is £47,000, and the largest creditor is the Halifax. If statutory interest is added, the total comes to some £85,000. Although Mr Chelnick said that the interest is in itself a consequence of alleged breaches of duty on the part of the trustee, in my judgment the real question is whether Mr McGuire has a real prospect of succeeding in recovering £85,000 or more.”

The other papers in the case, including the judgment of DJ Sparrow and a separate judgment of Lewison J when he granted permission to appeal, show that the £47,000 figure is, as one would expect, the amount of the unsecured debt which would not be repaid to creditors (in fact the whole amount of the unsecured debt, because there was not enough in the estate to pay the trustee’s costs and remuneration). It therefore does indeed appear that Lewison J meant “surplus available to the bankrupt” rather than “surplus available to creditors”. It may also be significant that when Lewison J set out the wording of section 304(2) he cited only that part requiring leave to be granted for an application by the bankrupt, and did not cite the prior words “(whether or not there is, or is likely to be, a surplus for the purposes of section 330(5)(final distribution))”.

This would appear to be an error in the judge’s approach. However, its explanation may lie in the fact that the skeleton argument of Mr McGuire for the appeal before Lewison J seems to have proceeded on the footing that there was an arguable case for a surplus. Paragraph 23 reads:

“had [DJ Sparrow] investigated the undervalue issue, he would have concluded that there was a realistic possibility of establishing that the shortfall could be turned into a surplus.”

Paragraph 38 contains this sentence:

“Had [DJ Sparrow considered the evidence properly] he would have concluded that Mr McGuire has a real prospect of establishing that the errors made by the Trustee resulted in Mr McGuire suffering financial loss.”

Nonetheless, and notwithstanding the apparent common approach of counsel below, there could be said to be an error of principle in requiring such a surplus. That is capable of giving rise to an important point of principle for the purpose of the threshold question in respect of second appeals. However, it does not follow that he should have permission to appeal. That would turn on the question of whether he has a real prospect of success on any such appeal when the right test is applied, which we still have to consider. Furthermore, the likelihood of a surplus is still likely to be relevant to the question of permission even if its absence is not determinative. We return to these matters below, but first need to deal with other criticisms of the decision below.

Miss Start says that in addition to the “surplus” point the judge erred by purporting to apply what she said was the right test but going on to decide the case by reference to other factors. This, she said, was another point of principle which made the matter worthy of a second appeal.

The proper test which Miss Start said should be applied to applications for permission under section 304 is that set out by Hart J in Brown v Beat, and cited by Lewison J at paragraph 18 of his judgment:

“The factors which the court must bear in mind in deciding whether or not to grant permission are, first, whether or not a reasonably meritorious cause of action has been shown and, secondly, whether giving permission for its prosecution is reasonably likely to result in a benefit to the estate.”

Miss Start says that that was the test, and the judge should have applied nothing else. In fact he wrongly brought in additional factors, and particularly in his paragraph 49 when, having referred to the absence of a surplus, he added his reference to Mr McGuire’s inability to conduct litigation properly (see above). That, she said, went outside the proper test and was an error of principle.

We do not agree. Hart J cannot be taken as having laid down any particular test. It would not be appropriate for the court to lay down exclusive criteria by reference to which an application by the bankrupt under section 304(2) had, in all cases, to be judged. He was doing no more than identifying two central factors which have to be taken into account (and obviously so). That is quite apparent from the context of his judgment. In the immediately preceding paragraph to that in which the words cited appear he referred to the policy behind the leave requirement in section 304(2), namely to apply a filter because of the risk of vexatious applications. The risk of vexation in the proceedings is therefore obviously another matter which can, and in our view should, be taken into account, though a favourable answer to Hart J’s two questions may well be sufficient in many cases to demonstrate that the particular course of action proposed by the bankrupt is worthwhile and not driven by vexation. Furthermore, at page 427 Hart J returned to the point and described a different test, or perhaps an umbrella test under which his two more specific questions should be asked. At page 427B he said:

“An application for leave under a Grepe v Loam order or under section 304(2) stands on a somewhat different footing from the normal case of a final decision on a trial inter partes. It is not final in the sense that nothing in practice can prevent an application being renewed. It is also different in that the criteria being applied by the court in deciding whether or not to grant leave are those that I have mentioned, namely is there material produced on the application such as would justify a reasonable litigant pursuing the particular litigations proposed?”

As a sort of umbrella test that must be unobjectionable. It coincides with the description of the test proposed by Blackburn J in Re Hellyer (a Bankrupt) [1998] BPIR 695 at 696C in considering whether or not to allow an application which would otherwise have been barred by a Grepe v Loam order (the precursor of civil restraint orders). We cannot see anything wrong with that as a requirement. Hart J himself referred to the Hellyer test at page 424, and added:

“That criterion of reasonableness has, of course, to be stretched to include the factors which I have mentioned, that is to say, the likelihood of success, and the risks as to costs of the estate in the event of failure.”

All this points to a test which is wider than the two criteria relied on by Miss Start.

Furthermore, in Parkinson Engineering Services PLC v Swan & another [2010] BPIR 437 Lloyd LJ expressly said that the two requirements were not exhaustive, albeit in the context of section 212 of the Insolvency Act:

“The judge started by considering whether or not it would be appropriate to allow proceedings under section 212. It seems to me that this was the correct starting point. He had seen (as we did) the decision of Hart J in Brown v Beat [2002] BPIR 421, where the judge, considering the corresponding provision as regards bankruptcy, identified two criteria: whether or not a reasonably meritorious cause of action has been shown, and whether giving permission for its prosecution is reasonably likely to result in a benefit to the estate. Those are not exhaustive but they are certainly relevant and likely to be among the most important factors. They are relevant here, together with the question of delay.”

All this shows that Lewison J was right to take into account Hart J’s two criteria, together with such further other factors as seemed to be relevant. It follows, therefore, that there is no error or principle here, and indeed, in this area, no error of any kind in the judgment.

The complaints of Mr McGuire under this head centred around his assertions that various properties owned by the estate, or in which the estate has an indirect interest through rights to purchase or through the estate of the sister, were disposed of at an undervalue or disclaimed when they might have had some real value. In relation to several of the relevant transactions the trustee had the advice of agents, and in that context the judge referred to section 23 which provides that a trustee may employ an agent:

“and shall not be responsible for the default of any such agent if employed in good faith.

“48.

This too, in my judgment, provides a defence for the trustee.”

Miss Start said that section 23 could not be used by the trustee in bankruptcy; the Insolvency Act provided a complete code in which section 23 (which was still in force at the relevant time) had no part to play. We very much doubt that that submission is correct, but in any event the prospect of it being raised as a defence, and having to be dealt with, is something that would be taken into account by any reasonable litigant considering the application which Mr McGuire wished to make. The judge was entitled to consider it as part of the decision on whether permission should be granted. One cannot simply ignore likely defences to which there is no clear answer.

In paragraph 48 of his judgment the judge observed that the sales which Mr McGuire sought to impugn took place in 2000 and that his application for leave was not made until May 2007. As a result any such claims were likely to be time-barred, applying the Limitation Act 1980 by analogy if not directly. He observed:

“There is, in my judgment, no real answer to Mr Briggs’ point based on limitation.”

As a matter of submission, Miss Start said that Mr McGuire’s answer to that was that he did not know about the undervalue until 2002, which is within 6 years of the application for permission to bring his section 304 application. That does not seem to us to be an answer to any limitation defence. It would only be an answer if it were coupled with some sort of concealment case so as to start the limitation clock running from a later date. Miss Start said that in any event it was wrong to consider limitation as a defence in an application of this kind. It would be for the trustee to raise limitation in answer to an application under section 304(1) once permission had been given for it, and it was not necessary for a bankrupt applying for leave under section 304(2) to anticipate that matter. We do not agree with that way of looking at the matter. A tribunal hearing an application for leave is entitled to look at the matter in the round, and to take into account anything which would obviously be run as a defence – see our remarks in relation to section 23 of the Trustee Act 1925. If it appears that limitation is likely to be one of those, then a reasonable litigant would have to bear that in mind, and, in presenting an application to the court, would have to indicate how the apparent defence would be dealt with. The court on that occasion would often not rule on the point in a definitive way, but if the applicant bankrupt has no apparent answer to it, then that is plainly something that the court may take into account in considering the leave application. In many cases it will be reasonable to expect the bankrupt actually to anticipate the point. In the present case it is not apparent that the bankrupt has any real answer to it. It is obviously a relevant factor. The judge did not err in principle in taking it into account.

That means that the only error of principle is the one identified above, namely his apparent requirement of a potential surplus. However, as we have already observed, that is not enough to entitle Mr McGuire to have permission to appeal the final decision. He would need to establish a real prospect of success in an appeal which considered the matter on the correct basis. Lewison J’s decision demonstrated that it was unlikely that anything much would be realised, in financial terms, by an application against the trustee under section 304. If that part of his decision stands then even on a correct approach to the question of surplus there would be no basis for giving leave to bring proceedings because there is no worthwhile claim. It is therefore necessary to consider Lewison J’s reasoning about that.

The judge below went through the various claims which Mr McGuire sought to bring and came to the conclusion that they were at best small and at worst unmaintainable. Subject to a point about further evidence to which we will come, those conclusions seem to us to be unimpeachable.

Dealing with those points briefly, the judge’s conclusions were as follows:

At paragraph 46 Lewison J observed that the claim that the properties had been sold at an undervalue came down to an allegation that the valuations on which the trustee in bankruptcy relied were negligent, as counsel for Mr McGuire below had accepted. That meant showing not only that the valuations were wrong, but that they were ones that no competent valuer would have made. He observed that any such case was fatally wounded by the absence of any expert evidence produced by Mr McGuire. We agree with that conclusion. Any claim that a property has been sold at an undervalue must be established by more than the mere assertion of the claimant to that effect. Before the district judge and before Lewison J Mr McGuire had no such evidence, despite the fact that he had been warned many times that he would need such evidence in order to support his application. His failure to remedy that omission was always going to be fatal.

At the very last moment before this court Mr McGuire sought to begin to remedy the omission. On 15^th March 2013 he served the trustee with a valuation report prepared by a local valuer on 8^th March 2013 in relation to 6 Sea Cliff. He valued the property as at 7^th July 2000 “in the region of £85,000”. Miss Start sought permission to adduce that evidence. She said it would be fair to do so in the context of this case, especially since this court is, she said, no longer constrained by the principles in Ladd v Marshall [1954] 1WLR 1489.

Although Ladd v Marshall does not now necessarily embody a complete set of principles applicable to adducing fresh evidence on appeal, it nonetheless embodies very relevant factors. Of particular significance in this case are the first two requirements – the extent to which the evidence could or could not have been obtained with reasonable diligence for use at the principal hearing, and the requirement that the evidence must have some important influence on the result of the case, though it need not be decisive. So far as the first is concerned, it must be borne in mind that this evidence is sought to be adduced at a second appeal. The only reason which we were given (without the benefit of a witness statement) for its not having been obtained before is that Mr McGuire could not afford it before. This is unconvincing and insufficient. We have been not given any details as to how Mr McGuire’s means have changed in the long history of this matter (going back to a period long before the hearing before DJ Sparrow). The number of occasions on which Mr McGuire has been told he needs such evidence is of significance in this area. The mere assertion by counsel, on the hearing of this second appeal, that he did not have the means to get the evidence before is not particularly compelling. So far as the second criterion is concerned, the evidence is capable of being relevant but it is far from being capable of turning the matter round in Mr McGuire’s favour. Mr McGuire’s real case is that all the sales were at an undervalue. He has proved evidence in relation to one only. The amount of the undervalue would, if established, restore sufficient to the estate to pay off the trustee’s apparent outstanding costs and expenses, but little more. In order to bring home the full force of his intended claim, Mr McGuire would have to obtain similar evidence in relation to a number of other properties. It is not apparent that he would be able to do that. Accordingly, if the evidence were admitted, and if it were then to be used as evidence in support of his ongoing claim, and even if it were accepted in its entirety (which is far from certain) it would not get him very far.

Furthermore, if this evidence were admitted on this appeal it would work an injustice to the respondent. The trustee was served late, and has not had a fair opportunity to meet the evidence and consider its shortcomings. He put together his own witness statement making some comments about it, but he has not had a fair opportunity to meet it. There may be fundamental flaws in the evidence for all we know, and it would not be right to admit it for the purposes of this appeal without the trustee having had a better opportunity to consider and to meet it. He has been deprived of that opportunity by reason of the lateness with which it has been produced. That is a positive reason going against its admission.

For those reasons, therefore, we do not admit the fresh evidence on this appeal. It follows that Mr McGuire is without any valuation evidence to back up his claims that his estate has been dealt with consistently on the basis of a series of transactions at an undervalue, and that is a fundamental flaw in his application that he be allowed to pursue the trustee. It remains as much of a flaw now as it was perceived to be by Lewison J.

The effect of all this is that Lewison J’s approach to the various aspects of the claims that Mr McGuire would seek to bring contains no errors of principle contains no irrelevant material, and it contains no irrelevant material. He concluded that the claims would not yield any, or any worthwhile, fruit, and we would go so far as to say that his analysis cannot be faulted on all the evidence available. This means that there is, in effect, no point in allowing proceedings to be brought against the trustee. Even at their highest, the claims would barely wipe out the unpaid trustee’s costs, and anything less than that would be completely pointless. There is insufficient benefit to the estate, and no reasonable litigant would contemplate bringing them. On that basis Mr McGuire has no real prospects of success on an appeal even in the light of the judge’s apparent error of principle.

It is helpful to consider this factor in the light of our conclusion, and the judge’s conclusion, as to the worth of the potential claims. Lewison J took into account the question of whether Mr McGuire would conduct the proceedings properly and proportionately. We consider that this is plainly a relevant consideration for any claim. The main purpose of imposing a leave requirement on bankrupts is to protect trustees from exposure to vexatious or unjustifiable litigation. In many cases the filter will concentrate on the merits of the claim for which leave is sought, but if the bankrupt has provided separate evidence of a tendency to disproportionate and inappropriate conduct in litigation then that seems to us to be potentially highly relevant. Its significance may vary with the strength and value of the claim - we can see that it would be a strong thing to shut out an apparently good and valuable claim because of fears about the manner in which it will be run – but it is still relevant.

The judge was therefore entitled, as a matter of principle, to take it into account. Furthermore, there is no basis for criticising his application of it to the facts of this case. The history of this case, and the voluminous documents generated by Mr McGuire with which we have been supplied, demonstrate that Mr McGuire has a very strong sense of grievance and has been pursuing a very long campaign against the trustee because he considers that he should never have been made bankrupt in the first place and then considers, without any evidential justification, that the trustee has wrongly dissipated his estate. The figures demonstrate that he cannot personally benefit from the claim that he wants to bring, and his creditors are very unlikely to benefit either. All this is a recipe for litigation with the qualities described by Lewison J – disproportionate and improperly conducted. It is the sort of litigation against which trustees are entitled to be protected by the section 304 filter.

The application of this point is therefore justified both as a matter of principle and on the facts of this case. It is another strong pointer against a successful appeal, and therefore against the grant of permission to appeal.

We therefore conclude:

We therefore refuse permission to appeal.