Merrygold (Liquidator) v Bates & Anor

On 6 April 2005 Anderson Owen Limited (“the Company”) was wound up by the court. Mr Merrygold was appointed liquidator. The Company had acted as an insurance intermediary, and had collected commissions when policies were incepted. Those commissions were the subject of “claw back” in the event that the policies lapsed. The business of the Company had been conducted fraudulently, and many of the policies had been taken out purely in order to collect the initial commission. The commissions were distributed by the company to its director and members, so that when the “claw back” obligations arose the Company was insolvent.

Philip Bates was the director of the Company: and he has been convicted of fraudulent trading. Nicole Bates (“Mrs Bates”) was the company secretary (and also a person authorised by the FSA to conduct the business of the Company). In December 2008 the liquidator commenced proceedings against Mrs Bates seeking a declaration pursuant to section 212 of the Insolvency Act 1986 (“IA 1986”) that as an officer of the Company she had been guilty of misfeasance and/or breach of fiduciary duty and/or a duty to act in the interests of the Company in causing the Company to make a number of payments from 3 November 2003 to 13 August 2004 totalling over £1 million into the personal account of Mr Bates in Jersey. The Originating Application went on to allege, secondly, that Mrs Bates had beneficially received the Company’s money (which was traceable). Specific payments were identified. Two payments of (£216,000 and of £500,112) were said to have been paid into Mrs Bates’s Commerz Bank account: and a cheque for £450,000 was said to have been drawn upon an account in Monaco in favour of Mrs Bates. Whether any of these transactions represents an improper dealing with monies which belonged to the Company (or whether they represent the payment to Mrs Bates of the proceeds of sale of other assets which belonged personally to her) remains to be determined. I am simply describing the claim brought by Mr Merrygold against her.

Mrs Bates lives in Germany. Mr Merrygold’s originating application seeking relief under section 212 IA 1986 and in respect of breaches of fiduciary duty were “insolvency proceedings” within the meaning of Rule 13.7 of the Insolvency Rules 1986 (“IR”). By IR 12.12(1) “CPR Part 6 paragraphs 6.17 to 6.35 (service of process etc out of the jurisdiction)” do not apply in insolvency proceedings. Instead by IR 12.12(3):-

“Where for the purposes of insolvency proceedings any process…is required to be served on a person who is not in England and Wales, the court may order service to be effected within such time, on such person, at such place and in such manner as it thinks fit…”.

It was established in Re Busytoday Limited [1992] 1 WLR 683 that the discretion granted by these words was so wide that the court was not obliged to order that service abroad must be in accordance with local law.

On 13 November 2008 Regulation (EC) No. 1393/2007 (“the Service Regulation”) took effect. On 10 December 2008 Chief Registrar Baister made an Order pursuant to IR 12.12(3) giving the liquidator permission to serve, by post, a sealed copy of the section 212 application on Mrs Bates in Germany. Service by that means would not have been good service according to German law: nor would it have complied with the provisions of the Service Regulation.

Mrs Bates had previously retained the firm of Russell Jones & Walker as her English solicitors: but on 9 December 2008 they informed the liquidator that they had been unable to make contact with Mrs Bates and did not consider that they were still instructed by her. Mrs Bates had, however, also retained a firm of German lawyers (“Vogel”). On 22 December 2008 the liquidator’s solicitors contacted Vogel, informed them of the permission that had been granted by the Chief Registrar, and requested that they be informed if the proceedings should be served on the German lawyers rather than Mrs Bates personally. To this they received the immediate response:-

“We represent Mrs Nicole Bates. Any contact simply to our office.”

Vogel would appear to have made contact with Mrs Bates concerning this exchange, for the following day two communications occurred. First, Mrs Bates contacted the liquidator’s solicitors to convey a request “that ALL correspondence goes directly and only to him…he is my main lawyer and acting for me in ALL countries…”. Second, the liquidator’s solicitors made a direct request to Mrs Bates for confirmation that Vogel had authority to accept service of proceedings on her behalf. Mrs Bates immediately responded “Yes of course he has”. Accordingly on 23 December 2008 the liquidator’s solicitors wrote to Vogel enclosing “by way of service” the liquidator’s section 212 application. That same day the liquidator’s solicitors also wrote to Mrs Bates enclosing “by way of service a further copy of the application”, explaining that was in compliance with the order of the Chief Registrar.

On 20 January 2009 Vogel wrote to the liquidator’s solicitors to say that they “cannot accept receipt of the order” because they “cannot act for her before the British courts”, and that they had advised her to instruct English solicitors.

The first hearing of the section 212 application was listed before Registrar Derrett for hearing on 5 February 2009. The preceding day Messrs Woodfines wrote to the liquidator’s solicitors to say that they had been instructed by Mrs Bates and that they “[did] not accept that service of the proceedings is valid or that Mrs Bates has submitted to the jurisdiction of the High Court”. They also disputed that Vogel were authorised to accept service of the proceedings on behalf of Mrs Bates, on the basis that she had no understanding of the legal concept of “service” and could not therefore give informed consent. Woodfines did not attend (and Mrs Bates was not represented at) the hearing on 5 February 2009. At that hearing the Registrar ordered that Mrs Bates issue any application to challenge the service of the application (if so advised) by 4:00pm on 19 February 2009 and gave detailed case management directions I the event that no such application was issued (beginning with service of a Defence by 19 March 2009). This timetable had been agreed with Woodfines who had indicated that in agreeing joint directions Mrs Bates “did not concede jurisdiction”.

No application relating to service of the proceedings was issued by 16 February 2009. Mrs Bates disinstructed Woodfines. On 16 March 2009 Messrs George Davies, solicitors, wrote to the liquidator’s solicitors to say that they had now been instructed by Mrs Bates, and that they had a copy of the Order of 5 February 2009. They noted that the Defence was due on 19 March and requested that time for service be extended by four weeks until 16 April. This was agreed.

On 6 April 2009 (no extension of time having been previously obtained by agreement or by order) Mrs Bates issued the application now before me for an order that service be set aside and that the Chief Registrar’s order also be set aside. This application came before the court on 27 May 2009 and was (at the request of Mrs Bates) adjourned. On 10 June 2009 notice was given by the court that the further hearing would be on 27 October 2009. On 22 October 2009 Messrs George Davies came off the record as acting for Mrs Bates (though there are hints in the correspondence that the process began on 2 October). Mrs Bates has thereafter been e-mailing the Court directly saying that the hearing must be postponed because she cannot argue any of the issues, is not a lawyer, and cannot make travel or child care arrangements at less than 14 days notice. In the course of the e-mails she does, however, say that she is as keen as the liquidator to sort the matter out, that she wants it resolved, and that she would appreciate it if the court could “take the view to end this matter in maybe one hearing and finally close the subject”.

The first question to be addressed is whether in the face of Mrs Bates’s e-mails and her non-attendance at this hearing I should simply adjourn it and hope that the Court can find another date convenient to the parties in perhaps three months. This question must be approached from the standpoint of the interests of justice, that is to say, seeking to strike a fair balance between the interests of Mrs Bates, the interests of the liquidator (and the creditors whom he represents) and (not to be overlooked) the interests of the administration of justice. I articulate the principle upon which I am acting because it is important that litigants should not assume that if (shortly before a hearing) they part company with their legal representatives and decide to conduct the matter themselves (or indeed instruct a new legal team) they will obtain a postponement of the hearing almost as of course. Invariably the questions raised by those events are difficult.

I have decided that I should not adjourn the application, but nor should I simply dismiss the application on the grounds that Mrs Bates has not appeared through a representative or personally to argue it. I consider that I should deal with the application on its merits, but that I should provide Mrs Bates with a limited opportunity (at her own risk in costs) to apply to the High Court to review, rescind or vary any order I make.

I consider this a fair answer to the problem posed for the following reasons:-

I therefore turn to consider Mrs’s Bates application.

The first question is whether the order of Chief Registrar ought (whatever its legal merit) to be set aside on procedural grounds. Mrs Bates says that the order was obtained by means of material non disclosure. It is common ground that the liquidator did not draw to the attention of the Chief Registrar that the proceedings which it was intended should be served on Mrs Bates were, in fact, the second set of proceedings. There had been an earlier claim issued in support of an application for a freezing injunction against Mrs Bates. Such an order was granted but, at an inter partes hearing before Mr Justice Mann, was discharged.

The basis of that application was that Mrs Bates was the company secretary and that it could be established that she had signed nineteen proposal forms for insurance policies that yielded £49,000 worth of commission, all of the policies having lapsed and none of the commission having been repaid. It was said that those two facts raised an inference that she was connected with the rest of the fraud and supported a freezing order in a sum of £950,000. Mr Justice Mann pointed out that that was not a summary of the case which appeared particularly cleanly anywhere in the material before the Court and that “it seems to me that when put forward in that way it is a weak case”.

Mrs Bates says that the underlying merits of the claim are an extremely important consideration for the Court in exercising its discretion as to whether to permit service abroad, and that the observation of Mr Justice Mann should have been brought to the attention of the Chief Registrar. She says that the Chief Registrar ought also to have been informed of the view of the Serious Fraud Office (in fact expressed in a document dated 5 February 2009 and so well after the hearing before the Chief Registrar) that an account held in Mont Carlo and belonging to an off shore company called Acorn Commercial Ventures Limited (“Acorn”) contained a significant sum that could be shown to be directly derived from the Company, and that that is where the money can be traced to. (It is from that Acorn account that £450,000 was transferred to Mrs Bates). Further, Mrs Bates says the Chief Registrar was not told that her costs of the 2007 proceedings had not been paid.

I am satisfied that there was no material non disclosure. The Chief Registrar did not have to enter into a detailed consideration of the merits of the claim. He was obliged to ask himself whether there was a real issue between the liquidator and Mrs Bates which a Court might reasonably be asked to try i.e. a claim that was properly arguable: Re: Howard Holdings Inc. [1998] BCC 549 at 553H. He was therefore bound to consider the present section 212 application. This advances a different case from that advanced in the first proceedings. In particular, a key part of the present proceedings is that Mrs Bates caused or procured or permitted or acquiesced in transfers of money into accounts of which she was the sole or joint holder (in particular that at Commerz Bank), and specific transfers are identified. The insurance policies signed in blank do not feature. The sums now claimed far exceed recovery of the commissions relating to those policies. There was no obligation to draw to the attention of the Chief Registrar the observations of Mr Justice Mann upon a different case.

Nor would there have been an obligation to draw to the Chief Registrar the (as then unexpressed) views of the SFO about the money in the Acorn account. The fact that there is a significant sum in the Acorn account which might belong to the company does not mean that transfers out of the Acorn account into Mrs Bates’s Commerz Bank account are somehow “untraceable”. That is especially so where the SFO’s views were actually expressed in the context of meeting a claim by Mr Bates that the money now in the Acorn account was not company money but belonged to his children. The point about non-payment of costs seems simply to have been wrong. I hold there was no material non-disclosure.

The next issue for decision is whether the Chief Registrar was correct in law when he made the order for service that he did. The solicitors for Mrs Bates have in evidence submitted that the provisions of the Service Regulation apply to all “civil and commercial matters where a judicial…document has to be transmitted from one member state to another for service there”. Direct service of the English proceedings by the liquidator’s solicitors upon Mrs Bates using the postal system would not (it is submitted) have complied with the provisions of the Service Regulation: and so the Chief Registrar’s order must be set aside as being incorrect in law.

Confronted by a non-attending litigant in person, Counsel for the liquidator took the tactical decision to accept (for the purposes of the hearing before me) that this argument was correct. I shall decide the application on that basis. But I will express the view that I do not think the position taken by Mrs Bates is necessarily correct. Because the point has not been argued before me nor debated in academic context (other than in two or three articles) I will simply state the reasons why I am unwilling to accept, without qualification, the correctness of the point taken by Mrs Bates.

If I proceed on the footing that the provisions Service Regulation do apply to the service of the section 212 proceedings on Mrs Bates in Germany (so that the service of the proceedings on Mrs Bates pursuant to the Chief Registrar’s order was not in accordance with the Service Regulation) the question then arises whether it should be set aside. Mrs Bates’s solicitors submit that it must be. The liquidator’s solicitors rely on IR 7.55 which provides:-

“No insolvency proceedings shall be invalidated by any formal defect or any irregularity, unless the court before which objection is made considers that substantial injustice has been caused by the defect or irregularity, and that the injustice cannot be remedied by any order of the court”.

In my judgment defective service is within the scope of this rule.

The essential purpose of rules as to service is to ensure that a party has proper notice of proceedings brought and a fair opportunity to deal with them. Of course, they might also have significance in other contexts e.g. in founding jurisdiction or enabling a claim to be brought within a limitation period. Whether the court should insist upon strict compliance with them will be influenced by all such considerations: and guidance as to how to weigh them can be found in CPR 3.10.

The evidence of Mrs Bates contains the submission that the Court should not permit service other than in accordance with the Service Directive without good reason, relying upon Knauf UK v British Gypsum [2002] 1 WLR 907. This concerned an application under CPR 6.8 for permission to effect service by “an alternative method” with the object of commencing proceedings against a German company by serving its London solicitors. The object was to commence English proceedings which would have priority over any subsequent German proceedings under Article 21 of Brussels Convention. This was later described in Phillips v Symes [2008] UKHL1 at paragraph 39 as “a naked attempt to use CPR Rule 6.8 to subvert the Brussels Convention”. Unsurprisingly it failed. This is not such a case. The Chief Registrar was not asked to make an order so that the liquidator could grab jurisdiction: the Chief Registrar was asked to make an order so that proceedings properly commenced here could be progressed.

In Phillips v Symes (supra) itself the question was whether the English court was “first seised”, which in turn depended upon whether service in Switzerland had been effective. The papers were not in order because the claim form had been removed from the packet. The House of Lords addressed the question whether CPR Rule 3.10 enabled the court to determine that the documents actually served constituted sufficient service. Lord Brown of Eaton-Under-Heywood (with whom the other members of the House agreed) was of opinion that CPR 3.10 might well enable the court to order (on the facts of that case) that service had been effective, notwithstanding that it was not strictly in compliance with the Rules: and he considered that “The Golden Mariner” [1990] 2 Ll. Rep. 215 stood as authority for that proposition.

In discharge of her duty to the Court Counsel for the liquidator drew to my attention a note at page 353 of the White Book to the effect that CPR Rule 3.10 should not be used retrospectively to cure a method of service which was defective under the law of the state where service was effected: but the authority for that proposition is the decision at first instance in Olafsson [2006] EWHC 3162 whereas that decision was reversed on appeal (see [2008] EWCA Civ 152).

In my judgment nothing in that guidance indicates that the curative power conferred by IR 7.55 is not capable of being exercised so as to treat as valid service which was technically defective. The mode of service upon Mrs Bates was (on the footing that the Service Regulation applied to these proceedings) formally defective and irregular but I do not consider that it occasioned any substantial injustice, and such difficulty as it did occasion is capable of remedy by an order of the Court.

These are my reasons for that view:-

There is a further reason for treating what was done as effective service, which operates both as an additional factor under IR 7.55 and itself provides a free-standing ground. I consider that Mrs Bates has really waived the right to complain about the mode of service. Guidance as to the correct test to apply in assessing whether any particular conduct amounts to a submission to the jurisdiction can be found in the judgment of the Chancellor in Global Multi Media International Limited v Ara Media Services [2006] EWHC 3107 at paragraph 27. The Chancellor there adopts the standard of whether a disinterested bystander with knowledge of the case would have regarded acts of the defendant as inconsistent with making and maintaining a challenge to the jurisdiction and holds:-

“The test to be applied is an objective one and what must be determined is whether the only possible explanation for the conduct relied on is an intention on the part of the defendant to have the case tried in England”.

I find such conduct on the part of Mrs Bates in this case. Whilst she was instructing Messrs Woodfines she secured the opportunity to make an application to challenge service upon her, and the Court made directions as to the conduct of the case in the event that no such challenge was mounted. The mere agreement upon directions in default of an application challenging service plainly did not amount to a waiver of the right to make the application. By the time Messrs George Davies were instructed Mrs Bates no longer had the right of challenge which the order of 5 February 2009 had granted to her, and there were in force directions made by Court order for the conduct of the case. Messrs George Davies applied for an extension of time to serve the Defence. They then agreed further consequential variations to the timetable. They then agreed that the liquidator’s solicitors could attend at the listing office on 7 April on behalf of both parties to set the matter down for trial. This conduct (when coupled with Mrs Bates’s failure to exercise her right to challenge in accordance with the order of 5 February) is to my mind, on an objective analysis, consistent only with an intention as at 31 March 2009 to have the case proceed to trial and not to make or maintain a challenge that service had been ineffective. I hold that this conduct amounts to a waiver of the right to take the point about service (and on that ground Mrs Bates’s application ought to be dismissed): or alternatively, that the conduct is a significant factor to be taken into account in assessing how to apply IR 7.55 and it (together with the other factors enumerated above) means that IR 7.55 should be applied in a way which validates the service on Mrs Bates and on Vogel in January 2009.

For these reasons I would dismiss the application. So that the dismissal of the application and the recognition of effective service in January 2009 do not occasion any injustice to Mrs Bates I would extend the time for service of her Defence (which is now of time) until 4:00pm on 14 December 2009. The liquidator should serve any Reply by 4:00pm on 11 January 2010, with disclosure taking place no later than 28 January 2010. There shall be consequential amendments to the other dates set out in the order of 5 February 2009.

I have specifically mentioned disclosure because I believe that an open and whole hearted discharge of disclosure obligations (without procedural wrangling and before the expense of preparation of witness statements) is likely to lead to an economic, expeditious and just disposal of the case. What is needed is complete disclosure of the relevant company banking documents (mandates, cheques, transfer instructions and relevant statements), and equivalent disclosure by Mrs Bates of the Jersey joint and sole Woolwich accounts, the Acorn account in Monaco, and her Commerz Bank account in Germany. It is analysis of this material by accountants that is likely to enable a conclusion to be drawn whether the sums which arrived in Mrs Bates’s bank accounts are the traceable proceeds of company money or are the proceeds of sale of her own assets according to the rules of following or tracing. (In expressing that view I have of course formed no view on the substantive issues in the action and fully recognise that a tracing claim is not the only claim advanced by the liquidator, and that Mrs Bates’ claim to ownership is by no means the only response open to her).

I therefore propose:-

This judgment will be formally handed down at 10.00am on 11 November 2009. I do not expect any attendance. Arrangements will be made to e-mail a copy to Mrs Bates.