Hornan v Baillie & Ors

The first respondent, Mr. Baillie, resides in France. He formerly lived here. He seeks a ruling to the effect that he has not been properly served with the ordinary application in this matter, which arises in the liquidation of Baillies Limited. The ordinary application was issued on the eve of the sixth anniversary of the liquidation and, therefore, just before the expiry of the most favourable limitation period upon which the liquidator can rely.

A number of heads of relief are sought, both against Mr Baillie and against other respondents, who are not party to the present application and who have been served outside the jurisdiction, in the Isle of Man, pursuant to earlier orders I made which have not been challenged. The claims against Mr Baillie are for transactions at an undervalue, fraudulent trading and transactions defrauding creditors, the latter being under s.423 of the Insolvency Act 1986. The distinguishing feature of claims under that section is that they are not (unlike the other claims raised) limited to claims in the liquidation as such, though, in this case, they are in fact brought by the liquidator. Any victim to a transaction can bring a claim under s.423, and a victim would have included the company prior to its liquidation.

I granted a freezing order on 23^rd April 2010. I also granted permission to serve out of the jurisdiction and gave directions as to service.

When the matter was first before me, it was brought on the assumption that the provisions of the CPR would apply to the s.423 claims; that was based upon a previous decision of my own in a case called Krug International (UK) Ltd [2008] BPIR 1512. When, however, I pointed out to the liquidator's counsel that the proposition he derived from that case, that s.423 claims, even when brought by a liquidator, were not insolvency proceedings, had been conceded and was not a matter of decision, he chose to argue that the s.423 claims, as well, were insolvency proceedings within the meaning of the Insolvency Rules 1986.

The significance is this. Under Insolvency Rule 12.12(1) (as it then stood), it was provided that CPR Part 6, paras.6.17 to 6.35 did not apply in insolvency proceedings. Instead, it was provided, under Rule 12.12(3) as follows:

In In Re Busytoday Limited [1992] 1 WLR 683, Mummery J held that the provisions of the Rules of the Supreme Court (“RSC”) were expressly displaced by r.12.12 and that the court had a much wider discretion to order service on a person outside of the jurisdiction than under the RSC. Likewise, the court has a much wider discretion, to the extent that it has a discretion at all, as to the time and method of service. Mindful of the generous wording of r.12.12, I made an order which was intended to be of very great width, under which I directed that the proceedings could be served by personal service or by any other means provided by the CPR, or otherwise in such manner as might be permissible under French law.

Mr Baillie's counsel has argued before me that the order for service out of the jurisdiction, upon its true construction, required that service, whatever means were chosen, should be in accordance with French law; he says that follows from the use of the word "otherwise" which links the third possible method of service with the earlier methods. I do not agree with that as a matter of construction. It seems to me that "otherwise" in that context means in such other manner and is alternative to the two other methods of service specified. On reflection, the reference to the CPR was unhelpful because it begged the question: nonetheless, personal service could be effected in a way which was not necessarily in accordance with French law.

In this application, Mr Baillie is seeking to set aside that order and so it remains open to him to argue that that is an order which I should not have made, notwithstanding the width of r.12.12. He does so on the basis of Council Regulation (EC) 1393/2007 (“the service regulation”) which is directly applicable in this jurisdiction. The service regulation has been amended since its original passing, but nothing turns on that. The different versions of the service regulation have not changed materially. The relevant provision is article 4, which provides: "Judicial documents shall be transmitted directly and as soon as possible between the agencies designated pursuant to Article 2."

It is common ground that if the service regulation applies and is mandatory, Article 4 required service to be effected in France personally upon Mr Baillie through the agency of a French court bailiff (or “huissier”, which is the French word). It is also common ground that that did not happen in this case. What happened is that, at the end of July 2010, service was effected personally upon Mr Baillie, in France, by an English process server.

It seems to me that the terms of Article 4 are mandatory and do not permit any alternative form of service where it applies. Accordingly, counsel for Mr Baillie is correct that, in that event, I should not have made an order authorising alternative methods of service.

The service regulation applies to "civil and commercial" matters (see regulation 1). That is not a concept which has any fixed meaning in English law, though, as is pointed out in Dicey Morris and Collins on The Conflict of Laws, at para 11-024 , in civil law systems the term is generally used in contra-distinction to public law.

There are exceptions in the service regulation, but insolvency proceedings are not one of them; that contrasts with Council Regulation (EC) 424/2001 (“the judgments regulation”) where insolvency proceedings are an exception. To my mind, the distinction is significant and I am of the view and would, if necessary, hold that insolvency proceedings are not excluded by the service regulation and that the service regulation therefore required service through a huissier.

There is another point. Section 423 is a section which is applicable, as I have mentioned, irrespective of whether or not there is a liquidation or other form of insolvency process. Any victim, including the company itself, could have brought these proceedings at any time. It is clear from European jurisprudence, namely Gourdain v. Nadler, case 133/78 [1979] ECR 733 and from the more recent decision of Byers and Yacht Bull Corporation [2010] 2 BCLC 169, that insolvency proceedings for the purpose of the judgments regulation does not include all cases arising in an insolvency but must arise directly from the insolvency and be closely connected to proceedings relating to the winding up of insolvent companies. A section 423 claim is not so connected (see, for example, Jyske Bank v. Spejeldnaes [2000] BCC 16, and the decision of Arden J in TC Bank PLC v. Katz [1997] BPIR 147). The section 423 claims brought by the liquidator are important claims and I have not been invited to consider the remaining claims proceeding without the section 423 claims. Moreover, I am considering the validity of service of the claims as they stood at the date of purported service, which included the section 423 claims.

It seems to me, looking at these proceedings as a whole, that it is not possible, because of the inclusion of the section 423 claims, to regard them as insolvency proceedings for the purpose of the service regulation, even assuming for present purposes that the service regulation does not apply to insolvency proceedings.

I should mention that, in Re Anderson Owen Limited [2009] EWHC 2837 Ch., a decision of Norris J, the obiter view was expressed that the concession in that case, that the service regulation applied to insolvency claims, was not necessarily right. However, the judge made no final determination, given that he had not heard any argument. I have heard full argument and, as I have said, I am inclined to hold, and do (to the extent that it is necessary) that the service regulation does apply to all forms of insolvency proceedings. This is so despite the fact that there is now a separate insolvency regulation (Council Regulation (EC) 1346/2000). The insolvency regulation is, significantly, silent on service. This reflects in my judgment the assumption that the service regulation applies.

It follows from this that, despite the order which I made in April 2010, these proceedings have not hitherto been validly served upon Mr Baillie. The liquidator nonetheless says that I should waive any defect, as Norris J did in the Anderson Owen case, to which I have referred, pursuant to r.7.55 of the Insolvency Rules 1986. That provides:

Norris J was prepared to, and did, waive the defect in the Anderson Owen case, pointing out that the primary objective of service was to bring the proceedings to the attention of the party in question and that the defect in that case did not undermine that process. The same can be said in this case. Nonetheless, Norris J accepted that the position might be different, for example in the case of a claim form which had expired.

Under the CPR, a claim form for service out of the jurisdiction has to be served within six months; otherwise it expires. There is no such provision in relation to an ordinary application brought during the subsistence of an existing insolvency process. Counsel for Mr Baillie has not challenged the suitability of bringing these proceedings by ordinary, as opposed to originating, application. He does, however, say that the court ought to apply the six-month period of validity, by analogy. Otherwise, as he points out, an office-holder could issue insolvency proceedings on the very last day of the limitation period and sit upon them indefinitely. Counsel for the liquidator says that that is not so. He points out that the form of application requires a date to be fixed for the first hearing, which will inevitably be far less than 6 months ahead. That is correct, but the first hearing may not necessarily be effective.

In the present case, there was no first hearing because, although one was fixed upon issue of the ordinary application, it was vacated by me when I made the order for service out and accompanying freezing order in April 2010. The reason it was vacated was because, on the evidence then before me, it appeared that there would inevitably be delay in having the freezing order recognised in France. I therefore required an undertaking to serve it at a much later date and fixed a further hearing for reconsideration. By that time, the ordinary application had been served by the English process server, but not in accordance with the service regulation. It seems to me that that could happen in any case and that the assurance of an early return date which was prayed in aid by the liquidator's counsel is not, in truth, a satisfactory assurance at all.

It is a matter of chance that the Insolvency Rules provide for a different form of process from that prescribed by the CPR for bringing a party before the court. It seems to me that counsel for Mr Baillie is correct that the court should apply the six-month period of validity by analogy. It follows that, were I to waive the defect, I would be depriving Mr Baillie of a potential limitation defence. I have heard no serious argument justifying an extension of the six-month period of validity, if I rule that that period applies. There was no impediment to the liquidator serving pursuant to the service regulation; he chose not to do so, understandably, given the order which I made in April 2010. I have some sympathy with the liquidator for having done that, but sympathy cannot override the rights and legitimate expectations of Mr Baillie

The fact that the liquidator acted, as I have no doubt he did, in good faith, pursuant to the order which I made, does not entitle me to ignore the fact that the order I made should not have been made in the form in which I made it. What I should have been asked to do was to require service in accordance with the service regulation; there is no suggestion that that would not have been both practicable and effective. The French proceedings, recognising my earlier order, have been served through a huissier upon Mr Baillie in France, without difficulty.

It accordingly seems to me that, upon the facts of this case, a serious injustice would be done by waiving the defect or by extending the period of validity of the ordinary application in that it would potentially deprive Mr Baillie of a limitation defence. In those circumstances, given that Mr Baillie has not been properly brought before the court, there is no legitimate basis upon which I can now rectify the matter for the liquidator.

It follows from these rulings that the order for service out, upon Mr Baillie (but not upon the other respondents) should be set aside. Further, all orders made upon the basis that I had jurisdiction against Mr Baillie should likewise be set aside. It is said by the liquidator's counsel that the application challenging service was made unconscionably late. It is not, however, suggested that I should not entertain the application on that ground. In the case of an ordinary claim form, the CPR provides for any challenge to the jurisdiction to be made within 14 days of an acknowledgment of service. There is no acknowledgment of service in the case of an ordinary application in insolvency, so the CPR does not directly apply. I have no doubt however that delay in making the application is a factor that I can properly take into account. However, delay in making the application has not had a significant impact in this case, as nothing of substance has happened in the proceedings during that period of delay.

Mr Baillie points to a fundamental defect in the proceedings. It appears that what triggered him ultimately into action was the threat of a default judgment being obtained against him. I can understand why he responded to the threat in that way, though one might have thought that, having taken his stand, as he had already done in correspondence, as to whether or not he was properly served, he might have stuck to his guns and had the courage of his convictions. If he has not been properly served, one consequence is that any judgment from this court will not be recognised and enforced in France.

In all the circumstances, I see no reason for brushing the defective service under the carpet; on the contrary, I see every reason for recognising that the service was defective and I shall accordingly grant Mr Baillie the declaration he seeks, together with the ancillary relief I have indicated, setting the relevant orders as against him, but not against the other respondents, aside.

I shall now her counsel on any other consequences of this judgment.

I will extend the injunction for 14 days, that is to say until close of business on 20^th January 2012. I do that for this reason. I have been directed to the White Book for a principle with which I am reasonably familiar, which asks the question: where does the balance of justice or injustice lay? There is a risk of injustice to the liquidator if there is an immediate discharge of the injunction, given that I have granted permission to appeal and the injunction therefore may be reinstated on appeal. On the other hand, it seems to me that the primary decision as to whether to continue the injunction must be the Court of Appeal's and that the liquidator should have every encouragement to get before the Court of Appeal as soon as possible.

I will therefore grant the injunction on the same terms and with the same cross-undertaking, but only for a further period of 14 days. If you want any further relief, you will have to go to the Court of Appeal.