Williams v Glover & Anor

This the hearing of an application by the Applicant for directions made pursuant to s.167(3) of the Insolvency Act 1986 (“IA”) concerning the assignment of conduct of certain outstanding tax appeals by GP Aviation Group International Limited (“the Company”) and for a stay of misfeasance proceedings brought by the Applicant against the Respondents pending the outcome of the appeals. The hearing was concluded at 16.30 on the 17^th May 2013. Although the application had been fully argued, I was asked to delay delivery of a judgment until the first week in June because there were on going discussions that, if successful, would mean that it would be unnecessary to deliver this judgment. I acceded to that submission since if a pragmatic solution to the problem could be agreed, it would avoid the parties becoming further distracted by what is or has become a highly technical issue.

I had the benefit of full skeleton arguments from both counsel and careful and considered oral submissions from each of them and I record my gratitude to them both for the quality of the submissions and for the spirit in which they were delivered notwithstanding that relations between the parties have become very strained.

The Applicant has commenced a misfeasance claim against the Respondents in which it is alleged that the Respondents acted in breach of the fiduciary duties that they owed to the Company and caused or permitted the Company to make allegedly unlawful distributions. In view of the fact that I may have to try that claim, I confine the factual summary to those facts strictly necessary for the determination of this present application. I make clear that nothing in this judgment resolves or is intended to resolve any disputed issues of fact that arise in the misfeasance proceedings, not least because this application has proceeded on the basis of written evidence and written and oral submissions.

The Respondents are the former directors of the Company. In November 2004, the Company (acting by the Respondents) sold its business and assets for which it received total consideration of £2.5 million, which included £1.3 million in cash. Thereafter the Respondents embarked on a process, which on the Respondents’ case, was a bona fide attempt to wind up the affairs of the Company at a time when its assets exceeded its liabilities. It was not a formal Members Voluntary Liquidation. The Applicant does not accept that the process was conducted properly or lawfully but the Respondents maintain that they acted throughout in good faith, that they relied at all times on professional advice and that they made full provision for the Company’s liabilities before paying themselves. In any event, the Applicant alleges that £1.6 million was paid out by the Company in purported discharge of its liabilities following which the Company was struck off the Register pursuant to s.652A of the Companies Act 1985. The Respondents do not admit this figure. In June 2008 the Company was restored to the Register and was wound up on a creditor’s petition and subsequently the Applicant was appointed liquidator.

In April 2009, HMRC submitted a proof of debt for £19,240 in respect of Corporation Tax liability for the accounting periods ending 30^th September 2003 and 2004. In November 2010, the Applicant commenced the misfeasance proceedings to which I have referred in which he sought recovery of £696,000 paid to the Respondents for their shares in the Company and sums now totalling about £400,000, but originally totalling approximately £1 million, in respect of payments that the Applicant maintains the respondents have not proved were payments lawfully and properly authorised by them in accordance with the duties they owed to the Company.

In October 2012, HMRC raised “discovery” assessments against the Company for Corporation Tax of £1.4 million (inclusive of penalties) together with interest, claimed to be due in particular as a result of the sale by the Company of its assets as I have described. The power to make such an assessment is contained in Paragraph 41(1) of Schedule 18 to the Finance Act 1998 (“FA98”). At the request of the Respondents the Applicant caused the Company to serve notice of appeal against the assessments and to apply for postponement of the payment of tax. The power to appeal is contained in Paragraph 48 of Schedule 18 FA98 and must be addressed in writing to the officer of HMRC who issues the notice of assessment within 30 days after issue of the assessment. The Applicant has informed the Respondents that unless the appeal succeeds he intends to allege in the misfeasance proceedings that the Respondents are liable to account to the Company for the debts created by the assessments. The substantive appeal has yet to be referred to the FTT and the postponement application has been allowed only to the extent that the tax due and payable has been reduced to £1.2 million. In consequence the Respondents requested the Applicant to file an appeal against that decision with the FTT. The FTT has given various directions that have to be complied with between 10^th May and 14^th June 2013. Compliance with those directions has been stayed by agreement between the Applicant and HMRC pending determination of this application.

The Applicant has made clear that he does not have the means to finance the conduct of the tax appeals and in any event he has doubts as to the merits of the substantive appeals. In the result to date the appeals have been controlled by the Applicant but (it is alleged by the Respondents but disputed by the Applicant) funded by the Respondents. Counsel for the Respondents describes these arrangements in his skeleton submissions as being “… attended by contention, dispute and delay …” and that it is common ground that “ … the current situation is highly unsatisfactory …”. In those circumstances, the Respondents have requested the Applicant to assign the appeals to them. The Applicant doubts whether there is power to do so or if there is whether it ought to be exercised and for that reason has sought directions.

The Respondents contend that the most appropriate and practical direction would be one that requires the Applicant to assign the appeals to the Respondents. The Applicant whilst maintaining the position that he will act in accordance with the directions of the Court, submits that there are a number of difficult legal and practical issues that in reality prevent this course from being adopted. It is common ground that the issue between the parties raises four sub-issues being:

Issue 1

Clearly the Applicant is entitled to conduct the appeals on behalf of the Company with sanction if necessary pursuant to Paragraph 4 of Schedule 4. The power to conduct the appeal is not of itself capable of assignment – see (most recently) Ruttle Plant Limited v. SSEFRA [2008] EWHC 238 (TCC) [2009] 1 All ER 448 per Ramsey J at [43], following earlier authority to similar effect including Grovewood Holdings Plc v. James Capel & Co Limited [1995] Ch 80 per Lightman J at 89G. Thus the Applicant can have power to assign the appeals only if the right to appeal is property capable of being sold within the meaning of Paragraph 6 of Schedule 4. It is this issue that was the principal one argued by the parties before me.

On behalf of the Respondents it is submitted that a thing in action is included within the statutory definition of the property of the Company and that a right to appeal against a liability is such a thing in action. The Applicant submits that the right to appeal the discovery assessments is not property but rather is a right conferred on the Company by statute that the liquidator has a right to exercise for the purpose of conducting the liquidation. It is common ground that this issue has not been decided by any English authority although it is submitted by the Applicant that the issue has been decided for the purposes of Australian law by a decision of the High Court of Australia. It is submitted that this authority is highly persuasive and ought to be followed unless a good reason for saying that English Law is different from Australian Law in this regard. Many of the authorities that touch on the issue are bankruptcy not corporate liquidation cases. It is to be borne in mind that on a person being adjudicated bankrupt, all his property vests in his trustee whereas the property of a company in liquidation does not vest in a liquidator. This distinction needs to be remembered when considering the various authorities.

It has long been recognised that a cause of action (being a chose or thing in action) is property within the meaning of Paragraph 6 of Schedule 4 that either vests in the trustee or is part of the assets of the Company in liquidation and thus is an asset that a liquidator (or trustee in bankruptcy) may assign to a third party pursuant to the statutory power of sale – see Seear v. Lawson (1880) 15 Ch.D 426 (assignment of a cause of action by a trustee) and In Re Park Gate Waggon Works Co (1881) 17 Ch.D 234 (assignment by a liquidator of a cause of action). It is common ground that in this regard at least the law was correctly stated by Lightman J in Grovewood (ante) at 86. This does not involve any attempt to assign a statutory power to enforce because the right to enforce is an incidental right of the owner for the time being of the chose that is the cause of action.

The question that arises in this case is whether the right of the Company to appeal from the assessment is itself a property right. This is not an issue that it is necessary to decide other than where an assignment is being contemplated. This is so because (absent a purported assignment of the right to appeal) in company liquidations, the only person entitled to authorise the commencement or continuation of an appeal in the name of the company concerned is the office holder, and, in personal bankruptcies, the bankrupt loses his locus standi to commence or continue an appeal on adjudication and thereafter any appeal can be advanced only by the trustee exercising his statutory powers.

There is an interesting debate within the authorities as to whether in personal bankruptcies the reason why the bankrupt loses standing to prosecute an appeal is because the right to appeal is a property right that has vested in the trustee or whether it is simply an incident of the fact of bankruptcy. This issue was the subject of detailed submissions from the parties. In essence, it was submitted by the Respondents that if the reasons why a bankrupt did not have standing to prosecute the appeal was because the right to appeal was a property right that vested in the trustee, it followed that the right of a company to appeal would also be a property right and thus it was a right that a liquidator was entitled to sell if minded to do so. I turn to the authorities where this issue has been considered. It is necessary to note at the outset however that in each of the cases where the issue has been considered, it was not necessary to decide the question whether the right to appeal was a thing in action because the only issue was whether the bankrupt was entitled to commence or continue the challenge under consideration and in relation to that point, it has long been recognised that the bankrupt loses standing as I have described already.

The leading authority on this issue in England is Heath v. Tang [1993] 1 WLR 1421. That case concerned attempts by each respective bankrupt to appeal from the judgment in respect of which the bankrupt had been adjudicated bankrupt in circumstances where the trustee concerned was either unwilling to appeal or a trustee had yet to be appointed. The Court of Appeal concluded that on adjudication a bankrupt was divested of his interest in his property and liability for his debts and therefore did not have standing to appeal. The judgment of the Court was given by Hoffmann LJ as he then was. He cited with apparent approval at 1423D-F the earlier decision of the Court of Appeal in Boaler v. Power [1910] 2 QB 229, where it had been held that the right of a bankrupt to continue with an action commenced before he was adjudicated bankrupt vested in the trustee and the bankrupt thereafter had no locus to prosecute it. In relation to cases where the bankrupt is a defendant Hoffmann LJ said at 1424E-F:

“… there is usually no question of the cause of action having vested in the trustee. Unless the defence is set off … the bankrupt will not be asserting by way of defence any cause of action of his own. But in cases in which the Plaintiff is claiming an interest in some property of the bankrupt, that property will have vested in the trustee. And in claims for debt or damages, the only assets out of which the claim can be satisfied will have likewise vested. It will therefore be equally true to say that the bankrupt has no issue in the proceedings. …”

In adopting that approach Hoffmann LJ cited Rochfort v. Battersby (1849) 2 H.L.Cas. 388. In that case a bankrupt sought to appeal to the House of lords and was held not to be entitled to do so because the bankruptcy legislation then in force had the effect of “… divesting the insolvent of all title and interest in the property, which would authorise or justify him in entering into any litigation respecting it.”. This led Hoffman LJ to conclude that “… in principle a bankrupt cannot in his own name appeal from a judgment against him that is enforceable only against the estate vested in his trustee”.

The effect of this decision is therefore that whilst a bankrupt does not have locus to prosecute an appeal following his or her bankruptcy, that is not because the right to appeal is property that is vested in the trustee but because the appeal relates to a judgment that can be enforced only against assets that have vested in the trustee.

Hoffmann LJ recognised that there was a residual category of case where the bankrupt retained a right to appeal, following the decision of the Court of Appeal in Dence v. Mason [1879] WN 177. In that case the Court of Appeal held that a bankrupt was entitled to maintain an appeal against an order made before his bankruptcy by which an injunction had been granted against him personally. The Court held he was entitled to maintain the appeal against the injunction because it was “ … a personal order against him …” though not in relation to the costs order made against him below because he had no interest in the outcome of an appeal against that order because his estate had vested in the trustee. This led Hoffmann LJ to conclude that “… the bankrupt would not have been entitled to appeal against an order that was enforceable only against his estate …”. Thus he did not analyse the outcome by reference to the right of appeal being a property right but simply by reference to the enforceability issue.

Heath (ante) establishes the negative proposition that a bankrupt has no right to appeal a decision or judgment that is enforceable only against his estate but in my judgment it does not establish the affirmative proposition that such a right of appeal is property. That issue was not one that it was necessary for the Court of Appeal to decide. The approval of the approach in Dence (ante) is consistent with that view. An injunction against the bankrupt personally does not affect the bankrupt’s estate, a claim for such an injunction can be maintained against a bankrupt notwithstanding his bankruptcy, and common sense suggests that he entitled to defend a claim for such an order and to seek permission to appeal, and appeal if permission is given, if the outcome is adverse. This issue does not as such engage the issue of whether a right of appeal is a right of property because it has always been recognised that causes of action personal to the bankrupt do not vest notwithstanding the wide statutory definition of what constitutes property – see Heath (ante), at 1423A-C.

In subsequent cases however the distinction between standing and an appeal right being of itself property has not always been maintained. This issue arose in a case that came before the Upper Tribunal (Finance and Tax Chamber) in R (Singh) v. HMRC and Rose [2010] UKUT 174 (TCC) [2010] STC 2020. The issue in that case was whether the bankrupt tax payer was entitled to bring judicial review proceedings against a decision of HMRC, which his trustee (Mr Rose) did not wish to pursue. Warren J said at Paragraphs 25-26:

“Although it was not, as far as I can see, expressly stated in Heath v. Tang that the right to appeal vested in the trustee, authority demonstrates that this is the position. Thus in Wordsworth v. Dixon … Sir Thomas Bingham MR giving the judgment of the court said this referring to Heath …

‘… that clearly establishes that on the vesting of a bankrupt’s estate in the trustee, the right to challenge a judgment which would takes effect against the estate vests in the trustee. That means that the right to seek leave to appeal … vests in [the trustee] …’

… Hoffmann LJ was also a member of the court that decided Wordsworth … there can be no doubt therefore that he was of the view that the right to appeal vested in the trustee even if he did not expressly say as much in Heath …”

There are three difficulties about this. First strictly it is obiter because it was not necessary for the decision. The question whether or not Mr Singh was entitled to bring judicial review proceedings was decided by reference to a submission that his entitlement to do so was a personal right in the sense discussed in Heath (ante). As Warren J observed in Paragraph 40 of his judgment, if that was not the case then Mr Singh could not assert the right because he had no interest in the outcome of the challenge. Indeed as Warren J acknowledged at Paragraph 35 of his judgment, when questioning whether Arnold v. Williams [2008] BPIR 247 was properly decided, Heath (ante) was decided not on the basis that a right of appeal vests in the trustee, but on the basis that a bankrupt has no standing to proceed with the appeal because he has no interest in the estate which has vested in the trustee. Secondly, the authority on which Warren J relied was a decision on an application for permission to appeal. Finally, I am not at all sure that the Court of Appeal in Wordsworth intended to decide the question whether a bare right to appeal was property. The report in that case was not cited to me. It was not suggested that the property issue was one that it was necessary to the decision and I would be reluctant to regard a question of this importance to be one that has been decided by a judgment given on application for permission to appeal when (if what is said to be the result of that decision is correct) it would contradict the clear reasoning set out in Heath and that in the later Court of Appeal case of Royal Bank of Scotland v. Farley [1996] BPIR 638, referred to by the majority in their judgment in Cummings and Fuller v. Claremont Petroleum NL and another [1998] BPIR 187 at 195, as to which see further below.

The final English authority that I need to refer to is McNulty v. HMRC [2012] UKUT 174 (TCC) [2012] STC 2110, a decision of the Upper Tribunal (Arnold J). The facts of this case are complex. What matters is that the application that was made to the FTT was to strike out an appeal brought by a bankrupt on the basis that he had no locus standi to bring it. The appeal was struck out and there was an appeal to the Upper Tribunal. The issue was not whether any right of appeal the appellant had was property but whether he had locus to bring the appeal on the basis that the particular appeal right was to be regarded as personal applying the exception identified in Heath. It is true to say that Arnold J held at [24] of his judgment that things in action in s.436 of the IA included rights of appeal but strictly that was unnecessary for the decision since the issue in that case turned whether the relevant appeal right was personal, and if it was whether it had been compromised, not on whether it was a property interest. Other than a reference in [31] to Wordsworth there is no reasoning that takes the matter further. It is not clear that the question whether a right of appeal was a property right had been fully argued in that case.

I turn now to the decision of the High Court of Australia in Cummings and Fuller v. Claremont Petroleum NL and another (ante). In that case the issue was whether the Appellants retained a right to appeal against an order requiring them to pay damages for breach of fiduciary duty notwithstanding that they had been made bankrupt. The definition of property under the Australian Bankruptcy code is not materially different from that contained in the IA. It is set out in the judgment of the majority at 191D-E. The conclusion reached by the majority was that the right to appeal was not property that vested in the estate but in any event that the Appellants had no locus to bring the appeals. In their judgment, the majority expressed their conclusion in these terms at 191E-192B:

“Some rights created by statute can constitute property, but a right to appeal does not have the character of property merely because it is a creature of statute. A chose in action may be the property of the person entitled to enforce it but a liability to satisfy a judgment enforcing a chose in action is not property of the person against whom the judgment is entered. A liability is not property of the person liable. Nor is a right to appeal against a money judgment property of the judgment debtor. … as a matter of ordinary language a judgment debtor’s right of appeal against the judgment is not property.”

Some time is taken up explaining Boaler (ante) that had apparently been relied on in earlier Australian decisions for the proposition that a right of appeal was to be treated as property. In my judgment that was mistaken because Boaler (ante) was concerned with whether a bankrupt could continue an action in which he was seeking to set aside an earlier judgment on the ground that it had been obtained by fraud. That was refused because the right to continue the actions commenced by the bankrupt was a chose in action that had vested in the trustee on the making of the bankruptcy order. The commencement or continuation of the actions was not in any sense an exercise of a right of appeal. It was a fresh claim, which was necessarily a chose in action. On that ground alone that case does not provide central assistance on the issue now under consideration. That was precisely the point made by the majority in Cummings (ante) at 194. I respectfully agree with that analysis.

The majority concluded that the bankrupt was not entitled to exercise a right of appeal outside the exceptions identified in Heath for the reasons identified in that case – that is that adjudication divests the bankrupt of his interest in his property and liability for his provable debts – in other words following the reasoning adopted by Hoffmann LJ in Heath - see the majority judgment at 195. Thus as I see it the conclusion of the majority that a right to appeal is not a property right was strictly speaking unnecessary for the decision.

The issue of whether a right of appeal is property for the purposes of a liquidation or bankruptcy is a novel point. Heath does not support such a conclusion and the Upper Tribunal cases referred to above are not binding on the point because it was unnecessary to decide that issue in either of those cases. The High Court of Australia has concluded that a bare right of appeal is not property. That decision is not binding on me and it was not necessary on the facts of that case to decide the point that now arises. For both those reasons, that authority is at best of persuasive value only. Thus as I see it there is one Court of Appeal authority (Heath (ante)) that suggests by implication that a right to appeal is not to be treated as property, there is one later Court of Appeal authority (Royal Bank of Scotland v. Farley (ante)) that is apparently consistent with the orthodox approach adopted in Heath, there is a decision of the Court of Appeal on an application for permission to appeal that on one reading is consistent with a right of appeal being a thing in action and two Upper Tribunal decisions that contain obiter observations that support this approach. In my judgment this is not a sound foundation on which to conclude that a right of appeal is a chose capable of being property and thus capable of being assigned by an office holder.

It is necessary therefore to approach this issue as a novel point that has not been decided by binding authority, but from a starting point that (a) the definition of property in s.436 of the IA is cast in the widest terms and (b) Hoffmann LJ could have but chose not to proceed in Heath (ante) on the basis a right of appeal was a property right that vested in a trustee on the making of a bankruptcy order.

I have come to the conclusion that a bare right of appeal of the sort I am now considering is not property within the meaning of the IA. I reach that conclusion for the following reasons.

First, the classical definition of a chose in action is that identified by Channel J in Torkington v. Magee [1902] 2 KB 437 at 430 – that it is an expression used to describe “… all personal rights of property which can only be claimed or enforced by action and not by taking physical possession”. A bare right to appeal against what would otherwise be a liability does not satisfy this definition. It is not a right that must be claimed by action. It is a right that is unconditionally conferred on the Company (in this case) by operation of statute. It is not a property right that can only be enforced by action. That is a cause of action and a bare right to appeal does not fall within the scope of that concept either.

Secondly, the authorities maintain a distinction between a chose and the remedies available for its enforcement. As I have said already, the right to a remedy is an incident of the ownership of the chose. The remedy is not something that is capable of being sold or assigned separately from the right to which it relates. It is this point that underlies the reasoning of Ramsey J in Ruttle Plant Limited (ante). It was this point too that underpins the reasoning in ICS v. West Bromwich BS [1998] 1 WLR 896 where the substantive conclusion of the House of Lords was that a claim to rescission could be made only by the owner of the mortgaged property and was not a separately assignable chose in action being simply part of the process of rescission – see 914HY – 915F. A chose in action can be assigned but not a particular remedy by which that chose can be enforced. As Lord Hoffmann put it (speaking for the majority in that case) “… what is assigned is the chose … the existence of a remedy or remedies is an essential condition for the existence of a chose …but that does not mean that the remedies are property in themselves, capable of assignment separately from the chose.” Lord Hoffmann defined a chose as being “... something capable of being turned into money …” and “… the assignee either acquires the right to the money or he does not. If he does, he necessarily acquires whatever remedies are available to recover the money …”. A liability does not satisfy this requirement. If that is so, it is difficult to see how a right vested in the person otherwise liable to appeal can have such status. Aside from that, a right of appeal relating to an estate in which the proposed assignee of the right to appeal has no proprietary interest is not something capable of being turned into money in this sense. It is akin to assigning a remedy without the right in respect of which the remedy exists.

The right of appeal is a right conferred on the Company by statute by reason of it having been assessed to tax. The liability to which the bare right to appeal relates could not on conventional analysis be assigned – see Linden Gardens Trust Limited v. Lenesta Sludge Disposals Limited [1994] 1 AC 85 at 103. What is in issue here is a tax liability. It is difficult to see on what basis it would be treated any differently. Thus the liability to which the right of appeal is appurtenant cannot be assigned. Thus all that could be assigned would be the right to appeal. Such a right is no more capable of assignment than is a remedy independently of the chose to which it relates. Whilst I accept that as a matter of legal theory it may be possible to novate the legal relationship that exists in a manner than enables a liability to be passed from one party to another, that requires the consent of both the obligor and the obligee and it is difficult to see any circumstances in which such a situation could arise where the purpose of the exercise is to enable a right of appeal to be exercised that if exercised successfully will be adverse to the interests of the person to whom the liability is owed. This is all the more the case where the right to appeal is vested in a trustee in bankruptcy or company in liquidation.

Thirdly, this analysis is entirely consistent with the orthodox approach to whether a bankrupt has locus to appeal, as to which see Heath (ante). As I have said already Hoffmann LJ could have but did not approach the issue on the basis that a right to appeal was a property right that vested in the trustee as part of the bankrupt’s estate. Introducing an entirely artificial concept of property for the purpose of concluding that an office holder can assign a right of appeal without being able to assign the liability that goes with it may have all sorts of unintended consequences for the conventional approach in relation to personal orders that it is entirely unnecessary to create.

All this leads me to conclude that a bare right to appeal is not property within the meaning of s.436 of the IA. A right of appeal available to a bankrupt is one that the bankrupt loses locus to bring or maintain once he or she is adjudicated bankrupt because the only assets out of which the underlying liability can be met have vested in the trustee and not because the right is a chose that vests in the trustee. The trustee has a statutory right (but not the obligation) to exercise any right of appeal that the bankrupt might have had as and from the moment at which the bankrupt is made the subject of a bankruptcy order. Similarly a right to appeal available to a company in liquidation can only be exercised by the office holder once appointed because he she or they then become the only agents of the company entitled to do so. Again however that is not the result of the right to appeal being treated as a property interest.

Issues 2 to 4

I make clear that nothing in this judgment is intended to be of any application to anything other than a bare right to appeal as described in this case and as is available to the Company on the facts of this case. Different considerations may apply where the liability can be novated or where the appeal right is one that is incidental to a property right that can be assigned (for example a right to appeal a planning decision in relation to land that is sold by an office holder).

I conclude that it is not open to the Applicant to assign the Company’s right to appeal the tax assessments to which it has become subject. The decision whether and if so for how long to pursue the appeals is one for the applicant alone, who is entitled to fund the appeal from sums advanced for that purpose by the Respondents but only if and to the extent that he judges that to be in the best interests of the creditors generally balancing on the one hand the benefit to creditors generally of a successful appeal, the merits and likely outcome of any such appeal and the effect on the assets of the Respondents of them funding the appeal having regard to the outstanding misfeasance claim.

All parties would appear to be agreed that it is appropriate to stay the misfeasance proceedings as long as the appeals are being pursued. I will hear from counsel further as to whether there should be a stay and if so as to the detailed terms that it is proposed should apply to any stay.