Cook v Mortgage Debenture Ltd [2016] EWCA Civ 103

Case No A3/2013/1225[2016] EWCA Civ 103
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Venue MANCHESTER DISTRICT REGISTRY
HIS HONOUR JUDGE WAKSMAN QC
5CH50098
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 25 February 2016
Before
THE MASTER OF THE ROLLSLORD JUSTICE McCOMBELORD JUSTICE DAVID RICHARDS
Between
THOMAS EVAN COOKRespondentMORTGAGE DEBENTURE LIMITEDAppellant
Crown copyright©(Transcript of the Handed Down Judgment ofWordWave International LimitedTrading as DTI165 Fleet Street, London EC4A 2DYTel No: 020 7404 1400, Fax No: 020 7831 8838Official Shorthand Writers to the Court)
Raquel Agnello QC and Jack Rivett (instructed by Bishop & Co) for AppellantSebastian Clegg (instructed by Mills & Reeve) for RespondentHearing Hearing date: 9 February 2016
Judgment
[1]This appeal raises a point of construction of the provisions for a moratorium in connection with the administration of a company. Paragraph 43(6) of schedule B1 to the Insolvency Act 1986 provides that:
“No legal process (including legal proceedings, execution, distress and diligence) may be instituted or continued against the company or property of the company except – (a) with the consent of the administrator, or (b) with the permission of the court.”
This provision applies both from the time that a company enters administration and, by virtue of paragraph 44(4), from the time that a company or its directors file with the court a copy of notice of intention to appoint an administrator. The issue concerns the meaning in this context of the expression “legal process (including legal proceedings …) … against the company” and whether it applies to an application by an interested non-party to be joined as a defendant to proceedings commenced by the company before the moratorium and to an appeal from a refusal of such an application.[2]Before coming to the decision under appeal, I will summarise the background and procedural history.[3]In 1992 Philip and Patricia Chapman borrowed £9,000 secured by a charge on their house, from a company called Basdring Limited (Basdring). In 2003 Basdring granted a debenture in favour of National Westminster Bank, which included a charge on all its assets, including its entire loan book. The debenture was subsequently assigned by the bank to a Mr Nolan and by him to the appellant, Mortgage Debenture Limited (MDL). Basdring went into liquidation and its liquidator concluded negotiations with Mr and Mrs Chapman, in settlement of their claim that they had repaid the loan, whereby, in consideration for the payment by them of £9,000, the debt and the charge over their house was discharged. Mr and Mrs Chapman raised the finance by a loan from Nationwide Building Society (Nationwide), secured by a first legal charge on their property.[4]MDL, as assignee of Basdring’s loan book, considered that there were grounds for challenging the agreement reached with Mr and Mrs Chapman. In 2005 it commenced proceedings against Mr and Mrs Chapman and Basdring, claiming to set aside the compromise and revive the debt and security. In 2011, Nationwide wrote to Kester Cunningham John (KCJ), its solicitors in the re-financing of the Chapmans’ loan, putting them on notice that if Nationwide suffered any loss, it would consider potential claims against them and fully reserving its rights.[5]The proceedings brought by MDL were actively pursued and defended in 2006-2007 but little or no progress was made after that time. Neither Mr and Mrs Chapman nor Basdring took an active part after 2007. Basdring was later dissolved but was restored to the register of companies in February 2014.[6]On 17 April 2012, the respondent Thomas Evan Cook, a former partner in KCJ, who was supervising KCJ’s defence of other proceedings brought against them by MDL, applied to be joined as a party to the proceedings against the Chapmans and Basdring as a representative of KCJ. The application was made under CPR 19.2 and 19.4 on the grounds of a direct financial interest in the determination of the claims made by MDL by reason of their impact on MDL’s claim against KCJ and an indirect financial interest by reason of the potential claim by Nationwide against KCJ. The application was heard by DJ Obodai, in the Manchester District Registry of the High Court, on 17 July 2012 and she dismissed the application. Permission to appeal was granted by HHJ Pelling QC on the second ground but refused on the first ground.[7]The appeal came before HHJ Waksman QC on 18 April 2013. He allowed the appeal but the current appeal from him is not concerned with the merits of that decision.[8]On 12 April 2013 MDL filed a notice of intention to appoint an administrator at the Manchester District Registry in accordance with paragraph 27 of schedule B1 to the Insolvency Act 1986. By virtue of paragraph 44, this had the effect of bringing the moratorium provisions in paragraph 43 into effect. MDL went into administration with the appointment of an administrator on 13 June 2013.[9]Counsel instructed on behalf of the proposed administrator appeared before HHJ Waksman QC, not to contest the merits of the appeal on which no submissions were made, but to submit that, by reason of the statutory moratorium, the appeal could not proceed except with the permission of the court, for which no application had been made. The judge heard submissions from counsel for the proposed administrator and for Mr Cook and ruled on the question before proceeding to hear the appeal. He said:
“I am going to proceed with this appeal today. I do not consider that an appeal against the refusal to allow the mere joinder of this party as an additional defendant to argue against the company’s claim itself amounts to legal process against the company within the meaning of paragraph 43(6) of Schedule B1 which is applied on an interim basis by virtue of paragraph 44 and the notice of intention to appoint administrators made on 12th April. I do at the moment consider that the making or the enforcement of any adverse costs order would fall within that paragraph but that is a separate matter that I can deal with later and as you are here merely representing the intended administrator and not the company, the fact is that this appeal will proceed without the company attending and, as is the case with any hearing where one party does not attend, there is the right at least to apply to set aside any adverse decision and ask for the hearing to be re-fixed providing that good grounds can be shown and that is the ultimate safeguard for the company. Of course, if the company should decide through the administrator, assuming the administration order is made hereafter, that it is not going to continue with these proceedings in any event, then the appeal will be rendered academic but I am not in a position to know that today.”
[10]Permission to appeal on the interpretation of paragraph 43(6) was granted by Lewison LJ.[11]Administration as an insolvency procedure was introduced by the Insolvency Act 1986, but a moratorium has long been a feature of a compulsory liquidation. Section 130(2) of the Insolvency Act 1986, reflecting similar provisions in earlier legislation, provides:
“When a winding-up order has been made or a provisional liquidator has been appointed, no action or proceeding shall be proceeded with or commenced against the company or its property, except by leave of the court and subject to such terms as the court may impose.”
A similar provision exists as regards bankruptcy of individuals: see section 285 of the Insolvency Act 1986. There is no automatic moratorium in the case of a creditors’ voluntary winding-up but the liquidator may obtain a stay of any action or proceeding against the company by an application to the court under section 112.[12]In the case of liquidation and bankruptcy, the purpose of these provisions is essentially twofold. First, given that the property of the company or individual stands under the statute to be realised and distributed, subject to any existing interests, among the creditors on a pari passu basis, the moratorium prevents any creditor from obtaining priority and thereby undermining the pari passu basis of distribution. Second, given that both a liquidation and bankruptcy contain provisions for the adjudication of claims by persons claiming to be creditors, the moratorium protects those procedures and prevents unnecessary and potentially expensive litigation. In circumstances where the potential liability of the company or bankrupt is best determined in ordinary legal proceedings, as for example is often the case with a personal injuries claim, the court will give permission for proceedings to be commenced or continued, but usually on terms that no judgment against the company or individual can be enforced against the assets of the estate.[13]In the case of an administration, this is not a sufficient description of the purposes of the moratorium in paragraph 43(6). An administration may be a prelude to a liquidation or, once an administrator gives notice of an intention to make distributions to creditors, may become a substitute for a liquidation. In such circumstances, the purposes described above apply also to the moratorium in the case of an administration. But before that point is reached, the principal purpose of an administration is either to rescue the company itself as a going concern or to preserve its business or such parts of its business as may be viable. The purpose of the moratorium is to assist in the achievement of those purposes. The moratorium on legal process against the property of the company best preserves the opportunity to save the company or its business by preventing the dismemberment of its assets through execution or distress. The moratorium on legal proceedings serves the same purpose by preventing the company from being distracted by unnecessary claims. As Nicholls LJ put it in In re Atlantic Computer Systems plc [1992] Ch 505 at 528, the moratorium provides “a breathing space”. Once again, however, the court will readily give permission for proceedings to be commenced or continued where it is appropriate to do so.[14]In support of the appeal, Ms Agnello QC made, in summary, the following submissions. First, the phrase “legal process” used in paragraph 43(6) is broad in its meaning. It is not restricted to a substantive claim but includes any procedure that is governed by legal rules and a defined procedure: see In Re Frankice (Golders Green) Ltd [2010] EWHC 1229 at [39] per Norris J. Second, the purpose of the moratorium, being to assist the achievement of the purposes of the administration and to give the company and its administrator a breathing space, is as much engaged by applications in proceedings in which the company is the claimant as in those in which it is the defendant. Such applications will be a distraction from the main purposes of the administration and may involve adverse costs consequences. Third, in any event, an appeal to which the company is a respondent is a legal process against the company, irrespective of the underlying application. Fourth, Ms Agnello submits that there is an inconsistency in the reasoning of the judge in that, having held that an appeal against the refusal to allow the joinder of Mr Cook was not affected by paragraph 43(6), he expressed at least the provisional view that the making of any adverse costs order in respect of the appeal or the underlying application would fall within that provision.[15]The moratorium under paragraph 43(6) applies to any “legal process (including legal proceedings, execution, distress and diligence)”. The words in parenthesis show the breadth of the expression “legal process” in this provision. Nonetheless, it seems to me clear that, if the application by Mr Cook to be joined in the proceedings and his appeal against the refusal of that application fall within the terms of paragraph 43(6), it is because they are “legal proceedings”. They do not constitute some other form of “legal process”.[16]The essential feature of legal proceedings falling within the moratorium is that they must be “against the company”. A claimant who wishes to commence proceedings against a company in administration, or to continue proceedings against a company which has gone into administration since the commencement of the proceedings, must obtain the consent of the administrator or the permission of the court. No such consent or permission is required in the case of proceedings brought by a company which is in administration or which goes into administration after the commencement of the proceedings.[17]It follows, as a matter of basic fairness, that defendants to proceedings where the claimant is a company in administration should be able to defend themselves without restriction. This causes no difficulty in taking steps such as serving a defence or witness statements or participating in a trial. However, an issue could be said to arise where defence takes the form of an active step against the claimant company. It is established that essentially defensive steps are not within the statutory moratorium.[18]In Humber & Co v John Griffiths Cycle Co (1901) 85 LT 141, the respondent company brought proceedings against the appellants for damages for breach of an alleged contract but the claim was dismissed at first instance. The respondent company appealed to the Court of Appeal after it had been ordered to be wound up. The appeal was allowed and the defendants appealed to the House of Lords. A preliminary objection was taken on behalf of the respondent company that an appeal was a proceeding against the company within section 87 of the Companies Act 1862, which provided that when a winding-up order had been made “no suit, action, or other proceeding shall be proceeded with or commenced against the company except with the leave of the court”. The House of Lords rejected the submission, Lord Davey saying:
“I am of opinion that the objection cannot be maintained. It was the respondents who themselves proceeded with the action after the winding-up order, by prosecuting their appeal in the Court of Appeal, and when once an action by the company itself has been proceeded with, there is no necessity for the defendants in the action to obtain leave for any defensive proceeding on their part. The liquidator was either party or privy to the proceedings in the Court of Appeal, and the respondents, having been successful in that appeal, cannot now object to the appellants defending themselves against the consequences of the judgment by the ordinary means of an appeal to this House.”
[19]It is true, as was observed by Spigelman CJ in the New South Wales Court of Appeal in Skinner v Jeogla Pty Ltd [2001] NSWCA 15, that this “reasoning is redolent of the language of waiver, rather than that of statutory interpretation”. However, the moratorium was imposed by a section which prohibited any action being proceeded with or commenced except with the leave of the court. The prohibition was absolute and it was not open to a liquidator to waive the effect of the section. Either an appeal by an unsuccessful defendant fell within the moratorium or it did not. The reason that the leave of the court to bring the appeal was not required was because, as a defensive proceeding, it was not a proceeding to which section 87 applied.[20]This approach was adopted by the Supreme Court of Western Australia, on appeal, in BPM Pty Ltd v HPM Pty Ltd (1996) 14 ACLC 857. The court held that an application for security for costs made by a defendant against a plaintiff company which had gone into liquidation was not a proceeding against the company within the terms of the moratorium contained in section 471B of the Corporations Act.[21]The sequence of events in BPM v HPM was strikingly similar to that in the present case. The proceedings were commenced by the plaintiff company before it went into liquidation and an application for security for costs was made and refused. The relevant defendant appealed and shortly before the hearing of the appeal the plaintiff company went into liquidation. Counsel appeared at the appeal on the instructions of the liquidator who sought an adjournment, which was refused, and in any event relied on section 471B for the submission that the appeal was automatically stayed. The submission was rejected by the court. Anderson J, in a judgment with which the other members of the court agreed, said at p.859:
“In my opinion, an application for security for costs is not a proceeding in a court against the company within the meaning of s 471B. We were not referred to any authority directly in point but in my view the section is concerned with proceedings initiated against the company, not with procedural applications by defendants in an action initiated by the company. If it was intended that the section should operate to cut down the defensive procedural measures that would otherwise be available to a defendant in an action brought by the company, thereby reducing the defendant’s normal rights in the litigation whilst leaving the company’s rights intact, much clearer language would have been used in the legislation.”
[22]Anderson J considered and applied the decision in Humber v Griffiths, holding that the application for security for costs and the appeal against its refusal “was “defensive” in its essential character … it was one of the defensive measures which the first defendant was entitled to take in response to the appellant’s action against it.”[23]We were referred to a number of decisions of the courts of New South Wales on this subject which, it is fair to say, are not consistent. In Skinner v Jeogla Pty Ltd, a decision of the full Court of Appeal to which I have earlier referred, the claimant had been wound up after it succeeded at trial and before the defendant’s appeal was heard. The appellant conceded that leave to proceed with the appeal under section 471B was necessary. There is discussion of whether leave was required in each of the three judgements, with reference made to both Humber v Griffiths and BPM v HPM, and different views were expressed, but in the light of the concession there was no need to reach a conclusion. In Distinctive FX9 Pty Ltd v Statewide Developments Pty Ltd [2012] NSWCA 393, Beazley JA, sitting as a single judge of the Court of Appeal on an application for security for the costs of the appeal, raised a preliminary question whether an appeal against a judgment obtained by the respondent company was subject to the moratorium under section 471B, given that the respondent had since gone into liquidation. After referring to the English and Australian authorities mentioned above, she concluded that the bringing of an appeal, and a summons for leave to appeal, constituted the commencement of a proceeding for which leave was required under the section. The main discussion in the judgment was whether, under the relevant procedural rules, an appeal was a new proceeding and, holding that it was, this led to the conclusion that it was a proceeding against the company for which leave was required. There is no discussion as to whether defensive steps fall within the purpose and ambit of the section. In Dealquip Australia Pty Ltd v 33 Electra Pty Ltd (No. 2) [2013] NSWSC 1382, White Jat first instance held that an application for summary dismissal for want of prosecution was not a proceeding for which leave was required, in an action commenced by the claimant company before it was in liquidation and in which it had taken no steps following the commencement of its liquidation. The judge expressly followed BPM v HPM. In similar circumstances, in JFTA Pty Ltd v John Holland Pty Ltd [2014] FCA 760, Katzmann J, sitting at first instance in the Federal Court of Australia, agreed with the decision of White J in Dealquip and followed it.[24]The distinction between legal proceedings against a company and essentially defensive steps is illustrated by the approach taken by the courts to the application of moratorium provisions to counterclaims. If a counterclaim is pleaded solely to raise a defence by way of set off, it is a defensive measure and no permission of the court is required. If, on the other hand, the counterclaim seeks a net payment from the claimant to the defendant, it does constitute a legal proceeding against the company for which the permission of the court is required. See Langley Constructions (Brixham) Ltd v Wells [1969] 1 WLR 503 (CA).[25]Even accepting that defensive steps may not constitute proceedings against the company for the purposes of the moratorium applicable in a compulsory liquidation, Ms Agnello submitted that this should not follow in the case of an administration, where as earlier discussed the purposes of the moratorium were somewhat different. In my judgement, the broader purposes to be served by a moratorium in an administration do not, either as a matter of the language of the provision or as a matter of principle, justify a different approach to defensive proceedings. As to language, there is no essential difference between section 130(2) (“no action or proceeding shall be proceeded with or commenced against the company or its property”) and paragraph 43(6) (“No legal process (including legal proceedings….) may be instituted or continued against the company or property of the company”). If Parliament had intended that the latter moratorium should apply to defensive proceedings, it is hardly likely that, in the light of the earlier authorities regarding a company in liquidation, it would have used substantially the same language without qualification. As to principle, while it is certainly true that dealing with defensive steps will engage the time of the administrator and result in costs, those considerations do not obviously justify putting a party at a disadvantage in the defence of claims made against it.[26]Relying on some of the Australian cases, Ms Agnello laid considerable stress on the fact that the proceeding before HH Judge Waksman QC was an appeal to which the company was the respondent and was therefore a proceeding against the company for the purposes of the moratorium. So stated this submission cannot stand with the decision in Humber v Griffiths for the reasons earlier given. In my view, this question is to be judged by reference to the nature of the original application. If the application was a legal proceeding against the company within the terms of the moratorium, then an appeal against the dismissal of the application would also be a proceeding for which permission was required. Its purpose would remain to obtain relief against the company. If, however, the original application was not a proceeding against the company, an appeal against the dismissal of the application cannot sensibly be regarded as such a proceeding.[27]The application under appeal in the present case was not a defensive step taken by a defendant to proceedings brought by the company. In this connection, we invited submissions from the parties on Eastern Holdings Establishment of Vaduz v Singer & Friedlander Ltd [1967] 1 WLR 1017. Buckley J held that the issue of an interpleader summons to which a company in liquidation was a respondent was a proceeding against the company within the terms of the automatic stay imposed by section 231 of the Companies Act 1948. The applicant held shares as nominee and the issue, which it proposed should be determined on the interpleader summons, was the identity of the beneficial owner of the shares. The order sought would require two companies, neither of which were parties to the litigation, and one of which was in compulsory liquidation, to appear and state the nature and particulars of their respective claims to the shares and to abide by any order that the court might make. The applicant submitted that it was not seeking any relief against either of those companies but merely giving them the opportunity to appear and maintain their claim, if they so wished. Buckley J rejected this submission, holding that the effect of an order made on the interpleader summons would be to make the company in liquidation a party to proceedings so that an order as to the beneficial ownership of the shares could be made against it, or in its favour. He said at p.1021:
“While it is true that the defendant does not claim any relief in the strict sense against any of the claimants, the object of the interpleader summons is to relieve the defendant of the risk of being sued independently of this action by the claimants, or either of them, and, in that sense, I think, the defendant does seek some relief, I do not say, perhaps, against, but in relation to, the company in liquidation. At any rate, it seems to me that, as a matter of convenience, if nothing more, there is much to favour the view that section 231 should be construed as extending to an application of this kind, so that the companies court, which is the court that controls matters connected with the winding up of this company should be seized of the whole of this dispute, which seems to be one of considerable complexity, from the earliest stages.”
He added that “section 231 ought to be construed widely, and sufficiently widely to embrace an interpleader summons.”[28]Ms Agnello submitted that the reasoning of Buckley J applied to an application to be joined to proceedings under CPR 19. She submitted that the object of the joinder would be to invite the court to determine an issue in dispute between the applicant and the company and, to that extent, the applicant would institute a legal process pursuant to which it would seek relief against the company.[29]In my view, the position in the Eastern Holdings case is clearly distinguishable from the circumstances of the present case. By the interpleader summons, the applicant was, as Mr Clegg for the respondent submits, seeking to bring the company in liquidation into proceedings in which it was not a party and in which orders adverse to its interests could be made. It was essentially no different from the commencement of proceedings by one of the possible beneficial owners against the company in liquidation seeking appropriate declaratory relief. Such proceedings would clearly fall within the terms of the statuary moratorium.[30]By contrast, in the present case, MDL is not only a party to the proceedings but is the claimant. By making his application to be joined, Mr Cook was not seeking any relief against the company but was seeking to be heard on an issue which affected his firm’s interests in possible proceedings that might be brought by a third party, Nationwide. While not a defensive proceeding, in the strict sense of a step taken to defend himself against a claim brought by the company in administration, the application has none of the character of legal proceedings against the company.[31]This leaves finally Ms Agnello’s submission of an inconsistency in the judge’s reasoning. The judge expressed a provisional view that the making of an adverse costs order against MDL on Mr Cook’s application would fall within paragraph 43(6). It is as well to remember that the judge was dealing with this issue at short notice and without the benefit of the detailed submissions made to us and that he came to what I consider to be a correct conclusion on the main issue. His view on the making of an adverse costs order was provisional only and, with the benefit of submissions and time for consideration, I would not accept it. Seeking an order for the costs of an application is not a separate application against the company. It is incidental to or consequential upon the application for which permission was not required. The applicant is free to seek, and the court is free to make, an order for costs against the company on such an application without infringing the moratorium.[32]For these reasons, I would dismiss this appeal.[33]I agree.

The Master of the Rolls

[34]I also agree.

Cited in 9 later judgments