Jacob v Vockrodt [2007] EWHC 2403 (QB)

[2007] EWHC 2403 (QB)

Case No HQ05X03381

IN THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

St. Dunstan’s House

Venue 133-137 Fetter Lane

London, EC4A 1HD

Date Friday, 12 th October 2007

Before

HIS HONOUR JUDGE PETER COULSON QC

(Sitting as a Judge of the High Court)

Between

MAMMEN P. JACOBClaimant

HEINO VOCKRODTDefendant

Digital Transcription of Marten Walsh Cherer Ltd.,

6 th Floor, 12-14 New Fetter Lane, London EC4A 1AG.

Telephone No: 020 7936 6000 Fax No: 020 7427 0093 DX: 410 LDE

Email: info@martenwalshcherer.com

Website: www.martenwalshcherer.com

MR. EDMUND CULLEN (instructed by Alen-Buckley & Co.) for Claimant

MR. ADRIAN DAVIES (instructed by Sempik & Co) for Defendant

Hearing Hearing Dates: 10 th, 11 th, and 12 th October 2007

JUDGMENT

[1]Pursuant to a written loan agreement dated 15th September 2003 Mr. Jacob, the claimant, lent Mr. Vockrodt, the defendant, the sum of US$100,000. This sum remains to be repaid. As part of the claimant’s attempts to recover the US$100,000 he presented a bankruptcy petition against the defendant, which petition was subsequently terminated in favour of the defendant. The defendant now raises a counterclaim based on the malicious presentation of that bankruptcy petition.

[2]Accordingly, save for this counterclaim, it is accepted that the claimant is entitled to the US$100,000 plus interest. The sole issue for me is whether or not the bankruptcy petition was maliciously presented. If I find that it was not, the counterclaim must be dismissed and the claimant is entitled to judgment. If, on the other hand, I find that it was, the assessment of any damages caused thereby will have to be the subject of a subsequent hearing.

[3]I propose to set out the background to, and terms of, the loan agreement (section B below) and then an outline chronology of the relevant events (section C). At section D I identify the relevant legal principles. Thereafter at sections E and F I analyse the detail of the defendant’s counterclaim by reference to those principles. I should acknowledge at the outset the considerable assistance that I have received from both counsel in arriving at my conclusions, which are summarised shortly at section G below. B. The Loan Agreement

B1 Background

[4]The claimant and the defendant had both worked for Credit Suisse and knew each other. The claimant was a director; the defendant was a trader. It seems that some time in the late 1990’s the defendant ceased to work for Credit Suisse. In the summer of 2003 they agreed that the defendant would invest money on behalf of the claimant and they would share the profits. The claimant agreed to loan a sum of money to the defendant to allow him to trade on that basis.

[5]The defendant’s then solicitors sent a draft loan agreement to the claimant on 9th September 2003. The draft was dated 15th September 2003. The claimant was surprised that the sum identified was US$100,000 as he had previously agreed to loan US$50,000 for trading purposes. However, he was still willing to sign, saying in an e-mail of 11th September 2003 that:

“This is all based on trust”

. When, on 12th September, the defendant provided details of the bank into which the US$100,000 was to be paid, he added:

“Remember you’ll always have access to the funds, no restrictions. You just let me know and I’ll transfer back however much you need.”

B2 The Terms of the Agreement

[6]The loan agreement that was signed was in precisely the same terms as that sent out on 9th September. The relevant provisions were as follows:

“1. In consideration of the sum of US$100,000 (hereinafter called ‘the principal sum’) now paid by the Lender to the Borrower, the receipt of which is hereby acknowledged, Borrower hereby covenants with the Lender to pay the Lender the principal sum with interest thereon from the date hereof at the rate set out and on the terms contained and described in Schedule 1 hereto. 2. If the Borrower shall pay the Lender the principal sum with interest thereon in accordance with the covenant hereinbefore contained, the Lender will, at the request and cost of the Borrower, duly discharge this loan. 3. The Borrower will on demand repay to the Lender all money properly paid and all costs, charges and expenses properly incurred by the Lender together with interest thereon from the time of paying or incurring the same until repayment at the rate aforesaid and, until so paid, such costs, charges and expenses shall be added to the principal sum hereby secured and interest thereon and shall be payable on the respective dates hereinafter appointed for the payment of interest on the principal sum …. Schedule 1 1. The Borrower will pay to the Lender interest of 6% per annum on the principal sum. 2. The Borrower will further pay a non-guaranteed premium calculated as being the difference of 6% and the Borrower’s business rate of return as calculated by the Borrower. 3. The interest and the premium (hereinafter called ‘the premium’) is to be paid bi-annually on each 15th March and 15th September commencing on 15th March 2004. ….. 5. The minimum period for the loan is two years from the date hereof. 6. The Lender may demand repayment from the Borrower of the loan between 16th September 2004 and 1 October 2004 should the combined interest and premium payments up to and including 15th September 2004 be below 15% per annum …..”

Schedule 1

[7]The claimant told me that he did not read the agreement before signing it. Had he done so, he would have seen that clause 3, which talked about repayment on demand, was contradicted by Schedule 1 paragraph 5, which said that the loan agreement would last for a minimum of two years. The claimant would also have realised that the defendant’s assurance, identified in paragraph 5 above (which had been proffered after the draft had been sent), was nowhere referred to in the document that he signed. Herein lies the start of this unhappy story, of which this judgment is, I hope, the last chapter. C. Outline Chronology

[8]On 27th January 2004 the claimant sought repayment of the US$100,000. His request made to the defendant by way of e-mail was in the following terms:

“Dear Heino and Lanka, I’m sorry to inform you that Shireen and myself will be separating pending maybe a divorce. We both look at life in different ways and we do not see any chance as of now to reconcile. Hence we came to this conclusion to go our separate ways. Heino, under these circumstances, I cannot continue the investment with you. The performance is great but please close out all the open positions and transfer the funds …..”

[9]In cross-examination, the claimant accepted that it had been untrue to say that he was separating from his wife, and that in reality he wanted the money back because he was concerned that the defendant was not keeping proper records of his transactions and did not provide any detailed information to the claimant. It was not at all clear why the claimant did not simply demand the return of the money, and set out those reasons for his decision. It is unfortunate that the whole repayment process started with this lie, although it does not appear that anything significant turns on it.

[10]When this elicited no response, the claimant e-mailed the defendant and his wife again on 9th February. The e-mail said:

“Did you both think you can get away with it? You both are young and if you want to spoil your life and your children’s its your choice. I’ll give you till Wednesday 11/01/04 to settle the money you took under false pretence. I’ll use every legal procedure in [Switzerland] and UK to see that I get my money back. You bet you took the wrong man to cheat. You will learn your lesson.”

[11]I am in no doubt that this e-mail was couched in intemperate terms and the claimant can be criticised for its vaguely threatening tone. However, I also find that, as the e-mail made clear, the claimant was solely interested in recovering the US$100,000 and that his stated methods of achieving that would be the use of “every legal procedure” in Switzerland and the UK. I reject the suggestion that this e-mail comprised or contained threats of a more sinister nature or that it was taken by the defendant and his wife as conveying such threats. I therefore do not accept Mr. Davies’ colourful description of the e-mail as ‘scandalous and appalling’.

[12]The defendant’s response of 13th February 2004 did not give any indication that he felt in any way threatened by the e-mail. He makes plain that he had not shown it to his wife. More importantly, I think, the letter promised to repay the loan by 15th March 2004, the date on which the first interest payment fell due in any event. The relevant parts of the letter say as follows:

“Subsequently I will adhere to the loan agreement (which I stipulated as a safeguard for both of us) and will return interest and principal on the next payment date, 15th March 2004. For the purpose of keeping a clean record of both receipt and payment I will transfer the money in US$ denominations to my account in Zurich (where it came from), and then onwards to your account (also where it came from). In this context I want to point out that contractually I am not obliged to return the loan at this date. You would agree with me that in today’s business climate any other counterparty would hold you to the contractual terms. However, I want to draw a line under recent events and to do it by the book. Your rather distressed e-mail, which I have refused to show to Lanka, was not exactly an exercise in trust building but did not have any influence on this decision. The decision is final and instructions have already been issued to the respective banks for value 15th March 2004.”

[13]Despite this clear promise, neither the principal nor the interest was paid by 15th March 2004. The failure to pay the interest was on any view a breach of the loan agreement, for which no explanation has ever been offered. The decision not to pay the principal after it had been promised by the defendant was never communicated to the claimant, and thus no explanation for the defendant’s change of heart was ever provided. In cross-examination the defendant said that the claimant would have known that the non-payment stemmed from the argument that the loan agreement still had 18 months left to run. But I cannot accept that, given the terms of the defendant’s assurance of 12th September (paragraph 5 below) and the defendant’s written promise to pay dated 13th February. At the very least, the claimant was owed the courtesy of a detailed response to his repeated chasers for the loan sent out by the claimant and his solicitor, Mr.Reich, in March and April 2004. Instead, all of those requests were simply ignored.

[14]Mr. Reich worked for Baker & McKenzie. In early June he contacted the London office of that firm who then took over the control and conduct of the claimant’s case. The bulk of the work done by Baker & McKenzie was performed by an associate, Ben Palmer. His preliminary written advice to the claimant, dated 10th June 2004, had been sent to Mr. Reich the previous day and had given rise to some e-mail debate. The advice identified a potential claim for immediate repayment, although Mr. Palmer considered that because of the apparent contradiction in the terms of the Agreement “it would not be entirely straightforward to litigate”. He recommended that the claimant should proceed by way of summary judgment. This view was reiterated on 17th June 2004, although again Mr. Palmer identified the risks and cost consequences if the claim did not succeed. At this point it is clear that Baker & McKenzie had in mind a straightforward action for a debt. There had been no mention of presenting a bankruptcy petition against the defendant.

[15]On the basis of Mr. Palmer’s advices to the claimant of 10th and 17th June 2004, the claimant instructed Mr. Palmer to commence legal proceedings. As noted above, when those instructions were given, the proceedings envisaged were for a simple debt. It was only thereafter, on 24th June 2004, that Baker & McKenzie mentioned bankruptcy proceedings to the claimant for the first time. In his e-mail of that date Mr. Palmer advised the claimant:

“….. It appears at this stage that we will not receive the money by the deadline we imposed being Tuesday of next week. If this is the case (and I will call Mr. Vockrodt’s lawyers again on Tuesday to confirm this), our next step will be to serve what is called a statutory demand upon Mr. Vockrodt. If he were to ignore this demand then we would be able to apply to the court for him to be made bankrupt. In practice I would expect him to make contact once the demand is served since I have no doubt that he will wish to avoid being declared bankrupt.”

[16]I find, on the evidence of Baker & McKenzie’s own files, that this important change of strategy on their part, from a straightforward debt action to a bankruptcy petition, was adopted without having been first discussed with the claimant. This was rather a surprising omission given the different principles involved in these alternate strategies. It seems that the new strategy had occurred to Mr. Palmer just the day before, on 23rd June, when he e-mailed his colleague, John Leadley, a partner in Baker & McKenzie, to the effect that the threat of bankruptcy proceedings “may be more effective than issuing a claim”.

[17]On 28th June 2004, before anything further had been done by Baker & McKenzie, the defendant’s solicitors wrote to say that payment of the US$100,000 would be made on or around 15th July 2004. I consider that Mr. Palmer’s response to this information – which was not discussed beforehand with the claimant – was overly-aggressive, because it described the offer as unacceptable and went on to point out that the defendant:

“…has had ample opportunity to meet his obligations and our client will not be deterred from securing your client’s performance of those obligations by your client’s constant prevarication. We are proceeding.”

For reasons which were again never explained, the promise made by the defendant’s solicitors was not kept and the money was not paid.

[18]The following day the claimant spoke to Mr. Palmer and stated that he “would not be bothered by a delay of a week or so” and that if “[the defendant] needs time to breathe” he was prepared to give that to him. Mr. Palmer told him that the statutory demand procedure, which was about to be put in hand as part of the new strategy, had a built-in period of time in which the debtor was able to repay the debt before bankruptcy proceedings could be initiated. I find that this was important advice because it emphasised to the claimant that, following the service of the statutory demand, the onus was on the defendant to indicate if and why the debt was disputed, and that it would therefore give the defendant at least some further time to pay up, prior to the initiation of the bankruptcy proceedings themselves.

[19]The statutory demand was served on 6th July 2004. At that point it should be remembered that the claimant wanted both the repayment of the loan and the interest which it had been agreed would be paid by the 15th March in any event pursuant to the express terms of the loan agreement However, the statutory demand was limited to the US$100,000 because, as it itself made plain, the calculation of the precise amount of interest due required the defendant’s cooperation “which has not been forthcoming”. When informed about the service of the statutory demand, the claimant said to Mr. Palmer that the most important thing was to recover the loan amount and that, if the defendant gave “an irrevocable and unconditional guarantee from a bank or an individual or institution acceptable to us, we should go for it”.

[20]The defendant did not respond to the statutory demand. He simply ignored it. Thus the three weeks went by without any response from the defendant at all. Mr. Palmer e-mailed the claimant to express his surprise at this. Importantly, he went on to add that in the circumstances “the next step is to present the defendant with a formal petition for his bankruptcy”. Mr. Cullen correctly makes the point that there is nothing in this e-mail, or in any other document or attendance note emanating from Baker & McKenzie at this time, to the effect that there were any risks attached to the presentation of the bankruptcy petition. On the contrary, I consider that the e-mail makes it seem like the natural consequence of the defendant’s failure to respond to the statutory demand. Certainly there was no warning that the defendant could terminate the petition by demonstrating an arguable case on the debt.

[21]In particular, it seems to me, again working from the Baker & McKenzie files, that once Baker & McKenzie had altered their strategy to pursue the bankruptcy route against the defendant, the point about the possible conflict between the clauses in the loan agreement and the ways in which that difficulty might be overcome, had slipped from the forefront of Mr. Palmer’s mind. Certainly at this stage he was advising the claimant on the basis that the bankruptcy proceedings were a relatively straightforward process.

[22]The bankruptcy petition was presented on 11th August 2004 on the basis of Baker & McKenzie’s advice. Indeed on that day, the claimant had asked them “to do whatever you think the best to achieve our goal”. The petition was served on 20th August 2004. At this point the interest due on 15th March 2004 was still outstanding, although the petition again said that it would be claimed separately because of the absence of cooperation from the defendant. Following the service of the petition, at last the defendant responded and on 24th August offered to pay £45,000, which was then worth about US$80,000. Mr. Palmer was quick to advise the claimant that he was in a strong position and that this offer was too low. He advised the claimant to ask for £60,000. The claimant followed this advice and the defendant promptly increased his own offer to £50,000. On 26th August 2004 Mr. Palmer advised the claimant in these terms:

“As you will recall, our initial advice to you was that while we feel that you have a strong case against Mr. Vockrodt, there are areas of uncertainty which Mr. Vockrodt might choose to exploit if he chose to try and dispute that the debt is owed. While I am reasonably confident that we would ultimately overcome the arguments he might raise, the fact remains that we would have to spend time doing so and that this would obviously increase the costs to you. As I have said, we would certainly attempt to recover those costs from Mr. Vockrodt. However, there is inevitably a certain element of costs which is never recovered even when a client is 100% successful. The more costs that are incurred, the greater this figure will be in absolute terms. ….. The decision as to whether or not to accept the offer currently put forward by Mr. Vockrodt must be yours alone. On balance, however, I think that we ought to continue to hold out for the full £60,000. This course of action does entail, however, an increased risk of irrecoverable costs being incurred and delay being experienced.”

[23]On 15th September 2004 three things happened. First, the defendant paid the interest which had, on any view, been outstanding since 15th March. Secondly, for the first time, the defendant, through his solicitors, indicated that he opposed the bankruptcy petition. Even then the letter failed to set out the grounds for that challenge. Thirdly, the defendant expressly withdrew any previous offers to settle the case. Negotiations were, apparently, at an end. Thereafter the defendant served evidence which, for the very first time, made plain that the claim for the repayment of the loan was disputed on the ground that the loan agreement did not expire until September 2005 at the earliest.

[24]On 16th September 2004 the relevant written material setting out these points was sent on by Baker & McKenzie to the claimant. In the covering e-mail, in the absence of Mr. Palmer, Mr. Leadley said:

“As previously advised by assistant, Ben Palmer (who is away on vacation but returns on Monday), the claim to recover the entirety of the debt now is not without difficulty and there is a risk of your having to pay Vockrodt’s costs if he were to succeed in having the petition set aside (which he may do simply by showing that he has a bona fide and arguable defence to the claim). My view on balance is that we should test his resolve and at least await his application, if any, before finally deciding whether to pursue the petition at a final hearing.”

[25]This was the first advice that the claimant had received since the bankruptcy route had been first identified which suggested that the petition may be set aside. However, the advice was, at least for the moment, to maintain that petition. This was reiterated by Mr. Palmer on his return from holiday on 22nd September 2004 when, in a further e-mail to the claimant, he said:

“As John mentioned, there is a risk that we will be unsuccessful in convincing the court that Mr. Vockrodt actually owes the debt now for reasons which we have already discussed on previous occasions. I believe that our position is reasonably strong but you need to be aware that the court does not take the decision to make someone bankrupt lightly. Therefore if Mr. Vockrodt is able to convince the court that he has some kind of defence to our claims – even if it is not a good defence – then the risk is that the court will give him the benefit of the doubt and refuse to make the order. In those circumstances, the court may order you to pay Mr. Vockrodt’s costs though again we would argue that this should not be the case here. The alternative to asking the court to make the bankruptcy order would be to go back to Mr. Vockrodt’s solicitors with some kind of offer to settle the proceedings. However, given the stance now being taken by the other side, I think this would be interpreted as a sign of weakness and will be unlikely to lead to substantial recoveries. I would not rule out the possibility, however, of Mr. Vockrodt’s solicitors approaching us with an offer as the hearing gets closer.”

[26]Despite this advice, the claimant was anxious to make an offer and the following day he asked Mr. Palmer to make an offer whereby the defendant would pay US$85,000 to settle the claim. It does not appear that this offer was ever put by Baker & McKenzie to the defendant.

[27]On 4th October 2004 Mr. Palmer wrote again advising the claimant not to make an offer, because it would “send the message that we are not determined to proceed with the claim”. He went on to say:

“I remain of the view that this way of proceeding (by way of bankruptcy proceedings) rather than by ‘normal litigation’ will prove to be the right way in which to proceed with the recovery of the debt. The threat of being made bankrupt, I have no doubt, will be regarded by Mr. Vockrodt as being more serious than equivalent court proceedings. Further, once a court has finally determined that a debt exists, bankruptcy proceedings are a much quicker and more effective way of enforcing that court’s order against a debtor’s assets.”

The claimant’s response was to say that Baker & McKenzie must continue to do whatever was necessary and that in the circumstances no further offer would be made.

[28]However, it appears that despite this, the claimant was still anxious to settle if he could and therefore, contrary to the advice of Baker & McKenzie, he suggested on 12th November 2004 that he “would be prepared to cease proceedings if the defendant would offer an unconditional and irrevocable bank guarantee drawn on a reputable UK clearing bank in the amount of US$100,000 to be payable in six months’ time.” Mr. Palmer queried whether the claimant was prepared to wait for so long, but the claimant indicated that he was. The offer was made, but was not accepted by the defendant. Thereafter Mr. Palmer advised in writing that the claimant should accept nothing less than the payment of the full US$100,000.

[29]Counsel was instructed by Baker & McKenzie to advise and to appear at the hearing of the bankruptcy petition. According to Mr. Palmer’s e-mail of 5th January 2005 to the claimant, counsel was “confident that we stand a good chance of success”. The letter advised the claimant that his case was strong and that unless the full sum of US$100,000 was offered, “we should press on and make our case at the hearing”.

[30]The hearing of the petition took all day on 11th January 2005. Judgment was reserved and given on 9th February 2005, a delay which perhaps in itself indicates the difficulties presented by the arguments before the registrar. Her analysis of the issues can be found in the final two paragraphs of her judgment. I consider that the material part of that analysis for present purposes is as follows:

“26. In this case, the terms of the petition rely upon an agreement dated 9th September 2003. However, counsel for the petitioner submits that the agreement was reached on 12th September 2003 and is evidenced by the written agreement dated 15th September 2003. Further, I am invited by the petitioner to take account of e-mail exchanges which predate the agreement to understand the intention of the parties so that I may construe two clauses in the agreement which are on their face conflicting. It is not the role of this court to make findings of fact. In my judgment, without the benefit of cross-examination, no conclusion can be reached about the true intentions of the parties. I am also invited to take account of certain legal propositions in order to construe the terms of the agreement. Whilst this court may consider a pure point of construction, it is not the role of this court to go beyond that.”

Although the petition was dismissed, the registrar did not expressly say in her judgment that its presentation had been or was an abuse of the process of the court.

[31]For these reasons, I think that paragraph 6 of the claimant’s particulars of claim is incorrect when it alleges that the petition was dismissed because of the inconsistent provisions which the registrar had no jurisdiction to determine. I think paragraph 6.6 of the defence is more accurate, because it is there averred that the petition was dismissed because of the nature of the arguments advanced to get round that contradiction, namely, the allegations of parole representations/warranties and a collateral warranty, all outlined by the claimant in his evidence in support of the petition. In short, the potential ways open to the claimant to avoid the apparent contradictions in the loan agreement itself could not be determined at the hearing of the bankruptcy petition, and therefore meant that the petition had to be dismissed. D. The Relevant Legal Principles

D1 General

[32]An action lies in respect of injury caused by the malicious and unreasonable commencement of bankruptcy proceedings against an individual: see Gregory v. Portsmouth City Council

[2000] 1 AC 419

at 427, House of Lords. Such an action shares many similarities with the tort of malicious prosecution, under which head a number of the relevant authorities occur. The tort of malicious presentation of a bankruptcy petition was described in Gregory as an exceptional class of civil proceedings which would not be extended and could be regarded as something of an anomaly.

D2 The Necessary Elements

[33]There are five elements to a successful claim of this type. They are:(a) the presentation of a bankruptcy petition;

(b) the termination of that petition in favour of the party against whom it was made;

(d) the malicious presentation of that petition;

(e) the identification of damage caused by the malicious presentation of that petition. I deal briefly with each of these five elements below.

D3 Element 1: Presentation

[34]The tort is described as the malicious presentation of a bankruptcy petition and the cases stress that what really matters is the situation at the time that the petition was presented: see for example, Quartz Hill Consolidated Gold Mining Company v Eyre

[1883] 11 QBD 674

at 684. There was some debate in the present case about whether, if all the other ingredients were in place, the malicious continuation of bankruptcy proceedings (where the original petition could not be described as unreasonable or malicious) might also be actionable. In Tims v. John Lewis & Co. Ltd.

[1951] 2KB 459

at 472, which was a malicious prosecution case, it was said that a prosecutor who continues, after discovering facts which show the prosecution to be groundless will, if he does not inform the court of these facts, be guilty of malice and may well have no reasonable or probable cause for continuing the prosecution.

[35]In my judgment, as a matter of simple analogy with the malicious prosecution cases, the malicious continuation of bankruptcy proceedings which were not themselves commenced maliciously (i.e. because circumstances have radically changed following presentation of the petition), is probably separately actionable, as suggested in Tims. I do not believe that such a conclusion extends the ambit of this tort beyond the limits set out in Gregory. Moreover, the actionable damage in such a situation would have to be confined to the damage caused by the continuation of the bankruptcy proceedings, not the original presentation of the petition. That might be extremely difficult to establish in practice, since it is usually the presentation of the petition that does the damage, rather than the subsequent continuation of the bankruptcy proceedings.

D4 Element 2: Termination

[36]Secondly, it must be shown that the bankruptcy proceedings were terminated in favour of the party bringing the action, in this case the defendant. In Tibbs v. Islington London Borough Council

[2002] EWCA (Civ) 1682

;

[2003] BPIR 743

the action failed because, amongst other things, the petitioner in the bankruptcy proceedings had recovered a significant sum, albeit substantially less than the original claim.

D5 Element 3: Reasonable and Probable Cause

[37]I consider that the clearest statement of principle on this point can be found in the judgment of Slade LJ in Radivojevic v. LR Industries Ltd. [1984] Court of Appeal transcript 514. He said:

“Want of reasonable and probable cause I take to mean want of genuine belief, based on reasonable grounds, that there were good grounds in law for presenting the bankruptcy petition at the time when it was presented upon an alleged act of bankruptcy.”

Thus, if there was reasonable and probable cause for the claimant to believe that the petition should be presented, there can be no claim against him: seeCox v. English, Scottish & Australian Bank

[1905] AC 168

at 175.

[38]The authorities make it clear that the issue as to whether there was reasonable and probable cause is a question of fact and not a question of law: see Halsbury’s Laws of England, Fourth Edition, Volume 45.2 paragraph 471 Quartz Hill and Herniman v. Smith

[1938] AC 305

. It will depend upon the information and belief of the party who presented the petition: see the remarks of Tindal CJ in Broad v Ham [1839] 5 Bing NC 722 at 725.

[39]The petitioner who pursues the unsuccessful bankruptcy petition will often act in reliance upon legal advice. Mr. Cullen submitted that if he does so, then even if the advice was erroneous, such a petitioner would have had reasonable or probable cause to present the petition; that, effectively, reliance on legal advice of whatever quality is a complete answer to a claim of this type. Authorities on which he relied in support of that proposition include: (a) Ravenga v. Mackintosh [1884] 2 B&C 693 at 697 where Bayley J said:

“If a party lays all the facts of his case fairly before counsel and acts bona fide upon the opinion he is given by that counsel, however erroneous that opinion may be, he is not liable to an action of this description.” (b) Glinski v. McIver [1962] AC 726 where Viscount Simonds cited the passage in Ravenga and added: “I would, however, suggest to your Lordships that subject to the qualification which Bayley J no doubt thought it unnecessary to state, that the counsel whose advice is taken and followed is reputed to be competent in that branch of the law, the opinion of that learned judge is sound and should be adopted by your Lordships. It appears to me that just as the prosecutor is justified in acting on information about facts given him by reliable witnesses, so he may accept advice upon the law given him by a competent lawyer. That is the course that a reasonable man would take and, if so, the so-called objective test is satisfied.”

Lord Denning in the same case agreed with that proposition, saying that:

“The advice of counsel, if honestly sought and honestly acted upon, affords a good protection.”

[40]For the defendant, Mr. Davies maintained that, if the advice was negligent, it broke the chain of causation. He said that advice that no reasonable solicitor could give was therefore unreasonable, and if the petitioner had relied on it, he acted unreasonably. Amongst the authorities that he relied on in support of that proposition were: (a) The relevant passage in Clerk & Lindsell on Torts, 19th edition 2006 at paragraph 16-31, which certainly suggests that legal advice must be competent and goes on to say:

“Undoubtedly if the prosecutor believes in the facts of the case and is advised by competent counsel before whom the facts have been fairly laid, it will be difficult to show lack of reasonable and probable cause ….. That someone has taken pains to form an opinion, however, is no proof that the opinion is sound but it may tend to show that it is honest and therefore have a bearing on the issue of malice.” (b) Abbott v. Refuge Assurance Co. Ltd. [1962] 1QB 432 in which Ormrod LJ said that, whilst the opinion of counsel might sometimes be conclusive, “each case must be considered on its own facts” and that “the variations in the circumstances of the cases are almost infinite”

. In the same case Upjohn LJ said at paragraph 456:

“Again, counsel may have to advise on a difficult question of law. It would be hard if a prosecutor acting on his advice was held to have acted without reasonable and probable cause because after much conflict of judicial opinion the advice of counsel is held to be wrong.” (c) Reynolds v. The Metropolitan Police Commissioner [1985] 1QB 881 where at page 886 Waller LJ said: “While the [DPP]’s advice could not convert the absence of reasonable and probable cause into the presence of reasonable and probable cause, it is entirely proper that the fact of the advice should be before the court.”

[41]Having considered those various passages, I conclude that reliance on legal advice can never, on its own, be enough to constitute reasonable and probable cause, but it will inevitably be a very important factor in the court’s consideration of that issue. It will often make it impossible for the party bringing the claim to establish either the necessary absence of reasonable and probable cause or the necessary presence of malice. Moreover, I consider that this principle operates, whether or not the advice in question can subsequently be criticised as having been negligent, unless it could be shown that the unsuccessful petitioner either knew or should have known that the advice was negligent or that the legal adviser was inexperienced or incompetent. I should also say that, despite Mr. Davies’ suggestion to the contrary, I conclude that it makes no difference to this principle whether the legal adviser in question was a solicitor or a barrister.

D6 Element 4: Malice

[42]Fourthly, the defendant in the present case must prove malice. This has been taken to include not only spite or ill-will but improper motive in the presentation of the petition: see, for a winding-up case, Partizan Ltd. v. OJ Kilkenny & Co Ltd

[1998] 1 BCLC 157

and, for a malicious prosecution case,Gibbs v. Rea

[1998] AC 786

at 797. Absence of reasonable or probable belief will not of itself amount to malice: see Hicks v. Faulkner

[1878] 8 QBD 167

at 175.

D7 Element 5: Damage

[43]Fifthly, as in any tort, the claiming party must demonstrate that it suffered damage as a result of the malicious presentation of the bankruptcy petition. As noted above, this is not a matter with which I am concerned in the present hearing.

[44]I now turn to apply those principles to the facts of this case. Because it is not disputed that the claimant presented a bankruptcy petition against the defendant, and that the petition was terminated in favour of the defendant, the first two elements identified at paragraphs 34 to 36 above have been established. The discussion there is only relevant when I come on to consider the question of the continuation of the petition as opposed to its presentation (paragraphs 67-68 below). That point aside, I shall concentrate on reasonable and probable case (section E below) and malice (section F below). E. Reasonable and Probable Cause

E1: The Defendant’s Case

[45]On behalf of the defendant, Mr. Davies submits that there was an absence of reasonable and proper cause when the petition was presented. The steps in his argument were as follows:(a) The bankruptcy proceedings were an abuse of the process and should never have been brought;

(b) The claimant knew that the debt was disputed at the time that the petition was presented so he knew or must be taken to have known that the bankruptcy proceedings were an abuse of process and were always going to be dismissed. It must be unreasonable to present a petition which is an abuse of process.

(c) The fact that the claimant took legal advice is therefore irrelevant and, given that such advice was plainly negligent, the fact of such advice cannot assist the claimant in any event.

E2: Abuse of Process

[46]Mr. Davies relied on the well-known passage in the judgment of Harman J in Re a Company

[1983] BCLC 492

in which he said:

“First, it is trite law that the Companies Court is not and should not be used as (despite the methods in fact often adopted) a debt-collecting court. The proper remedy for debt collecting is an execution upon a judgment, a distress, a garnishee order or some such procedure. On a petition in the Companies Court, in contrast with an ordinary action there is not a true lis between the petitioner and the company which they can deal with as they will. The true position is that a creditor petitioning the Companies Court is invoking a class right (see Re Crigglestone v. Coal Co. [1986] 2 Ch 327) and his petition must be governed by whether he is truly invoking that right on behalf of himself and all others of his class rateably, or whether he has some private purpose in view. It has long been an order that a petition presented for the purpose of putting pressure on the company is not properly presented: see Re a Company [1894] 2 Ch. 349 and, in a slightly different context, Re Bellador Silk Ltd. [1965] 1 All ER 667.”

Mr. Davies also relied on similar statements by Baron Cleasby in Johnson v. Emerson and Sparrow[1871] LR 6 Ex 329 and Hoffmann J (as he then was) in Re a Company

[1992] 1 WLR 351

[47]It is, of course, right that a bankruptcy petition must not be utilised where the petitioner knows that the debt is the subject of a bona fide dispute, but chooses to proceed with the petition in any event, so as to put illegitimate pressure on the other party to pay the debt. But the authorities cited above cannot be taken as authority for any wider principle or proposition. In my judgment, the correct approach to the facts, in a situation where the petition has failed and it is subsequently suggested that the presentation was malicious, was that applied in Partizan by Rimer J, when he concluded at page 173:

“It follows that I am not satisfied that, when it presented the petition, Kilkenny was moved by notice or considerations different in any way from those which ordinarily motivate creditors who petition to wind up a company on the grounds that a debt claimed to be due to them (not being one which is regarded by the petitioner as disputed on substantial grounds) is unpaid despite demand; namely, at least an element of hope that, if the company can pay the debt despite its previous failure to do so, it will pay it and, if it cannot do so, a hope and expectation that it will be placed in liquidation so that there can be an orderly realisation of its assets for the benefit of its creditors generally.”

[48]What the cases show (and the point I take Rimer J to be addressing by the phrase in brackets in the quotation from his judgment set out above), is that the presentation of a petition is an abuse of process only if the petitioner knows or believes that the debt is in truth the subject of a substantial dispute. The question is whether, therefore, the claimant in the present case knew or reasonably believed that the debt was substantially disputed at the time of the presentation of the bankruptcy petition. For the reasons that I set out below, I have concluded that the claimant did not know or reasonably believe that the debt was substantially disputed by the defendant in August 2004.

E3: Substantial Dispute

[49]Mr. Davies maintains that the claimant knew that the debt was substantially disputed because of the advice that he received from Baker & McKenzie in June 2004 as to the arguments which the defendant might put forward in answer to any claim based on the loan agreement. It is certainly right that, in June 2004, the claimant had been advised by Baker & McKenzie of this potential problem. But, as against that, the claimant had ample ground for reasonably believing that, by the time that the petition was presented in August, the debt was not substantially disputed. The particular reasons for that conclusion start with the defendant’s various promises to the claimant. (a). The Defendant’s Promises (ii). The defendant had promised on 13th February 2004 that the money would be repaid (paragraphs 12 and 13 above). (iii). The defendant did not indicate thereafter that he had changed his mind and, more importantly, did not identify any ground for disputing the debt at any time between February and June 2004 (paragraph 13 above). (iv). The final event prior to the service of the statutory demand was the defendant’s solicitor’s letter of 28th June 2004, again promising that the money would be paid on or around 15th July 2004 (paragraph 17 above). 59. In consequence, I consider that the claimant was reasonably entitled to believe that there was no substantial dispute at the time that the statutory demand was served at the beginning of July 2004.

(b) The Statutory Demand Process

[50]Pursuant to sections 267 and 268 of the Insolvency Act 1986, a debtor appears to be unable to pay a debt if, amongst other reasons, the petitioning creditor has served a statutory demand requiring him to pay the debt and at least three weeks have elapsed since the demand was served and it has neither been complied with nor set aside. Rule 6.4 and 6.5 of the Insolvency Rules provide a mechanism by which the statutory demand may be set aside if, amongst other reasons, the debt is disputed on grounds which appear to the court to be substantial. The whole purpose of the statutory demand process is to give the debtor a final chance either to pay the debt or indicate the substantial grounds for disputing it.

[51]In Barnes v. Whitehead

[2004] BPIR 693

His Honour Judge Maddocks noted that, whilst a petition might still be dismissed even if an application to set aside the statutory demand had not been made, the correct procedure was to challenge the debt before a petition could be issued. In so saying he was echoing the judgment of Chadwick LJ in Turner v. The Royal Bank of Scotland

[2000] BPIR 683

[52]In the present case, the defendant did not avail himself of this opportunity. He did not respond to the statutory demand, nor did he instruct his solicitors to respond to it. He did not seek to have it set aside. He did not indicate any substantial ground for challenging the statutory demand or for the non-payment of the debt; he simply ignored the demand altogether. The criteria for serving a bankruptcy petition under the Act and under the Rules had therefore been satisfied.

[53]In such circumstances, when the only two responses from the defendant and his solicitors had been promises to pay the debt, and when there had been no response at all to the statutory demand, it is, I think, impossible to say that the claimant knew, despite all that, that the debt was substantially disputed. It follows that it is also impossible to say that the claimant acted unreasonably when he presented the bankruptcy petition. After all, he had done everything in accordance with the Insolvency Rules and had had no response. I consider that he therefore acted reasonably in taking the next step set out in those Rules by presenting his petition. I should add that, save in exceptional circumstances, which simply do not arise in the present case, a petitioner who has received earlier promises to pay the debt, and has subsequently received no response whatever to the statutory demand, is overwhelmingly likely to demonstrate a reasonable and probable cause to present the bankruptcy petition. To find otherwise would substantially undermine the purpose of this part of the 1986 Act and these specific Insolvency Rules.

(c) The Outstanding Interest

[54]There is one final point that needs to be made on the existence (or otherwise) of a substantial dispute. At the time of the presentation of the petition, the claimant knew that he was, on any view, entitled to the interest that should have been paid in March. The sum had not been paid and remained outstanding at the time of the petition. There was a clear reference to this claim in the petition although, as I have said, it was not claimed as part of the petition because of the absence of information from the defendant. The fact that this sum was owed could not be disputed by the defendant and indeed was paid shortly after the presentation of the petition (see paragraph 23 above). I consider that this is a further factor in the claimant’s favour when considering the alleged absence of reasonable and probable cause.

E4: Reliance on Legal Advice

[55]There is an entirely separate reason why I have concluded that there was no absence of reasonable or probable cause when the bankruptcy petition was presented. That, of course, is the claimant’s reliance on the advice of Baker & McKenzie. It is not disputed that the claimant acted reasonably in instructing Baker & McKenzie in the first place. By reference to the events summarised at paragraphs 14 to 30 above I find that the claimant relied on their advice. In accordance with the principle that I have summarised at paragraph 41 above, I find that he acted reasonably in so doing. Thus, even if with hindsight Baker & McKenzie’s advice can be criticised, the claimant’s reliance upon it cannot. There is nothing to show that the claimant knew or should have known that the advice was – to put it neutrally – open to criticism. Thus, the claimant’s reliance on that legal advice was further evidence, if it were needed, of the necessary reasonable and probable cause at the time of the presentation of the bankruptcy petition.

[56]Now let us assume that I am wrong in my summary of the applicable principle at paragraph 41 above, and that Mr. Davies is right to suggest that negligent advice breaks the chain of causation and prevents the claimant from being able to rely upon it in these proceedings. That then gives rise to the question: were Baker & McKenzie negligent? I have concluded that, on balance, they were not.

[57]I certainly accept that their conduct can be criticised in at least two respects. First, they changed their strategy literally overnight from the pursuit of a debt action to the pursuit of the defendant in bankruptcy, without giving the claimant any advice as to the ramifications of this change and, very possibly, not thinking through those consequences themselves. I am left with the impression that they considered the two approaches as straightforward alternatives when, of course, that was not the case.

[58]Secondly, I consider that they never fully considered how the difficulties created by the contradictory terms in the loan agreement might be satisfactorily resolved at the bankruptcy hearing. The registrar, after taking some weeks to decide these points, concluded that she could not do so without oral evidence. It is unclear whether this difficulty was ever really addressed by Baker & McKenzie, or by counsel instructed for the bankruptcy hearing.

[59]However, I do not consider that it is appropriate for me to find that, simply because of those two material criticisms, Baker & McKenzie were negligent. It seems to me that they were advising the claimant to do what petitioners are often advised to do in these circumstances, and to act in the precise manner described by Rimer J in Partizan; that is to say, they advised the claimant to pursue a debt which remained unpaid despite the statutory demand, with the element of hope that, if the defendant was in a position to pay the debt, it could be paid before the bankruptcy hearing. Moreover, I note that this approach was latterly endorsed by counsel who had been instructed to appear at the hearing. In those circumstances, therefore, I consider that whilst Baker & McKenzie’s advice in this case cannot be free from proper criticism, I cannot find that it was negligent.

E5: Reasonableness Generally

[60]On all the evidence, and in particular by reference to:(a) the promises made by the defendant and his solicitors to pay the debt in February and late June 2004;

(b) the failure on the part of the defendant to dispute the debt before and during the three-week period of the statutory demand;

(d) the claimant’s reasonable reliance on the advice of Baker & McKenzie; I have concluded that there was no absence of reasonable or probable cause in the presentation of the bankruptcy petition in August 2004. This key element in the defendant’s counterclaim is therefore missing.

[61]For completeness, I should deal very briefly with each of the individual points as to reasonableness advanced by the defendant at paragraph 3 of his rejoinder and adopted, with varying degrees of enthusiasm, by Mr. Davies in his oral submissions.

[62]Paragraphs 3.1 to 3.6 of the rejoinder refer to the advice given by Baker & McKenzie to Mr. Reich and to the claimant in early June 2004. That advice, as set out above, was concerned with the possible contradiction in the loan agreement and the possible ways round it. The first point to note, of course, is that those letters and e-mails were written and sent some time before the promise to pay on 28th June and before Baker & McKenzie decided to pursue the defendant by way of bankruptcy proceedings. All they demonstrate is that, in early June, the claimant was aware of a possible argument that might arise as to the construction of the loan agreement. They do not go directly to the claimant’s belief in the justification of the bankruptcy petition because at that point no such petition had even been mentioned to him. When it was finally raised with him the presentation of the petition was not described by Baker & McKenzie as involving any significant risks (see paragraphs 20-21 above).

[63]Paragraph 3.7 of the rejoinder relates to the e-mail advice of 16th September 2004 quoted at paragraph 24 above. The advice was to carry on with the petition and the claimant reasonably relied on that advice. Paragraph 3.8 refers to the written instructions to counsel which the claimant did not see and which do not, I think, have any relevance to the issue of reasonableness.

[64]Finally, paragraphs 3.8 and 3.9 of the rejoinder refer to Baker & McKenzie’s letters of 27th July 2005 and 9th September 2005 written after the event in which they defend themselves from the claimant’s criticisms of the bankruptcy strategy. In the letter of 27th July to Mr. Reich, Baker & McKenzie say that the claimant was warned:

“…more than once that his claim for repayment of the loan then rather than September of this year was not guaranteed to succeed and that the particular strategy of pursuing the bankruptcy proceedings was high risk and carried costs exposures for him. There are e-mails expressly making these points. However, the client especially liked the idea of following the bankruptcy route as he believed it would cause Vockrodt some difficulty in view of his then impending divorce.”

In the letter of 9th September 2006 Baker & McKenzie said to the claimant that he had:

“….. given your unequivocal instructions to us to pursue Mr. Vockrodt aggressively and to procure repayment of the loan by the quickest and most direct means available. This was despite our having clearly advised you on 10th June 2004 that whilst there were arguments in support of your entitlement to repayment of the loan on demand, the matter was by no means free from doubt.”

[65]In his closing submissions, Mr. Davies distanced the defendant from the contents of those letters. In my judgment he was wise to do so, but it seems to me that I do need to deal with these points, given that they certainly create the impression that the claimant was well aware in June, July and August 2004 of the “high risks” involved in the bankruptcy proceedings, and even knew that the bankruptcy procedure might be being misused. I am bound to say that the content of these two letters is simply not supported by the other documents in the Baker & McKenzie files. In particular I find that:(a) There was never any advice to the claimant as to the pros and cons of pursuing bankruptcy proceedings rather than a straightforward debt claim (see above), let alone that bankruptcy proceedings were “ high risk”.

(b) There was no e-mail or other instruction from the claimant recorded by Baker & McKenzie in which he said that he liked the idea of pursuing the bankruptcy route because it would cause the defendant difficulty in his impending divorce. Indeed, there is nothing about any impending divorce in any of the documents relating to the defendant and I can only assume that Mr. Leadley was thinking about a completely different case when he made that reference. More importantly, I find that, as set out above, it was the claimant (and not Baker & McKenzie) who repeatedly took a more conciliatory view of the proceedings and made numerous attempts to resolve them.

(c) There is no record of any instructions from the claimant to pursue the defendant aggressively and to provide repayment by the quickest and most direct means available. Indeed, as noted above, the claimant repeatedly indicated a willingness to take a more indirect route through the use of guarantees, and to wait in one instance for six months before payment. It was Baker & McKenzie who questioned whether the claimant was prepared to wait that long, not the other way round.

(d) The reference by Baker & McKenzie to the advice of 10th June in support of their argument that the claimant was aware of the risks of the bankruptcy proceedings rather neatly makes the claimant’s case for him now, given that that advice was sent some time before Baker & McKenzie themselves had even considered the possibility of pursuing the defendant down the bankruptcy route.

[66]Accordingly, having worked my way through the defendant’s pleaded case as to reasonableness, I can find no reason to modify my conclusions summarised at paragraphs 48 to 60 above. The claimant did not act unreasonably or have an unreasonable or improbable belief in the presentation of the bankruptcy petition.

E6 The Fallback Argument

[67]For the reasons given in paragraph 35 above, I consider that, in principle, it might be open to the defendant in the present case to argue that, even if the presentation of the petition was legitimate, the continuation of the bankruptcy proceedings after the advice in September (paragraph 24 above) was malicious. If so, of course, the defendant would need to show that there was an absence of reasonable belief after that time. But there was plainly no such thing. In particular:(a) the later advices from Baker & McKenzie stated that the claimant was in a strong position;

(b) the later advices from Baker & McKenzie advised the claimant to continue with the petition and he reasonably relied on that advice;

(c) the later advices from Baker & McKenzie made plain that nothing less than the full payment of the US$100,000 was sufficient;

(d) counsel apparently gave similar advice when he was instructed.

[68]Accordingly, I expressly find that, even if the fallback position is available as a matter of principle (and I consider that it probably is), it fails in this case on the findings of fact that I have made. F. Malice

F1: General

[69]In the light of my conclusion, that for two separate reasons there was no absence of reasonable and probable belief when the petition was presented (paragraphs 45 to 68 above), it is strictly unnecessary for me to deal with this issue. However, I do so because it is entirely clear to me from the evidence that I have heard, and the documents that I have seen, that the claimant was never at any stage motivated by malice. It seems to me that all the claimant ever wanted was his money back. F2: ‘Malice in Law’

[70]Mr. Davies submitted that because the bankruptcy proceedings were, in this case, an abuse of the process (because they were not designed to invoke a class right as per Harman J in Re a Company) it must follow that the petition was premised on the basis of an improper motive. In this regard he said that the position was clearly analogous to the situation in Johnson v. Emerson and Sparrowand he relied on Baron Cleasby’s remarks that:

“The whole proceeding to make the plaintiff a bankrupt was no doubt a lawful one but the object of the proceeding was not a proper one. There is no pretence for saying that the proceedings were taken to carry into effect the legitimate objects of the bankruptcy law, viz. the fair distribution of the bankrupt debtor’s assets among his creditors so that his debts may be paid. The proceeding was taken by an angry man to coerce the plaintiff into an admission of the debt.”

As a consequence Mr. Davies said that, if the bankruptcy proceedings were an abuse of the process, they were engendered entirely by an improper motive and that therefore was clear evidence of what he called ‘malice in law’.

[71]Although this was rather a novel proposition, it was extremely persuasively argued and I have given it the consideration that I feel it merits. It does, however, seem to me that, if this argument were taken to its logic conclusion, then every bankruptcy petitionwhich was dismissed as an abuse of process (because it fell foul of the approach outlined by Harman J), could be categorised as having been motivated by an improper motive and would therefore give rise to an actionable wrong of the type alleged here. One is tempted to respond that, if that was a correct approach, there would be many more reported cases on this area of the law.

[72]It seems to me that Mr. Davies’ submission is incorrect in principle. I note that, as Mr. Cullen submitted, there is no such thing as malice in law. More importantly, perhaps, it seems to me that a conclusion that a petitioner was guilty of malice must be dependent upon the findings of fact made by the court concerning the petitioner’s motives, statements and conduct. It cannot automatically be said to arise merely because of what could be categorised as a procedural mistake (i.e. choosing bankruptcy proceedings over a debt action), particularly in circumstances where such a mistake, if that is what it was, arose because of advice given by solicitors on which the petitioner reasonably relied.

[73]Further and in any event, of course, on the factual findings that I have made, I have concluded that the bankruptcy proceedings were not an abuse of process. Thus, the point of principle relied on by Mr. Davies would not arise in the present case in any event.

[74]There is one final point I should make concerning this part of the case. As I have noted, Mr. Davies’ submissions emphasised throughout their almost automatic nature: i.e. that the bankruptcy petition was an abuse because the debt was always disputed, therefore its pursuit must have been caused by an improper motive. As I have said, I have rejected that argument on the facts. But let us suppose that I was wrong to do so, and assume that the bankruptcy proceedings were an abuse of process, and that further it had been established that the claimant could not rely on Baker & McKenzie’s negligent advice to protect himself from the argument that there was no reasonable and probable cause for the presentation of the petition.

[75]On those assumptions, as I have said, Mr. Davies submits that the malice follows almost as a matter of course, because the bankruptcy proceedings were the result of an improper motive; namely, their utilisation for a wholly inappropriate purpose. But I reject that contention for this reason. If the pursuit of the petition had been unreasonable, because Baker & McKenzie were negligent in advising its presentation, then I would unhesitatingly find that the claimant’s reliance on that advice was not only understandable, but honest, and could not, therefore, amount to malice as alleged or at all. If the reliance on Baker & McKenzie was honest, which it palpably was, the defendant’s case on malice against the claimant must fail. It seems to me that specific support for that conclusion can be found in the passage in Clerk & Lindsell which I have cited at paragraph 40 above, in which the point is made, I think correctly, that even if a petitioner’s opinion was not sound, the fact that it was based upon the facts and (if relevant) legal advice, would tend to show that it was honest and would therefore, as the learned editors put it, ‘have a bearing on the issue of malice’.

F3: The Claimant’s Motivation

[76]Further and in any event, so that there is no doubt about it, I find that the claimant’s motivation on the facts was never at any time tinged with even the suggestion of malice. Throughout his instructions to Baker & McKenzie, both before and after the presentation of the bankruptcy petition, the claimant on a number of occasions demonstrated that he had no wish to bankrupt the defendant and was always anxious to give him the time and means necessary to repay the loan. I refer in particular to:(a) the claimant’s statement on 29th June that he was prepared to give the defendant ‘time to breathe’ (see paragraph 18 above);

(b) the claimant’s instruction on 6th July that he would be prepared to accept a guarantee in lieu of actual payment (see paragraph 19 above);

(d) the claimant’s instruction to offer an acceptance of US$85,000 which was apparently never communicated by Baker & McKenzie (paragraph 26 above); and

(e) the claimant’s instruction on 12th November that he would cease the bankruptcy proceedings if he was offered a guarantee, even if the payment would be delayed for six months (see paragraph 28 above). Indeed, as I have already noted, that period was actually queried by Baker & McKenzie as being too generous.

[77]In my judgment these, and the other matters to which I have referred, demonstrate the plain fact that the claimant’s focus was and remained upon the need to get back the US$100,000 without causing undue hardship to the defendant. All the attendance notes and e-mails taken together describe and characterise an approach which I would conclude was the very opposite of malice.

F4: The Defendant’s Case on Malice

[78]The defendant’s case on the facts identifying malice was set out at paragraph 5 of the rejoinder and was supplemented by a very useful note from Mr. Davies which was handed in, through absolutely no fault of his own, shortly before the start of the trial. I have found both that document and the rejoinder very useful and I go through each point now in relation to malice – again, I hope, shortly – using them as a checklist for the points that arose.

[79]The first item is the claimant’s e-mail of 9th February 2004 (paragraphs 10 and 11 above). I have said that this was intemperate and vaguely threatening, but it appears to have had no adverse affect on the defendant and does not, in my judgment, evidence malice. It does stress the claimant’s intended reliance upon legal procedures which, of course, is what happened.

[80]The second item is the advice of the 9th and 10th June from Baker & McKenzie about the potential difficulties. That does not evidence malice and I have already said that that advice needs to be set in the context of, amongst other things, the defendant’s promises to return the money given both before and after that advice; the defendant’s failure to respond to the statutory demand; and Baker & McKenzie’s generally optimistic advice about the bankruptcy proceedings.

[81]The third item, which is also referred to in paragraph 5.1 of the rejoinder, asserts, by reference to an attendance notice of 17th June, that the claimant wanted the money back as quickly as possible as a result of pressure from his wife. That has not been borne out by the evidence but even if it had been, it would not, in my judgment, amount to malice in any event.

[82]Paragraph 5.2 of the rejoinder alleges, by reference to the same conversation, that the claimant said that he did not care what he spent to recover the money and that he wanted to ‘get even’ with the defendant. The claimant denied that he ever suggested such a thing and raised the possibility that the document had been created after the event. On the evidence I have seen I cannot accept that, and I conclude that the claimant probably did say what Mr. Palmer recorded him as saying. However, I do not see how expressions of this sort – which I am bound to say are common to a plethora of excitable litigants down the years – can be said to amount to, or evidence, malice. Moreover, neither this point, nor the point at paragraph 81 above, can be relevant to the alleged malicious presentation of the bankruptcy petition given that the conversation took place some time before that option had even been suggested.

[83]There was also the suggestion that the claimant would spend a good deal of money to recover the US$100,000 and that this was a ‘less than commercial’ view. However, I reject the suggestion that that could amount to malice; it was simply a statement of intent by the claimant.

[84]The fifth point, also at paragraph 5.3 of the rejoinder, refers to a fax sent by the claimant to Baker & McKenzie in connection with the FSA which asked Baker & McKenzie to make some enquiries, in the context of the FSA’s regulatory duties, presumably about the claimant’s status as an investor. The claimant, who is not a lawyer, said in cross-examination that he was exploring the possibility of reporting the defendant to the FSA, but he made plain that that would be something that would turn on Baker & McKenzie’s advice. According to the same note, Baker & McKenzie advised him to focus on making the claim rather than by referring the defendant’s activities to the FSA. That was, I think there can be no doubt, advice with which everybody would agree. The claimant expressly accepted it. It does not seem to me, therefore, that that exchange can amount to malice. It is not unusual for litigants to consider the strength of their position by reference to matters which are not directly connected to the particular facts of their claim.

[85]The sixth point refers to the advice of the 16th September (paragraph 24 above). I have already made the point that this concluded that the bankruptcy petition should be maintained. It does not and cannot, in my judgment, evidence malice.

[86]The seventh and eighth points, which are referred to at paragraph 5.4 of the rejoinder, come from Baker & McKenzie’s instructions to counsel for the hearing. The more important passage refers to the claimant’s “distinct lack of enthusiasm for settling this dispute by means other than those which result in the defendant’s bankruptcy”. As I made plain in argument, if that was a true statement, it might indeed indicate malice. However, for the reasons summarised at paragraph 76 above, it seems to me that it is simply incorrect. In the circumstances, I regret that such a paragraph found its way into Baker & McKenzie’s instructions to counsel.

[87]The other passage in the instructions referred to is a reference to the fact that the claim might be vulnerable to the suggestion that there was something illegitimate about the underlying loan agreement. Indeed, the registrar had concerns on this point, as is apparent from her judgment, but I cannot say if the loan agreement was unlawful or not, and it seems to me that the fact that it might have been does not and cannot evidence malice on the part of the claimant.

[88]The final two points as to malice, also identified in paragraphs 5.5 and 5.6 of the rejoinder, rely on the Baker & McKenzie letters which I have already dealt with at some detail at paragraphs 64 and 65 above. I have already concluded that the statements in those letters, which were relied on in the defendant’s pleading, were simply not in accordance with the facts.

F. Summary

[89]For the reasons set out at paragraphs 45 to 68 above I have concluded that there was no absence of reasonable and probable cause and that, on the contrary, the claimant acted reasonably at all times in presenting the petition.

[90]For the reasons set out at paragraphs 69 to 88 above I have concluded that there was no malice on the part of the claimant.

[91]For these two separate reasons it seems to me that the counterclaim must be dismissed. The claimant would then be entitled to judgment for the US$100,000. I will deal with all questions of interest and costs separately. - - - - - - - - - - - - - - -

Cited in 1 later judgment

DAVID HILL and DAVID MCCRACKEN v THE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMS [2026] UKUT 00306 (TCC) 2026