Legal Services Commission v Banks & Anor [2008] EWHC 1035 (QB)

[2008] EWHC 1035 (QB)Case No HQ06X03834
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 14/05/2008
Before
MR JUSTICE DAVID STEEL
Between
LEGAL SERVICES COMMISSIONClaimant(1) GRANT RUSSELL BANKSDefendants(2) JANINE BANKSDefendant
Nicola Rushton (instructed by CKFT Solicitors) for ClaimantSimon Williams (instructed by Cumberland Ellis LLP) for DefendantsHearing Hearing dates: 6 May 2008
Judgment

Introduction

[1]This is a claim by the Legal Services Commission (“LSC”) under section 16 of the Legal Aid Act 1988. It is pursued on the basis that the defendants (“the Banks”) have recovered the sum of over £200,000 in the proceedings for which legal aid was granted to them representing the rent withheld pending satisfaction of the judgment obtained by the Banks as buyers against sellers of property. Accordingly it is contended that this recovery is property on which there is a statutory charge for the benefit of the Legal Services Commission in the sum of £189,848.64. In the alternative the claim is advanced as a claim for damages for breach of statutory duty to pay the charged monies to the LSC under Rule 87 of the Civil Legal Aid (General) Regulations 1989.

Background

[2]In May 1997 the Banks purchased a leasehold interest in the Grenville Nursing Home in Devon from a Mr. and Mrs. Cox (“the Coxes”). The premium was £250,000 with an annual rent of £50,000. They had been induced to enter into the purchase by an answer to pre-contract enquiries regarding the likely turnover of the business.[3]Following the purchase, it emerged that the Coxes had been informed before the sale that the local authority, by reason of budget cuts, would not in future be referring the same number of patients to the nursing home. However the Coxes had not passed on the information to the Banks in their response to the enquiries.[4]The Banks commenced proceedings against the Coxes in the Chancery Division seeking damages for misrepresentation. These proceedings were funded by legal expenses insurance. They were dismissed in April 2000 when it was held by Lloyd J that the letter informing the Coxes of the cuts in social services funding had not been received by them.[5]Following the trial, the Banks were able to obtain further evidence which related to a meeting between Devon Social Services and Mrs. Cox at which the letter was discussed. The Court of Appeal admitted the fresh evidence, allowed the appeal and ordered a retrial.[6]By now the legal expenses insurance was exhausted and the Banks sought and obtained legal aid in June 2000. (It being a business claim such a facility would not now be available.) The retrial took place in December 2000. The trial judge was Lawrence Collins J. He held that the Coxes had received the letter, the contents of the letter constituted a material change in the conduct of the business, the misrepresentations in the response to the pre-contract enquiries were made fraudulently and, absent such misrepresentations, the Banks would not have entered into the transaction.[7]The judge held that the Coxes were liable in damages together with costs. He ordered a payment on account of costs in the sum of £100,000 payable on or before 12 January 2001. The judge also made an interim charging order in the same sum over the Coxes’ freehold interest in the Grenville Nursing Home and in their own home.[8]Following the judgment, the Banks stopped paying rent under the lease. As a result in April 2001 the Coxes threatened to exercise their right of re-entry under the lease for non-payment of the rent. Upon application by the Banks Lawrence Collins J granted an injunction preventing re-entry pending the hearing of the assessment of damages. Although not in the form of order, the judge also required, according to his subsequent judgment, an undertaking from the Banks “to pay such rent as was due from the sums paid to them from such amount (if any) as was awarded to them as a result of the enquiry as to damages.”[9]The Coxes applied to the Court of Appeal for permission to appeal the judgment on liability but this was refused in May 2001. The damages were thereafter assessed, judgment being given by Lawrence Collins J in October 2002 in the total sum of £1,230,764. It would appear that at that stage the injunction was also continued. Despite outward appearances, however, the outcome was disastrous from the Banks’ point of view.[10]Indeed, in the meantime, in September 2001, the legal aid certificate had been withdrawn because it had become clear that any sums ordered to be paid by the Coxes were never going to be met. Their financial position is summarised in the judgment as follows:
“Mr and Mrs Cox own the freehold to the Grenville, but the NatWest Bank has a mortgage amounting to over £300,000. They own the freehold to the bungalow in which they live, but the NatWest Bank has a mortgage of £50,000 on it and there is also a second charge of £60,000 on the freehold in respect of unpaid legal fees, which exceed £75,000. They say that there is unlikely to be anything left for the costs of the claimants or damages. The amount available for unsecured creditors if they became bankrupt might amount to £1,000.”
[11]The financial position of the Banks was equally dire. In order to fund the premium, the Banks took out a mortgage of £85,000 and obtained an unsecured loan for a further £85,000. The balance of the £80,000 was provided from their own resources. But by 2002 the sum outstanding on the loans had already reached £300,000 despite the non-payment of rent. This reflected the impact of the reduced level of turnover resulting from the council’s change of policy. It was down by £80,000 per annum or more.[12]The Coxes have not paid the £100,000 on account of costs. More importantly from the Banks’ point of view, they have also not paid any part of £1.3 million in damages. Even the interest accruing would be in excess of £65,000 per annum. For the reasons already spelt out, efforts by the Banks to enforce their judgment have proved forlorn.[13]Given the financial plight of both parties Lawrence Collins J had sought to encourage some form of mediation but without success. As he put it in his judgment, the Banks found themselves locked into a long lease at a substantial rent which they could not dispose of. Although the Banks were entitled to a substantial award of damages, there was no realistic prospect that it could be satisfied even in part. Thus any judgment in their favour would “have little practical effect other than to ensure that they will not have to pay any rent on the property to Mr. and Mrs. Cox”.[14]Sometime later, in July 2005, the Coxes’ mortgagees entered into possession of the freehold interest in the nursing home, having commenced possession proceedings against the Coxes for non-payment of the mortgage. The Banks thereafter became liable to pay rent to the mortgagees. However the position as regards the rent payable meantime was not altered.

The claimant’s case

[15]The present proceedings were commenced in December 2006. The case advanced on behalf of LSC can be summarised as follows:- i) The Banks recovered property in their proceedings against the Coxes in the form of a money judgment. ii) A statutory legal aid charge arose over that judgment. iii) The value of the judgment to the Banks is the amount of the retained rent moneys: alternatively, by reason of the judgment and the injunction against re-entry, they have retained moneys otherwise payable to the Coxes and, thus, to that extent have enforced their judgment. iv) The Banks were under an obligation to pay over to the LSC any monies subject to the charge. If the Banks still retain the money, it remains charged and thus payable to the LSC: if they no longer have the money they are in breach of statutory duty in dissipating the money.

Statutory Framework

[16]The legal aid statutory charge arises under s. 16(6) of the Legal Aid Act 1988:
“(6) Except so far as regulations otherwise provide— (a) any sums remaining unpaid on account of a person's contribution in respect of the sums payable by the Board in respect of any proceedings, and (b) a sum equal to any deficiency by reason of his total contribution being less than the net liability of the Board on his account, shall be a first charge for the benefit of the Board on any property which is recovered or preserved for him in the proceedings.”
[17]The obligation to pay any money recovered over to the LSC arises under regulation 87(1) of the General Regulations 1989:
“87.— Money recovered to be paid to solicitor or the Board (1) Subject to regulations 89 and 94, all moneys payable to an assisted person– (a) by virtue of any agreement or order made in connection with the action, cause or matter to which his certificate relates, whether such agreement was made before or after the proceedings were taken; or ……. shall be paid or repaid, as the case may be, to the solicitor of the assisted person or, if he is no longer represented by a solicitor, to the Board, and only the solicitor, or, as the case may be, the Board, shall be capable of giving a good discharge for moneys so payable.”

Recovery of property

[18]The leading authority in the field is Hanlon v Law Society [1981] A.C. 124 which was concerned with Section 9 of the Legal Aid Act 1974. It was the precursor to section 16(6) above and was in broadly similar terms. The case concerned matrimonial proceedings as a result of which the court transferred the matrimonial house to the legally aided wife. Her overall costs amounted to £8,000 whilst the value of the home was only £14,000. She sought an order that the Law Society was not entitled to a statutory charge on the house on the basis that it had not been recovered or preserved.[19]The House of Lords held that property is recovered or preserved if its ownership or transfer had been in issue in the proceedings as a matter of fact having regard to the pleadings, the evidence and the judgment: see per Lord Simon at p.180 at G and Lord Scarman at p.187G.[20]This straightforward analysis is an echo of the judgment of Sir John Donaldson M.R in Davies v Eli Lilly & Co [1987] 1 W.L.R. 1136:
“In other words, for the successful plaintiff the legal aid fund provides a loan, not a grant, at least to the extent that his damages are sufficient to repay the loan. Put slightly differently, every legally aided plaintiff should realise that if he succeeds in recovering more by way of damages, costs and interests than it has cost to recover them — if the money actually paid by the defendant in respect of damages, costs and interest exceeds his own costs, which after all is what he expected — he will be in no better position than an unassisted litigant.”

Chose in action

[21]It follows in my judgment that the Banks have ‘recovered’ property in the sense of a judgment. This chose in action is duly subject to the statutory charge: see Cavaliere v Legal Services Commission [2003] All E.R. (D) 353. But it is not suggested that this chose in action should be assigned in whole or part to the LSC. The claim is, as I understand it, premised on the secondary question as to whether any monies have been recovered for which the Banks must account to the LSC pursuant to regulation 87.

Recovery of monies

[22]On one view it might be thought that these proceedings were a financial disaster from the perspective of the Banks. But it was the claimant’s case that the chose in action associated with their successful claim gave rise to a financial return of £50,000 per annum over some 4.5 years reflecting the rent payable during the period prior to the mortgagees taking possession. The Banks must accordingly, so the argument ran, account for the total sum concerned to the LSC.[23]I am unable to accept this analysis: i) The payment of rent was never in issue in the proceedings. As such it was neither recovered nor preserved. ii) The injunction restraining re-entry was obtained in separate proceedings (although it is by no means clear that any claim form was ever issued). iii) Given the terms of the undertaking the practical effect was the temporary release of the claimants from payment of rent. But the true position was merely to postpone payment of rent pending satisfaction of the judgment. iv) Liability for the rent thus remained undischarged and continued to be payable to the Coxes. The proceedings for which the Banks received financial assistance have as such resulted in no financial gain to them. v) Against that background, the Banks are not required to pay the rent (or rather its monetary equivalent) to the LSC under regulation 87 or otherwise account for it.