Mulkerrins (formerly Woodward (FC)) (Appellant) v. Pricewaterhouse Coopers (a firm) (formerly trading as Coopers & Lybrand) (a firm) (Respondents) [2003] UKHL 41

House of Lords
[2003] UKHL 41
Between
Mulkerrins (formerly Woodward)AppellantPricewaterhouse Coopers (a firm) (formerly trading as Coopers & Lybrand) (a firm)Respondent
Before
Lord Bingham of CornhillLord Nicholls of BirkenheadLord MillettLord LordLord Walker of GestingthorpeDate 31 July 2003
[1]I have had the advantage of reading in draft the opinions of my noble and learned friends Lord Walker of Gestingthorpe and Lord Millett. I am in full agreement with them and for the reasons which they give I would allow the appeal and make the order which Lord Walker proposes. LORD NICHOLLS OF BIRKENHEAD My Lords,[2]I have had the opportunity of reading in draft the speech of my noble and learned friend Lord Walker of Gestingthorpe. For the reasons he gives, with which I agree, I would allow this appeal and make the order he proposes. LORD MILLETT My Lords,[3]Ms Mulkerrins claims damages from her former professional advisers PricewaterhouseCoopers ("PwC") for having negligently failed to protect her from bankruptcy. Her claim has yet to be tried and her allegations have not been established. Even allowing for this, however, she has been shamefully ill-served by her former advisers, by the law of insolvency, and by the civil justice system.[4]At the beginning of the story Ms Mulkerrins owned a freehold property where she ran a small but profitable business as the proprietor of a nursing home. She faced the prospect of bankruptcy as a result of the failure of a business which she and her husband had formerly carried on together. The situation was tailor-made for an individual voluntary arrangement ("IVA"). Bankruptcy would destroy the business and yield relatively little for the creditors. An IVA, on the other hand, would preserve the business and enable the creditors to receive payments from the income of the nursing home. She consulted PwC, who were licensed insolvency practitioners, and on their advice made all the necessary arrangements to enter into an IVA with a view to avoiding bankruptcy.[5]Despite this Ms Mulkerrins has been made bankrupt and the nursing home has been closed down by the Official Receiver, who did not have the funds to carry it on. She alleges that this would not have happened but for PwC's negligence. Her attempts to obtain redress have been thwarted at every turn. First, she had to fight off her trustee-in-bankruptcy, who somewhat implausibly claimed that her cause of action had vested in him for the benefit of the creditors. She won that round when the district judge in the Reading County Court sitting in Bankruptcy ruled that her trustee had no interest in the claim (because her creditors had none). He did not appeal and she duly brought proceedings against PwC. They strongly objected to being sued by their own former client. Taking advantage of their own alleged wrong in failing to take the necessary steps to prevent her bankruptcy in the first place they insisted that, now that she had become bankrupt, they should be sued by her trustee. This was more than a little impudent, even brazen. It meant that Ms Mulkerrins had to fight the same battle all over again. She effectively won again before the deputy judge in the High Court ([2000] BPIR 506), but PwC had greater determination (or resources) than the trustee, and this time she was taken to the Court of Appeal ([2001] BPIR 106), where she lost. Her action has been struck out. She has now been discharged from bankruptcy and the trustee has been released, with the result that the Official Receiver has become trustee in his place: see section 300(2) of the Insolvency Act 1986. He is under the trustee's ordinary duty to realise the assets of the bankrupt estate for the benefit of the creditors. Relying on the decision of the Court of Appeal he has conducted an auction of Ms Mulkerrins' claim and proposes to distribute most of the proceeds to the creditors, despite the fact that they are bound by an order of the bankruptcy court that it is an asset in which they have no interest at all.[6]Ms Mulkerrins has thus lost her business, had her claim for redress struck out, and faces the prospect of losing the value of her business for a second time. But for an order of a district judge she would now be suffering the ultimate misfortune of being a party to a leading case in your Lordships' House brought to resolve one of the more intractable problems in the law of insolvency. This is the problem which was recently considered by the Court of Appeal Ord v Upton [2000] Ch 352 namely to what extent does a "hybrid" claim of a bankrupt vest in his trustee on bankruptcy. A hybrid claim is constituted by a single cause of action which is partly for personal injury or loss of reputation (to which the creditors are not entitled) and partly for financial loss (to which they normally are).[7]Ms Mulkerrins claims damages for having been made bankrupt. Her claim is a "hybrid" one, for she claims damages for loss of reputation as well as damages for loss of assets and earning capacity. By far the greater part of her claim, however, is for financial loss arising from the closure of the business by the Official Receiver. This would not have occurred but for the bankruptcy, and was a readily foreseeable and indeed virtually inevitable consequence of the making of the bankruptcy order. She seeks to be placed in the financial position she would have been in if PwC had acted with proper skill and care and she had been made the subject of an IVA instead of a bankruptcy order.[8]The first question is: what was the effect of the order of the bankruptcy court? The dispute which it was called upon to decide was whether the chose in action which represented Ms Mulkerrins' claim against PcW was an asset which had vested in the trustee for the benefit of the creditors or remained vested in Ms Mulkerrins for her own benefit. The District Judge held that the trustee had no interest in the claim. In the High Court the deputy judge considered that this referred to the beneficial interest; he held that the effect of the district judge's order was that title to sue had vested in the trustee but he held it in trust for Ms Mulkerrins and not for the creditors: [2000] BPIR 506. This was rejected by the Court of Appeal: [2001] BPIR 106. Jonathan Parker LJ observed at para 61 that:
"….the district judge was not in any way concerned with accountability, or with the beneficial ownership of the cause of action. She was concerned only with the legal ownership: with the question - who can sue PwC? The district judge was not contemplating that the Trustee would be accountable for anything. She was contemplating that it would be Mrs. Mulkerrins who would sue, not the Trustee."
[9]This is true so far as it goes, but it is not the whole truth. The district judge was certainly dealing with the legal title to the chose in action - the right to sue PwC. But she was not dealing with the bare legal title. She ruled that the trustee had no interest in the claim, and her reasoning shows that she meant no interest at all whether at law or in equity. She considered that the claim had not vested in the trustee because it was not an asset which was available to the creditors, that is to say it was not part of the bankrupt estate. She did not overlook the basic rule that, with few exceptions, the property of a bankrupt vests in his trustee for the benefit of his creditors; or that at least so much of a chose in action as represents a claim to compensation for financial loss vests in him. To her credit she recognised that Ms Mulkerrins' claim was of an unusual kind, as neither the deputy judge nor the Court of Appeal seems to have done. It was a claim for damages for being made bankrupt. As she put it, "the bankruptcy itself is the cause of action". The district judge did not consider that a claim of this character could vest in the trustee for the benefit of the creditors; though she seems to have considered that this was a matter of timing which made the cause of action after acquired property.[10]Both the deputy judge and the Court of Appeal thought that the district judge's decision was wrong. The cause of action did not arise after the bankruptcy order but in the same instant as the bankruptcy order. The Court of Appeal distinguished between "the Ord v Upton world", which they thought was the real world, and "the artificial world" created by the district judge's order. As between the parties to a judicial decision, however, it does not matter whether the decision is right or wrong. As I observed in Crown Estates Commissioners v Dorset County Council [1990] Ch 297, 305 res judicata (or to give it its full name estoppel per rem judicatam ) is a form of estoppel which gives effect to the policy of the law that the parties to a judicial decision should not afterwards be allowed to re-litigate the same question, even though the decision may be wrong. If it is wrong, it must be challenged by appeal or not at all. As between themselves, the parties are bound by the decision, and may neither re-litigate the same cause of action nor re-open any issue which was an essential part of the decision. The doctrine comes into its own only when the decision is wrong; if it is right, it merely serves to save time and costs.[11]The district judge's order, therefore, bound the trustee and through him the creditors. As between Ms Mulkerrins and the creditors, her claim against PwC and its proceeds belonged to her and did not form part of the bankrupt estate available to them. The Court of Appeal, with respect, overlooked the fact that, whatever world PwC inhabited, the trustee and the creditors lived in the world created by the district judge's order.[12]PwC, of course, were not parties to the proceedings in the bankruptcy court. They were not given notice of the proceedings and took no part in them. They are not, therefore, bound by the order of the district judge. But this does not mean that they can simply ignore it or that they are unaffected by it. It means only that they cannot be prejudiced by it. They cannot re-litigate the issue, not because it is res judicata as against them , but because they have no legitimate interest in doing so.[13]The general rule is that the benefit of a contract may be assigned to a third party without the consent of the other contracting party. If this is not desired, it is open to the parties to agree that the benefit of the contract shall not be assignable by one or either of them, either at all or without the consent of the other party. There is nothing objectionable in this; a party is entitled to insist that he deal only with the particular party with whom he has contracted: see Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85, 105, per Lord Browne-Wilkinson. But unless he takes the precaution of including in the contract a prohibition of assignment, he has no right to object to it. A debt is freely assignable both at law and in equity without the debtor's consent. Section 136 of the Law of Property Act 1925 requires notice of the assignment to be given to the debtor if it is to be effective at law; it does not require his consent.[14]An assignment of a claim for unliquidated damages in tort may be open to challenge on the grounds of maintenance and champerty; but not on the ground that such an assignment needs the consent of the proposed defendant. It is now established that a trustee may properly discharge his duty to obtain the best price for the assets of a bankrupt estate by assigning the bankrupt's claim against a third party. It is common ground that PwC could not have prevented the trustee from re-assigning Ms Mulkerins' claim against them back to her had the district judge's decision gone the other way.[15]The reason that the debtor's consent is not required to an assignment of a debt is that the assignment cannot prejudice him. The assignment is subject to equities, which means that any set-off which the debtor may have against the assignor can be asserted against the assignee. On bankruptcy the trustee is in no better position than his bankrupt; a creditor's right to sue his debtor vests in his trustee subject to equities. It would have been inappropriate to allow PwC to take any part in the proceedings in the bankruptcy court. They were brought to resolve a dispute between Ms Mulkerrins on the one hand and her creditors, represented by the trustee, on the other. PwC were debtors with an adverse interest to Ms Mulkerrins and her estate. They could not be prejudiced by the vesting of Ms Mulkerrins' claim vesting in her trustee; and a fortiori they could not be prejudiced if it remained in her. They had no legitimate interest in the question to be decided.[16]In the event no question of assignment arose. The district judge held that the claim did not vest in the trustee but remained vested in Ms Mulkerrins despite her bankruptcy. PwC are being sued by their own former client, the very person to whom they owed a duty of care. In the circumstances their protests have a very hollow ring to them.[17]So far I have been content to assume that the decision of the district judge may have been wrong. But it should not be assumed that it was. Ms Mulkerrins' claim is an unusual one, for she complains of PwC's failure to prevent the making of a bankruptcy order against her. She claims damages representing the difference between her financial position as a result of the bankruptcy order and the financial position she would have enjoyed if she had entered into an IVA instead. Treating this claim as being wholly or mainly a claim in respect of financial loss, and even assuming that (contrary to the view of the district judge) it was not after-acquired property, it would be very surprising if a claim of this character could be made available to the creditors. They would be claiming damages for the making of the very bankruptcy order under which their claim arose. The greater part of their claim would represent damages for the closure of the nursing home, even though it was a going concern when it supposedly vested in the Official Receiver and was closed down by him. The creditors have received the full value of the bankrupt estate. The damages which Ms Mulkerrins claims represent the value of what she lost by the making of the bankruptcy order; but while this could have been available to the creditors under an IVA, it could never have been made available to them in a bankruptcy.[18]The Court of Appeal assumed that the claim vested in the trustee because it was wholly or largely a claim for financial loss, without considering the particular nature of the claim. The question has not been argued before us and is not covered by authority. I prefer to express no concluded view upon it, but to leave it open for decision when the need arises, while expressing the view that it should not be taken to be concluded by the judgment of the Court of Appeal in the present case.[19]It is sufficient to dispose of this case by saying that, right or wrong, the district judge's order bound the trustee and through him the creditors. Ms Mulkerrins' claim must be taken to form no part of the bankrupt estate available to her creditors, and she is at liberty to pursue it in her own name and for her own benefit. In agreement with my noble and learned friend, Lord Walker of Gestingthorpe, whose speech I have had the advantage of reading in draft and with which I agree, I would allow the appeal. LORD SCOTT OF FOSCOTE My Lords,[20]I have had the advantage of reading the opinions of my noble and learned friends Lord Millett and Lord Walker of Gestingthorpe. I agree with them and for the reasons they give I, too, would allow this appeal and make the order Lord Walker has proposed. LORD WALKER OF GESTINGTHORPE My Lords,[21]On the making of a bankruptcy order the bankrupt's estate vests automatically in the trustee in bankruptcy as soon as he becomes trustee. The bankrupt's estate is widely defined, subject to some exceptions (including business equipment and household necessities) as comprising:
"all property belonging to or vested in the bankrupt at the commencement of the bankruptcy"
. Property is widely defined as including "money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property". That is the effect of sections 283, 306 and 436 of the Insolvency Act 1986, which replaced similar but by no means identical provisions in a succession of earlier statutes.[22]However, the wide language used in successive statutes to describe the bankrupt's estate was from an early stage interpreted by the court as excluding rights of action which are classified as personal to the bankrupt, rather than relating to his property. The most notable early case was the decision of your Lordships' House in Beckham v. Drake (1849) 2 HL Cas 579, but the report of counsel's argument in that case refers to numerous authorities going back to the time of Lord Mansfield. The point was explained as follows by Erle J, one of the judges who advised the House (at page 604), "This was an action on a contract for hiring and service, whereby the plaintiff was to serve for seven years, and the defendant to pay weekly wages during that time; and the breach was a dismissal during the seven years. The plaintiff, after this breach, and before the commencement of the action, became bankrupt; and the question is, whether this cause of action passed from the plaintiff to his assignees. The general principle is, that all rights of the bankrupt which can be exercised beneficially for the creditors do so pass, and the right to recover damages may pass though they are unliquidated … This principle is subject to exception. The right of action does not pass where the damages are to be estimated by immediate reference to pain felt by the bankrupt in respect of his body, mind or character, and without immediate reference to his rights of property. Thus it has been laid down that the assignees cannot sue for breach of promise of marriage, for criminal conversation, seduction, defamation, battery, injury to the person by negligence, as by not carrying safely, not curing, not saving from imprisonment by process of law …"[23]The line of authority includes the decision of your Lordships' House in Wilson v United Counties Bank Ltd [1920] AC 102. Major Wilson had left England on active service soon after the beginning of the first world war, leaving his business affairs (which seem to have been in a fairly precarious state) in the hands of his bank. The jury found that the bank had failed in its duty to supervise his business affairs and to take reasonable steps to maintain his credit and reputation. Major Wilson was made bankrupt and he and his trustee in bankruptcy joined in an action against the bank. The jury awarded damages of about £45,000 for depreciation in the bankrupt's business and estate caused by the bank's negligence (although the House was not unanimous as to whether this finding was justified on the evidence) and £7,500 for damage to his credit and reputation. The former sum was recoverable by the trustee in bankruptcy, and the latter by the bankrupt personally, even though (as Lord Atkinson observed at page 128) the damages arose from the same breach of contract.[24]Wilson v United Counties Bank Ltd can therefore be described as a hybrid claim, the term used by Aldous LJ in Ord v Upton [2000] Ch 352, 366. That case was concerned with a claim which a bankrupt labourer (aged 30 at the time of his bankruptcy) brought against a doctor who had treated him, some years before his bankruptcy, for back pain. Liability was admitted and the claim was substantial, including over £170,000 for loss of past earnings and over £730,000 for loss of future earnings. The Court of Appeal, following the decision of the Supreme Court of British Columbia in re Bell (a bankrupt) [1998] BPIR 26, held that both parts of the claim for loss of earnings formed part of the estate, and that Mr Ord himself was entitled only to the damages for pain and suffering. Aldous LJ (with whom Kennedy and Mantell LJJ agreed) summarised the decision as follows (at page 371), "The authorities are only consistent with the conclusion that the trustee is entitled to the damages for past and future loss of earnings and is not entitled to the damages for pain and suffering. As there is a single cause of action, it vested in the trustee. There is in my view nothing in that conclusion which imposes practical difficulties with which the law cannot deal. The trustee as constructive trustee would have to account to the bankrupt for the property which he obtained inadvertently or by arrangement in an action which vested in him for the benefit of the creditors. The idea that the cause of action should vest in the bankrupt would not be acceptable and compulsory joinder of both could lead to difficulties when the claim for loss of earnings was small compared with the potential costs of the litigation. In such a case the trustee, if the cause of action vested in him, would have to consider carefully his duty to the bankrupt and would probably, if requested, assign the cause of action to him".[25]The most recent authority is the decision of the Court of Appeal in Grady v HM Prison Service [2003] EWCA Civ 527, 11 April 2003. It concerned a claim for unfair dismissal made by an administrative officer who had been a bankrupt about a year after the termination of her employment. The Court of Appeal (in a judgment of the court delivered by Sedley LJ) observed (at para 14) that there is "no bright line" between personal rights of action and those which form part of a bankrupt's estate, but (para 24) that all the reasoning in the authorities "tends to place on the non-vesting side of the line a claim which is primarily directed at the restoration of a contractual relationship in which the claimant's skill and labour are the essential commodity".[26]The Official Receiver, who was given leave to intervene in this appeal, has (both in his petition for leave and in his printed case) placed before your Lordships some thoughtful and well-researched submissions, including a helpful survey of Commonwealth and United States authorities. He has drawn attention to the apparently anomalous results which can flow from accidents of timing of different stages in the prosecution of a right of action, and to the practical problems which may arise from a trustee in bankruptcy prosecuting a hybrid right of action, partly on behalf of the creditors and party on behalf of the bankrupt himself. But in the event your Lordships did not find it necessary, and did not consider it appropriate to hear all argument on these points. That is because the very unusual facts of the present appeal permit it to be disposed of on much narrower grounds, and make it an unsuitable case for exploration of the wider issues.[27]The appellant, Ms Barbara Mulkerrins, is an experienced state registered nurse. In 1995 she was separated from her husband (Mr Woodward, to whom she is no longer married). She was running a small nursing home in Berkshire providing specialised 24-hour care for four mentally disabled adults. Ms Mulkerrins was the sole proprietor of the business, and owned the freehold of the property, subject to a mortgage. The residents were paid for by a care association, and the high level of fees (£650 per resident per week) reflected the labour-intensive nature of the business.[28]Considered on its own, the nursing home was financially viable. But Ms Mulkerrins had outstanding debts, for which she and her husband were both liable, in connection with a property business. On 25 October 1994 a builders' merchant presented a bankruptcy petition against Ms Mulkerrins in the Reading County Court. After some adjournments it was due to be heard on 26 June 1995. Ms Mulkerrins consulted insolvency practitioners, Coopers & Lybrand, now PriceWaterhouseCoopers ("PwC"). Mr Rutlen of PwC advised her to apply to the county court for an individual voluntary arrangement ("IVA") under Part VIII of the Insolvency Act 1968. He advised that she had a good chance of obtaining an IVA under which she would for a period of three years pay to her creditors £500 a month out of the profits of the nursing home business. Ms Mulkerrins accepted that advice. She paid PwC an amount on account of their charges and PwC undertook to prepare an IVA proposal with a partner in PwC as the nominee. PwC attended the hearing on 26 June 1995 and an interim order was made suspending the bankruptcy proceedings. The petition was adjourned to the next open date (subsequently fixed as Monday 21 August). An application to continue the interim order was to be made on Friday 18 August. The nominee was required to lodge a report with the court by Wednesday 16 August.[29]Then, as the deputy judge (Mr Jules Sher QC) said in his judgment ([2000] BPIR 506, 508) disaster struck. Ms Mulkerrins was due to go to Ireland for about a fortnight for a family reunion on the 25th anniversary of her father's death. Her case (which PwC denies) is that she asked Mr Rutlen whether she should attend court on either the Friday or the Monday and was told that it was unnecessary. She went to Ireland. PwC did not lodge the nominee's report on the Wednesday. It reached the court by post on the Thursday (with a letter stating that the nominee did not propose to attend, but requesting continuation of the interim order) but these documents did not get placed before the district judge. On Friday 18 August no one appeared and the district judge discharged the interim order. On Monday 21 August there was again no appearance, and Ms Mulkerrins was adjudicated bankrupt.[30]She heard this news by telephone on Thursday 24 August. By then the Official Receiver had learnt of the existence of the nursing home (which was apparently unknown to the petitioner) and had visited it. He formed the view that the business must be closed down at once. He arranged with Berkshire Social Services for the residents to be moved to other accommodation and on the afternoon of 23 August he obtained an order from the district judge authorising him "in the absence of the bankrupt" to close down the business. The order records that the district judge heard representations by telephone from solicitors instructed by PwC. The residents were moved out on 24 August. There was subsequently an application (paid for by PwC) to annul the bankruptcy order, but it failed. In any case the nursing home business had by then effectively ceased to exist.[31]Naturally enough, Ms Mulkerrins was extremely upset. She wished to sue PwC for breach of their professional duty. Towards the end of 1995 Mr Blake of KPMG was appointed as her trustee in bankruptcy. There were some without prejudice discussions between Ms Mulkerrins' solicitors, Mr Blake, and PwC and its solicitors (particulars of these discussions were ordered to be struck out of Ms Mulkerrins' reply). But nothing significant came of them and on 19 August 1998 (just before her discharge from bankruptcy) Ms Mulkerrins issued a writ against PwC. Her statement of claim was served on 17 May 1999. It claimed general damages for "loss of status and business reputation" and special damages for the loss of her assets, including the nursing home.[32]The considerable interval between the issue of the writ and the service of the statement of claim is explained, at least in part, by discussions which took place between Ms Mulkerrins and Mr Blake. Each claimed to be the proper person to prosecute the claim against PwC. In order to resolve the difference of opinion Ms Mulkerrins made an application to the Reading County Court. It was an ordinary application in her bankruptcy proceedings, made under section 303 of the Insolvency Act 1986, sub-sections (1) and (2) of which provide as follows: "(1) If a bankrupt or any of his creditors or any other person is dissatisfied by any act, omission or decision of a trustee of the bankrupt's estate, he may apply to the court; and on such an application the court may confirm, reverse or modify any act or decision of the trustee, may give him directions or may make such other order as it thinks fit. (2) The trustee of a bankrupt's estate may apply to the court for directions in relation to any particular matter arising under the bankruptcy".[33]There was a contested hearing before District Judge Henson on 3 February 1999 (that is, about 10 months before Ord v. Upton was decided by the Court of Appeal). Both sides were represented by counsel. The district judge heard argument, adjourned for a short while to consider the matter and then gave judgment. There is no official transcript but there is a full note prepared by the trustee in bankruptcy's solicitor. A covering letter from the solicitor indicates that it was common ground between counsel that there could only be one cause of action in respect of the damage to her reputation and the financial loss, and that it was therefore a question as to whether the entire cause of action vested in the trustee in bankruptcy or in Ms Mulkerrins.[34]The district judge's reasoning is recorded as follows in the note:
"I have to say that I agree with the Applicant. The bankruptcy itself is the cause of action and could not accrue until the bankruptcy order was made. I do not think the argument that the cause of action arose before the bankruptcy order, as a result of which the bankruptcy order was inevitable, is convincing and I do not believe the definition of property can include the bankruptcy of this person"
. The relevant part of the order was the declaration that "The Respondent has no interest in the following chose in action namely a right of action by the Applicant against Coopers & Lybrand (a firm) for personal injuries, loss and damage arising out of her bankruptcy which was caused by their negligence and breach of contract as licensed insolvency practitioners". The heading to the order as drawn up contains two errors. It refers to section 303 (2) (rather than section 303 (1)) and it refers to the respondent as KPMG (rather than Mr Blake). But no one has suggested that either error casts any doubt on the substance of the order. Mr Knowles QC (appearing in your Lordships' House for PwC) accepted that "no interest" means what it says - that is no interest at all, legal or equitable.[35]There is no suggestion that this order was in any way collusive. On the contrary, it was clearly made after vigorous argument. It has never been appealed, probably because the trustee in bankruptcy had no funds available. At a hearing which took place before another district judge at the end of 2001, it was suggested that the order of 3 February 1999 might be discharged or revoked under section 375 (1) of the Insolvency Act 1986, which provides that every court with bankruptcy jurisdiction may review, rescind or vary any order made by it in the exercise of that jurisdiction. But it would be extraordinary to contemplate rescinding an order which has now stood for over four years, and has been acted on in litigation which has now reached your Lordships' House. Mr Davies QC for the Official Receiver very properly recognised that that is no longer a practical possibility.[36]PwC were not given notice of the hearing on 3 February 1999 and did not know that it was taking place. The first they heard of it was in a letter dated 1 April 1999 from Ms Mulkerrins' solicitor. The absence of notice to PwC is at the heart of their submission that the order of 3 February 1999 was wrong, that it does not bind PwC, and that it should for practical purposes be ignored. The Official Receiver (who became involved in the matter again after Mr Blake's discharge) did indeed appear to disregard the order in negotiations which he conducted, during 2001, for the assignment of the cause of action in which (according to the order of 3 February 1999) he had no interest.[37]On 7 September 1999 PwC applied to strike out part of Ms Mulkerrins' claim. This application overlapped a preliminary issue which had been directed by the Master. On the very eve of the hearing before the deputy judge the Court of Appeal handed down judgment in Ord v Upton . This led to rapid reassessment of both sides' arguments and the enlargement of the scope of the strike-out application.[38]In his judgment the deputy judge referred to the two elements of Ms Mulkerrins' claim as the personal loss and the financial loss. He was satisfied that PwC's breach of contract (if eventually established at trial) occurred on Friday 18 August 1995 at the latest. He rejected the submission that the right of action could be regarded as after-acquired property (which does not vest automatically in the trustee in bankruptcy but may be acquired by him under section 307 of the Insolvency Act 1986, subject to the qualifications set out in that section). The deputy judge listed, and proceeded to reject, four arguments which had been relied on by Mr Krolick on behalf of Ms Mulkerrins (page 516): "(1) The decision of the Reading County Court in Bankruptcy is binding upon the defendants; (2) In the alternative, it is an abuse of process to assert that the cause of action is vested in the trustee in bankruptcy; (3) The defendants are estopped from denying the cause of action is vested in the claimants; (4) The decision of the Reading County Court in Bankruptcy was correct, and the cause of action is vested entirely in the claimant".[39]The deputy judge then turned to a fifth argument, which he himself had prompted (at page 520): "Although, as I have held, the defendants are not bound by the Reading County Court judgment, the [trustee in bankruptcy] is; and, once the time for appealing that judgment went by, the position as between the claimant and him became permanent and clear; as between the two of them it was she who was entitled to the claim against the defendants and all the damages that might be awarded in pursuance of that claim. The corollary is that, as against the claimant, the [trustee in bankruptcy] was not entitled to such damages for the benefit of the creditors. In short, once the time for appealing had gone by, the claimant's beneficial entitlement to the claim against the defendants was unassailable. The defendants are not bound by the judgment of the Reading County Court but they cannot challenge the fact that it was made and the consequence that the claimant became beneficially entitled to the claim and its proceeds. The same is not true of the legal title to the claim. That, as I have held, was vested in the [trustee in bankruptcy] and, as the defendants are not bound by the judgment, they remain entitled to assert, as they do of course assert, that the legal title remains vested in the [trustee in bankruptcy]. If he sued, and recovered, he would hold the proceeds upon trust for the claimant. Even in the absence of the Reading County Court proceedings, he would have been a trustee of that part of such proceeds as represented damages in respect of the personal loss: see Ord v Upton . The effect of the Reading County Court judgment was to extend her beneficial entitlement from the damages in respect of the personal loss to all the damages recovered, irrespective of whether they represented personal or financial loss".[40]The deputy judge then referred to the decision of Scott J in Weddell v Pearce & Major [1998] Ch 26, and to some well-known authorities discussed by Scott J in his judgment. The deputy judge concluded that Ms Mulkerrins' proceedings were not a nullity, but that the Official Receiver should be joined as a defendant. On that basis, he dismissed the strike-out application and determined the preliminary issue in favour of Ms Mulkerrins.[41]PwC appealed to the Court of Appeal ([2001] BPIR 106), which took the same view as the deputy judge had taken on the arguments raised in Ms Mulkerrins' respondent's notice. But the Court of Appeal took a different view on what had become the main issue. Jonathan Parker LJ (with whom Kennedy and Laws LJJ agreed) referred in his conclusions (paragraph 60) to what he called the Ord v Upton world, and then (in paragraph 61) to what he called the artificial world of the Reading judgment (sc of 3 February 1999). He said, "The difficulty with this [the deputy judge's approach], to my mind, is that the district judge was not in any way concerned with accountability, or with the beneficial ownership of the cause of action". That is so, up to a point. On 3 February 1999 Aldous LJ's judgment in Ord v Upton lay in the future, and the notion of a trustee in bankruptcy being accountable (as a constructive trustee) in respect of part of the recovery to be achieved by prosecuting a right of action was, I think, unheard of. But it is, with respect, incorrect to say that the district judge was not in any way concerned with the beneficial ownership of the right of action and (as the Lord Justice went on to say) that she was concerned only with legal ownership. The fact is that she was concerned with both legal and beneficial ownership, viewed globally and without any need for differentiation between them. That was the all-or-nothing choice which counsel had placed before her as their agreed position. Whether it was right or wrong, the order of 3 February 1999 clearly and decisively determined the issue between the only two possible contenders for the right of action against PwC. But the Court of Appeal treated it as an "artificial world" and concluded that the deputy judge's reasoning was fallacious. The Court of Appeal allowed the appeal, determined the preliminary issue against Ms Mulkerrins, and dismissed her action.[42]In his oral submissions to your Lordships Mr Knowles concentrated (as I have already mentioned) on the fact that PwC had not had notice of the hearing on 3 February 1999. He accepted that if the trustee in bankruptcy had made a legal assignment of his right of action to Ms Mulkerrins, or if Ms Mulkerrins had obtained the right to sue in the trustee's name, PwC would have had to put up with the consequences, unwelcome though they were. But in the absence of such an assignment PwC could, he said, object to being faced with a claimant who has legal aid, and is likely to be unable to pay PwC's costs if her claim ultimately fails. This potential problem about costs gave PwC a sufficient interest to give them standing to oppose the making of the order, had they known of the application.[43]In my opinion this submission is mistaken, for reasons which were explained by Lord Hoffmann in Stein v Blake [1996] AC 243, 260:
"It is a matter of common occurrence for an individual to become insolvent while attempting to pursue a claim against someone else. In some cases, the bankruptcy will itself have been caused by the failure of the other party to meet his obligations. In many more cases, this will be the view of the bankrupt. It is not unusual in such circumstances for there to be a difference of opinion between the trustee and the bankrupt over whether a claim should be pursued. The trustee may have nothing in his hands with which to fund litigation. Even if he has, he must act in the interests of creditors generally and the creditors will often prefer to receive an immediate distribution rather than see the bankrupt's assets ventured on the costs of litigation which may or may not yield a larger distribution at some future date. The bankrupt, with nothing more to lose, tends to take a more sanguine view of the prospects of success. In such a case the trustee may decide, as in this case, that the practical course in the interests of all concerned (apart from the defendant) is to assign the claim to the bankrupt and let him pursue it for himself, on terms that he accounts to the trustee for some proportion of the proceeds. It is understandable that a defendant who does not share the bankrupt's view of the merits of the claim may be disappointed to find that notwithstanding the bankruptcy, which he thought would result in a practical commercial decision by an independent trustee to discontinue the proceedings, the action is still being pursued by the bankrupt. His disappointment is increased if he finds that the bankrupt as plaintiff in his own name has the benefit of legal aid which would not have been available to the trustee. Similar considerations apply to an assignment of a right of action by the liquidator of an insolvent company to a shareholder or former director. In such a case there is the further point that the company as plaintiff can be required to give security for costs. The shareholder assignee as an individual cannot be required to give security even if (either because he does not qualify or the Legal Aid Board considers that the claim has no merits) he is not in receipt of legal aid"
. Lord Hoffmann concluded that the systemic defect, if there was one, lay in the arrangements for legal aid and costs orders and not in the law of insolvency. His observations were directed to a different situation (where the trustee in bankruptcy assigned a right of action for financial loss which had undoubtedly vested in him) but they are also relevant to the present case.[44]PwC's grievance about its likely inability to recover its costs, if Ms Mulkerrins is ultimately unsuccessful, would not in my opinion have given it the right to be heard on the application under section 303 of the Insolvency Act 1968. Under rule 7.7(4) of the Insolvency Rules 1986 the district judge could no doubt have directed that notice of the application should be given to PwC, but that would in my opinion have been a very unusual step to take. The district judge cannot be criticised for not having taken it. The hearing was an exercise of the court's supervisory jurisdiction over the bankruptcy process, and PwC was a stranger to that process, with interests directly opposed to those of both the creditors and the bankrupt herself. Even if PwC had happened to be a creditor, the conflict of interest would have reduced their claim to be heard on a question of this sort (compare the practice of the Chancery Division on a summons to consider whether trustees should take proceedings against a defendant who happens to be a beneficiary, as explained in In re Moritz [1960] Ch 251 and In re Eaton [1964] 1 WLR 1269; and, on a comparable situation in the Companies Court, Smith v Croft (No 2) [1988] Ch 114, 185-6).[45]If (as I think) PwC had no right to be heard on the question of entitlement to the right of action, it is irrelevant that PwC was not bound by the district judge's order in such a way as to create an estoppel per rem judicatam . There is a statement in Spencer Bower, Turner and Handley, Res Judicata 3rd ed (1996), p 130, para 251, that "An English judicial decision which operates upon a thing by effecting a disposition of it determines its status and may be set up by, or against, any member of the English public, as conclusive in rem ". But it is simply not necessary to explore this difficult area. In relation to the points raised in Mr Krolick's respondent's notice in the Court of Appeal it may be accepted that the order of 3 February 1999 was erroneous, and that it does not bind PwC by estoppel per rem judicatam or indeed by any other form of estoppel. But as the deputy judge said, the order certainly did bind the trustee in bankruptcy who was the only other possible contender for title to the right of action. The substantial effect of the order was not to assign the right of action, but to declare that it had not been affected by the bankruptcy. From the moment that the right of action arose, it was at all material times in the legal and beneficial ownership of Ms Mulkerrins. If the trustee in bankruptcy, as the only possible rival claimant, was bound by the order, its practical effect was not open to challenge by PwC.[46]It was not necessary for the deputy judge to direct that the Official Receiver (who is now performing the residual functions of the trustee in bankruptcy) should be joined as a defendant to the proceedings. For these reasons and for the further reasons given in the speech of Lord Millett, with which I agree, I would allow the appeal and restore the deputy judge's order, other than his direction for joinder of the Official Receiver.

Cited in 6 later judgments