Mulkerrins v PricewaterhouseCoopers (A Firm)

JurisdictionUK Non-devolved
JudgeLORD BINGHAM OF CORNHILL,LORD NICHOLLS OF BIRKENHEAD,LORD MILLETT,LORD WALKER OF GESTINGTHORPE,LORD SCOTT OF FOSCOTE
Judgment Date31 July 2003
Neutral Citation[2003] UKHL 41
CourtHouse of Lords
Date31 July 2003
Mulkerrins (formerly Woodward) (FC)
(Appellant)
and
Pricewaterhouse Coopers
(a firm) (formerly trading as Coopers & Lybrand (a firm)) (Respondents)

[2003] UKHL 41

The Appellate Committee comprised:

Lord Bingham of Cornhill

Lord Nicholls of Birkenhead

Lord Millett

Lord Lord Scott of Foscote

Lord Walker of Gestingthorpe

HOUSE OF LORDS

LORD BINGHAM OF CORNHILL

My Lords,

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...

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